AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 4, 2003
Securities Act File No. 333-_____
Investment Company Act File No. 811-00041
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-2
(Check Appropriate Box or Boxes)
[X] REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
[_] Pre-Effective Amendment No. _________________
[_] Post-Effective Amendment No. ________________
and/or
[X] REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
-----------------------------
GENERAL AMERICAN INVESTORS COMPANY, INC.
(Exact Name of Registrant as Specified in Charter)
-----------------------------
450 Lexington Avenue
Suite 3300
New York, New York 10017
(212) 916-8400
(Address of Principal Executive Offices)
-----------------------------
Eugene L. DeStaebler, Jr.
450 Lexington Avenue
Suite 3300
New York, New York 10017
(212) 916-8400
(Name and Address of Agent for Service)
-----------------------------
Copies to:
John E. Baumgardner, Jr., Esq. Sarah E. Cogan, Esq.
Sullivan & Cromwell LLP Simpson Thacher & Bartlett LLP
125 Broad Street 425 Lexington Avenue
New York, New York 10004 New York, New York 10017
(212) 558-4000 (212) 455-2000
-----------------------------
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 pursuant to Rule 415 under the Securities Act of 1933, other
than securities offered in connection with a dividend reinvestment plan, check
the following box. [_]
It is proposed that this filing will become effective (check appropriate box):
[X] when declared effective pursuant to Section 8(c)
If appropriate, check the following box:
[_] this [post-effective] amendment designates a new effective date for a
previously filed [post-effective amendment] [registration statement].
[_] this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act and the Securities Act
registration statement number of the earlier effective registration statement
for the same offering is _____
---------------------
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
================================================================================================================================
PROPOSED MAXIMUM PROPOSED MAXIMUM
AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF
TITLE OF SECURITIES BEING REGISTERED REGISTERED SHARE PRICE (1) REGISTRATION FEE
================================================================================================================================
__% Cumulative Preferred Stock,
Series B, par value $1.00 per share 4,000,000 $25.00 $100,000,000 $8,090
================================================================================================================================
(1) Estimated solely for the purpose of calculating the registration fee.
---------------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, 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.
GENERAL AMERICAN INVESTORS COMPANY, INC.
CROSS-REFERENCE SHEET
Items in Part A of Form N-2 Location in Prospectus (Caption)
----------------------------------------------------------------------------------------------------------------------
PART A
1. Outside Front Cover................................ Outside Front Cover Page
2. Inside Front and Outside Back Cover Page........... Outside Front Cover Page; Inside Front Cover Page;
Outside Back Cover Page
3. Fee Table and Synopsis............................. Not Applicable
4. Financial Highlights............................... Financial Highlights
5. Plan of Distribution............................... Outside Front Cover Page; Prospectus Summary;
Underwriting
6. Selling Shareholders............................... Not Applicable
7. Use of Proceeds.................................... Prospectus Summary; Use of Proceeds; Investment
Objectives and Policies
8. General Description of the Registrant.............. Outside Front Cover Page; Prospectus Summary; The
Company; Investment Objectives and Policies; Risk
Factors; Description of Series B Preferred Stock
9. Management......................................... Prospectus Summary; Management; Custodian, Transfer
Agent, Registrar and Dividend-Paying Agent
10. Capital Stock, Long-Term Debt, and Other Securities Outside Front Cover Page; Prospectus Summary;
Capitalization; Investment Objectives and Policies;
Description of Series B Preferred Stock; Description of
Capital Stock and Other Securities; Taxation
11. Defaults and Arrears on Senior Securities.......... Not Applicable
12. Legal Proceedings.................................. Not Applicable
13. Table of Contents of the Statement of Additional
Information........................................ Table of Contents of Statement of Additional Information
Items in Part B of Form N-2 Location in Statement of Additional Information
----------------------------------------------------------------------------------------------------------------------
14. Cover Page......................................... Outside Front Cover Page
15. Table of Contents.................................. Outside Front Cover Page
16. General Information and History.................... General Information and History
17. Investment Objectives and Policies................. Investment Objectives and Policies
18. Management......................................... Management of the Company
19. Control Persons and Principal Holders of Securities Management of the Company; Principal Stockholders
20. Investment Advisory and Other Services............. Investment Advisory and Other Services
21. Brokerage Allocation and Other Practices........... Brokerage Allocation and Other Practices, Net Asset
Value
22. Tax Status......................................... Taxation
23. Financial Statements............................... Financial Statements
PART C
Information required to be included in Part C is set forth under the
appropriate item, so numbered, in Part C to this Registration Statement.
RED HERRING TEXT
----------------
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES
IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
================================================================================
SUBJECT TO COMPLETION, DATED _____, 2003
PROSPECTUS
______ SHARES
GENERAL AMERICAN INVESTORS COMPANY, INC.
__% CUMULATIVE PREFERRED STOCK, SERIES B
(LIQUIDATION PREFERENCE $25.00 PER SHARE)
General American Investors Company, Inc. is offering __________ shares
of __% Cumulative Preferred Stock, Series B, par value $1.00 share (liquidation
preference $25.00 per share), which will be senior securities of the Company.
The Company is a closed-end diversified management investment company. The
Company's principal investment objective is long-term capital appreciation.
Lesser emphasis is placed on current income. No assurance can be given, however,
that the Company's investment objectives will be achieved.
Dividends on the Series B Preferred Stock offered hereby will be
cumulative from _________, 2003 at the annual rate of __% of the liquidation
preference of $25.00 per share and will be payable quarterly on _____, _____,
______ and _____ in each year, commencing ________, 2003.
The Series B Preferred Stock may not be issued unless it is rated "Aaa"
by Moody's Investors Service, Inc. In order to keep this rating, the composition
of the Company's portfolio must reflect the guidelines established by Moody's,
and the Company will be required to maintain a minimum discounted asset coverage
ratio with respect to the Series B Preferred Stock. See "Description of Rating
Agency Guidelines--Rating Agency Guidelines." The Company is also required to
maintain the minimum asset coverage by the Investment Company Act of 1940, as
amended.
The Series B Preferred Stock is subject to mandatory redemption in
whole or in part by the Company in the event that the Company fails to maintain
a quarterly asset coverage of at least 200% as required by the 1940 Act or fails
to maintain the discounted asset coverage required by Moody's. Commencing
__________, 2008 and any time thereafter, the Company, at its option, may redeem
the Series B Preferred Stock in whole or in part. Prior to __________, 2008, the
Series B Preferred Stock will be redeemable, at the option of the Company, only
to the extent necessary for the Company to continue to qualify for tax purposes
as a regulated investment company. In the event the Company redeems the Series B
Preferred Stock, the redemption will be for cash, at a redemption price equal to
$25.00 per share plus accumulated but unpaid dividends (whether or not earned or
declared). See "Description of Series B Preferred Stock--Redemption" and
"Description of Rating Agency Guidelines--Redemption."
---------------
The Company intends to apply to list the Series B Preferred Stock on
the New York Stock Exchange. If listed, trading of the Series B Preferred Stock
on the New York Stock Exchange is expected to commence within 30 days of the
date of this prospectus. Prior to the offering, there has been no public market
for the Series B Preferred Stock. See "Underwriting."
---------------
INVESTING IN THE SERIES B PREFERRED STOCK INVOLVES RISKS. SEE "RISK
FACTORS" BEGINNING ON PAGE 17 FOR CERTAIN CONSIDERATIONS RELEVANT TO AN
INVESTMENT IN THE SERIES B PREFERRED STOCK.
---------------
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
--------- -----
Offering Price.............................
Underwriting Discount(1)...................
Proceeds to the Company(2).................
----------------------
(1) The Company has agreed to indemnify the underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended.
(2) Before deducting estimated offering expenses of $_____ payable by the
Company.
The shares of Series B Preferred Stock offered hereby are offered by
the underwriters listed in this prospectus, subject to receipt and acceptance by
them and subject to their right to reject any order in whole or in part. It is
expected that certificates for the shares of Series B Preferred Stock will be
ready for delivery only through the facilities of The Depository Trust Company
in New York, New York on or about ________, 2003 against payment therefor in
immediately available funds.
---------------
CITIGROUP [UNDERWRITER]
The date of this prospectus is __________, 2003.
Certain persons participating in the offering of the Series B Preferred
Stock may engage in transactions that stabilize, maintain or otherwise affect
the market price of the Series B Preferred Stock, including the entry of
stabilizing bids, syndicate covering transactions or the imposition of penalty
bids. See "Underwriting."
This prospectus sets forth important information about the Company you
should know before deciding whether to invest in the Series B Preferred Stock.
You should read this prospectus carefully and retain it for future reference.
Additional information about the Company, including a Statement of
Additional Information, has been filed with the Securities and Exchange
Commission (the "Commission"). You may obtain the Statement of Additional
Information, as well as other material incorporated by reference and other
information regarding the Company, on the Commission's website
(http://www.sec.gov). You may also obtain the Statement of Additional
Information without charge by writing to the Company at its address at 450
Lexington Avenue, Suite 3300, New York, New York 10017, or by calling the
Company at (212) 916-8400 or toll-free at (800) 436-8401. The Statement of
Additional Information is dated the same date as this prospectus and is
incorporated by reference in its entirety. The table of contents of the
Statement of Additional Information appears on page 32 of this prospectus.
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN OR INCORPORATED BY
REFERENCE INTO THIS PROSPECTUS. NEITHER THE COMPANY NOR THE UNDERWRITERS HAVE
AUTHORIZED ANY OTHER PERSON TO PROVIDE YOU WITH DIFFERENT OR INCONSISTENT
INFORMATION. IF ANYONE PROVIDES YOU WITH DIFFERENT OR INCONSISTENT INFORMATION,
YOU SHOULD NOT RELY ON IT. THE COMPANY 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. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO
WHICH IT RELATES. YOU SHOULD ASSUME THAT THE INFORMATION IN THIS PROSPECTUS IS
ACCURATE ONLY AS OF THE DATE ON THE FRONT COVER OF THIS PROSPECTUS.
-----------------------
TABLE OF CONTENTS
PAGE
Prospectus Summary................................................................................................3
Financial Highlights.............................................................................................10
The Company......................................................................................................12
Use of Proceeds..................................................................................................12
Capitalization...................................................................................................13
Portfolio........................................................................................................14
Investment Objectives and Policies...............................................................................15
Management.......................................................................................................17
Risk Factors.....................................................................................................17
Description of Series B Preferred Stock..........................................................................19
Description of Rating Agency Guidelines..........................................................................24
Description of Capital Stock and Other Securities................................................................27
Taxation.........................................................................................................28
Certain Provisions of the Restated Certificate of Incorporation and By-Laws; Anti-Takeover Provisions............29
Custodian, Transfer Agent, Registrar and Dividend-Paying Agent...................................................30
Underwriting.....................................................................................................30
Validity of Series B Preferred Stock.............................................................................31
Experts..........................................................................................................31
Additional Information...........................................................................................31
Table of Contents of Statement of Additional Information.........................................................32
2
PROSPECTUS SUMMARY
This is only a summary. You should review the more detailed information
contained in this prospectus and in the Statement of Additional Information.
The Company.......................... General American Investors Company,
Inc., a Delaware corporation (the
"Company"), has been engaged in
business as a closed-end diversified
management investment company since
October 15, 1928. The Company
succeeded to a similar business
established in 1927. The Company's
outstanding common stock, par value
$1.00 per share, is listed and traded
on the New York Stock Exchange, Inc.
(the "NYSE") under the symbol "GAM."
As of June 30, 2003, the sum of the
net assets of the Company less the
liquidation value of the Company's
outstanding preferred stock
($150,000,000) was approximately
$900,995,376. As of June 30, 2003,
the Company had outstanding
29,882,056 shares of common stock and
6,000,000 shares of 7.20%
Tax-Advantaged Cumulative Preferred
Stock, Series A, par value $1.00 per
share (liquidation preference $25.00
per share) (the "Series A Preferred
Stock"). Pursuant to the Certificate
of Designations, Preferences and
Rights (the "Certificate of
Designations") relating to the Series
A Preferred Stock, the Company may
redeem the Series A Preferred Stock
on each quarterly dividend payment
date on or after June 23, 2003. The
Company intends to redeem all of the
outstanding Series A Preferred Stock
on September 23, 2003. See
"--Condition to Offering" below.
The Offering......................... The Company is offering up to _____
shares of ___% Cumulative Preferred
Stock, Series B, par value $1.00 per
share (liquidation preference $25.00
per share) (the "Series B Preferred
Stock"), at a purchase price of $__
per share.
Investment Objectives and Policies... The primary objective of the Company is
long-term capital appreciation.
Lesser emphasis is placed on current
income. In seeking to achieve its
primary objective, the Company
invests principally in common stocks
believed by management to have
better-than-average growth potential.
No assurance can be given, however,
that the Company's investment
objectives will be achieved. See
"Investment Objectives and Policies."
Portfolio............................ As of June 30, 2003, the net assets
applicable to the Company's common
stock were $900,995,376, of which
$341,758,920 was unrealized
appreciation on investments and
securities sold short. See
"Portfolio."
Management........................... The Board of Directors of the Company
has overall management responsibility
for the Company. Spencer Davidson,
President and Chief Executive Officer
of the Company, manages the Company's
portfolio. See "Management--Portfolio
Management" on page 17 of this
prospectus and "Management of the
Company" in the Statement of
Additional Information.
3
Dividends............................ Dividends on the Series B Preferred
Stock at the annual rate of ___% of
the liquidation preference of $25.00
per share, when, as and if declared
by the Board of Directors, will be
cumulative from ________, 2003. The
dividends will be payable, out of the
Company's legally available funds
therefor, quarterly in arrears on
________, _______, ________ and
________ in each year, commencing
___________, 2003 to the holders of
record on the preceding _______,
______, _______ and _______,
respectively. See "Description of
Series B Preferred Stock--Dividends."
Rating............................... The Company will issue the Series B
Preferred Stock only if the shares
receive a rating of "Aaa" from
Moody's Investors Service, Inc
("Moody's"). A rating of "Aaa" is the
highest investment grade rating
issued for preferred stock by
Moody's. The Certificate of
Designations creating and fixing the
rights and preferences of the Series
B Preferred Stock contains certain
provisions that reflect guidelines
established by Moody's (the "rating
agency guidelines") in order to
obtain this rating on _______, 2003,
the date of original issue of the
Series B Preferred Stock. See
"Description of Rating Agency
Guidelines--Rating Agency
Guidelines."
Asset Coverage....................... The Company will be required to maintain
two different asset maintenance
requirements:
o the asset coverage required by the
Investment Company Act of 1940, as
amended (the "1940 Act"), and
o the discounted asset coverage
required by Moody's.
Each asset maintenance requirement is
summarized below.
The Company will be required to
maintain, as of the last business day
of March, June, September and
December of each year, an asset
coverage of at least 200% with
respect to the Series B Preferred
Stock, which is the asset coverage
required by Section 18 of the 1940
Act. The Company estimates that if it
had issued and sold the shares of
Series B Preferred Stock offered
hereby and redeemed all of its
outstanding shares of Series A
Preferred Stock as of June 30, 2003,
the asset coverage for the Series B
Preferred Stock under the 1940 Act
would have been approximately ___%
(after giving effect to the deduction
of the underwriting discounts and
estimated expenses payable in
connection with the offering of
approximately $_____). The asset
coverage would have been computed as
follows: value of the Company's
assets less liabilities not
constituting senior securities
($________) divided by senior
securities representing indebtedness
plus the liquidation preference of
each class of preferred stock
($_______), expressed as a percentage
= _____%. See "Description of Rating
Agency Guidelines--Asset
Maintenance."
4
Under the rating agency guidelines, the
Company will be required to maintain
assets having an aggregate discounted
value at least equal to the basic
maintenance amount, which is the
minimum asset coverage specified by
Moody's. Moody's has established the
discount factors and guidelines for
determining the discounted value of
the Company's assets in connection
with the Company's receipt of a
rating of "Aaa" on the Series B
Preferred Stock. See "Description of
Rating Agency Guidelines--Rating
Agency Guidelines."
The Certificate of Designations for the
Series B Preferred Stock, which
contains the technical provisions of
the various components of the asset
coverage tests, has been filed as an
exhibit to this registration
statement and may be obtained through
the Commission's website
(http://www.sec.gov).
Voting Rights........................ At all times, holders of shares of the
Company's preferred stock then
outstanding (including the Series B
Preferred Stock), voting as a single
class, will elect two members of the
Company's Board of Directors, and
holders of shares of preferred stock
and common stock, voting as a single
class, will elect the remaining
directors. However, upon a failure by
the Company to pay dividends on any
of its preferred stock in an amount
equal to two full years' dividends,
holders of shares of the preferred
stock, voting as a separate class,
will have the right to elect the
smallest number of directors that
would constitute a majority of the
directors until cumulative dividends
on all shares of preferred stock have
been paid or provided for. Holders of
shares of Series B Preferred Stock
and any other preferred stock will
vote separately as a class on certain
other matters, as required under the
Certificate of Designations relating
to their series, the 1940 Act and
Delaware law. Except as otherwise
indicated in this prospectus and as
otherwise required by applicable law,
holders of shares of Series B
Preferred Stock will be entitled to
one vote per share on each matter
submitted to a vote of stockholders
and will vote together with holders
of shares of common stock and any
other preferred stock as a single
class. See "Description of Series B
Preferred Stock--Voting Rights."
Mandatory Redemption................. The Company will be required to redeem
the Series B Preferred Stock in the
situations discussed below.
The Series B Preferred Stock is subject
to mandatory redemption in whole or
in part by the Company in the event
that the Company fails to maintain
the asset coverage requirements in
accordance with the rating agency
guidelines or the 1940 Act as
described above and, in each case,
does not cure that failure by the
applicable cure date. Any mandatory
redemption will be made for cash at a
redemption price equal to $25.00 per
share plus accumulated and unpaid
dividends (whether or not earned or
declared) to the redemption date.
5
In the event that shares are redeemed
due to a failure to maintain the
quarterly asset coverage, the Company
may, but is not required to, redeem a
sufficient number of shares of Series
B Preferred Stock in order that the
asset coverage, as defined in the
1940 Act, of the remaining
outstanding shares of Series B
Preferred Stock and any other
preferred stock after redemption is
up to 225%.
Under the rating agency guidelines, in
the event that shares are redeemed
due to a failure to maintain weekly a
discounted asset coverage at least
equal to the basic maintenance
amount, the Company may redeem a
sufficient number of shares of Series
B Preferred Stock in order that the
aggregate discounted value of the
Company's assets exceeds the basic
maintenance amount of the remaining
outstanding shares of Series B
Preferred Stock and any other
preferred stock by up to 10%.
The Series B Preferred Stock is also
subject to mandatory redemption in
whole if the Company's Board of
Directors and holders of common stock
authorize certain transactions. See
"Description of Series B Preferred
Stock--Redemption--Mandatory
Redemption" and "Description of
Rating Agency Guidelines--
Redemption."
Optional Redemption.................. Subject to the limitations of the 1940
Act and Delaware law, commencing
____, 2008 and any time thereafter
the Company at its option may redeem
the Series B Preferred Stock in whole
or in part. Prior to ____, 2008, the
Series B Preferred Stock will be
redeemable at the option of the
Company only to the extent necessary
for the Company to continue to
qualify for tax purposes as a
regulated investment company. Any
optional redemption will be made for
cash at a price equal to $25.00 per
share plus accumulated and unpaid
dividends (whether or not earned or
declared) to the redemption date. See
"Description of Series B Preferred
Stock--Redemption--Optional
Redemption."
Liquidation Preference............... The liquidation preference of each share
of Series B Preferred Stock is $25.00
plus an amount equal to accumulated
and unpaid dividends (whether or not
earned or declared) to the date of
distribution. See "Description of
Series B Preferred Stock--Liquidation
Rights."
Use of Proceeds...................... The Company will use the net proceeds
from the offering of the Series B
Preferred Stock to purchase
additional portfolio securities in
accordance with its investment
objectives and policies. See "Use of
Proceeds."
Listing.............................. Prior to this offering, there has been
no public market for the Series B
Preferred Stock. The Company intends
to apply to list the shares of Series
B Preferred Stock on the NYSE.
However, during an initial period
which is not expected to exceed 30
days from the date of this
prospectus, the Series B Preferred
Stock
6
may not be listed on the NYSE.
Risk Factors......................... Risk is inherent in all investing.
Therefore, before investing in Series
B Preferred Stock you should consider
the risks carefully. These risks
include:
General
o The market price for the Series B
Preferred Stock will be influenced
by changes in interest rates, the
perceived credit quality of the
Series B Preferred Stock and other
factors.
o The Company may be required to
redeem your Series B Preferred
Stock to meet regulatory or rating
agency requirements or may
voluntarily redeem your Series B
Preferred Stock. Subject to these
redemptions, the Series B
Preferred Stock is perpetual.
o The Series B Preferred Stock is
not a debt obligation of the
Company. The Series B Preferred
Stock will be junior in respect of
dividends and liquidation
preferences to any indebtedness
incurred by the Company. Although
unlikely, precipitous declines in
the value of the Company's assets
could result in the Company having
insufficient assets to redeem all
of the Series B Preferred Stock
for the full redemption price.
o The value of the Company's
investment portfolio may decline,
reducing the asset coverage for
the Series B Preferred Stock.
Further, if an issuer of a common
stock in which the Company invests
experiences financial difficulties
or if an issuer's preferred stock
or debt security is downgraded or
defaults or if an issuer in which
the Company invests is affected by
other adverse market factors,
there may be a negative impact on
the income and/or asset value of
the Company's investment
portfolio.
o The Company may not meet the asset
coverage requirements or earn
sufficient income from its
investments to pay dividends on
the Series B Preferred Stock.
Rating Agency Risk
o Moody's could downgrade or
withdraw the rating assigned to
the Series B Preferred Stock,
which would likely have an adverse
effect on the liquidity and market
value of these preferred shares.
The present credit rating does not
eliminate or mitigate the risks of
investing in these preferred
shares.
7
Illiquidity Prior to Exchange Listing
o During an initial period which is
not expected to exceed 30 days
after the date of its issuance,
the Series B Preferred Stock will
not be traded on any securities
exchange. During this period, it
is expected that the underwriters
intend to make a market in the
Series B Preferred Stock; however,
they have no obligation to do so.
As a result, an investment in the
Series B Preferred Stock may be
illiquid during this period.
Foreign Securities
o The Company may invest its assets
in foreign securities. Investing
in securities of foreign companies
and foreign governments, which
generally are denominated in
foreign currencies, may involve
certain risk and opportunity
considerations not typically
associated with investing in
domestic companies and could cause
the Company to be affected
favorably or unfavorably by
changes in currency exchange rates
and revaluations of currencies.
Dependence on Key Personnel
o The Company is dependent upon the
expertise of Mr. Spencer Davidson
in providing portfolio management
services with respect to the
Company's investments. If the
Company were to lose the services
of Mr. Davidson, its investment
decisions could be adversely
affected to the extent the Company
could not appoint a successor in a
timely manner. The Company cannot
assure you that it will find a
suitable replacement for Mr.
Davidson in a timely manner in the
event of his death, resignation,
retirement or inability to act on
behalf of the Company.
Condition to Offering................ Under the Company's Restated Certificate
of Incorporation, it is authorized to
issue up to 10,000,000 shares of
preferred stock in one or more series
from time to time. As of the date of
this prospectus, 6,000,000 shares of
the Company's Series A Preferred
Stock were issued and outstanding.
Pursuant to the Certificate of
Designations relating to the Series A
Preferred Stock, upon redemption, the
shares of Series A Preferred Stock
shall be canceled and shall revert to
authorized but unissued shares of
preferred stock undesignated as to
series. Accordingly, the Series B
Preferred Stock offered hereby may
not be validly issued until a
sufficient number of shares of Series
A Preferred Stock outstanding have
been redeemed. Pursuant to the
Certificate of Designations, the
Company intends to notify the holders
of the Series A Preferred Stock on
August ___, 2003 that it will redeem
all of the outstanding shares of
Series A Preferred Stock on September
23, 2003 for an aggregate
8
redemption price equal to
approximately $______. All conditions
precedent to redemption of the Series
A Preferred Stock will be satisfied
in all material respects prior to the
issuance of the Series B Preferred
Stock offered hereby.
Federal Income Tax
Considerations.................... The Company has qualified, and intends
to remain qualified, for federal
income tax purposes, as a regulated
investment company. Qualification
requires, among other things,
compliance by the Company with
certain distribution requirements.
Limitations on distributions, which
could be imposed in the event the
Company fails to satisfy the asset
coverage requirements under the 1940
Act on the Series B Preferred Stock,
could jeopardize the Company's
ability to meet the distribution
requirements. The Company presently
intends, however, to the extent
possible, to purchase or redeem
Series B Preferred Stock, if
necessary, in order to maintain
compliance with those asset coverage
requirements. See "Taxation" for a
more complete discussion of these and
other federal income tax
considerations.
Anti-takeover Provisions............. Certain provisions of the Company's
Restated Certificate of Incorporation
and By-Laws may be regarded as
"anti-takeover" provisions. Pursuant
to these provisions, the affirmative
vote of the holders of 66 2/3% of the
outstanding shares of capital stock
of the Company is necessary to
authorize the conversion of the
Company from a closed-end to an
open-end investment company and to
authorize a merger or consolidation
of the Company with an open-end
investment company. The overall
effect of these provisions is to make
it more difficult to convert the
Company's status to an open-end
investment company. In addition, the
affirmative vote of the holders of 66
2/3% of the outstanding shares of
capital stock of the Company is
necessary to authorize the sale of
all or substantially all of the
assets of the Company. See "Certain
Provisions of the Restated
Certificate of Incorporation and
By-Laws; Anti-Takeover Provisions."
Custodian, Transfer Agent, Registrar
and Dividend-Paying Agent......... Deutsche Bank Trust Company Americas
serves as the Company's custodian.
Mellon Investor Services LLC serves
as the Company's stock transfer
agent, registrar and dividend-paying
agent. See "Custodian, Transfer
Agent, Registrar and Dividend-Paying
Agent."
9
FINANCIAL HIGHLIGHTS
The selected financial data below sets forth per share operating
performance data, total investment return, ratios and supplemental data for the
six months ended June 30, 2003 and for each year in the ten-year period ended
December 31, 2002. The financial information was derived from and should be read
in conjunction with the financial statements of the Company incorporated by
reference into this prospectus and the Statement of Additional Information. The
financial information set forth below (except for the financial data for the six
months ended June 30, 2003) has been audited by Ernst & Young LLP, independent
auditors, as stated in their unqualified report accompanying the financial
statements, which report is incorporated by reference into this prospectus and
the Statement of Additional Information.
Six Months
Ended June 30, Year Ended December 31,
--------------- --------------------------------------------------------------
2003 2002 2001 2000 1999 1998
--------------- --------- ---------- ---------- --------- -------
(unaudited)
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period....... $26.48 $35.14 $39.91 $41.74 $34.87 $29.15
--------------- --------- ---------- ---------- --------- -------
Net investment income................... .02 .19 .41 .53 .45 .47
Net gain (loss) on securities-realized
and unrealized........................ 3.87 (7.88) (.66) 6.12 11.32 9.44
--------------- --------- ---------- ---------- --------- -------
Distributions on Preferred Stock:
Dividends from investment income(1)... - (.12) (.07) (.11) (.07) (.03)
Distributions from capital gains...... - (.23) (.29) (.29) (.35) (.20)
Unallocated........................... (.18) - - - - (.01)
--------------- --------- ---------- ---------- --------- -------
(.18) (.35) (.36) (.40) (.42) (.24)
--------------- --------- ---------- ---------- --------- -------
Total from investment operations........... 3.71 (8.04) (.61) 6.25 11.35 9.67
--------------- --------- ---------- ---------- --------- -------
Less distributions on Common Stock:
Dividends from investment income(2)... (.01) (.21) (.88) (2.30) (.71) (.48)
Distributions from capital gains...... (.03) (.41) (3.28) (5.78) (3.77) (3.24)
In excess of net income............... - - - - - -
--------------- --------- ---------- ---------- --------- -------
(.04) (.62) (4.16) (8.08) (4.48) (3.72)
--------------- --------- ---------- ---------- --------- -------
Capital Stock transaction-
effect of Preferred Stock offering.... - - - - - (.23)
--------------- --------- ---------- ---------- --------- -------
Net asset value, end of period............. $30.15 $26.48 $35.14 $39.91 $41.74 $34.87
=============== ========= ========== ========== ========= =======
Per share market value, end of period...... $27.44 $23.85 $33.47 $36.00 $37.19 $30.44
=============== ========= ========== ========== ========= =======
TOTAL INVESTMENT RETURN:
Stockholder Return, based on market
price per share....................... 15.24%(3) -27.21% 4.33% 19.10% 39.22% 31.31%
RATIOS AND SUPPLEMENTAL DATA:
Net assets applicable to common stock,
end of period (000's omitted)......... $900,995 $809,192 $1,097,530 $1,155,039 $1,094,519 $868,933
Ratio of expenses to average net assets
applicable to common stock............ 0.61%(3) 0.97% 1.02% 1.09% 1.01% 0.95%
Ratio of net income to average net assets
applicable to common stock............ 0.07%(3) 0.61% 1.15% 1.24% 1.23% 1.50%
Portfolio turnover rate.................... 7.15%(3) 22.67% 23.81% 40.61% 33.68% 34.42%
Shares outstanding, end of period (000's
omitted).............................. 29,882 30,561 31,232 28,941 26,219 24,917
10
Year Ended December 31,
------------- -------------- ------------- ------------- -----------
1997 1996 1995 1994 1993
------------- -------------- ------------- ------------- -----------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period....... $25.24 $23.94 $22.31 $24.75 $28.56
------------- -------------- ------------- ------------- -----------
Net investment income................... .21 .22 .08 .05 .03
Net gain (loss) on securities-realized
and unrealized........................ 7.15 3.86 4.54 (.94) (.80)
------------- -------------- ------------- ------------- -----------
Distributions on Preferred Stock:
Dividends from investment income(1)... - - - - -
Distributions from capital gains...... - - - - -
Unallocated........................... - - - - -
------------- -------------- ------------- ------------- -----------
- - - - -
------------- -------------- ------------- ------------- -----------
Total from investment operations........... 7.36 4.08 4.62 (.89) (.77)
------------- -------------- ------------- ------------- -----------
Less distributions on Common Stock:
Dividends from investment income(2)... (.26) (.20) (.11) (.05) (.04)
Distributions from capital gains...... (3.19) (2.58) (2.87) (1.49) (2.98)
In excess of net income............... - - (.01) (.01) (.02)
------------- -------------- ------------- ------------- -----------
(3.45) (2.78) (2.99) (1.55) (3.04)
------------- -------------- ------------- ------------- -----------
Capital Stock transaction-
effect of Preferred Stock offering.... - - - - -
------------- -------------- ------------- ------------- -----------
Net asset value, end of period............. $29.15 $25.24 $23.94 $22.31 $24.75
============= ============== ============= ============= ===========
Per share market value, end of period...... $26.19 $21.00 $20.00 $19.00 $22.25
============= ============== ============= ============= ===========
TOTAL INVESTMENT RETURN:
Stockholder Return, based on market price per
share...................................... 42.58% 19.48% 21.22% -7.86% -15.92%
RATIOS AND SUPPLEMENTAL DATA:
Net assets applicable to common stock, end of
period (000's omitted)................ $702,597 $597,597 $573,693 $519,722 $553,898
Ratio of expenses to average net assets
applicable to common stock............ 0.98% 1.05% 1.25% 1.17% 1.16%
Ratio of net income to average net assets
applicable to common stock............ 0.80% 0.88% 0.36% 0.21% 0.14%
Portfolio turnover rate.................... 32.45% 33.40% 29.14% 17.69% 19.50%
Shares outstanding, end of period (000's
omitted)................................... 24,105 23,679 23,963 23,292 22,379
----------------------
(1) Includes short-term capital gains in the amount of $.04 per share for 2001,
$.09 per share for 2000, and $.03 per share for 1999.
(2) Includes short-term capital gains in the amount of $.19 per share for 2002,
$.51 per share for 2001, $1.82 per share for 2000, $.29 per share for 1999,
$.05 per share for 1997 and $.03 per share for 1995.
(3) Not annualized.
11
The following table provides information about the Company's Series A
Preferred Stock since its issuance in June 1998. The information has been
audited (except for the financial data for the six months ended June 30, 2003)
by Ernst & Young LLP, independent accountants.
Involuntary
Liquidating
Total Amount Asset Coverage Preference Per Average Market
Year Outstanding Per Share Share Value Per Share
--------------------- ------------ --------------- -------------- ---------------
1998 6,000,000 $171.06 $25.00 $25.74
1999 6,000,000 $209.25 $25.00 $24.64
2000 6,000,000 $228.41 $25.00 $26.03
2001 6,000,000 $212.53 $25.00 $25.47
2002 6,000,000 $163.07 $25.00 $26.03
2003 (as of June 30) 6,000,000 $177.28 $25.00 $25.59
(unaudited)
For purposes of the foregoing table, the asset coverage per share is
calculated by dividing the total value of the Company's assets on the last day
of the relevant period by the number of shares of Series A Preferred Stock
outstanding on that date. Involuntary liquidation preference per share refers to
the amount holders of Series A Preferred Stock are entitled to receive per share
in the event of liquidation of the Company prior to the holders of common stock
being entitled to receive any amounts in respect of the assets of the Company.
The average market value per share is the average of the weekly closing prices
of the Series A Preferred Stock on the NYSE each week during the relevant
period.
THE COMPANY
General American Investors Company, Inc. is a closed-end diversified
management investment company, incorporated under the laws of the State of
Delaware on October 15, 1928, and is registered under the 1940 Act. The Company
succeeded to a similar business established in 1927. As of June 30, 2003, the
Company had 29,882,056 shares of common stock outstanding with an aggregate net
asset value of $900,995,376, and 6,000,000 shares of Series A Preferred Stock
outstanding. The Company's common stock is traded on the NYSE under the symbol
"GAM." The Company's Series A Preferred Stock is traded on the NYSE under the
symbol "GAM Pr."
The Company intends to redeem all of the outstanding Series A Preferred
Stock on September 23, 2003. The Company's principal office is located at 450
Lexington Avenue, Suite 3300, New York, New York 10017, its telephone number is
(212) 916-8400 and its toll-free telephone number is (800) 436-8401.
USE OF PROCEEDS
The net proceeds to the Company from this offering are estimated to be
approximately $______ (after deducting the underwriting discounts and estimated
offering expenses). The Company expects to invest these proceeds in accordance
with its investment objectives and policies within six months from the
completion of the offering, depending on market conditions for the types of
securities in which the Company principally invests. Pending this investment,
the proceeds will be held in high quality short-term debt securities and
instruments. See "Investment Objectives and Policies."
12
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
June 30, 2003 (unaudited) on an actual basis and as adjusted to give effect to
(i) the redemption of 6,000,000 shares of Series A Preferred Stock for an
aggregate redemption price of approximately $_____ and (ii) the consummation of
the offering of ____________ shares of Series B Preferred Stock.
June 30, 2003 (unaudited)
----------------------------------------
Actual As Adjusted(1)
----------------- --------------------
Long-term debt....................... --
Stockholders' equity:
Preferred stock, $1.00 par value:
10,000,000 shares, authorized (the
"Actual" column reflects the
Company's outstanding
capitalization as of June 30,
2003; the "As Adjusted" column
assumes the issuance of _____
shares of Series B Preferred
Stock, liquidation preference
$25.00 per share, and the
redemption and cancellation of
6,000,000 shares of Series A
Preferred Stock, liquidation
preference of $25.00 per
share)......................... $150,000,000
============
Common stock, $1.00 par value:
50,000,000 shares authorized,
29,882,056 shares outstanding
(exclusive of 1,349,507 shares
held in Treasury).............. $29,882,056
Additional paid-in capital........ 547,762,055
Accumulated realized loss on
investments........... (14,374,856)
Undistributed net income.......... 1,607,201
Unallocated distributions on
Series A Preferred Stock....... (5,640,000)
Unrealized appreciation on
investments and securities
sold short (including aggregate
gross unrealized appreciation
of $398,757,748)............... 341,758,920
-----------
Net assets applicable to
common stock............... $900,995,376
============
----------------------
(1) After deducting the underwriting discounts and estimated offering expenses
of approximately $_____.
13
PORTFOLIO
The following table sets forth certain information regarding the
Company's investment portfolio as of June 30, 2003.
Value Percentage
--------------------------- ---------------------------
Common stocks........................................... $753,824,719 83.7%
Convertible corporate notes............................. 10,400,000 1.2
Corporate discount notes................................ 191,556,642 21.3
U.S. Treasury bills..................................... 95,732,612 10.6
Liabilities in excess of cash, receivables and
other assets............................................ (518,597) (0.1)
Series A Preferred Stock (6,000,000 shares at a
liquidation value of $25.00 per share)............... (150,000,000) (16.7)
--------------------------- ---------------------------
Net assets applicable to common stock............ $900,995,376 100.0%
=========================== ===========================
Sector weightings in common stock portfolio:
Insurance............................................... $179,616,350 19.9%
Pharmaceuticals and health care......................... 167,470,320 18.6
Retail trade............................................ 166,317,300 18.5
Banking................................................. 82,218,800 9.1
Communications and information services................. 43,344,000 4.8
Environment control (including services)................ 29,689,060 3.3
Consumer products and services.......................... 19,844,000 2.2
Electronics............................................. 16,031,375 1.8
Oil and natural gas (including services)................ 14,950,000 1.7
Miscellaneous........................................... 12,735,148 1.4
Semiconductors.......................................... 11,378,871 1.3
Aerospace/Defense....................................... 6,864,000 0.8
Special holdings........................................ 2,072,000 0.2
Computer software and systems........................... 1,293,495 0.1
--------------------------- ---------------------------
$753,824,719 83.7%
=========================== ===========================
14
The following table sets forth the Company's ten largest investment
holdings as of June 30, 2003.
% Net Assets
Applicable to
Shares Value Common Stock
--------- ------------ -------------
The Home Depot, Inc.................. 1,945,000 $64,418,400 7.1%
Everest Re Group, Ltd................ 690,000 52,785,000 5.9
The TJX Companies, Inc............... 2,425,000 45,687,000 5.1
Pfizer Inc........................... 1,025,000 35,003,750 3.9
Genentech, Inc....................... 485,000 34,978,200 3.9
Golden West Financial Corporation.... 410,000 32,804,100 3.6
Wal-Mart Stores, Inc................. 570,000 30,591,900 3.4
M&T Bank Corporation................. 310,000 26,108,200 2.9
Costco Wholesale Corporation......... 700,000 25,620,000 2.8
PartnerRe Ltd........................ 490,000 25,043,900 2.8
------------ -------------
$373,040,450 41.4%
============ =============
The following table sets forth as of June 30, 2003 the unrealized
appreciation on investments as a percentage of the Company's net assets
applicable to common stock.
Cost basis of net assets....................... $559,236,456 62.1%
Unrealized appreciation on investments and
securities sold short........................ 341,758,920 37.9
------------ --------
Total net assets applicable to common stock.... $900,995,376 100.0%
============ ========
INVESTMENT OBJECTIVES AND POLICIES
INVESTMENT OBJECTIVES
The Company's principal investment objective is long-term capital
appreciation. Lesser emphasis is placed on current income. In seeking to achieve
its primary investment objective, the Company invests principally in common
stocks believed by its management to have better-than-average growth potential.
There are market risks inherent in any investment, and no assurance can be given
that the investment objectives of the Company will be achieved.
INVESTMENT POLICIES
The Company's investment policy is flexible, as its Restated
Certificate of Incorporation permits the Company to invest in all forms of
securities without limiting the portion of its assets that may be invested in
any one type. While common stocks have made up the bulk of investments, assets
may be held in cash or invested in all types of securities. These types of
securities include, among others, bonds, debentures, notes, preferred and common
stocks, rights and warrants. The Company may invest its assets in whatever
amounts or proportions that it believes are best suited to current and
anticipated economic and market conditions. As a diversified management
investment company registered under the 1940 Act, the Company may not make any
investment which would result in less than 75% of its assets being in cash or
cash items, government securities and securities of other companies, limited in
the case of any one issuer to not more than 5% of the Company's total assets and
to 10% of the voting securities of that issuer.
15
CHANGES IN INVESTMENT OBJECTIVES AND POLICIES; INVESTMENT RESTRICTIONS
The Company's principal investment objective is long-term capital
appreciation. Lesser emphasis is placed on current income. These investment
objectives may not be changed without the affirmative vote of the holders of a
majority of the Company's outstanding voting securities.
The policies set forth below are fundamental policies of the Company
and may not be changed without the affirmative vote of the holders of a majority
of the Company's outstanding voting securities. Under these fundamental
policies, the Company may not:
o Issue any class of senior security, or sell any such security of
which it is the issuer, except as permitted by the 1940 Act.
o Borrow money in excess of 25% of its gross assets, except for the
purchase or redemption of outstanding senior securities.
o Underwrite securities in excess of 20% of its gross assets.
o Increase its holdings in a particular industry by additional
investment in that industry beyond 50% of the value of the
Company's gross assets.
o Purchase or sell real estate.
o Purchase or sell commodities or commodity contracts in excess of
20% of its gross assets.
o Make loans (other than through the purchase of a portion of an
issue of bonds, debentures or other securities, issued by another
person) to other persons in an amount exceeding 10% to any one
person or exceeding in the aggregate 20% of its gross assets.
o Invest in companies for the purpose of exercising control of
management, unless it becomes necessary to do so to conserve any
investment.
If a percentage restriction is met at the time of investment, a later
increase or decrease in percentage resulting from a change in the value of
portfolio securities or amount of total assets will not be considered a
violation of that restriction.
Within the limits of these fundamental policies the Company has
reserved freedom of action. While the Company's fundamental policy permits the
Company to invest up to 50% of the gross value of its assets in a particular
industry, it is the operating policy of the Company to invest not more than 25%
of its assets in any one particular industry.
FOREIGN SECURITIES
The Company may invest its assets in foreign securities, which may
include securities issued by companies in developing countries. As of June 30,
2003, 9.6% of the Company's net assets applicable to common stock were invested
in securities of companies domiciled in foreign countries.
PORTFOLIO TURNOVER
The Company buys and sells securities to accomplish its investment
objective. The investment policies of the Company and fluctuating market
conditions are instrumental in determining the frequency of changes in
investments. Consequently, it is not possible to predict the portfolio turnover
of the Company with certainty. During the six months ended June 30, 2003 and the
fiscal years ended December 31, 2002 and 2001, the portfolio turnover of the
Company was 7.15% (not annualized), 22.67% and 23.81%, respectively.
16
Portfolio turnover generally involves some expense to the Company,
including brokerage commissions or dealer mark-ups and other transaction costs
on the sale of securities and reinvestment in other securities. The portfolio
turnover rate is computed by dividing the lesser of the amount of the long-term
securities purchased or securities sold by the average monthly value of
securities owned during the year (excluding securities whose maturities at
acquisition were one year or less).
MANAGEMENT
Under the Company's Restated Certificate of Incorporation and Delaware
General Corporation Law, the Company's business and affairs are managed by or
under the direction of its Board of Directors. The Company's portfolio is
internally managed by the officers of the Company, without an investment
adviser. Information about the directors and officers of the Company is included
in the Statement of Additional Information.
PORTFOLIO MANAGEMENT
Spencer Davidson, President and Chief Executive Officer of the Company,
has been responsible for the management of the Company's portfolio since August
1995. Mr. Davidson joined the Company in 1994 as senior investment counselor.
Prior thereto, he was the general partner of a private investment partnership.
He has spent his entire business career on "Wall Street" since first joining an
investment and banking firm in 1966.
Mr. Davidson supervises and coordinates the Company's investment
operations and provides overall guidance with respect to industry developments
and the economic outlook. He is assisted by seven individuals who have ongoing
responsibility for monitoring and evaluating developments in industries in which
they specialize. The essential function of the investment staff is to assess
social, economic and technological changes and to evaluate whether these changes
give rise to investment opportunities.
EXPENSES
The Company pays all of its own expenses, including, without
limitation, salaries and benefits of its officers and employees; rent for office
space; other investment research, administration and office operations costs;
non-affiliated directors' fees; transfer agent, registrar and custodian fees;
preparation, printing and distribution of its proxy statements, stockholder
reports and notices; auditing and legal fees; federal registration fees; stock
exchange listing fees and expenses; federal, state and local taxes; brokerage
commissions; and the cost of issue and sale of its securities.
RISK FACTORS
Prospective investors should consider carefully the following risk
factors in addition to other information set forth in this prospectus and the
Statement of Additional Information prior to making an investment in the Series
B Preferred Stock.
PREFERRED STOCK
General. There are a number of risks associated with an investment in
Series B Preferred Stock. The market price for the Series B Preferred Stock will
be influenced by changes in interest rates, the perceived credit quality of the
Series B Preferred Stock and other factors. The Series B Preferred Stock is
subject to redemption under specified circumstances and investors may not be
able to reinvest the proceeds received from the redemption in an investment
providing the same or a better rate than that of the Series B Preferred Stock.
Subject to the redemption provisions, the Series B Preferred Stock is perpetual.
The Series B Preferred Stock is not a debt obligation of the Company.
The Series B Preferred Stock would be junior in respect of dividends and
liquidation preference to any indebtedness incurred by the Company. Although
unlikely, precipitous declines in the value of the Company's assets could result
in the Company having insufficient assets to redeem all of the Series B
Preferred Stock for the full redemption price.
17
The value of the Company's investment portfolio may decline, reducing
the asset coverage for the Series B Preferred Stock. Further, if an issuer of a
common stock in which the Company invests experiences financial difficulties or
if an issuer's preferred stock or debt security is downgraded or defaults or if
an issuer in which the Company invests is affected by other adverse market
factors, there may be a negative impact on the income and/or asset value of the
Company's investment portfolio.
Restrictions on Dividends and Other Distributions. Restrictions imposed
on the declaration and payment of dividends or other distributions to the
holders of the Company's common stock and preferred stock, both by the 1940 Act
and by requirements imposed by Moody's, might impair the Company's ability to
maintain its qualification as a regulated investment company for federal income
tax purposes. While the Company intends to redeem its preferred stock (including
the Series B Preferred Stock) to the extent necessary to enable the Company to
distribute its income as required to maintain its qualification as a regulated
investment company under the Internal Revenue Code of 1986, as amended (the
"Code"), there can be no assurance that those actions can be effected in time to
meet the Code requirements. See "Taxation" in the Statement of Additional
Information.
Ratings and Asset Coverage Risk. While it is a condition to the closing
of the offering that Moody's assigns a rating of "Aaa" to the Series B Preferred
Stock, the rating does not eliminate or necessarily mitigate the risks of
investing in Series B Preferred Stock. The credit rating on the Series B
Preferred Stock could be reduced or withdrawn while an investor holds shares,
which would likely have an adverse effect on the liquidity and market value of
the Series B Preferred Stock.
Illiquidity Prior to Exchange Listing. Prior to the offering, there has
been no public market for the Series B Preferred Stock. The Company intends to
apply to list the shares of Series B Preferred on the NYSE. However, in the
event shares of the Series B Preferred Stock are issued and approved for
listing, during an initial period, which is not expected to exceed 30 days after
the date of its initial issuance, the Series B Preferred Stock will not be
traded on any securities exchange. During this period, the underwriters intend
to make a market in the Series B Preferred Stock though they have no obligation
to do so. As a result, an investment in the Series B Preferred Stock may be
illiquid during this period.
FOREIGN SECURITIES
The Company may invest its assets in foreign securities. Investing in
securities of foreign companies and foreign governments, which generally are
denominated in foreign currencies, may involve certain risk and opportunity
considerations not typically associated with investing in domestic companies,
including the risks listed below.
o Investing in foreign securities could cause the Company to be
affected favorably or unfavorably by changes in currency exchange
rates and revaluations of currencies.
o Less information may be available about foreign companies and
foreign governments than about domestic companies. For example,
foreign companies and foreign governments generally are not
subject to uniform accounting, auditing and financial reporting
standards or to other regulatory practices and requirements
comparable to those applicable to domestic companies.
o Foreign securities and their markets may not be as liquid as U.S.
securities and their markets.
o Securities of some foreign companies may involve greater market
risk than securities of U.S. companies.
o Investing in foreign securities may result in higher expenses
than investing in domestic securities because of the payment of
fixed brokerage commissions on foreign exchanges, which generally
are higher than commissions on U.S. exchanges, and the imposition
of transfer taxes or transaction charges associated with foreign
exchanges.
18
o Investment in foreign securities may also be subject to local
economic risks, including instability of some foreign
governments, the possibility of currency blockage or the
imposition of withholding taxes on dividend or interest payments,
and the potential for expropriation, nationalization or
confiscatory taxation and limitations on the use or removal of
funds or other assets.
DEPENDENCE ON KEY PERSONNEL
The Company is dependent upon the expertise of Mr. Spencer Davidson in
providing portfolio management services with respect to the Company's
investments. If the Company were to lose the services of Mr. Davidson, its
investment decisions could be adversely affected to the extent the Company could
not appoint a successor in a timely manner. The Company cannot assure you that
it can find a suitable replacement for Mr. Davidson in a timely manner in the
event of his death, resignation, retirement or inability to act on behalf of the
Company.
DESCRIPTION OF SERIES B PREFERRED STOCK
The following is a summary of the terms of the Series B Preferred
Stock. This description may not be complete in all respects, and is qualified by
reference to the Certificate of Designations relating to the Series B Preferred
Stock, the form of which is filed as an exhibit to this registration statement.
GENERAL
Under its Restated Certificate of Incorporation, the Company is
authorized to issue up to 10,000,000 shares of preferred stock. The Board of
Directors has the authority to establish the designations and the powers,
preferences and rights of the shares of each series of preferred stock, and the
qualifications, limitations or restrictions of the shares of each series. As of
June 30, 2003, 6,000,000 shares of the Company's Series A Preferred Stock were
issued and outstanding. Pursuant to the Certificate of Designations relating to
the Series A Preferred Stock, the Company may redeem the Series A Preferred
Stock on each quarterly dividend payment date on or after June 23, 2003. The
Company intends to notify the holders of the Series A Preferred Stock on August
____, 2003 that it will redeem all of the outstanding shares of the Series A
Preferred Stock on September 23, 2003.
Following the redemption of the Series A Preferred Stock, the
Certificate of Designations relating to the Series B Preferred Stock will
authorize the Company to issue up to ________ shares of Series B Preferred
Stock. No fractional shares of Series B Preferred Stock will be issued. The
Board of Directors reserves the right to issue additional shares of Series B
Preferred Stock, from time to time, subject to the restrictions set forth in the
Certificate of Designations. The shares of Series B Preferred Stock will, upon
issuance, be fully paid and nonassessable and will have no preemptive, exchange
or conversion rights. Any shares of Series B Preferred Stock repurchased or
redeemed by the Company will be canceled and will revert to authorized but
unissued preferred stock undesignated as to series. The Board of Directors may,
by resolution, classify or reclassify any authorized but unissued preferred
stock from time to time by setting or changing the preferences, rights, voting
powers, restrictions, limitations or terms of redemption. The Company will not
issue any class of stock senior to the shares of Series B Preferred Stock.
Payments to the holders of Series B Preferred Stock of dividends or
upon redemption or in liquidation will be subject to the prior payments of
interest and repayment of principal then due on any other indebtedness of the
Company.
DIVIDENDS
Holders of shares of Series B Preferred Stock will be entitled to
receive, when, as and if declared by the Board of Directors out of funds legally
available therefor, cumulative cash dividends at the annual rate of __% per
share of the liquidation preference of $25.00 per share and no more, payable
quarterly in arrears on ______________, ______________, ______________ and
______________ in each year (or, if that date is not a business day, on the next
succeeding business day) (each, a "dividend payment date"), commencing
__________, 2003, to the persons in whose names the shares of Series B Preferred
Stock are registered at the close of business on
19
the preceding ______________, ______________, ______________ and ______________,
respectively. Dividends on the shares of Series B Preferred Stock will
accumulate from the date the shares are issued.
No dividends will be declared or paid or set apart for payment on
shares of Series B Preferred Stock for any dividend period or part thereof
unless full cumulative dividends have been or contemporaneously are declared and
paid on all outstanding shares of Series B Preferred Stock through the most
recent dividend payment dates thereof. If full cumulative dividends are not
declared and paid (or a sum sufficient is set apart) on the Series B Preferred
Stock, all dividends declared on the shares of Series B Preferred Stock will be
paid pro rata to the holders of the outstanding shares. Holders of shares of
Series B Preferred Stock will not be entitled to any dividends, whether payable
in cash, property or stock, in excess of full cumulative dividends. No interest,
or sum of money in lieu of interest, will be payable in respect of any dividend
payment that may be in arrears.
While any shares of Series B Preferred Stock are outstanding, the
Company will not declare, pay or set apart for payment any dividend or other
distribution on its common stock or any stock of the Company ranking junior to
or on a parity with the Series B Preferred Stock as to dividends or upon
liquidation unless the Company satisfies each condition specified below. This
limitation will not apply to a dividend or distribution that will be paid in
shares of, or options, warrants or rights relating to, the Company's common
stock or stock ranking junior to the Series B Preferred Stock. In addition,
while any shares of Series B Preferred Stock are outstanding, the Company will
not call for redemption, redeem, purchase or otherwise acquire for consideration
any shares of its common stock or any other of its stock ranking junior to the
Series B Preferred Stock unless the Company satisfies each condition specified
below. This limitation will not apply to the call for redemption, redemption,
purchase or other acquisition by conversion into or exchange for the Company's
common stock or other stock junior to the Series B Preferred Stock. The
limitations on dividends and distributions or redemption and exchange discussed
above will apply unless in each case the following conditions are satisfied:
o immediately after the transaction, the Company will hold assets
with an aggregate discounted value for Moody's at least equal to
the basic maintenance amount and the Company will maintain the
asset coverage required by Moody's (see "Description of Rating
Agency Guidelines--Asset Maintenance" and "--Redemption"),
o full cumulative dividends on shares of Series B Preferred Stock
due on or prior to the date of the transactions have been
declared and paid (or sufficient funds to cover the payment of
the dividends have been deposited with the dividend-paying
agent), and
o the Company has redeemed the full number of shares of Series B
Preferred Stock required to be redeemed by any provision for
mandatory redemption contained in the Certificate of
Designations.
REDEMPTION
Mandatory Redemption. The Company will be required to redeem the Series
B Preferred Stock in whole or in part in the event that the Company fails to
maintain a quarterly asset coverage of at least 200% or fails to maintain the
discounted asset coverage required by Moody's. See "Description of Rating Agency
Guidelines--Redemption."
The Series B Preferred Stock is also subject to mandatory redemption in
whole by the Company at the redemption price if the Company's Board of Directors
and holders of common stock authorize:
o the dissolution of the Company,
o any plan of reorganization (as that term is defined in the 1940
Act) adversely affecting the Series B Preferred Stock, or
o any action to change the nature of the Company business so as to
cease to be an investment company as provided in Section 13(a)(4)
of the 1940 Act.
20
Optional Redemption. Prior to _________, 2008, the Company may, at its
option, redeem shares of Series B Preferred Stock only to the extent that the
redemption is necessary, in the judgment of the Company, to maintain the
Company's status as a regulated investment company under the Code. Commencing
_______, 2008 and any time thereafter, the Company may, at its option, redeem
shares of Series B Preferred Stock in whole or in part. Any redemption is
subject to the limitations of the 1940 Act, Delaware law and any other agreement
relating to indebtedness of the Company.
Redemption Price. Any redemption shall be made in cash at a price equal
to $25.00 per share plus accumulated and unpaid dividends (whether or not earned
or declared) to the redemption date.
Redemption Procedures. A notice of redemption will be given to the
holders of record of Series B Preferred Stock selected for redemption not less
than 30 or more than 60 days prior to the date fixed for the redemption. Each
notice of redemption will state:
o the redemption date,
o the number of shares of Series B Preferred Stock to be redeemed,
o the CUSIP number(s) of the shares,
o the redemption price,
o the place or places where the shares are to be redeemed,
o that dividends on the shares to be redeemed will cease to accrue
on the redemption date, and
o the provision of the Certificate of Designations under which the
redemption is being made.
No defect in the notice of redemption or in the mailing thereof will
affect the validity of the redemption proceedings, except as required by
applicable law.
LIQUIDATION RIGHTS
Upon a liquidation, dissolution or winding up of the affairs of the
Company (whether voluntary or involuntary), holders of shares of Series B
Preferred Stock then outstanding will be entitled to receive a liquidation
distribution in the amount of $25.00 per share plus an amount equal to all
accumulated but unpaid dividends thereon, up to and including the date fixed for
the distribution or payment excluding interest thereon (the "liquidation
preference"). The holders will be entitled to receive the liquidation preference
out of assets of the Company available for distribution to stockholders, after
satisfying claims of creditors but before any payment is made to holders of the
Company's common stock or any other class of its stock ranking junior to the
Series B Preferred Stock as to liquidation payments. Holders of Series B
Preferred Stock are entitled to no further right or claim to any of the
remaining assets of the Company. If the assets of the Company available for
distribution among the holders of all outstanding shares of Series B Preferred
Stock and any other shares of preferred stock then outstanding that rank equal
with the Series B Preferred Stock with respect to payment upon liquidation, will
be insufficient to permit the full payment of the liquidation preference, then
the assets of the Company will be distributed ratably amongst those holders. If
full payment of the liquidation preference is not made, no dividends or
distributions will be made to holders of the Company's common stock or any other
class of its stock ranking junior to the Series B Preferred Stock as to
liquidation.
VOTING RIGHTS
Except as otherwise stated in this prospectus and as otherwise required
by applicable law, holders of shares of Series B Preferred Stock will be
entitled to one vote per share on each matter submitted to a vote of
stockholders and will vote together with holders of shares of common stock and
of any other preferred stock of the Company then outstanding as a single class.
21
In connection with the election of the Company's directors, holders of
shares of Series B Preferred Stock and any other preferred stock then
outstanding, voting as a separate class, will be entitled at all times to elect
two of the Company's directors, and the remaining directors will be elected by
holders of shares of common stock and holders of shares of Series B Preferred
Stock and any other preferred stock then outstanding, voting together as a
single class. In addition, if at any time dividends on outstanding shares of
Series B Preferred Stock and/or any other preferred stock are unpaid in an
amount equal to at least two full years' dividends thereon or if at any time
holders of any shares of preferred stock are entitled, together with the holders
of shares of Series B Preferred Stock, to elect a majority of the directors of
the Company under the 1940 Act, then the number of directors constituting the
Board of Directors automatically will be increased by the smallest number that,
when added to the two directors elected exclusively by the holders of shares of
Series B Preferred Stock and any other preferred stock as described above, would
constitute a majority of the Board of Directors as so increased by such smallest
number. These additional directors will be elected at a special meeting of
stockholders that will be called and held as soon as practicable. At all
subsequent meetings at which directors are to be elected, the holders of shares
of Series B Preferred Stock and any other preferred stock then outstanding,
voting as a separate class, will be entitled to elect the smallest number of
additional directors that, together with the two directors these holders in any
event will be entitled to elect, constitutes a majority of the total number of
directors of the Company as so increased. The terms of office of the persons who
are directors at the time of that election will continue. If the Company
thereafter pays, or declares and sets apart for payment in full, all dividends
payable on all outstanding shares of Series B Preferred Stock and any other
preferred stock for all past dividend periods, the additional voting rights of
the holders of shares of Series B Preferred Stock and any other preferred stock
as described above will cease, and the terms of office of all of the additional
directors elected by the holders of shares of Series B Preferred Stock and any
other preferred stock will terminate immediately and automatically. This
termination will not affect any of the directors with respect to whose election
the holders of shares of common stock were entitled to vote or the two directors
the holders of shares of Series B Preferred Stock and any other preferred stock
have the right to elect in any event.
So long as the shares of Series B Preferred Stock are outstanding, the
Company will not, without the affirmative vote of the holders of a majority of
the shares of Series B Preferred Stock outstanding at the time, voting
separately as one class, amend, alter or repeal the provisions of the Restated
Certificate of Incorporation, whether by merger, consolidation or otherwise, so
as to materially adversely affect any of the rights set forth in the Restated
Certificate of Incorporation of holders of the shares of Series B Preferred
Stock. The Board of Directors, however, without stockholder approval, may amend,
alter or repeal the rating agency guidelines in the event the Company receives
confirmation from Moody's that the amendment, alteration or repeal would not
impair the rating then assigned to the Series B Preferred Stock.
The affirmative vote of a majority of the votes entitled to be cast by
holders of outstanding shares of the Series B Preferred Stock and any other
preferred stock then outstanding, voting as a separate class, will be required
to approve any plan of reorganization adversely affecting these shareholders or
any action requiring a vote of security holders under Section 13(a) of the 1940
Act. These include, among other things, any action to change the
subclassification from a closed-end investment company to an open-end investment
company and changes in the Company's investment objective or changes in the
investment restrictions described as fundamental policies under "Investment
Objectives and Policies," each to the extent stockholder authorization is
required. The class vote of holders of shares of the Series B Preferred Stock
and any other preferred stock described above will be in addition to a separate
vote of the requisite percentage of shares of common stock and Series B
Preferred Stock and any other preferred stock, voting together as a single
class, necessary to authorize the action in question.
The foregoing voting provisions will not apply to any shares of Series
B Preferred Stock if, at or prior to the time when the act with respect to which
the vote otherwise would be required will be effected, the shares will have been
(i) redeemed or (ii) called for redemption and the Company has deposited with
the dividend-paying agent sufficient funds to effect the redemption.
LIMITATION ON INCURRENCE OF INDEBTEDNESS AND ISSUANCE OF ADDITIONAL
PREFERRED STOCK
So long as any shares of Series B Preferred Stock are outstanding, the
Company may issue and sell one or more series of a class of senior securities of
the Company that represent indebtedness under the 1940 Act and/or otherwise
create or incur indebtedness, if,
22
o immediately after giving effect to the incurrence of the
indebtedness and to its receipt and application of the proceeds
thereof, the Company will have an "asset coverage," as defined in
the 1940 Act, of at least 300% of the amount of all indebtedness
of the Company then outstanding, and
o the additional indebtedness will not have any preference or
priority over any other indebtedness of the Company upon the
distribution of assets of the Company or in respect of the
payment of interest.
Any possible liability resulting from lending and/or borrowing
portfolio securities, entering into reverse repurchase agreements, entering into
futures contracts and writing options, to the extent such transactions are made
in accordance with the investment restrictions of the Company then in effect,
will not be considered to be indebtedness limited by the Certificate of
Designations.
So long as any shares of Series B Preferred Stock are outstanding, the
Company may issue and sell shares of one or more other series of preferred stock
constituting a class of senior securities of the Company that represent stock
under the 1940 Act in addition to the shares of Series B Preferred Stock,
provided that,
o if the Company is using the proceeds (net of all offering
expenses payable by the Company) of the additional preferred
stock to purchase all or a portion of the shares of Series B
Preferred Stock or to redeem or otherwise refinance all or a
portion of the shares of Series B Preferred Stock, any other
preferred stock and/or any indebtedness of the Company then
outstanding, then the Company will, immediately after giving
effect to the issuance of the additional preferred stock and to
its receipt and application of the proceeds thereof, have an
"asset coverage" for all senior securities of the Company which
are stock, as defined in the 1940 Act, of at least 200% of the
shares of Series B Preferred Stock and all other preferred stock
of the Company then outstanding, or
o if the Company is using the proceeds (net of all offering
expenses payable by the Company) of the additional preferred
stock for any other purpose, then the Company will, immediately
after giving effect to the issuance of such additional preferred
stock and to its receipt and application of the proceeds thereof,
have an "asset coverage" for all senior securities of the Company
which are stock, as defined in the 1940 Act, of at least 200% of
the shares of Series B Preferred Stock and all other preferred
stock of the Company then outstanding, and
o in the case of either situation above, no such additional
preferred stock will have any preference or priority over any
other preferred stock of the Company upon the distribution of the
assets of the Company or in respect of the payment of dividends.
REPURCHASE OF SERIES B PREFERRED STOCK
The Company is a closed-end investment company. As a result, holders of
Series B Preferred Stock do not, and will not, have the right to redeem their
shares of the Company. The Company, however, may repurchase shares of the Series
B Preferred Stock when it is deemed advisable by the Board of Directors in
compliance with the requirements of the 1940 Act and the rules and regulations
thereunder and the Securities Exchange Act of 1934, as amended, and the rules
and regulations thereunder.
BOOK-ENTRY
Shares of Series B Preferred Stock will initially be held in the name
of Cede & Co. ("Cede") as nominee for The Depository Trust Company ("DTC"). The
Company will treat Cede as the holder of record of the Series B Preferred Stock
for all purposes. In accordance with the procedures of DTC, however, purchasers
of Series B Preferred Stock will be deemed the beneficial owners of shares
purchased for purposes of dividends, voting and liquidation rights. Purchasers
of Series B Preferred Stock may obtain registered certificates by contacting the
transfer agent.
23
DESCRIPTION OF RATING AGENCY GUIDELINES
RATING AGENCY GUIDELINES
The following is a summary of the terms of the rating agency
guidelines. This description may not be complete in all respects and is
qualified by reference to the Certificate of Designations relating to the Series
B Preferred Stock, the form of which is filed as an exhibit to this registration
statement. For the complete definitions of certain terms used in the rating
agency guidelines and summarized herein, please refer to the glossary that
appears at the end of the Statement of Additional Information as well as the
Certificate of Designations.
The Series B Preferred Stock will be rated by Moody's. Moody's has
established guidelines in connection with the Company's receipt of a rating of
"Aaa" for the Series B Preferred Stock on their date of original issue. Moody's,
a nationally recognized securities rating organization, issues ratings for
various securities reflecting the perceived creditworthiness of those
securities. The guidelines have been developed by Moody's in connection with
issuances of asset-backed and similar securities, including debt obligations and
various preferred stocks, generally on a case-by-case basis through discussions
with the issuers of these securities. The guidelines are designed to ensure that
assets underlying outstanding debt or preferred stock will be sufficiently
varied and will be of sufficient quality and amount to justify investment-grade
ratings. The guidelines do not have the force of law but are being adopted by
the Company in order to satisfy current requirements necessary for Moody's to
issue the above-described rating for the Series B Preferred Stock, which rating
is generally relied upon by investors in purchasing these or similar securities.
The guidelines provide a set of tests for portfolio composition and discounted
asset coverage that supplements (and in some cases is more restrictive than) the
applicable requirements of Section 18 of the 1940 Act. Moody's guidelines are
included in the Certificate of Designations relating to the Series B Preferred
Stock and are referred to in this prospectus as the "rating agency guidelines."
The Company intends to maintain assets having an aggregate discounted
value weekly at least equal to the basic maintenance amount specified by the
rating agency guidelines. See "--Asset Maintenance--Basic Maintenance Amount."
If the Company fails to meet this requirement and its failure is not
cured, the Company will be required to redeem some or all of the Series B
Preferred Stock. See "-- Redemption." The rating agency guidelines exclude from
the discounted asset value calculation certain types of securities in which the
Company may invest and also limit the Company's acquisition of futures contracts
or options on futures contracts, limit reverse repurchase agreements, limit the
writing of options on portfolio securities and limit the lending of portfolio
securities to 5% of the Company's total assets. The Company historically has
either not acquired these instruments or has engaged in investment strategies
requiring these instruments to only a limited degree. As a result, the Company
does not believe that compliance with the rating agency guidelines will have an
adverse effect on its portfolio or on the achievement of its investment
objectives.
The Company may, but is not required to, adopt any modifications to the
rating agency guidelines that may be established in the future by Moody's.
Failure to adopt these modifications, however, may result in a change in Moody's
rating or a withdrawal of a rating altogether. In addition, Moody's may, at any
time, change or withdraw the rating. As set forth in the Certificate of
Designations relating to the Series B Preferred Stock, the Board of Directors of
the Company may, without stockholder approval, adjust, modify, alter or change
the rating agency guidelines if Moody's advises the Company in writing that the
adjustment, modification, alteration or change will not adversely affect its
then current rating on the Series B Preferred Stock.
24
As described by Moody's, a preferred stock rating is an assessment of
the capacity and willingness of an issuer to pay preferred stock obligations.
The rating on the Series B Preferred Stock is not a recommendation to purchase,
hold or sell such shares, inasmuch as the rating does not comment as to market
price or suitability for a particular investor. Nor do the rating agency
guidelines address the likelihood that a holder of Series B Preferred Stock will
be able to sell such shares. The rating is based on current information
furnished to Moody's by the Company 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 Company will pay fees to Moody's for rating the Series B Preferred
Stock.
ASSET MAINTENANCE
The Company will be required to satisfy two separate asset maintenance
requirements under the terms of the Certificate of Designations relating to the
Series B Preferred Stock. These requirements are summarized below.
Asset Coverage. The Company will be required under the Certificate of
Designations to maintain as of the last business day of each March, June,
September and December of each year, an asset coverage of at least 200% (or such
higher percentage as may be required under the 1940 Act) with respect to all
outstanding senior securities of the Company which are stock, including the
Series B Preferred Stock. If the Company fails to maintain the asset coverage on
these dates and its failure is not cured within 60 days, the Company will be
required under certain circumstances to redeem certain of the shares of Series B
Preferred Stock. See "--Redemption."
If the shares of Series B Preferred Stock offered hereby had been
issued and sold and all of the shares of Series A Preferred Stock had been
redeemed as of June 30, 2003, the asset coverage immediately following the
issuance and sale (after giving effect to the deduction of the underwriting
discounts and estimated offering expenses of $_____) would have been computed as
follows:
Value of Company assets less
liabilities not constituting senior
securities $
---------------------------------------- ---------- = %
Senior securities representing $
indebtedness plus liquidation
preference of the Series B Preferred
Stock
Basic Maintenance Amount. The Company will be required under the
Certificate of Designations to maintain, as of each valuation date, assets
meeting specified guidelines of Moody's, as described under "--Rating Agency
Guidelines," having an aggregate discounted value at least equal to the basic
maintenance amount. The basic maintenance amount is the minimum asset coverage
specified by Moody's and generally is the dollar amount equal to:
o the sum of the aggregate liquidation preference of the Series B
Preferred Stock, including any unpaid dividends on the valuation
date plus all dividends on the Series B Preferred Stock accruing
during the 70 days following the valuation date, and the
Company's other liabilities due on, or within 90 days after, the
valuation date, less
o the discounted value of the Company's assets and cash and certain
high rated investments.
If the Company fails to meet this requirement as to any valuation date
and its failure is not cured within 14 days after the relevant valuation date,
the Company will be required to redeem certain of the shares of Series B
Preferred Stock. See "--Redemption."
Any security not in compliance with the rating agency guidelines
described under "--Rating Agency Guidelines" will be excluded from the
discounted asset value calculation.
Moody's guidelines impose specified discounts, referred to as Moody's
discount factors, to securities held by the Company. These discount factors and
guidelines for determining the market value of the Company's portfolio holdings
have been based on criteria established in connection with the rating of the
Series B Preferred Stock. These factors include, but are not limited to:
o the sensitivity of the market value of the relevant asset to
changes in interest rates,
o the liquidity and depth of the market for the relevant asset, the
credit quality of the relevant asset (for example, the lower the
rating of a corporate debt obligation, the higher the related
discount factor), and
25
o the frequency with which the relevant asset is marked to market.
The Moody's discount factor relating to any asset of the Company and
the basic maintenance amount, the assets eligible for inclusion in the
calculation of the discounted value of the Company's assets and certain
definitions and methods of calculation relating thereto may be changed from time
to time by the Board of Directors, provided that, among other things, these
changes will not impair the rating then assigned to the Series B Preferred Stock
by Moody's.
Under the rating agency guidelines, the Company is required to prepare
a maintenance report relating to each valuation date, which is generally the
last business day of each week. The maintenance report sets forth the assets of
the Company, the market value and the discounted value (as defined by Moody's)
of those assets and the basic maintenance amount. The Company will deliver the
maintenance reports to Moody's on a monthly basis. Annually, the Company will
deliver letters prepared by the Company's independent auditors regarding the
accuracy of the calculations made by the Company in the maintenance reports
prepared by the Company in that calendar year.
REDEMPTION
The Company will be required to redeem, at a redemption price equal to
$25.00 per share plus accumulated and unpaid dividends (whether or not earned or
declared) to the date of redemption, certain of the shares of Series B Preferred
Stock (to the extent permitted under the 1940 Act, Delaware law and any other
agreement relating to indebtedness of the Company), in the event that:
o the Company fails to maintain the quarterly asset coverage of at
least 200% and its failure is not cured on or before 60 days
following such failure (a "cure date"), or
o the Company fails to maintain assets having an aggregate
discounted value at least equal to the basic maintenance amount
as of any valuation date, and its failure is not cured on or
before the 14th day after the relevant valuation date (also, a
"cure date").
In the event of mandatory redemption, the Company will redeem the
minimum number of outstanding shares of Series B Preferred Stock which, if the
redemption had occurred immediately prior to the opening of business on a cure
date, would have resulted in:
o the quarterly asset coverage having been satisfied, or
o the Company's discounted asset value being equal to or greater
than the basic maintenance amount on that cure date.
The Company will be required to redeem all of the outstanding shares of
Series B Preferred Stock if the quarterly asset coverage or the discounted asset
value requirements described above cannot be satisfied through the redemption of
shares of Series B Preferred Stock.
In the event that shares of Series B Preferred Stock are redeemed due
to the Company failing to maintain a quarterly asset coverage of at least 200%
as noted above, the Company may, but is not required to, redeem a
sufficient number of shares of Series B Preferred Stock so that the quarterly
asset coverage after the redemption of the remaining outstanding shares of
Series B Preferred Stock and any other preferred stock after redemption will be
up to 225%.
In the event that shares of Series B Preferred Stock are redeemed due
to the failure to meet the minimum aggregate discounted asset value as noted
above, the Company may, but is not required to, redeem a sufficient number of
shares of Series B Preferred Stock so that the aggregate discounted value of the
Company's assets exceeds the basic maintenance amount of the remaining
outstanding shares of Series B Preferred Stock and any other preferred stock by
up to 10%.
26
If the Company does not have funds legally available for the redemption
of, or is otherwise unable to redeem, all the shares of Series B Preferred Stock
to be redeemed on any redemption date, the Company will redeem on such
redemption date that number of shares for which it has legally available funds,
or is otherwise able, to redeem ratably from each holder whose shares are to be
redeemed. The remainder of the shares required to be redeemed will be redeemed
on the earliest practicable date on which the Company will have funds legally
available for the redemption of, or is otherwise able to redeem, such shares
upon written notice of redemption ("notice of redemption").
If fewer than all shares of Series B Preferred Stock are to be
redeemed, the redemption will be made pro rata from each holder of shares in
accordance with the respective number of shares held by each the holder on the
record date for that redemption. If fewer than all shares of Series B Preferred
Stock held by any holder are to be redeemed, the notice of redemption mailed to
each holder will specify the number of shares to be redeemed from that holder.
Unless all accumulated and unpaid dividends for all past dividend periods will
have been or are contemporaneously paid or declared and funds for the payment
thereof deposited with the dividend-paying agent, no redemptions of Series B
Preferred Stock may be made.
DESCRIPTION OF CAPITAL STOCK AND OTHER SECURITIES
CAPITAL STOCK
Common Stock. The Company is authorized to issue 50,000,000 shares of
common stock, par value $1.00 per share. Each share of common stock has equal
voting, dividend, distribution and liquidation rights. The shares of common
stock outstanding are fully paid and nonassessable. The shares of common stock
are not redeemable and have no preemptive, conversion or cumulative voting
rights. As a NYSE-listed company, the Company is required to hold annual
meetings of its stockholders.
Preferred Stock. The Company's Board of Directors has the authority to
cause the Company to issue and sell up to 10,000,000 shares of preferred stock,
par value $1.00 per share. The terms of any shares of preferred stock have or
will be fixed by the Board of Directors and could materially limit and/or
qualify the rights of the holders of the Company's common stock.
On June 19, 1998, the Company issued and sold 6,000,000 shares of its
Series A Preferred Stock. Shares of Series A Preferred Stock are noncallable for
five years and have a liquidation preference of $25.00 per share plus an amount
equal to accumulated and unpaid dividends to the date of redemption. Holders of
shares of the Series A Preferred Stock are entitled to receive cumulative cash
dividends at the annual rate of 7.20% of the liquidation preference of $25.00
per share, when as and if declared by the Board of Directors and after creditors
claims are satisfied. Under the Certificate of Designations relating to the
Series A Preferred Stock, the Company is required to satisfy two separate asset
maintenance requirements: asset coverage of at least 200% and portfolio holdings
meeting specified guidelines by Moody's having an aggregate discounted value at
least equal to a basic maintenance amount. Holders of shares of the Series A
Preferred Stock have voting rights equivalent to those of the holders of common
stock (one vote per share) and, generally, vote together with the holders of
common stock as a single class. The terms of the Series A Preferred Stock are
substantially similar to the terms of the Series B Preferred Stock offered
hereby (except as to dividend rates). For further information regarding the
rights of preferred stock, including the Series A Preferred Stock, see
"Description of Series B Preferred Stock."
The Board of Directors has designated _____ shares of preferred stock
as the Series B Preferred Stock offered hereby. See "Description of Series B
Preferred Stock."
The following table shows the number of shares of (i) capital stock
authorized, (ii) capital stock held by the Company for its own account and (iii)
capital stock outstanding for each class of authorized capital stock of the
Company as of June 30, 2003.
27
Amount Outstanding
Amount Held (Exclusive of Amount
By Company For Held By Company For
Title of Class Amount Authorized Its Own Account Its Own Account)
-------------- ----------------- --------------- --------------------
Common stock...................... 50,000,000 1,349,507 29,882,056
Preferred stock................... 10,000,000
Series A Preferred Stock...... 6,000,000 0 6,000,000
TAXATION
The following is a summary of certain U.S. federal income tax
consequences to a stockholder of acquiring, holding and disposing of shares of
the Series B Preferred Stock. This section is based on the Code, Treasury
regulations promulgated thereunder, published rulings and court decisions, all
as currently in effect. These laws are subject to change, possibly on a
retroactive basis. PLEASE CONSULT YOUR OWN TAX ADVISOR CONCERNING THE
CONSEQUENCES OF INVESTING IN SHARES OF THE SERIES B PREFERRED STOCK IN YOUR
PARTICULAR CIRCUMSTANCES UNDER THE CODE AND THE LAWS OF ANY OTHER TAXING
JURISDICTION.
TAXATION OF THE COMPANY
The Company has elected to be taxed as a regulated investment company
under Subchapter M of the Code and intends to meet all other requirements that
are necessary for it to be relieved of federal taxes on income and gains it
distributes to stockholders. As a regulated investment company, the Company is
not subject to federal income tax on the portion of its investment company
taxable income (as that term is defined in the Code, without regard to the
deduction for dividends paid) and net capital gain (i.e., the excess of net
long-term capital gain over net short-term capital loss) that it distributes to
stockholders, provided that it distributes at least 90% of its investment
company taxable income for the year, and satisfies certain other requirements of
the Code. Additionally, a regulated investment company will be subject to a 4%
nondeductible excise tax to the extent it fails to distribute by the end of any
calendar year substantially all of its ordinary income for the calendar year and
capital gain net income for the one year period ending October 31 of that year,
plus certain other amounts. The Company intends to make sufficient distributions
of its qualified dividend income, ordinary income and capital gain net income
prior to the end of each calendar year to avoid liability for Company-level tax.
TAXATION OF STOCKHOLDERS
The Company anticipates distributing substantially all of its net
investment income for each taxable year. Dividends of net investment income paid
to a noncorporate U.S. stockholder before January 1, 2009 that are designated as
qualified dividend income will generally be taxable to such stockholder at a
maximum rate of 15%. However, the amount of dividend income that may be so
designated by the Company will generally be limited to the aggregate of the
eligible dividends received by the Company. In addition, the Company must meet
certain holding period and other requirements with respect to the shares on
which the Company received the eligible dividends, and the noncorporate U.S.
stockholder must meet certain holding period and other requirements with respect
to the shares of Series B Preferred Stock. Eligible dividends are, in general,
dividends from taxable domestic corporations and certain foreign corporations
(e.g., generally, foreign corporations incorporated in a possession of the
United States or in certain countries with a comprehensive tax treaty with the
United States, or the stock of which is readily tradable on an established
securities market in the United States). Dividends of net investment income that
are not designated as qualified dividend income and dividends of net short-term
capital gains will be taxable to stockholders at ordinary income rates to the
extent they are paid out of the Company's current or accumulated earnings and
profits. Dividends paid by the Company with respect to a taxable year will
qualify for the 70% dividends received deduction generally available to
corporations to the extent of the amount of dividends received by the Company
from certain domestic corporations for the taxable year, provided that certain
holding period and other requirements are met at the Company and stockholder
level. Stockholders will be advised annually as to the U.S. federal income
28
tax consequences of distributions made during the year, including the portion of
dividends paid that qualify for the reduced tax rate and the dividends received
deduction.
The Company intends to distribute to stockholders its net capital gain
for each taxable year. If net capital gain is distributed and designated as a
"capital gain dividend," it will be taxable to stockholders as long-term capital
gain, regardless of the length of time the stockholder has held its shares or
whether such gain was recognized by the Company prior to the date on which the
stockholder acquired its shares. Capital gain of a noncorporate U.S. stockholder
that is recognized before January 1, 2009 is generally taxed at a maximum rate
of 15% where the property is held by the Company for more than one year. Capital
gain of a corporate stockholder is taxed at the same rate as ordinary income.
Distributions on shares of the Series B Preferred Stock that do not
constitute qualified dividend income, ordinary income dividends or capital gain
dividends will be treated as a return of capital to the extent of (and in
reduction of) the stockholder's tax basis in its shares; any excess will be
treated as gain from the sale of its shares, as discussed below.
Prospective investors in the Series B Preferred Stock should be aware
that distributions from the Company will, all other things being equal, have the
effect of reducing the market value of the Series B Preferred Stock by the
amount of the distribution. If the market value is reduced below a stockholder's
cost, the distribution will nonetheless be taxable as described above, even if
the distribution effectively represents a return of invested capital. Investors
should consider the tax implications of buying shares just prior to a
distribution, when the price of shares may reflect the amount of the forthcoming
distribution.
SALE OR REDEMPTION OF SHARES
A stockholder will recognize gain or loss on the sale or redemption of
shares of Series B Preferred Stock in an amount equal to the difference between
the proceeds of the sale or redemption and the stockholder's adjusted tax basis
in the shares. All or a portion of any loss so recognized may be disallowed if
the stockholder acquires other substantially identical shares of the Company
within a period of 61 days beginning 30 days before such disposition.
In general, any gain or loss arising from (or treated as arising from)
the sale or redemption of shares of Series B Preferred Stock will be considered
capital gain or loss and will be long-term capital gain or loss if the shares
were held for more than one year. However, any capital loss arising from the
sale or redemption of shares held for six months or less will be treated as a
long-term capital loss to the extent of the amount of capital gain dividends
received on (or undistributed capital gains credited with respect to) such
shares. Capital gain of a noncorporate U.S. stockholder that is recognized
before January 1, 2009 is generally taxed at a maximum rate of 15% where the
property is held by the stockholder for more than one year. Capital gain of a
corporate stockholder is taxed at the same rate as ordinary income.
BACKUP WITHHOLDING
The Company will be required in certain cases to backup withhold and
remit to the U.S. Treasury a portion of qualified dividend income, ordinary
income dividends, capital gain dividends and the proceeds of redemption of
shares, paid to any stockholder (1) who has provided either an incorrect tax
identification number or no number at all, (2) who is subject to backup
withholding by the Internal Revenue Service for failure to report the receipt of
interest or dividend income properly or (3) who has failed to certify to the
Company that it is not subject to backup withholding or that it is a corporation
or other "exempt recipient." Backup withholding is not an additional tax and any
amounts withheld may be refunded or credited against a stockholder's federal
income tax liability, provided the appropriate information is furnished to the
Internal Revenue Service.
CERTAIN PROVISIONS OF THE RESTATED CERTIFICATE OF INCORPORATION
AND BY-LAWS; ANTI-TAKEOVER PROVISIONS
The Company presently has provisions in its Restated Certificate of
Incorporation and By-Laws (together, in each case, its "governing documents")
which could make it more difficult to convert the Company's status to an
29
open-end investment company. The affirmative vote of the holders of 66 2/3% of
the outstanding shares of capital stock of the Company is required to authorize
the conversion of the Company from a closed-end to an open-end investment
company and to authorize a merger or consolidation of the Company with an
open-end investment company. These and other provisions of the governing
documents of the Company may be regarded as "anti-takeover" provisions. In
addition, the affirmative vote of 66 2/3% of the outstanding shares of capital
stock of the Company is required to approve the sale of all or substantially all
of the assets of the Company. These governing documents of the Company are on
file with the Commission.
The Board of Directors has determined that the foregoing voting
requirements are in the best interests of the stockholders generally.
CUSTODIAN, TRANSFER AGENT, REGISTRAR AND DIVIDEND-PAYING AGENT
Deutsche Bank Trust Company Americas, which is located at 130 Liberty
Street, New York, New York 10006, acts as custodian of the Company's securities,
cash and other assets directly or through a book-entry system. Deutsche Bank
Trust Company Americas is responsible for delivering and receiving payment for
securities sold by the Company, receiving and paying for securities purchased by
the Company, collecting income from investments of the Company and performing
other duties, all as directed by an authorized person of the Company. Mellon
Investor Services LLC, which is located at 85 Challenger Road, Ridgefield Park,
New Jersey 07660, acts as the Company's transfer agent, registrar and
dividend-paying agent and will serve in that capacity with respect to the Series
B Preferred Stock.
UNDERWRITING
Citigroup Global Markets Inc. and __________ are acting as
underwriters in this offering. Subject to the terms and conditions stated in the
underwriting agreement, dated the date of this prospectus, each underwriter
named below has agreed to purchase, and the Company has agreed to sell to that
underwriter, the number of shares of Series B Preferred Stock set forth opposite
the underwriter's name.
NUMBER OF SERIES B
UNDERWRITER PREFERRED SHARES
----------- -------------------
Citigroup Global Markets Inc.....................
The underwriting agreement provides that the obligations of the
underwriters to purchase the shares included in this offering are subject to
approval of legal matters by counsel and to other conditions. The underwriters
are obligated to purchase all the Series B Preferred Stock, if they purchase any
of those shares. The Company has agreed to indemnify the underwriters against
certain liabilities, including liabilities arising under the Securities Act of
1933, as amended, or to contribute to payments the underwriter may be required
to make for any of those liabilities.
OFFERING OF SERIES B PREFERRED STOCK
The Company has been advised by the underwriters that they propose
initially to offer some of the Series B Preferred Stock directly to the public
at the public offering price set forth on the cover page of this prospectus and
some of the shares to dealers at the public offering price less a concession not
to exceed $_____ per share. The Company will pay an underwriting discount of
$_____ per share, which is equal to _____% of the initial offering price per
share. After the initial public offering, the underwriters may change the public
offering price and the concession. Investors must pay for any Series B Preferred
share purchased in the initial public offering on or before ______, 2003.
Prior to the offering, there has been no public market for the Series B
Preferred Stock. Application has been made to list the Series B Preferred Stock
on the NYSE. However, during an initial period which is not expected to exceed
30 days after the date of this prospectus, the Series B Preferred Stock will not
be traded on any securities exchange. During this period, the underwriters
intend to make a market in the Series B Preferred Stock;
30
however, they have no obligation to do so. Consequently, an investment in the
Series B Preferred Stock may be illiquid during this period.
In connection with the offering, the underwriters may purchase and sell
shares of Series B Preferred Stock in the open market. These transactions may
include short sales and stabilizing transactions. Short sales involve syndicate
sales of shares in excess of the number of shares to be purchased by the
underwriters in the offering, which creates a syndicate short position.
Stabilizing transactions consist of bids for or purchases of shares in the open
market while the offering is in progress.
The underwriters also may impose a penalty bid. Penalty bids permit the
underwriters to reclaim a selling concession from a syndicate member when the
underwriters repurchase shares originally sold by that syndicate member in
order to cover syndicate short positions or make stabilizing purchases.
Any of these activities may have the effect of preventing or retarding
a decline in the market price of the stock. They may also cause the price of the
Series B Preferred Stock to be higher than the price that would otherwise exist
in the open market in the absence of these transactions. The underwriters may
conduct these transactions on the NYSE or in the over-the-counter market, or
otherwise. If the underwriters commence any of these transactions, they may
discontinue them at any time.
PROVISION OF OTHER SERVICES TO THE COMPANY
The underwriters or their affiliates have acted in the past and the
Company anticipates that the underwriters or their affiliates may continue from
time to time to act as brokers or dealers in executing the Company's portfolio
transactions. The underwriters and their affiliates are active underwriters of,
and dealers in, securities and act as market makers in a number of these
securities, and therefore can be expected to engage in transactions with,
including portfolio transactions, and perform services for, the Company in the
ordinary course of their business.
The principal business address of Citigroup Global Markets Inc. is 388
Greenwich Street, New York, New York 10013.
VALIDITY OF SERIES B PREFERRED STOCK
The validity of the shares of Series B Preferred Stock will be passed
on for the Company by Sullivan & Cromwell LLP, New York, New York. Certain legal
matters will be passed on by Simpson Thacher & Bartlett LLP, New York, New York,
counsel to the underwriters.
EXPERTS
Ernst & Young LLP are the independent auditors of the Company. The
audited financial statements of the Company and certain of the information
appearing under the caption "Financial Highlights" included in this prospectus
have been audited by Ernst & Young LLP. Ernst & Young LLP has an office at 5
Times Square, New York, New York 10036, and also performs tax and other
professional services for the Company.
ADDITIONAL INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934 and the 1940 Act and in accordance therewith
files reports and other information with the Commission. Reports, proxy
statements and other information filed by the Company with the Commission
pursuant to the informational requirements of such Acts can be inspected and
copied at the public reference facilities maintained by the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549. The Commission maintains a website
at http://www.sec.gov containing reports, proxy and information statements and
other information regarding registrants, including the Company, that file
electronically with it.
31
The Company's common stock and Series A Preferred Stock is listed on
the NYSE, and reports, proxy statements and other information concerning the
Company and filed with the Commission by the Company can be inspected at the
offices of the NYSE, 20 Broad Street, New York, New York 10005.
This prospectus constitutes part of a registration statement filed by
the Company with the Commission under the Securities Act of 1933 and the 1940
Act. This prospectus omits certain of the information contained in the
registration statement, and reference is hereby made to the registration
statement and related exhibits for further information with respect to the
Company and the Series B Preferred Stock offered hereby. Any statements
contained herein concerning the provisions of any document are not necessarily
complete, and, in each instance, reference is made to the copy of such document
filed as an exhibit to the registration statement or otherwise filed with the
Commission. Each such statement is qualified in its entirety by such reference.
The complete registration statement may be obtained from the Commission upon
payment of the fee prescribed by its rules and regulations.
TABLE OF CONTENTS OF
STATEMENT OF ADDITIONAL INFORMATION
A Statement of Additional Information dated the date hereof has been
filed with the Commission and is incorporated by reference in this prospectus.
You may obtain a copy of the Statement of Additional Information by writing to
the Company at its address at 450 Lexington Avenue, Suite 3300, New York, New
York 10017, or by calling the Company at (212) 916-8400 or toll-free at (800)
436-8401. The Table of Contents of the Statement of Additional Information is as
follows:
PAGE
----
General Information and History......................................... B-2
Investment Objectives and Policies...................................... B-2
Management of the Company............................................... B-3
Principal Stockholders.................................................. B-9
Code of Ethics and Related Matters...................................... B-9
Investment Advisory and Other Services.................................. B-9
Brokerage Allocation and Other Practices................................ B-10
Net Asset Value......................................................... B-10
Financial Statements.................................................... B-11
Taxation................................................................ B-11
General Information..................................................... B-15
Counsel and Independent Auditors........................................ B-16
Glossary................................................................ B-16
32
====================================== ======================================
_________ SHARES
GENERAL AMERICAN
INVESTORS COMPANY, INC.
___% CUMULATIVE PREFERRED STOCK,
SERIES B
(LIQUIDATION PREFERENCE
$25.00 PER SHARE)
-----------------
PROSPECTUS
________, 2003
-----------------
Citigroup
[Underwriter]
====================================== ======================================
33
SUBJECT TO COMPLETION DATED ____________, 2003
GENERAL AMERICAN INVESTORS COMPANY, INC.
-----------------------
STATEMENT OF ADDITIONAL INFORMATION
General American Investors Company, Inc. (the "Company") is a
diversified closed-end management investment company that seeks long-term
capital appreciation by investing primarily in a portfolio of equity securities.
Lesser emphasis is placed on current income.
This Statement of Additional Information ("SAI") is not a prospectus,
but should be read in conjunction with the prospectus of the Company dated
___________, 2003. This SAI does not include all information that a prospective
investor should consider before purchasing shares of Series B Preferred Stock,
and investors should obtain and read the prospectus prior to purchasing shares
of Series B Preferred Stock. You may obtain a copy of the prospectus without
charge by calling the Company at (212) 916-8400 or toll-free at (800) 436-8401.
This SAI incorporates by reference the entire prospectus.
-----------------------
TABLE OF CONTENTS
PAGE
----
General Information and History......................................... B-2
Investment Objectives and Policies...................................... B-2
Management of the Company............................................... B-3
Principal Stockholders.................................................. B-9
Code of Ethics and Related Matters...................................... B-9
Investment Advisory and Other Services.................................. B-9
Brokerage Allocation and Other Practices................................ B-10
Net Asset Value......................................................... B-10
Financial Statements.................................................... B-11
Taxation................................................................ B-11
General Information..................................................... B-15
Counsel and Independent Auditors........................................ B-16
Glossary................................................................ B-16
The prospectus and this SAI omit certain of the information contained
in the registration statement of Form N-2 filed with the Securities and Exchange
Commission, Washington, D.C. The registration statement may be obtained from the
Commission upon payment of the fee prescribed, or inspected at the Commission's
office at no charge.
This Statement of Additional Information is dated _______________,
2003.
B-1
RED HERRING TEXT
----------------
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.
GENERAL INFORMATION AND HISTORY
General American Investors Company, Inc. (the "Company") was organized
as a Delaware corporation on October 15, 1928 and succeeded to a similar
business established in 1927. The Company is a diversified closed-end investment
company, and is an internally-managed independent organization. Net assets
applicable to the common stock, par value $1.00 of the Company were $900,995,376
as of June 30, 2003. In addition, the aggregate liquidation value of the
Company's 6,000,000 shares of 7.20% Tax-Advantaged Cumulative Preferred Stock,
Series A, par value $1.00 per share (liquidation preference $25.00 per share)
("Series A Preferred Stock"), issued on June 19, 1998, was $150,000,000 as of
June 30, 2003.
In 1973, the Company commenced providing investment advisory services
to outside accounts and, in 1974, it registered under the Investment Advisers
Act of 1940, as amended (the "Advisers Act"). In 1980, the Company formed a
wholly-owned subsidiary, General American Advisers, Inc., which also registered
under the Advisers Act. The subsidiary, which began operations in April 1981,
was formed to enable the Company to remain in compliance with the provisions of
the Internal Revenue Code, which, in effect, limit the amount of service income
that may be earned by a regulated investment company. As of December 31, 1995,
the subsidiary discontinued its operations and, in early 1996, deregistered as
an investment advisory company. On July 31, 1998, the Company ceased to provide
investment advisory services to outside accounts and in January 1999, the
Company deregistered as an investment advisory company.
Shares of the Company's common stock are listed and traded on the New
York Stock Exchange (under the symbol "GAM"). The Company intends to redeem all
of the outstanding Series A Preferred Stock on September 23, 2003, in accordance
with the terms of the Certificate of Designations, Preferences and Rights
relating to the Series A Preferred Stock. Shares of the Series A Preferred Stock
are listed and traded on the New York Stock Exchange (under the symbol "GAM
Pr").
INVESTMENT OBJECTIVES AND POLICIES
The Company's principal investment objective is long-term capital
appreciation. Lesser emphasis is placed on current income. These objectives may
not be changed without the affirmative vote of the holders of a majority of the
Company's outstanding voting securities.
FUNDAMENTAL POLICIES
Except for the information set forth in items (2) and (5) below, the
following are fundamental policies which may not be changed without the
affirmative vote of the holders of a majority of the Company's voting
securities:
(1) The Company may issue debt and senior equity securities to the
extent permitted by the Investment Company Act of 1940, as
amended (the "1940 Act").
(2) The Company has no policy with respect to short sales, purchases
on margin or the writing of put and call options. Prior to 2000,
the Company had not engaged in transactions of this nature;
however, it has complete freedom of action to do so in the
future and during the past three years the Company has engaged
in short sales of securities to a limited extent, principally
for hedging purposes.
(3) The Company may not borrow money in excess of 25% of its gross
assets, except for the purchase or redemption of outstanding
senior securities.
(4) The Company may not underwrite securities in excess of 20% of
its gross assets.
(5) The Company has no policy restricting the acquisition of
restricted securities (securities that must be registered under
the Securities Act of 1933, as amended) before they may be
offered or sold to the public.
B-2
(6) The Company's holdings in a particular industry may not be
increased by additional investment in that industry beyond 50%
of the value of the Company's gross assets.
(7) The Company does not purchase or sell real estate.
(8) The Company may not trade in commodities and commodity contracts
in excess of 20% of its gross assets.
(9) The Company may not make loans (other than through the purchase
of a portion of an issue of bonds, debentures or other
securities issued by another person) to other persons in an
amount exceeding 10% to any one person or exceeding in the
aggregate 20% of its gross assets.
(10) The Company does not make investments for the purpose of
participating in management, although it maintains the freedom
to do so if it should become necessary to conserve any
investment.
Other than as set forth above and subject to the requirements of the
1940 Act relating to diversified investment companies, the Company's investment
policy is flexible, as its charter permits investment in all forms of securities
without limiting the portion of its assets which may be invested in any one
type. The Company's operating policy, however, is to invest not more than 25% of
the value of its assets in any one particular industry.
MANAGEMENT OF THE COMPANY
DIRECTORS
The following table sets forth certain information with respect to each
director of the Company. The address of each director is c/o General American
Investors Company, Inc., 450 Lexington Avenue, Suite 3300, New York, New York
10017.
Name, Age, Position(s) with Company
and Length of Time Served(1) Principal Occupation(s) During Past Other Directorships and Affiliations
Five Years
--------------------------------------------------------------------------------------------------------------------
INDEPENDENT DIRECTORS
--------------------------------------------------------------------------------------------------------------------
Arthur G. Altschul, Jr. (39) Managing Member, Diaz & Altschul Delta Opportunity Fund, Ltd.,
Director since 1995 Capital Management, LLC (investments Director; Medicis Pharmaceutical
and securities) Corporation, Director; The Overbrook
Foundation, Trustee
Lawrence B. Buttenwieser (71) Counsel since 2002 and Partner
Director since 1967 (1966-2002), Katten Muchin Zavis
Chairman since 1995 Rosenman and predecessor firms
(lawyers)
Lewis B. Cullman (84) President, Cullman Ventures LLC Chess-in-the-Schools, Inc., Chairman,
Director since 1961 (formerly Cullman Ventures, Inc.) Board of Trustees; Metropolitan
(calendars and catalogs) Museum of Art, Honorary Trustee;
Museum of Modern Art, Honorary
Trustee and Vice Chairman,
International Council; Neurosciences
Research Foundation, Vice Chairman,
Board of Trustees; The New York
Botanical Garden, Senior Vice
Chairman, Board of Managers
B-3
Name, Age, Position(s) with Company
and Length of Time Served(1) Principal Occupation(s) During Past Other Directorships and Affiliations
Five Years
--------------------------------------------------------------------------------------------------------------------
Gerald M. Edelman (74) Member and Chairman of the Neurosciences Institute of the
Director since 1976 Department of Neurobiology, The Neurosciences Research Foundation
Scripps Research Institute Director and President
John D. Gordan, III (57) Partner, Morgan, Lewis & Bockius LLP
Director since 1986 (lawyers)
Sidney R. Knafel (72) Managing Partner, SRK Management BioReliance Corporation, Chairman,
Director since 1994 Company (private investment company) Board of Directors; IGENE
Biotechnology, Inc., Director;
Insight Communications Company, Inc.,
Chairman, Board of Directors
Richard R. Pivirotto (73) President, Richard R. Pivirotto Co., General Theological Seminary,
Director since 1971 Inc. (self-employed consultant) Trustee; The Gillette Company,
Director; The Greenwich Bank and
Trust Company, Director; Greenwich
Hospital Corporation, Trustee;
Immunomedics, Inc., Director; New
York Life Insurance Company,
Director; Princeton University,
Charter Trustee Emeritus
Joseph T. Stewart, Jr. (74) Corporate director and trustee, Foundation of the University of
Director since 1987 Executive Consultant, Johnson & Medicine and Dentistry of New Jersey,
Johnson (1990-1999) Trustee; Marine Biological
Laboratory, Member, Advisory Council;
United States Merchant Marine
Academy, Trustee, Board of Advisors
Raymond S. Troubh (77) Financial Consultant Ariad Pharmaceuticals, Inc.,
Director since 1989 Director; Diamond Offshore Drilling,
Inc., Director; Enron Corp.,
Chairman, Board of Directors; Gentiva
Health Services, Inc., Director;
Hercules Incorporated, Director;
Petrie Stores Liquidating Trust,
Trustee; Triarc Companies, Inc.,
Director; WHX Corporation, Director
INTERESTED DIRECTOR
--------------------------------------------------------------------------------------------------------------------
Spencer Davidson(2) (61) President and Chief Executive Medicis Pharmaceutical Corporation,
Director, President and Officer, General American Investors Director; Neurosciences Research
Chief Executive Officer since 1995 Company, Inc. Foundation, Trustee
----------
(1) Each director is elected for a one year term of office.
(2) Mr. Davidson is an "interested" director, as defined in the 1940 Act,
because he is an officer of the Company.
Normally, holders of shares of preferred stock of the Company,
including the Series B Preferred Stock, voting as a separate class, will elect
two members of the Company's Board of Directors, and holders of preferred stock
and common stock, voting as a single class, will elect the remaining directors.
See "Description of Series B
B-4
Preferred Stock--Voting Rights" in the prospectus. Messrs. Altschul and Knafel
have been designated as the preferred stock directors and are to be elected only
by the holders of the Company's preferred stock.
OFFICERS
The following table sets forth certain information with respect to each
officer of the Company other than Mr. Spencer Davidson, President and Chief
Executive Officer of the Company, information with respect to whom is set forth
above. The address of each officer is c/o General American Investors Company,
Inc., 450 Lexington Avenue, Suite 3300, New York, New York 10017.
Principal Occupation(s) During
Name, Age, Position(s) with Company and Length of Time Served(1) Past Five Years
Eugene L. DeStaebler, Jr. (64)............................................... Vice-President, Administration
Vice-President, Administration since 1978
Principal Financial Officer since 2002
Peter P. Donnelly (54)....................................................... Vice-President
Vice-President since 1991
Andrew V. Vindigni (43)...................................................... Vice-President
Vice-President since 1991
Diane G. Radosti (50)........................................................ Treasurer
Treasurer since 1990
Principal Accounting Officer since 2003
Carole Anne Clementi (56).................................................... Secretary
Secretary since 1994
----------
(1) Each officer is elected for a one year term of office.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has an Audit Committee comprised of the
following directors, all of whom are "non-interested" directors: Mr. Sidney R.
Knafel, Chairman, Mr. Arthur G. Altschul, Jr., Mr. Lawrence B. Buttenwieser, Mr.
Lewis B. Cullman, Mr. John D. Gordan, III and Mr. Raymond S. Troubh. Generally,
the Audit Committee assists the Board of Directors in its oversight of the
Company's accounting and financial reporting and internal controls, the
independent audit of the Company's financial statements, the selection of the
independent auditors and the evaluation of the independence of the independent
auditors. The Audit Committee met twice during the fiscal year ended December
31, 2002.
The Board of Directors has a Compensation Committee comprised of the
following directors: Mr. Joseph T. Stewart, Jr., Chairman, Mr. Arthur G.
Altschul, Jr., Mr. Lawrence B. Buttenwieser, Mr. Sidney R. Knafel, Mr. Richard
R. Pivirotto and Mr. Raymond S. Troubh; and Mr. Lewis B. Cullman and Dr. Gerald
M. Edelman, alternates. Generally, the Compensation Committee reviews the
operations of the Company and performance and contributions made during each
year by its officers and employees, reviews management proposals for year-end
supplemental compensation and levels of compensation for the ensuing year,
reviews comparable operating and compensation data of other companies in the
investment industry, including information and trends provided by an outside
consulting firm, and makes recommendations on matters of compensation to the
Board of Directors. The Compensation Committee met once during the fiscal year
ended December 31, 2002.
The Board of Directors has an Executive Committee comprised of the
following directors: Mr. Richard R. Pivirotto, Chairman, Mr. Lawrence B.
Buttenwieser, Mr. Spencer Davidson (an "interested person" of the Company), Dr.
Gerald M. Edelman and Mr. Joseph T. Stewart, Jr.; and Mr. John D. Gordan, III,
alternate. The Executive Committee has the authority to exercise the powers of
the Board of Directors in the management of the
B-5
business and affairs of the Company when the Board is not in session. The
Executive Committee did not meet during the fiscal year ended December 31, 2002.
The Board of Directors has a Nominating Committee comprised of the
following directors (all of the Company's "non-interested" directors): Mr.
Richard R. Pivirotto, Chairman, Mr. Arthur G. Altschul, Jr., Mr. Lawrence B.
Buttenwieser, Mr. Lewis B. Cullman, Dr. Gerald M. Edelman, Mr. John D. Gordan,
III, Mr. Sidney R. Knafel, Mr. Joseph T. Stewart, Jr. and Mr. Raymond S. Troubh.
The Nominating Committee is responsible for directing the process whereby
individuals are selected and nominated to serve as directors of the Company.
This includes canvassing, recruiting, interviewing and soliciting independent
director candidates and making recommendations to the Board with respect to
individuals to be nominated to serve as directors. In addition, the Nominating
Committee will consider nominees recommended by, and respond to related
inquiries received from, stockholders. The Nominating Committee met once during
the fiscal year ended December 31, 2002.
The Board of Directors has a Pension Committee comprised of the
following directors: Mr. John D. Gordan, III, Chairman, Mr. Lewis B. Cullman,
Dr. Gerald M. Edelman, Mr. Richard R. Pivirotto, and Mr. Raymond S. Troubh; and
Mr. Sidney R. Knafel and Mr. Joseph T. Stewart, Jr., alternates. The Pension
Committee is responsible for the general administration of the Company's
Employees' Retirement Plan and establishes and carries out a funding policy and
method consistent with the objectives of the Plan. The Pension Committee met
once during the fiscal year ended December 31, 2002.
SECURITY OWNERSHIP OF MANAGEMENT
The dollar range of the value of equity securities of the Company
beneficially owned by each director as of June 30, 2003 is as follows:
Name of Director Dollar Range of Equity Securities in the Company
-----------------------------------------------------------------------------------------
INDEPENDENT DIRECTORS
Arthur G. Altschul, Jr. Over $100,000
Lawrence B. Buttenwieser Over $100,000
Lewis B. Cullman Over $100,000
Gerald M. Edelman $50,001-$100,000
John D. Gordan, III Over $100,000
Sidney R. Knafel Over $100,000
Richard R. Pivirotto $50,001-$100,000
Joseph T. Stewart, Jr. Over $100,000
Raymond S. Troubh Over $100,000
INTERESTED DIRECTOR
Spencer Davidson Over $100,000
B-6
COMPENSATION
The following table sets forth the compensation received during 2002
from the Company by its directors and three highest-paid officers.
Pension or
retirement
benefits
Aggregate accrued during
Name of individual Position compensation 2002(1)
-------------------------------------------------------------------------------------------------------------------
Spencer Davidson President and Chief Executive Officer, $2,200,000 $72,000
Director(2)
Andrew V. Vindigni Vice-President 1,100,000 48,000
Eugene L. DeStaebler, Jr. Vice-President, Administration 500,000 36,000
Arthur G. Altschul, Jr. Director(3)(4)(5) 15,000 -
Lawrence B. Buttenwieser Director, Chairman of the Board(2)(3)(4)(5) 15,000 -
Lewis B. Cullman Director(3)(5)(6) 15,000 -
Gerald M. Edelman Director(2)(5)(6) 14,000 -
John D. Gordan, III Director(3)(5)(6) 15,000 -
Bill Green(7) Director(3)(4)(5) 10,000 -
Sidney R. Knafel Director(3)(4)(5) 15,000 -
Richard P. Pivirotto Director(2)(4)(5)(6) 14,000 -
Joseph T. Stewart, Jr. Director(2)(4)(5) 14,000 -
Raymond S. Troubh Director(3)(4)(5)(6) 15,000 -
----------
(1) The amounts shown in this column represent the Company's payments made
during 2002 to the trustee of the Company's Employees' Thrift Plan, as
described below, or accounting reserves established during 2002 under the
Company's Excess Contribution Plan, as described below, on behalf of the
respective individuals or group members.
(2) Member of Executive Committee. (3) Member of Audit Committee. (4) Member of
Compensation Committee. (5) Member of Nominating Committee. (6) Member of
Pension Committee.
(7) Mr. Green served as a director through the date of his death, October 14,
2002.
During 2002, each director who was not a paid officer of the Company
received a fee of $10,000 as an annual retainer, a fee of $500 for attendance at
each directors' meeting and $500 for each committee meeting which he attended in
his capacity as a director.
With respect to the Company's Employees' Thrift Plan, the Company
matches 150% of an employee's contributions up to 8% of basic salary to the
plan. Company contributions are invested in shares of the Company's common
stock. An employee's interest in Company contributions to his account is fully
vested after six years of service. Partial vesting begins after two years of
participation in the plan. All employees, including officers, are eligible to
participate in the Thrift Plan after six months of service with the Company.
Employees whose annual compensation exceeds $150,000 are required to invest
their future contributions to the plan in shares of the Company's common stock,
and their existing plan balances will be converted into the Company's common
stock over the three years next succeeding the attainment of that compensation
level.
B-7
The Company has an Employees' Retirement Plan, which is broadly
characterized as a defined benefit plan. The Company contributes to the trustee
for the plan annual costs, which include actuarially determined current service
costs and amortization of prior service costs. Retirement benefits are based on
final average earnings (basic salary and beginning in 2000, bonuses, but only
for non-highly compensated employees, exclusive of bonuses for highly
compensated employees, overtime, commissions, pension, retainer fees, fees under
contracts or any other forms of additional or special compensation, for the five
consecutive years in which the participant had the highest basic salary during
the last ten years of service) and years of credited service, less an offset for
social security covered compensation, plus an additional amount equal to $50 for
each year of credited service. All employees, including officers, over age 21
commence participation in the plan after one year of service and are fully
vested after six years of service. Partial vesting begins after two years of
service. Participants are eligible to receive normal retirement benefits at age
65. In certain instances, a reduced benefit may begin upon retirement between
ages 55 and 65.
The following table shows the estimated annual retirement benefits
(including amounts attributable to the Company's Excess Benefit Plan, as
described below), which are subject to a deduction based on a portion of social
security covered compensation, payable on a straight life annuity basis, at
normal retirement date to all eligible employees, including officers, in
specified compensation and years-of-service classifications:
Estimated Annual Benefits Based Upon Years of Credited Service
--------------------------------------------------------------
10 20 30 40
Final Average
Earnings
$100,000 $16,830 $33,665 $50,495 $61,900
200,000 33,120 66,245 99,365 121,630
300,000 49,410 98,825 148,235 181,360
400,000 65,700 131,405 197,105 241,090
500,000 81,990 163,985 245,975 300,820
600,000 98,280 196,565 294,845 360,550
For each of the officers of the Company listed in the compensation
table on page B-7, the following indicates his years of credited service in the
Company's Retirement Plan and basic salary for 2002: Spencer Davidson (8)
$600,000, Andrew V. Vindigni (14) $400,000 and Eugene L. DeStaebler, Jr. (26)
$300,000.
The Company also has Excess Contribution and Excess Benefit Plans.
Under such plans, the Company may establish accounting reserves and make
payments directly to selected participants in the Company's Thrift and
Retirement Plans, respectively, to the extent the levels of contributions or
benefits for such participants under such plans are limited by Sections 415, 416
and/or 401(a)(17) of the Internal Revenue Code. Such benefits commence at the
time benefits commence under the related tax-qualified plan. Messrs. Davidson,
Vindigni and DeStaebler are participants in both the Excess Contribution and
Excess Benefit Plans.
PROXY VOTING POLICIES
The overriding policy that guides the manner in which the Company votes
proxies is the best long-term interests of the Company. While generally
supporting and voting in accordance with the recommendations of management, the
Company reviews each proposal and any competing interests on a case-by-case
basis. Proposals and recommendations made by management of a portfolio company
are reviewed to gain assurance that management's positions are consistent with
its integrity and the long-term interests of the company. When this is the case,
significant weight is given to the views of management when the Company votes
proxies. Where a proposal negatively impacts the rights or privileges of the
Company's portfolio securities, the Company would vote against such proposal
unless adequate justification for it were presented. Faced with proposals that
involve changes in the state of incorporation, mergers or other restructuring,
the Company would, if necessary, complete its review of the rationale for the
proposal by contacting the company's representatives and, with few exceptions,
vote in favor of management's recommendations. Proposals relating to
anti-takeover provisions are considered in light of the Company's assessment of
the capability of current management, the duration of the proposal and the
negative impact it might have on the attractiveness of the company to future
investors, among other factors. The Company will generally vote with management
on proposals relating to changes of a company's capital structure, based on a
B-8
review of the particular facts before finalizing any decision. The Company also
generally votes in favor of well-structured stock option plans and management
compensation programs. The Company generally supports management recommendations
with respect to stockholder proposals relating to social issues.
PRINCIPAL STOCKHOLDERS
As of June 30, 2003, the following persons owned of record or were
known by the Company to have owned beneficially 5% or more of its outstanding
common stock:
Title of Security, Name and Address Type and Percentage of Ownership
----------------------------------- --------------------------------
The Depository Trust Company Of record ownership only, 79.7%
Cede & Co.
P.O. Box 20
Bowling Green Station
New York, New York 10274
As of June 30, 2003, all officers and directors of the Company as a
group owned approximately 7.66% of the Company's outstanding shares of common
stock. In addition, approximately 1.89% of the Company's outstanding shares of
common stock were held as of such date by the trustee for the Company's
Employees' Thrift Plan with respect to which the Company has the power to vote.
CODE OF ETHICS AND RELATED MATTERS
The Company has had a written code of ethics since 1981, which was
amended most recently as of October 9, 2002, with respect to trading in
securities by its directors, officers and employees. The code generally
prohibits such persons from taking personal advantage of any information they
may have concerning the Company's current investment decisions or programs. The
code permits personnel subject to its provisions to invest in securities subject
to procedures, such as preclearance of securities transactions, reasonably
necessary to prevent access persons from engaging in any unlawful conduct set
forth in Rule 17j-1. Access persons will not be given preclearance to trade in
securities which are in the process of being purchased or sold, or securities
being considered for purchase or sale, by the Company. The code of ethics can be
reviewed and copied at the Securities and Exchange Commission's Public Reference
Room in Washington, D.C. Information on the operations of the Reference Room may
be obtained by calling the Securities and Exchange Commission at (202) 942-8090.
The code of ethics is also available on the EDGAR database on the Securities and
Exchange Commission's website at http://www.sec.gov. Copies of the code of
ethics may also be obtained, after paying a duplicating fee, by electronic
request at the following e-mail address: publicinfo@sec.gov, or by writing the
Securities and Exchange Commission's Public Reference Room Section, Washington,
D.C. 20549-0102.
INVESTMENT ADVISORY AND OTHER SERVICES
CUSTODIAN
Deutsche Bank Trust Company Americas, 130 Liberty Street, New York, New
York 10006, is the custodian for the assets of the Company. The custodian is
responsible for holding all cash and securities of the Company, directly or
through a book-entry system, delivering and receiving payment for securities
sold by the Company, receiving and paying for securities purchased by the
Company, collecting income from investments of the Company and performing other
duties, all as directed by an authorized person of the Company. During 2002,
2001 and 2000, the Company paid $34,500, $38,500 and $37,500, respectively, in
fees to Deutsche Bank Trust Company Americas for its custodial services.
B-9
REGISTRAR, TRANSFER AGENT AND DIVIDEND-PAYING AGENT
Mellon Investor Services LLC, which is located at 85 Challenger Road,
Ridgefield Park, New Jersey 07660, acts as the Company's transfer agent,
registrar and dividend-paying agent with respect to the Company's common stock
and Series A Preferred Stock and will serve in such capacity with respect to the
Series B Preferred Stock.
BROKERAGE ALLOCATION AND OTHER PRACTICES
The Company's general policy regarding the execution of securities
transactions is to select brokers and dealers on the basis of the most favorable
markets, prices and execution of orders. A certain amount of the Company's
securities transactions are placed with brokers and dealers who provide
brokerage and research services and in these circumstances the commissions paid
may be higher than those which might otherwise have been paid to another broker
or dealer if those services had not been provided.
Research services generally include receipt of written reports,
attendance at meetings or participation in discussions with respect to specific
subjects, such as a company, an industry or the economic outlook. Block
availability is also a consideration in determining the selection of brokers.
In negotiating brokerage commissions on securities transactions, the
Company's trader, with his awareness of competitive rates, negotiates the most
favorable commission to effect a particular transaction. Size of order and
difficulty of execution are considerations in the negotiation. All transactions,
including the commission factor, are subject to supervision and review by the
Company's officers.
During the year ended December 31, 2002, the Company did not acquire
any securities of any of its regular brokers or dealers (as defined in Rule
10b-1 under the 1940 Act) or of any of their parents.
Brokerage commissions paid by the Company during 2002, 2001 and 2000
were $1,096,080, $620,552 and $944,948, respectively.
One or more of the underwriters or their affiliates may have effected
purchases and sales of the portfolio securities of the Company and may be chosen
to effect similar transactions for the Company in the future.
NET ASSET VALUE
The Company calculates the net asset value of its shares of common
stock daily and makes that information available daily at the Company's website
www.generalamericaninvestors.com, by telephone at (212) 916-8400 or, toll-free,
(800) 436-8401 and for distribution on most electronic quotation systems using
the symbol "XGAMX." Currently, The Wall Street Journal, The New York Times and
Barron's publish net asset values for closed-end investment companies weekly.
Net asset value per share of common stock is determined at the close of regular
trading on the New York Stock Exchange (currently 4:00 P.M., Eastern time) on
each day on which the exchange is open. The net asset value of the Company's
common stock is calculated by dividing the current value of the Company's total
assets less the sum of all of its liabilities and the aggregate liquidation
preference of its outstanding shares of preferred stock, by the total number of
shares of the common stock outstanding.
In determining net asset value, securities listed on an exchange or on
the NASDAQ National Market System are valued on the basis of the last reported
sale prior to the time the valuation is made. Listed and NASDAQ securities for
which no sales are reported on such day and other securities traded in the
over-the-counter market are valued at the last bid price (asked price for open
short positions) on the valuation date. Quotations are taken from the market
where the security is primarily traded. Securities traded primarily on foreign
exchanges are valued at the closing values of such securities on their
respective exchanges as of the day the securities are being valued. Corporate
discount notes and U.S. Treasury bills are valued at amortized cost, which
approximates market value. Securities for which market quotations are not
readily available are valued at their fair value under procedures established
and supervised by the Company's Board of Directors.
B-10
The underwriting discount and the expenses of issuance and distribution
associated with the Series B Preferred Stock will be charged to paid-in capital.
FINANCIAL STATEMENTS
The audited financial statements included in the Annual Report to the
Company's stockholders for the fiscal year ended December 31, 2002, together
with the report of Ernst & Young LLP thereon, and the unaudited financial
statements included in the Semi-Annual Report to the Company's stockholders for
the six months ended June 30, 2003, together with the review report of Ernst &
Young LLP thereon, are incorporated herein by reference.
TAXATION
The following is a summary of certain U.S. federal income tax
consequences to a stockholder of acquiring, holding and disposing of shares of
the Series B Preferred Stock. This section is based on the Internal Revenue Code
of 1986, as amended (the "Code"), Treasury regulations promulgated thereunder,
published rulings and court decisions, all as currently in effect. These laws
are subject to change, possibly on a retroactive basis. PLEASE CONSULT YOUR OWN
TAX ADVISOR CONCERNING THE CONSEQUENCES OF INVESTING IN SHARES OF THE SERIES B
PREFERRED STOCK IN YOUR PARTICULAR CIRCUMSTANCES UNDER THE CODE AND THE LAWS OF
ANY OTHER TAXING JURISDICTION.
TAXATION OF THE COMPANY
The Company has elected to be taxed as a regulated investment company
under Subchapter M of the Code and intends to meet all other requirements that
are necessary for it to be relieved of federal taxes on income and gains it
distributes to stockholders. As a regulated investment company ("RIC"), the
Company is not subject to federal income tax on the portion of its investment
company taxable income (as that term is defined in the Code, without regard to
the deduction for dividends paid) and net capital gain (i.e., the excess of net
long-term capital gain over net short-term capital loss) that it distributes to
stockholders, provided that it distributes at least 90% of its investment
company taxable income for the year (the "Distribution Requirement"), and
satisfies certain other requirements of the Code that are described below.
In addition to satisfying the Distribution Requirement, the Company
must derive at least 90% of its gross income in each taxable year from
dividends, interest, certain payments with respect to loans of stock and
securities, gains from the sale or disposition of stock, securities or foreign
currencies and other income (including but not limited to gains from options,
futures or forward contracts) derived with respect to its business of investing
in such stock, securities or currencies.
The Company must also satisfy an asset diversification test in order to
qualify as a regulated investment company. Under this test, at the close of each
quarter of the Company's taxable year, (1) 50% or more of the value of the
Company's assets must be represented by cash, United States government
securities, securities of other regulated investment companies, and other
securities, with such other securities limited, in respect of any one issuer, to
an amount not greater than 5% of the value of the Company's assets and 10% of
the outstanding voting securities of such issuer and (2) not more than 25% of
the value of the Company's assets may be invested in securities of any one
issuer (other than U.S. government securities or securities of other regulated
investment companies), or of two or more issuers which the Company controls and
which are engaged in the same, similar or related trades or businesses.
If for any year the Company does not qualify as a regulated investment
company or satisfy the Distribution Requirement, all of its taxable income
(including its net capital gain) will be subject to tax at regular corporate
rates without any deduction for distributions to stockholders. In this case,
distributions from the Company will generally be taxable to the stockholders as
qualified dividend income, as discussed below, and generally will be eligible
for the dividends received deduction in the case of corporate stockholders.
A 4% non-deductible excise tax is imposed on a regulated investment
company to the extent that it distributes income in such a way that it is
taxable to stockholders in a calendar year other than the calendar year in which
the regulated investment company earned the income. Specifically, the excise tax
will be imposed if the
B-11
regulated investment company fails to distribute in each calendar year an amount
equal to the sum of (1) 98% of qualified dividend income and ordinary taxable
income for the calendar year, (2) 98% of capital gain net income for the
one-year period ending on October 31 of such calendar year (or, at the election
of a regulated investment company having a taxable year ending November 30 or
December 31, for its taxable year), and (3) all qualified dividend income,
ordinary taxable income and capital gain net income for previous years that was
not previously distributed. For purposes of the imposition of the excise tax,
amounts that are not actually distributed but that are taxed to the regulated
investment company as investment company taxable income or capital gain income
will be treated as having been distributed during the calendar year in which
such tax is imposed.
The Company intends to make sufficient distributions of its qualified
dividend income, ordinary income and capital gain net income prior to the end of
each calendar year to avoid liability for this excise tax. However, investors
should note that the Company may in certain circumstances be required to
liquidate portfolio investments to make sufficient distributions to avoid excise
tax liability.
If the Company does not meet the asset coverage requirements of the
1940 Act or the Certificate of Designations, the Company will be required to
suspend distributions to the holders of the common stock until the asset
coverage is restored. See "Description of Series B Preferred Stock -- Dividends"
in the prospectus. Such a suspension of distributions might prevent the Company
from satisfying the Distribution Requirement, or might prevent it from
distributing enough net investment income and capital gain net income to avoid
completely the imposition of the excise tax. Upon any failure to meet the asset
coverage requirements, the Company may, and in certain circumstances will, be
required to redeem shares of Series B Preferred Stock in order to restore the
requisite asset coverage and avoid the adverse consequences to the Company and
its stockholders of failing to satisfy the Distribution Requirement. If asset
coverage were restored, the Company would again be able to pay dividends and
might be able to avoid Company-level taxation.
The Company may make investments or engage in transactions that affect
the character, amount and timing of gains or losses realized by the Company. The
Company may make investments that produce income that is not matched by a
corresponding cash receipt by the Company. Any such income would be treated as
income earned by the Company and therefore would be subject to the distribution
requirements of the Code. Such investments may require the Company to borrow
money or dispose of other securities in order to comply with those requirements.
The Company may also make investments that prevent or defer the recognition of
losses or the deduction of expenses. These investments may likewise require the
Company to borrow money or dispose of other securities in order to comply with
the distribution requirements of the Code. Additionally, the Company may make
investments that result in the recognition of ordinary income or short-term
capital gain rather than long-term capital gain, that result in the recognition
of a capital loss rather than an ordinary loss, or that prevent the Company from
accruing a long-term holding period. These investments may prevent the Company
from making capital gain distributions as described below. The Company intends
to monitor its transactions, will make the appropriate tax elections and will
make the appropriate entries in its books and records when it makes any such
investments in order to mitigate the effect of these rules.
The Company invests in equity securities of foreign issuers. If the
Company purchases shares in certain foreign corporations (referred to as passive
foreign investment companies ("PFICs") under the Code), the Company may be
subject to federal income tax on a portion of any "excess distribution" from
such foreign corporation, including any gain from the disposition of such
shares, even if such income is distributed by the Company to its stockholders.
In addition, certain interest charges may be imposed on the Company as a result
of such distributions. If the Company were to invest in an eligible PFIC and
elected to treat the PFIC as a qualified electing fund (a "QEF"), in lieu of the
foregoing requirements, the Company would be required to include each year in
its income and distribute to stockholders in accordance with the distribution
requirements of the Code, a pro rata portion of the QEF's ordinary earnings and
net capital gain, whether or not distributed by the QEF to the Company.
Alternatively, the Company generally will be permitted to "mark to market" any
shares it holds in a PFIC. If the Company made such an election, the Company
would be required to include in income each year and distribute to stockholders
in accordance with the distribution requirements of the Code, an amount equal to
the excess, if any, of the fair market value of the PFIC stock as of the close
of the taxable year over the adjusted basis of such stock at that time. The
Company would be allowed a deduction for the excess if any, of the adjusted
basis of the PFIC stock over its fair market value as of the close of the
taxable year, but only to the extent of any net mark-to-market gains with
respect
B-12
to the stock included by the Company for prior taxable years. The Company will
make appropriate basis adjustments in the PFIC stock to take into account the
mark-to-market amounts.
Notwithstanding any election made by the Company, dividends received by
the Company will not constitute eligible dividends that can be distributed to
the Company's stockholders and designated as qualified dividend income, as
discussed below, if the payor is a PFIC either in the taxable year of the
distribution or the preceding taxable year. Instead, distributions to the
Company's stockholders that are attributable to such dividends will be taxed at
ordinary income rates.
Income received by the Company from sources within foreign countries
may be subject to withholding and other taxes imposed by such countries. The
Company historically has invested less than 50% of its total assets in foreign
securities. As long as the Company continues to invest less than 50% of its
assets in foreign securities, it will not be eligible to "pass-through" to
stockholders of the Company the ability to use the foreign tax deduction or
foreign tax credit for foreign taxes paid by the Company.
TAXATION OF STOCKHOLDERS
The Company anticipates distributing substantially all of its net
investment income for each taxable year. Dividends of net investment income paid
to a noncorporate U.S. stockholder before January 1, 2009 that are designated as
qualified dividend income will generally be taxable to such stockholder at a
maximum rate of 15%. However, the amount of dividend income that may be so
designated by the Company will generally be limited to the aggregate of the
eligible dividends received by the Company. In addition, the Company must meet
certain holding period and other requirements with respect to the shares on
which the Company received the eligible dividends, and the noncorporate U.S.
stockholder must meet certain holding period and other requirements with respect
to the shares of Series B Preferred Stock. Eligible dividends are, in general,
dividends from taxable domestic corporations and certain foreign corporations
(e.g., generally, foreign corporations incorporated in a possession of the
United States or in certain countries with a comprehensive tax treaty with the
United States, or the stock of which is readily tradable on an established
securities market in the United States). Dividends of net investment income that
are not designated as qualified dividend income and dividends of net short-term
capital gains will be taxable to stockholders at ordinary income rates to the
extent they are paid out of the Company's current or accumulated earnings and
profits. Dividends paid by the Company with respect to a taxable year will
qualify for the 70% dividends received deduction generally available to
corporations to the extent of the amount of dividends received by the Company
from certain domestic corporations for the taxable year, provided that certain
holding period and other requirements are met at the Company and stockholder
level. Stockholders will be advised annually as to the U.S. federal income tax
consequences of distributions made during the year, including the portion of
dividends paid that qualify for the reduced tax rate and the dividends received
deduction.
The Company intends to distribute to stockholders its net capital gain
for each taxable year. If net capital gain is distributed and designated as a
"capital gain dividend," it will be taxable to stockholders as long-term capital
gain, regardless of the length of time the stockholder has held its shares or
whether such gain was recognized by the Company prior to the date on which the
stockholder acquired its shares. Capital gain of a noncorporate U.S. stockholder
that is recognized before January 1, 2009 is generally taxed at a maximum rate
of 15% where the property is held by the Company for more than one year. Capital
gain of a corporate stockholder is taxed at the same rate as ordinary income.
The Internal Revenue Service's position in a published revenue ruling indicates
that the Company is required to designate distributions paid with respect to its
Series B Preferred Stock and its common stock as consisting of a portion of each
type of income distributed by the Company such that the portion of each type of
income received by the holders of each class of stock will be equal to the
portion of total Company dividends received by such class. Thus, the Company
will designate dividends paid as capital gain dividends, dividends eligible for
the dividends received deduction and dividends that qualify for treatment as
qualified dividend income in a manner that allocates such dividends between the
holders of the Series B Preferred Stock and the holders of common stock, in
proportion to the total dividends paid to each such class during or with respect
to the taxable year, or otherwise as required by applicable law.
Distributions on shares of the Series B Preferred Stock that do not
constitute qualified dividend income, ordinary income dividends or capital gain
dividends will be treated as a return of capital to the extent of (and in
B-13
reduction of) the stockholder's tax basis in its shares; any excess will be
treated as gain from the sale of its shares, as discussed below.
Prospective investors in the Series B Preferred Stock should be aware
that distributions from the Company will, all other things being equal, have the
effect of reducing the market value of the Series B Preferred Stock by the
amount of the distribution. If the market value is reduced below a stockholder's
cost, the distribution will
nonetheless be taxable as described above, even if the distribution effectively
represents a return of invested capital. Investors should consider the tax
implications of buying shares just prior to a distribution, when the price of
shares may reflect the amount of the forthcoming distribution.
SALE OR REDEMPTION OF SHARES
A stockholder will recognize gain or loss on the sale or redemption of
shares of Series B Preferred Stock in an amount equal to the difference between
the proceeds of the sale or redemption and the stockholder's adjusted tax basis
in the shares. All or a portion of any loss so recognized may be disallowed if
the stockholder acquires other substantially identical shares of the Company
within a period of 61 days beginning 30 days before such disposition.
In general, any gain or loss arising from (or treated as arising from)
the sale or redemption of shares of Series B Preferred Stock will be considered
capital gain or loss and will be long-term capital gain or loss if the shares
were held for more than one year. However, any capital loss arising from the
sale or redemption of shares held for six months or less will be treated as a
long-term capital loss to the extent of the amount of capital gain dividends
received on (or undistributed capital gains credited with respect to) such
shares. Capital gain of a noncorporate U.S. stockholder that is recognized
before January 1, 2009 is generally taxed at a maximum rate of 15% where the
property is held by the stockholder for more than one year. Capital gain of a
corporate stockholder is taxed at the same rate as ordinary income.
Under recently promulgated Treasury regulations, if a stockholder
recognizes a loss on the disposition of shares of Series B Preferred Stock of $2
million or more for an individual stockholder or $10 million or more for a
corporate stockholder in any single taxable year (or a greater loss over a
combination of years), the stockholder may be required to file with the Internal
Revenue Service a disclosure statement on Form 8886. The fact that a loss is
reportable under these regulations does not affect the legal determination of
whether the taxpayer's treatment of the loss is proper. Stockholders should
consult their tax advisors to determine the applicability of these regulations
in light of their individual circumstances.
BACKUP WITHHOLDING
The Company will be required in certain cases to backup withhold and
remit to the U.S. Treasury a portion of qualified dividend income, ordinary
income dividends, capital gain dividends and the proceeds of redemption of
shares, paid to any stockholder (1) who has provided either an incorrect tax
identification number or no number at all, (2) who is subject to backup
withholding by the Internal Revenue Service for failure to report the receipt of
interest or dividend income properly or (3) who has failed to certify to the
Company that it is not subject to backup withholding or that it is a corporation
or other "exempt recipient." Backup withholding is not an additional tax and any
amounts withheld may be refunded or credited against a stockholder's federal
income tax liability, provided the appropriate information is furnished to the
Internal Revenue Service.
FOREIGN STOCKHOLDERS
Taxation of a stockholder who, as to the United States, is a
nonresident alien individual, foreign trust or estate, foreign corporation, or
foreign partnership ("foreign stockholder") depends on whether the income from
the Company is "effectively connected" with a U.S. trade or business carried on
by such stockholder. If the income from the Company is not effectively connected
with a U.S. trade or business carried on by a foreign stockholder, dividends
paid to such foreign stockholder from net investment income or the Company's net
short-term capital gain will be subject to U.S. withholding tax at the rate of
30% (or lower treaty rate) upon the gross amount of the dividend. Such a foreign
stockholder would generally be exempt from U.S. federal income tax, including
withholding tax, on gains realized on the sale of shares of Series B Preferred
Stock, capital gain dividends and
B-14
amounts retained by the Company that are designated as undistributed capital
gains. If the income from the Company is effectively connected with a U.S. trade
or business carried on by a foreign stockholder, then qualified dividend income,
ordinary income dividends, capital gain dividends, undistributed capital gains
credited to such stockholder and any gains realized upon the sale of shares of
the Series B Preferred Stock will be subject to U.S. federal income tax at the
graduated rates applicable to U.S. citizens or domestic corporations.
In the case of foreign non-corporate stockholders, the Company may be
required to backup withhold U.S. federal income tax on distributions that are
otherwise exempt from withholding tax (or taxable at a reduced treaty rate)
unless such stockholders furnish the Company with proper notification of their
foreign status.
The tax consequences to a foreign stockholder entitled to claim the
benefits of an applicable tax treaty may be different from those described
herein. Foreign stockholders are urged to consult their own tax advisers with
respect to the particular tax consequences to them of an investment in the
Series B Preferred Stock, the procedure for claiming the benefit of a lower
treaty rate and the applicability of foreign taxes. Transfers by gift of shares
of Series B Preferred Stock by an individual foreign stockholder will not be
subject to U.S. federal gift tax, but the value of shares of Series B Preferred
Stock held by such a stockholder at his death will generally be includible in
his gross estate for U.S. federal estate tax purposes, subject to any applicable
estate tax treaty.
GENERAL INFORMATION
BOOK-ENTRY-ONLY ISSUANCE
The Depository Trust Company ("DTC"), New York, New York, will act as
securities depository for the shares of Series B Preferred Stock offered
pursuant to the prospectus. The information in this section concerning DTC and
DTC's book-entry system is based upon information obtained from DTC. Shares of
the Series B Preferred Stock initially will be issued only as fully-registered
securities registered in the name of Cede & Co. (as nominee for DTC).
DTC is a limited-purpose trust company organized under the New York
Banking Law, a "banking organization" within the meaning of the New York Banking
Law, a member of the Federal Reserve System, a "clearing corporation" within the
meaning of the New York Uniform Commercial Code and a "clearing agency"
registered pursuant to the provisions of Section 17A of the Securities Exchange
Act of 1934, as amended. DTC holds securities that its participants deposit with
DTC. DTC also facilities the settlement among participants of securities
transactions, such as transfers and pledges, in deposited securities through
electronic computerized book-entry changes in participants' accounts, thereby
eliminating the need for physical movement of securities certificates. Direct
participants include securities brokers and dealers, banks, trust companies,
clearing corporations and certain other organizations. Access to the DTC system
is also available to others known as indirect participants, such as securities
brokers and dealers, banks and trust companies that clear through or maintain a
custodial relationship with a direct participant, either directly or indirectly.
The rules applicable to DTC and its participants are on file with the
Commission.
Purchases of Series B Preferred Stock within the DTC system must be
made by or through direct participants, which will receive a credit for the
shares of Series B Preferred Stock on DTC's records. The ownership interest of
each actual purchaser of each share of Series B Preferred Stock, referred to as
the beneficial owner, is in turn to be recorded on the direct or indirect
participants' records. Beneficial owners will not receive written confirmation
from DTC of their purchases, but beneficial owners are expected to receive
written confirmations providing details of the transactions, as well as periodic
statements of their holdings, from the direct or indirect participant through
which the beneficial owners purchased their shares of Series B Preferred Stock.
Transfers of ownership interests in shares of the Series B Preferred Stock are
to be accomplished by entries made on the books of participants acting on behalf
of beneficial owners. Beneficial owners will not receive certificates
representing their ownership interests in shares of the Series B Preferred
Stock, except as provided herein.
DTC has no knowledge of the actual beneficial owners of the shares of
Series B Preferred Stock; DTC's records reflect only the identity of the direct
participants to whose accounts such shares of Series B Preferred Stock are
credited, which may or may not be the beneficial owners. The participants will
remain responsible for keeping account of their holdings on behalf of their
customers.
B-15
Conveyance of notices and other communications by DTC to direct
participants, by direct participants to indirect participants, and by direct
participants and indirect participants to beneficial owners will be governed by
arrangements among them, subject to any statutory or regulatory requirements as
may be in effect from time to time.
Redemption notices shall be sent to Cede & Co. If less than all of the
securities are being redeemed, DTC's practice is to determine by lot the amount
of the interest of each direct participant.
Payments on the Series B Preferred Stock will be made to DTC. DTC's
practice is to credit direct participants' accounts on the relevant payment date
in accordance with their respective holdings shown on DTC's records unless DTC
has reason to believe that it will not receive payments on such payment date.
Payments by participants to beneficial owners will be governed by standing
instructions and customary practices and will be the responsibility of such
participant and not of DTC or the Company, subject to any statutory or
regulatory requirements as may be in effect from time to time. Payment of
dividends to DTC is the responsibility of the Company, disbursement of such
payments to direct participants is the responsibility of DTC, and disbursement
of such payments to the beneficial owners is the responsibility of direct and
indirect participants. Furthermore, each beneficial owner must rely on the
procedures of DTC to exercise any rights under the shares of Series B Preferred
Stock.
Beneficial owners may obtain certificates representing the shares of
Series B Preferred Stock by contacting Mellon Investor Services LLC, which acts
as transfer agent for the Company's capital stock.
DTC may discontinue providing its services as securities depository
with respect to the Series B Preferred Stock at any time by giving reasonable
notice to the Company. Under such circumstances, in the event that a successor
securities depository is not obtained, certificates representing shares of the
Series B Preferred Stock will be printed and delivered. The Company may decide
to discontinue use of the system of book-entry transfers through DTC (or a
successor securities depository). In that event, Series B Preferred Stock
certificates will be printed and delivered.
COUNSEL AND INDEPENDENT AUDITORS
Sullivan & Cromwell LLP, 125 Broad Street, New York, New York 10004, is
counsel to the Company in connection with the offering of the Series B Preferred
Stock.
Ernst & Young LLP, 5 Times Square, New York, New York 10036, has been
selected as independent auditors for the Company.
GLOSSARY
"Basic Maintenance Amount" means, as of any valuation date, the dollar
amount equal to (i) the sum of (A) the product of the number of shares of Series
B Preferred Stock outstanding on such valuation date multiplied by the
liquidation preference; (B) to the extent not included in (A), the aggregate
amount of cash dividends (whether or not earned or declared) that will have
accumulated for each outstanding share of Series B Preferred Stock from the most
recent dividend payment date to which dividends have been paid or duly provided
for (or, in the event the Basic Maintenance Amount is calculated on a date prior
to the initial dividend payment date with respect to the Series B Preferred
Stock, then from the date of original issue) through the valuation date plus all
dividends to accumulate on the Series B Preferred Stock then outstanding during
the 70 days following such valuation date; (C) the Company's other liabilities
due and payable as of such valuation date (except that dividends and other
distributions payable by the Company by the issuance of common stock will not be
included as a liability) and such liabilities projected to become due and
payable by the Company during the 90 days following such valuation date
(excluding liabilities for investments to be purchased and for dividends and
other distributions not declared as of such valuation date); (D) any current
liabilities of the Company as of such valuation date to the extent not reflected
in any of (i)(A) through (i)(C) (including, without limitation, and immediately
upon determination, any amounts due and payable by the Company pursuant to
reverse repurchase agreements and any payables for assets purchased as of such
valuation date) less (ii) (A) the Discounted Value of any of the Company's
assets and/or (B) the face value of
B-16
any of the Company's assets if, in the case of both (ii)(A) and (ii)(B), such
assets are either cash or securities which mature prior to or on the date of
redemption or repurchase of Series B Preferred Stock or payment of another
liability and are either U.S. Government Obligations or securities which have a
rating assigned by Moody's of at least Aaa, P-1, VMIG-1 or MIG-1 or by S&P of at
least AAA, SP-l+ or A-1+, in both cases irrevocably held by the Company's
custodian bank in a segregated account or deposited by the Company with the
dividend-paying agent for the payment of the amounts needed to redeem or
repurchase Series B Preferred Stock subject to redemption or repurchase or any
of (i)(B) through (i)(D) and provided that in the event the Company has
repurchased Series B Preferred Stock at a price of less than the liquidation
preference thereof and irrevocably segregated or deposited assets as described
above with its custodian bank or the dividend-paying agent for the payment of
the repurchase price the Company may deduct 100% of the liquidation preference
of such Series B Preferred Stock to be repurchased from (i) above.
"Discounted Value" means the quotient of (A) in the case of
non-convertible fixed income securities, the lower of the principal amount and
the market value thereof or (B) in the case of any other Moody's Eligible
Assets, the market value thereof, divided by the applicable Moody's Discount
Factor.
"Fitch" means Fitch, Inc., or its successor.
"Moody's" means Moody's Investors Service, Inc., or its successor.
"Moody's Discount Factor" means, for purposes of determining the
Discounted Value of any Moody's Eligible Asset, the percentage determined as
follows. The Moody's Discount Factor for any Moody's Eligible Asset other than
the securities set forth below will be the percentage provided in writing by
Moody's.
i. Corporate debt securities (non-convertible): The percentage
determined by reference to the rating on such asset with reference to
the remaining term to maturity of such asset, in accordance with the
table set forth below.
Moody's Rating Category
-------------------------------------------------------------------
Term to Maturity of
Corporate Debt Security Aaa Aa A Baa Ba B Unrated(1)
----------------------- --- -- - --- -- - -------
1 year or less............................. 109% 112% 115% 118% 137% 150% 250%
2 years or less (but longer than 1 year)... 115 118 122 125 146 160 250
3 years or less (but longer than 2 years).. 120 123 127 131 153 168 250
4 years or less (but longer than 3 years).. 126 129 133 138 161 176 250
5 years or less (but longer than 4 years).. 132 135 139 144 168 185 250
7 years or less (but longer than 5 years).. 139 143 147 152 179 197 250
10 years or less (but longer than 7 years). 145 150 155 160 189 208 250
15 years or less (but longer than 10 years) 150 155 160 165 196 216 250
20 years or less (but longer than 15 years) 150 155 160 165 196 228 250
30 years or less (but longer than 20 years) 150 155 160 165 196 229 250
Greater than 30 years...................... 165 173 181 189 205 240 250
------------
(1) Unless conclusions regarding liquidity risk as well as estimates of
both the probability and severity of default for a Company asset can be
derived from other sources as well as combined with a number of sources,
unrated fixed-income and convertible securities, which are securities that
are not rated by any of Moody's, S&P or Fitch, are limited to 10% of
discounted Moody's Eligible Assets. If a security is either rated below B
or not rated by any of Moody's, S&P or Fitch, the Company will use the
applicable percentage set forth in the row of
B-17
the table entitled "Unrated." Upon notice by Moody's, ratings assigned by
S&P or Fitch may be subject to adjustments in particular categories of
credits for which the S&P and/or Fitch rating does not seem to approximate
a Moody's rating equivalent.
The Moody's Discount Factors presented in the immediately preceding
table will also apply to corporate debt securities that do not pay interest in
U.S. dollars or euros, provided that the Moody's Discount Factor determined from
the table shall be multiplied by a factor of 110% for purposes of calculating
the Discounted Value of such securities.
ii. Preferred stock: The Moody's Discount Factor for preferred
stock shall be (A) for preferred stocks issued by a utility, 155%; (B)
for preferred stocks of industrial and financial issuers, 197%; and (C)
for auction rate preferred stocks, 350%.
iii. Common stock:
Utility Industrial Financial
------------ ------------ ------------
170% 264% 241%
iv. Convertible securities (including convertible preferreds):
Discount Factors(1)
-------------------------------------------------------------
Ratings Utility Industrial Financial Transportation
--------- --------- ------------ ----------- --------------
Aaa................ 162% 256% 233% 250%
Aa................. 167% 261% 238% 265%
A.................. 172% 266% 243% 275%
Baa................ 188% 282% 259% 285%
Ba................. 195% 290% 265% 290%
B.................. 199% 293% 270% 295%
NR(2).............. 300% 300% 300% 300%
------------
(1) Discount factors are for 7-week exposure period.
(2) Unless conclusions regarding liquidity risk as well as estimates of
both the probability and severity of default for a Company asset can be
derived from other sources as well as combined with a number of sources,
unrated fixed-income and convertible securities, which are securities that
are not rated by any of Moody's, S&P or Fitch, are limited to 10% of
discounted Moody's Eligible Assets. If a security is either rated below B
or not rated by any of Moody's, S&P or Fitch, the Company will use the
applicable percentage set forth in the row of the table entitled "Unrated."
Upon notice by Moody's, ratings assigned by S&P or Fitch may be subject to
adjustments in particular categories of credits for which the S&P and/or
Fitch rating does not seem to approximate a Moody's rating equivalent.
Upon conversion to common stock, the Discount Factors applicable to
common stock will apply:
Utility Industrial Financial
------------ ------------ -----------
170% 264% 241%
v. Short-term instruments: The Moody's Discount Factor applied
to short-term portfolio securities, including without limitation
corporate debt securities, Short Term Money Market Instruments and
municipal debt obligations, will be (A) 100%, so long as such portfolio
securities mature or have a demand feature at par exercisable within
the Moody's Exposure Period; (B) 115%, so long as such portfolio
securities do not mature within the Moody's Exposure Period or have a
demand feature at par not exercisable within the Moody's Exposure
Period; and (C) 125%, if such securities are not rated by Moody's, so
long as such portfolio securities are rated at least A-1+/AA or
SP-1+/AA by S&P and mature or have a
B-18
demand feature at par exercisable within the Moody's Exposure Period.
A Moody's Discount Factor of 100% will be applied to cash.
vi. U.S. Government Securities and U.S. Treasury Strips:
U.S. Government Securities U.S. Treasury Strips
Remaining Term to Maturity Discount Factor Discount Factor
-------------------------- -------------------------- --------------------
1 year or less.............................. 107% 107%
2 years or less (but longer than 1 year).... 113 115
3 years or less (but longer than 2 years)... 118 121
4 years or less (but longer than 3 years)... 123 128
5 years or less (but longer than 4 years)... 128 135
7 years or less (but longer than 5 years)... 135 147
10 years or less (but longer than 7 years).. 141 163
15 years or less (but longer than 10 years). 146 191
20 years or less (but longer than 15 years). 154 218
30 years or less (but longer than 20 years). 154 244
vii. Rule 144A Securities: The Moody's Discount Factor applied
to Rule 144A Securities for Rule 144A Securities whose terms include
rights to registration under the Securities Act of 1933, as amended,
within one year and Rule 144A Securities which do not have registration
rights within one year will be 120% and 130%, respectively, of the
Moody's Discount Factor which would apply were the securities
registered under the Securities Act of 1933, as amended.
viii. Bank loans: The Moody's Discount Factor applied to
senior bank loans shall be the percentage specified in the table below
opposite such Moody's Loan Category:
Moody's Loan Category Discount Factor
--------------------- ---------------
A 118%
B 137%
C 161%
D 222%
E 222%
ix. Asset-backed and mortgage-backed securities: The Moody's
Discount Factor applied to asset-backed securities shall be 131%. The
Moody's Discount Factor applied to collateralized mortgage obligations,
planned amortization class bonds and targeted amortization class bonds
shall be determined by reference to the weighted average life of the
security and whether cash flow is retained (i.e., controlled by a
trustee) or excluded (i.e., not controlled by a trustee), in accordance
with the table set forth below.
Remaining Term to Maturity Cash Flow Retained Cash Flow Excluded
-------------------------- ------------------ ------------------
3 years or less............................ 133% 141%
7 years or less (but longer than 3 years).. 142 151
10 years or less (but longer than 7 years). 158 168
20 years or less (but longer than 10 years) 174 185
The Moody's Discount Factor applied to residential mortgage
pass-throughs (including private-placement mortgage pass-throughs)
shall be determined by reference to the coupon paid by such security
and whether cash flow is retained (i.e., controlled by a trustee) or
excluded (i.e., not controlled by a trustee), in accordance with the
table set forth below.
B-19
Coupon Cash Flow Retained Cash Flow Excluded
------ ------------------ ------------------
5% 166 % 173 %
6% 162 169
7% 158 165
8% 154 161
9% 151 157
10% 148 154
11% 144 154
12% 142 151
13% 139 148
adjustable 165 172
The Moody's Discount Factor applied to fixed-rate pass-throughs
that are not rated by Moody's and are serviced by a servicer approved
by Moody's shall be determined by reference to the table in the
following paragraph (relating to whole loans).
The Moody's Discount Factor applied to whole loans shall be
determined by reference to the coupon paid by such security and whether
cash flow is retained (i.e., controlled by a trustee) or excluded
(i.e., not controlled by a trustee), in accordance with the table set
forth below.
Coupon Cash Flow Retained Cash Flow Excluded
------ ------------------ ------------------
5% 172% 179%
6% 167 174
7% 163 170
8% 159 165
9% 155 161
10% 151 158
11% 148 157
12% 145 154
13% 142 151
adjustable 170 177
x. Municipal debt obligations: The Moody's Discount
Factor applied to municipal debt obligations shall be the percentage
determined by reference to the rating on such asset and the shortest
Exposure Period set forth opposite such rating that is the same length
as or is longer than the Moody's Exposure Period, in accordance with
the table set forth below (provided that, except as provided in the
following table, any municipal obligation (excluding any short-term
municipal obligation) not rated by Moody's but rated by S&P shall be
deemed to have a Moody's rating which is one full rating category
lower than its S&P rating):
Exposure Period Aaa(1) Aa(1) A(1) Baa(1) Other(2) (V)MIG-1(3) SP-1+(4) Unrated(5)
--------------- --- -- - --- ----- -------- ----- -------
Seven weeks ........ 151% 159% 166% 173% 187% 136% 148% 225%
Eight weeks or less
but greater than
seven weeks......... 154 161 168 176 190 137 149 231
Nine weeks or less
but greater than 158 163 170 177 192 138 150 240
eight weeks.........
------------
1 Moody's rating.
2 Municipal debt obligations not rated by Moody's but rated BBB by S&P.
B-20
3 Municipal debt obligations rated MIG-1 or VMIG-1, which do not mature
or have a demand feature at par exercisable in 30 days and which do not
have a long-term rating.
4 Municipal debt obligations not rated by Moody's but rated SP-1+ by
S&P, which do not mature or have a demand feature at par exercisable
in 30 days and which do not have a long-term rating.
5 Municipal debt obligations rated less than Baa3 or not rated by
Moody's and less than BBB or not rated by S&P, not to exceed 10% of
Moody's Eligible Assets.
xi. Structured Notes: The Moody's Discount Factor applied to
structured notes will be (A) in the case of a corporate issuer, the
Moody's Discount Factor determined in accordance with paragraph (i)
under this definition, whereby the rating on the issuer of the
structured note will be the rating on the structured note for purposes
of determining the Moody's Discount Factor in the table in paragraph
(i); and (B) in the case of an issuer that is the U.S. government or an
agency or instrumentality thereof, the Moody's Discount Factor
determined in accordance with paragraph (iii) under this definition.
"Moody's Eligible Assets" means:
i. cash (including interest and dividends due on assets rated
(A) Baa3 or higher by Moody's if the payment date is within five
business days of the valuation date, (B) A2 or higher if the payment
date is within thirty days of the valuation date, and (C) A1 or higher
if the payment date is within the Moody's Exposure Period) and
receivables for Moody's Eligible Assets sold if the receivable is due
within five business days of the valuation date, and if the trades
which generated such receivables are (A) settled through clearing house
firms or (B) (1) with counterparties having a Moody's long-term debt
rating of at least Baa3 or (2) with counterparties having a Moody's
Short Term Money Market Instrument rating of at least P-1;
ii. Short-Term Money Market Instruments so long as (A) such
securities are rated at least P-1, (B) in the case of demand deposits,
time deposits and overnight funds, the supporting entity is rated at
least A2, or (C) in all other cases, the supporting entity (1) is rated
A2 and the security matures within one month, (2) is rated A1 and the
security matures within three months or (3) is rated at least Aa3 and
the security matures within six months; provided, however, that for
purposes of this definition, such instruments (other than commercial
paper rated by S&P and not rated by Moody's) need not meet any
otherwise applicable S&P rating criteria;
iii. U.S. Government Securities and U.S. Treasury Strips;
iv. Rule 144A Securities;
v. Senior loans and other bank loans approved by Moody's;
vi. corporate debt securities if (A) such securities are rated
Caa or higher by Moody's; (B) such securities provide for the periodic
payment of interest in cash in U.S. dollars or euros, except that such
securities that do not pay interest in U.S. dollars or euros shall be
considered Moody's Eligible Assets if they are rated by Moody's or S&P;
(C) for securities which provide for conversion or exchange into equity
capital at some time over their lives, the issuer must be rated at
least B3 by Moody's and the discount factor will be 250%; (D) for debt
securities rated Ba1 and below, no more than 10% of the original amount
of such issue may constitute Moody's Eligible Assets; (E) such
securities have been registered under the Securities Act of 1933, as
amended, or are restricted as to resale under federal securities laws
but are eligible for resale pursuant to Rule 144A under the Securities
Act of 1933, as amended, as determined by the Company's portfolio
manager acting pursuant to procedures approved by the Board of
Directors, except that such securities that are not subject to U.S.
federal securities laws shall be considered Moody's Eligible Assets if
they are publicly traded; and (F) such securities are not subject to
extended settlement.
Notwithstanding the foregoing limitations, (x) corporate debt
securities not rated at least Caa by Moody's or not rated by Moody's
shall be considered to be Moody's Eligible Assets only to the extent
the market value of such corporate debt securities does not exceed 10%
of the aggregate market value of all
B-21
Moody's Eligible Assets; provided, however, that if the market value
of such corporate debt securities exceeds 10% of the aggregate market
value of all Moody's Eligible Assets, a portion of such corporate debt
securities (selected by the Company) shall not be considered Moody's
Eligible Assets, so that the market value of such corporate debt
securities (excluding such portion) does not exceed 10% of the
aggregate market value of all Moody's Eligible Assets; and (y)
corporate debt securities rated by neither Moody's nor S&P shall be
considered to be Moody's Eligible Assets only to the extent such
securities are issued by entities which (i) have not filed for
bankruptcy within the past three years, (ii) are current on all
principal and interest in their fixed income obligations, (iii) are
current on all preferred stock dividends, and (iv) possess a current,
unqualified auditor's report without qualified, explanatory language.;
vii. preferred stocks if (A) dividends on such preferred stock
are cumulative, (B) such securities provide for the periodic payment of
dividends thereon in cash in U.S. dollars or euros and do not provide
for conversion or exchange into, or have warrants attached entitling
the holder to receive, equity capital at any time over the respective
lives of such securities, (C) the issuer of such a preferred stock has
common stock listed on either the New York Stock Exchange or the
American Stock Exchange, (D) the issuer of such a preferred stock has a
senior debt rating from Moody's of Baa1 or higher or a preferred stock
rating from Moody's of Baa3 or higher and (E) such preferred stock has
paid consistent cash dividends in U.S. dollars or euros over the last
three years or has a minimum rating of A1 (if the issuer of such
preferred stock has other preferred issues outstanding that have been
paying dividends consistently for the last three years, then a
preferred stock without such a dividend history would also be
eligible). In addition, the preferred stocks must have the following
diversification requirements: (X) the preferred stock issue must be
greater than $50 million and (Y) the minimum holding by the Company of
each issue of preferred stock is $500,000 and the maximum holding of
preferred stock of each issue is $5 million. In addition, preferred
stocks issued by transportation companies will not be considered
Moody's Eligible Assets;
viii. common stocks (i) which (A) are traded on a nationally
recognized stock exchange or in the over-the-counter market, (B) if
cash dividend paying, pay cash dividends in US dollars and (C) may be
sold without restriction by the Company; provided, however, that (y)
common stock which, while a Moody's Eligible Asset owned by the
Company, ceases paying any regular cash dividend will no longer be
considered a Moody's Eligible Asset until 71 days after the date of the
announcement of such cessation, unless the issuer of the common stock
has senior debt securities rated at least A3 by Moody's and (z) the
aggregate market value of the Company's holdings of the common stock of
any issuer in excess of 4% in the case of utility common stock and 6%
in the case of non-utility common stock of the aggregate market value
of the Company's holdings shall not be Moody's Eligible Assets, (ii)
which are securities denominated in any currency other than the US
dollar or securities of issuers formed under the laws of jurisdictions
other than the United States, its states and the District of Columbia
for which there are dollar-denominated American Depository Receipts
("ADRs") or their equivalents which are traded in the United States on
exchanges or over-the-counter and are issued by banks formed under the
laws of the United States, its states or the District of Columbia or
(iii) which are securities of issuers formed under the laws of
jurisdictions other than the United States (and in existence for at
least five years) for which no ADRs are traded; provided, however, that
the aggregate market value of the Company's holdings of securities
denominated in currencies other than the US dollar and ADRs in excess
of (A) 6% of the aggregate market value of the outstanding shares of
common stock of such issuer thereof or (B) 10% of the market value of
the Company's Moody's Eligible Assets with respect to issuers formed
under the laws of any single such non-U.S. jurisdiction other than
Australia, Belgium, Canada, Denmark, Finland, France, Germany, Ireland,
Italy, Japan, the Netherlands, New Zealand, Norway, Spain, Sweden,
Switzerland and the United Kingdom, shall not be a Moody's Eligible
Asset;
ix. ADR securities, based on the following guidelines: (i)
sponsored ADR program or (ii) level II or level III ADRs. Private
placement Rule 144A ADRs are not eligible for collateral consideration.
Global depositary receipt programs will be evaluated on a case by case
basis;
x. asset-backed and mortgage-backed securities:
B-22
(A) Asset-backed securities if (1) such securities are rated
at least Aa3 by Moody's or at least AA by S&P, (2) the securities
are part of an issue that is $250 million or greater, or the
issuer of such securities has a total of $500 million or greater
of asset-backed securities outstanding at the time of purchase of
the securities by the Company and (3) the expected average life of
the securities is not greater than 4 years;
(B) Collateralized mortgage obligations ("CMOs"), including
CMOs with interest rates that float at a multiple of the change in
the underlying index according to a pre-set formula, provided that
any CMO held by the Company (1) has been rated Aaa by Moody's or
AAA by S&P, (2) does not have a coupon which floats inversely, (3)
is not portioned as an interest-only or principal-only strip and
(4) is part of an issuance that had an original issue size of at
least $100 million;
(C) Planned amortization class bonds ("PACs") and targeted
amortization class bonds ("TACs") provided that such PACs or TACs
are (1) backed by certificates of either the Federal National
Mortgage Association ("FNMA"), the Government National Mortgage
Association ("GNMA") or the Federal Home Loan Mortgage Corporation
("FHLMC") representing ownership in single-family first lien
mortgage loans with original terms of 30 years, (2) part of an
issuance that had an original issue size of at least $10 million,
(3) part of PAC or TAC classes that have payment priority over
other PAC or TAC classes, (4) if TACs, TACs that do not support
PAC classes, and (5) if TACs, not considered reverse TACs (i.e.,
do not protect against extension risk);
(D) Consolidated senior debt obligations of Federal Home Loan
Banks ("FHLBs"), senior long-term debt of the FNMA, and
consolidated systemwide bonds and FCS Financial Assistance
Corporation Bonds of Federal Farm Credit Banks ("FFCBs")
(collectively, "FHLB, FNMA and FFCB Debentures"), provided that
such FHLB, FNMA and FFCB Debentures are (1) direct issuance
corporate debt rated Aaa by Moody's, (2) senior debt obligations
backed by the FHLBs, FFCBs or FNMA, (3) part of an issue entirely
denominated in U.S. dollars and (4) not callable or exchangeable
debt issues;
(E) Mortgage pass-throughs rated at least Aa by Moody's and
pass-throughs issued prior to 1987 (if rated AA by S&P and based
on fixed-rate mortgage loans) by Travelers Mortgage Services,
Citicorp Homeowners, Citibank, N.A., Sears Mortgage Security or
RFC - Salomon Brothers Mortgage Securities, Inc., provided that
(1) certificates must evidence a proportional, undivided interest
in specified pools of fixed or adjustable rate mortgage loans,
secured by a valid first lien, on one- to four-family residential
properties and (2) the securities are publicly registered (not
issued by FNMA, GNMA or FHLMC);
(F) Private-placement mortgage pass-throughs provided that (1)
certificates represent a proportional undivided interest in
specified pools of fixed-rate mortgage loans, secured by a valid
first lien, on one- to four-family residential properties, (2)
documentation is held by a trustee or independent custodian, (3)
pools of mortgage loans are serviced by servicers that have been
approved by FNMA or FHLMC and funds shall be advanced to meet
deficiencies to the extent provided in the pooling and servicing
agreements creating such certificates, and (4) pools have been
rated Aa or better by Moody's; and
(G) Whole loans (e.g., direct investments in mortgages)
provided that (1) at least 65% of such loans (a) have seasoning of
no less than 6 months, (b) are secured by single-family detached
residences, (c) are owner-occupied primary residences, (d) are
secured by a first-lien, fully-documented mortgage, (e) are
neither currently delinquent (30 days or more) nor delinquent
during the preceding year, (f) have loan-to-value ratios of 80% or
below, (g) carry normal hazard insurance and title insurance, as
well as special hazard insurance, if applicable, (h) have original
terms to maturity not greater than 30 years, with at least one
year remaining to maturity, (i) have a minimum of $10,000
remaining principal balance, (j) for loans underwritten after
January 1, 1978, FNMA and/or FHLMC forms are used for fixed-rate
loans, and (k) such loans are whole loans and not participations;
(2) for loans that do not satisfy the requirements set forth in
the foregoing clause (1), (a) non-owner occupied properties
represent no greater than 15% of the aggregate of either the
adjustable-rate pool or the fixed-
B-23
rate pool, (b) multi-family properties (those with five or more
units) represent no greater than 15% of the aggregate of either
the adjustable-rate pool or the fixed-rate pool, (c) condominiums
represent no greater than 10% of the aggregate of either the
adjustable-rate pool or the fixed-rate pool, and any condominium
project must be 80% occupied at the time the loan is originated,
(d) properties with loan-to-value ratios exceeding 80% represent
no greater than 25% of the aggregate of either the
adjustable-rate pool or the fixed-rate pool and the portion of
the mortgage on any such property that exceeds a loan-to-value
ratio of 80% is insured with Primary Mortgage Insurance from an
insurer rated at least Baa3 by Moody's and (e) loan balances in
excess of the current FHLMC limit plus $75,000 represent no
greater than 25% of the aggregate of either the adjustable-rate
pool or the fixed-rate pool, loan balances in excess of $350,000
represent no greater than 10% of the aggregate of either the
adjustable-rate pool or the fixed-rate pool, and loan balances in
excess of $1,000,000 represent no greater than 5% of the
aggregate of either the adjustable-rate pool or the fixed-rate
pool; (3) no greater than 5% of the pool of loans is concentrated
in any one zip code; (4) the pool of loans contains at least 100
loans or $2 million in loans per servicer; (5) for
adjustable-rate mortgages ("ARMs"), (a) any ARM is indexed to the
National Cost of Funds index, the 11th District Cost of Funds
index, the 1-year Treasury or the 6-month Treasury, (b) the
margin over the given index is between 0.15% and 0.25% for either
cost-of-funds index and between 0.175% and 0.325% for Treasuries,
(c) the maximum yearly interest rate increase is 2%, (d) the
maximum life-time interest rate increase is 6.25% and (e) ARMs
may include Federal Housing Administration and Department of
Veterans Affairs loans; (6) for "teaser" loans, (a) the initial
discount from the current ARM market rate is no greater than 2%,
(b) the loan is underwritten at the market rate for ARMs, not the
"teaser" rate, and (c) the loan is seasoned six months beyond the
"teaser" period.
xi. Any municipal debt obligation that (A) pays interest in cash,
(B) does not have a Moody's rating, as applicable, suspended by
Moody's, and (C) is part of an issue of municipal debt obligations of
at least $5,000,000, except for municipal debt obligations rated below
A by Moody's, in which case the minimum issue size is $10,000,000;
xii. Structured Notes and traded custody receipts representing
direct ownership in a portfolio of underlying securities (TRACERS); and
xiii. Financial contracts, as such term is defined in Section
3(c)(2)(B)(ii) of the 1940 Act, not otherwise provided for in this
definition but only upon receipt by the Company of a letter from
Moody's specifying any conditions on including such financial contract
in Moody's Eligible Assets and assuring the Company that including such
financial contract in the manner so specified would not affect the
credit rating assigned by Moody's to the Series B Preferred Stock.
In addition, portfolio holdings as described below must be within the
following diversification and issue size requirements in order to be included in
Moody's Eligible Assets:
Maximum Single Maximum Single Minimum Issue Size
Ratings(1) Issuer(2),(3) Industry(3),(4) ($ in million)(5)
------- -------------- --------------- ------------------
Aaa..................... 100% 100% $100
Aa...................... 20 60 100
A....................... 10 40 100
Baa..................... 6 20 100
Ba...................... 4 12 50(6)
B1-B2................... 3 8 50(6)
B3 or below............. 2 5 50(6)
------------
1 Refers to the preferred stock and senior debt rating of the
portfolio holding.
2 Companies subject to common ownership of 25% or more are considered
as one issuer.
3 Percentages represent a portion of the aggregate market value of
corporate debt securities.
4 Industries are determined according to Moody's Industry
Classifications, as defined herein.
5 Except for preferred stock, which has a minimum issue size of $50
million.
B-24
6 Portfolio holdings from issues ranging from $50 million to $100
million are limited to 20% of the Company's total assets.
Where the Company sells an asset and agrees to repurchase such asset in
the future, the Discounted Value of such asset will constitute a Moody's
Eligible Asset and the amount the Company is required to pay upon repurchase of
such asset will count as a liability for the purposes of the Basic Maintenance
Amount. Where the Company purchases an asset and agrees to sell it to a third
party in the future, cash receivable by the Company thereby will constitute a
Moody's Eligible Asset if the long-term debt of such other party is rated at
least A2 by Moody's and such agreement has a term of 30 days or less; otherwise
the Discounted Value of such purchased asset will constitute a Moody's Eligible
Asset. For the purposes of calculation of Moody's Eligible Assets, portfolio
securities which have been called for redemption by the issuer thereof shall be
valued at the lower of market value or the call price of such portfolio
securities.
Notwithstanding the foregoing, an asset will not be considered a
Moody's Eligible Asset to the extent that it (i) has been irrevocably deposited
for the payment of (i)(A) through (i)(E) under the definition of Basic
Maintenance Amount or to the extent it is subject to any liens, except for (A)
liens which are being contested in good faith by appropriate proceedings and
which Moody's has indicated to the Company will not affect the status of such
asset as a Moody's Eligible Asset, (B) liens for taxes that are not then due and
payable or that can be paid thereafter without penalty, (C) liens to secure
payment for services rendered or cash advanced to the Company by its custodian,
transfer agent or registrar and (D) liens arising by virtue of any repurchase
agreement, or (ii) has been segregated against obligations of the Company in
connection with an outstanding derivative transaction.
"Moody's Exposure Period" means the period commencing on a given
valuation date and ending 49 days thereafter.
"Moody's Industry Classification" means, for the purposes of
determining Moody's Eligible Assets, each of the following industry
classifications (or such other classifications as Moody's may from time to time
approve for application to the Preferred Shares):
1. Aerospace and Defense: Major Contractor, Subsystems, Research,
Aircraft Manufacturing, Arms, Ammunition
2. Automobile: Automobile Equipment, Auto-Manufacturing, Auto Parts
Manufacturing, Personal Use Trailers, Motor Homes, Dealers
3. Banking: Bank Holding, Savings and Loans, Consumer Credit, Small
Loan, Agency, Factoring, Receivables
4. Beverage, Food and Tobacco: Beer and Ale, Distillers, Wines and
Liquors, Distributors, Soft Drink Syrup, Bottlers, Bakery, Mill
Sugar, Canned Foods, Corn Refiners, Dairy Products, Meat Products,
Poultry Products, Snacks, Packaged Foods, Candy, Gum, Seafood,
Frozen Food, Cigarettes, Cigars, Leaf/Snuff, Vegetable Oil
5. Buildings and Real Estate: Brick, Cement, Climate Controls,
Contracting, Engineering, Construction, Hardware, Forest Products
(building-related only), Plumbing, Roofing, Wallboard, Real
Estate, Real Estate Development, REITs, Land Development
6. Chemicals, Plastics and Rubber: Chemicals (non-agricultural),
Industrial Gases, Sulfur, Plastics, Plastic Products, Abrasives,
Coatings, Paints, Varnish, Fabricating
7. Containers, Packaging and Glass: Glass, Fiberglass, Containers
made of: Glass, Metal, Paper, Plastic, Wood or Fiberglass
8. Personal and Non-Durable Consumer Products (Manufacturing Only):
Soaps, Perfumes, Cosmetics, Toiletries, Cleaning Supplies, School
Supplies
B-25
9. Diversified/Conglomerate Manufacturing
10. Diversified/Conglomerate Service
11. Diversified Natural Resources, Precious Metals and Minerals:
Fabricating, Distribution
12. Ecological: Pollution Control, Waste Removal, Waste Treatment and
Waste Disposal
13. Electronics: Computer Hardware, Electric Equipment, Components,
Controllers, Motors, Household Appliances, Information Service
Communicating Systems, Radios, TVs, Tape Machines, Speakers,
Printers, Drivers, Technology
14. Finance: Investment Brokerage, Leasing, Syndication, Securities
15. Farming and Agriculture: Livestock, Grains, Produce, Agriculture
Chemicals, Agricultural Equipment, Fertilizers
16. Grocery: Grocery Stores, Convenience Food Stores
17. Healthcare, Education and Childcare: Ethical Drugs, Proprietary
Drugs, Research, Health Care Centers, Nursing Homes, HMOs,
Hospitals, Hospital Supplies, Medical Equipment
18. Home and Office Furnishings, Housewares, and Durable Consumer
Products: Carpets, Floor Coverings, Furniture, Cooking, Ranges
19. Hotels, Motels, Inns and Gaming
20. Insurance: Life, Property and Casualty, Broker, Agent, Surety
21. Leisure, Amusement, Motion Pictures, Entertainment: Boating,
Bowling, Billiards, Musical Instruments, Fishing, Photo Equipment,
Records, Tapes, Sports, Outdoor Equipment (Camping), Tourism,
Resorts, Games, Toy Manufacturing, Motion Picture Production
Theaters, Motion Picture Distribution
22. Machinery (Non-Agricultural, Non-Construction, Non-Electronic):
Industrial, Machine Tools, Steam Generators
23. Mining, Steel, Iron and Non-Precious Metals: Coal, Copper, Lead,
Uranium, Zinc, Aluminum, Stainless Steel, Integrated Steel, Ore
Production, Refractories, Steel Mill Machinery, Mini-Mills,
Fabricating, Distribution and Sales of the foregoing
24. Oil and Gas: Crude Producer, Retailer, Well Supply, Service and
Drilling
25. Printing, Publishing, and Broadcasting: Graphic Arts, Paper, Paper
Products, Business Forms, Magazines, Books, Periodicals,
Newspapers, Textbooks, Radio, T.V., Cable Broadcasting Equipment
26. Cargo Transport: Rail, Shipping, Railroads, Rail-car Builders,
Ship Builders, Containers, Container Builders, Parts, Overnight
Mail, Trucking, Truck Manufacturing, Trailer Manufacturing, Air
Cargo, Transport
27. Retail Stores: Apparel, Toy, Variety, Drugs, Department, Mail
Order Catalog, Showroom
28. Telecommunications: Local, Long Distance, Independent, Telephone,
Telegraph, Satellite, Equipment, Research, Cellular
29. Textiles and Leather: Producer, Synthetic Fiber, Apparel
Manufacturer, Leather Shoes
B-26
30. Personal Transportation: Air, Bus, Rail, Car Rental
31. Utilities: Electric, Water, Hydro Power, Gas
32. Diversified Sovereigns: Semi-sovereigns, Canadian Provinces,
Supra-national Agencies
The Company will use its discretion in determining which industry
classification is applicable to a particular investment in consultation with its
independent accountants and Moody's, to the extent the Company considers
necessary.
"Moody's Loan Category" means the following five categories (and, for
purposes of this categorization, the market value of a Moody's Eligible Asset
trading at par is equal to $1.00):
(i) "Moody's Loan Category A" means performing senior loans which
have a market value or an approved price greater than or equal to
$0.90.
(ii) "Moody's Loan Category B" means: (A) performing senior loans
which have a market value or an approved price of greater than or equal
to $0.80 but less than $0.90; and (B) non-performing senior loans which
have a market value or an approved price greater than or equal to
$0.85.
(iii) "Moody's Loan Category C" means: (A) performing senior loans
which have a market value or an approved price of greater than or equal
to $0.70 but less than $0.80; and (B) non-performing senior loans which
have a market value or an approved price of greater than or equal to
$0.75 but less than $0.85.
(iv) "Moody's Loan Category D" means senior loans which have a
market value or an approved price less than $0.75.
(v) "Moody's Loan Category E" means non-senior loans which have a
market value or an approved price.
Notwithstanding any other provision contained above, for purposes of
determining whether a Moody's Eligible Asset falls within a specific Moody's
Loan Category, to the extent that any Moody's Eligible Asset would fall in more
than one of the Moody's Loan Categories, such Moody's Eligible Asset shall be
deemed to fall into the Moody's Loan Category with the lowest applicable Moody's
Discount Factor.
"Portfolio Calculation" means the aggregate Discounted Value of all of
Moody's Eligible Assets.
"Rule 144A Securities" means securities which are restricted to resale
under federal securities laws but are eligible for resale pursuant to Rule 144A
under the Securities Act of 1933, as amended as determined by the Company's
portfolio manager.
"S&P" means Standard & Poor's Ratings Services, a division of The
McGraw-Hill Companies, Inc., a corporation organized and existing under the laws
of the State of Delaware, its successors and their assigns, and if such
corporation shall be dissolved or liquidated or shall no longer perform the
functions of a securities rating agency, "S&P" shall be deemed to refer to any
other nationally recognized securities rating agency designated by the Company.
"Short-Term Money Market Instruments" means the following types of
instruments if, on the date of purchase or other acquisition thereof by the
Company (or, in the case of an instrument specified by clauses (i) and (ii)
below, on the valuation date), the remaining terms to maturity thereof are not
in excess of 90 days:
(i) U.S. Government Securities;
B-27
(ii) commercial paper that is rated at the time of purchase or
acquisition and the valuation date at least P-1 by Moody's and is
issued by an issuer (or guaranteed or supported by a person or entity
other than the issuer) whose long-term unsecured debt obligations are
rated at least Aa by Moody's;
(iii) demand or time deposits in or certificates of deposit of
or banker's acceptances issued by (A) a depository institution or trust
company incorporated under the laws of the United States of America or
any state thereof or the District of Columbia or (B) a United States
branch office or agency of a foreign depository institution (provided
that such branch office or agency is subject to banking regulation
under the laws of the United States, any state thereof or the District
of Columbia) if, in each case, the commercial paper, if any, and the
long-term unsecured debt obligations (other than such obligations the
ratings of which are based on the credit of a person or entity other
than such depository institution or trust company) of such depository
institution or trust company at the time of purchase or acquisition and
the valuation date, have (1) credit ratings from Moody's of at least
P-1 in the case of commercial paper and (2) credit ratings from Moody's
of at least Aa in the case of long-term unsecured debt obligations;
provided, however, that in the case of any such investment that matures
in no more than one business day from the date of purchase or other
acquisition by the Company, all of the foregoing requirements will be
applicable except that the required long-term unsecured debt credit
rating of such depository institution or trust company from Moody's
will be at least A2; and provided, further, however, that the foregoing
credit rating requirements will be deemed to be met with respect to a
depository institution or trust company if (1) such depository
institution or trust company is the principal depository institution in
a holding company system, (2) the commercial paper, if any, of such
depository institution or trust company is not rated below P-1 by
Moody's and (3) the holding company will meet all of the foregoing
credit rating requirements (including the preceding proviso in the case
of investments that mature in no more than one business day from the
date of purchase or other acquisition by the Company);
(iv) repurchase obligations with respect to any U.S.
Government Securities entered into with a depository institution, trust
company or securities dealer (acting as principal) which is rated (A)
at least Aa3 if the maturity is three months or less, (B) at least A1
if the maturity is two months or less and (C) at least A2 if the
maturity is one month or less; and
(v) Eurodollar demand or time deposits in, or certificates of
deposit of, the head office or the London branch office of a depository
institution or trust company meeting the credit rating requirements of
commercial paper and long-term unsecured debt obligations specified in
clause (iii) above, provided that the interest receivable by the
Company will be payable in U.S. dollars and will not be subject to any
withholding or similar taxes.
"Structured Notes" means privately negotiated debt obligations where
the principal and/or interest is determined by reference to the performance of a
benchmark asset or market, such as selected securities or an index of
securities, or the differential performance of two assets or markets, such as
indices reflecting bonds.
"U.S. Government Securities" means direct obligations of the United
States or of its agencies or instrumentalities that are entitled to the full
faith and credit of the United States and that, other than United States
Treasury Bills, provide for the periodic payment of interest and the full
payment of principal at maturity or call for redemption.
"U.S. Treasury Strips" means securities based on U.S. Treasury
Securities created through the Separate Trading of Registered Interest and
Principal of Securities program.
B-28
PART C. OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(1) Financial Statements*
(2) (a) (1) Restated Certificate of Incorporation**
(2) Certificate of Amendment to the Restated Certificate of
Incorporation**
(3) Certificate of Amendment to the Restated Certificate of
Incorporation**
(4) Certificate of Amendment to the Restated Certificate of
Incorporation**
(5) Certificate of Correction to the Certificate of Amendment
to the Restated Certificate of Incorporation**
(6) Series A Preferred Stock Certificate of
Designations***
(7) Series B Preferred Stock Certificate of Designations**
(8) Certificate of Amendment to the Restated Certificate of
Incorporation, dated March 13, 2000+
(b) By-Laws**
(c) Not Applicable
(d) (1) Series A Preferred Stock Specimen Stock Certificate***
(2) Series B Preferred Stock Specimen Stock Certificate ****
(e) Not Applicable
(f) Not Applicable
(g) Not Applicable
(h) (1) Form of Underwriting Agreement****
(2) Form of Master Agreement Among Underwriters****
(i) (1) Employees' Retirement Plan**
(2) (A) Amendment of the Employees' Retirement Plan dated
February 14, 1995**
(B) Amendment of the Employees' Retirement Plan dated
October 13, 1999+
(C) Amendment of the Employees' Retirement Plan dated
July 11, 2001+
(D) Amendment of the Employees' Retirement Plan dated
April 10, 2002+
(E) Amendment of the Employees' Retirement Plan dated
July 10, 2002+
(3) (A) Employees' Thrift Plan**
(B) Amendment of the Employees' Thrift Plan dated
October 13, 1999+
(C) Amendment of the Employees' Thrift Plan dated July 11,
2001+
(D) Amendment of the Employees' Thrift Plan dated
April 10, 2002+
(E) Amendment of the Employees' Thrift Plan dated
July 10, 2002+
(4) Excess Benefit Plan**
(5) Excess Contribution Plan**
(j) Custodian Agreement**
(k) Not Applicable
(l) Opinion and Consent of Sullivan & Cromwell LLP****
C-1
(m) Not Applicable
(n) Consent of Ernst & Young LLP+
(o) Not Applicable
(p) Not Applicable
(q) Not Applicable
(r) Code of Ethics+
----------
* Incorporated by reference from Company's Annual Report for the year ended
December 31, 2002, File No. 811-00041, as filed with the Securities and
Exchange Commission on February 12, 2003 and from the Company's
Semi-Annual Report for the six months ended on June 30, 2003 (File No.
811-00041) as filed with the Securities and Exchange Commission on
July 29, 2003.
** Incorporated by reference from the Company's Registration Statement on
Form N-2 (File No. 811-00041), as filed with the Securities and Exchange
Commission on March 23, 1998.
*** Incorporated by reference from the Company's Amendment No. 2 to the
Company's Registration Statement on Form N-2 (File No. 811-00041), as
filed with the Securities and Exchange Commission on June 10, 1998
**** To be filed by amendment.
+ Filed herewith.
Item 25. Marketing Arrangements
See Exhibit 2(h) to this registration statement.
Item 26. Other Expenses of Issuance and Distribution(1)
The following table sets forth the estimated expenses payable by the
Company in connection with the offering described in this registration statement
(excluding underwriting discounts and commissions):
Nature of Expenses Amount
------------------ ------
SEC registration fees............................................. $
NYSE listing fee..................................................
Rating agency fee.................................................
Printing expenses.................................................
Auditing fees and expenses........................................
Legal fees and expenses...........................................
Auditing fees and expenses........................................
Miscellaneous.....................................................
Total.......................................... $
======
---------------
(1) The amounts set forth above, except for the SEC and NYSE fees, are in
each case estimated.
Item 27. Persons Controlled by or Under Common Control with the Company
General American Advisers, Inc. is a wholly-owned, inactive subsidiary
of the Company.
C-2
Item 28. Number of holders of each class of securities of the Company as of
June 30, 2003:
Number of
Title of Class Record Holders
-------------- --------------
Common Stock, par value $1.00 per share....................................... 4,544
7.20% Tax-Advantaged Cumulative Preferred Stock, Series A,
par value $1.00 per share (liquidation preference $25.00 per share)..... 1
Item 29. Indemnification
Under the Company's Restated Certificate of Incorporation and By-Laws,
the directors and officers of the Company will not be liable to the Company or
its stockholders for monetary damages for breach of fiduciary duty as a
director, provided that the foregoing shall not eliminate or limit liability of
a director (i) for any breach of such director's duty of loyalty to the Company
or its stockholders, (ii) for acts or omissions not in good faith or which
involve intentional misconduct, gross negligence or reckless disregard of the
duties involved in the conduct of such director's office, or a knowing violation
of law, (iii) under Section 174 of Title 8 of the Delaware Code, or (iv) for any
transaction from which such director derived an improper personal benefit.
The Company maintains a mutual fund professional liability/directors
and officers liability and corporate reimbursement insurance policy which
generally provides that the insurance carrier will pay, on behalf of the Company
and its directors and officers, certain amounts which they may be required to
pay as a result of certain claims made against them for actions taken in course
of the management or operations of the Company.
Insofar as indemnification for liabilities under the Securities Act of
1933 may be permitted to the directors and officers, the Company has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in such Act and is
therefore unenforceable. If a claim for indemnification against such liabilities
under the Securities Act of 1933 (other than for expenses incurred in a
successful defense) is asserted against the Company by the directors or officers
in connection with the shares, the Company will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question of whether such indemnification by it
is against public policy as expressed in such Act and will be governed by the
final adjudication of such issue.
Item 30. Business and Other Connections of Adviser
Not applicable.
Item 31. Location of Accounts and Records
The Company's accounts and records are maintained at the Company's
principal executive offices located at 450 Lexington Avenue, Suite 3300, New
York, New York 10017. In addition, Deutsche Bank Trust Company Americas, which
is located at 130 Liberty Street, New York, New York 10006, acts as the
custodian of the securities, cash and other assets of the Company and maintains
certain accounts and records of the Company. Mellon Investor Services LLC, which
is located at 85 Challenger Road, Ridgefield Park, New Jersey 07660, acts as the
Company's transfer agent, registrar and dividend-paying agent and maintains
certain accounts and records of the Company.
Item 32. Management Services
Not applicable.
C-3
Item 33. Undertakings
1. The Company undertakes to suspend the offering of shares of Series
B Preferred Stock until the prospectus is amended if (1) subsequent
to the effective date of this registration statement, its net asset
value declines more than ten percent from its net asset value as of
the effective date of the registration statement or (2) its net
asset value increases to an amount greater than its net proceeds as
stated in the prospectus.
2. Not applicable.
3. Not applicable.
4. Not applicable.
5. The Company undertakes that (a) for the purpose of determining any
liability under the Securities Act of 1933, the information omitted
from the form of prospectus filed as part of the registration
statement in reliance upon Rule 430A and contained in the form of
prospectus filed by the Company pursuant to Rule 497(h) will be
deemed to be a part of the registration statement as of the time it
was declared effective; and (b) for the purpose of determining any
liability under the Securities Act, each post-effective amendment
that contains a form of prospectus will be deemed to be a new
registration statement relating to the securities offered therein,
and the offering of such securities at that time will be deemed to
be the initial bona fide offering thereof.
6. The Company undertakes to send by first class mail or other means
designed to ensure equally prompt delivery, within two business
days of receipt of a written or oral request, any Statement of
Additional Information constituting Part B of this registration
statement.
C-4
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 registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of New York, State of New
York on the 4th day of August, 2003.
GENERAL AMERICAN INVESTORS COMPANY, INC.
By: /s/ Eugene L. DeStaebler, Jr.
-----------------------------------
Name: Eugene L. DeStaebler, Jr.
Title: Vice-President, Administration
POWER OF ATTORNEY
We, the undersigned officers and directors of General American
Investors Company, Inc., hereby severally constitute and appoint Spencer
Davidson, Eugene L. DeStaebler, Jr. and Diane G. Radosti (with full power to
each of them to act alone) his or her true and lawful attorney-in-fact and
agent, for him or her and on his or her behalf and in his or her place and stead
in any and all capacities, to make, execute and sign all amendments and
supplements to the Registration Statement on Form N-2 and any and all
registration statements relating to said Registration Statement that are to be
effective upon filing pursuant to Rule 462(b) under the Securities Act of 1933,
as amended, and the Investment Company Act of 1940, as amended, and to file with
the Securities and Exchange Commission, and any other regulatory authority
having jurisdiction over the offer and the sale of shares of Series B Preferred
Stock of the Company, any and all amendments and supplements to such
Registration Statement, and any and all exhibits and other documents requisite
in connection therewith, granting unto said attorneys, and each of them, full
power and authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises as fully to all intents and
purposes as the undersigned officers and directors themselves might or could do.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed below by the following persons in the
capacities and the on the date indicated below.
Signature Title Date
--------- ----- ----
President and Chief Executive August 4, 2003
/s/ Spencer Davidson Officer and Director (Principal
-----------------------------------------------------
(Spencer Davidson) Executive Officer)
Vice-President, Administration August 4, 2003
/s/ Eugene L. DeStaebler, Jr. (Principal Financial Officer)
-----------------------------------------------------
(Eugene L. DeStaebler, Jr.)
/s/ Diane G. Radosti Treasurer (Principal Accounting August 4, 2003
-----------------------------------------------------
(Diane G. Radosti) Officer)
/s/ Lawrence B. Buttenwieser Chairman of the Board of Directors August 4, 2003
-----------------------------------------------------
(Lawrence B. Buttenwieser) and Director
C-5
/s/ Arthur G. Altschul, Jr. Director August 4, 2003
------------------------------------------------------
(Arthur G. Altschul, Jr.)
/s/ Lewis B. Cullman Director August 4, 2003
-----------------------------------------------------
(Lewis B. Cullman)
/s/ Gerald M. Edelman Director August 4, 2003
-----------------------------------------------------
(Gerald M. Edelman)
/s/ John D. Gordan, III Director August 4, 2003
-----------------------------------------------------
(John D. Gordan, III)
/s/ Sidney R. Knafel Director August 4, 2003
-----------------------------------------------------
(Sidney R. Knafel)
/s/ Richard R. Pivirotto Director August 4, 2003
-----------------------------------------------------
(Richard R. Pivirotto)
/s/ Joseph T. Stewart, Jr. Director August 4, 2003
-----------------------------------------------------
(Joseph T. Stewart, Jr.)
/s/ Raymond S. Troubh Director August 4, 2003
-----------------------------------------------------
(Raymond S. Troubh)
C-6
SCHEDULE OF EXHIBITS TO FORM N-2
Exhibit Page
Number Description Number
---------- ---------------------------------------------------------------------------------- ------
Exhibit A (1) Restated Certificate of Incorporation*
A (2) Certificate of Amendment to the Restated Certificate of Incorporation, dated
April 28, 1987*
A (3) Certificate of Amendment to the Restated Certificate of Incorporation, dated
March 19, 1992*
A (4) Certificate of Amendment to the Restated Certificate of Incorporation, dated
March 11, 1998*
A (5) Certificate of Correction to the Certificate of Amendment to the Restated
Certificate of Incorporation, dated March 20, 1998*
A (6) Series A Preferred Stock Certificate of Designations*
A (7) Series B Preferred Stock Certificate of Designations**
A (8) Certificate of Amendment to the Restated Certificate of Incorporation, dated
March 13, 2000+
Exhibit B By-Laws*
Exhibit C Not Applicable
Exhibit D (1) Series A Preferred Stock Specimen Stock Certificate*
(2) Series B Preferred Stock Specimen Stock Certificate**
Exhibit E Not Applicable
Exhibit F Not Applicable
Exhibit G Not Applicable
Exhibit H (1) Form of Underwriting Agreement**
(2) Form of Master Agreement Among Underwriters**
Exhibit I (1) Employees' Retirement Plan*
(2) (A) Amendment of the Employees' Retirement Plan dated
February 14, 1995*
(2) (B) Amendment of the Employees' Retirement Plan dated
October 13, 1999+
(2) (C) Amendment of the Employees' Retirement Plan dated July 11,
2001+
(2) (D) Amendment of the Employees' Retirement Plan dated April 10,
2002+
(2) (E) Amendment of the Employees' Retirement Plan dated July 10,
2002+
(3) (A) Employees' Thrift Plan*
(3) (B) Amendment of the Employees' Thrift Plan dated October 13,
1999+
(3) (C) Amendment of the Employees' Thrift Plan dated July 11,
2001+
(3) (D) Amendment of the Employees' Thrift Plan dated April 10,
2002+
(3) (E) Amendment of the Employees' Thrift Plan dated July 10,
2002+
C-7
(4) Excess Benefit Plan*
(5) Excess Contribution Plan*
Exhibit J Custodian Agreement*
Exhibit K Not Applicable
Exhibit L Opinion and Consent of Sullivan & Cromwell LLP**
Exhibit M Not Applicable
Exhibit N Consent of Ernst & Young LLP+
Exhibit O Not Applicable
Exhibit P Not Applicable
Exhibit Q Not Applicable
Exhibit R Code of Ethics+
---------
* Previously filed and incorporated by reference.
** To be filed by amendment.
+ Filed herewith.
C-8