AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 11, 2003
SECURITIES ACT FILE NO. 333-107615
INVESTMENT COMPANY ACT FILE NO. 811-00041
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 1
TO
FORM N-2
(CHECK APPROPRIATE BOX OR BOXES)
[X] REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
[X] PRE-EFFECTIVE AMENDMENT NO. 1________
[ ] 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): [ ] 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
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PROPOSED MAXIMUM PROPOSED MAXIMUM
AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF
TITLE OF SECURITIES BEING REGISTERED REGISTERED(1) SHARE PRICE(2) REGISTRATION FEE(3)
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% Cumulative Preferred Stock,
Series B, par value $1.00 per
share............................... 8,000,000 $25.00 $200,000,000 $16,180
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(1) Of such amount, 4,000,000 shares were previously registered.
(2) Estimated solely for the purpose of calculating the registration fee.
(3) A fee in the amount of $8,090 was previously paid.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, 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.
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GENERAL AMERICAN INVESTORS COMPANY, INC.
CROSS-REFERENCE SHEET
Items in Part A of Form N-2 Location in Prospectus(Caption)
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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; Description of Rating Agency
Guidelines; 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.
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 SEPTEMBER 11, 2003
PROSPECTUS
8,000,000 SHARES
GENERAL AMERICAN INVESTORS COMPANY, INC.
% CUMULATIVE PREFERRED STOCK, SERIES B
(LIQUIDATION PREFERENCE $25.00 PER SHARE)
------------------
General American Investors Company, Inc. is offering 8,000,000 shares of
% Cumulative Preferred Stock, Series B, par value $1.00 per share
(liquidation preference $25.00 per share). 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 required 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 has applied 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 16 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..............................................
Sales Load(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 $500,000 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, which is the
business day following the date of this prospectus, against payment therefor in
immediately available funds.
------------------
CITIGROUP MERRILL LYNCH & CO.
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 33 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.......................................... 1
Financial Highlights........................................ 8
The Company................................................. 10
Use of Proceeds............................................. 10
Capitalization.............................................. 11
Portfolio................................................... 12
Investment Objectives and Policies.......................... 14
Management.................................................. 15
Risk Factors................................................ 16
Description of Series B Preferred Stock..................... 18
Description of Rating Agency Guidelines..................... 23
Description of Capital Stock and Other Securities........... 27
Taxation.................................................... 28
Certain Provisions of the Restated Certificate of
Incorporation and By-Laws; Anti-Takeover Provisions....... 30
Privacy Policy.............................................. 30
Custodian, Transfer Agent, Registrar and Dividend-Paying
Agent..................................................... 30
Underwriting................................................ 31
Validity of Series B Preferred Stock........................ 32
Experts..................................................... 32
Additional Information...................................... 32
Table of Contents of Statement of Additional Information.... 33
i
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 notified the
holders of the Series A Preferred Stock on
August 15, 2003 that it will redeem all of the
outstanding shares of Series A Preferred Stock
on September 23, 2003. See "-- Condition to
Offering" below.
The Offering.................. The Company is offering 8,000,000 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 15
of this prospectus and "Management of the
Company" in the Statement of Additional
Information.
Dividends..................... Dividends on the Series B Preferred Stock at
the annual rate of % of the liquidation
preference of $25.00 per share, when, as
1
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:
- the asset coverage required by the Investment
Company Act of 1940, as amended (the "1940
Act"), and
- 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 at an assumed public offering
price of $25.00 per share 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 547% (after
giving effect to the deduction of an assumed
sales load and estimated expenses payable in
connection with the offering of approximately
$6,800,000). The asset coverage would have been
computed as follows: value of the Company's
assets less liabilities not constituting senior
securities ($1,094,195,376) divided by senior
securities representing indebtedness plus the
liquidation preference of each class of
preferred stock ($200,000,000), expressed as a
percentage = 547%. See "Description of Rating
Agency Guidelines -- Asset Maintenance."
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
2
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 together 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 together 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.
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%.
3
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 has filed an application 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 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
- 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.
4
- 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.
- 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.
- 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
- 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.
Redemption
- The Company may be required to redeem the
Series B Preferred Stock to meet regulatory
or rating agency requirements or may
voluntarily redeem the Series B Preferred
Stock. Subject to these redemptions, the
Series B Preferred Stock is perpetual.
Illiquidity Prior to Exchange Listing
- 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
- 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.
5
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 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 notified the holders of the Series
A Preferred Stock on August 15, 2003 that it
will redeem all of the outstanding shares of
Series A Preferred Stock on September 23, 2003
for an aggregate redemption price equal to
approximately $150,000,000. All of the
outstanding shares of Series A Preferred Stock
must be redeemed before any shares of the
Series B Preferred Stock offered hereby may be
issued.
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
6
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."
7
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
8
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.
9
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
LIQUIDATION
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 sales load 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."
10
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 $150,000,000 and (ii) the consummation of the
offering of 8,000,000 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 8,000,000 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 $200,000,000
============ ============
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 $ 29,882,056
Additional paid-in capital................................ 547,762,055 540,962,055
Accumulated realized loss on investments.................. (14,374,856) (14,374,856)
Undistributed net income.................................. 1,607,201 1,607,201
Unallocated distributions on Series A Preferred Stock..... (5,640,000) (5,640,000)
Unrealized appreciation on investments and securities sold
short (including aggregate gross unrealized
appreciation of $398,757,748).......................... 341,758,920 341,758,920
------------ ------------
Net assets applicable to common stock.................. $900,995,376 $894,195,376
============ ============
---------------
(1) After deducting an assumed sales load and estimated offering expenses of
approximately $6,800,000.
11
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%
============ =====
12
The following table sets forth the Company's ten largest investment
holdings as of June 30, 2003.
% NET
ASSETS
APPLICABLE TO
COMMON
SHARES VALUE 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%
============ =====
13
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.
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:
- Issue any class of senior security, or sell any such security of which it
is the issuer, except as permitted by the 1940 Act.
- Borrow money in excess of 25% of its gross assets, except for the
purchase or redemption of outstanding senior securities.
- Underwrite securities in excess of 20% of its gross assets.
- Increase its holdings in a particular industry by additional investment
in that industry beyond 50% of the value of the Company's gross assets.
- Purchase or sell real estate.
- Purchase or sell commodities or commodity contracts in excess of 20% of
its gross assets.
- 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.
- 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.
14
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 not invest 25% or more 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.
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.
15
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 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.
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.
REDEMPTION. The Series B Preferred Stock is subject to both mandatory and
optional redemption under specified circumstances 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. Upon redemption, 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. For a
description of the circumstances in which the shares may be redeemed, see
"Description of Series B Preferred Stock -- Redemption."
ILLIQUIDITY PRIOR TO EXCHANGE LISTING. Prior to the offering, there has
been no public market for the Series B Preferred Stock. The Company has filed an
application to list the shares of Series B Preferred Stock 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.
16
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.
- Investing in foreign securities could cause the Company to be affected
favorably or unfavorably by changes in currency exchange rates and
revaluations of currencies.
- 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.
- Foreign securities and their markets may not be as liquid as U.S.
securities and their markets.
- Securities of some foreign companies may involve greater market risk than
securities of U.S. companies.
- 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.
- 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.
17
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 notified
the holders of the Series A Preferred Stock on August 15, 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 8,000,000 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 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.
18
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:
- 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"),
- 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
- 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:
- the dissolution of the Company,
- any plan of reorganization (as that term is defined in the 1940 Act)
adversely affecting the Series B Preferred Stock, or
- 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.
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.
19
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:
- the redemption date,
- the number of shares of Series B Preferred Stock to be redeemed,
- the CUSIP number(s) of the shares,
- the redemption price,
- the place or places where the shares are to be redeemed,
- that dividends on the shares to be redeemed will cease to accrue on the
redemption date, and
- 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.
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
20
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 objectives 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,
- 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
- 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.
21
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,
- 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
- 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
- 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.
22
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.
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.
23
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 an assumed sales load and estimated
offering expenses of $6,800,000) would have been computed as follows:
Value of Company assets less
liabilities not constituting senior
securities $1,094,195,376
= 547%
------------------------------------ ----------------
Senior securities representing $200,000,000
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:
- 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
- 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:
- the sensitivity of the market value of the relevant asset to changes in
interest rates,
24
- 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
- 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:
- 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
- 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:
- the quarterly asset coverage having been satisfied, or
- 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%.
25
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 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.
26
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 and the pricing committee thereof has designated
8,000,000 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.
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
27
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 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
28
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.
29
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
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.
PRIVACY POLICY
The Company collects non-public personal information about its stockholders
with respect to their transactions in shares of the Company's securities if the
stockholders' shares are registered in their names. This information includes
the stockholder's address, tax identification or Social Security number and
dividend elections. The Company does not have knowledge of, nor does it collect
personal information about, stockholders who hold the Company's securities at
financial institutions such as brokers or banks in "street name" registration.
Under our privacy policy, the Company does not disclose any nonpublic
personal information about its stockholders or former stockholders to anyone,
except as permitted by law.
The Company restricts access to non-public personal information about its
stockholders to employees to the extent necessary to perform services for its
stockholders. The Company maintains physical, electronic and procedural
safeguards that comply with federal standards to guard the non-public personal
information of its stockholders.
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.
30
UNDERWRITING
Citigroup Global Markets Inc. and Merrill Lynch, Pierce, Fenner & Smith
Incorporated 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. ..............................
Merrill Lynch, Pierce, Fenner & Smith Incorporated..........
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 a sales load 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 shares of Series B Preferred
Stock purchased in the initial public offering on or before , 2003. 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 , which is the business day
following the date of this prospectus. Under Rule 15c6-1 adopted by the
Commission under the Securities Exchange Act of 1934, as amended, trades in the
secondary market generally are required to settle in three business days, unless
the parties to any such trade expressly agree otherwise. Accordingly, purchasers
who wish to trade shares of Series B Preferred Stock prior to the closing date
may be required to specify alternate settlement arrangements to prevent a failed
settlement because of the initial settlement procedures.
Prior to the offering, there has been no public market for the Series B
Preferred Stock. The Company has filed an application 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 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; 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
31
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.
The Company's common stock and Series A Preferred Stock are 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.
32
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-10
Code of Ethics and Related Matters.......................... B-10
Investment Advisory and Other Services...................... B-10
Brokerage Allocation and Other Practices.................... B-11
Net Asset Value............................................. B-11
Financial Statements........................................ B-12
Taxation.................................................... B-12
General Information......................................... B-16
Counsel and Independent Auditors............................ B-18
Glossary.................................................... B-18
33
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
8,000,000 SHARES
GENERAL AMERICAN INVESTORS COMPANY, INC.
% CUMULATIVE PREFERRED STOCK,
SERIES B
(LIQUIDATION PREFERENCE $25.00 PER SHARE)
------------
PROSPECTUS
, 2003
------------
CITIGROUP
MERRILL LYNCH & CO.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
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.
SUBJECT TO COMPLETION DATED SEPTEMBER 11, 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-10
Code of Ethics and Related Matters.......................... B-10
Investment Advisory and Other Services...................... B-10
Brokerage Allocation and Other Practices.................... B-11
Net Asset Value............................................. B-11
Financial Statements........................................ B-12
Taxation.................................................... B-12
General Information......................................... B-16
Counsel and Independent Auditors............................ B-18
Glossary.................................................... B-18
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
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 notified the holders of
Series A Preferred Stock on August 15, 2003 that it will redeem all of the
outstanding Series A Preferred Stock on September 23, 2003 for an aggregate
redemption price equal to approximately $150,000,000. 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 not invest 25% or more 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 PRINCIPAL OCCUPATION(S) DURING PAST
LENGTH OF TIME SERVED(1) FIVE YEARS OTHER DIRECTORSHIPS AND AFFILIATIONS
--------------------------------------- ----------------------------------- ------------------------------------
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
Gerald M. Edelman (74)............... Member and Chairman of the Department Neurosciences Institute of the
Director since 1976 of Neurobiology, The Scripps Research Neurosciences Research Foundation
Institute Director and President
B-3
NAME, AGE, POSITION(S) WITH COMPANY AND PRINCIPAL OCCUPATION(S) DURING PAST
LENGTH OF TIME SERVED(1) FIVE YEARS OTHER DIRECTORSHIPS AND AFFILIATIONS
--------------------------------------- ----------------------------------- ------------------------------------
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 Company, Inc. Foundation, Trustee
since 1995
---------------
(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 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.
B-4
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)
NAME, AGE, POSITION(S) WITH COMPANY AND LENGTH OF TIME SERVED(1) DURING 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 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
B-5
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:
DOLLAR RANGE OF
EQUITY SECURITIES
NAME OF DIRECTOR 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
ACCRUED
AGGREGATE 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 15,000 --
Board(2)(3)(4)(5)
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
----------------------------------------
FINAL AVERAGE EARNINGS 10 20 30 40
---------------------- ------- -------- -------- --------
$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
B-8
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 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.
B-9
PRINCIPAL STOCKHOLDERS
As of August 31, 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, 79.8%
Cede & Co.
P.O. Box 20
Bowling Green Station
New York, New York 10274
As of August 31, 2003, all officers and directors of the Company as a group
owned approximately 7.65% of the Company's outstanding shares of common stock.
In addition, approximately 1.90% 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 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.
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.
B-10
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.
The sales load and the expenses of issuance and distribution associated
with the Series B Preferred Stock will be charged to paid-in capital.
B-11
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. Copies of the Annual
Report and Semi-Annual Report to the Company's stockholders may be obtained
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.
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.
B-12
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 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
B-13
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 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
B-14
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
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
B-15
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 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. (DTC's partnership nominee) or
such other name as may be requested by an authorized representative of DTC. One
or more fully-registered security certificate or certificates initially will be
issued, representing in the aggregate the total number of securities, and will
be deposited with DTC.
DTC is a limited-purpose trust company organized under the New York Banking
Law, a "banking organization" within the meaning of the New York Banking Law, a
member of the Federal Reserve System, a "clearing corporation" within the
meaning of the New York Uniform Commercial Code and a "clearing agency"
registered pursuant to the provisions of Section 17A of the Securities Exchange
Act of 1934, as amended. DTC holds securities that its participants deposit with
DTC ("direct participants"). DTC also facilities the settlement among direct
participants of securities transactions, such as transfers and pledges, in
deposited securities through electronic computerized book-entry changes in
direct participants' accounts, thereby eliminating the need for physical
movement of securities certificates. Direct participants
B-16
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.
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.
B-17
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 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 Securities, U.S.
Treasury Strips 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-1+ 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.
B-18
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
----------------------------------------------
AAA AA A BAA BA B UNRATED(1)
--- --- --- --- --- --- ----------
TERM TO MATURITY OF CORPORATE DEBT SECURITY
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 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: Eligible preferred stock will be from issuers
possessing a senior unsecured rating that is Baa or higher:
MOODY'S RATING CATEGORY DISCOUNT FACTORS
----------------------- ----------------
Aaa......................................................... 150%
Aa.......................................................... 155%
A........................................................... 160%
Baa......................................................... 165%
Ba.......................................................... 196%
B........................................................... 216%