As filed with the Securities and Exchange Commission on July 8, 2005.
Securities Act Registration No. 333-__________
Investment Company Registration No. 811-7390
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
Pre-Effective Amendment No. ___ [ ]
Post-Effective Amendment No. ___ [ ]
and/or
REGISTRATION STATEMENT UNDER
THE INVESTMENT COMPANY ACT OF 1940 [X]
AMENDMENT NO. 9 [X]
Boulder Growth & Income Fund, Inc.
(Exact Name of Registrant as Specified In Charter)
1680 38th Street, Suite 800
Boulder, Colorado 80301
(Address of Principal Executive Offices)
(303) 444-5483
(Registrant's Telephone Number, including Area Code)
Stephen C. Miller, Esq.
Boulder Investment Advisers, LLC
1680 38th Street, Suite 800
Boulder, Colorado 80301
(Name and Address of Agent for Service)
Copies to:
Arthur L. Zwickel, Esq.
Paul, Hastings, Janofsky & Walker, LLP
515 South Flower Street, 25th Floor
Los Angeles, CA 90071
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING: As soon as practicable after the
effective date of this Registration Statement.
If any securities being registered on this form will be offered on a delayed or
continuous basis in reliance on Rule 415 under the Securities Act of 1933, other
than securities offered in connection with a dividend reinvestment plan, check
the following box. [ ]
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
Title of Securities Amount Being Proposed Proposed Amount of
Being Registered Registered Maximum Offering Maximum Aggregate Registration Fee
Price per Unit Offering Price
Shares of Preferred Stock, par value $25,000 per
share............................................... 1,000 shares $25,000 $25,000,000 $2,942.50
The registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment that specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933, as amended, or until this
Registration Statement shall become effective on such date as the
Securities and Exchange Commission, acting pursuant to said Section 8(a),
may determine.
BOULDER GROWTH & INCOME FUND, INC.
Form N2
CROSS REFERENCE SHEET
Items In
Part A Caption Location in Prospectus
Item 1. Outside Front Cover.................................................. Front Cover Page
Item 2. Inside Front and Outside Back Cover Page............................. Front Cover Page
Item 3. Fee Table and Synopsis............................................... Prospectus Summary and Fee Table
Item 4. Financial Highlights................................................. Financial Highlights (Unaudited)
Item 5. Plan of Distribution................................................. Front Cover Page; Prospectus Summary; The Auction;
Underwriting
Item 6. Selling Shareholders................................................. Not Applicable
Item 7. Use of Proceeds...................................................... Use of Proceeds
Item 8. General Description of the Registrant................................ Cover Page; Prospectus Summary; The Fund;
Investment Objective and Policies; Investment
Philosophy; Risk Factors; Determination of Net
Asset Value; Capitalization of the Fund and Other
Matters
Item 9. Management........................................................... Prospectus Summary; Management of the Fund;
Portfolio Contents; Description of Preferred Shares
Item 10. Capital Stock , Long-Term Debt, and Other Securities................. Capitalization; Description of Preferred Shares;
The Auction; Capitalization of the Fund and Other
Matters; Federal Income Tax Matters
Item 11. Defaults and Arrears on Senior Securities........................... Not Applicable
Item 12. Legal Proceedings.................................................... Not Applicable
Item 13. Table of Contents of the Statement of Additional Table of Contents of the Statement of Additional
Information
Information..........................................................
Items In
Part B Caption Location in Statement of Additional Information
Item 14. Cover Page......................................................... Front Cover Page
Item 15. Table of Contents.................................................. Front Cover Page
Item 16. General Information and History.................................... Not Applicable
Item 17. Investment Objective and Policies.................................. Investment Objective and Policies; Investment
Philosophy;
Item 18. Management......................................................... Management of the Fund;
Item 19. Control Persons and Principal Holders of Securities................ Management of the Fund; Security Ownership of
Certain Beneficial Owners; Ownership of the Fund
by Directors
Item 20. Investment Advisory and Other Services............................. Management of the Fund; Compensation to the
Advisers and Administrator; Factors Considered by
the Independent Directors in Approving the
Investment Advisory Agreements; Duration and
Termination; Conflicts of Interest
Item 21. Brokerage Allocation and Other Practices........................... Portfolio Transactions, Brokerage Allocation and
Other Practices
Item 22. Tax Status......................................................... Federal Income Tax Matters
Item 23. Financial Statements............................................... Financial Statements
PART C OTHER INFORMATION
Information required to be included in Part C is set forth under the appropriate
item, so numbered, in Part C to this Registration Statement.
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. A
REGISTRATION STATEMENT RELATING TO THE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. WE MAY NOT SELL THESE SECURITIES UNTIL THIS
REGISTRATION STATEMENT IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL
THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN
ANY STATE WHERE THE OFFER, SOLICITATION OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED JULY 8, 2005
PROSPECTUS
$25,000,000
BOULDER GROWTH & INCOME FUND, INC.
Auction Market Preferred Shares ("Preferred Shares")
1,000 Shares
Liquidation Preference $25,000 Per Share
The Boulder Growth & Income Fund, Inc. (the "Fund") is offering 1,000 Auction
Market Preferred Shares. The shares are referred to in this prospectus as
"Preferred Shares." The Fund is a closed-end, non-diversified management
investment company.
Investment Objective. The Fund's investment objective is total return. The Fund
seeks to produce both income and long-term capital appreciation by investing in
a portfolio of equity and debt securities. The Fund invests primarily in common
stocks, including dividend paying common stocks such as those issued by
utilities, real estate investment trusts ("REITs") and closed-end registered
investment companies. The Fund also invests in fixed income securities such as
U.S. government securities, preferred stocks and bonds. The Fund invests
primarily in securities of U.S.-based companies and to a lesser extent in
foreign equity securities and sovereign debt, in each case denominated in
foreign currency. The Fund has no restrictions on its ability to invest in
foreign securities. The Fund is concentrated in REITs, which means it must
invest more than 25% of its total assets in REITs and companies in the real
estate industry. No assurance can be given that the Fund will achieve its
investment objective.
Investment Advisers. Boulder Investment Advisers, LLC ("BIA") and Stewart West
Indies Trading Company, Ltd. d/b/a Stewart Investment Advisers ("SIA")
(collectively the "Advisers") act as the co-investment advisers to the Fund. The
address of the Fund and BIA is 1680 38th Street, Suite 800, Boulder, Colorado
80301. The address of SIA is Bellerive, Queen Street, St. Peter, Barbados.
INVESTING IN THE PREFERRED SHARES INVOLVES RISKS THAT ARE DESCRIBED IN THE "RISK
FACTORS" SECTION BEGINNING ON PAGE 23 OF THIS PROSPECTUS. THE MINIMUM PURCHASE
AMOUNT OF THE PREFERRED SHARES IS $25,000.
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.
PER SHARE TOTAL
-------------- -------------
Public offering price (1)................................. $25,000 $25,000,000
Sales load................................................
Estimated offering expenses...............................
Proceeds, after expenses, to the Fund.....................
(1) The public offering price per share will be increased by the amount of
dividends, if any, that have accumulated from the date the Preferred Shares
are first issued.
The underwriter is offering the Preferred Shares subject to various conditions.
The underwriter expects to deliver the Preferred Shares to purchasers, in
book-entry form, through the facilities of The Depository Trust Company ("DTC")
on or about _________, 2005.
__________________, 2005
[Lead Underwriter - Full Name]
You should read this prospectus, which sets forth concisely the information
about the Fund that a prospective investor ought to know before investing,
before deciding whether to invest in the Preferred Shares, and retain it for
future reference. A Statement of Additional Information dated July __, 2005,
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 can review the table of contents of the
Statement of Additional Information on page 48 of this prospectus. You may
request a free copy of the Statement of Additional Information or the Fund's
annual and semi-annual reports, request other information about the Fund, or
make shareholder inquiries by calling (800) 331-1710 or by writing to the Fund.
The Fund's Statement of Additional Information and annual and semi-annual
reports are also available free of charge on the Fund's website
(http://www.boulderfunds.net) and on the Securities and Exchange Commission's
website (http://www.sec.gov), which also contains other information about the
Fund. You may also email requests for these documents to publicinfo@sec.gov or
make a request in writing to the Securities and Exchange Commission's Public
Reference Section, Washington, D.C. 20549-0102. The Fund's registration number
under the Investment Company Act of 1940, as amended (the "1940 Act") is
811-02328.
The Preferred Shares 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.
The Fund is offering 1,000 Preferred Shares. The Preferred Shares have a
liquidation preference of $25,000 per share, plus any accumulated, unpaid
dividends. The Preferred Shares also have priority over the Fund's common shares
as to distribution of assets, as described in this prospectus. It is a condition
of closing this offering that the Preferred Shares be assigned a rating of Aaa
by Moody's Investor Services, Inc. ("Moody's") and AAA by Fitch, Inc. ("Fitch").
The dividend rate for the Preferred Shares for the initial dividend period will
be ___%. The initial dividend period for the Preferred Shares is from the date
of issuance through ____________, 2005. For subsequent periods, the Preferred
Shares will pay dividends based on a rate set at auction, usually held every
twenty-eight days. Prospective purchasers should carefully review the auction
procedures described in this prospectus and should note: (1) a buy order (called
a "bid order") or sell order is a commitment to buy or sell Preferred Shares
based on the results of an auction; and (2) purchases and sales will be settled
on the next business day after the auction.
THE PREFERRED SHARES WILL NOT BE LISTED ON AN EXCHANGE. YOU MAY ONLY BUY OR SELL
PREFERRED SHARES THROUGH AN ORDER PLACED AT AN AUCTION WITH OR THROUGH CERTAIN
BROKER-DEALERS OR IN A SECONDARY MARKET MAINTAINED BY CERTAIN BROKER-DEALERS.
THESE BROKER-DEALERS ARE NOT REQUIRED TO MAINTAIN THIS MARKET, AND IT MAY NOT
PROVIDE YOU WITH LIQUIDITY.
TABLE OF CONTENTS
PRIVACY PRINCIPLES OF THE FUND....................................................................................3
PROSPECTUS SUMMARY................................................................................................4
FINANCIAL HIGHLIGHTS (UNAUDITED).................................................................................17
THE FUND.........................................................................................................17
USE OF PROCEEDS..................................................................................................17
CAPITALIZATION...................................................................................................18
INVESTMENT OBJECTIVE AND POLICIES................................................................................18
INVESTMENT PHILOSOPHY............................................................................................20
PORTFOLIO CONTENTS...............................................................................................20
RISK FACTORS.....................................................................................................23
MANAGEMENT OF THE FUND...........................................................................................27
DESCRIPTION OF PREFERRED SHARES..................................................................................33
GENERAL.......................................................................................................33
DIVIDENDS AND RATE PERIODS....................................................................................33
REDEMPTION....................................................................................................36
LIQUIDATION...................................................................................................36
RATING AGENCY GUIDELINES AND ASSET COVERAGE...................................................................37
VOTING RIGHTS.................................................................................................38
THE AUCTION......................................................................................................39
GENERAL.......................................................................................................39
AUCTION AGENCY AGREEMENT......................................................................................39
BROKER-DEALER AGREEMENTS......................................................................................39
AUCTION PROCEDURES............................................................................................39
SUBMISSION OF ORDERS BY BROKER-DEALERS TO AUCTION AGENT.......................................................41
NOTIFICATION OF RESULTS AND SETTLEMENT........................................................................42
SECONDARY MARKET TRADING AND TRANSFERS OF Preferred Shares....................................................42
FEDERAL INCOME TAX MATTERS.......................................................................................43
DETERMINATION OF NET ASSET VALUE.................................................................................45
UNDERWRITING.....................................................................................................47
CAPITALIZATION OF THE FUND AND OTHER MATTERS.....................................................................45
TABLE OF CONTENTS OF THE STATEMENT OF ADDITIONAL INFORMATION.....................................................48
_______________________________________________
You should rely only on the information contained in or incorporated by
reference into this prospectus. The Fund has not, and the underwriters have not,
authorized any other person to provide you with different information. If anyone
provides you with different or inconsistent information, you should not rely on
it. The Fund is not, and the underwriters are not, making an offer to sell these
securities in any jurisdiction where the offer or sale is not permitted. The
information appearing in this prospectus is given as of the date of this
prospectus. The Fund's business, financial condition, results of operations and
prospects may have changed since the date of this prospectus.
PRIVACY PRINCIPLES OF THE FUND
The Fund has established the following policy regarding information about the
Fund's shareholders: We consider all shareholder data to be private and
confidential, and we hold ourselves to the highest standards in its safekeeping
and use. The Fund collects nonpublic information (e.g., name, address, Social
Security Number, Fund holdings) about shareholders from transactions in Fund
shares. The Fund will not release information about current or former
shareholders (except as permitted by law) unless one of the following conditions
is met: (i) we receive your prior written consent; (ii) we believe the recipient
to be you or your authorized representative; or (iii) we are required by law to
release information to the recipient. The Fund has not and will not in the
future give or sell information about its current or former shareholders to any
other company, individual, or group (except as permitted by law). The Fund will
only use information about its shareholders as necessary to service or maintain
shareholder accounts in the ordinary course of business. Internally, we also
restrict access to shareholder personal data to those who have a specific need
for the records. We maintain physical, electronic and procedural safeguards that
comply with Federal standards to guard your personal data. The Fund's primary
service providers (i.e., advisers, administrators, transfer agent and custodian
(the "Service Providers")) have adopted individual privacy policies that conform
with and assure the Fund's compliance with the foregoing.
The Fund and its Service Providers restrict access to non-public personal
information about its shareholders to employees of the Fund's investment
advisers and their 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. For
more information about the Fund's privacy policies, please visit
http://www.boulderfunds.net.
PROSPECTUS SUMMARY
The following is only a summary. This summary does not contain all of the
information that you should consider before investing in the Preferred Shares,
especially the information set forth under the heading "Risk Factors." You
should review the more detailed information contained in the body of this
prospectus, the Statement of Additional Information and the Fund's Articles
Supplementary Creating and Fixing the Rights of Auction Preferred Stock (the
"Articles Supplementary") attached as Appendix C to the Statement of Additional
Information.
The Fund Boulder Growth & Income Fund, Inc. is a
non-diversified, closed-end management investment company
that was organized in October 1972 and began investment
activities in January 1974. The Fund's common shares are
traded on the New York Stock Exchange (the "NYSE") under the
symbol "BIF." As of _____ __, 2005, the Fund had _________
shares of common stock outstanding. The average weekly
trading volume of the Fund's common stock on the NYSE during
the period from ____________ through _____________ was
____shares. As of ______ ___, 2005, the net assets of the
Fund were approximately $___________.
As of July ___, 2005, the Fund had a bank line of credit in
the amount of $20,000,000 (the "Bank Debt") of which it had
drawn down $20,000,000. The Bank Debt is used for investment
and will be repaid entirely in conjunction with the Offering
(defined below) out of the proceeds of the Offering.
The Fund's investment advisers are Boulder Investment
Advisers, LLC and Stewart West Indies Trading Company, Ltd.
d/b/a Stewart Investment Advisers. The address of the Fund
and BIA is 1680 38th Street, Suite 800, Boulder, Colorado
80301. The address of SIA is Bellerive, Queen Street, St.
Peter, Barbados.
The Offering The Fund is offering an aggregate of 1,000
Preferred Shares at a purchase price of $25,000 per share
plus dividends, if any, that have accumulated from the date
the Fund first issues the Preferred Shares (the "Offering").
The Preferred Shares are being offered through a group of
underwriters (the "Underwriters") led by [Lead Underwriter -
Full Name] ("Lead Underwriter").
The Preferred Shares entitle their holders to receive cash
dividends at an annual rate that may vary for successive
dividend periods. In general, except as described under
"Description of Preferred Shares" and "Dividends and Rate
Periods" below, the dividend period for each series of
Preferred Shares will be twenty-eight days. Deutsche Bank
Trust Company Americas (the "Auction Agent") will determine
the dividend rate for any dividend period by an auction
conducted on the business day immediately prior to the start
of that dividend period. See "The Auction."
The Preferred Shares are not listed on an exchange. Instead,
investors may buy or sell Preferred Shares at an auction by
submitting orders to broker-dealers that have entered into
agreements ("Broker-Dealer Agreements") with the Auction
Agent ("Broker-Dealers") or to broker-dealers that have
entered into separate agreements with a Broker-Dealer.
Generally, investors in the Preferred Shares will not
receive certificates representing ownership of their shares.
The Depository Trust Company or any successor (the
"Securities Depository" or "DTC") or its nominee for the
account of the investor's Broker-Dealer will maintain record
ownership of Preferred Shares in book-entry form. An
investor's Broker-Dealer, in turn, will maintain records of
that investor's beneficial ownership of Preferred Shares.
Investment Objective and The Fund's investment objective is total return. The
Principal Investment Fund seeks to produce both income and long-term capital
Strategies appreciation by investing in a portfolio of equity and
debt securities. The Fund invests primarily in common
stocks, including dividend paying common stocks such
as those issued by utilities, real estate investment
trusts ("REITs") and regulated investment companies
under the Code (as defined below) ("RICs").
The Fund also invests in fixed income securities such
as U.S. government securities, preferred stocks and bonds.
The Fund invests primarily in securities of U.S.-based
companies and to a lesser extent in foreign equity
securities and sovereign debt, in each case
denominated in foreign currency. The Fund has no
restrictions on its ability to invest in foreign
securities. The Fund is concentrated in REITs,
which means it must invest more than 25% of its
total assets in REITs and companies in the real
estate industry. No assurance can be given that the
Fund will achieve its investment objective. See
"Investment Objective and Policies."
The Fund is a "non-diversified" investment company, as
defined in the 1940 Act, which means that it is permitted to
invest its assets in a more limited number of issuers than
"diversified" investment companies. A diversified company
may not, with respect to 75% of its total assets, invest
more than 5% of its total assets in the securities of any
one issuer and may not own more than 10% of the outstanding
voting securities of any one issuer. However, pursuant to
the requirements of Subchapter M of the Internal Revenue
Code of 1986, as amended (the "Code"), (A) not more than 25%
of the Fund's total assets may be invested in securities of
any one issuer (other than U.S. government securities and
RICs) or of any two or more issuers controlled by the Fund
which may be deemed to be engaged in the same, similar or
related trades or businesses, and (B) with respect to 50% of
the total value of the Fund's portfolio, (i) the Fund must
limit to 5% the portion of its assets invested in the
securities of a single issuer (other than U.S. government
securities and RICs), and (ii) the Fund may not own more
than 10% of the outstanding voting securities of any one
issuer (other than U.S. government securities and RICs). The
Fund intends to concentrate its common stock investments in
a few issuers and to take large positions in those issuers,
consistent with being a "non-diversified" fund. As a result,
the Fund may be subject to a greater risk of loss than a
diversified fund or a fund that has diversified its
investments more broadly. Taking larger positions is also
likely to increase the volatility of the Fund's net asset
value, reflecting fluctuation in the value of large Fund
holdings.
The Fund has adopted a concentration policy pursuant to
which it must, under normal market conditions, invest more
than 25% of its total assets in REITs or companies in the
real estate industry. The Fund must obtain shareholder
approval prior to changing this policy. The portion of the
Fund's assets invested in REITs and such other companies
will vary based on market conditions, but it is not expected
to exceed 50% of total assets. As of July ___, 2005, ____%
of the Fund's assets were invested in REITs. Although the
Fund can invest in REITs of any size, it currently intends
to invest in REITs with market capitalizations of greater
than $500 million. Although the Fund generally invests in
U.S. REITs, such companies may invest directly or indirectly
in non-U.S. properties, and the Fund may make direct
investments in foreign REITs. The Fund presently owns one
foreign REIT security.
Under the 1940 Act, the Fund must limit to 10% the portion
of its assets invested in RICs, and under Subchapter M, no
single investment can exceed 25% of the Fund's total assets
at the time of purchase. These percentage limitations are
calculated at the time of investment, and the Fund is not
required to dispose of assets if holdings increase above
these levels due to appreciation. As of July __, 2005, ___%
of the Fund's assets were invested in RICs, and ___% of the
Fund's assets were invested in Berkshire Hathaway, Inc.
(NYSE: BRK). The Fund has no restrictions on its ability to
invest in foreign securities. As of July __, 2005, ___% of
the Fund's assets were invested in foreign securities.
Under normal market conditions, the Fund intends to invest
at least 80% of its net assets in common stocks, primarily
domestic common stocks and secondarily in foreign common
stocks denominated in foreign currencies. The portion of the
Fund's assets that are not invested in common stocks may be
invested in fixed income securities, cash equivalents and
income-producing common stocks. The term "income-producing
common stocks" includes RICs whose objective is income,
REITs, and other dividend-paying common stocks, while the
term "fixed income securities" includes bonds, U.S.
government securities, notes, bills, debentures, preferred
stocks, convertible securities, bank debt obligations,
repurchase agreements and short-term money market
obligations.
Under normal circumstances, the Fund will not have more than
10% of its assets in cash or cash equivalents. The Fund may,
for temporary defensive purposes, allocate a higher portion
of its assets to cash and cash equivalents. For this
purpose, cash equivalents consist of, but are not limited
to, short-term (less than twelve months to maturity) U.S.
government securities, certificates of deposit and other
bank obligations, investment grade corporate bonds, other
debt instruments and repurchase agreements.
Except for the Fund's investment objective, industry
concentration and fundamental investment restrictions as
described in this prospectus and in the Statement of
Additional Information, the percentage limitations and
investment policies set forth in this prospectus can be
changed by the Fund's Board of Directors (the "Board")
without shareholder approval.
Use of Leverage The Fund expects to utilize financial
by the Fund leverage on an ongoing basis for investment purposes
specifically through the issuance of the Preferred Shares.
After completion of the Offering, the Fund anticipates its
total leverage from the issuance of Preferred Shares will be
approximately [22%] of the Fund's total assets. This amount
may change but the Fund will not incur additional leverage
in the form of preferred shares if as a result its total
leverage would exceed 50% of the Fund's total assets.
Although the Fund may in the future offer other preferred
shares, increase the number of Preferred Shares, or incur
other indebtedness, which would further leverage the Fund,
the Fund does not currently intend to offer preferred shares
other than the Preferred Shares offered hereby or to incur
indebtedness, other than short-term credits in connection
with the settlements of portfolio transactions.
The Fund generally will not utilize leverage if the Advisers
anticipate that leverage would result in a lower return to
holders of the Fund's common shares over time. Use of
financial leverage creates an opportunity for increased
returns for the holders of the Fund's common shares but, at
the same time, creates the possibility for greater loss
(including the likelihood of greater volatility of net asset
value and market price of the common shares and of
dividends), and there can be no assurance that a leveraging
strategy will be successful during any period in which it is
employed. Because the fees paid to the Advisers will be
calculated on the basis of the Fund's managed assets, the
fees will be higher when leverage (including the Preferred
Shares) is utilized, giving the Advisers an incentive to
utilize leverage.
Risk The following is a summary of the principal risks of
Considerations investing in the Preferred Shares. You should read the more
extensive discussion in this prospectus under "Risk Factors"
beginning on page 23.
Risks of Investing in the Preferred Shares. The primary
risks of investing in the Preferred Shares are:
|X| If an auction fails you may not be able to
sell some or all of your shares.
|X| Because of the nature of the market for
Preferred Shares, you may receive less
than the price you paid for your Preferred
Shares if you sell them outside of the
auction, especially when market interest
rates are rising.
|X| A rating agency could, at any time,
downgrade or withdraw its rating assigned
to the Preferred Shares without prior
notice to the Fund or shareholders. Any
downgrading or withdrawal of rating could
affect the liquidity of the Preferred
Shares in an auction.
|X| The Fund may be forced to redeem Preferred
Shares to meet regulatory or rating agency
requirements or may voluntarily redeem
your shares in certain circumstances.
|X| In certain circumstances, the Fund may not
earn sufficient income from its
investments to pay dividends on the
Preferred Shares.
|X| If interest rates rise, the value of the
Fund's investment portfolio will decline,
reducing the asset coverage for Preferred
Shares.
Leverage Risk. The Preferred Shares leverage creates an
opportunity for increased return but, at the same time, will
involve special risk considerations. Leveraging resulting
from the Preferred Shares will magnify declines as well as
increases in the net asset value of the Fund's common stock
and in the net return on its portfolio. Although the
principal amount of the Fund's Preferred Shares will be
fixed, the Fund's assets may change in value during the time
the Preferred Shares are outstanding, thus increasing
exposure to capital risk. To the extent the return derived
from the assets obtained with the Preferred Shares proceeds
exceeds the interest and other expenses that the Fund will
have to pay, the Fund's net return will be greater than if
Preferred Shares leverage was not used. Conversely, however,
if the return from the assets obtained with the Preferred
Shares proceeds is not sufficient to cover the cost of
borrowing, the net return of the Fund will be less than if
Preferred Shares leverage was not used, and therefore the
amount available for distribution to the Fund's shareholders
as dividends will be reduced.
Interest Rate Risk. The Preferred Shares pay dividends based
on shorter-term interest rates. The Fund presently has
invested the proceeds of the Bank Debt in REITs and other
dividend paying and income producing securities
(collectively, "Income Producing Securities") and
anticipates continuing to do so in order to generate
sufficient income to pay dividends on the Preferred Shares
when due. The dividends and rates paid on the Income
Producing Securities can be expected to fluctuate. If
short-term interest rates rise, dividend rates on the
Preferred Shares will also rise since the auction setting
the dividend rate on Preferred Shares will compete for
investors with other short-term instruments. A significant
increased dividend rate on the Preferred Shares could result
in the Fund under-earning its Preferred Shares dividend,
which would lead to the Preferred Shares shareholders
receiving a return of capital, assuming there are no capital
gains to be paid out. Similarly, if the rating agencies
lower the rating assigned to the Preferred Shares, the
dividend rate on the Preferred Shares will likely increase.
The Fund must pay all its expenses before it can pay any
dividends, including any Preferred Shares dividends.
Risk Associated with Concentrating in REITs. The Fund has
adopted an investment policy of concentrating in REITs.
Under normal market conditions, the Fund is required to
maintain over 25% of its investments in REITs and companies
in the real estate industry. The Fund must obtain
shareholder approval prior to changing this policy, thus
limiting its flexibility to liquidate REITs in the future
should market conditions warrant. Since the Fund
concentrates its assets in the real estate industry, the
Fund's performance will be impacted by the performance of
the REIT markets. Property values may fall due to increasing
vacancies or declining rents resulting from economic, legal,
cultural or technological developments. REIT prices also may
drop because of the failure of borrowers to pay their loans
and poor management. Many REITs utilize leverage, which
increases investment risk and could adversely affect a
REIT's operations and market value in periods of rising
interest rates as well as risks normally associated with
debt financing. In addition, there are risks associated with
particular sectors of real estate investments (e.g., retail,
office, hotel, healthcare and multifamily properties),
although the Fund does not intend to focus on any particular
sector of real estate investments.
Auction Risk. The dividend rate for the Preferred Shares
normally is set through an auction process. In the auction,
holders of Preferred Shares may indicate the dividend rate
at which they would be willing to hold or sell their
Preferred Shares or purchase additional Preferred Shares.
The auction also provides liquidity for the sale of
Preferred Shares. An auction fails if there are more
Preferred Shares offered for sale than there are buyers. You
may not be able to sell your Preferred Shares at an auction
if the auction fails. A holder of the Preferred Shares
therefore can be given no assurance that there will be
sufficient clearing bids in any auction or that the holder
will be able to sell its Preferred Shares in an auction.
Also, if you place bid orders (orders to retain Preferred
Shares) at an auction only at a specified dividend rate, and
that rate exceeds the rate set at the auction, you will not
retain your Preferred Shares. Additionally, if you buy
Preferred Shares or elect to retain Preferred Shares without
specifying a dividend rate below which you would not wish to
buy or continue to hold those Preferred Shares, you could
receive a lower rate of return on your Preferred Shares than
the market rate. Finally, the dividend periods for the
Preferred Shares may be changed by the Fund, subject to
certain conditions and with notice to the holders of
Preferred Shares, which could also affect the liquidity of
your investment.
As noted above, if there are more Preferred Shares offered
for sale than there are buyers for those Preferred Shares in
any auction, the auction will fail and you may not be able
to sell some or all of your Preferred Shares at that time.
The relative buying and selling interest of market
participants in your Preferred Shares and in the auction
rate securities market as a whole will vary over time, and
such variations may be affected by, among other things, news
relating to the Fund, the attractiveness of alternative
investments, the perceived risk of owning the security
(whether related to credit, liquidity or any other risk),
the tax treatment accorded the instruments, the accounting
treatment accorded auction rate securities, including recent
clarifications of U.S. generally accepted accounting
principles relating to the treatment of auction rate
securities, reactions to regulatory actions or press
reports, financial reporting cycles and market sentiment
generally. Shifts of demand in response to any one or
simultaneous particular events cannot be predicted and may
be short-lived or exist for longer periods.
Secondary Market Risk. If you try to sell your Preferred
Shares between auctions you may not be able to sell any or
all of your Preferred Shares or you may not be able to sell
them for $25,000 per share or $25,000 per share plus
accumulated but unpaid dividends. If the Fund has designated
a special dividend period, changes in interest rates could
affect the price you would receive if you sold your
Preferred Shares in the secondary market. You may transfer
Preferred Shares outside of auctions only to or through a
Broker-Dealer that has entered into a Broker-Dealer
Agreement, or other persons as the Fund permits.
Securities and Exchange Commission Inquiries. Certain of the
Underwriters have advised the Fund that those Underwriters
and various other broker-dealers and other firms that
participate in the auction rate securities market received
letters from the staff of the Securities and Exchange
Commission in the spring of 2004. The letters requested that
each of these firms voluntarily conduct an investigation
regarding its respective practices and procedures in that
market. Pursuant to these requests, each of those
Underwriters conducted its own voluntary review and reported
its findings to the Securities and Exchange Commission
staff. At the staff's request, those Underwriters are
engaging in discussions with the staff concerning its
inquiry. Neither those Underwriters nor the Fund can predict
the ultimate outcome of the inquiry or how that outcome will
affect the market for the Preferred Shares or the auctions.
Ratings and Asset Coverage Risk. While it is expected that
Moody's will assign a rating of Aaa and Fitch will assign a
rating of AAA to the Preferred Shares, such ratings do not
eliminate or necessarily mitigate the risks of investing in
the Preferred Shares. Moody's or Fitch could downgrade its
rating of the Preferred Shares or withdraw its rating of the
Preferred Shares at any time, which may make your shares
less liquid at an auction or in the secondary market and may
materially and adversely affect the value of the Preferred
Shares if sold outside an auction. If the Fund fails to
satisfy the asset coverage ratios discussed under
"Description of Preferred Shares - Rating Agency Guidelines
and Asset Coverage," the Fund will be required to redeem, at
a time that may not be favorable to the Fund or its
shareholders, a sufficient number of the Preferred Shares in
order to return to compliance with the asset coverage
ratios.
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 federal income tax
purposes.
General Risks of Investing in the Fund. The Fund is not a
complete investment program and should only be considered as
an addition to an investor's existing diversified portfolio
of investments. Due to uncertainty inherent in all
investments, there can be no assurance that the Fund will
achieve its investment objectives.
|X| Non-Diversified Status Risk. The Fund is classified as "non-diversified"
under the 1940 Act. As a result, it can invest a greater portion of its assets
in obligations of a single issuer than a "diversified" fund. The Fund will
therefore be more susceptible than a diversified fund to being adversely
affected by any single corporate, economic, political or regulatory
occurrence. The Fund intends to diversify its investments to the extent
necessary to qualify, and maintain its status, as a regulated investment
company under U.S. federal income tax laws. See "Risks Factors - General Risks
of Investing in the Fund" and "Federal Income Tax Matters."
|X| Investments in Common Stocks. The Fund expects to invest, under normal
market conditions, in excess of 80% of its assets in publicly traded common
stocks. Common stocks generally have greater risk exposure and reward
potential over time than bonds. The volatility of common stock prices has
historically been greater than bonds, and as the Fund invests primarily in
common stocks, the Fund's net asset value may also be volatile. Further,
because the time horizon for the Fund's investments in common stock is longer,
the time necessary for the Fund to achieve its objective of total return will
likely be longer than for a fund that invests solely for income.
|X| Reinvestment Risk. Income from the Fund's portfolio will decline if the Fund invests
the income from, or proceeds from the sale of its, Income Producing Securities into lower
yielding instruments. A decline in income could affect the Fund's ability to pay
dividends on the Preferred Shares.
|X| Concentration Risk. The Fund intends to concentrate its common stock investments in a
few issuers and to take large positions in those issuers, consistent with being a
"non-diversified" fund. As a result, the Fund may be subject to a greater risk of loss than
a diversified fund or a fund that has diversified its investments more broadly.
Taking larger positions is also likely to increase the volatility of the Fund's net
asset value, reflecting fluctuation in the value of large Fund holdings.
|X| Investment in Berkshire Hathaway. The Fund presently has invested a
significant percentage of its portfolio in Berkshire Hathaway, Inc. (NYSE: BRK)
("Berkshire"). As of July ___, 2005, the Fund held 310 Berkshire Class A
shares, representing ____% of the Fund's assets. The Advisers do not currently
intend to liquidate any portion of the Fund's position in Berkshire. Although
not an insurance company itself, Berkshire owns Geico Insurance and General Re
Insurance, and therefore derives a significant portion of its income, and its
value, from these two insurance companies. The insurance business can be
significantly affected by interest rates as well as price competition within
the industry. In addition, an insurance company may experience significant
changes in its year to year operating performance based both on claims paid and
on performance of invested assets. Insurance companies can also be affected by
government regulations and tax laws, which may change from time to time. A
significant decline in the market price of Berkshire or any other company in
which the Fund has made a significant common stock investment (i) would result
in a significant decline in the Fund's net asset value, (ii) may result in a
proportionate decline in the market price of the Fund's common shares, and
(iii) may result in greater risk and market fluctuation than a fund that has a
more diversified portfolio.
|X| Investments in REITs. The Fund has adopted a concentration policy pursuant
to which it must, under normal market conditions, invest more than 25% of its
total assets in REITs or companies in the real estate industry. The Fund must
obtain shareholder approval prior to changing this policy, thus limiting its
flexibility to liquidate REITs in the future should market conditions warrant.
Since the Fund will concentrate its assets in the real estate industry, the
Fund's performance will be generally linked to performance of the real estate
markets. Property values may fall due to increasing vacancies or declining
rents resulting from economic, legal, cultural or technological developments.
REIT prices also may drop because of the failure of borrowers to pay their
loans and poor management. Many REITs utilize leverage, which increases
investment risk and could adversely affect a REIT's operations and market value
in periods of rising interest rates, as well as risks normally associated with
debt financing. In addition, there are risks associated with particular
sectors of real estate investments (e.g., retail, office, hotel, healthcare and
multifamily properties), although the Fund does not intend to focus on any
particular sector of real estate investments.
|X| Leveraging Risk. The Fund is currently leveraged with the Bank Debt which
will be replaced with leverage from the Preferred Shares. Use of leverage may
have a number of adverse effects on the Fund and its shareholders including:
(i) leverage may magnify market fluctuations in the Fund's underlying holdings
thus causing a disproportionate change in the Fund's net asset value; (ii) the
Fund's cost of leverage may exceed the return on the underlying securities
acquired with the proceeds of the leverage, thereby diminishing rather than
enhancing the return to shareholders and generally making the Fund's total
return to such shareholders more volatile; (iii) the Fund may be required to
sell investments in order to meet dividend or interest payments on the debt or
preferred stock it has issued when it may be disadvantageous to do so; (iv)
leveraging through the issuance of preferred stock requires that the holders of
the preferred stock have class voting rights on various matters that could make
it more difficult for the holders of the Fund's common stock to change the
investment objective or fundamental policies of the Fund, to convert it to an
open-end fund or make certain other changes; and (v) the Fund may be forced to
redeem some or all of the Preferred Shares at inopportune times due to a
decline in market value of Fund investments.
|X| Discount From Net Asset Value. Common stock of closed-end funds frequently
trade at a market price that is less than the value of the net assets
attributable to those shares (a "discount"). The possibility that the Fund's
shares will trade at a discount from net asset value is a risk separate and
distinct from the risk that the Fund's net asset value will decrease. The risk
of purchasing shares of a closed-end fund that might trade at a discount or
unsustainable premium is more pronounced for investors who wish to sell their
shares in a relatively short period of time because, for those investors,
realization of a gain or loss on their investments is likely to be more
dependent upon the existence of a premium or discount than upon portfolio
performance.
|X| Size of the Fund. As of July ___, 2005, the Fund had net assets of
approximately $____ million. As a fund with a relatively small asset base, the
Fund may be subject to certain operational inefficiencies including: higher
expense ratio, less coverage by analysts and the marketplace in general which
can contribute to a less active trading market for the Fund's shares and
consequently a wider discount, more limited ability to attract new investors
and/or take advantage of investment opportunities and less ability to take
advantage of lower transaction costs available to larger investors.
|X| Repurchase of the Fund's Common Stock. The Fund is authorized to repurchase
its common shares on the open market when the shares are trading at a discount
from net asset value as determined by the Board from time to time. The
acquisition of common shares by the Fund will decrease the total assets of the
Fund and, therefore, have the effect of increasing the Fund's expense ratio and
may adversely affect the ability of the Fund to achieve its investment
objectives. Furthermore, the acquisition of common shares by the Fund may
require the Fund to redeem the Preferred Shares in order to maintain certain
asset coverage requirements. To the extent the Fund may need to liquidate
investments to fund repurchase of common shares, this may result in portfolio
turnover which will result in additional expenses being borne by the Fund.
|X| Dependence on Key Personnel. The Advisers are
dependent upon the expertise of Stewart
Horejsi in providing advisory services with
respect to the Fund's investments. If the
Advisers were to lose the services of Mr.
Horejsi, their ability to service the Fund
could be adversely affected. There can be no
assurance that a suitable replacement could
be found for Mr. Horejsi in the event of his
death, resignation, retirement or inability
to act on behalf of the Advisers.
|X| Issuer Risk. The value of the Fund's
portfolio may decline for a number of reasons
which directly relate to the issuers of the
securities in the portfolio, such as
management performance, financial leverage
and reduced demand for an issuer's goods and
services.
|X| Inflation Risk. Inflation risk is the risk
that the value of assets or income from
investments will be worth less in the future
as inflation decreases the value of money. As
inflation increases, the real value of the
Fund's portfolio can decline.
|X| Repurchase Agreements. The use of repurchase agreements involves certain
risks. For example, if the seller of securities under a repurchase agreement
defaults on its obligation to repurchase the underlying securities, as a result
of bankruptcy or otherwise, the Fund will seek to dispose of such securities,
which action could involve costs or delays. If the seller becomes insolvent and
subject to liquidation or reorganization under applicable bankruptcy or other
laws, the Fund's ability to dispose of the underlying securities may be
restricted. Finally, it is possible that the Fund may not be able to
substantiate its interest in the underlying securities.
|X| Foreign Securities Risk. The Fund is permitted to invest in foreign securities.
Investment in non-U.S. issuers may involve unique risks compared to investing in
securities of U.S. issuers. These risks are more pronounced to the extent that the Fund
invests a significant portion of its non-U.S. investments in one region or in the
securities of emerging market issuers. These risks may include:
o Less information about non-U.S. issuers
or markets may be available due to less
rigorous disclosure, accounting
standards or regulatory practices.
o Many non-U.S. markets are smaller, less
liquid and more volatile. In a changing
market, the Advisers may not be able to
sell the Fund's portfolio securities at
times, in amounts and at prices they
consider reasonable.
o Currency exchange rates or controls may
adversely affect the value of the
Fund's investments.
o The economies of non-U.S. countries may
grow at slower rates than expected or
may experience downturns or recessions.
o Withholdings and other non-U.S. taxes may decrease the Fund's return.
|X| Currency Risk. A portion of the Fund's assets may be quoted or denominated
in non-U.S. currencies. These securities may be adversely affected by
fluctuations in relative currency exchange rates and by exchange control
regulations. The Fund's investment performance may be negatively affected by a
devaluation of a currency in which the Fund's investments are quoted or
denominated. Further, the Fund's investment performance may be significantly
affected, either positively or negatively, by currency exchange rates because
the U.S. dollar value of securities quoted or denominated in another currency
will increase or decrease in response to changes in the value of such currency
in relation to the U.S. dollar.
|X| Sovereign debt risk. An investment in debt obligations of non-U.S.
governments and their political subdivisions ("sovereign debt") involves
special risks that are not present in corporate debt obligations. The non-U.S.
issuer of the sovereign debt or the non-U.S. governmental authorities that
control the repayment of the debt may be unable or unwilling to repay principal
or interest when due, and the Fund may have limited recourse in the event of a
default. During periods of economic uncertainty, the market prices of
sovereign debt may be more volatile than prices of debt obligations of U.S.
issuers. In the past, certain non-U.S. countries have encountered difficulties
in servicing their debt obligations, withheld payments of principal and
interest and declared moratoria on the payment of principal and interest on
their sovereign debt.
|X| Liquidity Risk. Although the Fund invests primarily in securities traded on
national exchanges, it may invest in less liquid assets from time to time that
are not readily marketable and may be subject to restrictions on resale.
Illiquid securities may be more difficult to value or may impair the Fund's
ability to realize the full value of its assets in the event of a voluntary or
involuntary liquidation of such assets and thus may cause a decline in the
Fund's net asset value. The Fund has no limitation on the amount of its assets
that may be invested in securities which are not readily marketable or are
subject to restrictions on resale, although it may not invest more than 30% of
the value of its total assets in securities which have been acquired through
private placement. In certain situations, the Fund could find it more
difficult to sell such securities at desirable times and/or prices.
|X| Market Disruption Risk. The terrorist attacks in the United States on
September 11, 2001 had a disruptive effect on the securities markets. The Fund
cannot predict the effects of similar events in the future on the U.S.
economy. These terrorist attacks and related events, including the war in
Iraq, its aftermath, and continuing occupation of Iraq by coalition forces,
have led to increased short-term market volatility and may have long-term
effects on U.S. and world economies and markets. A similar disruption of the
financial markets could impact interest rates, auctions, secondary trading,
ratings, credit risk, inflation and other factors relating to the Preferred
Shares.
|X| Anti-Takeover Provisions Risk. The Fund's charter (the "Charter") and
bylaws (the "Bylaws") include provisions that could limit the ability of other
entities or persons to acquire control of the Fund or to change the composition
of its Board. Such provisions could limit the ability of shareholders to sell
their shares at a premium over prevailing market prices by discouraging a third
party from seeking to obtain control of the Fund. These provisions include
advance notice requirements for shareholder proposals and super-majority voting
requirements for certain transactions with affiliates, open-ending the Fund or
a merger, liquidation, asset sale or similar transaction.
Investment The Fund is co-advised by Boulder
Advisers Investment Advisers, LLC and Stewart West Indies Trading
Company, Ltd. d/b/a Stewart Investment Advisers. The
Advisers have been providing advisory services to the Fund
since January 2002, and to Boulder Total Return Fund, Inc.
since March 1999. As of July ___, 2005, the Advisers had a
total of $_____ million in assets under management. The Fund
pays the Advisers an aggregate monthly fee at the annual
rate of 1.25% of the Fund's average monthly net asset value
(the "Adviser Fee"). The liquidation value of any
outstanding preferred stock (e.g., the Preferred Shares) is
included in determining the Fund's net asset value on which
fees are calculated. The Fund's co-administrator is Fund
Administrative Services, LLC ("FAS" or the "Administrator")
which is an affiliate of the Advisers.
Trading Market The Preferred Shares will not be listed on an
exchange. Instead, you may buy or sell the Preferred Shares
at an auction that normally is held every twenty-eight days
by submitting orders to a Broker-Dealer or to a
broker-dealer that has entered into a separate agreement
with a Broker-Dealer. In addition to the auctions,
Broker-Dealers and other broker-dealers may maintain a
secondary trading market in the Preferred Shares outside of
auctions but may discontinue this activity at any time.
There is no assurance that a secondary market will provide
holders of Preferred Shares with liquidity. You may transfer
Preferred Shares outside of auctions only to or through a
Broker-Dealer or a broker-dealer that has entered into a
Broker-Dealer Agreement, or other persons as the Fund
permits.
Dividends and Rate The table below shows the dividend rate,
Period the dividend payment date and the number of days for the
initial rate period of the Preferred Shares offered in this
prospectus. For subsequent rate periods, the Preferred
Shares will pay dividends based on a rate set at auctions
normally held every 28 days. In most instances, dividends
are payable on the first business day following the end of
the rate period.
The rate set at auction will not exceed the maximum
applicable rate. The dividend payment date for special rate
periods will be set out in the notice designating a special
rate period.
Dividends on the Preferred Shares will be cumulative from
the date the Preferred Shares are first issued and will be
paid out of legally available funds.
Initial Dividend Rate Dividend Payment Subsequent Number of Days in Initial Rate
Date for Initial Rate Dividend Period
Period Payment Day
_________________% ____________,2005 __________ ____________
The Fund may, subject to certain conditions, designate
special rate periods of more than 28 days. The Fund may not
designate a special rate period unless sufficient clearing
bids were made in the most recent auction for the Preferred
Shares. In addition, full cumulative dividends, any amounts
due with respect to mandatory redemptions and any additional
dividends payable prior to such date must be paid in full.
The Fund also must have received confirmation from Moody's
and Fitch or any substitute rating agency that the proposed
special rate period will not adversely affect such agency's
then-current rating on the Preferred Shares and the lead
Undewriter designated by the Fund, initially [Lead
Underwriter], must not have objected to the declaration of a
special rate period. See "Description of Preferred
Shares--Dividends and Rate Periods" and "Designation of
Special Rate Periods" and "The Auction".
The Preferred Shares will entitle their holders to receive
cash dividends at a rate per annum that may vary for the
successive dividend periods for such shares. The applicable
rate for a particular dividend period will be determined by
an auction conducted on the business day immediately
preceding the start of such dividend period. A "business
day" is a day on which the NYSE is open for trading and
which is not a Saturday, Sunday or other day on which banks
in New York City are authorized or obligated by law to
close.
Determination of Maximum Applicable Rate. Generally, the
applicable rate for any regular dividend period for the
Preferred Shares will not be more than the maximum
applicable rate. The maximum applicable rate will depend on
the credit rating assigned to the Preferred Shares and on
the duration of the dividend period. The maximum applicable
rate will be the higher of the applicable percentage of the
reference rate or the applicable spread plus the reference
rate. The reference rate (the "Reference Rate") is the
applicable LIBOR Rate (as defined in "Description of
Preferred Shares - Dividends and Rate Periods -
Determination of Maximum Applicable Rate") for a dividend
period of fewer than 365 days or the applicable Treasury
Index Rate (as defined in "Description of Preferred Shares -
Dividends and Rate Periods - Determination of Maximum
Applicable Rate") for a dividend period of 365 days or more.
The applicable percentage or applicable spread as so
determined is further subject to upward but not downward
adjustment in the discretion of the Board after consultation
with the lead Underwriter, initially [Lead Underwriter]. In
the case of a special dividend period, the maximum
applicable rate will be specified by the Fund in the notice
of the special dividend period for such special dividend
payment period.
The applicable percentage and spread are as follows:
Applicable Percentage Payment Table
Credit Ratings Applicable Percentage Applicable Spread
Moody's Fitch
Aaa AAA 125% 1.25%
Aa3 to Aa1 AA- to AA+ 150% 1.50%
A3 to A1 A- to A+ 200% 2.00%
Baa3 to Baa1 BBB- to BBB+ 250% 2.50%
Ba1 and Lower BB+ and lower 300% 3.00%
There is no minimum applicable rate in respect of any
dividend period. See "Description of Preferred Shares -
Dividends and Rate Periods."
Assuming the Fund maintains a Aaa/AAA rating on the
Preferred Shares, the practical effect of the different
methods used to calculate the maximum applicable rate is
shown in the table below:
Reference Rate Maximum Maximum Applicable Method used to
Applicable Rate Rate Using the Determine the
Using the Applicable spread Maximum
Applicable Applicable Rate
ercentage
1% 1.25% 2.25% Spread
2% 2.50% 3.25% Spread
3% 3.75% 4.25% Spread
4% 5.00% 5.25% Spread
5% 6.25% 6.25% Either
6% 7.50% 7.25% Percentage
Prior to each dividend payment date, the Fund is required to
deposit with the Auction Agent sufficient funds for the
payment of declared dividends. The failure to make such a
deposit will result in the cancellation of any auction and
the dividend rate will be the maximum applicable rate until
such failure to deposit is cured or, if not timely cured, a
non-payment rate of 300% of the Reference Rate. The Fund
does not intend to establish any reserves for the payment of
dividends.
Ratings The Preferred Shares are expected to receive ratings
of Aaa from Moody's and AAA from Fitch. These ratings are an
assessment of the capacity and willingness of an issuer to
pay preferred stock obligations. The ratings are not a
recommendation to purchase, hold or sell the Preferred
Shares inasmuch as the rating does not comment as to market
price or suitability for a particular investor. The ratings
also do not address the likelihood that an owner of
Preferred Shares will be able to sell such shares in an
auction or otherwise. The ratings are based on information
obtained from the Fund and other sources. The ratings may be
changed, suspended, or withdrawn in the rating agencies'
discretion as a result of changes in, or the unavailability
of, such information. See "Description of Preferred Shares -
Rating Agency Guidelines and Asset Coverage."
Redemption The Fund is required to redeem Preferred Shares
if the Fund does not meet the asset coverage ratio required
by the 1940 Act, or to correct a failure to meet a rating
agency guideline in a timely manner. The Fund may
voluntarily redeem Preferred Shares, in whole or in part,
subject to certain conditions. See "Description of Preferred
Shares - Redemption" and "Description of Preferred Shares -
Rating Agency Guidelines and Asset Coverage."
Asset Maintenance Under the Articles Supplementary, which
establishes and fixes the rights and preferences of the
Preferred Shares, the Fund must maintain asset coverage of
the Preferred Shares as required by the rating agency or
agencies rating the Preferred Shares (the "Preferred Shares
Basic Maintenance Amount"). The Preferred Shares Basic
Maintenance Amount is the sum of (a) the aggregate
liquidation preference of the Preferred Shares then
outstanding, together with the aggregate liquidation
preference on any other series of preferred shares of the
Fund (plus redemption premium, if any), and (b) certain
accrued and projected dividend and other payment obligations
of the Fund. Moody's and Fitch have each established
separate guidelines for calculating discounted value of the
Fund's assets for purposes of this asset coverage test. To
the extent any particular portfolio holding does not satisfy
a rating agency's guidelines, all or a portion of the
holding's value will not be included in the rating agency's
calculation of discounted value. The Moody's and Fitch
guidelines also impose certain diversification requirements
on the Fund's portfolio.
As required by the 1940 Act, the Fund must also maintain
asset coverage of at least 200% with respect to outstanding
senior securities that are preferred stock, including the
Preferred Shares (the "1940 Act Preferred Share Asset
Coverage").
In the event that the Fund does not satisfy these coverage
tests, some or all of the Preferred Shares will be subject
to mandatory redemption. See "Description of Preferred
Shares - Redemption."
Based on the composition of the Fund's portfolio as of July
__, 2005, the asset coverage of the Preferred Shares, as
measured pursuant to the 1940 Act, would be approximately
____% if the Fund were to issue Preferred Shares
representing approximately ___% of the Fund's managed
assets.
Mandatory If the Preferred Shares Basic Maintenance Amount
Redemption or the 1940 Act Preferred Share Asset Coverage is not
maintained or restored as specified herein, the Preferred
Shares will be subject to mandatory redemption, out of funds
legally available therefore, at the mandatory redemption
price of $25,000 per share plus an amount equal to dividends
thereon (whether or not earned or declared) accumulated but
unpaid to the date fixed for redemption. Any such redemption
will be limited to the minimum number of Preferred Shares
necessary to restore the Preferred Shares Basic Maintenance
Amount or the 1940 Act Preferred Share Asset Coverage, as
the case may be. The Fund's ability to make such a mandatory
redemption may be restricted by the provisions of the 1940
Act.
Optional The Preferred Shares are redeemable at the option
Redemption of the Fund, as a whole or in part, on any dividend payment
date (except on an initial dividend payment date or a
special dividend period with respect to which the Fund has
agreed not to redeem Preferred Shares voluntarily (a
"Non-Call Period")) at the optional redemption price of
$25,000 per share, plus an amount equal to dividends thereon
(whether or not earned or declared) accumulated but unpaid
to the date fixed for redemption plus the premium, if any,
resulting from the designation of a Premium Call Period. A
"Premium Call Period" is a period during which Preferred
Shares are only redeemable at the option of the Fund at a
price per share equal to $25,000 plus accumulated but unpaid
dividends, plus a premium.
Liquidation The liquidation preference for the Preferred
Preference Shares will be $25,000 per share plus accumulated but unpaid
dividends, if any, whether or not declared. See "Description
of Preferred Shares - Liquidation."
Voting Rights The holders of preferred shares, including the
Preferred Shares, voting as a separate class, have the right
to elect at least two Directors of the Fund at all times.
Such holders also have the right to elect a majority of the
Directors in the event that two years' dividends on such
preferred shares are unpaid. In each case, the remaining
Directors will be elected by holders of common shares and
preferred shares, including the Preferred Shares, voting
together as a single class. The holders of preferred shares,
including the Preferred Shares, will vote as a separate
class or classes on certain other matters required under the
Articles Supplementary, the 1940 Act and Maryland law. See
"Description of Preferred Shares - Voting Rights."
Auction Procedure Unless otherwise permitted by the Fund,
investors may only participate in auctions through their
Broker-Dealers. The process for determining the applicable
rate on the Preferred Shares described in this section is
referred to as the "Auction Procedures" and each setting of
the applicable rate is referred to as an "auction."
Prior to the submission deadline on each auction date each
customer of a Broker-Dealer who is listed on the records of
that Broker-Dealer (or, if applicable, the Auction Agent) as
a beneficial owner of such shares may submit the following
types of orders with respect to shares to that
Broker-Dealer:
1. Hold Order - indicating its desire to hold shares without
regard to the applicable rate for the next dividend period.
2. Bid - indicating its desire to purchase or hold the
indicated number of shares at $25,000 per share if the
applicable rate for shares for the next dividend period is
not less than the rate specified in the bid. A bid order by
an existing holder will be deemed an irrevocable offer to
sell shares at $25,000 per share if the applicable rate for
shares for the next dividend period is less than the rate or
spread specified in the bid.
3. Sell Order - indicating its desire to sell shares at
$25,000 per share without regard to the applicable rate for
the next dividend period.
A beneficial owner may submit different types of orders to
its Broker-Dealer with respect to different Preferred Shares
then held by the beneficial owner. A beneficial owner of
such shares that submits its bid with respect to such shares
to its Broker-Dealer having a rate higher than the maximum
applicable rate for such shares on the auction date will be
treated as having submitted a sell order to its
Broker-Dealer. A beneficial owner of shares that fails to
submit an order to its Broker-Dealer with respect to such
shares will ordinarily be deemed to have submitted a hold
order with respect to such shares to its Broker-Dealer.
However, if a beneficial owner of shares fails to submit an
order with respect to such shares to its Broker-Dealer for
an auction relating to a special dividend period of more
than ___ days, such beneficial owner will be deemed to have
submitted a sell order to its Broker-Dealer. A sell order
constitutes an irrevocable offer to sell the Preferred
Shares subject to the sell order. A beneficial owner that
offers to become the beneficial owner of additional
Preferred Shares is, for purposes of such offer, a potential
holder as discussed below.
A potential holder is a customer of a Broker-Dealer that
either (i) is not a beneficial owner of Preferred Shares but
wishes to purchase shares or (ii) is a beneficial owner of
Preferred Shares that wishes to purchase additional shares.
A potential holder may submit bids to its Broker-Dealer in
which it offers to purchase shares at $25,000 per share if
the applicable rate for shares for the next dividend period
is not less than the specified rate in such bid. A bid
placed by a potential holder of shares specifying a rate
higher than the maximum applicable rate for shares on the
auction date will not be accepted.
The Broker-Dealers in turn will submit the orders of their
respective customers who are beneficial owners and potential
holders to the Auction Agent. The Broker-Dealers will
designate themselves (unless otherwise permitted by the
Fund) as existing holders of shares subject to orders
submitted or deemed submitted to them by beneficial owners.
They will designate themselves as potential holders of
shares subject to orders submitted to them by potential
beneficial owners. However, neither the Fund nor the Auction
Agent will be responsible for a Broker-Dealer's failure to
comply with these Auction Procedures. Any order placed with
the Auction Agent by a Broker-Dealer as or on behalf of an
existing holder or a potential holder will be treated the
same way as an order placed with a Broker-Dealer by a
beneficial owner or potential beneficial owner. Similarly,
any failure by a Broker-Dealer to submit to the Auction
Agent an order for any Preferred Shares held by it or
customers who are beneficial owners will be treated as a
beneficial owner's failure to submit to its Broker-Dealer an
order in respect of Preferred Shares held by it. A
Broker-Dealer may also submit orders to the Auction Agent
for its own account as an existing holder or potential
holder, provided it is not an affiliate of the Fund.
There are sufficient clearing bids for shares in an auction
if the number of shares subject to bids submitted to the
Auction Agent by Broker-Dealers for potential holders with
rates or spreads equal to or lower than the maximum
applicable rate is at least equal to or exceeds the sum of
the number of shares subject to sell orders and the number
of shares subject to bids specifying rates or spreads higher
than the maximum applicable rate submitted or deemed
submitted to the Auction Agent by Broker-Dealers for
existing holders. If there are sufficient clearing bids for
shares, the applicable rate for shares for the next
succeeding dividend period thereof will be the lowest rate
specified in the submitted bids which, taking into account
such rate and all lower rates bid by Broker-Dealers as or on
behalf of existing holders and potential holders, would
result in existing holders and potential holders owning the
shares available for purchase in the auction.
If there are not sufficient clearing bids for such shares,
the applicable rate for the next dividend period will be the
maximum applicable rate on the auction date. However, if the
Fund has declared a special dividend period and there are
not sufficient clearing bids, the election of a special
dividend period will not be effective and the applicable
rate for the next rate period will be the same as during the
current rate period. If there are not sufficient clearing
bids, beneficial owners of Preferred Shares that have
submitted or are deemed to have submitted sell orders may
not be able to sell in the auction all shares subject to
such sell orders. If all of the applicable outstanding
Preferred Shares are the subject of submitted hold orders,
then the dividend period following the auction will
automatically be the same length as the minimum dividend
period and the applicable rate for the next dividend period
will be 90% of the Reference Rate on the date of the
applicable auction.
The Auction Procedures include a pro rata allocation of
shares for purchase and sale which may result in an existing
holder continuing to hold or selling, or a potential holder
purchasing, a number of Preferred Shares that is different
than the number of shares specified in its order. To the
extent the allocation procedures have that result,
Broker-Dealers that have designated themselves as existing
holders or potential holders in respect of customer orders
will be required to make appropriate pro rata allocations
among their respective customers.
The following is a simplified example of how a typical
auction works. Assume that the Fund has 1,000 outstanding
Preferred Shares and three current holders. The three
current holders and three potential holders submit orders
through broker-dealers at the auction:
Holder Goal Action
Current Holder A........... Owns 500 shares, wants to Bid order of 4.1% rate for
sell all 500 shares if all 500 shares
auction rate is less than
4.1%
Current Holder B........... Owns 300 shares, wants to Hold order - will take the
hold auction rate
Current Holder C........... Owns 200 shares, wants to Bid order of 3.9% rate for
sell all 200 shares if all 200 shares
auction rate is less than
3.9%
Current Holder D........... Wants to buy 200 shares Places order to buy at or
above 4.0%
Current Holder E........... Wants to buy 300 shares Places order to buy at or
above 3.9
Current Holder F........... Wants to buy 200 shares Places order to buy at or
above 4.1%
The lowest dividend rate that will result in all 1,000
Preferred Shares in the above example continuing to be held
is 4.0% (the offer by D). Therefore, the dividend rate will
be 4.0%. 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.
Federal Income The Fund intends to take the position that
Taxation under present law, the Preferred Shares will constitute
stock of the Fund. Distributions with respect to the
Preferred Shares (other than distributions in redemption of
the Preferred Shares that are treated as exchanges of stock
under Section 302(b) of the Code) will constitute dividends
to the extent of the Fund's current or accumulated earnings
and profits as calculated for U.S. federal income tax
purposes. The dividends generally will be taxable as
ordinary income. Distributions of net capital gain that are
designated by the Fund as capital gain dividends, if any,
however, will be treated as long-term capital gains without
regard to the length of time the shareholder has held shares
of the Fund.
Administrator, Custodian, Fund Administrative Services, LLC serves as the Fund's
Transfer Agent, Registrar co-administrator. Under its Administration Agreement
and Dividend Disbursing with the Fund, FAS provides certain administrative and
Agent executive management services to the Fund including:
providing the Fund's principal offices and executive officers,
overseeing and administering all contracted service
providers, making recommendations to the Board
regarding policies of the Fund, conducting
shareholder relations, authorizing expenses and
other administrative tasks.
Under the Administration Agreement, FAS receives a monthly
fee calculated at an annual rate of 0.20% of the value of
the Fund's average monthly net assets up to $250 million;
0.18% of the Fund's average monthly net assets on the next
$150 million; and 0.15% on the value of the Fund's average
monthly assets over $400 million. FAS has agreed to waive a
portion of its fee in order to limit the Fund's the total
monthly administration expenses (including administration,
co-administration, transfer agent and custodian fees) to
0.30% of the Fund's average monthly net assets. The equity
owners of FAS are Evergreen Atlantic, LLC and the Lola Brown
Trust No. 1B, each of which is considered to be an
"affiliated person" of the Fund as that term is defined in
the 1940 Act.
Investors Bank & Trust Company ("Investors Bank") serves as
the Fund's co-administrator and custodian. As compensation
for its services, Investors Bank receives certain
out-of-pocket expenses, transaction fees and asset-based
fees of ___%, which are accrued daily and paid monthly.
PFPC Inc. ("PFPC"), an indirect, majority-owned subsidiary
of PNC Financial Services Group, Inc., serves as the Fund's
transfer agent, dividend-paying agent and registrar for the
Fund's common stock. As compensation for PFPC's services as
such, the Fund pays PFPC a monthly fee plus certain
out-of-pocket expenses.
Deutsche Bank Trust Company Americas will serve as Auction
Agent, transfer agent, dividend paying agent and registrar
for the Preferred Shares.
FINANCIAL HIGHLIGHTS (UNAUDITED)
The table below sets forth selected financial data, including operating
performance data, total investment returns, ratios to average net assets and
other supplemental data, for a share of the Fund's common stock outstanding
throughout the period presented. The per share operating performance and ratios
for the period ending June 30, 2001 and prior years were audited by the Fund's
previous independent registered public accounting firm. The per share operating
performance and ratios for the periods ended June 30, 2002, 2003 and 2004 were
audited by _________, the Fund's independent registered public accounting firm,
as stated in their report which is incorporated by reference into the Statement
of Additional Information. The following information should be read in
conjunction with the Financial Statements and Notes thereto, which are
incorporated by reference into the Statement of Additional Information.
[INSERT FINANCIAL DATA]
The information above represents the operating performance data for a common
share outstanding, total investment return, ratios to average net assets and
other supplemental data for the period indicated. This information has been
determined based upon financial information provided in the financial statements
and market value data for the Fund's common shares.
As of July ___, 2005, the Fund had a bank line of credit in the amount of
$20,000,000 (defined above as the "Bank Debt") of which it had drawn down
$20,000,000. The Bank Debt is used for investment and will be repaid entirely in
conjunction with the Offering out of the proceeds of the Offering. The following
table depicts the outstanding Bank Debt as of July ___, 2005 and the end of each
fiscal year within the most recent 10 years during which the Fund had the Bank
Debt or any other bank debt outstanding.
Year Total Amount Outstanding Exclusive Asset Coverage Per Unit
of Treasury Securities
11/30/2003 $20,000,000 4.79
11/30/2004 $18,000,000 5.80
6/30/2005 $20,000,000 5.41
THE FUND
The Fund is a non-diversified, closed-end management investment company
organized as a Maryland corporation in October 1972. From its inception, and
prior to April 26, 2002, the Fund was named USLife Income Fund, Inc. and was
virtually 100% invested in corporate bonds. In January 2002, the Fund's largest
shareholder, the Ernest Horejsi Trust No. 1B, succeeded in replacing the Board
of Directors with a slate of its nominees. Soon thereafter, in April 2002,
shareholder approved changing the Fund's investment objective and corporate
name, changing the Fund's classification from diversified to non-diversified and
changing or eliminating a number of the Fund's fundamental investment
restrictions. Thereafter, the Fund began the process of liquidating its bond
portfolio and started investing in common equities consistent with the new
investment objective. As of July ___, 2005, the Fund had none of its assets
invested in bonds.
As of July ___, 2005, the Fund had _________ shares of common stock outstanding.
The Fund's common shares are traded on the NYSE under the symbol "BIF." The
average weekly trading volume of the Fund's common stock on the NYSE during the
period from ____________ through _____________ was ____shares. As of July ___,
2005, the net assets of the Fund were approximately $___________.
The following provides information about the Fund's outstanding shares as of
_________, 2005:
Title of class Amount Amount held by Amount
Authorized the Fund for its Outstanding
Account
Common Shares........ 240,000 0
Preferred Shares
Preferred Shares..... 1,000 0 0
USE OF PROCEEDS
The net proceeds of the Offering will be approximately $24,________ after
payment of offering expenses (estimated to be $_______) and the sales load.
Approximately $_____ of the net proceeds will be used to redeem the Bank Debt
(which has an interest rate of __% and matures on demand), with the balance
being invested in accordance with the Fund's investment objective and policies
as soon as practicable. We anticipate that we will be able to invest
substantially all of such net proceeds within approximately three months after
completion of this offering. Pending such investment, we anticipate investing
the proceeds in short-term securities issued by the U.S. government or its
agencies or instrumentalities or in high quality, short-term or long-term debt
obligations or money market instruments.
CAPITALIZATION (UNAUDITED)
The Fund's Charter authorizes the issuance of 250,000,000 shares of common
stock, par value $0.01 per share. In 2002, Fund shareholders approved an
amendment to the Fund's Charter which authorizes the Board, without shareholder
approval, to increase the Fund's authorized capital. Pursuant to such amendment,
and in connection with a rights offering in 2002, the Board resolved to increase
the authorized capital of the Fund to its current level.
The following table sets forth the capitalization of the Fund as of July __,
2005, and as adjusted to give effect to the issuance of the Preferred Shares
offered hereby assuming the Fund issues [1,000 ] of the Preferred Shares
representing approximately [ ] of the Fund's total assets (including estimated
offering expenses of $[ ] and a sales load of $[_____] per Preferred Share). The
common shareholders' paid in capital is charged with the cost of issuance of the
Preferred Shares.
Actual As Adjusted
Preferred Shares, $0.01 par value, $25,000 stated
value per share, at liquidation value, including
dividends payable; _______ shares authorized (no
shares issued); 1,000 shares issues, as adjusted $___________ $___________
Shareholder's Equity:
Common shares, $0.01 par value per share; ______
shares authorized, _________ shares outstanding
(1) $___________ $___________
Undistributed net investment income $___________ $___________
Accumulated net realized gain/loss on investments $___________ $___________
Net unrealized appreciation/depreciation on
investments $___________ $___________
Net assets attributable to common shares $___________ $___________
Net assets, plus liquidation preferences of
Preferred Shares $___________ $___________
(1) None of these outstanding shares are held by or for the account of the Fund.
INVESTMENT OBJECTIVE AND POLICIES
INVESTMENT OBJECTIVE. The Fund's investment objective is total return. The Fund
seeks to produce both income and long-term capital appreciation by investing in
a portfolio of equity and debt securities. The Fund invests primarily in common
stocks, including dividend paying common stocks such as those issued by
utilities, REITs and closed-end RICs. The Fund also invests in fixed income
securities such as U.S. government securities, preferred stocks and bonds. The
Fund invests primarily in securities of U.S.-based companies and to a lesser
extent in foreign equity securities and sovereign debt, in each case denominated
in foreign currency. The Fund has no restrictions on its ability to invest in
foreign securities. The Fund is concentrated in REITs which means it must invest
more than 25% of its total assets in REITs and companies in the real estate
industry. No assurance can be given that the Fund will achieve its investment
objective.
INVESTMENT POLICIES. The Fund is a "non-diversified" investment company, as
defined in the 1940 Act, which means that it is permitted to invest its assets
in a more limited number of issuers than "diversified" investment companies. A
diversified company may not, with respect to 75% of its total assets, invest
more than 5% of its total assets in the securities of any one issuer and may not
own more than 10% of the outstanding voting securities of any one issuer.
However, pursuant to the requirements of Subchapter M of the Code, (A) not more
than 25% of the Fund's total assets may be invested in securities of any one
issuer (other than U.S. government securities and RICs) or of any two or more
issuers controlled by the Fund which may be deemed to be engaged in the same,
similar or related trades or businesses, and (B) with respect to 50% of the
total value of the Fund's portfolio, (i) the Fund must limit to 5% the portion
of its assets invested in the securities of a single issuer (other than U.S.
government securities and RICs), and (ii) the Fund may not own more than 10% of
the outstanding voting securities of any one issuer (other than U.S. government
securities and RICs). The Fund intends to concentrate its common stock
investments in a few issuers and to take large positions in those issuers,
consistent with being a "non-diversified" fund. As a result, the Fund may be
subject to a greater risk of loss than a diversified fund or a fund that has
diversified its investments more broadly. Taking larger positions is also likely
to increase the volatility of the Fund's net asset value, reflecting fluctuation
in the value of large Fund holdings.
As a matter of investment policy, the Fund is concentrated in REITs, which means
it must, under normal market conditions, invest more than 25% of its total
assets in REITs or companies in the real estate industry. The Fund must obtain
shareholder approval prior to changing this policy. The portion of the Fund's
assets invested in REITs and such other companies will vary based on market
conditions, but it is not expected to exceed 50% of total assets. As of July
___, 2005, ___% of the Fund's assets were invested in REITs. Although the Fund
can invest in REITs of any size, it currently intends to invest in REITs with
market capitalizations of greater than $500 million. Although the Fund generally
invests in U.S. REITs, such companies may invest directly or indirectly in
non-U.S. properties, and the Fund may make direct investments in foreign REITs.
The Fund presently owns one foreign REIT security.
Under normal market conditions, the Fund intends to invest at least 80% of its
net assets in common stocks, primarily domestic common stocks and secondarily in
foreign common stocks denominated in foreign currencies. The term
"income-producing common stocks" includes RICs whose objective is income, REITs,
and other dividend-paying common stocks. Under the 1940 Act, the Fund must limit
to 10% the portion of its assets invested in RICs, and under Subchapter M, no
single investment can exceed 25% of the Fund's total assets at the time of
purchase. These percentage limitations are calculated at the time of investment,
and the Fund is not required to dispose of assets if holdings increase above
these levels due to appreciation. As of July __, 2005, ___% of the Fund's assets
were invested in RICs, and ___% of the Fund's assets were invested in Berkshire
Hathaway, Inc. Class A shares. The Fund has no restrictions on its ability to
invest in foreign securities. As of July __, 2005, ___% of the Fund's assets
were invested in foreign securities.
The portion of the Fund's assets that are not invested in common stocks may be
invested in fixed income securities (including bonds, U.S. government
securities, notes, bills, debentures, preferred stocks, convertible securities,
bank debt obligations, repurchase agreements and short-term money market
obligations), cash equivalents and income-producing common stocks. Under normal
circumstances, the Fund will not have more than 10% of its assets in cash or
cash equivalents. The Fund may, for temporary defensive purposes, allocate a
higher portion of its assets to cash and cash equivalents. For this purpose,
cash equivalents consist of, but are not limited to, short-term (less than
twelve months to maturity) U.S. government securities, certificates of deposit
and other bank obligations, investment grade corporate bonds other debt
instruments and repurchase agreements.
The Fund is also subject to the following fundamental policies, which may only
be changed with shareholder approval. The Fund may not:
1. Issue any senior securities except as permitted under the 1940 Act.
2. Invest in the securities of companies conducting their principal
business activity in the same industry if, immediately after such
investment, the value of its investments in such industry would exceed
25% of the value of its total assets; provided that this limitation
will not apply to REITs or related companies in the same industry as
REITs.
3. Participate on a joint or a joint and several basis in any trading
account in securities, except that the Fund may, to the extent
permitted by rules, regulations or orders of the Securities and
Exchange Commission, combine orders with others for the purchases and
sales of securities in order to achieve the best overall execution.
4. Purchase or sell interests in oil, gas or other mineral exploration or
development programs.
5. Purchase or sell real estate, except that the Fund may purchase or
sell interests in REITs and securities secured by real estate or
interests therein issued by companies owning real estate or interests
therein.
6. Purchase or sell commodities or commodity contracts.
7. Make loans other than through the purchase of debt securities in
private placements and the loaning of portfolio securities as
described under "Investment Objective and Policies".
8. Borrow money in an amount exceeding the maximum permitted under the
1940 Act.
9. Underwrite securities of other issuers, except insofar as it may be
deemed to be an underwriter in selling a portfolio security which may
require registration under the Securities Act of 1933, as amended (the
"Securities Act").
10. Invest more than 30% of the value of its total assets in securities
which have been acquired through private placements.
11. Purchase or retain the securities of any issuer, if, to the Fund's
knowledge, those officers and directors of the Fund or its investment
advisers who individually own beneficially more than 1/2 of 1% of the
outstanding securities of such issuer, together own beneficially more
than 5% of such outstanding securities.
12. Pledge, mortgage or hypothecate its assets except in connection with
permitted borrowing and to the extent related to transactions in which
the Fund is authorized to engage.
Except for the Fund's investment objective, industry concentration and
fundamental investment restrictions as described in this prospectus and in the
Statement of Additional Information, the percentage limitations and investment
policies set forth in this prospectus can be changed by the Board without
shareholder approval.
OTHER INVESTMENT TECHNIQUES. The Fund may engage in other types of transactions,
including, but not limited to, investment in restricted and illiquid securities,
repurchase agreements, when-issued and forward commitment transactions,
borrowing, securities lending and other transactions. For a description of such
types of transactions, see "Investment Policies and Techniques" and "Other
Investment Policies and Techniques" in the Statement of Additional Information.
INVESTMENT PHILOSOPHY
COMMON STOCKS. With respect to the Fund's common stock portfolio (other than
common stocks purchased primarily for their income-producing potential), the
Advisers use an "intrinsic value" approach to selecting and managing the Fund's
assets. The Advisers define intrinsic value as the discounted value of the cash
that can be taken out of a business during its remaining life. Accordingly, in
their securities selection process, the Advisers put primary emphasis on
analysis of balance sheets, cash flows, the quality of management and its
ability to efficiently and effectively allocate capital, various internal
returns which indicate profitability, and the relationships that these factors
have to the price of a given security. The intrinsic value approach is based on
the belief that the securities of certain companies may sell at a discount from
the Advisers' estimate of such companies' "intrinsic value". The Advisers will
attempt to identify and invest in such securities, with the expectation that
such value discount will narrow over time and thus provide capital appreciation
for the Fund. When the Fund makes an investment in common stock of an issuer, it
will likely make a significant investment and typically hold such stock for a
long period of time. Over time, the Fund believes that value investing produces
superior total returns.
FIXED INCOME INVESTMENTS. In seeking its total return objective, the Fund may
invest a portion of its assets in U.S. government securities, preferred stocks,
bonds and other income producing securities. In selecting such investments, the
Advisers consider, among other things, current yield, liquidity, price
variability and the underlying fundamental characteristics of the issuer, with
particular emphasis on debt to equity and debt coverage ratios.
BONDS. Prior to April 26, 2002, the Fund was called USLIFE Income Fund, Inc. and
was virtually 100% invested in corporate bonds. Since the Fund changed its
investment objective on April 26, 2002, the Advisers have liquidated all of the
Fund's bond portfolio. As of July __, 2005, the Fund had none of its assets
invested in bonds.
PORTFOLIO CONTENTS
At any given time, the Fund has some or all of the types of investments
described below. Under normal market conditions, the Fund invests primarily in a
portfolio of common stocks and income producing securities such as stocks of
REITs, RICs and utilities, bonds and preferred stocks.
COMMON STOCKS. The Fund may invest all or any portion of its assets in common
stock. Common stock is defined as shares of a corporation that entitle the
holder to a pro rata share of the profits of the corporation, if any, without
preference over any other shareholder or class of shareholders, including
holders of the corporation's preferred stock and other senior equity. Common
stock usually carries with it the right to vote and frequently an exclusive
right to do so. Upon liquidation, holders of common stock also have the right to
participate in the assets of the corporation after all other claims are paid.
In selecting common stocks for investment, the Fund expects to focus primarily
on U.S.-based companies, although the Fund is permitted to invest in companies
outside the U.S. Generally, target companies have consistent high returns on
equity, while using modest amounts of debt relative to their industries. The
Fund seeks investments in businesses the Advisers understand which have fairly
predictable and improving future earnings, and most importantly, are reasonably
priced relative to the businesses' earnings and anticipated growth in earnings.
The Fund does not focus its investments in "large-cap", "mid-cap" or "small-cap"
companies since the Advisers believe it would be unwise to impose such
investment limitations.
REAL ESTATE INVESTMENT TRUSTS (REITs). As a matter of investment policy, the
Fund is concentrated in REITs, which means it will, under normal market
conditions, invest more than 25% of its total assets in REITs or companies in
the real estate industry. The Fund must obtain shareholder approval prior to
changing this policy. REITs are trusts that invest primarily in commercial real
estate or real estate-related loans. A REIT is not taxed on income distributed
to its shareholders or unit-holders if it complies with regulatory requirements
relating to its organization, ownership, assets and income, and with a
regulatory requirement that it distribute to its shareholders or unit-holders at
least 90% of its taxable income for each taxable year. Generally, REITs can be
classified as equity REITs, mortgage REITs and hybrid REITs. Equity REITs invest
the majority of their assets directly in real property and derive their income
primarily from rents and capital gains from appreciation realized through
property sales. Mortgage REITs invest the majority of their assets in real
estate mortgages and derive their income primarily from interest payments.
Hybrid REITs combine the characteristics of both equity and mortgage REITs. By
investing in REITs indirectly through the Fund, shareholders will bear not only
the proportionate share of the expenses of the Fund, but also, indirectly,
similar expenses of underlying REITs. The Fund invests in REITs primarily for
income.
The Fund may be subject to certain risks associated with the direct investments
of the REITs. REITs may be affected by changes in their underlying properties
and by defaults by borrowers or tenants. Mortgage REITs may be affected by the
quality of the credit extended. Furthermore, REITs are dependent on specialized
management skills. Some REITs may have limited diversification and may be
subject to risks inherent in financing a limited number of properties. REITs
depend generally on their ability to generate cash flow to make distributions to
shareholders or unit-holders, and may be subject to defaults by borrowers and to
self-liquidations. In addition, a REIT may be affected by its failure to qualify
for tax-free pass-through of income under the Code or its failure to maintain
exemption from registration under the 1940 Act.
REGISTERED INVESTMENT COMPANIES (RICs). The Fund is permitted to invest up to
10% of its assets in securities issued by RICs. The common stock of closed-end
RICs can trade at a substantial discount to the underlying net asset value of
the RIC, and the Fund may, from time to time, invest in common stocks issued by
RICs when they are trading at discounts or when the Advisers otherwise deem
market conditions appropriate. The Fund intends to normally invest in RICs that
pay dividends. RICs that pay regular dividends typically own interest rate
sensitive securities, which tend to increase in value when interest rates
decline, and decrease in value when interest rates increase. To the extent that
the Fund invests in RICs, the Fund's shareholders will incur expenses with
respect to both the Fund and that portion of the Fund's assets invested in other
RICs. However, as common stocks of closed-end RICs can trade at substantial
discounts to their underlying net asset values, the Advisers may deem the
"double" expense to have minimal impact when compared to the discount at which
the Fund may buy their shares. The net asset value and market value of common
stock issued by RICs will fluctuate with the value of the underlying assets. The
Fund may invest in the auction market preferred stock of other closed-end funds
primarily as a means of investing the Fund's cash for the short-term in higher
yielding alternatives to repurchase agreements or US treasury securities. The
Fund will consider investing cash in these instruments, and other short-term
money market type alternatives, when the yield spread is adequately attractive
over repurchase agreements and US treasuries. The Fund generally will invest in
auction market preferred stocks that are rated AAA although it may invest in
lower rated securities from time to time.
PREFERRED STOCKS. The Fund may invest in preferred securities. Preferred
securities are equity securities, but they have many characteristics of fixed
income securities, such as a fixed dividend payment rate and/or a liquidity
preference over the issuer's common shares. However, because preferred shares
are equity securities, they may be more susceptible to risks traditionally
associated with equity investments than fixed income securities. Unlike common
stock, preferred securities typically do not have voting rights.
Fixed rate preferred stocks have fixed dividend rates. They can be perpetual,
with no mandatory redemption date, or issued with a fixed mandatory redemption
date. Certain issues of preferred stock are convertible into other equity
securities. Perpetual preferred stocks provide a fixed dividend throughout the
life of the issue, with no mandatory retirement provisions, but may be callable.
Sinking fund preferred stocks provide for the redemption of a portion of the
issue on a regularly scheduled basis with, in most cases, the entire issue being
retired at a future date. The value of fixed rate preferred stocks can be
expected to vary inversely with interest rates. Adjustable rate preferred stocks
have a variable dividend rate which is determined periodically, typically
quarterly, according to a formula based on a specified premium or discount to
the yield on particular U.S. Treasury securities, typically the highest
base-rate yield of one of three U.S. Treasury securities: the 90-day Treasury
bill; the 10-year Treasury note; and either the 20-year or 30-year Treasury bond
or other index. The premium or discount to be added to or subtracted from this
base-rate yield is fixed at the time of issuance and cannot be changed without
the approval of the holders of the adjustable rate preferred stock. Some
adjustable rate preferred stocks have a maximum and a minimum rate and in some
cases are convertible into common stock.
Auction rate preferred stocks pay dividends that adjust based on periodic
auctions. Such preferred stocks are similar to short-term corporate money market
instruments in that an auction rate preferred stockholder has the opportunity to
sell the preferred stock at par in an auction, normally conducted at least every
49 days, through which buyers set the dividend rate in a bidding process for the
next period. The dividend rate set in the auction depends on market conditions
and the credit quality of the particular issuer. Typically, the auction rate
preferred stock's dividend rate is limited to a specified maximum percentage of
an external commercial paper index as of the auction date. Further, the terms of
the auction rate preferred stocks generally provide that they are redeemable by
the issuer at certain times or under certain conditions.
The Fund may, from time to time, invest in preferred securities that are rated,
or whose issuer's senior debt is rated, investment grade by Moody's and Standard
& Poor's ("S&P") at the time of investment, although the Fund is not limited to
investments in investment grade preferred securities. In addition, the Fund may
acquire unrated issues that the Advisers deem to be comparable in quality to
rated issues in which the Fund is authorized to invest.
MONEY MARKET INSTRUMENTS. Under normal conditions, the Fund may hold up to 10%
of its assets in cash or money market instruments. The Fund intends to invest in
money market instruments pending investments in common stocks, to serve as
collateral in connection with certain investment techniques, and to hold as a
reserve pending the payment of dividends to investors. When the Advisers believe
that economic circumstances warrant a temporary defensive posture, the Fund may
invest without limitation in short-term money market instruments.
Money market instruments that the Fund may acquire usually will be securities
rated in the highest short-term rating category by Moody's or S&P or the
equivalent from another major rating service, or securities of issuers that have
received such ratings with respect to other short-term debt or comparable
unrated securities. Money market instruments in which the Fund typically expects
to invest include: Government Securities (as defined below); bank obligations
(including certificates of deposit, time deposits and bankers' acceptances of
U.S. or foreign banks); commercial paper rated P-l by Moody's or A-1 by S&P; and
repurchase agreements.
REPURCHASE AGREEMENTS. The Fund may invest temporarily, without limitation, in
repurchase agreements, which are agreements pursuant to which securities are
acquired by the Fund from a third party with the understanding that they will be
repurchased by the seller at a fixed price on an agreed date. These agreements
may be made with respect to any of the portfolio securities in which the Fund is
authorized to invest. Repurchase agreements may be characterized as loans
secured by the underlying securities. The Fund may enter into repurchase
agreements with (i) member banks of the Federal Reserve System having total
assets in excess of $500 million and (ii) securities dealers, provided that such
banks or dealers meet certain creditworthiness standards established by the
Board. The resale price reflects the purchase price plus an agreed-upon market
rate of interest which is unrelated to the coupon rate or date of maturity of
the purchased security. The collateral is marked to market daily. Such
agreements permit the Fund to keep all its assets earning interest while
retaining "overnight" flexibility in pursuit of investments of a longer term
nature.
GOVERNMENT SECURITIES. The Fund may invest in government securities that include
direct obligations of the United States and obligations issued by U.S.
government agencies and instrumentalities ("Government Securities"). Included
among direct obligations of the United States are treasury bills, treasury notes
and treasury bonds, which differ principally in terms of their maturities and
are supported by the full faith and credit of the U.S. government. Securities
issued by U.S. government agencies and instrumentalities include other
securities that are supported by the full faith and credit of the United States
(such as Government National Mortgage Association certificates); securities that
are supported by the right of the issuer to borrow from the U.S. Treasury (such
as securities of Federal Home Loan Banks); and securities that are supported by
the credit of the instrumentality (such as Federal National Mortgage Association
and Federal Home Loan Mortgage Corporation bonds). No assurance can be given
that the U.S. government will provide financial support in the future to U.S.
government agencies, authorities or instrumentalities that are not supported by
the full faith and credit of the United States. Securities guaranteed as to
principal and interest by the U.S. government, its agencies, authorities or
instrumentalities include (i) securities for which the payment of principal and
interest is backed by an irrevocable letter of credit issued by the U.S.
government or any of its agencies, authorities or instrumentalities; and (ii)
participations in loans made to non-U.S. governments or other entities that are
so guaranteed. The secondary market for certain of these participations is
limited and therefore may be regarded as illiquid.
ZERO COUPON SECURITIES. The Fund may invest up to 10% of its total assets in
zero coupon securities issued by the U.S. government, its agencies or
instrumentalities, as well as custodial receipts or certificates underwritten by
securities dealers or banks that evidence ownership of future interest payments,
principal payments or both on certain government securities. Zero coupon
securities pay no cash income to their holders until they mature and are issued
at substantial discounts from their value at maturity. When held to maturity,
their entire return comes from the difference between their purchase price and
their maturity value. Because interest on zero coupon securities is not paid on
a current basis, the values of securities of this type are subject to greater
fluctuations than are the values of securities that distribute income regularly
and may be more speculative than such securities. Accordingly, the values of
these securities may be highly volatile as interest rates rise or fall. In
addition, the Fund's investments in zero coupon securities will result in
special tax consequences. Although zero coupon securities do not make interest
payments, for tax purposes a portion of the difference between a zero coupon
security's maturity value and its purchase price is taxable income of the Fund
each year.
Custodial receipts evidencing specific coupon or principal payments have the
same general attributes as zero coupon Government Securities but are not
considered to be Government Securities. Although typically under the terms of a
custodial receipt the Fund is authorized to assert its rights directly against
the issuer of the underlying obligation, the Fund may be required to assert
through the custodian bank such rights as may exist against the underlying
issuer. Thus, in the event the underlying issuer fails to pay principal and/or
interest when due, the Fund may be subject to delays, expenses and risks that
are greater than those that would have been involved if the Fund had purchased a
direct obligation of the issuer. In addition, in the event that the trust or
custodial account in which the underlying security has been deposited is
determined to be an association taxable as a corporation, instead of a
non-taxable entity, the yield on the underlying security would be reduced in
respect of any taxes paid.
LENDING OF SECURITIES. The Fund is authorized to lend securities it holds to
brokers, dealers and other financial organizations, although it has no current
intention of doing so. Loans of the Fund's securities, if and when made, may not
exceed 33-1/3% of the Fund's total assets. The Fund's loans of securities will
be collateralized by cash, letters of credit or Government Securities that will
be maintained at all times in a segregated account with the Fund's custodian in
an amount at least equal to the current market value of the loaned securities.
From time to time, the Fund may pay a part of the interest earned from the
investment of collateral received for securities loaned to the borrower and/or a
third party that is unaffiliated with the Fund and that is acting as a "finder."
By lending its portfolio securities, the Fund can increase its income by
continuing to receive interest on the loaned securities, by investing the cash
collateral in short-term instruments or by obtaining yield in the form of
interest paid by the borrower when Government Securities are used as collateral.
The risk in lending portfolio securities, as with other extensions of credit,
consists of the possible delay in recovery of the securities or the possible
loss of rights in the collateral should the borrower fail financially. The Fund
will adhere to the following conditions whenever it lends its securities: (i)
the Fund must receive at least 100% cash collateral or equivalent securities
from the borrower, which will be maintained by daily marking-to-market; (ii) the
borrower must increase the collateral whenever the market value of the
securities loaned rises above the level of the collateral; (iii) the Fund must
be able to terminate the loan at any time; (iv) the Fund must receive reasonable
interest on the loan, as well as any dividends, interest or other distributions
on the loaned securities and any increase in market value; (v) the Fund may pay
only reasonable custodian fees in connection with the loan; and (vi) voting
rights on the loaned securities may pass to the borrower, except that, if a
material event adversely affecting the investment in the loaned securities
occurs, the Board must terminate the loan and regain the Fund's right to vote
the securities.
PORTFOLIO TURNOVER. Although the Advisers are not restricted with respect to
portfolio turnover, it is not the Fund's policy to engage in transactions with
the objective of seeking profits from short-term trading. It is expected that
the annual portfolio turnover rate of the Fund will be less than 50% excluding
securities having a maturity of one year or less. Because it is difficult to
accurately predict portfolio turnover rates, actual turnover may be higher or
lower. Higher portfolio turnover results in increased Fund expenses, including
brokerage commissions, dealer mark-ups and other transaction costs on the sale
of securities and on the reinvestment in other securities. For the fiscal years
ended November 30, 2003 and November 30, 2004, the Fund's portfolio turnover
rates were 40% and 33%, respectively.
RISK FACTORS
Risk is inherent in all investing. Investing in any investment company security
involves risk, including the risk that you may receive little or no return on
your investment or that you may lose part or all of your investment. Therefore,
before investing you should consider carefully the following risks that you
assume when you invest in Preferred Shares.
LEVERAGE RISK. The Fund expects to use financial leverage on an ongoing basis
for investment purposes. Taking into account the Preferred Shares being offered
in this prospectus, and the retirement of the Bank Debt with the proceeds of the
Preferred Shares, the amount of leverage would, as of July ___, 2005, represent
approximately ____% of the Fund's total assets. The Fund's leveraged capital
structure creates special risks not associated with unleveraged funds having a
similar investment objectives and policies. These include the possibility of
higher volatility of both the net asset value of the Fund and the value of
assets serving as asset coverage for the Preferred Shares.
Because the fee paid to the Advisers will be calculated on the basis of the
Fund's managed assets (which equals the aggregate net asset value of the common
shares plus the liquidation preference of the Preferred Shares), the fee will be
higher when leverage is utilized, giving the Advisers an incentive to utilize
leverage.
INTEREST RATE RISK. The Preferred Shares pay dividends based on shorter-term
interest rates. The Fund presently has invested the proceeds of the Bank Debt in
REITs and other dividend paying and income producing securities (defined above
as "Income Producing Securities") and anticipates continuing to do so in order
to generate sufficient income to pay interest on the Preferred Shares when due.
The dividends and rates paid on the Income Producing Securities can be expected
to fluctuate. If short-term interest rates rise, dividend rates on the Preferred
Shares will also rise since the auction setting the dividends on Preferred
Shares will compete for investors with other short-term instruments. A
significant increased dividend rate on the Fund's Preferred Shares could result
in the Fund under-earning its Preferred Shares dividend, which would lead to the
Preferred Shares shareholders receiving a return of capital, assuming there are
no capital gains to be paid out. Similarly, if the rating agencies lower the
rating assigned to the Preferred Shares, the dividend rate on the Preferred
Shares will likely increase. The Fund must pay all its expenses before it can
pay any dividends, including any Preferred Shares dividends.
AUCTION RISK. The dividend rate for the Preferred Shares normally is set through
an auction process. In the auction, holders of Preferred Shares may indicate the
dividend rate at which they would be willing to hold or sell their Preferred
Shares or purchase additional Preferred Shares. The auction also provides
liquidity for the sale of Preferred Shares. An auction fails if there are more
Preferred Shares offered for sale than there are buyers. You may not be able to
sell your Preferred Shares at an auction if the auction fails. A holder of the
Preferred Shares therefore can be given no assurance that there will be
sufficient clearing bids in any auction or that the holder will be able to sell
its Preferred Shares in an auction. Also, if you place bid orders (orders to
retain Preferred Shares) at an auction only at a specified dividend rate, and
that rate exceeds the rate set at the auction, you will not retain your
Preferred Shares. Additionally, if you buy Preferred Shares or elect to retain
Preferred Shares without specifying a dividend rate below which you would not
wish to buy or continue to hold those Preferred Shares, you could receive a
lower rate of return on your Preferred Shares than the market rate. Finally, the
dividend periods for the Preferred Shares may be changed by the Fund, subject to
certain conditions with notice to the holders of Preferred Shares, which could
also affect the liquidation of your investment. See "Description of Preferred
Shares" and "The Auction - Auction Procedures."
As noted above, if there are more auction rate securities offered for sale than
there are buyers for those auction rate securities in any auction, the auction
will fail and you may not be able to sell some or all of your auction rate
securities at that time. The relative buying and selling interest of market
participants in your auction rate securities and in the auction rate securities
market as a whole will vary over time, and such variations may be affected by,
among other things, news relating to the issuer, the attractiveness of
alternative investments, the perceived risk of owning the security (whether
related to credit, liquidity or any other risk), the tax treatment accorded the
instruments, the accounting treatment accorded auction rate securities,
including recent clarifications of U.S. generally accepted accounting principles
relating to the treatment of auction rate securities, reactions to regulatory
actions or press reports, financial reporting cycles and market sentiment
generally. Shifts of demand in response to any one or simultaneous particular
events cannot be predicted and may be short-lived or exist for longer periods.
SECONDARY MARKET RISK. If you try to sell your Preferred Shares between auctions
you may not be able to sell any or all of your Preferred Shares or you may not
be able to sell them for $25,000 per share or $25,000 per share plus accumulated
but unpaid dividends. If the Fund has designated a special dividend period (a
rate period of more than twenty-eight days), changes in interest rates could
affect the price you would receive if you sold your Preferred Shares in the
secondary market. You may transfer Preferred Shares outside of auctions only to
or through a Broker-Dealer that has entered into a Broker-Dealer Agreement, or
other persons as the Fund permits. The Fund does not anticipate imposing
significant restrictions on transfers to other persons. However, unless any such
other person has entered into a relationship with a Broker-Dealer that has
entered into a Broker-Dealer Agreement with the Auction Agent, that person will
not be able to submit bids at auctions with respect to the Preferred Shares.
Broker-Dealers that maintain a secondary trading market for Preferred Shares are
not required to maintain this market, and the Fund is not required to redeem
Preferred Shares either if an auction or an attempted secondary market sale
fails because of a lack of buyers. The Preferred Shares will not be listed on a
stock exchange or the Nasdaq National Market. If you sell your Preferred Shares
to a Broker-Dealer between auctions, you may receive less than the price you
paid for them, especially if market interest rates have risen since the last
auction. In addition, a Broker-Dealer may, in its own discretion, decide to sell
the Preferred Shares in the secondary market to investors at any time and at any
price, including at prices equivalent to, below or above the par value of the
Preferred Shares.
SECURITIES AND EXCHANGE COMMISSION INQUIRIES. The Underwriters have advised the
Fund that certain of the Underwriters and various other broker-dealers and other
firms that participate in the auction rate securities market received letters
from the staff of the Securities and Exchange Commission in the spring of 2004.
The letters requested that each of these firms voluntarily conduct an
investigation regarding its respective practices and procedures in that market.
Pursuant to these requests, each of those Underwriters conducted its own
voluntary review and reported its findings to the Securities and Exchange
Commission staff. At the staff's request, those Underwriters are engaging in
discussions with the staff concerning its inquiry. Neither those Underwriters
nor the Fund can predict the ultimate outcome of the inquiry or how that outcome
will affect the market for the Preferred Shares or the auctions.
RATINGS AND ASSET COVERAGE RISK. While it is expected that Moody's will assign a
rating of Aaa to the Preferred Shares and Fitch will assign a rating of AAA to
the Preferred Shares, such ratings do not eliminate or necessarily mitigate the
risks of investing in Preferred Shares. Moody's or Fitch could downgrade its
rating of the Preferred Shares or withdraw its rating of the Preferred Shares at
any time, which may make your shares less liquid at an auction or in the
secondary market and may materially and adversely affect the value of the
Preferred Shares if sold outside an auction. Moody's and Fitch are not required
to provide prior notice of a decision to downgrade the Preferred Shares or to
withdraw their rating. If Moody's or Fitch downgrades the Preferred Shares, the
Fund may alter its portfolio or redeem Preferred Shares in an effort to improve
the rating, although there is no assurance that it will be able to do so to the
extent necessary to restore the prior rating. If the Fund fails to satisfy the
asset coverage ratios discussed under "Description of Preferred Shares - Rating
Agency Guidelines and Asset Coverage," the Fund will be required to redeem, at a
time that is not favorable to the Fund or its shareholders, a sufficient number
of Preferred Shares in order to return to compliance with the asset coverage
ratios. The Fund may be required to redeem Preferred Shares at a time when it is
not advantageous for the Fund to make such redemption or to liquidate portfolio
securities in order to have available cash for such redemption. The Fund may
voluntarily redeem Preferred Shares under certain circumstances in order to meet
asset maintenance tests. While a sale of substantially all the assets of the
Fund or the merger of the Fund into another entity would require the approval of
the holders of Preferred Shares voting as a separate class as discussed under
"Description of Preferred Shares - Voting Rights," a sale of substantially all
the assets of the Fund or the merger of the Fund with or into another entity
would not be treated as a liquidation of the Fund nor require that the Fund
redeem Preferred Shares, in whole or in part, provided that the Fund continued
to comply with the asset coverage ratios discussed under "Description of
Preferred Shares - Rating Agency Guidelines and Asset Coverage." See
"Description of Preferred Shares - Rating Agency Guidelines and Asset Coverage"
for a description of the asset maintenance tests the Fund must meet.
RESTRICTIONS ON DIVIDENDS AND OTHER DISTRIBUTIONS. Restrictions imposed on the
declaration and payment of dividends or other distributions to the holders of
the Fund's common 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 RIC for federal income tax purposes. While the
Fund may redeem Preferred Shares to enable the Fund to distribute its income as
required to maintain its qualification as a RIC under the Code, there can be no
assurance that such redemptions can be effected in time to meet the requirements
of the Code. See "Federal Income Tax Matters."
GENERAL RISKS OF INVESTING IN THE FUND. The Fund is not a complete investment
program and should only be considered as an addition to an investor's existing
diversified portfolio of investments. Due to uncertainty inherent in all
investments, there can be no assurance that the Fund will achieve its investment
objective.
NON-DIVERSIFIED STATUS RISK. The Fund is classified as "non-diversified"
under the 1940 Act. As a result, it can invest a greater portion of its
assets in obligations of a single issuer than a "diversified" fund. The
Fund will therefore be more susceptible than a diversified fund to being
adversely affected by any single corporate, economic, political or
regulatory occurrence. The Fund intends to diversify its investments to the
extent necessary to qualify, and maintain its status, as a regulated
investment company under U.S. federal income tax laws. See "Federal Income
Tax Matters."
INVESTMENTS IN COMMON STOCKS. The Fund expects to invest, under normal
market conditions, in excess of 80% of its assets in publicly traded common
stocks. Common stocks generally have greater risk exposure and reward
potential over time than bonds. The volatility of common stock prices has
historically been greater than bonds, and as the Fund invests primarily in
common stocks, the Fund's net asset value may also be volatile. Further,
because the time horizon for the Fund's investments in common stock is
longer, the time necessary for the Fund to achieve its objective of total
return will likely be longer than for a fund that invests solely for
income.
REINVESTMENT RISK. Income from the Fund's portfolio will decline if the
Fund invests the income from or proceeds from the sale of its Income
Producing Securities into lower yielding instruments or Income Producing
Securities with a lower spread over the base lending rate. A decline in
income could affect the Fund's ability to pay dividends on the Preferred
Shares.
CONCENTRATION RISK. The Fund is classified as "non-diversified" under the
1940 Act, which means it can invest a greater portion of its assets in
obligations of a single issuer than a "diversified" fund. The Fund will
therefore be more susceptible than a diversified fund to being adversely
affected by any single corporate, economic, political or regulatory
occurrence. Taking larger positions is also likely to increase the
volatility of the Fund's net asset value, reflecting fluctuation in the
value of large Fund holdings.
INVESTMENTS IN REITs. As a matter of investment policy, the Fund is
concentrated in REITs, which means it must maintain over 25% of its
investments in REITs and other companies in the real estate industry. The
Fund must obtain shareholder approval prior to changing this policy, thus
limiting its flexibility to liquidate REITs in the future should market
conditions warrant. Since the Fund concentrates its assets in the real
estate industry, the Fund's performance will be generally linked to
performance of the real estate markets. Property values may fall due to
increasing vacancies or declining rents resulting from economic, legal,
cultural or technological developments. REIT prices also may drop because
of poor management or the failure of borrowers to pay their loans. Many
REITs utilize leverage which increases investment risk and could adversely
affect a REIT's operations and market value in periods of rising interest
rates as well as risks normally associated with debt financing. The
dividend income paid out by the REIT may be reduced or eliminated,
depending on the income produced by the underlying properties owned by the
REITs. In the normal course of business, REITs face risks that are either
non-financial or non-quantifiable. These risks principally include credit
risk as well as legal risk. Because most REITs are typically financed with
debt instruments, they are also interest rate sensitive. In addition, there
are risks associated with particular sectors of real estate investments
(e.g., retail, office, hotel, healthcare and multifamily properties),
although the Fund does not intend to focus on any particular sector of real
estate investments.
INVESTMENTS IN BERKSHIRE HATHAWAY. The Fund presently has invested a
significant percentage of its portfolio in low-dividend or non-dividend
paying common stocks such as Berkshire Hathaway, Inc. (NYSE: BRK)
("Berkshire"). As of July ___, 2005, the Fund held 310 Berkshire Class A
shares, representing ____% of the Fund's assets. The Advisers do not
currently intend to liquidate any portion of the Fund's position in
Berkshire. Although not an insurance company itself, Berkshire owns Geico
Insurance and General Re Insurance, and therefore derives a significant
portion of its income, and its value, from these two insurance companies.
The insurance business can be significantly affected by interest rates as
well as price competition within the industry. In addition, an insurance
company may experience significant changes in its year to year operating
performance based both on claims paid and on performance of invested
assets. Insurance companies can also be affected by government regulations
and tax laws, which may change from time to time. A significant decline in
the market price of Berkshire or any other company in which the Fund has
made a significant common stock investment (i) would result in a
significant decline in the Fund's net asset value, (ii) may result in a
proportionate decline in the market price of the Fund's common shares, and
(iii) may result in greater risk and market fluctuation than a fund that
has a more diversified portfolio.
LEVERAGING. The Fund is currently leveraged with the Bank Debt which will
be replaced with leverage from the Preferred Shares. Use of leverage may
have a number of adverse effects on the Fund and its shareholders
including: (i) leverage may magnify market fluctuations in the Fund's
underlying holdings thus causing a disproportionate change in the Fund's
net asset value; (ii) the Fund's cost of leverage may exceed the return on
the underlying securities acquired with the proceeds of the leverage,
thereby diminishing rather than enhancing the return to shareholders and
generally making the Fund's total return to such shareholders more
volatile; (iii) the Fund may be required to sell investments in order to
meet dividend or interest payments on the debt or preferred stock it has
issued when it may be disadvantageous to do so; (iv) leveraging through the
issuance of preferred stock requires that the holders of the preferred
stock have class voting rights on various matters that could make it more
difficult for the holders of the Fund's common stock to change the
investment objective or fundamental policies of the Fund, to convert it to
an open-end fund or make certain other changes; and (v) the Fund may be
forced to redeem some or all of the Preferred Shares at inopportune times
due to a decline in market value of Fund investments.
DISCOUNT FROM NET ASSET VALUE. Common stock of closed-end funds frequently
trade at a market price that is less than the value of the net assets
attributable to those shares (a "discount"). The possibility that the
Fund's shares will trade at a discount from net asset value is a risk
separate and distinct from the risk that the Fund's net asset value will
decrease. The risk of purchasing shares of a closed-end fund that might
trade at a discount or unsustainable premium is more pronounced for
investors who wish to sell their shares in a relatively short period of
time because, for those investors, realization of a gain or loss on their
investments is likely to be more dependent upon the existence of a premium
or discount than upon portfolio performance.
SIZE OF FUND. As of July ___, 2005, the Fund had net assets of
approximately $____ million. As a fund with a relatively small asset base,
the Fund may be subject to certain operational inefficiencies including:
higher expense ratio, less coverage by analysts and the marketplace in
general which can contribute to a less active trading market for the Fund's
shares and consequently a wider discount, more limited ability to attract
new investors and/or take advantage of investment opportunities and less
ability to take advantage of lower transaction costs available to larger
investors.
REPURCHASE OF THE FUND'S COMMON STOCK. The Fund is authorized to repurchase
its common shares on the open market when the shares are trading at a
discount from net asset value as determined by the Board from time to time.
The acquisition of common shares by the Fund will decrease the total assets
of the Fund and, therefore, have the effect of increasing the Fund's
expense ratio and may adversely affect the ability of the Fund to achieve
its investment objectives. Furthermore, the acquisition of common shares by
the Fund may require the Fund to redeem the Preferred Shares in order to
maintain certain asset coverage requirements. To the extent the Fund may
need to liquidate investments to fund repurchase of common shares, this may
result in portfolio turnover which will result in additional expenses being
borne by the Fund.
DEPENDENCE ON KEY PERSONNEL. The Advisers are dependent upon the expertise
of Stewart Horejsi in providing advisory services with respect to the
Fund's investments. If the Advisers were to lose the services of Mr.
Horejsi, their ability to service the Fund could be adversely affected.
There can be no assurance that a suitable replacement could be found for
Mr. Horejsi in the event of his death, resignation, retirement or inability
to act on behalf of the Advisers.
ISSUER RISK. The value of the Fund's portfolio may decline for a number of
reasons which directly relate to the issuers of the securities in the
portfolio, such as management performance, financial leverage and reduced
demand for the issuer's goods and services.
INFLATION RISK. Inflation risk is the risk that the value of assets or
income from investment will be worth less in the future as inflation
decreases the value of money. As inflation increases, the real value of the
common shares and distributions thereon can decline.
REPURCHASE AGREEMENTS. The use of repurchase agreements involves certain
risks. For example, if the seller of securities under a repurchase
agreement defaults on its obligation to repurchase the underlying
securities, as a result of bankruptcy or otherwise, the Fund will seek to
dispose of such securities, which action could involve costs or delays. If
the seller becomes insolvent and subject to liquidation or reorganization
under applicable bankruptcy or other laws, the Fund's ability to dispose of
the underlying securities may be restricted. Finally, it is possible that
the Fund may not be able to substantiate its interest in the underlying
securities. To minimize this risk, the securities underlying the repurchase
agreement will be held by the custodian at all times in an amount at least
equal to the repurchase price, including accrued interest. If the seller
fails to repurchase the securities, the Fund may suffer a loss to the
extent proceeds from the sale of the underlying securities are less than
the repurchase price.
FOREIGN SECURITIES RISK. The Fund may invest without limit in foreign
securities. Investment in non-U.S. issuers may involve unique risks
compared to investing in securities of U.S. issuers. These risks are more
pronounced to the extent that the Fund invests a significant portion of its
non-U.S. investment in one region or in the securities of emerging market
issuers. These risks may include:
o Less information about non-U.S. issuers or markets may be available due
to less rigorous disclosure, accounting standards or regulatory practices.
o Many non-U.S. markets are smaller, less liquid and more volatile. In a
changing market, the Advisers may not be able to sell the Fund's portfolio
securities at times, in amounts and at prices they consider reasonable.
o Currency exchange rates or controls may adversely affect the value of the
Fund's investments.
o The economies of non-U.S. countries may grow at slower rates than
expected or may experience a downturn or recession.
o Withholdings and other non-U.S. taxes may decrease the Fund's return.
CURRENCY RISK. A portion of the Fund's assets may be quoted or denominated
in non-U.S. currencies. These securities may be adversely affected by
fluctuations in relative currency exchange rates and by exchange control
regulations. The Fund's investment performance may be negatively affected
by a devaluation of a currency in which the Fund's investments are quoted
or denominated. Further, the Fund's investment performance may be
significantly affected, either positively or negatively, by currency
exchange rates because the U.S. dollar value of securities quoted or
denominated in another currency will increase or decrease in response to
changes in the value of such currency in relation to the U.S. dollar.
SOVEREIGN DEBT RISK. An investment in debt obligations of non-U.S.
governments and their political subdivisions ("sovereign debt") involves
special risks that are not present in corporate debt obligations. The
non-U.S. issuer of the sovereign debt or the non-U.S. governmental
authorities that control the repayment of the debt may be unable or
unwilling to repay principal or interest when due, and the Fund may have
limited recourse in the event of a default. During periods of economic
uncertainty, the market prices of sovereign debt may be more volatile than
prices of debt obligations of U.S. issuers. In the past, certain non-U.S.
countries have encountered difficulties in servicing their debt
obligations, withheld payments of principal and interest and declared
moratoria on the payment of principal and interest on their sovereign debt.
A sovereign debtor's willingness or ability to repay principal and pay
interest in a timely manner may be affected by, among other factors, its
cash flow situation, the extent of its foreign currency reserves, the
availability of sufficient non-U.S. exchange, the relative size of the debt
service burden, the sovereign debtor's policy toward its principal
international lenders and local political constraints. Sovereign debtors
may also be dependent on expected disbursements from non-U.S. governments,
multilateral agencies and other entities to reduce principal and interest
arrearages on their debt. The failure of a sovereign debtor to implement
economic reforms, achieve specified levels of economic performance or repay
principal or interest when due may result in the cancellation of
third-party commitments to lend funds to the sovereign debtor, which may
further impair such debtor's ability or willingness to service its debts.
LIQUIDITY RISK. Although the Fund invests primarily in securities traded on
national exchanges, it may invest in less liquid assets from time to time
that are not readily marketable and may be subject to restrictions on
resale. Illiquid securities may be more difficult to value or may impair
the Fund's ability to realize the full value of its assets in the event of
a voluntary or involuntary liquidation of such assets and thus may cause a
decline in the Fund's net asset value. . The Fund has no limitation on the
amount of its assets that may be invested in securities which are not
readily marketable or are subject to restrictions on resale, although it
may not invest more than 30% of the value of its total assets in securities
which have been acquired through private placement. In certain situations,
the Fund could find it more difficult to sell such securities at desirable
times and/or prices.
MARKET DISRUPTION RISK. The terrorist attacks in the United States on
September 11, 2001 had a disruptive effect on the securities markets. The
Fund cannot predict the effects of similar events in the future on the U.S.
economy. These terrorist attacks and related events, including the war in
Iraq, its aftermath, and continuing occupation of Iraq by coalition forces,
have led to increased short-term market volatility and may have long-term
effects on U.S. and world economies and markets. A similar disruption of
the financial markets could impact interest rates, auctions, secondary
trading, ratings, credit risk, inflation and other factors relating to the
Preferred Shares.
ANTI-TAKEOVER PROVISIONS RISK. The Fund's Charter and Bylaws include
provisions that could limit the ability of other entities or persons to
acquire control of the Fund or to change the composition of its Board. Such
provisions could limit the ability of shareholders to sell their shares at
a premium over prevailing market prices by discouraging a third party from
seeking to obtain control of the Fund. These provisions include advance
notice requirements for shareholder proposals, super-majority voting
requirements for certain transactions with affiliates, open-ending the Fund
and a merger, liquidation, asset sale or similar transaction.
MANAGEMENT OF THE FUND
The Board is responsible for the overall management of the Fund, including
supervision of the duties performed by the Advisers. There are currently five
directors of the Fund, one of whom is an "interested person" of the Fund (as
defined in the 1940 Act).
INFORMATION ABOUT DIRECTORS AND OFFICERS. Set forth in the following table is
certain information about each Director of the Fund, including his address, age,
position with the Fund, term of office, length of time served and principal
occupation during the last five years:
Name, Address*, Age Position, Length of Principal Occupation(s) and Other Number of Funds
Term Served, and Term Directorships Held During the Past Five in Fund Complex
of Office** Years Overseen by
Director+
------------------------------------------------------------------------------------------------------------------------------------
Independent Directors
Joel W. Looney, Director of the Fund Partner, Financial Management Group, LLC 2
Chairman since January, 2002. (investment adviser), since July 1999; CFO,
Age: 43 Chairman of the Board Bethany College, 1995-1999; Director,
of the Fund since Boulder Total Return Fund, Inc., since
October 2004. January 2001; Director and Chairman of the
Board, First Financial Fund, Inc., since
August 2003.
Alfred G. Aldridge, Jr. Director of the Fund Executive Vice President, Business 2
Brig. Gen. (Retired) since January 2002. Development Specialists (sales and
Cal. Air National Guard marketing consulting) since 2004; Sales
Age: 67 Manager, Shamrock Foods Company,1982-2002;
Director, Arizona Sports Foundation, since
1997; Director, Boulder Total Return Fund,
Inc., since 1999; Director, Maricopa Youth
Assistance Foundation, since 2004.
Richard I. Barr Director of the Fund Retired; Manager, Advantage Sales and 2
Age: 67 since January 2002. Marketing, Inc. (food brokerage),
1963-2001; Director, Boulder Total Return
Fund, Inc., since 1999 and Chairman of the
Board since 2003; Director, First Financial
Fund, Inc., since 2001.
Dennis R. Causier*** Director of the Fund Retired; Managing Director and Chairman, 1
Age: 57 since October 2004. P.S. Group PLC (engineering and
construction), 1966-2001; Owner,
Professional Yacht Management Services
(yacht management) 2002-present; Director,
First Financial Fund, Inc., since October,
2004.
------------------------------------------------------------------------------------------------------------------------------------
Interested Director
John S. Horejsi++ Director of the Fund Director of Horejsi Charitable Foundation 1
Age: 37 since May 2004. (a private charitable foundation), since
1997.
* Unless otherwise specified, the Directors' respective addresses are c/o
Boulder Growth & Income Fund, Inc., 1680 38th Street, Suite 800, Boulder,
Colorado 80301.
** Each Director's current term expires at the annual meeting of shareholders in
2006.
*** Mr. Causier is a British citizen and a resident of ____________ and
substantially all of his assets are located outside the United States. As a
result, it may be difficult to realize judgments of courts of the United States
predicated upon civil liabilities under federal securities laws of the United
States. The Fund has been advised that there is substantial doubt as to (i) the
enforceability in ______________ of such civil remedies and criminal penalties
as are afforded by the federal securities laws of the United States, (ii)
whether the ____________ courts would enforce judgments of United States courts
obtained in actions against Mr. Causier predicated upon the civil liability
provisions of the federal securities laws, or (iii) whether _________ courts
would enforce, in an original action, liabilities against Mr. Causier predicated
solely on federal securities laws. Mr. Causier has appointed the Secretary of
the Fund (presently Stephanie Kelley in Boulder, Colorado) as his agent for
service of process in any legal action in the United States, thus subjecting him
to the jurisdiction of the United States courts.
+ The "fund complex" consists of the Fund and Boulder Total Return Fund, Inc.
which is also managed by the Advisers.
++ Mr. Horejsi is an "interested person" of the Fund by virtue of his
relationship with Stewart Horejsi, the Fund's primary portfolio manager and an
employee of BIA and SIA.
Messrs. Looney, Barr and Causier also serve as directors of First Financial
Fund, Inc., an investment company acknowledged to be under common control with
the Advisers. From the late 1980's until January, 2001, Mr. Looney served,
without compensation, as one of three trustees of the Mildred Horejsi Trust, an
affiliate of the Fund's largest shareholder, the Ernest Horejsi Trust No. 1B
(the "EH Trust"). The address for the EH Trust is 3601 C Street, Suite 600,
Anchorage, Alaska 99503.
The EH Trust holds [21%] of the Fund's outstanding shares and is the Fund's
largest shareholder. The EH Trust has asserted, and the Fund has acknowledged,
that the EH Trust is a "control person" as contemplated by the 1940 Act. The
sole trustees of the EH Trust are Badlands Trust Company, LLC ("Badlands"),
Larry Dunlap and Susan Ciciora, Stewart Horejsi's daughter (collectively, the
"EH Trustees"). The EH Trustees may also be deemed to be control persons by
virtue of their trusteeship with the EH Trust. The EH Trustees disclaim any such
control relationship. The Stewart R. Horejsi Trust No. 2A (the "SRH Trust"), an
irrevocable grantor trust established by Stewart Horejsi for the benefit of his
issue, is the sole equity owner of Badlands and may be deemed indirectly to be a
control person by virtue of its ownership of Badlands. The SRH Trust disclaims
any such control relationship.
As discussed above, the EH Trust owns [21%] of the Fund's common stock, is a
"control person" as contemplated under the 1940 Act and is affiliated with
entities who own the Advisers and FAS (i.e., the Horejsi Affiliates). As a large
shareholder, EH Trust is able to significantly influence any matters upon which
the holders of common stock may vote, including the election of the Fund's
directors and any change in the Fund's investment adviser. Since all members of
the Board are elected annually, the EH Trust may be able to effect a change of
control with respect to the entire Board in a single election. Similarly,
several of the Fund's corporate governance policies grant shareholders voting
power or decrease the voting requirement necessary to take certain actions. As a
large shareholder, the EH Trust will have greater influence over the adoption or
failure of certain corporate actions requiring a vote of the Fund's
shareholders. In particular, the EH Trust would have a greater influence in
compelling a special meeting with the support of only a small percentage of
other non-Horejsi shareholders. Nonetheless, since most of the other actions
under the Fund's corporate governance policies require the support of either a
majority or two-thirds of outstanding shares for a future change, the EH Trust
cannot effect any such change without the support of a substantial number of
non-Horejsi shareholders. However, in these instances, where an action requires
a majority or two-thirds voting approval, the EH Trust may have an effective
veto.
Together with other trusts and entities affiliated with the Horejsi family (more
particularly defined below as the "Horejsi Affiliates"), the EH Trust has
asserted control with respect to two other investment companies, Boulder Total
Return Fund, Inc. ("BTF") and First Financial Fund, Inc. ("FF"). As discussed
below, the Horejsi Affiliates also own the Advisers and FAS, the Fund's
co-administrator. The following table shows security ownership by the
Independent Directors with respect to BTF and FF as of December 31, 2004.
Name of Director Company Title of Class Value of Percent of Class
Securities (1)
Joel W. Looney BTF Common $_____ Less than 1%
FF Common $_____ Less than 1%
Alfred G. Aldridge BTF Common $_____ Less than 1%
FF Common $_____ Less than 1%
Richard I. Barr BTF Common $_____ Less than 1%
FF Common $_____ Less than 1%
Dennis R. Causier BTF Common $0 Less than 1%
FF Common $0 Less than 1%
(1) Closing price on December 31, 2004.
Direct ownership of the Fund's common stock by all officers and directors of the
Fund is less than one percent. John Horejsi, an interested director of the Fund,
is a discretionary beneficiary of the EH Trust and may be deemed to have
indirect beneficial ownership of the common stock held by the EH Trust. Mr.
Horejsi disclaims all such beneficial ownership. Mr. Horejsi does not directly
own any shares of the Fund. Stephen Miller, the Fund's president, is an officer
and director of Badlands and may be deemed to have in direct beneficial
ownership of the common stock held by the EH Trust. However, because two of the
EH Trustees are required in order for the EH Trust to vote or exercise
dispositive authority with respect to shares owned by the EH Trust, Mr. Miller
disclaims beneficial ownership of such shares.
The names of the officers of the Fund and certain additional information are
listed in the table below. Each officer was elected to office by the Board at a
meeting held on April 26, 2005. Each officer will hold such office until a
successor has been elected by the Board.
Position, Length of Term
Name, Address, Age Served, and Term of Principal Occupation(s) and Other Directorships Held
Office During the Past Five Years
Stephen C. Miller President of the Fund President of and General Counsel for BIA, since 1999;
1680 38th Street, since January 2002 and Manager, FAS, since 1999; Vice President of SIA, since
Suite 800 Director from January ______; Director and President of Boulder Total Return
Boulder, CO 80301 2002 through October Fund, Inc., since 1999 (resigned as Director in 2004);
Age: 52 2004. Appointed Director and President of First Financial Fund, Inc.
annually. since 2003 (resigned as Director and Chairman in 2004);
President and General Counsel, Horejsi, Inc.
(liquidated in 1999); General Counsel, Brown
Welding Supply, LLC (sold in 1999);
officer of various other entities
affiliated with the Horejsi family; Of
Counsel, Krassa & Miller, LLC since 1991.
Carl D. Johns Chief Financial Officer, Vice President and Treasurer of BIA and Assistant
1680 38th Street, Chief Accounting Manager of FAS, since April, 1999; Vice President, Chief
Suite 800 Officer, Vice President Financial Officer and Chief Accounting Officer, Boulder
Boulder, CO 80301 and Treasurer since Total Return Fund, Inc., since 1999 and First Financial
Age: 41 January 2002. Appointed Fund, Inc., since August 2003.
annually.
Stephanie J. Kelley Secretary since January Secretary, Boulder Total Return Fund, Inc., since
1680 38th Street, 2002. Appointed October 2000 and First Financial Fund, Inc., since
Suite 800 annually. August 2003; Assistant Secretary and Assistant Treasurer
Boulder, CO 80301 of various other entities affiliated with the Horejsi
Age: 48 family; Employee, FAS, since March 1999.
Nicole L. Murphey Assistant Secretary Assistant Secretary, Boulder Total Return Fund, Inc.,
1680 38th Street, since January 2002. since October 2000 and First Financial Fund, Inc. since
Suite 800 Appointed annually. August 2003; Employee, FAS, since July 1999.
Boulder, CO 80301
Age: 28
Candace Cavalier Assistant Secretary Assistant Secretary, Boulder Total Return Fund, Inc. and
200 Clarendon Street since April 2005. First Financial Fund, Inc. since January 2005; Associate
Boston, MA 02116 Appointed annually Counsel, Investors Bank & Trust Company, since March
Age: 33 2004; Consultant at Deutsche Asset Management from
September 2002 to Sept 2003; Associate at Hinckley, Allen &
Snyder LLP from July 2001 to July 2002; Staff Attorney at
Securities and Exchange Commission from September 1998 to
June 2001.
Laura Healy Assistant Treasurer Assistant Treasurer, Boulder Total Return Fund, Inc. and
200 Clarendon Street since January 2005. First Financial Fund, Inc. since January 2005; Senior
Boston, MA 02116 Appointed annually. Director, Investors Bank & Trust Company, since January
Age: 41 2002; Assistant Treasurer at MFS Investment Management
from December 1996 to January 2002.
Janice Desmond Assistant Treasurer Assistant Treasurer, Boulder Total Return Fund, Inc. and
200 Clarendon Street since January 2005. First Financial Fund, Inc. since January 2005; Director,
Boston, MA 02116 Appointed annually. Investors Bank & Trust Company, since January 2005; Vice
Age: 54 President of Deutsche Asset Management from February
2001 to January 2005; Assistant Vice President of
Wellington Asset Management from September 1999 to
February 2001.
INFORMATION REGARDING THE ADVISERS AND OTHER SERVICE PROVIDERS. The Fund is
co-advised by BIA and SIA. Since January of 2002, the Advisers have been
providing advisory services to the Fund and, since March of 1999, to the Boulder
Total Return Fund, Inc. As of July ___, 2005, the Advisers had a total of $_____
million in assets under management.
BOULDER INVESTMENT ADVISERS, LLC. BIA was formed on April 8, 1999, as a Colorado
limited liability company and is registered as an investment adviser under the
Investment Advisers Act of 1940, as amended. Together with SIA, BIA serves as
the investment co-adviser to two registered closed-end investment companies, the
Fund and Boulder Total Return Fund, Inc (together, the "Boulder Funds"). At the
present time, BIA has only one other client, also co-advised with SIA, which is
an affiliated private foundation, the Horejsi Charitable Foundation. Stewart R.
Horejsi is an employee of and investment manager for both Advisers and has
extensive experience managing common stocks for the Fund as well as for the
various other trusts and entities affiliated with the Horejsi family (the
"Horejsi Affiliates"). The members of BIA are Evergreen Atlantic, LLC, a
_________, located at 1680 38th Street, Suite 800, Boulder, Colorado 80301 and
the Lola Brown Trust No. 1B, an irrevocable Alaska domiciled trust, whose
address is c/o Badlands Trust Company, LLC, 3601 C Street, Suite 600, Anchorage,
Alaska 99503 (the "Members"). The Members each hold a 50% interest in BIA. The
Members are "affiliated persons" of the Fund (as that term is defined in the
1940 Act). Both Mr. Horejsi and John S. Horejsi, Mr. Horejsi's son and one of
the Fund's "interested" directors, are discretionary beneficiaries under the
Lola Brown Trust No. 1B as well as under other Horejsi family affiliated trusts
which own Evergreen Atlantic, LLC. Accordingly, as a result of this
relationship, both Stewart R. Horejsi and John S. Horejsi may directly or
indirectly benefit from the relationship between the Fund and BIA.
STEWART INVESTMENT ADVISERS. SIA is a Barbados international business company,
incorporated on November 12, 1996. As discussed above, SIA, together with BIA,
serves as the investment co-adviser to the Boulder Funds and the Horejsi
Charitable Foundation, which presently are SIA's only clients. SIA is wholly
owned by the Stewart West Indies Trust, an irrevocable trust domiciled in
Alaska, established by Stewart Horejsi in 1996 primarily to benefit his issue
(the "West Indies Trust"). The West Indies Trust's address is c/o Badlands Trust
Company, LLC, 3601 C Street, Suite 600, Anchorage, Alaska 99503. Mr. Horejsi is
not a beneficiary under the West Indies Trust. However, John S. Horejsi, Mr.
Horejsi's son and the Fund's "interested" director, is a discretionary
beneficiary under the West Indies Trust and thus, as a result of this
relationship, may directly or indirectly benefit from the relationship between
SIA and the Fund.
SIA is not domiciled in the United States and substantially all of its assets
are located outside the United States. As a result, it may be difficult to
realize judgments of courts of the United States predicated upon civil
liabilities under federal securities laws of the United States. The Fund has
been advised that there is substantial doubt as to (i) the enforceability in
Barbados of such civil remedies and criminal penalties as are afforded by the
federal securities laws of the United States, (ii) whether the appropriate
foreign courts would enforce judgments of United States courts obtained in
actions against SIA predicated upon the civil liability provisions of the
federal securities laws, or (iii) whether a Barbados court would enforce, in an
original action, liabilities against SIA predicated solely on federal securities
laws. Pursuant to the advisory agreement between SIA and the Fund, SIA has
appointed the Secretary of the Fund (presently Stephanie Kelley in Boulder,
Colorado) as its agent for service of process in any legal action in the United
States, thus subjecting it to the jurisdiction of the United States courts.
PORTFOLIO MANAGERS. Stewart R. Horejsi is the Fund's primary investment manager
and, together with Carl D. Johns, the Fund's Vice President and Treasurer, is
responsible for the day-to-day management of the Fund's assets and is primarily
responsible for the Fund's asset allocation. Mr. Horejsi has been an employee of
both BIA and SIA since ______. Mr. Horejsi has been the President or Manager of
various subsidiaries of various Horejsi family affiliates since June 1986, and
the investment manager for various Horejsi Affiliates since 1982. He was a
director of the Boulder Total Return Fund, Inc. until November, 2001; General
Manager of Brown Welding Supply, LLC from 1994 until 1999; and a director of
Sunflower Bank from ____ to ____. Mr. Horejsi has been the Director and
President of the Horejsi Charitable Foundation, Inc. since 1997. He received a
Masters Degree in Economics from Indiana University in 1961 and a Bachelor of
Science Degree in Industrial Management from the University of Kansas in 1959.
Carl D. Johns, the Fund's Vice President and Treasurer, is also Vice President
and Treasurer for BIA and, together with Mr. Horejsi, is responsible for
research, managing the Fund's fixed income portfolio and BIA's day-to-day
advisory activities. He has worked for BIA since 1999. Since 1999, he has been
Chief Financial Officer, Chief Accounting Officer, Vice President and Treasurer
of the Boulder Total Return Fund, Inc. Mr. Johns is also the assistant manager
of FAS. Prior to joining BIA, Mr. Johns worked at Flaherty and Crumrine,
Incorporated, from 1992 to 1998. During that period he was an Assistant
Treasurer for the Preferred Income Fund Incorporated, the Preferred Income
Opportunity Fund Incorporated, and the Preferred Income Management Fund
Incorporated. Mr. Johns received a Bachelors degree in Mechanical Engineering at
the University of Colorado in 1985, and a Masters degree in Finance from the
University of Colorado in 1991.
Additional information regarding the portfolio managers' compensation, other
accounts managed and ownership of Fund shares is included in the Statement of
Additional Information.
THE INVESTMENT CO-ADVISORY AGREEMENTS. The Advisers and the Fund are parties to
investment co-advisory agreements dated as of April 26, 2002 (the "Advisory
Agreements"). Under the terms of the Advisory Agreements, the Advisers provide
advisory services regarding asset allocation, manage the investment of the
Fund's assets and provide such investment research, advice and supervision, in
conformity with the Fund's investment objective and policies, as necessary for
the operations of the Fund. The Advisory Agreements provide, among other things,
that the Advisers will bear all expenses in connection with the performance of
their services under the Advisory Agreements, although the Fund will bear
certain other expenses to be incurred in its operation, including organizational
expenses, taxes, interest, brokerage costs and commissions and stock exchange
fees; fees of Directors of the Fund who are not also officers, directors or
employees of the Advisers; Securities and Exchange Commission fees; state Blue
Sky qualification fees; insurance premiums; outside auditing and legal expenses;
costs of maintenance of the Fund's existence; membership fees in trade
associations; stock exchange listing fees and expenses; and litigation and other
extraordinary or non-recurring expenses.
The Advisory Agreements provide that the Fund shall pay to the Advisers for
their services an aggregate monthly fee at the annual rate of 1.25% of the
Fund's average monthly net assets (the "Adviser Fee") (including the principal
amount of leverage, if any). Under the terms of the Advisory Agreements, the
Advisers split the Adviser Fee as determined by the Advisers and approved by the
Board from time to time. Presently, the Adviser Fee is split between BIA and SIA
25% and 75%, respectively. Although the Advisers intend to devote such time and
effort to the business of the Fund as is reasonably necessary to perform their
respective duties to the Fund, the services of the Advisers are not exclusive
and the Advisers may provide similar services to other investment companies and
other clients and may engage in other activities.
The Advisory Agreements provide that the Advisers shall not be liable for any
error of judgment or mistake of law or omission or any loss suffered by the Fund
in connection with the matters to which the agreements relate, although the
agreements do not protect or purport to protect the Advisers against any
liability to the Fund to which the Advisers would otherwise be subject by reason
of willful misfeasance, bad faith or gross negligence on their part in the
performance of their duties or from reckless disregard by them of their
obligations and duties under the agreements. Each Advisory Agreement also
provides for indemnification by the Fund of the Advisers and their partners,
members, officers, employees, agents and control persons for liabilities
incurred by them in connection with their services to the Fund, subject to
certain limitations and conditions.
Each Advisory Agreement will continue in effect without a term so long as its
continuation is specifically approved at least annually by both (i) the vote of
a majority of the Board or the vote of a majority of the outstanding voting
securities of the Fund (as such term is defined in the 1940 Act) and (ii) by the
vote of a majority of the directors who are not parties to such Advisory
Agreement or interested persons (as such term is defined in the 1940 Act) of any
such party, cast in person at a meeting called for the purpose of voting on such
approval. Any of the Advisory Agreements may be terminated as a whole at any
time by the Fund, without the payment of any penalty, upon the vote of a
majority of the Board or a majority of the outstanding voting securities of the
Fund or by the Advisers on 60 days' written notice by either party to the other.
Except as otherwise provided by order of the Securities and Exchange Commission
or any rule or provision of the 1940 Act, each of the Advisory Agreements will
terminate automatically in the event of their assignment (as such term is
defined in the 1940 Act and the rules thereunder).
FUND ADMINISTRATIVE SERVICES, LLC. The Fund's co-administrator is Fund
Administrative Services, LLC ("FAS" or the "Administrator"). FAS (formerly
Boulder Administrative Services, LLC) is a Colorado limited liability company
whose principal place of business is 1680 38th Street, Suite 800, Boulder,
Colorado 80301. The members of FAS are Lola Brown Trust No. 1B (50%) and
Evergreen Atlantic, L.L.C. (50%) (the "Members"), each of which is considered to
be an "affiliated person" of the Fund as that term is defined in the 1940 Act.
The officers of FAS are Stephen C. Miller, manager; Carl D. Johns, assistant
manager; Laura Rhodenbaugh, secretary/treasurer; and Stephanie Kelley, assistant
secretary. Since January of 2002, FAS has been providing certain administrative
and executive management services to the Fund, including among other things
negotiation of service provider contracts, oversight of service providers,
maintenance of the Fund's policies and procedures, and provision of compliance,
legal and fund accounting services. FAS has also provided such administrative
and executive management services to the Boulder Total Return Fund, Inc. since
March of 1999, and to First Financial Fund, Inc. since August of 2003.
The Fund and FAS are parties to an Administration Agreement dated February 1,
2004 (the "Administration Agreement"). FAS is owned by the Members, who, as
indicated above, are also the owners of BIA and are included in the group
referred to herein as the Horejsi Affiliates. As discussed above, both Stewart
R. Horejsi and his son John S. Horejsi, the Fund's only "interested" director,
are discretionary beneficiaries under the Lola Brown Trust No. 1B, one of the
Members of FAS, and under the trusts that own Evergreen Atlantic, LLC, the other
Member of FAS.
Under the Administration Agreement, the Fund pays FAS a monthly fee calculated
at an annual rate of 0.20% of the value of the Fund's average monthly net assets
up to $250 million; 0.18% of the Fund's average monthly net assets on the next
$150 million; and, 0.15% on the value of the Fund's average monthly assets over
$400 million. Notwithstanding, FAS has agreed to cap the Fund's total
administration costs at 0.30% (including administration, co-administration,
transfer agent and custodian fees). Accordingly, FAS has agreed to waive a
portion of its fee should the total monthly administration expenses exceed
0.30%.
INVESTORS BANK & TRUST COMPANY. Investors Bank & Trust Company ("Investors
Bank"), located at 200 Clarendon Street, Boston, Massachusetts 02116, serves as
the Fund's co-administrator and custodian. As co-administrator, Investors Bank
provides certain services including fund accounting and preparation of materials
for Board meetings. Under an administration agreement and custody agreement
between the Fund and Investors Bank, the Fund pays Investors Bank a combined
monthly fee for both co-administrative and custodian services calculated at an
annual rate of 0.058% of the value of the Fund's average monthly net assets up
to $300 million and 0.04% on the value of the Fund's average monthly net assets
over $300 million, or a minimum monthly fee of $10,500. Presently, because of
the level of the Fund's average monthly net assets, the Fund pays the minimum of
$10,500 monthly. In addition, Investors Bank receives certain out-of-pocket
expenses, transaction fees and certain charges for securities transactions. All
customary fees of the custodian are paid by the Fund.
PFPC INC. The transfer agent, dividend disbursing agent and registrar for the
common shares of the Fund is PFPC Inc. ("PFPC"), an indirect, majority-owned
subsidiary of the PNC Financial Services Group, Inc. PFPC is located at 4400
Computer Drive, Westborough, MA 01581-5120. As compensation for PFPC's services,
the Fund pays PFPC a monthly fee plus certain out-of-pocket expenses.
DESCRIPTION OF PREFERRED SHARES
The following is a brief description of the material terms of the Preferred
Shares. For the complete terms of the Preferred Shares, please refer to the
detailed description of the Preferred Shares in the Articles Supplementary
(Appendix C to the Statement of Additional Information).
GENERAL. The Articles of Amendment and Restatement of the Fund filed on May 18,
2004 authorize the issuance of an unlimited number of preferred shares in one or
more classes or series with rights as determined by the Board without the
approval of common shareholders. The Preferred Shares will have a liquidation
preference of $25,000 per share, plus an amount equal to accumulated but unpaid
dividends (whether or not earned or declared).
The Preferred Shares are preferred shares that entitle their holders to receive
dividends when, as and if declared by the Board, out of funds legally available
therefor, at a rate per annum that may vary for successive dividend periods. The
applicable rate for a particular dividend period for the Preferred Shares will
be determined by an auction conducted on the business day before the start of
such dividend period. Beneficial owners and potential beneficial owners of
Preferred Shares may participate in auctions, although, except in the case of
special dividend periods of longer than 91 days, beneficial owners desiring to
continue to hold all of their Preferred Shares regardless of the applicable rate
resulting from auctions need not participate in order to continue to hold the
Preferred Shares. For an explanation of auctions and the method of determining
the applicable rate, see "Dividends and Rate Periods" and "The Auction" below.
The nominee of the Securities Depository is expected to be the sole holder of
record of the Preferred Shares. Accordingly, each purchase of Preferred Shares
must rely on (i) the procedures of the Securities Depository and, if such
purchaser is not a member of the Securities Depository, such purchaser's Agent
Member (members of DTC that will act on behalf of existing or potential holders
of Preferred Shares are referred to herein as "Agent Member"), to receive
dividends, distributions and notices and to exercise voting rights (if and when
applicable) and (ii) the records of the Securities Depository and, if such
purchaser is not a member of the Securities Depository, such purchaser's Agent
Member, to evidence its beneficial ownership of the Preferred Shares.
The Preferred Shares will rank on parity with any other series of preferred
shares of the Fund as to the payment of dividends and the distribution of assets
upon liquidation. Each share of Preferred Shares carries one vote on matters on
which Preferred Shares can be voted. When issued and sold, the Preferred Shares
will have a liquidation preference of $25,000 per share plus an amount equal to
accumulated but unpaid dividends (whether or not declared) and will be fully
paid and non-assessable. See "Liquidation." The Preferred Shares, when issued,
will be fully paid and non-assessable and have no preemptive, conversion or
cumulative voting rights. The Preferred Shares will not be convertible into
common shares or other shares of the Fund, and the holders thereof will have no
preemptive rights. The Preferred Shares will not be subject to any sinking fund
but will be subject to redemption at the option of the Fund on any dividend
payment date for the Preferred Shares (except during the initial dividend period
and during a Non-Call Period) at a redemption price generally equal to $25,000
per share plus accumulated and unpaid dividends. In certain circumstances, the
Preferred Shares will be subject to mandatory redemption by the Fund at a
redemption price of $25,000 per share plus accumulated and unpaid dividends. See
"Redemption."
DIVIDENDS AND RATE PERIODS.
GENERAL. The following is a general description of dividends and rate
periods for the Preferred Shares. The initial rate period for the Preferred
Shares will be _____days and the dividend rate for this period will be _____%.
Subsequent rate periods will be 28 days, and the dividend rate will be
determined by auction. The Fund, subject to certain conditions, may change the
length of subsequent rate periods by designating them as special rate periods.
See "Designation of Special Rate Periods" below.
DIVIDEND PAYMENT DATES. Dividends on the Preferred Shares will be payable,
when, as and if declared by the Board, out of legally available funds in
accordance with the Fund's Charter and applicable law. Dividend periods
generally will begin on the first business day after an auction. If dividends
are payable on a day that is not a business day, then dividends will generally
be payable on the next day if such day is a business day, or as otherwise
specified in the Articles Supplementary. If a dividend payment date 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 cannot be paid for any such reason, then:
o 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 dividend to be paid using their reasonable best
efforts;
o 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
o 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.
Dividends will be paid through DTC on each dividend payment date. The dividend
payment date will normally be the first business day after the dividend period
ends. DTC, in accordance with its current procedures, is expected to distribute
dividends received from the Auction Agent in same-day funds on each dividend
payment date to Agent Members. These Agent Members are in turn expected to
distribute such dividends to the persons for whom they are acting as agents.
Each of the current Broker-Dealers has indicated to the Fund that dividend
payments will be available in same-day funds on each dividend payment date to
customers that use a Broker-Dealer or a Broker-Dealer's designee as Agent
Member.
CALCULATION OF DIVIDEND PAYMENT. The Fund computes the dividends per share
payable on the Preferred Shares by multiplying the applicable rate in effect by
a fraction. The numerator of this fraction will normally be the number of days
in the rate period and the denominator will normally be 360. This rate is then
multiplied by $25,000 to arrive at the dividends per share. Dividends on the
Preferred Shares will accumulate from the date of their original issue, which is
_________, 2005. For each dividend payment period after the initial rate period,
the dividend will be the dividend rate determined at auction. The dividend rate
that results from an auction will not be greater than the maximum rate described
below.
DETERMINATION OF MAXIMUM APPLICABLE RATE. The maximum applicable rate for
any regular period will be the higher of (as set forth in the table below) the
applicable percentage of the Reference Rate or the applicable spread plus the
Reference Rate. The Reference Rate is the applicable LIBOR Rate (for a dividend
period or a special dividend period of fewer than 365 days), or the applicable
Treasury Index Rate (for a special dividend period of 365 days or more). In the
case of a special rate period, the maximum applicable rate will be specified by
the Fund in the notice of the special rate period for such dividend payment
period. The applicable percentage or applicable spread is determined on the day
that a notice of a special rate period is delivered if the notice specifies a
maximum applicable rate for a special rate period. The applicable percentage or
applicable spread will be determined based on the lower of the credit rating or
ratings assigned to the Preferred Shares by Moody's and Fitch.
The "LIBOR Rate," as described in greater detail in the Articles Supplementary,
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 Articles
Supplementary, 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.
Applicable Percentage Payment Table
Applicable
Credit Ratings Percentage Applicable Spread
Moody's Fitch
Aaa AAA 125% 1.25%
Aa3 to Aa1 A- to AA+ 150% 1.50%
A3 to A1 A- to A+ 200% 2.00%
Baa3 to Baa1 BBB- to BBB+ 250% 2.50%
Ba1 and lower BB+ and lower 300% 3.00%
Assuming the Fund maintains an Aaa/AAA rating on the Preferred Shares, the
practical effect of the different methods used to calculate the maximum
applicable rate is shown in the table below:
Maximum Applicable
Rate Using the Maximum Applicable Method Used to
Applicable Rate Using the Determine the Maximum
Reference Rate Percentage Applicable Spread Applicable Rate
1% 1.25% 2.25% Spread
2% 2.50% 3.25% Spread
3% 3.75% 4.25% Spread
4% 5.00% 5.25% Spread
5% 6.25% 6.25% Either
6% 7.50% 7.25% Percentage
The Board may amend the maximum applicable rate to increase the percentage
amount by which the Reference Rate described above is multiplied, or to increase
the spread added to the Reference Rate, to determine the maximum applicable rate
shown without the vote or consent of the holders of Preferred Shares, or any
other shareholder of the Fund, but only with confirmation from each rating
agency then rating the Preferred Shares that such action will not impair such
agency's then-current rating of the Preferred Shares, provided that immediately
following any such increase the Fund could meet the Preferred Shares Basic
Maintenance Amount test discussed below under "Rating Agency Guidelines and
Asset Coverage."
Prior to each dividend payment date, the Fund is required to deposit with the
Auction Agent sufficient funds for the payment of declared dividends. The
failure to make such deposit will result in the cancellation of any auction and
the dividend rate will be the maximum applicable rate until such failure to
deposit is cured or, if not timely cured, a non-payment rate of 300% of the
applicable Reference Rate. The Fund does not intend to establish any reserves
for the payment of dividends.
RESTRICTIONS ON DIVIDENDS AND OTHER DISTRIBUTIONS. While any of the
Preferred Shares are outstanding, the Fund, except as provided below, may not
declare, pay or set apart for payment, any dividend or other distribution in
respect of its common shares. In addition, the Fund may not call for redemption
or redeem any of its common shares. However, the Fund is not confined by the
above restrictions if:
o immediately after such transaction, the discounted value of the Fund's
portfolio would be equal to or greater than the Preferred Shares Basic
Maintenance Amount and the value of the Fund's portfolio would be
equal to or greater than the 1940 Act Preferred Share Asset Coverage
(see "Rating Agency Guidelines and Asset Coverage" below);
o full cumulative dividends on the Preferred Shares due on or prior to
the date of the transaction have been declared and paid or shall have
been declared and sufficient funds for the payment thereof deposited
with the Auction Agent; and
o the Fund has redeemed the full number of Preferred Shares required to
be redeemed by any provision for mandatory redemption contained in the
Articles Supplementary.
The Fund generally will not declare, pay or set apart for payment any dividend
on any class or series of shares of the Fund ranking, as to the payment of
dividends, on a parity with Preferred Shares unless the Fund has declared and
paid or contemporaneously declares and pays full cumulative dividends on the
Preferred Shares through its most recent dividend payment date. However, when
the Fund has not paid dividends in full upon the Preferred Shares through the
most recent dividend payment date or upon any other class or series of shares of
the Fund ranking, as to the payment of dividends, on a parity with Preferred
Shares through their most recent respective dividend payment dates, the amount
of dividends declared per share on Preferred Shares and such other class or
series of shares will in all cases bear to each other the same ratio that
accumulated dividends per share of Preferred Shares and such other class or
series of shares bear to each other.
DESIGNATION OF SPECIAL RATE PERIODS. The Fund may, in certain situations,
declare a special rate period. Prior to declaring a special rate period, the
Fund will give notice (a "notice of special rate period") to the Auction Agent
and to each Broker-Dealer. The notice will state that the next succeeding rate
period for the Preferred Shares will be a number of days as specified in such
notice. The Fund may not designate a special rate period unless sufficient
clearing bids were made in the most recent auction. In addition, full cumulative
dividends, any amounts due with respect to mandatory redemptions and any
additional dividends payable prior to such date must be paid in full or
deposited with the Auction Agent. The Fund also must have received confirmation
from Moody's and Fitch or any substitute rating agency that the proposed special
rate period will not adversely affect such agency's then-current rating on the
Preferred Shares and the Underwriter designated by the Fund, initially [Lead
Underwriter], must not have objected to declaration of a special rate period. A
notice of special rate period also will specify whether the shares of the
Preferred Shares will be subject to optional redemption during such special rate
period and, if so, the redemption premium, if any, required to be paid by the
Fund in connection with such optional redemption.
NON-PAYMENT PERIOD AND LATE CHARGE. A "failure to deposit," with respect to
the Preferred Shares, means a failure by the Fund to pay to the Auction Agent,
not later than 12:00 noon, New York City time, (A) on the business day next
preceding any dividend payment date for the Preferred Shares in funds available
on such dividend payment date in the City of New York, New York, the full amount
of any dividend (whether or not earned or declared) to be paid on such dividend
payment date or (B) on the business day next preceding any redemption date in
funds available on such redemption date in the City of New York, New York, the
redemption price to be paid on such redemption date after notice of redemption
is mailed; provided, however, that the foregoing clause (B) shall not apply to
the Fund's failure to pay the redemption price in respect of Preferred Shares
when the related notice of redemption provides that redemption of such shares is
subject to one or more conditions precedent and any such condition precedent
shall not have been satisfied at the time or times and in the manner specified
in such notice of redemption. If a failure to deposit occurs but, prior to 12:00
noon, New York City time, on the third business day next succeeding the date on
which such failure to deposit occurred, such failure to deposit shall have been
cured and the Fund shall have paid to the Auction Agent a late charge ("Late
Charge") equal to the sum of (1) if such failure to deposit consisted of the
failure to timely pay to the Auction Agent the full amount of dividends with
respect to any dividend period, an amount computed by multiplying (x) 300% of
the Reference Rate for the dividend period during which such failure to deposit
occurs on the dividend payment date for such dividend period by (y) a fraction,
the numerator of which shall be the number of days for which such failure to
deposit has not been cured (including the day such failure to deposit occurs and
excluding the day such failure to deposit is cured) and the denominator of which
shall be 360, and applying the rate obtained against the aggregate liquidation
preference of the outstanding Preferred Shares and (2) if such failure to
deposit consisted of the failure to timely pay to the Auction Agent the
redemption price of the shares, if any, for which notice of redemption has been
mailed by the Fund, an amount computed by multiplying (x) 300% of the Reference
Rate for the dividend period during which such failure to deposit occurs on the
redemption date by (y) a fraction, the numerator of which shall be the number of
days for which such failure to deposit is not cured (including the day such
failure to deposit occurs and excluding the day such failure to deposit is
cured) and the denominator of which shall be 360, and applying the rate obtained
against the aggregate liquidation preference of the outstanding shares to be
redeemed, then no auction will be held for the subsequent dividend period
thereof and the dividend rate for such subsequent dividend period will be the
maximum applicable rate on the auction date for such subsequent dividend period.
If any failure to deposit shall have occurred with respect to the Preferred
Shares during any dividend period thereof, and, prior to 12:00 noon, New York
City time, on the third business day next succeeding the date on which such
failure to deposit occurred, such failure to deposit shall not have been cured
or the Fund shall not have paid the applicable Late Charge to the Auction Agent,
no auction will be held in respect of Preferred Shares for the first subsequent
dividend period thereafter (or for any dividend period thereafter to and
including the dividend period during which (1) such failure to deposit is cured
and (2) the Fund pays the applicable Late Charge to the Auction Agent (the
condition set forth in this clause (2) to apply only in the event Moody's is
rating such shares at the time the Fund cures such failure to deposit), in each
case no later than 12:00 noon, New York City time, on the fourth business day
prior to the end of such dividend period) (a "non-payment period") and the
dividend rate for each such subsequent dividend period shall be a rate per annum
(the "non-payment period rate") equal to 300% of the applicable Reference Rate,
provided that the Board shall have the authority to adjust, modify, alter or
change from time to time such initial rate if the Board determines and the
rating agencies (or any substitute rating agency) advise the Fund in writing
that such adjustment, modification, alteration or change will not adversely
affect the then-current ratings on the Preferred Shares.
REDEMPTION
MANDATORY REDEMPTION. The Fund is required to maintain (a) a discounted
value of eligible portfolio securities equal to the Preferred Shares Basic
Maintenance Amount and (b) the 1940 Act Preferred Share Asset Coverage (at least
200% with respect to senior securities which are equity shares, including
Preferred Shares). Eligible portfolio securities for purposes of the Preferred
Shares Basic Maintenance Amount will be determined from time to time by the
rating agencies then rating the Preferred Shares. If the Fund fails to maintain
such asset coverage amounts and does not timely cure such failure in accordance
with the requirements of the rating agencies that rate the Preferred Shares, the
Fund must redeem all or a portion of the Preferred Shares. This mandatory
redemption will take place on a date that the Board specifies out of legally
available funds, in accordance with the Articles Supplementary and applicable
law, at the redemption price of $25,000 per share plus accumulated but unpaid
dividends (whether or not declared) to (but not including) the date fixed for
redemption. The number of Preferred Shares that must be redeemed in order to
cure such failure will be allocated pro rata among the outstanding Preferred
Shares. The mandatory redemption will be limited to the number of Preferred
Shares necessary, after giving effect to such redemption, in order that the
discounted value of the Fund's portfolio equals or exceeds the Preferred Shares
Basic Maintenance Amount, and the value of the Fund's portfolio equals or
exceeds the 1940 Act Preferred Share Asset Coverage. In determining the number
of Preferred Shares required to be redeemed in accordance with the foregoing,
the Fund will allocate the number of shares required to be redeemed to satisfy
the Preferred Shares Basic Maintenance Amount or the 1940 Act Preferred Share
Asset Coverage, as the case may be, pro rata among the Preferred Shares and any
other preferred shares of the Fund subject to redemption or retirement. If fewer
than all outstanding shares are, as a result, to be redeemed, the Fund may
redeem such shares by lot or other method that it deems fair and equitable.
OPTIONAL REDEMPTION. To the extent permitted under the 1940 Act and
Maryland law, the Fund at its option may, without the consent of the holders of
Preferred Shares, redeem Preferred Shares having a dividend period of one year
or less, in whole or in part, on the business day after the last day of such
dividend period upon not less than 15 calendar days' and not more than 40
calendar days' prior notice. The optional redemption price per share will be
$25,000 per share, plus an amount equal to accumulated but unpaid dividends
thereon (whether or not earned or declared) to the date fixed for redemption
plus the premium, if any, resulting from the designation of a Premium Call
Period. Preferred Shares having a dividend period of more than one year are
redeemable at the option of the Fund, in whole or in part, prior to the end of
the relevant dividend period, subject to any specific redemption provisions,
which may include the payment of redemption premiums to the extent required
under any applicable specific redemption provisions. The Fund will not make any
optional redemption unless, after giving effect thereto, (i) the Fund has
available certain deposit securities with maturities or tender dates not later
than the day preceding the applicable redemption date and having a value not
less than the amount (including any applicable premium) due to holders of
Preferred Shares by reason of the redemption of Preferred Shares on such date
fixed for the redemption and (ii) the Fund has eligible assets with an aggregate
discounted value at least equal to the Preferred Shares Basic Maintenance
Amount. Notwithstanding the foregoing, Preferred Shares may not be redeemed at
the option of the Fund unless all dividends in arrears on the outstanding
Preferred Shares, including all outstanding preferred shares, have been or are
being contemporaneously paid or set aside for payment. This would not prevent
the lawful purchase or exchange offer for Preferred Shares made on the same
terms to holders of all outstanding preferred shares.
LIQUIDATION
If the Fund is liquidated, the holders of outstanding Preferred Shares will
receive the liquidation preference, plus all accumulated but unpaid dividends,
before any payment is made to the holders of common shares. The holders of
Preferred Shares will be entitled to receive these amounts from the assets of
the Fund available for distribution to its shareholders. In addition, the rights
of holders of Preferred Shares to receive these amounts are subject to the
rights of holders of other preferred shares ranking on parity with the Preferred
Shares with respect to the distribution of assets upon liquidation of the Fund.
After the payment to the holders of Preferred Shares of the full preferential
amounts as described, the holders of Preferred Shares will have no right or
claim to any of the remaining assets of the Fund.
For purpose of the foregoing paragraph, a voluntary or involuntary liquidation
of the Fund does not include:
o the sale of all or substantially all the property or business of the
Fund;
o the merger or consolidation of the Fund into or with any other
business trust or corporation; or
o the merger or consolidation of any other business trust or corporation
into or with the Fund.
In addition, none of the foregoing would result in the Fund being required to
redeem any Preferred Shares if after such transaction the Fund continued to
comply with the rating agency guidelines and asset coverage ratios.
RATING AGENCY GUIDELINES AND ASSET COVERAGE. It is expected that Moody's will
assign a rating of Aaa and Fitch will assign a rating of AAA to the Preferred
Shares. Securities rated Aaa by Moody's are considered by Moody's as the best
quality investment grade securities and carry the smallest degree of investment
risk. Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, the changes that can be expected are most unlikely to impair the
fundamentally strong position of such issues. Securities rated AAA by Fitch
denote the lowest expectation of credit risk. They are assigned only in case of
exceptionally strong capacity for timely payment of financial commitments. This
capacity is highly unlikely to be adversely affected by foreseeable events.
The Fund is required under guidelines of Moody's and Fitch to maintain assets
having in the aggregate a discounted value at least equal to the Preferred
Shares Basic Maintenance Amount. Moody's and Fitch have each established
separate guidelines for calculating discounted value. To the extent any
particular portfolio holding does not satisfy a rating agency's guidelines, all
or a portion of the holding's value will not be included in the rating agency's
calculation of discounted value. The Moody's and Fitch guidelines also impose
certain diversification requirements on the Fund's portfolio. The Moody's and
Fitch guidelines do not impose any limitations on the percentage of the Fund's
assets that may be invested in holdings not eligible for inclusion in the
calculation of the discounted value of the Fund's portfolio. The amount of
ineligible assets included in the Fund's portfolio at any time may vary
depending upon the rating, diversification and other characteristics of the
eligible assets included in the portfolio. The Preferred Shares Basic
Maintenance Amount is the sum of (a) the aggregate liquidation preference of the
Preferred Shares then outstanding, together with the aggregate liquidation
preference on any other series of preferred shares (plus redemption premium, if
any), and (b) certain accrued and projected dividend and other payment
obligations of the Fund.
The Fund is also required under the 1940 Act to maintain the 1940 Act Preferred
Share Asset Coverage. The Fund's 1940 Act Preferred Share Asset Coverage is
tested as of the last business day of each month in which any senior equity
securities are outstanding. The minimum required 1940 Act Preferred Share Asset
Coverage amount of 200% may be increased or decreased if the 1940 Act is
amended. Based on the composition of the portfolio of the Fund and market
conditions as of __________ 2005, the 1940 Act Preferred Share Asset Coverage
with respect to all of the Fund's preferred shares, assuming the issuance on
that date of all Preferred Shares offered hereby and giving effect to the
deduction of related sales load and related offering costs estimated at
approximately $________ would have been computed as follows:
Value of Fund assets less liabilities not $
constituting senior securities
_____________________________________________ = __________ = _________%
Senior securities representing indebtedness
plus liquidation value of the preferred $
shares
In the event the Fund does not timely cure a failure to maintain (a) a
discounted value of its portfolio at least equal to the Preferred Shares Basic
Maintenance Amount or (b) the 1940 Act Preferred Share Asset Coverage, in each
case in accordance with the requirements of the rating agency or agencies then
rating the Preferred Shares, the Fund will be required to redeem preferred
shares as described under "Redemption - Mandatory Redemption" above.
The Fund may, but is not required to, adopt any modifications to the guidelines
that may be established by Moody's or Fitch. Failure to adopt any such
modifications, however, may result in a change in the ratings assigned to the
Preferred Shares or a withdrawal of ratings altogether. In addition, any rating
agency providing a rating for the Preferred Shares may, at any time, change or
withdraw any such rating. The Board may, without shareholder approval, amend,
alter or repeal any or all of the definitions and related provisions which have
been adopted by the Fund pursuant to the rating agency guidelines in the event
such rating agency is no longer rating the Preferred Shares or the Fund receives
written confirmation from Moody's or Fitch, as the case may be, that any such
amendment, alteration or repeal would not impair the rating then assigned to the
Preferred Shares.
As recently described by Moody's and Fitch, a preferred stock rating is an
assessment of the capacity and willingness of an issuer to pay preferred stock
obligations. The rating on the Preferred Shares is not a recommendation to
purchase, hold or sell those shares, inasmuch as the rating does not comment as
to market price or suitability for a particular investor. The rating agency
guidelines described above also do not address the likelihood that an owner of
Preferred Shares will be able to sell such shares in an auction or otherwise.
The rating is based on current information furnished to Moody's and Fitch by the
Fund and the Adviser and information obtained from other sources. The rating may
be changed, suspended or withdrawn as a result of changes in, or the
unavailability of, such information. The common shares have not been rated by a
nationally recognized statistical rating organization.
The rating agency's guidelines will apply to the Preferred Shares only so long
as the rating agency is rating the shares. The Fund will pay certain fees to
Moody's and Fitch for rating the Preferred Shares.
VOTING RIGHTS. Except as otherwise provided in this prospectus or as otherwise
required by law, holders of Preferred Shares will have equal voting rights with
holders of common shares and any other preferred shares (one vote per share) and
will vote together with holders of common shares and any preferred shares as a
single class.
Holders of outstanding preferred shares, including Preferred Shares, voting as a
separate class, are entitled to elect two of the Fund's Directors. The remaining
Directors are elected by holders of common shares and preferred shares,
including Preferred Shares, voting together as a single class. The term of
Directors elected by holders of preferred stock, such as the Preferred Shares,
will terminate automatically upon redemption in full of the preferred stock. If
at any time dividends (whether or not earned or declared) on outstanding
preferred shares, including Preferred Shares, are due and unpaid in an amount
equal to two full years of dividends, and sufficient cash or specified
securities have not been deposited with the Auction Agent for the payment of
such dividends, then, the sole remedy of holders of outstanding preferred
shares, including Preferred Shares, is that the number of Directors constituting
the Board will be automatically increased by the smallest number that, when
added to the two Directors elected exclusively by the holders of preferred
shares, including Preferred Shares, as described above, would constitute a
majority of the Board. The holders of preferred shares, including Preferred
Shares, will be entitled to elect that smallest number of additional Directors
at a special meeting of shareholders as soon as possible and at all subsequent
meetings at which Directors are to be elected. The terms of office of the
persons who are Directors at the time of that election will continue. If the
Fund thereafter shall pay, or declare and set apart for payment, in full, all
dividends payable on all outstanding preferred shares, including Preferred
Shares, the special voting rights stated above will cease, and the terms of
office of the additional Directors elected by the holders of preferred shares,
including Preferred Shares, will automatically terminate.
As long as any Preferred Shares are outstanding, the Fund will not, without the
affirmative vote or consent of the holders of at least a majority of the
Preferred Shares outstanding at the time (voting together as a separate class):
(a) authorize, create or issue any class or series of shares ranking prior
to or on a parity with the Preferred Shares with respect to payment of dividends
or the distribution of assets on dissolution, liquidation or winding up the
affairs of the Fund, or authorize, create or issue additional shares of any
series of Preferred Shares or any other preferred shares, unless, in the case of
preferred shares on a parity with the Preferred Shares, the Fund obtains written
confirmation from Moody's (if Moody's is then rating preferred shares), Fitch
(if Fitch is then rating preferred shares) or any substitute rating agency (if
any such substitute rating agency is then rating preferred shares) that the
issuance of a class or series would not impair the rating then assigned by such
rating agency to the Preferred Shares and the Fund continues to comply with
Section 13 of the 1940 Act, the 1940 Act Preferred Share Asset Coverage
requirements and the Preferred Shares Basic Maintenance Amount requirements, in
which case the vote or consent of the holders of the Preferred Shares is not
required;
(b) amend, alter or repeal the provisions of the Charter or Articles
Supplementary by merger, consolidation or otherwise, so as to adversely affect
any preference, right or power of the Preferred Shares or holders of Preferred
Shares; provided, however, that (i) none of the actions permitted by the
exception to (a) above will be deemed to affect such preferences, rights or
powers, (ii) a division of Preferred Shares will be deemed to affect such
preferences, rights or powers only if the terms of such division adversely
affect the holders of Preferred Shares and (iii) the authorization, creation and
issuance of classes or series of shares ranking junior to the Preferred Shares
with respect to the payment of dividends and the distribution of assets upon
dissolution, liquidation or winding up of the affairs of the Fund will be deemed
to affect such preferences, rights or powers only if Moody's or Fitch is then
rating the Preferred Shares and such issuance would, at the time thereof, cause
the Fund not to satisfy the 1940 Act Preferred Share Asset Coverage or the
Preferred Shares Basic Maintenance Amount; or
(c) approve any reorganization (as such term is used in the 1940 Act)
adversely affecting the Preferred Shares.
So long as any shares of the Preferred Shares are outstanding, the Fund will
not, without the affirmative vote or consent of the holders of at least 66 2/3%
of the Preferred Shares outstanding at the time, in person or by proxy, either
in writing or at a meeting, voting as a separate class, file a voluntary
application for relief under federal bankruptcy law or any similar application
under state law for so long as the Fund is solvent and does not foresee becoming
insolvent.
To the extent permitted under the 1940 Act, the Fund will not approve any of the
actions set forth in (a) or (b) above which adversely affects the rights
expressly set forth in the Charter or Articles Supplementary of a holder of
preferred shares differently than those of a holder of any other preferred
shares without the affirmative vote or consent of the holders of at least a
majority of the shares of each series adversely affected. Unless a higher
percentage is provided for under the Charter or Articles Supplementary, the
affirmative vote of the holders of a majority of the outstanding Preferred
Shares, voting together as a single class, will be required to approve any plan
of reorganization (including bankruptcy proceedings) adversely affecting such
shares or any action requiring a vote of security holders under Section 13(a) of
the 1940 Act. However, to the extent permitted by the Charter or Articles
Supplementary, no vote of holders of common shares, either separately or
together with holders of preferred shares as a single class, is necessary to
take the actions contemplated by (a) and (b) above. The holders of common shares
will not be entitled to vote in respect of such matters unless, in the case of
the actions contemplated by (b) above, the action would adversely affect the
contract rights of the holders of common shares expressly set forth in the
Charter.
The foregoing voting provisions will not apply with respect to Preferred Shares
if, at or prior to the time when a vote is required, such shares have been (i)
redeemed or (ii) called for redemption and sufficient funds have been deposited
in the Fund to effect such redemption.
THE AUCTION
GENERAL. The Articles Supplementary provide that, except as otherwise described
in this prospectus, the applicable rate for the Preferred Shares for each
dividend period after the initial dividend period will be the rate that results
from an auction conducted as set forth in the Articles Supplementary, the
material terms of which are summarized below. In such an auction, persons
determine to hold or offer to sell or, based on dividend rates bid by them,
offer to purchase or sell Preferred Shares. See the Articles Supplementary
included as Appendix C in the Statement of Additional Information for a more
complete description of the auction process.
AUCTION AGENCY AGREEMENT. The Fund will enter into an auction agency agreement
with the Auction Agent (currently, Deutsche Bank Trust Company Americas) which
provides, among other things, that the Auction Agent will follow the Auction
Procedures to determine the applicable rate for the Preferred Shares so long as
the applicable rate for the Preferred Shares is to be based on the results of an
auction.
The Auction Agent will act as agent for the Fund in connection with auctions. In
the absence of bad faith or negligence on its part, the Auction Agent will not
be liable for any action taken, suffered or omitted, or for any error of
judgment made, by it in the performance of its duties under the auction agency
agreement and will not be liable for any error of judgment made in good faith
unless the Auction Agent shall have been negligent in ascertaining the pertinent
facts. Pursuant to the auction agency agreement, the Fund is required to
indemnify the Auction Agent for certain losses and liabilities incurred by the
Auction Agent without negligence or bad faith on its part in connection with the
performance of its duties under such agreement.
The Auction Agent may terminate the auction agency agreement upon notice to the
Fund no earlier than 60 days after delivery of said notice. If the Auction Agent
should resign or its appointment is terminated during any period that any
Preferred Shares are outstanding, the Fund will use its best efforts to enter
into an agreement with a successor auction agent containing substantially the
same terms and conditions as the auction agency agreement. The Fund may remove
the Auction Agent provided that, prior to removal, the Fund has entered into a
replacement agreement with a successor auction agent.
BROKER-DEALER AGREEMENTS. Each auction requires the participation of one or more
Broker-Dealers. The Auction Agent will enter into agreements with several
Broker-Dealers selected by the Fund, which provide for the participation of
those Broker-Dealers in auctions for Preferred Shares.
The Auction Agent will pay to each Broker-Dealer after each auction, from funds
provided by the Fund, a service charge: (i) for any twenty-eight-day dividend
period, at the annual rate of 1/4 of 1% of the liquidation preference (such
liquidation preference being $25,000 per share) of the Preferred Shares held by
a Broker-Dealer's customer upon settlement in an auction (equal to $[62.50] per
Preferred Shares per year) and (ii) for any special dividend period, as
determined by mutual consent of the Fund and any such Broker-Dealer or
Broker-Dealers and which shall be based upon a selling concession that would be
applicable to an underwriting of fixed or variable rate preferred shares with a
similar fixed maturity or variable rate dividend period, respectively, at the
commencement of the dividend period with respect to such auction. This service
charge applies to Preferred Shares held on account of the Broker-Dealer's
clients as well as to Preferred Shares held for the Broker-Dealer's own account.
A Broker-Dealer may share a portion of any such fees with non-participating
broker-dealers that submit orders to the Broker-Dealer for an auction that are
placed by that Broker-Dealer at such auction.
The Fund may request that the Auction Agent terminate one or more Broker-Dealer
Agreements at any time upon five days' notice, provided that at least one
Broker-Dealer Agreement is in effect after termination of the Agreement(s).
AUCTION PROCEDURES. The following is a brief summary of the material terms of
the procedures to be used in conducting auctions. This summary is qualified by
reference to the Auction Procedures set forth in the Articles Supplementary,
which is attached as Appendix C to the Statement of Additional Information. The
settlement procedures to be used with respect to auctions are set forth in
Appendix D to the Statement of Additional Information.
Prior to the submission deadline on each auction date for the Preferred Shares,
each customer of a Broker-Dealer who is listed on the records of that
Broker-Dealer (or, if applicable, the Auction Agent) as a holder of Preferred
Shares, or a Broker-Dealer that holds Preferred Shares for its own account, may
submit the following types of orders with respect to the Preferred Shares to
that Broker-Dealer:
1. Hold Order - indicating its desire to hold shares without regard to
the applicable rate for the next dividend period.
2. Bid - indicating its desire to purchase or hold the indicated number
of shares at $25,000 per share if the applicable rate for the next
dividend period is not less than the rate specified in the bid. A bid
order by an existing holder will be deemed an irrevocable offer to
sell shares at $25,000 per share if the applicable rate for the next
dividend period is less than the rate or spread specified in the bid.
3. Sell Order - indicating its desire to sell shares at $25,000 per share
without regard to the applicable rate for the next dividend period.
A beneficial owner may submit different types of orders to its Broker-Dealer
with respect to different Preferred Shares then held by the beneficial owner. A
beneficial owner that submits its bid to its Broker-Dealer having a rate higher
than the maximum applicable rate on the auction date will be treated as having
submitted a sell order to its Broker-Dealer. A beneficial owner that fails to
submit an order to its Broker-Dealer will ordinarily be deemed to have submitted
a hold order to its Broker-Dealer. However, if a beneficial owner fails to
submit an order to its Broker-Dealer for an auction relating to a special
dividend period of more than [91] days such beneficial owner will be deemed to
have submitted a sell order to its Broker-Dealer. A sell order constitutes an
irrevocable offer to sell the Preferred Shares subject to the sell order. A
beneficial owner that offers to become the beneficial owner of additional
Preferred Shares is, for purposes of such offer, a potential holder as discussed
below.
A potential beneficial owner is either a customer of a Broker-Dealer that is not
a beneficial owner of Preferred Shares but that wishes to purchase shares or
that is a beneficial owner of shares that wishes to purchase additional shares.
A potential beneficial owner may submit bids to its Broker-Dealer in which it
offers to purchase shares at $25,000 per share if the applicable rate for shares
for the next dividend period is not less than the specified rate in such bid. A
bid placed by a potential holder of shares specifying a rate higher than the
maximum rate for shares on the auction date will not be accepted.
The Broker-Dealers in turn will submit the orders of their respective customers
who are beneficial owners and potential holders to the Auction Agent. They will
designate themselves (unless otherwise permitted by the Fund) as existing
holders of shares subject to orders submitted or deemed submitted to them by
beneficial owners. They will designate themselves as potential holders of shares
subject to orders submitted to them by potential beneficial owners. However,
neither the Fund nor the Auction Agent will be responsible for a Broker-Dealer's
failure to comply with these Auction Procedures. Any order placed with the
Auction Agent by a Broker-Dealer as or on behalf of an existing holder or a
potential holder will be treated the same way as an order placed with a
Broker-Dealer by a beneficial owner or potential holder. Similarly, any failure
by a Broker-Dealer to submit to the Auction Agent an order for any Preferred
Shares held by it or customers who are beneficial owners will be treated as a
beneficial owner's failure to submit to its Broker-Dealer an order in respect of
Preferred Shares held by it. A Broker-Dealer may also submit orders to the
Auction Agent for its own account as an existing holder or potential holder,
provided it is not an affiliate of the Fund. If a Broker-Dealer submits an order
for its own account in any auction, it may have knowledge of orders placed
through it in that auction and therefore have an advantage over other bidders,
but such Broker-Dealer would not have knowledge of orders submitted by other
Broker-Dealers in that auction. As a result of bidding by the Broker-Dealer in
an auction, the auction rate may be higher or lower than the rate that would
have prevailed had the Broker-Dealer not bid.
There are sufficient clearing bids for shares in an auction if the number of
shares subject to bids submitted or deemed submitted to the Auction Agent by
Broker-Dealers for potential holders with rates or spreads equal to or lower
than the maximum applicable rate is at least equal to or exceeds the sum of the
number of shares subject to sell orders and the number of shares subject to bids
specifying rates or spreads higher than the maximum applicable rate submitted or
deemed submitted to the Auction Agent by Broker-Dealers for existing holders. If
there are sufficient clearing bids for shares, the applicable rate for such
shares for the next succeeding dividend period thereof will be the lowest rate
specified in the submitted bids which, taking into account such rate and all
lower rates bid by Broker-Dealers as or on behalf of existing holders and
potential holders, would result in existing holders and potential holders owning
the shares available for purchase in the auction.
If there are not sufficient clearing bids for shares, the applicable rate for
the next dividend period will be the maximum applicable rate on the auction
date. If the Fund has declared a special rate period and there are not
sufficient clearing bids, the election of a special rate period will not be
effective and the applicable rate for the next rate period will be the same as
during the current dividend period. If there are not sufficient clearing bids,
beneficial owners of Preferred Shares that have submitted or are deemed to have
submitted sell orders may not be able to sell in the auction all shares subject
to such sell orders. If all of the applicable outstanding Preferred Shares are
the subject of submitted hold orders, then the dividend period following the
auction will automatically be the same length as the minimum dividend period and
the applicable rate for the next dividend period will be 90% of the Reference
Rate.
A Broker-Dealer may bid in an auction in order to prevent what would otherwise
be (i) a failed auction, (ii) an "all-hold" auction or (iii) an applicable rate
that the Broker-Dealer believes, in its sole discretion, does not reflect the
market rate for the Preferred Shares at the time of the auction. A
Broker-Dealer, may, but is not obligated to, advise beneficial owners of
Preferred Shares that the applicable rate that would apply in an "all-hold"
auction may be lower than the rate that would apply if owners submit bids and
such advice, if given, may facilitate the submission of bids by owners that
would avoid the occurrence of an "all-hold" auction.
The Auction Procedures include a pro rata allocation of shares for purchase and
sale which may result in an existing holder continuing to hold or selling, or a
potential holder purchasing, a number of Preferred Shares that is different than
the number of shares specified in its order. To the extent the allocation
procedures have that result, Broker-Dealers that have designated themselves as
existing holders or potential holders in respect of customer orders will be
required to make appropriate pro rata allocations among their respective
customers.
Settlement of purchases and sales will be made on the next business day (which
is also a dividend payment date) after the auction date through the Securities
Depository. Purchasers will make payment through their Agent Members in same-day
funds to the Securities Depository against delivery to their respective Agent
Members. The Securities Depository will make payment to the sellers' Agent
Members in accordance with DTC's normal procedures, which now provide for
payment against delivery by their Agent Members in same day funds.
If an auction date is not a business day because the NYSE is closed for business
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 Auction Agent is not able to
conduct an auction in accordance with the Auction Procedures for any such
reason, then the auction rate for the next dividend period will be the auction
rate determined on the previous auction date.
The following is a simplified example of how a typical auction works. Assume
that the Fund has 1,000 outstanding Preferred Shares and three current holders.
The three current holders and three potential holders submit orders through
Broker-Dealers at the auction:
Holder Goal Action
Current Holder A........... Owns 500 shares, wants to sell all Bid order of 4.1% rate for all 500 shares
500 shares if auction rate is less
than 4.1%
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 Bid order of 3.9% rate for all 200 shares
200 shares if auction rate is less
than 3.9%
Potential Holder D......... Wants to buy 200 shares if auction Places order to buy at or above 4.0%
rate is equal to or greater than 4.0%
Potential Holder E......... Wants to buy 300 shares if auction Places order to buy at or above 3.9%
rate is equal to or greater than 3.9%
Potential Holder F......... Wants to buy 200 shares if auction Places order to buy at or above 4.1%
rate is equal to or greater than 4.1%
The lowest dividend rate that will result in all 1,000 Preferred Shares in the
above example continuing to be held is 4.0% (the offer by D). Therefore, the
dividend rate will be 4.0%. 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.
SUBMISSION OF ORDERS BY BROKER-DEALERS TO AUCTION AGENT. Prior to 1:30 p.m., New
York City time, on each auction date, or such other time on the auction date as
may be specified by the Auction Agent (the "submission deadline"), each
Broker-Dealer will submit to the Auction Agent in writing or through the Auction
Agent's auction processing system all orders obtained by it for the auction to
be conducted on such auction date, designating itself (unless otherwise
permitted by the Fund) as the existing holder or potential holder in respect of
the Preferred Shares subject to such orders. Any order submitted by a beneficial
owner or a potential beneficial owner to its Broker-Dealer, or by a
Broker-Dealer to the Auction Agent, prior to the submission deadline for any
auction date, shall be irrevocable.
If the rate per annum specified in any bid contains more than three figures to
the right of the decimal point, the Auction Agent will round such rate per annum
up to the next highest one-thousandth (.001) of one-percent. If one or more
orders of an existing holder are submitted to the Auction Agent and such orders
cover in the aggregate more than the number of outstanding Preferred Shares held
by such existing holder, such orders will be considered valid in the following
order of priority:
(i) any hold order will be considered valid up to and including the
number of outstanding Preferred Shares held by such existing
holder, provided that if more than one hold order is submitted by
such existing holder and the number of Preferred Shares subject
to such hold orders exceeds the number of outstanding Preferred
Shares held by such existing holder, the number of Preferred
Shares subject to each of such hold orders will be reduced pro
rata so that such hold orders, in the aggregate, will cover
exactly the number of outstanding Preferred Shares held by such
existing holder;
(ii) any bids will be considered valid, in the ascending order of
their respective rates per annum if more than one bid is
submitted by such existing holder, up to and including the excess
of the number of outstanding Preferred Shares held by such
existing holder over the number of outstanding Preferred Shares
subject to any hold order referred to in clause (i) above (and if
more than one bid submitted by such existing holder specifies the
same rate per annum and together they cover more than the
remaining number of shares that can be the subject of valid bids
after application of clause (i) above and of the foregoing
portion of this clause (ii) to any bid or bids specifying a lower
rate or rates per annum, the number of shares subject to each of
such bids will be reduced pro rata so that such bids, in the
aggregate, cover exactly such remaining number of outstanding
shares); and the number of outstanding shares, if any, subject to
bids not valid under this clause (ii) shall be treated as the
subject of a bid by a potential holder; and
(iii) any sell order will be considered valid up to and including the
excess of the number of outstanding Preferred Shares held by such
existing holder over the sum of the number of Preferred Shares
subject to hold orders referred to in clause (i) above and the
number of Preferred Shares subject to valid bids by such existing
holder referred to in clause (ii) above; provided that, if more
than one sell order is submitted by any existing holder and the
number of Preferred Shares subject to such sell orders is greater
than such excess, the number of Preferred Shares subject to each
of such sell orders will be reduced pro rata so that such sell
orders, in the aggregate, will cover exactly the number of
Preferred Shares equal to such excess.
If more than one bid of any potential holder is submitted in any auction, each
bid submitted in such auction will be considered a separate bid with the rate
per annum and number of Preferred Shares therein specified.
NOTIFICATION OF RESULTS AND SETTLEMENT. The Auction Agent will advise each
Broker-Dealer who submitted a bid or sell order in an auction whether such bid
or sell order was accepted or rejected in whole or in part and of the applicable
rate for the next dividend period for the related Preferred Shares by telephone
or through the Auction Agent's auction processing system at approximately 3:00
p.m., New York City time, on the auction date for such auction. Each such
Broker-Dealer that submitted an order for the account of a customer then will
advise such customer whether such bid or sell order was accepted or rejected,
will confirm purchases and sales with each customer purchasing or selling
Preferred Shares as a result of the auction and will advise each customer
purchasing or selling Preferred Shares to give instructions to its Agent Member
of the Securities Depository to pay the purchase price against delivery of such
shares or to deliver such shares against payment therefor as appropriate. If a
customer selling Preferred Shares as a result of an auction fails to instruct
its Agent Member to deliver such shares, the Broker-Dealer that submitted such
customer's bid or sell order will instruct such Agent Member to deliver such
shares against payment therefor. Each Broker-Dealer that submitted a hold order
in an auction on behalf of a customer also will advise such customer of the
applicable rate for the next dividend period for the Preferred Shares. The
Auction Agent will record each transfer of Preferred Shares on the record book
of existing holders to be maintained by the Auction Agent.
In accordance with the Securities Depository's normal procedures, on the day
after each auction date, the transactions described above will be executed
through the Securities Depository, and the accounts of the respective Agent
Members at the Securities Depository will be debited and credited as necessary
to effect the purchases and sales of Preferred Shares as determined in such
auction. Purchasers will make payment through their Agent Members in same-day
funds to the Securities Depository against delivery through their Agent Members;
the Securities Depository will make payment in accordance with its normal
procedures, which now provide for payment in same-day funds. If the procedures
of the Securities Depository applicable to Preferred Shares shall be changed to
provide for payment in next-day funds, then purchasers may be required to make
payment in next-day funds
If any existing holder selling Preferred Shares in an auction fails to deliver
such Preferred Shares, the Broker-Dealer of any person that was to have
purchased Preferred Shares in such auction may deliver to such person a number
of whole Preferred Shares that is less than the number of Preferred Shares that
otherwise was to be purchased by such person. In such event, the number of
Preferred Shares to be so delivered will be determined by such Broker-Dealer.
Delivery of such lesser number of Preferred Shares will constitute good
delivery. Each Broker-Dealer Agreement also will provide that neither the Fund
nor the Auction Agent will have responsibility or liability with respect to the
failure of a beneficial owner, potential beneficial owner or their respective
Agent Members to deliver Preferred Shares or to pay for Preferred Shares
purchased or sold pursuant to an auction or otherwise.
SECONDARY MARKET TRADING AND TRANSFERS OF PREFERRED SHARES. The Broker-Dealers
may maintain a secondary trading market in Preferred Shares outside of auctions,
but are not obligated to do so, and may discontinue such activity at any time.
There can be no assurance that any secondary trading market in Preferred Shares
will provide owners with liquidity of investment. The Preferred Shares will not
be registered on any stock exchange or on the Nasdaq National Market. Investors
who purchase Preferred Shares in an auction (particularly if the Fund has
declared 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. In
addition, a Broker-Dealer may, in its own discretion, decide to sell Preferred
Shares in the secondary trading market to investors at any time and at any
price, including at prices equivalent to, below or above the par value of the
Preferred Shares.
A beneficial owner or an existing holder may sell, transfer or otherwise dispose
of Preferred Shares only in whole shares and only:
o pursuant to a bid or sell order placed with the Auction Agent in
accordance with the Auction Procedures;
o to a Broker-Dealer; or
o to such other persons as may be permitted by the Fund; provided,
however, that a sale, transfer or other disposition of Preferred
Shares from a customer of a Broker-Dealer who is listed on the records
of that Broker Dealer as the holder of such shares to that
Broker-Dealer or another customer of that Broker-Dealer shall not be
deemed to be a sale, transfer or other disposition if such
Broker-Dealer remains the existing holder of the shares; and in the
case of all transfers other than pursuant to auctions, the
Broker-Dealer (or other person, if permitted by the Fund) to whom such
transfer is made will advise the Auction Agent of such transfer.
FEDERAL INCOME TAX MATTERS
The following is a summary discussion of certain U.S. federal income tax
consequences that may be relevant to a shareholder of acquiring, holding and
disposing of Preferred Shares of the Fund. This discussion addresses only U.S.
federal income tax consequences to U.S. shareholders that hold their shares as
capital assets and does not address all of the U.S. federal income tax
consequences that may be relevant to particular shareholders in light of their
individual circumstances. This discussion also does not address the tax
consequences to shareholders who are subject to special rules, including,
without limitation, banks and financial institutions, insurance companies,
dealers in securities or foreign currencies, foreign shareholders, shareholders
who hold their shares as or in a hedge against currency risk, a constructive
sale, or a conversion transaction, shareholders who are subject to the
alternative minimum tax, or tax-exempt or tax-deferred plans, accounts, or
entities. In addition, the discussion does not address any state, local, or
foreign tax consequences, and it does not address any U.S. federal tax
consequences other than U.S. federal income tax consequences. 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, Treasury or the Internal Revenue Service (the "IRS") retroactively
or prospectively. No attempt is made to present a detailed explanation of all
U.S. federal income tax concerns affecting the Fund and its shareholders, and
the discussion set forth herein does not constitute tax advice. Investors are
urged to consult their own tax advisers to determine the specific tax
consequences to them of investing in the Fund, including the applicable federal,
state, local and foreign tax consequences to them and the effect of possible
changes in tax laws.
The Fund intends to elect to be treated and to qualify each year as a "regulated
investment company" under Subchapter M of the Code and to comply with applicable
distribution requirements so that it generally will not pay U.S. federal income
tax on income and capital gains distributed to shareholders. In order to qualify
as a regulated investment company, which qualification the following discussion
assumes, the Fund must satisfy certain tests regarding the sources of its income
and the diversification of its assets. If the Fund qualifies as a regulated
investment company and, for each taxable year, it distributes to its
shareholders an amount equal to or exceeding the sum of (i) 90% of its
"investment company taxable income" as that term is defined in the Code (which
includes, among other things, dividends, taxable interest, and the excess of any
net short-term capital gains over net long-term capital losses, as reduced by
certain deductible expenses) without regard to the deduction for dividends paid
and (ii) 90% of the excess of its gross tax-exempt interest over certain
disallowed deductions, the Fund generally will be relieved of U.S. federal
income tax on any income of the Fund, including "net capital gain" (the excess
of net long term capital gain over net short-term capital loss), distributed to
shareholders. However, if the Fund meets such distribution requirements but
chooses to retain some portion of investment company taxable income or net
capital gain, it generally will be subject to U.S. federal income tax at regular
corporate rates on the amount retained. The Fund intends to distribute at least
annually all or substantially all of its investment company taxable income, net
tax exempt interest and net capital gain. If for any taxable year the Fund did
not qualify as a regulated investment company, it would be treated as a
corporation subject to U.S. federal income tax thereby subjecting any income
earned by the Fund to tax at the corporate level and, when such income is
distributed, to a further tax at the shareholder level.
Under the Code, the Fund will be subject to a nondeductible 4% federal excise
tax on a portion of its undistributed ordinary income and capital gain net
income if it fails to meet certain distribution requirements with respect to
each calendar year. The Fund intends to make distributions in a timely manner
and accordingly does not expect to be subject to the excise tax, but there can
be no assurance that the Fund's distributions will be sufficient to avoid this
tax entirely.
Based in part on the lack of any present intention on the part of the Fund to
redeem or purchase the Preferred Shares at any time in the future, the Fund
intends to take the position that under present law the Preferred Shares will
constitute stock of the Fund and distributions with respect to the Preferred
Shares (other than distributions in redemption of the Preferred Shares that are
treated as exchanges under Section 302(b) of the Code) will constitute dividends
to the extent of the Fund's current or accumulated earnings and profits as
calculated for U.S. federal income tax purposes. This view relies in part on a
published ruling of the IRS stating that certain preferred stock similar in many
material respects to the Preferred Shares represents equity. It is possible,
however, that the IRS might take a contrary position asserting, for example,
that the Preferred Shares constitute debt of the Fund. If this position were
upheld, the discussion of the treatment of distributions below would not apply.
Instead distributions by the Fund to holders of Preferred Shares would
constitute interest, whether or not such distributions exceeded the earnings and
profits of the Fund, would be included in the income of the recipient and would
be taxed as ordinary income.
In general, assuming the Fund has sufficient current or accumulated earnings and
profits, dividends from investment company taxable income are taxable as
ordinary income and dividends from net capital gain that are designated as
capital gain dividends are taxable as long-term capital gains for U.S. federal
income tax purposes without regard to the length of time the shareholder has
held shares of the Fund. Since not all of the Fund's income is derived from
interest, some portion of its dividends from its investment company taxable
income may constitute "qualified dividend income" for federal income tax
purposes and thus may be eligible for the favorable federal long-term capital
gain tax rates on qualified dividend income. Capital gain dividends distributed
by the Fund to individual shareholders generally will qualify for the maximum
15% U.S. federal income tax rate on long-term capital gains. Under current law,
the maximum 15% U.S. federal income tax rate on long-term capital gains will
cease to apply to taxable years beginning after December 31, 2008.
If a portion of the Fund's income consists of qualifying dividends paid by U.S.
corporations (other than REITs), a portion of the dividends paid by the Fund to
corporate stockholders, if properly designated, may qualify for the dividend
received deduction or "DRD". In addition, for taxable years beginning on or
before December 31, 2008, distributions of investment income designated by the
Fund as derived from qualified dividend income will be taxed in the hands of
individuals at the rates applicable to long-term capital gain, provided holding
period and other requirements are met by both the Fund and the stockholder.
Specifically, a dividend paid by the Fund to a stockholder will not be treated
as qualified dividend income of the stockholder (1) if the dividend is received
with respect to any share held for fewer than 61 days during the 121-day period
beginning on the date which is 60 days before the date on which such share
becomes ex-dividend with respect to such dividend, (2) to the extent that the
recipient is under an obligation (whether pursuant to a short sale or otherwise)
to make related payments with respect to positions in substantially similar or
related property or (3) if the recipient elects to have the dividend treated as
investment income for purposes of the limitation on deductibility of investment
interest. 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 the stock of which and with respect to which such dividend
is paid is readily tradable on an established securities market in the United
States), but 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. There
can be no assurance of what portion, if any, of the Fund's distributions will be
entitled to the lower tax rates that apply to qualified dividend income.
Although dividends generally will be treated as distributed when paid, any
dividend declared by the Fund as of a record date in October, November or
December and paid during the following January will be treated for U.S. federal
income tax purposes as received by shareholders on December 31 of the calendar
year in which it is declared.
Distributions by the Fund in excess of the Fund's current and accumulated
earnings and profits will be treated as a return of capital to the extent of
(and in reduction of) the shareholder's tax basis in its shares and any such
amount in excess of that basis will be treated as gain from the sale of shares,
as discussed below. The U.S. federal income tax status of all distributions will
be reported to shareholders annually.
If the Fund retains any net capital gain for a taxable year, the Fund may
designate the retained amount as undistributed capital gains in a notice to
shareholders who, if subject to U.S. federal income tax on long-term capital
gains, (i) will be required to include in income for U.S. federal income tax
purposes, as long-term capital gain, their proportionate shares of such
undistributed amount, and (ii) will be entitled to credit their proportionate
shares of the tax paid by the Fund on the undistributed amount against their
U.S. federal income tax liabilities, if any, and to claim refunds to the extent
the credit exceeds such liabilities.
The IRS has taken the position that if a regulated investment company has two or
more classes of shares, it must designate distributions made to each class in
any year as consisting of no more than such class's proportionate share of
particular types of income, including ordinary income and capital gains. A
class's proportionate share of a particular type of income is determined
according to the percentage of total dividends paid by the regulated investment
company to such class. Consequently, if both common shares and Preferred Shares
are outstanding, the Fund intends to designate distributions made to the classes
of particular types of income in accordance with each such class's proportionate
share of such income. The Fund will designate dividends qualifying as capital
gain dividends and other taxable dividends in a manner that allocates such
income between the holders of common shares and Preferred Shares in proportion
to the total dividends paid to each class during the taxable year, or otherwise
as required by applicable law.
Sales and other dispositions of the Fund's shares generally are taxable events
for shareholders that are subject to tax. Shareholders should consult their own
tax advisers with reference to their individual circumstances to determine
whether any particular transaction in the Fund's shares is properly treated as a
sale for tax purposes (including a redemption of Preferred Shares), as the
following discussion assumes, and the tax treatment of any gains or losses
recognized in such transactions. In general, if shares of the Fund are sold, the
shareholder will recognize gain or loss equal to the difference between the
amount realized on the sale and the shareholder's adjusted basis in the shares
sold. Such gain or loss generally will be treated as long-term gain or loss if
the shares were held for more than one year and otherwise generally will be
treated as short-term gain or loss. Any loss recognized by a shareholder upon
the sale or other disposition of shares with a tax holding period of six months
or less will be treated as a long-term capital loss to the extent of any amounts
treated as distributions of long-term capital gains with respect to such shares.
Losses on sales or other dispositions of shares may be disallowed under "wash
sale" rules in the event substantially identical shares of the Fund are
purchased (including those made pursuant to reinvestment of dividends and/or
capital gains distributions) within a period of 61 days beginning 30 days before
and ending 30 days after a sale or other disposition of shares.
If, in connection with the selection of a long-term dividend period, (i) the
Fund provides that a Premium Call Period will follow a Non-Call Period, (ii)
based on all the facts and circumstances at the time of the designation of the
long-term dividend period the Fund is more likely than not to redeem the
Preferred Shares during the Premium Call Period, and (iii) the premium to be
paid upon redemption during the Premium Call Period exceeds a reasonable penalty
for early redemption, it is possible that the holder of Preferred Shares will be
required to accrue such premium as a dividend (to the extent of the Fund's
earnings and profits) over the term of the Non-Call Period.
The Fund is required in certain circumstances to backup withhold on reportable
payments, including dividends, capital gains distributions, and proceeds of
sales or other dispositions of the Fund's shares paid to certain holders of the
Fund's shares who do not furnish the Fund with their correct Social Security
number or other taxpayer identification number and make certain other
certifications, or who are otherwise subject to backup withholding. Backup
withholding is not an additional tax. Any amounts withheld from payments made to
a shareholder 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.
The foregoing is a general and abbreviated summary of the provisions of the Code
and the Treasury regulations currently in effect as they generally affect the
taxation of the Fund and its shareholders. As noted above, these provisions are
subject to change by legislative, judicial or administrative action, and any
such change may be retroactive. A further discussion of the U.S. federal income
tax rules applicable to the Fund can be found in the Statement of Additional
Information which is incorporated by reference into this prospectus.
Shareholders are urged to consult their tax advisers regarding specific
questions as to U.S. federal, foreign, state, and local income or other taxes.
As required by U.S. Treasury Regulations governing tax practice, you are hereby
advised that any written tax advice contained herein was not written or intended
to be used (and cannot be used) by any taxpayer for the purpose of avoiding
penalties that may be imposed under the Code.
The advice was prepared to support the promotion or marketing of the
transactions or matters addressed by the written advice.
Any person reviewing this discussion should seek advice based on such person's
particular circumstances from an independent tax adviser.
DETERMINATION OF NET ASSET VALUE
The net asset value of common stock of the Fund is computed based upon the value
of the Fund's portfolio securities and other assets. Net asset value per common
share of the Fund is determined as of the close of the regular trading session
on the NYSE no less frequently than the last business day of each week and
month, provided, however, that if any such day is a holiday or determination of
net asset value on such day is impracticable, the net asset value is calculated
on such earlier or later day as determined by the Advisers. The Fund calculates
net asset value per common share of the Fund by subtracting the Fund's
liabilities (including accrued expenses, dividends payable and any borrowings of
the Fund) and the liquidation value of any outstanding preferred stock from the
Fund's total assets (the value of the securities the Fund holds plus cash or
other assets, including interest accrued but not yet received) and dividing the
result by the total number of common shares of the Fund outstanding.
The Fund values its holdings by using market quotations provided by pricing
services, prices provided by market makers or estimates of market values
obtained from yield data relating to instruments or securities with similar
characteristics in accordance with procedures established by the Board.
Short-term securities having a maturity of 60 days or less are valued at
amortized cost, which approximates market value. Any securities or other assets
for which current 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 and responsibility of the Board.
CAPITALIZATION OF THE FUND AND OTHER MATTERS
REPURCHASE OF COMMON SHARES. Shares of closed-end investment companies often
trade at a discount to their net asset values, and the Fund's common shares have
in the past and may in the future trade at a discount to their net asset value.
The market price of the Fund's common shares is determined by such factors as
relative demand for and supply of such common shares in the market, the Fund's
net asset value, general market and economic conditions and other factors beyond
the control of the Fund. Although the Fund's common shareholders do not have the
right to require the Fund to redeem their common shares, the Fund may take
action, from time to time, to repurchase common shares in the open market or
make tender offers for its common shares at their net asset value. This may, but
will not necessarily, have the effect of reducing any market discount from net
asset value.
The acquisition of common shares by the Fund will decrease the total assets of
the Fund and, therefore, have the effect of increasing the Fund's expense ratio
and may adversely affect the ability of the Fund to achieve its investment
objectives. Furthermore, the acquisition of common shares by the Fund may
require the Fund to redeem the Preferred Shares in order to maintain certain
asset coverage requirements. To the extent the Fund may need to liquidate
investments to fund repurchase of common shares, this may result in portfolio
turnover which will result in additional expenses being borne by the Fund. The
Board currently considers the following factors to be relevant to a potential
decision to repurchase common shares: the extent and duration of the discount,
the liquidity of the Fund's portfolio, the impact of any action on the Fund or
its stockholders and market considerations. Any share repurchases or tender
offers will be made in accordance with the requirements of the Exchange Act and
the 1940 Act. See "U.S. Federal Taxation" for a description of the potential tax
consequences of a repurchase of common shares. See "Repurchase of Shares" in the
Statement of Additional Information.
CAPITALIZATION. The Charter authorizes the issuance of 250,000,000 shares of
common stock, par value $0.01 per share. In 2002, Fund shareholders approved an
amendment to the Fund's charter which authorizes the Board, without shareholder
approval, to increase the Fund's authorized capital. Pursuant to such amendment,
and in connection with a rights offering in 2002, the Board resolved to increase
the authorized capital of the Fund to its current level.
RIGHTS WITH REGARD TO DIVIDENDS, VOTING AND LIQUIDATION. When issued, shares of
common stock are fully paid and non-assessable. The Fund's shares have no
preemptive, conversion, exchange or redemption rights. Each share of common
stock has one vote and shares equally in dividends and distributions when and if
declared by the Fund and in the Fund's net assets upon liquidation. All voting
rights for the election of directors are non-cumulative. Consequently, the
holders of more than 50% of the shares can elect 100% of the directors then
nominated for election if they choose to do so (subject to the right of holders
of preferred shares to elect directors) and, in such event, the holders of the
remaining common shares will not be able to elect any directors.
COMMON STOCK. Although the Fund conducted a rights offerings in 2002, and may do
so again in the future, the Fund has no present intention of offering any
additional shares of capital stock other than the Preferred Shares described
herein. Any additional offerings of shares of capital stock, if made, will
require approval by the Board. Any additional offering of common shares will be
subject to the requirements of the 1940 Act that common shares may not be issued
at a price below the then current net asset value (exclusive of underwriting
discounts and commissions) except in connection with an offering to existing
stockholders or with the consent of a majority of the Fund's common
shareholders.
The Fund's common stock traded on the NYSE from January 1974 to April 29, 2002,
under the symbol "UIF". From April 30, 2002 to the present, the common stock has
traded on the NYSE under the symbol "BIF". On July __, 2005, there were
11,327,784 shares of common stock issued and outstanding, the net asset value
per common share was $____ and the closing price per common share on the NYSE
was $_____.
PREFERRED STOCK. Under the Charter, the Board is authorized to classify and
reclassify any unissued shares of the Fund's common stock as part of an issuance
of preferred stock. The Board is also authorized to set or change the
preferences, conversion or other rights, voting powers, restrictions,
limitations as to dividends, qualifications or terms or conditions of redemption
of such shares of stock. Under the 1940 Act, the Fund is permitted to have
outstanding more than one series of preferred shares so long as no single series
has a priority over another series as to the distribution of assets of the Fund
or the payment of dividends. Holders of common shares and outstanding preferred
shares of the Fund have no preemptive right to purchase any preferred shares
that might be issued. On July __, 2005, the Board classified 10,000 of its
unissued shares of common stock as preferred stock.
ANTI-TAKEOVER PROVISIONS OF THE CHARTER AND BY-LAWS. At a meeting of
shareholders held in May 2004, shareholders approved a comprehensive range of
corporate governance proposals which abolished or changed a number of
anti-takeover provisions previously adopted by the Fund. These included, among
others, proposals to (i) declassify the Board, (ii) elect directors by a
plurality of votes cast, (iii) permit shareholders to effect By-law amendments,
(iv) set the number of directors at exactly five, and (v) prohibit the Fund from
opting into the Maryland Unsolicited Takeovers Act. Nonetheless, the Fund
presently has provisions in its Charter and By-Laws which may still have the
effect of limiting the ability of other entities or persons to acquire control
of the Fund, to cause it to engage in certain transactions or to modify its
structure (commonly referred to as "anti-takeover" provisions):
(1) The Charter requires the affirmative vote of at least two-thirds
of the votes entitled to be cast by holders of common stock to
approve, adopt or authorize (a) certain business combinations
(e.g., merger, consolidation or liquidation, or sale, lease,
exchange, mortgage, pledge, transfer or other disposition of the
Fund's assets, etc.); (b) voluntary liquidation or dissolution of
the Fund; (c) shareholder proposals regarding investment
decisions; (d) conversion from a closed-end to an open-end
investment company; or (e) a self-tender for, or acquisition by
the Fund of, more than 25% of the Fund's outstanding shares of
stock, during any twelve-month period.
(2) The Fund's By-laws contain provisions the effect of which is to
prevent matters, including nominations of Directors, from being
considered at shareholders' meetings where the Fund has not
received sufficient prior notice of the matters.
The percentage of votes required under these provisions, which are greater than
the minimum requirements under Maryland law or the 1940 Act, make it more
difficult to effect a change in the Fund's business or management and could have
the effect of depriving holders of common shares of an opportunity to sell
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 Board, however, has considered these anti-takeover provisions
and believes that they are in the best interests of shareholders.
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM. The data in the "Financial
Highlights" section of this prospectus are based upon financial statements for
the 6 months ending May 31, 2005, that have not been audited and financial
statements for the year ending November 30, 2004, that have been audited by
________, the Fund's independent registered public accounting firm, located at
________________, as indicated in their reports with respect thereto, and are
incorporated by reference herein in reliance on their reports given on their
authority as experts in auditing and accounting.
VALIDITY OF SHARES. Certain legal matters in connection with the Preferred
Shares will be passed on by Paul, Hastings, Janofsky & Walker LLP, Los Angeles,
California, counsel to the Fund in connection with the Offering, and Venable
LLP. Certain matters have been passed upon for the Underwriters by Clifford
Chance US LLP, New York, New York. Clifford Chance US LLP may rely on the
opinion of Venable LLP as to certain matters of Maryland law.
REPORTS TO SHAREHOLDERS. The Fund sends unaudited semiannual reports and audited
annual reports, including lists of investments held, to shareholders.
AVAILABLE INFORMATION. The Fund is subject to the informational requirements of
the Exchange Act and the 1940 Act and in accordance therewith is required to
file reports, proxy statements and other information with the Securities and
Exchange Commission. Any such reports, proxy statements and other information
can be inspected and copied at the public reference facilities of the
Commission, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, the
Commission's New York Regional Office at 233 Broadway, New York, New York 10279
and its Chicago Regional Office at Suite 1400, Northwestern Atrium Center, 500
West Madison Street, Chicago, Illinois 60661. Reports, proxy statements and
other information concerning the Fund can also be inspected at the offices of
the NYSE, 20 Broad Street, New York, New York 10005.
Additional information regarding the Fund and the Offering is contained in the
Registration Statement on Form N-2, including amendments, exhibits and schedules
thereto, relating to the Preferred Shares filed by the Fund with the Securities
and Exchange Commission. This prospectus does not contain all of the information
set forth in the Registration Statement, including any amendments, exhibits and
schedules thereto. For further information with respect to the Fund and the
shares offered hereby, reference is made to the Registration Statement.
Statements contained in this Prospectus as to the contents of any contract or
other document referred to are not necessarily complete and in each instance
reference is made to the copy of such contract or other document filed as an
exhibit to the Registration Statement, each such statement being qualified in
all respects by such reference.
A copy of the Registration Statement may be inspected without charge at the
Securities and Exchange Commission's principal office in Washington, D.C., and
copies of all or any part thereof may be obtained from the Commission upon the
payment of certain fees prescribed by the Commission. The Commission maintains a
website (http://www.sec.gov) that contains the Registration Statement, other
documents incorporated by reference, and other information the Fund has filed
electronically with the Commission, including proxy statements and reports filed
under the Exchange Act.
UNDERWRITING
Subject to the terms and conditions stated in the purchase agreement dated July
__, 2005 (the "Purchase Agreement"), each Underwriter named below, for which
[Lead Underwriter] is acting as representative, has severally agreed to
purchase, and the Fund has agreed to sell to such Underwriter, the number of
Preferred Shares set forth opposite the name of such Underwriter.
Underwriter Number of Preferred
Shares
[Lead Underwriter - Full Name]
Total
The Purchase Agreement provides that the obligations of the Underwriters to
purchase the shares included in this offering are subject to the approval of
certain legal matters by counsel and to certain other conditions, including
without limitation the receipt by the Underwriters of customary closing
certificates, opinions and other documents, and the receipt by the Fund of Aaa
and AAA ratings on the Preferred Shares by Moody's and Fitch, respectively, as
of the time of the offering. The Underwriters are obligated to purchase all the
Preferred Shares if they purchase any of the Preferred Shares. In the Purchase
Agreement, the Fund and Advisers have agreed to indemnify the Underwriters
against certain liabilities, including liabilities arising under the Securities
Act, or to contribute payments the Underwriters may be required to make for any
of those liabilities
The Underwriters propose to initially offer some of the Preferred Shares
directly to the public at the public offering price set forth on the cover page
of this prospectus and some of the Preferred Shares to certain dealers at the
public offering price less a concession not in excess of $_______ per share. The
sales load the Fund will pay of $[250] per share is equal to 1% of the initial
offering price of the Preferred Shares. After the Offering, the Underwriters may
change the public offering price and the concession. Investors must pay for any
Preferred Shares purchased in the Offering on or before July ___, 2005.
The Fund anticipates that the Underwriters may from time to time act as brokers
or dealers in executing the Fund's portfolio transactions after they have ceased
to be Underwriters. The Underwriters are active underwriters of, and dealers in,
securities and act as market makers in a number of such securities, and
therefore can be expected to engage in portfolio transactions with, and perform
services for, the Fund.
The Underwriters have advised the Fund that certain of the Underwriters and
various other broker-dealers and other firms that participate in the auction
rate securities market received letters from the staff of the Securities and
Exchange Commission in the spring of 2004. The letters requested that each of
those firms voluntarily conduct an investigation regarding its respective
practices and procedures in that market. Pursuant to these requests, each of
those Underwriters conducted its own voluntary review and reported its findings
to the Securities and Exchange Commission staff. At the staff's request, those
Underwriters are engaging in discussions with the staff concerning its inquiry.
Neither those Underwriters nor the Fund can predict the ultimate outcome of the
inquiry or how that outcome will affect the market for the Preferred Shares or
the auctions.
The Fund anticipates that the Underwriters or their respective affiliates may,
from time to time, act in auctions as Broker-Dealers and receive fees as set
forth under "The Auction" and in the Statement of Additional Information.
The principal business address of [Lead Underwriter] is __________________.
In connection with this offering, certain of the Underwriters or dealers may
distribute prospectuses electronically.
The settlement date for the purchase of the Preferred Shares will be
____________, 2005, as agreed upon by the Underwriters, the Fund and the
Advisers pursuant to Rule 15c6-1 under the Securities Exchange Act of 1934, as
amended (the "Exchange Act").
TABLE OF CONTENTS OF THE STATEMENT OF ADDITIONAL INFORMATION
THE FUND
USE OF PROCEEDS
INVESTMENT OBJECTIVE AND POLICIES
INVESTMENT POLICIES AND RESTRICTIONS
INVESTMENT POLICIES AND TECHNIQUES
MANAGEMENT OF THE FUND
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS OWNERSHIP OF THE FUND BY
DIRECTORS DIRECTOR AND OFFICER COMPENSATION COMMITTEES OF THE BOARD OF DIRECTORS
INVESTMENT ADVISERS AND OTHER SERVICE PROVIDERS COMPENSATION TO THE ADVISERS AND
ADMINISTRATORS
FACTORS CONSIDERED BY THE INDEPENDENT DIRECTORS IN APPROVING THE INVESTMENT
ADVISORY AGREEMENTS
DURATION AND TERMINATION
POTENTIAL CONFLICTS OF INTEREST
PROXY VOTING
CODE OF ETHICS
PORTFOLIO TRANSACTIONS, BROKERAGE ALLOCATION AND OTHER PRACTICES
ADDITIONAL INFORMATION CONCERNING THE AUCTIONS FOR PREFERRED SHARES
RATING AGENCY GUIDELINES
REPURCHASE OF SHARES
FEDERAL INCOME TAX MATTERS.
PERFORMANCE-RELATED, COMPARATIVE AND OTHER INFORMATION
FINANCIAL STATEMENTS
ADDITIONAL INFORMATION
Appendix A - Description of Ratings
Appendix B - Proxy Voting Policies and Procedures
Appendix C - Articles Supplementary Creating and Fixing the Rights of Auction
Preferred Stock
Appendix D - Settlement Procedures
$25,000,000
BOULDER GROWTH & INCOME FUND, INC.
Auction Market Preferred Shares
1,000 Shares
Liquidation Preference $25,000 Per Share
July __, 2005
SUBJECT TO COMPLETION, DATED JULY 8, 2005
BOULDER GROWTH & INCOME FUND, INC.
STATEMENT OF ADDITIONAL INFORMATION
Boulder Growth & Income Fund, Inc. (the "Fund") is a closed-end, non-diversified
management investment company. This Statement of Additional Information does not
constitute a prospectus, but should be read in conjunction with the prospectus
relating hereto dated July __, 2005 (the "Prospectus"). This Statement of
Additional Information does not include all information that a prospective
investor should consider before participating in the auction market preferred
shares ("Preferred Shares") offering (the "Offering") described in the
Prospectus or otherwise purchasing the Fund's common stock. A copy of the
Prospectus may be obtained without charge by calling the Fund's co-administrator
(Fund Administrative Services, LLC) at (800)-________. You may also obtain a
copy of the Prospectus on the Securities and Exchange Commission's website
(http://www.sec.gov). Capitalized terms used but not defined in this Statement
of Additional Information have the meanings given to them in the Prospectus.
THE INFORMATION IN THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT COMPLETE AND
MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION
STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS
STATEMENT OF ADDITIONAL INFORMATION IS NOT AN OFFER TO SELL THESE SECURITIES AND
IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER
OR SALE IS NOT PERMITTED.
This Statement of Additional Information is dated July 8, 2005.
TABLE OF CONTENTS
THE FUND 2
USE OF PROCEEDS 2
INVESTMENT OBJECTIVE AND POLICIES 2
INVESTMENT POLICIES AND RESTRICTIONS 2
INVESTMENT POLICIES AND TECHNIQUES 3
MANAGEMENT OF THE FUND 9
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS 9
OWNERSHIP OF THE FUND BY DIRECTORS 9
DIRECTOR AND OFFICER COMPENSATION 10
COMMITTEES OF THE BOARD OF DIRECTORS 11
INVESTMENT ADVISERS AND OTHER SERVICE PROVIDERS 12
COMPENSATION TO THE ADVISERS AND ADMINISTRATORS 13
FACTORS CONSIDERED BY THE INDEPENDENT DIRECTORS IN APPROVING THE INVESTMENT ADVISORY AGREEMENTS 14
DURATION AND TERMINATION 16
POTENTIAL CONFLICTS OF INTEREST 16
PROXY VOTING 17
CODE OF ETHICS 17
PORTFOLIO TRANSACTIONS, BROKERAGE ALLOCATION AND OTHER PRACTICES 17
ADDITIONAL INFORMATION CONCERNING THE AUCTIONS FOR PREFERRED SHARES 18
RATING AGENCY GUIDELINES 19
REPURCHASE OF SHARES 20
FEDERAL INCOME TAX MATTERS 21
PERFORMANCE-RELATED, COMPARATIVE AND OTHER INFORMATION 25
FINANCIAL STATEMENTS 26
ADDITIONAL INFORMATION 26
Appendix A - Description of Ratings
Appendix B - Proxy Voting Policies and Procedures
Appendix C - Articles Supplementary Creating and Fixing the Rights of Auction Preferred Stock
Appendix D - Settlement Procedures
THE FUND
From its inception in 1972 until 2002, the Fund was called USLIFE Income Fund,
Inc. (the "Predecessor Fund"). The Predecessor Fund was managed to provide "a
high level of current income," was virtually 100% invested in corporate bonds
and was classified as a diversified fund under the Investment Company Act of
1940, as amended (the "1940 Act"). At a special shareholder meeting held in
April 2002, shareholders approved a change in the Fund's name, in the investment
objective to "total return" and in the Fund's classification from diversified to
non-diversified, and eliminated or changed certain of the Fund's fundamental
investment policies. See "Fundamental Policies" below. After the Fund
implemented these changes, the Fund's advisers liquidated a substantial portion
of the Fund's bond portfolio. As of June 30, 2005, none of the Fund's assets
were invested in bonds.
USE OF PROCEEDS
The majority of the net proceeds of the Offering will be used to pay off $20
million drawn from a line of credit the Fund currently uses as leverage. The
balance of the proceeds will be invested in accordance with the Fund's
investment objective and policies as soon as practicable. The Fund anticipates
that it will be able to invest substantially all of such net proceeds within
approximately three months after completion of this offering. Pending such
investment, the net proceeds may be invested in U.S. government securities or
high grade, short-term money market instruments. If necessary, the Fund may also
purchase, as temporary investments, securities of other open-end and closed-end
investment companies that invest in equity and fixed-income securities.
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is total return. The Fund seeks to produce both
income and long-term capital appreciation by investing in a portfolio of equity
and debt securities. The Fund invests primarily in common stocks, including
dividend paying common stocks such as those issued by utilities, REITs and
closed-end RICs. The Fund also invests in fixed income securities such as U.S.
government securities, preferred stocks and bonds. The Fund invests primarily in
securities of U.S.-based companies and to a lesser extent in foreign equity
securities and sovereign debt, in each case denominated in the sovereign
currency. The Fund has no restrictions on its ability to invest in foreign
securities. The Fund is concentrated in REITs which means it must invest more
than 25% of its total assets in REITs and companies in the real estate industry.
No assurance can be given that the Fund will achieve its investment objective.
The Fund is a "non-diversified" investment company, as defined in the 1940 Act,
which means that it is permitted to invest its assets in a more limited number
of issuers than "diversified" investment companies. A diversified company may
not, with respect to 75% of its total assets, invest more than 5% of its total
assets in the securities of any one issuer and may not own more than 10% of the
outstanding voting securities of any one issuer. However, pursuant to the
requirements of Subchapter M of the Internal Revenue Code of 1986, as amended
(the "Code"), (A) not more than 25% of the Fund's total assets may be invested
in securities of any one issuer (other than U.S. government securities and RICs)
or of any two or more issuers controlled by the Fund which may be deemed to be
engaged in the same, similar or related trades or businesses, and (B) with
respect to 50% of the total value of the Fund's portfolio, (i) the Fund must
limit to 5% the portion of its assets invested in the securities of a single
issuer (other than U.S. government securities and RICs), and (ii) the Fund may
not own more than 10% of the outstanding voting securities of any one issuer
(other than U.S. government securities and RICs). The Fund intends to
concentrate its common stock investments in a few issuers and to take large
positions in those issuers, consistent with being a "non-diversified" fund. As a
result, the Fund may be subject to a greater risk of loss than a diversified
fund or a fund that has diversified its investments more broadly. Taking larger
positions is also likely to increase the volatility of the Fund's net asset
value, reflecting fluctuations in the value of large Fund holdings.
Under normal market conditions, the Fund intends to invest at least 80% of its
net assets in common stocks, primarily domestic common stocks, and secondarily
in foreign common stocks denominated in foreign currencies.
INVESTMENT POLICIES AND RESTRICTIONS
INDUSTRY CONCENTRATION POLICY. As a matter of investment policy, the Fund is
concentrated in REITs, which means it must, under normal market conditions,
invest more than 25% of its total assets in REITs or companies in the real
estate industry (the "Concentration Policy"). The Fund must obtain shareholder
approval prior to changing this policy, thus limiting the Fund's flexibility to
liquidate REITs in the future should market conditions warrant.
FUNDAMENTAL POLICIES. A number of the Fund's investment policies, listed below,
are "fundamental" policies (the "Fundamental Policies"), which means that the
policies may not be changed without the approval of the holders of a majority of
the Fund's outstanding voting securities (which for this purpose and under the
1940 Act means the lesser of (i) 67% of the shares represented at a meeting at
which more than 50% of the outstanding shares are represented or (ii) more than
50% of the outstanding shares). The Fund may not:
1. Issue any senior securities except as permitted under the 1940 Act.
2. Invest in the securities of companies conducting their principal
business activity in the same industry if, immediately after such
investment, the value of its investments in such industry would exceed
25% of the value of its total assets; provided that this limitation
will not apply to REITs or related companies in the same industry as
REITs.
3. Participate on a joint or a joint and several basis in any trading
account in securities, except that the Fund may, to the extent
permitted by rules, regulations or orders of the SEC, combine orders
with others for the purchases and sales of securities in order to
achieve the best overall execution.
4. Purchase or sell interests in oil, gas or other mineral exploration or
development programs.
5. Purchase or sell real estate, except that the Fund may purchase or
sell REITs and securities secured by real estate or interests therein
issued by companies owning real estate or interests therein.
6. Purchase or sell commodities or commodity contracts.
7. Make loans other than through the purchase of debt securities in
private placements and the loaning of portfolio securities as
described under "Investment Objective and Policies".
8. Borrow money in an amount exceeding the maximum permitted under the
1940 Act.
9. Underwrite securities of other issuers, except insofar as it may be
deemed to be an underwriter in selling a portfolio security which may
require registration under the Securities Act of 1933.
10. Invest more than 30% of the value of its total assets in securities
which have been acquired through private placements.
11. Purchase or retain the securities of any issuer, if, to the Fund's
knowledge, those officers and directors of the Fund or its investment
adviser who individually own beneficially more than 1/2 of 1% of the
outstanding securities of such issuer, together own beneficially more
than 5% of such outstanding securities.
12. Pledge, mortgage or hypothecate its assets except in connection with
permitted borrowing and to the extent related to transactions in which
the Fund is authorized to engage.
With the exception of the Fund's investment objective (i.e., total return),
Concentration Policy and Fundamental Policies, all other policies, statements,
objectives, terms and conditions may be changed by the Fund's Board of Directors
(the "Board") without shareholder approval.
INVESTMENT POLICIES AND TECHNIQUES
The following information supplements the discussion of the Fund's investment
objective, policies and techniques that are described in the Prospectus.
PORTFOLIO INVESTMENTS. Under normal market conditions, the Fund intends to
invest at least 80% of its net assets in common stocks, primarily domestic
common stocks, and secondarily in foreign common stocks denominated in foreign
currencies. Common stocks include dividend-paying stocks of RICs and REITs. The
portion of the Fund's assets that is not invested in common stocks may be
invested in fixed income securities, cash equivalents and income-producing
common stocks. The term "income-producing common stocks" includes RICs whose
objective is income, REITs, and other dividend-paying common stocks, while the
term "fixed income securities" includes bonds, U.S. government securities,
notes, bills, debentures, preferred stocks, convertible securities, bank debt
obligations, repurchase agreements and short-term money market obligations.
COMMON STOCKS. The Fund may invest all or any portion of its assets in
common stock. Common stock is defined as shares of a corporation that entitle
the holder to a pro rata share of the profits of the corporation, if any,
without preference over any other shareholder or class of shareholders,
including holders of the corporation's preferred stock and other senior equity.
Common stock usually carries with it the right to vote and frequently an
exclusive right to do so. Holders of common stock also have the right to
participate in the assets of the corporation after all other claims are paid.
In selecting common stocks for investment, the Fund expects to focus primarily
on U.S.-based companies and secondarily on the common stock of foreign companies
denominated in foreign currencies. The Fund is permitted to invest without
limitation in companies outside the U.S. Generally, target companies will have
consistent high returns on equity, while using modest amounts of debt relative
to their industries. The Fund seeks investments in businesses which the Fund's
investment advisers, Boulder Investment Advisers, LLC ("BIA") and Stewart West
Indies Trading Company, Ltd. d/b/a Stewart Investment Advisers ("SIA")
(collectively the "Advisers"), understand, which have fairly predictable and
improving future earnings, and most importantly, are priced reasonably relative
to the businesses' earnings and anticipated growth in earnings. The Fund will
not necessarily focus its investments in "large-cap", "mid-cap" or "small-cap"
companies since the Advisers believe it would be unwise to impose such
investment limitations. Investments in small or middle capitalization companies
involve greater risk than is customarily associated with larger, more
established companies due to the greater business risks of small size, limited
markets and financial resources, narrow product lines and the frequent lack of
depth of management. The securities of small or medium-sized companies are often
traded over-the-counter, and may not be traded in volumes typical of securities
traded on a national securities exchange. Consequently, the securities of
smaller companies may have limited market stability and may be subject to more
abrupt or erratic market movements than securities of larger, more established
companies or the market averages in general.
When the Fund makes an investment in a common stock, it will likely make a
significant investment and typically hold it for a long period of time. In the
long run, the Fund believes that value investing produces superior total
returns. However, value stocks can remain undervalued for long periods of time
and may never reach what the Advisers believe are their full intrinsic values,
or, as with any security may decline in value. In addition, value stocks may
fall out of favor with investors and may under-perform growth stocks during
given periods.
REAL ESTATE INVESTMENT TRUSTS. As a matter of investment policy, the Fund
is concentrated in REITs, which means it will, under normal market conditions,
invest more than 25% of its total assets in REITs or companies in the real
estate industry. The Fund must obtain shareholder approval prior to changing
this policy. REITs are trusts that invest primarily in commercial real estate or
real estate-related loans. A REIT is not taxed on income distributed to its
shareholders or unit-holders if it complies with regulatory requirements
relating to its organization, ownership, assets and income, and with a
regulatory requirement that it distribute to its shareholders or unit-holders at
least 90% of its taxable income for each taxable year. Generally, REITs can be
classified as equity REITs, mortgage REITs and hybrid REITs. Equity REITs invest
the majority of their assets directly in real property and derive their income
primarily from rents and capital gains from appreciation realized through
property sales. Mortgage REITs invest the majority of their assets in real
estate mortgages and derive their income primarily from interest payments.
Hybrid REITs combine the characteristics of both equity and mortgage REITs. By
investing in REITs indirectly through the Fund, shareholders will bear not only
the proportionate share of the expenses of the Fund, but also, indirectly,
similar expenses of underlying REITs. The Fund invests in REITs primarily for
income.
The Fund may be subject to certain risks associated with the direct investments
of the REITs. REITs may be affected by changes in their underlying properties
and by defaults by borrowers or tenants. Mortgage REITs may be affected by the
quality of the credit extended. Furthermore, REITs are dependent on specialized
management skills. Some REITs may have limited diversification and may be
subject to risks inherent in financing a limited number of properties. REITs
depend generally on their ability to generate cash flow to make distributions to
shareholders or unit-holders, and may be subject to defaults by borrowers and to
self-liquidations. In addition, a REIT may be affected by its failure to qualify
for tax-free pass-through of income under the Code or its failure to maintain
exemption from registration under the 1940 Act.
REGISTERED INVESTMENT COMPANIES. The Fund is permitted to invest up to 10%
of its assets in other registered investment companies under the 1940 Act. The
common stock of closed-end RICs can trade at a substantial discount to the
underlying net asset value of the RIC, and the Fund may, from time to time,
invest in common stocks issued by RICs when they are trading at discounts or
when the Advisers otherwise deem market conditions appropriate. The Fund intends
to normally invest in RICs that pay dividends. RICs that pay regular dividends
typically own interest rate sensitive securities, which tend to increase in
value when interest rates decline, and decrease in value when interest rates
increase. To the extent that the Fund invests in RICs, the Fund's shareholders
will incur expenses with respect to both the Fund and that portion of the Fund's
assets invested in other RICs. However, as common stocks of closed-end RICs can
trade at substantial discounts to their underlying net asset values, the
Advisers may deem the "double" expense to have minimal impact when compared to
the discount at which the Fund may buy their shares. The net asset value and
market value of common stock issued by RICs will fluctuate with the value of the
underlying assets. The Fund may invest in the auction market preferred stock of
other closed-end funds primarily as a means of investing the Fund's cash for the
short-term in higher yielding alternatives to repurchase agreements or U.S.
treasury securities. The Fund will consider investing cash in these instruments,
and other short-term money market type alternatives, when the yield spread is
adequately attractive over repurchase agreements and U.S. treasuries. The Fund
generally will invest in auction market preferred stocks that are rated AAA
although it may invest in lower rated securities from time to time.
BONDS. Prior to April 26, 2002, the Fund was called USLIFE Income Fund,
Inc. and was virtually 100% invested in corporate bonds. Since the Fund changed
its investment objective on April 26, 2002, the Advisers have liquidated all of
the Fund's bond portfolio. As of June 30, 2005, none of the Fund's assets were
invested in bonds.
Bonds, or fixed income securities, are debt obligations issued by the U.S.
government and its agencies, corporations, municipalities and other borrowers.
The market values of fixed income investments will change in response to
interest rate changes and other factors. During periods of falling interest
rates, the values of outstanding fixed income securities generally rise.
Conversely, during periods of rising interest rates, the values of such
securities generally decline. Changes by recognized rating agencies in the
rating of any fixed income security and in the ability of an issuer to make
payments of interest and principal also affect the value of these investments.
Changes in the value of portfolio securities will not necessarily affect cash
income derived from these securities, but will affect the Fund's net asset
values.
Corporations issue bonds and notes to raise money for working capital or for
capital expenditures such as plant construction, equipment purchases and
expansion. In return for the money loaned to the corporation by shareholders,
the corporation promises to pay bondholders interest and to repay the principal
amount of the bond or note.
PREFERRED STOCKS. The Fund may invest in preferred securities. Preferred
securities are equity securities, but they have many characteristics of fixed
income securities, such as a fixed dividend payment rate and/or a liquidity
preference over the issuer's common shares. However, because preferred shares
are equity securities, they may be more susceptible to risks traditionally
associated with equity investments than fixed income securities. Unlike common
stock, preferred securities typically do not have voting rights.
Fixed rate preferred stocks have fixed dividend rates. They can be perpetual,
with no mandatory redemption date, or issued with a fixed mandatory redemption
date. Certain issues of preferred stock are convertible into other equity
securities. Perpetual preferred stocks provide a fixed dividend throughout the
life of the issue, with no mandatory retirement provisions, but may be callable.
Sinking fund preferred stocks provide for the redemption of a portion of the
issue on a regularly scheduled basis with, in most cases, the entire issue being
retired at a future date. The value of fixed rate preferred stocks can be
expected to vary inversely with interest rates. Adjustable rate preferred stocks
have a variable dividend rate which is determined periodically, typically
quarterly, according to a formula based on a specified premium or discount to
the yield on particular U.S. Treasury securities, typically the highest
base-rate yield of one of three U.S. Treasury securities: the 90-day Treasury
bill; the 10-year Treasury note; and either the 20-year or 30-year Treasury bond
or other index. The premium or discount to be added to or subtracted from this
base-rate yield is fixed at the time of issuance and cannot be changed without
the approval of the holders of the adjustable rate preferred stock. Some
adjustable rate preferred stocks have a maximum and a minimum rate and in some
cases are convertible into common stock.
Auction rate preferred stocks pay dividends that adjust based on periodic
auctions. Such preferred stocks are similar to short-term corporate money market
instruments in that an auction rate preferred stockholder has the opportunity to
sell the preferred stock at par in an auction, normally conducted at least every
49 days, through which buyers set the dividend rate in a bidding process for the
next period. The dividend rate set in the auction depends on market conditions
and the credit quality of the particular issuer. Typically, the auction rate
preferred stock's dividend rate is limited to a specified maximum percentage of
an external commercial paper index as of the auction date. Further, the terms of
the auction rate preferred stocks generally provide that they are redeemable by
the issuer at certain times or under certain conditions.
The Fund may, from time to time, invest in preferred securities that are rated,
or whose issuer's senior debt is rated, investment grade by Moody's and Standard
& Poor's ("S&P") at the time of investment, although the Fund is not limited to
investments in investment grade preferred securities. In addition, the Fund may
acquire unrated issues that the Advisers deem to be comparable in quality to
rated issues in which the Fund is authorized to invest.
MONEY MARKET INSTRUMENTS. Under normal conditions, the Fund may hold up to
10% of its assets in cash or money market instruments. The Fund intends to
invest in money market instruments pending investments in common stocks, to
serve as collateral in connection with certain investment techniques, and to
hold as a reserve pending the payment of dividends to investors. When the
Advisers believe that economic circumstances warrant a temporary defensive
posture, the Fund may invest without limitation in short-term money market
instruments.
Money market instruments that the Fund may acquire will be securities rated in
the highest short-term rating category by Moody's or S&P or the equivalent from
another major rating service, securities of issuers that have received such
ratings with respect to other short-term debt or comparable unrated securities.
Money market instruments in which the Fund typically expects to invest include:
U.S. government securities; bank obligations (including certificates of deposit,
time deposits and bankers' acceptances of U.S. or foreign banks); commercial
paper rated P-l by Moody's or A-1 by S&P ; and repurchase agreements.
REPURCHASE AGREEMENTS. The Fund may invest temporarily, without limitation,
in repurchase agreements, which are agreements pursuant to which securities are
acquired by the Fund from a third party with the understanding that they will be
repurchased by the seller at a fixed price on an agreed date. These agreements
may be made with respect to any of the portfolio securities in which the Fund is
authorized to invest. Repurchase agreements may be characterized as loans
secured by the underlying securities. The Fund may enter into repurchase
agreements with (i) member banks of the Federal Reserve System having total
assets in excess of $500 million and (ii) securities dealers, provided that such
banks or dealers meet certain creditworthiness standards. The resale price
reflects the purchase price plus an agreed upon market rate of interest which is
unrelated to the coupon rate or date of maturity of the purchased security. The
collateral is marked to market daily. Such agreements permit the Fund to keep
all its assets earning interest while retaining "overnight" flexibility in
pursuit of investments of a longer term nature.
The use of repurchase agreements involves certain risks. For example, if the
seller of securities under a repurchase agreement defaults on its obligation to
repurchase the underlying securities, as a result of its bankruptcy or
otherwise, the Fund will seek to dispose of such securities, which action could
involve costs or delays. If the seller becomes insolvent and subject to
liquidation or reorganization under applicable bankruptcy or other laws, the
Fund's ability to dispose of the underlying securities may be restricted.
Finally, it is possible that the Fund may not be able to substantiate its
interest in the underlying securities. To minimize this risk, the securities
underlying the repurchase agreement will be held by the custodian at all times
in an amount at least equal to the repurchase price, including accrued interest.
If the seller fails to repurchase the securities, the Fund may suffer a loss to
the extent proceeds from the sale of the underlying securities are less than the
repurchase price.
GOVERNMENT SECURITIES. The Fund may invest in securities that include
direct obligations of the United States and obligations issued by U.S.
government agencies and instrumentalities ("Government Securities"). Included
among direct obligations of the United States are Treasury bills, Treasury notes
and Treasury bonds, which differ principally in terms of their maturities.
Securities issued by U.S. government agencies and instrumentalities are:
securities that are supported by the full faith and credit of the United States
(such as Government National Mortgage Association certificates); securities that
are supported by the right of the issuer to borrow from the U.S. Treasury (such
as securities of Federal Home Loan Banks); and securities that are supported by
the credit of the instrumentality (such as Federal National Mortgage Association
and Federal Home Loan Mortgage Corporation bonds). No assurance can be given
that the U.S. government will provide financial support in the future to U.S.
government agencies, authorities or instrumentalities that are not supported by
the full faith and credit of the United States. Securities guaranteed as to
principal and interest by the U.S. government, its agencies, authorities or
instrumentalities include (i) securities for which the payment of principal and
interest is backed by an irrevocable letter of credit issued by the U.S.
government or any of its agencies, authorities or instrumentalities; and (ii)
participations in loans made to non-U.S. governments or other entities that are
so guaranteed. The secondary market for certain of these participations is
limited and therefore may be regarded as illiquid.
ZERO COUPON SECURITIES. The Fund may invest up to 10% of its total assets
in zero coupon securities issued by the U.S. government, its agencies or
instrumentalities as well as custodial receipts or certificates underwritten by
securities dealers or banks that evidence ownership of future interest payments,
principal payments or both on certain government securities. Zero coupon
securities pay no cash income to their holders until they mature and are issued
at substantial discounts from their value at maturity. When held to maturity,
their entire return comes from the difference between their purchase price and
their maturity value. Because interest on zero coupon securities is not paid on
a current basis, the values of securities of this type are subject to greater
fluctuations than are the values of securities that distribute income regularly
and may be more speculative than such securities. Accordingly, the values of
these securities may be highly volatile as interest rates rise or fall. In
addition, the Fund's investments in zero coupon securities will result in
special tax consequences. Although zero coupon securities do not make interest
payments, for tax purposes a portion of the difference between a zero coupon
security's maturity value and its purchase price is taxable income of the Fund
each year.
Custodial receipts evidencing specific coupon or principal payments have the
same general attributes as zero coupon Government Securities but are not
considered to be Government Securities. Although typically under the terms of a
custodial receipt the Fund is authorized to assert its rights directly against
the issuer of the underlying obligation, the Fund may be required to assert
through the custodian bank such rights as may exist against the underlying
issuer. Thus, in the event the underlying issuer fails to pay principal and/or
interest when due, the Fund may be subject to delays, expenses and risks that
are greater than those that would have been involved if the Fund had purchased a
direct obligation of the issuer. In addition, in the event that the trust or
custodial account in which the underlying security has been deposited is
determined to be an association taxable as a corporation, instead of a
non-taxable entity, the yield on the underlying security would be reduced in
respect of any taxes paid.
BORROWINGS. The Fund reserves the right to borrow funds to the extent
permitted by its Fundamental Policies. See "Fundamental Policies" above. The
proceeds of borrowings may be used for any valid purpose including, without
limitation, liquidity, investing and repurchases of capital stock of the Fund.
The Fund may borrow money only in an amount up to one-third of the value of the
Fund's total assets. Borrowing is a form of leverage and, in that respect,
entails risks, including volatility in net asset value, market value and income
available for distribution.
LENDING OF SECURITIES. The Fund is authorized to lend securities it holds
to brokers, dealers and other financial organizations, although it has no
current intention of doing so. Loans of the Fund's securities, if and when made,
may not exceed 33-1/3% of the Fund's total assets. The Fund's loans of
securities will be collateralized by cash, letters of credit or Government
Securities that will be maintained at all times in a segregated account with the
Fund's custodian in an amount at least equal to the current market value of the
loaned securities. From time to time, the Fund may pay a part of the interest
earned from the investment of collateral received for securities loaned to the
borrower and/or a third party that is unaffiliated with the Fund and that is
acting as a "finder."
By lending its portfolio securities, the Fund can increase its income by
continuing to receive interest on the loaned securities, by investing the cash
collateral in short-term instruments or by obtaining yield in the form of
interest paid by the borrower when Government Securities are used as collateral.
The risk in lending portfolio securities, as with other extensions of credit,
consists of the possible delay in recovery of the securities or the possible
loss of rights in the collateral should the borrower fail financially. The Fund
will adhere to the following conditions whenever it lends its securities: (i)
the Fund must receive at least 100% cash collateral or equivalent securities
from the borrower, which will be maintained by daily marking-to-market; (ii) the
borrower must increase the collateral whenever the market value of the
securities loaned rises above the level of the collateral; (iii) the Fund must
be able to terminate the loan at any time; (iv) the Fund must receive reasonable
interest on the loan, as well as any dividends, interest or other distributions
on the loaned securities and any increase in market value; (v) the Fund may pay
only reasonable custodian fees in connection with the loan; and (vi) voting
rights on the loaned securities may pass to the borrower, except that, if a
material event adversely affecting the investment in the loaned securities
occurs, the Board must terminate the loan and regain the Fund's right to vote
the securities.
SHORT SALES AGAINST THE BOX. The Fund may make short sales of securities in
order to reduce market exposure and/or to increase its income if at all times
when a short position is open, the Fund owns an equal or greater amount of such
securities or owns preferred stock, debt or warrants convertible or exchangeable
into an equal or greater number of the shares of common stocks sold short. Short
sales of this kind are referred to as short sales "against the box." The
broker-dealer that executes a short sale generally invests the cash proceeds of
the sale until they are paid to the Fund. Arrangements may be made with the
broker-dealer to obtain a portion of the interest earned by the broker on the
investment of short sale proceeds. The Fund will segregate the securities
against which short sales against the box have been made in a special account
with its custodian. Not more than 10% of the Fund's net assets (taken at current
value) may be held as collateral for such sales at any one time.
ILLIQUID SECURITIES. The Fund may invest in illiquid securities.
Historically, illiquid securities have included securities subject to
contractual or legal restrictions on resale because they have not been
registered under the 1933 Act, securities which are otherwise not readily
marketable and repurchase agreements having a maturity of longer than seven
days. Restricted securities are securities that may not be sold freely to the
public absent registration under the 1933 Act, or an exemption from
registration. The Fund has no limitation on the amount of its assets that may be
invested in securities which are not readily marketable or are subject to
restrictions on resale, although it may not invest more than 30% of the value of
its total assets in securities which have been acquired through private
placement.
The Board has delegated the function of making day-to-day determinations of
liquidity to the Advisers pursuant to guidelines approved by the Board. The Fund
is a closed-end fund which means that managing liquidity for the purpose of
shareholder redemptions is not an issue as it might otherwise be with an
open-end fund. Accordingly, the Advisers are not constrained in this regard in
their day-to-day management of the portfolio, knowing that redemptions are not
an issue. Moreover, a majority of the securities in the Fund, both historically
and currently, are exchange-traded securities with relatively good liquidity. In
the few cases where the liquidity of certain securities is less so, the Advisers
will take into account a number of factors in reaching liquidity decisions,
including, but not limited to: (1) the frequency of trades for the security, (2)
the number of dealers willing and ready to purchase and sell the security, (3)
whether any dealers have agreed to make a market in the security, (4) the number
of other potential purchasers for the security, and (5) the nature of the
securities and the nature of the marketplace trades.
WHEN-ISSUED, DELAYED DELIVERY AND FORWARD COMMITMENT TRANSACTIONS. The Fund
may purchase and sell securities, including Government Securities, on a
when-issued, delayed delivery or forward commitment basis. Typically, no income
accrues on securities the Fund has committed to purchase prior to the time
delivery of the securities is made, although the Fund may earn income on
securities it has segregated.
When purchasing a security on a when-issued, delayed delivery, or forward
commitment basis, the Fund assumes the rights and risks of ownership of the
security, including the risk of price fluctuations, and takes such fluctuations
into account when determining its net asset value. Because the Fund is not
required to pay for the security until the delivery date, these risks are in
addition to the risks associated with the Fund's other investments. If the Fund
remains substantially fully invested at a time when when-issued, delayed
delivery, or forward commitment purchases are outstanding, the purchases may
result in a form of leverage.
When the Fund has sold a security on a when-issued, delayed delivery, or forward
commitment basis, the Fund does not participate in future gains or losses with
respect to the security. If the other party to a transaction fails to deliver or
pay for the securities, the Fund could miss a favorable price or yield
opportunity or could suffer a loss. The Fund may dispose of or renegotiate a
transaction after it is entered into, and may sell when-issued, delayed delivery
or forward commitment securities before they are delivered, which may result in
a capital gain or loss. There is no percentage limitation on the extent to which
the Fund may purchase or sell securities on a when-issued, delayed delivery, or
forward commitment basis.
OTHER INVESTMENT TECHNIQUES AND POLICIES
PREFERRED SHARES LEVERAGE. The Prospectus contemplates an offering whereby
the Fund will be leveraged with 1,000 Preferred Shares. The Preferred Shares
will be senior to the common stock and will result in the financial leveraging
of the common stock. Dividends on Preferred Shares are cumulative. The Fund will
be required to meet certain asset coverage tests with respect to the Preferred
Shares. If the Fund fails to meet these requirements and does not correct such
failure, the Fund may be required to redeem, in part or in full, the Preferred
Shares at a redemption price of $25,000 per share plus an amount equal to the
accumulated and unpaid dividends on such shares in order to meet these
requirements. Additionally, failure to meet the foregoing asset requirements
could restrict the Fund's ability to pay dividends to common stock shareholders
and could lead to sales of portfolio securities at inopportune times.
Nevertheless, the Fund's management believes that well-managed leverage can have
a beneficial effect on common stock shareholders' total return. Leverage can
provide enough additional income to pay a substantial portion of Fund expenses,
if there is enough of a positive spread between the borrowed money and the
return on the assets acquired with such monies. Use of leverage may have a
number of adverse effects on the Fund and its shareholders, including: (i)
leverage may magnify market fluctuations in the Fund's underlying holdings thus
causing a disproportionate change in the Fund's net asset value; (ii) the Fund's
cost of leverage may exceed the return on the underlying securities acquired
with the proceeds of the leverage, thereby diminishing rather than enhancing the
return to shareholders and generally making the Fund's total return to such
shareholders more volatile; (iii) the Fund may be required to sell investments
in order to meet dividend or interest payments on the debt or preferred stock
when it may be disadvantageous to do so; and (iv) leveraging through the
issuance of preferred stock requires that the holders of the preferred stock
have class voting rights on various matters that could make it more difficult
for the holders of the common stock to change the investment objective or
fundamental policies of the Fund, to convert it to an open-end fund or make
certain other changes.
Although the Fund will focus its use of leverage on producing income, the Fund
may also purchase other income producing securities (e.g., RICs, REITs and
dividend-paying common stocks) or non-dividend-paying common stocks for
long-term appreciation. The Fund is limited in its use of leverage to the
maximum amount permitted pursuant to Section 18 of the 1940 Act.
RISKS ASSOCIATED WITH LEVERAGE. The Preferred Shares leverage (or any other
leverage) will create an opportunity for increased return but, at the same time,
will involve special risk considerations. Leveraging will magnify declines as
well as increases in the net asset value of the common stock and in the net
return on the Fund's portfolio. Although the principal of the Fund's Preferred
Shares will be fixed, the Fund's assets may change in value during the time the
Preferred Shares are outstanding, thus increasing exposure to capital risk. To
the extent the return derived from the assets obtained with the Preferred Shares
proceeds exceeds the interest and other expenses that the Fund will have to pay,
the Fund's net return will be greater than if Preferred Shares leverage was not
used. Conversely, however, if the return from the assets obtained with the
Preferred Shares proceeds is not sufficient to cover the dividends and cost of
the Preferred Shares, the net return of the Fund will be less than if Preferred
Shares leverage was not used, and therefore the amount available for
distribution to the Fund's shareholders as dividends will be reduced.
BORROWING THROUGH REPURCHASE AGREEMENTS. The Fund may borrow by entering
into reverse repurchase agreements with any member bank of the Federal Reserve
System and any broker-dealer or any foreign bank that has been determined by the
Advisers to be creditworthy. Under a reverse repurchase agreement, the Fund
would sell securities and agree to repurchase them at a mutually agreed date and
price. At the time the Fund enters into a reverse repurchase agreement, it will
establish and maintain a segregated account with its custodian or a designated
sub-custodian, containing cash or liquid obligations having a value not less
than the repurchase price (including accrued interest). Reverse repurchase
agreements involve the risk that the market value of the securities purchased
with the proceeds of the sale of securities received by the Fund may decline
below the price of the securities the Fund is obligated to repurchase. In the
event the buyer of securities under a reverse repurchase agreement files for
bankruptcy or becomes insolvent, the buyer or its trustee or receiver may
receive an extension of time to determine whether to enforce the Fund's
obligation to repurchase the securities, and the Fund's use of the proceeds of
the reverse repurchase agreement may effectively be restricted pending the
decision. Any reverse repurchase agreements entered into by the Fund will be
treated as borrowings for purposes of calculating the Fund's borrowing
limitation.
MANAGEMENT OF THE FUND
The Board is responsible for the overall management of the Fund, including
supervision of the duties performed by the Advisers. There are five Directors of
the Fund. One of the Directors is an "interested person" of the Fund (as defined
in the 1940 Act). The Directors who are not "interested persons" of the Fund are
referred to herein as "Independent Directors." See the "Management of the Fund"
in the Prospectus for additional information about the Directors and officers of
the Fund.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table sets forth certain information regarding the beneficial
ownership of the Fund's shares as of June ___, 2005, by each person who is known
by the Fund to beneficially own 5% or more of the Fund's common stock.
Name and address* of Owner Number of Shares Number of Shares Percentage
Directly Owned Beneficially Owned Beneficially Owned
Ernest Horejsi Trust No.1B (the 2,354,600 2,354,600 20.79%
"EH Trust")
Badlands Trust Company, LLC ---** 20.79%
Stewart R. Horejsi Trust No. 2A ---** 20.79%
Aggregate Shares Owned** 2,354,600 20.79%
_______________________
* The address of each listed owner is c/o Badlands Trust Company, LLC
("Badlands"), 3601 C Street, Suite 600, Anchorage, Alaska 99503.
** Excludes shares owned by the EH Trust. Badlands is one of three trustees of
the EH Trust. Badlands is a private trust company organized under the laws of
Alaska and is wholly owned by the Stewart R. Horejsi Trust No. 2A, an
irrevocable trust organized by Stewart R. Horejsi for the benefit of his issue.
The managers of Badlands are Larry Dunlap, Stephen C. Miller, Laura Rhodenbaugh,
Laura Tatooles, and Ron Kukes, each of whom disclaim beneficial ownership of
shares owned by the EH Trust. Mr. Miller is an officer and director of Badlands.
Because two of the Trust's trustees are required in order for the Trust to vote
or exercise dispositive authority with respect to shares owned by the Trust, Mr.
Miller disclaims beneficial ownership of such shares.
Information as to beneficial ownership in the previous paragraph has been
obtained from a representative of the beneficial owners; all other information
as to beneficial ownership is based on reports filed with the Securities and
Exchange Commission (the "SEC") by such beneficial owners.
As of June ___, 2005, Cede & Co., a nominee partnership of the Depository Trust
Fund, held of record, but not beneficially, __________shares or ___% of common
stock outstanding of the Fund. As of June ___, 2005, officers and Directors of
the Fund, as a group, owned ____________shares of the Fund's common stock
(including the aggregate shares of common stock owned by the EH Trust as set
forth above), representing ______% of common stock.
OWNERSHIP OF THE FUND BY DIRECTORS
Set forth in the following table are the current members of the Board
together with the dollar range of equity securities beneficially owned by each
Director as of December 31, 2004, as well as the aggregate dollar range of the
Fund's equity securities in all funds overseen in the Fund's family of
investment companies (i.e., other funds managed by BIA and SIA and which hold
themselves out as related companies).
Dollar Range of Equity Aggregate Dollar Range of
Securities in the Fund Equity Securities in All Funds
in the Family of Investment
Companies
Independent Directors
----------------------------------------------------------------------------------------------------------------------
Alfred G. Aldridge, Jr. $10,001 to $50,000 $50,001 to $100,000
Richard I. Barr $50,001 to $100,000 Over $100,000
Joel W. Looney $50,001 to $100,000 Over $100,000
Dennis R. Causier $0 $0
Interested Director
------------------------------------------------------------------------------------------------------------------------
John S. Horejsi Over $100,000+ Over $100,000
+ 2,354,600 shares of the Fund are held by the EH Trust. Accordingly, Mr.
Horejsi may be deemed to have indirect beneficial ownership of such Shares. Mr.
Horejsi disclaims all such beneficial ownership. Mr. Horejsi does not directly
own any shares of the Fund.
None of the Independent Directors or their family members owned
beneficially or of record any securities of the Advisers or any person directly
or indirectly controlling, controlled by, or under common control with the
Advisers.
DIRECTOR AND OFFICER COMPENSATION
The following table sets forth certain information regarding the
compensation of the Independent Directors for the fiscal year ended November 30,
2004. No persons other than the Independent Directors, as set forth below,
currently receive compensation from the Fund for acting as a Director or
officer. Directors and officers of the Fund do not receive pension or retirement
benefits from the Fund.
Aggregate Total Compensation from
Name of Person and Position with the Compensation from the Fund and Fund Complex
Fund the Fund Paid to Directors
------------------------------------------------------------------------------------------------
Alfred G. Aldridge, Jr., Director $23,000 $49,500
(2 funds)
Richard I. Barr, Director $23,000 $53,500
(2 funds)
Joel W. Looney, Director and Chairman $25,000 $53,500
of the Board (2 funds)
Dennis R. Causier, Director $4,533 $4,533
(1 fund)
Each Independent Director receives a fee of $8,000 per annum plus $3,000
for each in person meeting, $500 for each Audit Committee meeting and $500 for
each telephonic meeting of the Board. In addition, the Chairman of the Board and
the Chairman of the Audit Committee receives an additional $1,000 per meeting.
Each Independent Director of the Fund is reimbursed for travel and out-of-pocket
expenses associated with attending Board and Committee meetings. The Board held
eight meetings (four of which were held by telephone conference call) during the
fiscal year ended November 30, 2004. Each Director currently serving in such
capacity for the entire fiscal year attended at least 75% of the meetings of
Directors and any Committee of which he is a member. Directors currently serving
and who served less than the entire fiscal year attended at least 75% of such
meetings held during their tenure as a Director. The aggregate remuneration paid
to the Independent Directors of the Fund for acting as such during the fiscal
year ended November 30, 2004 amounted to $75,532.97.
COMMITTEES OF THE BOARD OF DIRECTORS
AUDIT COMMITTEE. The Fund has an audit committee consisting solely of all of the
Fund's Independent Directors (i.e., Messrs. Looney, Aldridge, Causier and Barr)
(the "Audit Committee"). The purpose of the Audit Committee is to assist the
Board in its oversight of the integrity of the Fund's financial statements, the
Fund's compliance with legal and regulatory requirements, and the
qualifications, independence and performance of the Fund's independent
registered public accounting firm (the "independent accountants"). The Audit
Committee reviews the scope and results of the Fund's annual audit with the
Fund's independent accountants and recommends the engagement of such independent
accountants. Management, however, is responsible for the preparation,
presentation and integrity of the Fund's financial statements, and the
independent accountants are responsible for planning and carrying out proper
audits and reviews. The Board adopted a written charter for the Audit Committee
on January 23, 2002 and most recently amended the Charter on January 23, 2004. A
copy of the Audit Committee Charter was attached as an appendix to the Fund's
proxy statement in 2004. Each member of the Audit Committee is independent, as
that term is defined by the New York Stock Exchange ("NYSE") Listing Standards.
The Audit Committee met two times during the fiscal year ended November 30,
2004.
NOMINATING COMMITTEE. The Board has a nominating committee (the "Nominating
Committee") consisting solely of the Independent Directors, which is responsible
for considering candidates for election to the Board in the event a position is
vacated or created. Each member of the Nominating Committee is independent, as
that term is defined by the NYSE Listing Standards. The Nominating Committee met
three times during the fiscal year ended November 30, 2004.
The Nominating Committee does not have a formal process for identifying
candidates. The Nominating Committee takes into consideration such factors as it
deems appropriate when nominating candidates. These factors may include
judgment, skill, diversity, experience with investment companies and other
organizations of comparable purpose, complexity, size and subject to similar
legal restrictions and oversight, the interplay of the candidate's experience
with the experience of other Board members, and the extent to which the
candidate would be a desirable addition to the Board and any committees thereof.
The Nominating Committee will consider all qualified candidates in the same
manner. The Nominating Committee may modify its policies and procedures for
director nominees and recommendations in response to changes in the Fund's
circumstances, and as applicable legal or listing standards change.
The Nominating Committee will consider director candidates recommended by
shareholders (if a vacancy were to exist) and submitted in accordance with
applicable law and the following procedures. Pursuant to the Fund's By-laws, at
any annual meeting of the shareholders, only business that has been properly
brought before the meeting will be conducted. To be properly brought before the
annual meeting, the business must be (i) specified in the notice of meeting,
(ii) by or at the direction of the Board, or (iii) otherwise properly brought
before the meeting by a shareholder. For business to be properly brought before
the annual meeting by a shareholder, the shareholder must have given timely
notice thereof in writing to the Secretary of the Fund. To be timely, a
shareholder's notice must be delivered to the Secretary of the Fund no later
than 5:00 p.m., Mountain Time, on the 120th day prior to the first anniversary
of the date of mailing of the notice for the preceding year's annual meeting.
However, if the date of the annual meeting is advanced or delayed by more than
30 days from the first anniversary of the date of the preceding year's annual
meeting, for notice by the shareholder to be timely, it must be delivered not
later than 5:00 p.m., Mountain Time, on the later of the 120th day prior to the
date of such annual meeting or the tenth day following the day on which public
announcement of the date of such meeting is first made. The public announcement
of a postponement or adjournment of an annual meeting shall not commence a new
time period for the giving of a shareholder's notice as described above.
Pursuant to the Fund's By-laws, such shareholder's notice shall set forth as to
each individual whom the shareholder proposes to nominate for election or
reelection as a director, (A) the name, age, business address and residence
address of such individual, (B) the class, series and number of any shares of
stock of the Fund that are beneficially owned by such individual, (C) the date
such shares were acquired and the investment intent of such acquisition, (D)
whether such shareholder believes any such individual is, or is not, an
"interested person" of the Fund, as defined in the 1940 Act and information
regarding such individual that is sufficient, in the discretion of the Board or
any committee thereof or any authorized officer of the Fund, to make such
determination and (E) all other information relating to such individual that is
required to be disclosed in solicitations of proxies for election of directors
in an election contest (even if an election contest is not involved), or is
otherwise required, in each case pursuant to Regulation 14A (or any successor
provision) under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and the rules thereunder (including such individual's written consent to
being named in the proxy statement as a nominee and to serving as a director if
elected).
INVESTMENT ADVISERS AND OTHER SERVICE PROVIDERS
The Fund is co-advised by Boulder Investment Advisers, LLC and Stewart West
Indies Trading Company, Ltd. d/b/a Stewart Investment Advisers. The Advisers
have been providing advisory services to the Fund since January, 2002, and to
Boulder Total Return Fund, Inc. since March, 1999. As of June ___, 2005, the
Advisers had a total of $_____ million in assets under management.
BOULDER INVESTMENT ADVISERS, LLC. BIA was formed on April 8, 1999, as a Colorado
limited liability company and is registered as an investment adviser under the
Investment Advisers Act of 1940, as amended. Stewart R. Horejsi is an employee
of and investment manager for both Advisers and has extensive experience
managing common stocks for the Fund as well as for the various other trusts and
entities affiliated with the Horejsi family (the "Horejsi Affiliates"). The
members of BIA are Evergreen Atlantic, LLC, whose address is 1680 38th Street,
Suite 800, Boulder, Colorado 80301 and the Lola Brown Trust No. 1B, whose
address is c/o Badlands Trust Company, LLC, 3601 C Street, Suite 600, Anchorage,
Alaska 99503 (the "Members"). Each of the Members hold a 50% interest in BIA.
The Members are "affiliated persons" of the Fund (as that term is defined in the
1940 Act). Both Mr. Horejsi and John S. Horejsi, Mr. Horejsi's son and the
Fund's "interested" Director, are discretionary beneficiaries under the Lola
Brown Trust No. 1B as well as under other Horejsi Affiliates which own Evergreen
Atlantic, LLC. Accordingly, as a result of this relationship, both Stewart R.
Horejsi and John S. Horejsi may directly or indirectly benefit from the
relationship between the Fund and BIA.
STEWART INVESTMENT ADVISERS. SIA is a Barbados international business company
incorporated on November 12, 1996. SIA is wholly owned by the Stewart West
Indies Trust (the "West Indies Trust"), an irrevocable trust domiciled in Alaska
and established by Mr. Horejsi in 1996 primarily to benefit his issue. The West
Indies Trust's address is c/o Badlands Trust Company, LLC, 3601 C Street, Suite
600, Anchorage, Alaska 99503. Mr. Horejsi is not a beneficiary under the West
Indies Trust. However, John S. Horejsi, Mr. Horejsi's son and the Fund's
"interested" Director, is a discretionary beneficiary under the West Indies
Trust and thus, as a result of this relationship, may directly or indirectly
benefit from the relationship between SIA and the Fund.
SIA is not domiciled in the United States and substantially all of its assets
are located outside the United States. As a result, it may be difficult to
realize judgments of courts of the United States predicated upon civil
liabilities under federal securities laws of the United States. The Fund has
been advised that there is substantial doubt as to the enforceability in
Barbados of such civil remedies and criminal penalties as are afforded by the
federal securities laws of the United States. Pursuant to the advisory agreement
between SIA and the Fund, SIA has appointed the Secretary of the Fund (presently
Stephanie Kelley in Boulder, Colorado) as its agent for service of process in
any legal action in the United States, thus subjecting it to the jurisdiction of
the United States courts.
CO-ADVISORY AGREEMENTS. The Advisers and the Fund are parties to investment
co-advisory agreements dated as of April 26, 2002 (the "Advisory Agreements").
Under the terms of the Advisory Agreements, the Advisers provide advisory
services regarding asset allocation, manage the investment of the Fund's assets
and provide such investment research, advice and supervision, in conformity with
the Fund's investment objective and policies, as necessary for the operations of
the Fund. The Advisory Agreements provide, among other things, that the Advisers
will bear all expenses in connection with the performance of their services
under the Advisory Agreements.
The Advisory Agreements provide that the Fund shall pay to the Advisers for
their services an aggregate monthly fee at the annual rate of 1.25% of the
Fund's average monthly net assets, including the principal amount of leverage,
if any (the "Adviser Fee"). The Adviser Fee is higher than the fees paid by most
similarly situated U.S. investment companies. Under the terms of the Advisory
Agreements, the Advisers share the Adviser Fee as determined by the Advisers and
approved by the Board from time to time. Presently, BIA and SIA receive 25% and
75%, respectively, of the Adviser Fee. Although the Advisers intend to devote
such time and effort to the business of the Fund as they deem reasonably
necessary to perform their respective duties to the Fund, the services of the
Advisers are not exclusive and the Advisers may provide similar services to
other investment companies and other clients and may engage in other activities.
The Advisory Agreements provide that the Advisers shall not be liable for any
error of judgment or mistake of law or omission or any loss suffered by the Fund
in connection with the matters to which the agreements relate, although the
agreements do not protect or purport to protect the Advisers against any
liability to the Fund to which the Advisers would otherwise be subject by reason
of willful misfeasance, bad faith or gross negligence on their part in the
performance of their duties or from reckless disregard by them of their
obligations and duties under the agreements. Each Advisory Agreement also
provides for indemnification by the Fund of the Advisers and their partners,
members, officers, employees, agents and control persons for liabilities
incurred by them in connection with their services to the Fund, subject to
certain limitations and conditions.
PORTFOLIO MANAGERS. Stewart R. Horejsi is the Fund's primary investment manager
and, together with Carl D. Johns, the Fund's Vice President and Treasurer, is
responsible for the day-to-day management of the Fund's assets. Mr. Horejsi is
primarily responsible for the Fund's asset allocation and Mr. Johns, also Vice
President and Treasurer for BIA, is responsible for research and managing the
Fund's fixed income portfolio. Messrs. Horejsi and Johns are referred to herein
as the "Portfolio Managers". The Portfolio Managers act as the portfolio
managers with respect to the Fund and one other registered investment company,
the Boulder Total Return Fund, Inc. ("BTF"). As of November 30, 2004, BTF had
total assets of approximately $_____. Mr. Horejsi also acts as portfolio manager
with respect to a client of the Advisers who is a Horejsi Affiliate, the Horejsi
Charitable Foundation, which has total assets of approximately $_______ as of
November 30, 2004. Mr. Horejsi also acts as a financial consultant to the
Horejsi Affiliates and manages their portfolios of equities having an aggregate
value of approximately $_______ as of November 30, 2004.
The Portfolio Managers are compensated with fixed salaries which are established
based on a number of considerations, including, among others, job and portfolio
performance, industry compensation and comparables, and years of experience and
service with the Adviser. The Portfolio Managers are reviewed from time to time
and their salaries may be adjusted based on their recent and long-term job
performance and cost of living increases. Generally, the Portfolio Managers do
not receive bonuses. Conflicts of interest may arise in connection with the
Portfolio Managers' management of the Fund's investments. This is because the
Portfolio Managers also serve as portfolio managers to BTF and the other
accounts described above that may have investment objectives identical or
similar to those of the Fund. See "Potential Conflicts of Interest" below.
Mr. Horejsi does not directly own any shares of the Fund. However, the EH Trust,
which has engaged Mr. Horejsi as a financial consultant and of which Mr. Horejsi
is a discretionary beneficiary, holds 2,354,600 shares of the Fund as of
November 30, 2004. Accordingly, Mr. Horejsi may be deemed to have indirect
beneficial ownership of such shares which have a dollar range in excess of $1
million. Mr. Horejsi disclaims all such beneficial ownership. Mr. Johns holds
between [$10,001 and $50,000] of the shares of the Fund as of November 30, 2004.
FUND ADMINISTRATIVE SERVICES, LLC. Fund Administrative Services, LLC ("FAS") is
the Fund's co-administrator. FAS is a Colorado limited liability company formed
in 1994. Its principal place of business is 200 S. Santa Fe, #4, Salina, KS
67401 and it has offices in Colorado at 1680 38th Street, Suite 800, Boulder,
Colorado 80301. The members of FAS are Lola Brown Trust No. 1B (50%) and
Evergreen Atlantic, LLC (50%). Stewart R. Horejsi, the Fund's portfolio manager,
and his son John S. Horejsi, the Fund's "interested" Director, are discretionary
beneficiaries of the Lola Brown Trust No. 1B, and of the trusts which own
Evergreen Atlantic, LLC. The officers of FAS are Stephen C. Miller, manager;
Carl Johns, assistant manager; Laura Rhodenbaugh, secretary/treasurer; and
Stephanie Kelley, assistant secretary. Since January of 2002, FAS has been
providing certain administrative and executive management services to the Fund,
including among other things negotiation of service provider contracts,
oversight of service providers, maintenance of the Fund's policies and
procedures, and provision of compliance, legal and fund accounting services. FAS
has also provided such administrative and executive management services to
Boulder Total Return Fund, Inc. since March of 1999 and to First Financial Fund,
Inc. since August of 2003.
The Fund and FAS are parties to an administration agreement dated February 1,
2004. Under the administration agreement, the Fund pays FAS a monthly fee
calculated at an annual rate of 0.20% of the value of the Fund's average monthly
net assets up to $250 million; 0.18% of the Fund's average monthly net assets on
the next $150 million; and, 0.15% on the value of the Fund's average monthly
assets over $400 million. FAS has agreed to cap the Fund's total administration
costs at 0.30% (including administration, co-administration, transfer agent and
custodian fees), and therefore waives a portion of its fee should the total
monthly administration expenses exceed 0.30% on an annualized basis.
INVESTORS BANK & TRUST COMPANY. Investors Bank & Trust Company ("Investors
Bank"), located at 200 Clarendon Street, Boston MA 02116 serves as the Fund's
co-administrator and custodian of its assets. As co-administrator, Investors
Bank provides certain services including fund accounting and preparation of
materials for Board meetings. Under an administration agreement and custody
agreement between the Fund and Investors Bank, the Fund pays Investors Bank a
combined monthly fee for both co-administrative and custodian services
calculated at an annual rate of 0.058% of the value of the Fund's average
monthly net assets up to $300 million and 0.04% on the value of the Fund's
average monthly net assets over $300 million, or a minimum monthly fee of
$10,500. Presently, because of the level of the Fund's average monthly net
assets, the Fund pays the minimum fee of $10,500 monthly. In addition, Investors
Bank receives certain out-of-pocket expenses, transaction fees and certain
charges for securities transactions. All customary fees of the custodian are
paid by the Fund.
COMPENSATION TO THE ADVISERS AND ADMINISTRATORS
Information is provided in this Statement of Additional Information and the
Prospectus concerning the Advisers and Administrator and their agreements with
the Fund. The amounts paid to such persons during the last three fiscal years
or, if shorter, the period during which the entity was retained to provide
services to the Fund are as follows:
Name of Entity Fees Paid by the Fund
2002 2003 2004
Boulder Investment Advisers, LLC
Stewart Investment Advisers
Fund Administrative Services, LLC * * *
Investors Bank & Trust Company -- -- $_**
*Prior to February 1, 2004, from fees it received under the prior administrative
agreement between FAS and the Fund, FAS was required to pay substantially all
fees respecting services provided to the Fund by any sub-administrators,
custodian or transfer agent. Under this arrangement, out of the funds identified
in the Table above, FAS paid such outsourced service providers $_______,
$_______ and $______ during fiscal year 2002, 2003 and 2004, respectively. At a
regular meeting of directors held on January 23, 2004, the Board approved a new
administrative agreement where by the Fund would separately pay FAS and all such
service providers.
** Investors Bank began providing administration services to the Fund on October
1, 2004.
FACTORS CONSIDERED BY THE INDEPENDENT DIRECTORS IN APPROVING THE
INVESTMENT ADVISORY AGREEMENTS
The 1940 Act requires that a fund's investment advisory agreements be approved
annually by both the Board and a majority of the Independent Directors voting
separately. The Independent Directors have determined that the terms of the
Fund's investment advisory agreements are fair and reasonable and that the
contracts are in the Fund's best interest. The Independent Directors believe
that the investment advisory agreements will enable the Fund to enjoy high
quality investment advisory services at a cost they deem appropriate, reasonable
and in the best interests of the Fund and its shareholders. At a regularly
scheduled meeting held on January 21, 2005, the Directors, by a unanimous vote
(including a separate vote of the Independent Directors), approved the renewal
of the Advisory Agreements.
FACTORS CONSIDERED. Generally, the Board considered a number of factors in
renewing the Advisory Agreements including, among other things, (i) the nature,
extent and quality of services to be furnished by the Advisers to the Fund; (ii)
the investment performance of the Fund compared to relevant market indices and
the performance of peer groups of closed-end investment companies pursuing
similar strategies; (iii) the advisory fees and other expenses paid by the Fund
compared to those of similar funds managed by other investment advisers; (iv)
the profitability to the Advisers of their investment advisory relationship with
the Fund; (v) the extent to which economies of scale would be realized as the
Fund grows and whether fee levels reflect any economies of scale; (vi) support
of the Advisers by the Fund's principal shareholders; (vii) the historical
relationship between the Fund and the Advisers, and (viii) the relationship
between the Advisers and its affiliated service provider, FAS. The Board also
reviewed the ability of the Advisers to provide investment management and
supervision services to the Fund, including the background, education and
experience of the key portfolio management and operational personnel, the
investment philosophy and decision-making process of those professionals, and
the ethical standards maintained by the Advisers.
DELIBERATIVE PROCESS. To assist the Board in its evaluation of the quality of
the Advisers' services and the reasonableness of the Advisers' fees under the
Advisory Agreements, the Board received a memorandum from independent legal
counsel to the Independent Directors discussing the factors generally regarded
as appropriate to consider in evaluating investment advisory arrangements and
the duties of directors in approving such arrangements. In connection with its
evaluation, the Board also requested, and received, various materials relating
to the Advisers' investment services under the Advisory Agreements. These
materials included a report prepared by Lipper, Inc. ("Lipper") comparing the
Fund's performance, advisory fees and expenses to a group of funds determined to
be most similar to the Fund (the "Peer Group") and a broader universe of
relevant funds (the "Universe"), in each case as determined by Lipper. The
Lipper report also included a performance comparison for the Fund against an
appropriate index. In addition, the Board received reports and presentations
from the Advisers that described, among other things, the Advisers' financial
condition, profitability from its relationship with the Fund, soft dollar
commission and trade allocation policies, organizational structure, and
compliance policies and procedures. The Board also considered information
received from the Advisers throughout the year, including investment performance
and expense ratio reports for the Fund.
In advance of the January 21, 2005 meeting, the Independent Directors held a
special telephonic meeting with counsel to the Fund and independent legal
counsel to the Independent Directors. The principal purpose of the meeting was
to discuss the renewal of the Advisory Agreements and review the materials
provided to the Board by the Advisers in connection with the annual review
process. As a result of these discussions, the Independent Directors requested
that the Advisers provide supplemental materials to assist the Board in its
evaluation of the Advisory Agreements. The Board held additional discussions at
the January 21, 2005 Board meeting, which included a private session among the
Independent Directors and their independent legal counsel at which no employees
or representatives of the Advisers were present.
BOARD CONSIDERATIONS. The information below summarizes the Board's
considerations in connection with its approval of the Advisory Agreements. In
deciding to approve the Advisory Agreements, the Board did not identify a single
factor as controlling and this summary does not describe all of the matters
considered. However, the Board concluded that each of the various factors
referred to below favored such approval.
Nature, Extent and Quality of the Services Provided; Ability to Provide
Services. The Board received and considered various data and information
regarding the nature, extent and quality of services provided to the Fund by the
Advisers under the Advisory Agreements. Each Adviser's most recent investment
adviser registration form on the Securities and Exchange Commission's Form ADV
was provided to the Board, as were the responses of the Advisers to information
requests submitted to the Advisers by the Independent Directors through their
independent legal counsel. The Board reviewed and analyzed the materials, which
included information about the background, education and experience of the
Advisers' key portfolio management and operational personnel and the amount of
attention devoted to the Fund by the Advisers' portfolio management personnel.
In this regard, it was noted that the Advisers' only clients are the Fund, one
other registered investment company (Boulder Total Return Fund, Inc.) and a
charitable foundation affiliated with the Horejsi family. Accordingly, the Board
was satisfied that the Advisers' investment personnel, including Stewart
Horejsi, the Fund's principal portfolio manager, devote a significant portion of
their time and attention to the success of the Fund and its investment strategy.
The Board also considered the Advisers' recently enhanced policies and
procedures for ensuring compliance with applicable laws and regulations. Based
on the above factors, the Board concluded that it was generally satisfied with
nature, extent and quality of the investment advisory services provided to the
Fund by the Advisers, and that the Advisers possessed the ability to continue to
provide these services to the Fund in the future.
Investment Performance. The Board considered the investment performance of
the Fund since January 2002, when the Advisers became the investment managers
for the Fund, as compared to both relevant indices and the performance of the
Fund's peer group universe. The Board noted favorably that for the one- and
three-year periods ending December 31, 2004, the Fund's performance based upon
total return ranked in the second quintile of its Universe (i.e., the upper 40%
of the funds in the Universe), and had outperformed the Standard & Poor's 500
index, the Fund's primary relevant benchmark, as well as the Dow Jones
Industrial Average and the Nasdaq Composite, the Fund's secondary benchmarks.
The Board acknowledged that the Universe included both leveraged and
non-leveraged closed-end funds to provide a more statistically significant group
for comparison purposes, even though the Fund is leveraged and comparing the
Fund only to Funds that use leverage may yield a different result. The Board
also noted that the investment performance for the Fund continued the superior
investment performance record achieved by Mr. Horejsi prior to his association
with the Fund in managing his family's extensive investment portfolio. Based on
these factors, the Board concluded that the overall performance results
supported the renewal of the Advisory Agreements.
Costs of Services Provided and Profits Realized by the Advisers. In
evaluating the costs of the services provided to the Fund by the Advisers, the
Board received statistical and other information regarding the Fund's total
expense ratio and its various components, including management fees and
investment-related expenses. This information included a comparison of the
Fund's various expenses to the Peer Group and the Universe. The Board
acknowledged that the level of fees charged by the Advisers is at the higher end
of the spectrum of fees charged by similarly situated investment advisers of
closed-end funds. The Fund's management fee expense ranked in the fifth quintile
of the nine funds included in the Peer Group and in the fourth quintile of the
Universe. The Board noted that the Fund's shareholders had removed most of the
Fund's investment limitations, resulting in a much broader (and more difficult
to assess) universe of investment possibilities for the Fund than might
otherwise be the case for other "sector" or "industry" oriented funds, which
requires a greater degree of portfolio management skill on the part of the
Advisers. The Board also considered that the Advisers do not participate in soft
dollar or directed brokerage transactions. Instead, the Advisers bear the cost
of third party research utilized by the Advisers, increasing the cost to the
Advisers of providing investment management services to the Fund and decreasing
the Fund's transaction expenses. It was also noted that the Advisers have
historically waived fees when the Fund held significant levels of un-invested
cash.
The Board also obtained detailed information regarding the overall profitability
of the Advisers and the combined profitability of the Advisers and FAS, which
acts as co-administrator for the Fund. The combined profitability information
was obtained to assist the Board in determining the overall benefits to the
Advisers from their relationship to the Fund. Based on its analysis of this
information, the Board determined that the level of profits earned by the
Advisers from managing the Fund bear a reasonable relationship to the services
rendered.
Based on these factors, the Board concluded that the fee under the Advisory
Agreements was reasonable and fair in light of the nature and quality of the
services provided by the Advisers.
Economies of Scale. The Board considered whether there have been economies
of scale with respect to the management of the Fund, whether the Fund has
appropriately benefited from any economies of scale, and whether the management
fee rate is reasonable in relation to the Fund's assets and any economies of
scale that may exist. Based on the relatively small size of the Fund, the Board
determined that no meaningful economies of scale would be realized until the
Fund achieved significantly higher asset levels. The Board also noted that the
Advisers' internal costs of providing investment management services to the Fund
had increased, in part due to administrative burdens and expenses resulting from
recent legislative and regulatory actions. Based on these factors, the Board
concluded that the absence of breakpoints in the Fund's current advisory fee
schedule was acceptable.
Shareholder Support and Historical Relationship with the Fund. The Board
placed considerable weight on the views of the Fund's largest shareholders,
which are affiliated with Mr. Horejsi and the Advisers. As of December 31, 2004,
these shareholders held approximately 21% of the Fund's outstanding common
shares, representing approximately $17 million of the Fund's net assets of $90
million, excluding leverage, on that date. The Board understands from Mr.
Horejsi that these shareholders are supportive of the Advisers and the renewal
of the Advisory Agreements. The Board also noted that the Fund had not received
any negative feedback from other Fund shareholders with respect to the levels of
investment management fees and expenses experienced by the Fund.
APPROVAL. The Board based its decision to approve the renewal of the Advisory
Agreements on a careful analysis, in consultation with Fund counsel and
independent counsel for the Independent Directors, of these and other factors.
In approving the Advisory Agreements, the Board concluded that the terms of the
Fund's investment advisory agreements are reasonable and fair and that renewal
of the Advisory Agreements is in the best interests of the Fund and its
shareholders.
DURATION AND TERMINATION
The terms of the Advisory Agreements were approved by the Board at a regular
meeting of the Board held on January 21, 2005, including a majority of the
Directors who are not parties to the agreement or "interested persons" of any
such party (as such term is defined in the 1940 Act).
Each Advisory Agreement will continue in effect without a term so long as its
continuation is specifically approved at least annually by both (i) the vote of
a majority of the Board or the vote of a majority of the outstanding voting
securities of the Fund (as such term is defined in the 1940 Act) and (ii) by the
vote of a majority of the directors who are not parties to such Advisory
Agreement or interested persons (as such term is defined in the 1940 Act) of any
such party, cast in person at a meeting called for the purpose of voting on such
approval. Any of the Advisory Agreements may be terminated as a whole at any
time by the Fund, without the payment of any penalty, upon the vote of a
majority of the Board or a majority of the outstanding voting securities of the
Fund or by the Advisers on 60 days' written notice by either party to the other.
Except as otherwise provided by order of the SEC or any rule or provision of the
1940 Act, each of the Advisory Agreements will terminate automatically in the
event of its assignment (as such term is defined in the 1940 Act and the rules
thereunder).
POTENTIAL CONFLICTS OF INTEREST
The Fund is managed by the Advisers, who also serve as investment advisers to
another closed-end investment company and at least one other account with
investment objectives identical or similar to those of the Fund. Mr. Horejsi
also manages a substantial portfolio of securities for the Horejsi Affiliates.
Securities frequently meet the investment objectives of the Fund, the Horejsi
Affiliates and such other funds and accounts. In such cases, the decision to
recommend a purchase to one fund or account rather than another is based on a
number of factors. The determining factors in most cases are the amount of
securities of the issuer then outstanding, the value of those securities and the
market for them. Other factors considered in the investment recommendations
include other investments that each fund or account presently has in a
particular industry and the availability of investment funds in each fund or
account. It is possible that at times identical securities will be held by more
than one fund and/or account. However, positions in the same issue may vary and
the length of time that any fund or account may choose to hold its investment in
the same issue may likewise vary.
To the extent that more than one of the funds or accounts managed by the
Advisers seeks to acquire the same security at about the same time, the Fund may
not be able to acquire as large a position in such security as it desires or it
may have to pay a higher price for the security. However, with respect to the
Horejsi Affiliates and the other private account managed by the Advisers, the
Horejsi Affiliates and such other private account have consented to allow the
funds managed by the Adviser to complete their transactions in any particular
security before the Horejsi Affiliates or such other private account will be
allowed to transact in such security, thus giving the funds managed by the
Advisers the first opportunity to trade in a particular security. The Fund may
not be able to obtain as large an execution of an order to sell or as high a
price for any particular portfolio security if the Advisers decide to sell on
behalf of another account the same portfolio security at the same time. On the
other hand, if the same securities are bought or sold at the same time by more
than one fund or account, the resulting participation in volume transactions
could produce better executions for the Fund. In the event more than one account
purchases or sells the same security on a given date, the purchases and sales
will normally be made as nearly as practicable on a pro rata basis in proportion
to the amounts desired to be purchased or sold by each account. Although the
other fund managed by the Advisers may have the same or similar investment
objectives and policies as the Fund, its portfolio does not generally consist of
the same investments as the Fund and its performance results are likely to
differ from those of the Fund.
PROXY VOTING
The Board has delegated to BIA the authority to vote proxies on behalf of the
Fund. The Board has approved the proxy voting guidelines of the Fund and will
review the guidelines and suggest changes they deem advisable. A summary of the
Fund's and BIA's proxy voting policies and procedures are attached to this
Statement of Additional Information as Appendices B and C, respectively.
Information regarding how the Fund voted proxies relating to portfolio
securities during the most recent 12-month period ended June 30 is available
without charge, upon request, by calling 1-800-_______, and on the Securities
and Exchange Commission's website, at www.sec.gov.
CODE OF ETHICS
The Fund and the Advisers have adopted a joint code of ethics pursuant to Rule
17j-1 under the 1940 Act that is applicable to officers, directors and
designated employees of the Fund and the Advisers, as applicable (the "Code of
Ethics"). The Code of Ethics permits such personnel to engage in personal
securities transactions for their own account, including securities that may be
purchased or held by the Fund, and is designed to prescribe means reasonably
necessary to prevent conflicts of interest from arising in connection with
personal securities transactions. The Code of Ethics is on file with, and is
available from, the Securities and Exchange Commission's Public Reference Room
in Washington, D.C. Information on the operation of the Public Reference Room
may be obtained by calling the Commission at 1-(202)-942-8090. The Code of
Ethics is also available on the EDGAR database on the Commission's internet
website at http://www.sec.gov. Copies of the Code of Ethics may be obtained,
after paying a duplicating fee, by electronic request to the following e-mail
address: publicinfo@sec.gov, or by writing the Commission's Public Reference
Section, Washington, D.C. 20549-0102.
PORTFOLIO TRANSACTIONS, BROKERAGE ALLOCATION AND OTHER PRACTICES
All orders for the purchase or sale of portfolio securities are placed on behalf
of the Fund by the Advisers pursuant to authority contained in the Advisory
Agreements. The Advisers seek best execution in selecting brokers and dealers to
effect the Fund's transactions and negotiating prices and any brokerage
commissions. The Fund may purchase certain money market instruments directly
from an issuer, in which case no commissions or discounts are paid. No separate
brokerage commission is typically paid on bond transactions, which are typically
executed on a principal basis, in contrast to common stock transactions, where
brokerage commissions are the norm. The Fund paid $______, $______, and $______
in brokerage commissions for the fiscal years ended November 30, 2002, 2003 and
2004, respectively.
The Advisers are responsible for effecting the Fund's securities transactions
and will do so in a manner it deems fair and reasonable to shareholders of the
Fund and not according to any formula. The Advisers' primary considerations in
selecting the manner of executing a securities transaction for the Fund are
prompt execution of orders, the size and breadth of the market for the security,
the reliability, integrity, financial condition and execution capability of the
firm, the difficulty in executing the order, and the best net price. The
Advisers have established procedures whereby it monitors, periodically evaluates
and reports to the Board the cost and quality of execution services provided by
brokers selected by the Advisers to execute transactions for the Fund. The
evaluation is made primarily based on a comparison of commissions charged by
other broker with similar capabilities and trade execution.
There are many instances when, in the judgment of the Advisers, more than one
firm can offer comparable execution services. In selecting among such firms,
consideration may be given to those firms which supply research and other
services in addition to execution services, although the Fund does not typically
rely on such research. The Advisers have adopted a policy against using any kind
of soft dollar arrangements. The Advisers utilize purchased research only in
regards to the REIT industry, but do not use soft dollars as a means of paying
for such research. Rather, the Advisers have arranged that a higher commission
would be paid only with regard to REIT trades that involve REITs covered by a
particular research company, in which case the Fund pays only the amount of
commission typically paid to other brokers and the Advisers pay any portion of
such commission that exceeds this typical brokerage commission. This policy has
been disclosed to and approved by the Board. During the fiscal year ended
November 30, 2004, the Advisers directed $10,690,854 in transactions with
related commissions of $14,206 to Green Street Advisers for the REIT related
research described above. Of the $14,206 in commissions related to these
transactions, the Advisers reimbursed the Fund for $7,103, the portion which the
Advisers deemed to be in excess of the commissions the Fund would likely have
paid to a broker which provided best execution.
Although the Advisory Agreements contain no restrictions on portfolio turnover,
it is not the Fund's policy to engage in transactions with the objective of
seeking profits from short-term trading. The annual portfolio turnover rate of
the Fund is generally less than 50%, excluding securities having a maturity of
one year or less. Because it is difficult to accurately predict portfolio
turnover rates, actual turnover may be higher or lower. Higher portfolio
turnover results in increased Fund expenses, including brokerage commissions,
dealer mark-ups and other transaction costs on the sale of securities and on the
reinvestment in other securities. For the fiscal years ended November 30, 2003
and November 30, 2004, the Fund's portfolio turnover rates were 40% and 33%,
respectively.
ADDITIONAL INFORMATION CONCERNING THE AUCTIONS FOR PREFERRED SHARES
GENERAL. The Depository Trust Company ("DTC" or the "Securities Depository")
will act as the Securities Depository with respect to the Preferred Shares. One
certificate for all of the Preferred Shares will be registered in the name of
Cede & Co., as nominee of the Securities Depository. Such certificate will bear
a legend to the effect that it is issued subject to the provisions restricting
transfers of shares of the Preferred Shares contained in the Articles
Supplementary Creating and Fixing the Rights of Auction Market Preferred Stock
(the "Articles Supplementary") which is attached hereto as Appendix D. Prior to
the commencement of the right of holders of the Preferred Shares to elect two of
the Fund's Directors, as described under "Description of Preferred Shares --
Voting Rights" in the Prospectus, Cede & Co. will be the holder of record of the
Preferred Shares and owners of such shares will not be entitled to receive
certificates representing their ownership interest in such shares. DTC, a New
York-chartered limited purpose trust company, performs services for its
participants, some of whom (and/or their representatives) own DTC. DTC maintains
lists of its participants and will maintain the positions (ownership interests)
held by each such participant in the Preferred Shares, whether for its own
account or as a nominee for another person.
THE AUCTION AGENT. Deutsche Bank Trust Company Americas (the "Auction Agent")
will act as agent for the Fund in connection with the auctions of the Preferred
Shares (the "Auctions"). In the absence of willful misconduct or gross
negligence on its part, the Auction Agent will not be liable for any action
taken, suffered, or omitted or for any error of judgment made by it in the
performance of its duties under the auction agency agreement between the Fund
and the Auction Agent and will not be liable for any error of judgment made in
good faith unless the Auction Agent was grossly negligent in ascertaining the
pertinent facts.
The Auction Agent may conclusively rely upon, as evidence of the identities of
the holders of the Preferred Shares, the Auction Agent's registry of holders,
and the results of auctions and notices from any broker-dealer ("Broker-Dealer")
that has entered into an agreement with the Auction Agent (a "Broker-Dealer
Agreement") (or other person, if permitted by the Fund) with respect to
transfers described under "The Auction - Secondary Market Trading and Transfers
of Preferred Shares" in the Prospectus and notices from the Fund. The Auction
Agent is not required to accept any such notice for an auction unless it is
received by the Auction Agent by 3:30 p.m., New York City time, on the business
day preceding such Auction.
The Auction Agent may terminate its auction agency agreement with the Fund upon
notice to the Fund on a date no earlier than 60 days after such notice. If the
Auction Agent should resign, the Fund will use its best efforts to enter into an
agreement with a successor auction agent containing substantially the same terms
and conditions as the auction agency agreement. The Fund may remove the Auction
Agent provided that prior to such removal the Fund shall have entered into such
an agreement with a successor auction agent.
BROKER-DEALERS. The Auction Agent, after each Auction for the Preferred Shares,
will pay to each Broker-Dealer, from funds provided by the Fund, a service
charge at the annual rate: (i) in the case of any Auction date immediately
preceding a dividend period other than a special dividend period of less than
one year, the product of (A) a fraction the numerator of which is the number of
days in such dividend period (calculated by counting the date of original issue
of such shares to but excluding the next succeeding dividend payment date of
such shares) and the denominator of which is 360, times (B) 1/4 of 1%, times (C)
$25,000 times (D) the sum of the aggregate number of shares of outstanding
Preferred Shares for which the Auction is conducted and (ii) in the case of any
special dividend period of one year or more, the amount determined by mutual
consent of the Fund and any such Broker-Dealers and shall be based upon a
selling concession that would be applicable to an underwriting of fixed or
variable rate Preferred Shares with a similar final maturity or variable rate
dividend period, respectively, at the commencement of the dividend period with
respect to such Auction. For the purposes of the preceding sentence, the
Preferred Shares will be placed by a Broker-Dealer if such shares were (a) the
subject of hold orders deemed to have been submitted to the Auction Agent by the
Broker-Dealer and were acquired by such Broker-Dealer for its customers who are
beneficial owners or (b) the subject of an order submitted by such Broker-Dealer
that is (i) a submitted bid of an existing holder that resulted in the existing
holder continuing to hold such shares as a result of the Auction or (ii) a
submitted bid of a potential bidder that resulted in the potential holder
purchasing such shares as a result of the Auction or (iii) a valid hold order.
The Fund may request the Auction Agent to terminate one or more Broker-Dealer
agreements at any time, provided that at least one Broker-Dealer agreement is in
effect after such termination.
Each Broker-Dealer Agreement provides that a Broker-Dealer (other than an
affiliate of the Fund) may submit orders in Auctions for its own account, unless
the Fund notifies all Broker-Dealers that they may no longer do so, in which
case Broker-Dealers may continue to submit hold orders and sell orders for their
own accounts. Any Broker-Dealer that is an affiliate of the Fund may submit
orders in Auctions, but only if such orders are not for its own account. If a
Broker-Dealer submits an order for its own account in any Auction, it might have
an advantage over other bidders because it would have knowledge of all orders
submitted by it in that Auction; such Broker-Dealer, however, would not have
knowledge of orders submitted by other Broker-Dealers in that Auction.
RATING AGENCY GUIDELINES
The descriptions of Fitch, Inc. ("Fitch") and Moody's Investors Service, Inc.
("Moody's") rating guidelines ("Rating Agency Guidelines") contained in this
Statement of Additional Information do not purport to be complete and are
subject to and qualified in their entireties by reference to the Articles
Supplementary, a copy of which is attached as Appendix C to this Statement of
Additional Information. A copy of the Articles Supplementary is filed as an
exhibit to the registration statement of which the prospectus and this Statement
of Additional Information are a part and may be inspected, and copies thereof
may be obtained, as described in the prospectus.
The composition of the Fund's portfolio reflects the Rating Agency Guidelines in
connection with the Fund's receipt of a rating of "Aaa" and "AAA" from Moody's
and Fitch, respectively, for the Preferred Shares. These Rating Agency
Guidelines relate, among other things, to credit quality characteristics of
issuers and diversification requirements and specify various discount factors
for different types of securities (with the level of discount greater as the
rating of a security becomes lower). Under the Rating Agency Guidelines, certain
types of securities in which the Fund may otherwise invest consistent with its
investment strategy are not eligible for inclusion in the calculation of the
discounted value of the Fund's portfolio. Such instruments include, for example,
private placements (other than Rule 144A securities) and other securities not
within the Rating Agency Guidelines. Accordingly, although the Fund reserves the
right to invest in such securities to the extent set forth herein, they have not
and it is anticipated that they will not constitute a significant portion of the
Fund's portfolio.
The Rating Agency Guidelines require that the Fund maintain assets having an
aggregate discounted value, determined on the basis of the Rating Agency
Guidelines, greater than the aggregate liquidation preference of the Preferred
Shares plus specified liabilities, payment obligations and other amounts, as of
periodic valuation dates. The Rating Agency Guidelines also require the Fund to
maintain asset coverage required by the 1940 Act as a condition to paying
dividends or other distributions on the Fund's common shares. The effect of
compliance with the Rating Agency Guidelines may be to cause the Fund to invest
in higher quality assets and/or to maintain relatively substantial balances of
highly liquid assets or to restrict the Fund's ability to make certain
investments that would otherwise be deemed potentially desirable by the
Advisers. The Rating Agency Guidelines are subject to change from time to time
with the consent of the relevant rating agency and would not apply if the Fund
in the future elected not to use financial leverage consisting of senior
securities rated by one or more rating agencies, although other similar
arrangements might apply with respect to other senior securities that the Fund
may issue.
The Fund intends to maintain, at specified times, a discounted value for its
portfolio at least equal to the amount specified by each rating agency. Moody's
and Fitch have each established separate guidelines for determining discounted
value. To the extent any particular portfolio holding does not satisfy the
applicable Rating Agency's Guidelines, all or a portion of such holding's value
will not be included in the calculation of discounted value (as defined by such
rating agency). The Rating Agency Guidelines do not impose any limitations on
the percentage of Fund's assets that may be invested in holdings not eligible
for inclusion in the calculation of the discounted value of the Fund's
portfolio. The amount of such assets included in the Fund's portfolio at any
time may vary depending upon the rating, diversification and other
characteristics of the Fund's assets that are eligible for inclusion in the
discounted value of the Fund's portfolio under the Rating Agency Guidelines. For
a more detailed description of the Rating Agency Guidelines, see the Articles
Supplementary.
REPURCHASE OF SHARES
The Fund is a closed-end investment company and therefore its common
shareholders do not have the right to cause the Fund to redeem their shares.
Instead, the Fund's common shares trade in the open market at a price that is a
function of several factors, including net asset value, dividend stability,
relative demand for and supply of such shares in the market, general market and
economic conditions, dividend stability, dividend levels (which are in turn
affected by expenses), and other factors. Because shares of a closed-end
investment company may frequently trade at prices lower than net asset value (a
"Discount"), the Board may consider actions that might be taken to reduce or
eliminate any material Discount in respect of common shares, which may include
the repurchase of such shares in the open market or in private transactions, the
making of a tender offer for such shares at net asset value, or the conversion
of the Fund to an open-end investment company. The Board may not decide to take
any of these actions. In addition, there can be no assurance that share
repurchases or tender offers, if undertaken, will reduce any Discount.
Once the Fund issues the Preferred Shares, the Fund's ability to repurchase
shares of, or tender for, its common stock may be limited by the asset coverage
requirements of the 1940 Act and by asset coverage and other requirements
imposed by various rating agencies. No assurance can be given that the Board
will decide to undertake share repurchases or tenders or, if undertaken, that
repurchases and/or tender offers will result in the Fund's common stock trading
at a price that is close to, equal to or above net asset value. The Fund may
borrow to finance repurchases and/or tender offers. Any tender offer made by the
Fund for its shares may be at a price equal to or less than the net asset value
of such shares. Any service fees incurred in connection with any tender offer
made by the Fund will be borne by the Fund and will not reduce the stated
consideration to be paid to tendering shareholders.
Subject to its investment limitations, the Fund may borrow to finance the
repurchase of common shares or to make a tender offer. Interest on any
borrowings to finance share repurchase transactions or the accumulation of cash
by the Fund in anticipation of share repurchases or tenders will reduce the
Fund's net income. Any share repurchase, tender offer or borrowing that might be
approved by the Board would have to comply with the Exchange Act and the 1940
Act and the rules and regulations under each of those Acts.
Although the decision to take action in response to a Discount will be made by
the Board at the time it considers such issue, it is the Board's present policy,
which may be changed by the Board, not to authorize repurchases of common shares
or a tender offer for such shares if (1) such transactions, if consummated,
would (a) result in the delisting of the common shares from the NYSE, or (b)
impair the Fund's status as a regulated investment company under the Code (which
would make the Fund a taxable entity, causing the Fund's income to be taxed at
the corporate level in addition to the taxation of shareholders who receive
dividends from the Fund) or as a registered closed-end investment company under
the 1940 Act; (2) the Fund would not be able to liquidate portfolio securities
in an orderly manner and consistent with the Fund's investment objective and
policies in order to repurchase shares; or (3) there is, in the Board's
judgment, any (a) material legal action or proceeding instituted or threatened
challenging such transactions or otherwise materially adversely affecting the
Fund, (b) general suspension of or limitation on prices for trading securities
on the NYSE, (c) declaration of a banking moratorium by Federal or state
authorities or any suspension of payment by U.S. banks in which the Fund
invests, (d) material limitation affecting the Fund or the issuers of its
portfolio securities by Federal or state authorities on the extension of credit
by lending institutions or on the exchange of foreign currency, (e) commencement
of war, armed hostilities or other international or national calamity directly
or indirectly involving the United States, or (f) other event or condition which
would have a material adverse effect (including any adverse tax effect) on the
Fund or its shareholders if shares were repurchased. The Board may in the future
modify these conditions in light of experience.
The repurchase by the Fund of its common shares at prices below net asset value
will result in an increase in the net asset value of those shares that remain
outstanding. However, there can be no assurance that share repurchases or
tenders at or below net asset value will result in the Fund's common shares
trading at a price equal to their net asset value. Nevertheless, the fact that
the Fund's shares may be the subject of repurchase or tender offers at net asset
value from time to time, or that the Fund may be converted to an open-end
company, may be helpful in reducing any spread between market price and net
asset value that might otherwise exist.
In addition, a purchase by the Fund of its common shares will decrease the
Fund's total assets, which would likely have the effect of increasing the Fund's
expense ratio. Any purchase by the Fund of its common shares at a time when
preferred shares are outstanding will increase the leverage applicable to the
outstanding common shares then remaining and decrease the asset coverage of the
preferred shares.
Before deciding whether to take any action if the common shares trade below net
asset value, the Board would likely consider all relevant factors, including the
extent and duration of the Discount, the liquidity of the Fund's portfolio, the
impact of any action that might be taken on the Fund or its shareholders and
market considerations. Based on these considerations, even if the Fund's shares
should trade at a Discount, the Board may determine that, in the interest of the
Fund and its shareholders, no action should be taken.
FEDERAL INCOME TAX MATTERS
The following is a summary discussion of certain U.S. federal income tax
consequences that may be relevant to a shareholder acquiring, holding and
disposing of Preferred Shares of the Fund. This discussion addresses only U.S.
federal income tax consequences to U.S. shareholders who hold their shares as
capital assets and does not address all of the U.S. federal income tax
consequences that may be relevant to particular shareholders in light of their
individual circumstances. This discussion also does not address the tax
consequences to shareholders that are subject to special rules, including,
without limitation, banks and financial institutions, insurance companies,
dealers in securities or foreign currencies, foreign shareholders, tax-exempt or
tax-deferred plans, accounts, or entities, or investors who engage in
constructive sale or conversion transactions. In addition, the discussion does
not address state, local or foreign tax consequences, and it does not address
any tax consequences other than U.S. federal income tax consequences. The
discussion reflects applicable tax laws of the United States as of the date of
this Statement of Additional Information, which tax laws may be changed or
subject to new interpretations by the courts, Treasury or the Internal Revenue
Service (the "IRS") retroactively or prospectively. No attempt is made to
present a detailed explanation of all U.S. federal income tax concerns affecting
the Fund or its shareholders, and the discussion set forth herein does not
constitute tax advice. Investors are urged to consult their own tax advisers to
determine the specific tax consequences to them of investing in the Fund,
including the applicable federal, state, local and foreign tax consequences to
them and the effect of possible changes in tax laws.
As required by U.S. Treasury Regulations governing tax practice, you are hereby
advised that any written tax advice contained herein was not written or intended
to be used (and cannot be used) by any taxpayer for the purpose of avoiding
penalties that may be imposed under the Code.
The advice was prepared to support the promotion or marketing of the
transactions or matters addressed by the written advice.
Any person reviewing this discussion should seek advice based on such person's
particular circumstances from an independent tax adviser.
The Fund has qualified and elected to be treated each year as a "regulated
investment company" under Subchapter M of the Code and to comply with applicable
distribution requirements so that it generally will not pay U.S. federal income
tax on income of the Fund, including net capital gains, distributed to
shareholders. In order to qualify as a regulated investment company under
Subchapter M of the Code, which qualification this discussion assumes, the Fund
must, among other things, derive at least 90% of its gross income for each
taxable year from dividends, interest, payments with respect to securities
loans, gains from the sale or other disposition of stock, securities or foreign
currencies, or other income (including gains from options, futures and forward
contracts) derived with respect to its business of investing in such stock,
securities or currencies (the "90% income test"). In addition to satisfying the
requirements described above, the Fund must satisfy an asset diversification
test in order to qualify as a regulated investment company. Under this test, at
close of each quarter of the Fund's taxable year, at least 50% of the value of
the Fund's assets must consist of cash and cash items (including receivables),
U.S. Government securities, securities of other regulated investment companies,
and securities of other issuers (as to which the Fund must not have invested
more than 5% of the value of the Fund's total assets in securities of any one
such issuer and as to which the Fund must not have held more than 10% of the
outstanding voting securities of any one such issuer), and no more than 25% of
the value of its total assets may be invested in the securities (other than U.S.
Government securities and securities of other regulated investment companies) of
any one issuer, or of two or more issuers which the Fund controls and which are
engaged in the same or similar or related trades or businesses.
The American Jobs Creation Act of 2004 (the "2004 Tax Act"), which the President
recently signed into law, provides that for taxable years of a regulated
investment company beginning after October 22, 2004, net income derived from an
interest in a "qualified publicly traded partnership," as defined in the Code,
will be treated as qualifying income for purposes of the 90% income test, and
for the purposes of the diversification requirements described above, the
outstanding voting securities of any issuer includes the equity securities of a
qualified publicly traded partnership and no more than 25% of the value of a
regulated investment company's total assets may be invested in the securities of
one or more qualified publicly traded partnerships. In addition, the separate
treatment for publicly traded partnerships under the passive loss rules of the
Code applies to a regulated investment company holding an interest in a
qualified publicly traded partnership, with respect to items attributable to
such interest.
If the Fund qualifies as a regulated investment company and, for each taxable
year, it distributes to its shareholders an amount equal to or exceeding the sum
of (i) 90% of its "investment company taxable income" as that term is defined in
the Code (which includes, among other things, dividends, taxable interest, and
the excess of any net short-term capital gains over net long-term capital
losses, as reduced by certain deductible expenses) and (ii) 90% of the excess of
its gross tax-exempt interest, if any, over certain disallowed deductions, the
Fund generally will not be subject to U.S. federal income tax on any income of
the Fund, including "net capital gain" (the excess of net long-term capital gain
over net short-term capital loss), distributed to shareholders. However, if the
Fund has met such distribution requirements but chooses not to distribute some
portion of its investment company taxable income or net capital gain, it
generally will be subject to U.S. federal income tax at regular corporate rates
on the amount retained. The Fund intends to distribute at least annually all or
substantially all of its investment company taxable income, net tax-exempt
interest, and net capital gain. If for any taxable year the Fund did not qualify
as a regulated investment company, it would be treated as a corporation subject
to U.S. federal income tax and all distributions out of earnings and profits
would be taxed to shareholders as ordinary income. In addition, the Fund could
be required to recognize unrealized gains, pay taxes and make distributions
(which could be subject to interest charges) before requalifying as a regulated
investment company.
Under the Code, the Fund will be subject to a nondeductible 4% U.S. federal
excise tax on a portion of its undistributed taxable ordinary income and capital
gains if it fails to meet certain distribution requirements with respect to each
calendar year. The Fund intends to make distributions in a timely manner and
accordingly does not expect to be subject to the excise tax, but as described
below, there can be no assurance that the Fund's distributions will be
sufficient to avoid entirely this tax.
Based in part on the lack of any present intention on the part of the Fund to
redeem or purchase the Preferred Shares at any time in the future, the Fund
intends to take the position that under present law the Preferred Shares will
constitute stock of the Fund and distributions with respect to the Preferred
Shares (other than distributions in redemption of the Preferred Shares that are
treated as exchanges under Section 302(b) of the Code) will constitute dividends
to the extent of the Fund's current or accumulated earnings and profits as
calculated for U.S. federal income tax purposes. This view relies in part on a
published ruling of the IRS stating that certain preferred stock, similar in
many material respects to the Preferred Shares, represents equity. It is
possible, however, that the IRS might take a contrary position asserting, for
example, that the Preferred Shares constitute debt of the Fund. If this position
were upheld, the discussion of the treatment of distributions below would not
apply. Instead distributions by the Fund to holders of Preferred Shares would
constitute interest, whether or not such distributions exceeded the earnings and
profits of the Fund, would be included in the income of the recipient, and would
be taxed as ordinary income.
In general, assuming that the Fund has sufficient earnings and profits,
dividends from investment company taxable income are taxable as ordinary income
and distributions from net capital gain, if any, that are designated as capital
gain dividends are taxable as long-term capital gains for U.S. federal income
tax purposes without regard to the length of time the shareholder has held
shares of the Fund. Since the Fund's income is derived primarily from interest,
dividends of the Fund from its investment company taxable income generally will
not constitute "qualified dividend income" for federal income tax purposes and
thus will not be eligible for the favorable federal long-term capital gain tax
rates on qualified dividend income. In addition, the Fund's dividends are not
expected to qualify for any dividends-received deduction that might otherwise be
available for certain dividends received by shareholders that are corporations.
Capital gain dividends distributed by the Fund to individual shareholders
generally will qualify for the maximum 15% U.S. federal tax rate on long-term
capital gains. Under current law, the maximum 15% U.S. federal tax rate on
qualified dividend income and long-term capital gains will cease to apply to
taxable years beginning after December 31, 2008.
Distributions by the Fund in excess of the Fund's current and accumulated
earnings and profits will be treated as a return of capital to the extent of
(and in reduction of) the shareholder's tax basis in its shares and any such
amount in excess of that basis will be treated as gain from the sale of shares,
as discussed below. The U.S. federal income tax status of all distributions will
be reported to shareholders annually. If the Fund retains any net capital gain
for a taxable year, the Fund may designate the retained amount as undistributed
capital gains in a notice to shareholders who, if subject to U.S. federal income
tax on long-term capital gains, (i) will be required to include in income for
U.S. federal income tax purposes, as long-term capital gain, their proportionate
shares of such undistributed amount, and (ii) will be entitled to credit their
proportionate shares of the tax paid by the Fund on the undistributed amount
against their U.S. federal income tax liabilities, if any, and to claim refunds
to the extent the credit exceeds such liabilities.
Although dividends generally will be treated as distributed when paid, any
dividend declared by the Fund as of a record date in October, November or
December and paid during the following January will be treated for U.S. federal
income tax purposes as received by shareholders on December 31 of the calendar
year in which it is declared. In addition, certain other distributions made
after the close of a taxable year of the Fund may be "spilled back" and treated
as paid by the Fund (except for purposes of the 4% excise tax) during such
taxable year. In such case, shareholders generally will be treated as having
received such dividends in the taxable year in which the distributions were
actually made.
If the Fund invests in certain pay-in-kind securities, zero coupon securities,
deferred interest securities or, in general, any other securities with original
issue discount (or with market discount if the Fund elects to include market
discount in income currently), the Fund generally must accrue income on such
investments for each taxable year, which generally will be prior to the receipt
of the corresponding cash payments. However, the Fund must distribute, at least
annually, all or substantially all of its investment company taxable income and
net tax-exempt interest, including such accrued income, to shareholders to
qualify as a regulated investment company under the Code and avoid U.S. federal
income and excise taxes. Therefore, the Fund may have to dispose of its
portfolio securities under disadvantageous circumstances to generate cash, or
may have to borrow the cash, to satisfy distribution requirements.
The Fund may invest significantly in debt obligations that are in the lowest
rating categories or are unrated, including debt obligations of issuers not
currently paying interest or who are in default. Investments in debt obligations
that are at risk of or in default present special tax issues for the Fund. Tax
rules are not entirely clear about issues such as when the Fund may cease to
accrue interest, original issue discount or market discount, when and to what
extent deductions may be taken for bad debts or worthless securities, how
payments received on obligations in default should be allocated between
principal and income and whether exchanges of debt obligations in a workout
context are taxable. These and other issues will be addressed by the Fund, in
the event it invests in such securities, in order to seek to ensure that it
distributes sufficient income to preserve its status as a regulated investment
company and does not become subject to U.S. federal income or excise tax.
If the Fund utilizes leverage through borrowing or issuing preferred shares, a
failure by the Fund to meet the asset coverage requirements imposed by the 1940
Act or by any rating organization that has rated such leverage, or additional
restrictions that may be imposed by certain lenders on the payment of dividends
or distributions potentially could limit or suspend the Fund's ability to make
distributions on its common shares. Such a limitation or suspension or
limitation could prevent the Fund from distributing at least 90% of its
investment company taxable income and net tax-exempt interest as is required
under the Code and therefore might jeopardize the Fund's qualification for
taxation as a regulated investment company under the Code and/or might subject
the Fund to the 4% excise tax discussed above. Upon any failure to meet such
asset coverage requirements, the Fund may, in its sole discretion, purchase or
redeem shares of preferred stock in order to maintain or restore the requisite
asset coverage and avoid the adverse consequences to the Fund and its
shareholders of failing to satisfy the distribution requirement. There can be no
assurance, however, that any such action would achieve these objectives. The
Fund will endeavor to avoid restrictions on its ability to distribute dividends.
For U.S. federal income tax purposes, the Fund is permitted to carry forward an
unused net capital loss for any year to offset its capital gains, if any, for up
to eight years following the year of the loss. To the extent subsequent capital
gains are offset by such losses, they would not result in U.S. federal income
tax liability to the Fund and are not expected to be distributed as such to
shareholders.
At the time of an investor's purchase of Fund shares, a portion of the purchase
price may be attributable to realized or unrealized appreciation in the Fund's
portfolio or undistributed taxable income of the Fund. Consequently, subsequent
distributions by the Fund with respect to these shares from such appreciation or
income may be taxable to such investor even if the trading value of the
investor's shares is, as a result of the distributions, reduced below the
investor's cost for such shares and the distributions economically represent a
return of a portion of the investment.
Foreign exchange gains and losses realized by the Fund in connection with
certain transactions involving foreign currency-denominated debt securities,
certain options and futures contracts relating to foreign currency, foreign
currency forward contracts, foreign currencies, or payables or receivables
denominated in a foreign currency are subject to Section 988 of the Code, which
generally causes such gains and losses to be treated as ordinary income and
losses and may affect the amount, timing and character of distributions to
shareholders. Under Treasury regulations that may be promulgated in the future,
any gains from such transactions that are not directly related to the Fund's
principal business of investing in stock or securities (or its options contracts
or futures contracts with respect to stock or securities) may have to be limited
in order to enable the Fund to satisfy the 90% income test. If the net foreign
exchange loss for a year were to exceed the Fund's investment company taxable
income (computed without regard to such loss), the resulting ordinary loss for
such year would not be deductible by the Fund or its shareholders in future
years.
Sales and other dispositions of Fund shares are taxable events for shareholders
that are subject to tax. Shareholders should consult their own tax advisers with
reference to their individual circumstances to determine whether any particular
transaction in Fund shares is properly treated as a sale for tax purposes, as
the following discussion assumes, and the tax treatment of any gains or losses
recognized in such transactions. In general, if Fund shares are sold, the
shareholder will recognize gain or loss equal to the difference between the
amount realized on the sale and the shareholder's adjusted tax basis in the
shares sold. Such gain or loss will be treated as long-term capital gain or loss
if the shares sold were held for more than one year and otherwise generally will
be treated as short-term capital gain or loss. Any loss realized by a
shareholder upon the sale or other disposition of shares with a tax holding
period of six months or less will be treated as a long-term capital loss to the
extent of any amounts treated as distributions of long-term capital gains with
respect to such shares. Losses on sales or other dispositions of shares may be
disallowed under "wash sale" rules in the event substantially identical shares
of the Fund are purchased (including those made pursuant to reinvestment of
dividends and/or capital gains distributions) within a period of 61 days
beginning 30 days before and ending 30 days after a redemption or other
disposition of shares. In such a case, the disallowed portion of any loss
generally would be included in the U.S. federal tax basis of the shares acquired
in the other investments. The ability to otherwise deduct capital losses may be
subject to other limitations under the Code.
The Fund may, at its option, redeem the Preferred Shares in whole or in part
subject to certain limitations and to the extent permitted under applicable law,
and is required to redeem all or a portion of the Preferred Shares to the extent
required to maintain the Preferred Shares Basic Maintenance Amount (as defined
in the Prospectus) and the 1940 Act Preferred Share Asset Coverage (as defined
in the Prospectus). Gain or loss, if any, resulting from a redemption of
Preferred Shares generally will be taxed as gain or loss from the sale of
Preferred Shares under Section 302 of the Code rather than as a dividend, but
only if the redemption distribution (a) is deemed not to be essentially
equivalent to a dividend, (b) is in complete redemption of a shareholder's
interest in the Fund, (c) is substantially disproportionate with respect to the
shareholder, or (d) with respect to a non-corporate shareholder, is in partial
liquidation of the shareholder's interest in the Fund. For the purposes of (a),
(b), and (c) above, a shareholder's ownership of common shares and Preferred
Shares will be taken into account and the common shares and Preferred Shares
held by persons who are related to the redeemed shareholder may also have to be
taken into account. If none of the conditions (a) through (d) are met, the
redemption proceeds may be considered to be a dividend distribution taxable as
ordinary income as discussed above. In addition, any declared but unpaid
dividends distributed to shareholders in connection with a redemption will be
taxable to shareholders as dividends as described above.
Under Treasury regulations, if a shareholder recognizes a loss with respect to
shares of $2 million or more for an individual shareholder, or $10 million or
more for a corporate shareholder, in any single taxable year (or a greater
amount over a combination of years), the shareholder must file with the IRS a
disclosure statement on Form 8886. Shareholders who own portfolio securities
directly are in many cases excepted from this reporting requirement but, under
current guidance, shareholders of regulated investment companies are not
excepted. A shareholder who fails to make the required disclosure to the IRS may
be subject to substantial penalties. The fact that a loss is reportable under
these regulations does not affect the legal determination of whether or not the
taxpayer's treatment of the loss is proper. Shareholders should consult with
their tax advisers to determine the applicability of these regulations in light
of their individual circumstances. Options written or purchased and futures
contracts entered into by the Fund on certain securities, indices and foreign
currencies, as well as certain forward foreign currency contracts, may cause the
Fund to recognize gains or losses from marking-to-market even though such
options may not have lapsed, been closed out, or exercised, or such futures and
forward contracts may not have been performed or closed out. The tax rules
applicable to these contracts may affect the characterization of some capital
gains and losses realized by the Fund as long-term or short-term. Certain
options, futures and forward contracts relating to foreign currencies may be
subject to Section 988, as described above, and accordingly may produce ordinary
income or loss. Additionally, the Fund may be required to recognize gain if an
option, futures contract, short sale or other transaction that is not subject to
the mark-to-market rules is treated as a "constructive sale" of an "appreciated
financial position" held by the Fund under Section 1259 of the Code. Any net
mark-to-market gains and/or gains from constructive sales may also have to be
distributed to satisfy the distribution requirements referred to above even
though the Fund may receive no corresponding cash amounts, possibly requiring
the disposition of portfolio securities or borrowing to obtain the necessary
cash. Losses on certain options, futures or forward contracts and/or offsetting
positions (portfolio securities or other positions with respect to which the
Fund's risk of loss is substantially diminished by one or more options, futures
or forward contracts) may also be deferred under the tax straddle rules of the
Code, which may also affect the characterization of capital gains or losses from
straddle positions and certain successor positions as long-term or short-term.
Certain tax elections may be available that would enable the Fund to ameliorate
some adverse effects of the tax rules described in this paragraph. The tax rules
applicable to options, futures, forward contracts and straddles may affect the
amount, timing and character of the Fund's income and gains or losses and hence
of its distributions to shareholders.
The federal income tax treatment of the Fund's investment in transactions
involving swaps, caps, floors, and collars and structured securities is
uncertain and may be subject to recharacterization by the IRS. To the extent the
tax treatment of such securities or transactions differs from the tax treatment
expected by the Fund, the timing or character of income recognized by the Fund
could be affected, requiring the Fund to purchase or sell securities, or
otherwise change its portfolio, in order to comply with the tax rules applicable
to regulated investment companies under the Code.
The IRS has taken the position that if a regulated investment company has two
classes or more of shares, it must designate distributions made to each class in
any year as consisting of no more than such class's proportionate share of
particular types of income, including ordinary income and net capital gain. A
class's proportionate share of a particular type of income is determined
according to the percentage of total dividends paid by the regulated investment
company to such class. Consequently, if both common shares and Preferred Shares
are outstanding, the Fund intends to designate distributions made to the classes
of particular types of income in accordance with the classes' proportionate
shares of such income. Thus, the Fund will designate dividends constituting
capital gain dividends and other taxable dividends in a manner that allocates
such income between the holders of common shares and Preferred Shares in
proportion to the total dividends paid to each class during the taxable year, or
otherwise as required by applicable law.
The Fund may be subject to withholding and other taxes imposed by foreign
countries, including taxes on interest, dividends and capital gains with respect
to its investments in those countries, which would, if imposed, reduce the yield
on or return from those investments. Tax conventions between certain countries
and the U.S. may reduce or eliminate such taxes in some cases. The Fund does not
expect to satisfy the requirements for passing through to its shareholders their
pro rata shares of qualified foreign taxes paid by the Fund, with the general
result that shareholders would not be entitled to any deduction or credit for
such taxes on their own tax returns.
Federal law requires that the Fund withhold (as "backup withholding") 28% of
reportable payments, including dividends, capital gain distributions and the
proceeds of redemptions and exchanges or repurchases of Fund shares, paid to
shareholders who have not complied with IRS regulations. In order to avoid this
withholding requirement, shareholders must certify on their Account
Applications, or on separate IRS Forms W-9, that the Social Security Number or
other Taxpayer Identification Number they provide is their correct number and
that they are not currently subject to backup withholding, or that they are
exempt from backup withholding. The Fund may nevertheless be required to
withhold if it receives notice from the IRS or a broker that the number provided
is incorrect or backup withholding is applicable as a result of previous
underreporting of interest or dividend income.
The description of certain U.S. federal tax provisions above relates only to
U.S. federal income tax consequences for shareholders who are U.S. persons,
i.e., U.S. citizens or residents or U.S. corporations, partnerships, trusts or
estates, and who are subject to U.S. federal income tax. Investors other than
U.S. persons may be subject to different U.S. tax treatment, including a
non-resident alien U.S. withholding tax at the rate of 30% or at a lower treaty
rate on amounts treated as ordinary dividends from the Fund and, unless an
effective IRS Form W-8BEN or other authorized withholding certificate is on
file, to backup withholding at the rate of 28% on certain other payments from
the Fund. Under the provisions the 2004 Tax Act, dividends paid by the Fund to
non-U.S. shareholders that are derived from short-term capital gains and
qualifying net interest income (including income from original issue discount
and market discount), and that are properly designated by the Fund as
"interest-related dividends" or "short-term capital gain dividends," will
generally not be subject to U.S. withholding tax, provided that the income would
not be subject to federal income tax if earned directly by the non-U.S.
shareholder. In addition, pursuant to the 2004 Tax Act, distributions of the
Fund attributable to gains from sales or exchanges of "U.S. real property
interests" (as defined in the Code and regulations) (including certain U.S. real
property holding corporations) will generally be subject to U.S. withholding tax
and may give rise to an obligation on the part of the non-U.S. shareholder to
file a United States tax return. The provisions contained in the 2004 Tax Act
relating to distributions to shareholders who are non-U.S. persons generally
will apply to distributions with respect to taxable years of the Fund beginning
after December 31, 2004 and before January 1, 2008. Shareholders should consult
their own tax advisers on these matters and on state, local, foreign and other
applicable tax laws.
PERFORMANCE-RELATED, COMPARATIVE AND OTHER INFORMATION
PERFORMANCE-RELATED INFORMATION. From time to time, in advertisements, sales
literature or reports to shareholders, the past performance of the Fund may be
illustrated and/or compared with that of other investment companies with similar
investment objectives. For example, yield or total return of the Fund's shares
may be compared to averages or rankings prepared by Lipper, Inc., a widely
recognized independent service which monitors mutual fund performance; the S&P
500 Index; the Dow Jones Industrial Average; or other comparable indices or
investment vehicles. In addition, the performance of the Fund's shares may be
compared to alternative investment or savings vehicles and/or to indices or
indicators of economic activity, e.g., inflation or interest rates. The Fund may
also include securities industry or comparative performance information
generally and in advertising or materials marketing the Fund's shares.
Performance rankings and listings reported in newspapers or national business
and financial publications, such as Barron's, Business Week, Consumers Digest,
Consumer Reports, Financial World, Forbes, Fortune, Investors Business Daily,
Kiplinger's Personal Finance Magazine, Money Magazine, New York Times, Smart
Money, USA Today, U.S. News and World Report, The Wall Street Journal and Worth,
may also be cited (if the Fund is listed in any such publication) or used for
comparison, as well as performance listings and rankings from various other
sources including Bloomberg Financial Markets, CDA/Wiesenberger, Donoghue's
Mutual Fund Almanac, Ibbotson Associates, Investment Company Data, Inc.,
Johnson's Charts, Kanon Bloch Carre and Co., Lipper, Inc., Micropal, Inc.,
Morningstar, Inc., Schabacker Investment Management and Towers Data Systems,
Inc. In addition, from time to time, quotations from articles from financial
publications such as those listed above may be used in advertisements, in sales
literature or in reports to shareholders of the Fund. The Fund may also present,
from time to time, historical information depicting the value of a hypothetical
account in one or more classes of the Fund since inception.
Past performance is not indicative of future results. At any time in the future,
yields and total return may be higher or lower than past yields and total
return, and there can be no assurance that any historical results will continue.
THE ADVISERS. From time to time, the Advisers may use, in advertisements or
information furnished to present or prospective shareholders, information
regarding the Advisers including, without limitation, information regarding
their investment style, countries of operation, organization, professional
staff, clients (including other registered investment companies), assets under
management and performance record. These materials may refer to opinions or
rankings of the Advisers' overall investment management performance contained in
third-party reports or publications.
FINANCIAL STATEMENTS
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM. The statements of assets and
liabilities and operations of the Fund as of November 30, 2004, incorporated by
reference into this Statement of Additional Information have been audited by
______________ ("_____"), the Fund's independent registered public accounting
firm, as set forth in its report thereon appearing elsewhere herein, and is
included in reliance upon such report given upon the authority of such firm as
experts in accounting and auditing. _____, located at ___________________, has
served as the Fund's independent registered public accounting firm since January
23, 2002, and has been selected to serve in such capacity for the Fund's fiscal
year ending November 30, 2005. The financial statements and report of
independent registered public accounting firm incorporated by reference into
this Statement of Additional Information have been so incorporated and the
financial highlights included in the prospectus have been so included in
reliance upon the report of ________ given on their authority as experts in
auditing and accounting.
INCORPORATION BY REFERENCE. The Fund's audited Portfolio of Investments and
Statement of Assets and Liabilities dated November 30, 2004; audited Statement
of Operations and Statement of Changes in Net Assets for the year ended November
30, 2004; and report of the independent registered public accounting firm for
the year ended November 30, 2004, are included in the Fund's Annual Report for
the fiscal year ended November 30, 2004, and incorporated herein by reference.
The Fund's unaudited Portfolio of Investments and Statement of Assets and
Liabilities dated May 31, 2005 and the unaudited Statement of Operations and
Statement of Changes in Net Assets for the six months ended May 31, 2005, are
included in the Fund's Semi-Annual Report for the six months ended May 31, 2005,
and incorporated herein by reference You may request a free copy of this
Statement of Additional Information or the Fund's annual and semi-annual
reports, request other information about the Fund, or make shareholder inquiries
by calling (800) 331-1710 or by writing to the Fund. This Statement of
Additional Information and annual and semi-annual reports are also available
free of charge on the Fund's website (http://www.boulderfunds.net) and on the
Securities and Exchange Commission's website (http://www.sec.gov), which also
contains other information about the Fund. You may also email requests for these
documents to publicinfo@sec.gov or make a request in writing to the Securities
and Exchange Commission's Public Reference Section, Washington, D.C. 20549-0102.
The Fund's registration number under the 1940 Act is 811-02328.
ADDITIONAL INFORMATION
A Registration Statement on Form N-2, including amendments thereto, relating to
the shares offered hereby, has been filed by the Fund with the Securities and
Exchange Commission, Washington, D.C. The prospectus and this Statement of
Additional Information do not contain all of the information set forth in the
Registration Statement, including any exhibits and schedules thereto. For
further information with respect to the Fund and the shares offered hereby,
reference is made to the Registration Statement. Statements contained in the
prospectus and this Statement of Additional Information as to the contents of
any contract or other document referred to are not necessarily complete and in
each instance reference is made to the copy of such contract or other document
filed as an exhibit to the Registration Statement, each such statement being
qualified in all respects by such reference.
Part C. Other Information.
Item 24. Financial Statements and Exhibits
1. Financial Statements:
a. Financial Statements included in Part A (Prospectus) of this
Registration Statement:
i. Financial highlights for each of the five years ended 2000, 2001,
2002, 2003, 2004 (1)
b. Financial Statements included in Part B (Statement of Additional
Information) of this Registration Statement.
i. Report of Independent Accountants (2)
ii. Statement of assets and liabilities as of November 30, 2004 (2)
iii. Statement of operations for the year ended November 30, 2004 (2)
iv. Statement of cash flows for the year ended November 30, 2004 (2)
v. Statement of changes in net assets for each of the years ended
November 30, 2004 and 2003 (2)
vi. Schedule of Investments as of November 30, 2004 (2)
2. Exhibits
a. Fund's Charter
i. Articles of Incorporation of the Fund (3)
ii. Articles of Amendment dated October 9, 1991 (3)
iii. Articles of Amendment dated November 24, 1998 (3)
iv. Articles Supplementary dated January 27, 2000 (3)
v. Articles of Amendment dated April 26, 2002 (3)
vi. Articles of Amendment dated October 21, 2002 (3)
vii. Articles of Amendment dated October 23, 2002 (3)
viii. Articles Supplementary dated April 8, 2004 (4)
ix. Articles of Amendment dated May 18, 2004 (4)
x. Articles of Amendment and Restatement dated May 18, 2004 (4)
xi. Articles of Amendment dated April 25, 2005 (4)
xii. Articles Supplementary Creating and Fixing the Rights of
Preferred Stock (5)
b. Amended and Restated By-laws of the Fund (4)
c. Not applicable
d. Specimen share certificates (5)
e. Dividend Reinvestment Plan (4)
f. Not applicable
g. Investment Advisory Agreements
i. Investment Co-Advisory Agreement between the Fund and Boulder
Investment Advisers, L.L.C. ("BIA") (3)
ii. Investment Co-Advisory Agreement between the Fund and Stewart
West Indies Trading Company, Ltd. d/b/a Stewart Investment
Advisers ("SIA") (3)
h. Purchase Agreement among the Fund, BIA and the Underwriters (5)
i. Deferred Compensation Plan of Kalman J. Cohen, Director. (3)
j. Custody Agreement between the Fund and Investors Bank & Trust Company
(4)
k. Other Agreements
i. Transfer Agency Agreement between the Fund and PFPC, Inc. (4)
ii. Administration Agreement between the Fund and Fund Administrative
Services, LLC. (4)
iii. Amendment to Administration Agreement between the Fund and Fund
Administrative Services, LLC. (4)
iv. Administration Agreement between the Fund and Investors Bank &
Trust Company (4)
v. Collateral Securities Account Agreement (4)
vi. Loan and Pledge Agreement between the Fund and Custodial Trust
Company (4)
vii. Delegation Agreement between the Fund and Investors Bank & Trust
Company (4)
viii. Auction Agency Agreement between the Fund and Deutsche Bank
Trust Company Americas (5)
ix. Broker-Dealer Agreement between the Fund and
_____________________. (5)
l. Opinions of Counsel
i. Opinion and consent of Paul Hastings Janofsky & Walter (5)
ii. Opinion and consent of Venable, Baetjer and Howard, LLP (5)
m. Consents to Service of Process
i. Consent to Service of Process with respect to Dennis Causier, an
independent director of the Fund (5)
ii. Consent to Service of Process with respect to SIA (3)
n. Consent of __________ (5)
o. Not applicable
p. Initial Share Purchase Agreement (5)
q. Not applicable
r. Code of Ethics of the Fund, BIA and SIA (4)
s. Power of Attorney (4)
(1) Incorporated herein by reference to the Registrant's Form N-CSR filed on
__________, 2005 for six months ending May 31, 2005.
(2) Incorporated herein by reference to the Registrant's Form N-CSR filed on
February 8, 2005 for year ending November 30, 2004.
(3) Incorporated hereby by reference to Amendment No. 8 to the Registration
Statement on Form N-2/A of the Registrant filed on November 20, 2002
(Securities Act File No. 33-100634; EDGAR Accession Number
0000950117-02-002800.
(4) Filed herewith.
(5) To be filed by amendment.
Item 26. Marketing Arrangements. Reference is made to the Purchase Agreement for
the Fund's preferred shares to be filed by amendment to this Registration
Statement.
Item 27. Other Expenses of Issuance and Distribution. The Fund expects to incur
approximately $_________ of expenses in connection with the Offering. The
following table identifies the significant expenses associated with the
Offering.
Registration Fees $
Printing Costs (other than certificates) $
Accounting Fees and Expenses $
Legal Fees and Expenses $
Rating Agency Fees $
Miscellaneous $
TOTAL ESTIMATED COSTS $
Item 28. Persons controlled by or under common control with the Fund. The Ernest
Horejsi Trust No. 1B (the "EH Trust") is the Fund's largest shareholder and has
asserted the existence of control with respect to the Fund. Together with other
trusts and entities affiliated with the Horejsi family (collectively, the
"Horejsi Affiliates"), the EH Trust has asserted control with respect to two
other investment companies, the Boulder Total Return Fund, Inc. and the First
Financial Fund, Inc. The Horejsi Affiliates also own the Advisers and FAS, the
Fund's co-administrator. The following table shows the relationship of each of
the related companies to the Fund and each company's ownership by the Horejsi
Affiliates.
Principal Shareholder(s)/Equity Percentage of shares
Holder(s) directly held in the
respective company as
of June 30, 2005
The Fund EH Trust [21%]
Boulder Total Return Fund, Inc. NYSE: BTF EH Trust [27.66%]
Lola Brown Trust No. 1B [11.11%]
Evergreen Atlantic LLC [2.79%]
Susan L. Ciciora Trust [1.42%]
John S. Horejsi Trust [0.85%]
Evergreen Trust [0.51%]
First Financial Fund, Inc. NYSE: FF Stewart R. Horejsi Trust No. 2A [7.36%]
EH Trust [7.50%]
Lola Brown Trust No. 1B [10.18%]
Mildred Horejsi Trust [8.34%]
Susan L. Ciciora Trust [5.90%]
Boulder Investment Advisers, LLC Lola Brown Trust No. 1B 50%
Evergreen Atlantic LLC 50%
Stewart West Indies Trading Company, Ltd. doing business as Stewart West Indies Trust 100%
Stewart Investment Advisers
Fund Administrative Services, LLC Lola Brown Trust No. 1B 50%
Evergreen Atlantic LLC 50%
The EH Trust was established by Ernest Horejsi, Stewart Horejsi's father, in
1966. It is an irrevocable grantor trust formed in Kansas but now domiciled in
Alaska. The Lola Brown Trust No. 1B was established by Lola Brown, the
grandmother of Stewart Horejsi, in 1967. It is an irrevocable grantor trust
formed in Kansas but now domiciled in Alaska. The Susan Ciciora Trust was
established by Susan Ciciora, the daughter of Stewart Horejsi, in 1998. It is an
irrevocable grantor trust formed in South Dakota but now domiciled in Alaska.
The John S. Horejsi Trust was established by John Horejsi, the son of Stewart
Horejsi, in 1998. It is an irrevocable grantor trust formed in South Dakota but
now domiciled in Alaska. The Evergreen Trust was established by Stewart Horejsi
in 1995. It is an irrevocable grantor trust formed in Bermuda but now domiciled
in Alaska. The Stewart R. Horejsi Trust No. 2A was established by Stewart
Horejsi in 1968. It is an irrevocable grantor trust formed in Kansas but now
domiciled in Alaska. The Mildred Horejsi was established by Mildred Horejsi,
Stewart Horejsi's mother, in 1965. It is an irrevocable grantor trust formed in
New York but now domiciled in Alaska. The Stewart West Indies Trust was
established by Stewart Horejsi in 1998. It is an irrevocable grantor trust
formed in South Dakota but now domiciled in Alaska. Evergreen Atlantic LLC is a
Colorado family limited liability company formed in 1995. Its members are the
Evergreen Trust (11%), the Susan Ciciora Trust (30%), the John S. Horejsi Trust
(15%) and the Stewart West Indies Trust (44%).
Item 29. Number of Holders of Shares.
Title of Class Record Holders as of_______, 2005
Common Stock, par value $.01 per share
Item 30. Indemnification. Section 2-418 of the General Corporation Law of the
State of Maryland, Article VIII of the Registrant's Articles of Incorporation
(to be filed as an Exhibit to this Registration Statement), Article 5.2 of the
Registrant's By-laws (to be filed as an Exhibit to this Registration), the
Investment Advisory Agreements (to be filed as Exhibits to this Registration
Statement) provide for indemnification. Insofar as indemnification for
liabilities arising under the Securities Act of 1933 (the "Act") may be
permitted to directors, officers and controlling persons of the Registrant,
pursuant to the foregoing provisions, or otherwise, the Registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
Item 31. Business and Other Connections of the Investment Adviser. Registrant is
fulfilling the requirement of this Item 31 to provide a list of the officers and
directors of its investment advisers, together with information as to any other
business, profession, vocation or employment of a substantial nature engaged in
by that entity or those of its officers and directors during the past two years,
by incorporating herein by reference the information contained in the current
Form ADV filed with the Securities and Exchange Commission by each of BIA (SEC
File No. ________) and SIA (SEC File No. ________) pursuant to the Investment
Advisers Act of 1940, as amended.
Item 32. Location of Accounts and Records.
Fund Administrative Services, L.L.C. Co-Administrator
1680 38th Street (Suite 800)
Boulder, CO 80301
Investors Bank & Trust Company. Co-Administrator
200 Clarendon Street
P.O. Box 9130 Boston, MA 02117
PFPC, Inc. Common Stock Transfer Agent
400 Bellevue Parkway
Wilmington, Delaware 19809
Investors Bank & Trust Company Custodian
200 Clarendon Street
P.O. Box 9130 Boston, MA 02117
Deutsche Bank Trust Company Americas Preferred Stock Transfer Agent
--------------------------
New York, NY
Item 33. Management Services. Not applicable.
Item 34. Undertakings
1. The Registrant hereby undertakes to suspend the offering of the shares
until it amends its Prospectus if (a) subsequent to the effective date
of its Registration Statement, the net asset value declines more than
10 percent from its net asset value as of the effective date of the
Registration Statement or (b) the net asset value increases to an
amount greater than its net proceeds as stated in the Prospectus.
2. Not applicable.
3. Not applicable.
4. Not applicable.
5. The Registrant hereby undertakes that:
a. For the purposes of determining any liability under the
Securities Act of 1933, the information omitted from the form of
prospectus filed as part of a registration statement in reliance
on Rule 430A and contained in the form of prospectus filed by the
Registrant under Rule 497(h) under the Securities Act of 1933
shall be deemed to be part of the Registration Statement as of
the time it was declared effective.
b. For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form
of prospectus shall be deemed to be a new Registration Statement
relating to the securities offered therein, and the offering of
the securities at that time shall be deemed to be the initial
bona fide offering thereof.
6. The Registrant hereby undertakes to send by first class mail or other
means designed to ensure equally prompt delivery, within two business
days of receipt of an oral or written request, any Statement of
Additional Information.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, and the
Investment Company Act of 1940, as amended, the Registrant has duly caused this
Amendment to its Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Boulder and the State of
Colorado, on the 8th day of July, 2005
BOULDER GROWTH & INCOME FUND, INC.
By: /s/ Stephen C. Miller
President