N-2/A: Initial filing of a registration statement on Form N-2 for closed-end investment companies
Published on February 27, 2004
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON February 27, 2004
REGISTRATION NOS. 333-111045
811-08025
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
Form N-2/A
[X] REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No. 1
Post-Effective Amendment No. ___
and
[X] REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 5
Global Income Fund, Inc.
11 Hanover Square, New York, New York 10005
(Address of Principal Executive Offices)
1-212-344-6310
(Registrant's Telephone Number, including area code)
--------------------------
Thomas B. Winmill, Esq.
Global Income Fund, Inc.
President, Chief Executive Officer and General Counsel
11 Hanover Square
New York, New York 10005
--------------------------
Copies to:
Stephanie A. Djinis, Esq.
Jean E. Minarick, Esq.
Law Offices of Stephanie A. Djinis
1749 Old Meadow Road
Suite 310
McLean, VA 22102
--------------------------
Approximate Date of Proposed Public Offering:
As soon as practicable after the effective date of this Registration Statement
(1) Registrant previously registered 1,733,038 shares on December 10, 2003, and
is registering an additional 6,147 shares necessary for this offering. The
total number of shares registered in connection with this offering is
1,739,185.
(2) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(c) under Securities Act of 1933. Based on the
average of the high and low prices reported on the American Stock Exchange
on February 25, 2004.
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SECTION 8(a), MAY DETERMINE
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
THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN
ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE
REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATES AS THE
COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
GLOBAL INCOME FUND, INC.
5,565,395 RIGHTS FOR 1,391,348 SHARES
Global Income Fund, Inc. (the "Fund") is issuing non-transferable rights
(the "Rights") to its holders of common stock (the "Shares"). You will receive
one Right for each outstanding Share of the Fund you own on RRR, 2004 (the
"Record Date"). These Rights entitle you to buy new Shares of the Fund. For
every four Rights that you receive, you can buy one new Share of the Fund, plus,
in certain circumstances, additional new Shares pursuant to an over-subscription
privilege. The new Shares issued in this Offer also will be listed under the
symbol GIF.
The Rights offering (the "Offer") seeks to reward existing Fund
shareholders by giving them the opportunity to purchase additional Shares at a
price below both market and net asset value (the "NAV") without paying any
commissions. The purchase price per Share (the "Purchase Price") will be __% of
the lower of (a) the Fund's NAV per Share or (b) the market price per Share. For
this purpose, the NAV per Share will be determined as of PPP, 2004 (the "Pricing
Date"), and the market price per Share will be the average of the
volume-weighted average sales price of a Share on the American Stock Exchange
(the "AMEX") (symbol GIF) on the Pricing Date and the four preceding trading
days. On LLL, 2004, the last reported NAV per Share of the Shares was $ _______
and the last reported sales price per Share on the AMEX was $ _______. The
Estimated Purchase Price is $_______ per Share.
The Offer will expire at 5:00 p.m., New York City time, on XXX, 2004 (the
"Expiration Date"), unless the Offer is extended as described in this
Prospectus.
IMPORTANT DATES TO REMEMBER
EVENT DATE
Record Date RRR, 2004
Offering Period* EEE, 2004 to XXX, 2004
Expiration Date of the Offer* XXX, 2004
Pricing Date PPP, 2004
Payment for Guarantees of Delivery Due DDD, 2004
Confirmation Date CCC, 2004
*Unless extended.
The primary investment objective of the Fund is to provide for its
shareholders a high level of income, with capital appreciation as a secondary
objective. The Fund pursues its investment objectives by investing primarily in
a global portfolio of investment grade fixed income securities. The Fund is a
non-diversified, closed-end management investment company registered under the
Investment Company Act of 1940, as amended (the "1940 Act"). An investment in
the Fund is not appropriate for all investors. There is no assurance that the
Fund's investment objectives will be achieved. For a discussion of certain risk
factors and special considerations with respect to owning Shares of the Fund,
see "Risk Factors and Special Considerations" on page __ of this Prospectus. CEF
Advisers, Inc. (the "Investment Manager") serves as investment manager to the
Fund. The Fund's address is 11 Hanover Square, New York, NY 10005 and its
telephone number is 1-212-344-6310.
This Prospectus contains information you should know before exercising your
Rights, including information about risks. Please read it before you invest and
keep it for future reference. A Statement of Additional Information, dated EEE,
2004 (the "SAI"), containing information about the Fund, has been filed with the
Securities and Exchange Commission ("SEC") and is incorporated by reference in
its entirety into this Prospectus. The table of contents of the SAI appears on
page __ of this Prospectus. A copy of the SAI may be obtained by calling N.S.
Taylor & Associates, Inc., the Information Agent at 1-866-470-4100 or at the
SEC's website (http://www.sec.gov). The SAI will be sent within two business
days of receipt of a request.
Shareholder inquiries should be directed to the Information Agent, N.S.
Taylor & Associates, Inc., at 1-866-470-4100.
--------------------------------
(1) Estimated based on an estimated Purchase Price per Share of __% of the
lower of (a) the NAV per Share of the Fund's Shares on LLL, 2004 or (b) the
average of the volume-weighted average sales prices of a Share on the AMEX on
LLL, 2004 and the four preceding trading days. Total offering expenses are
estimated to be $157,505.
o Shareholders who do not exercise their Rights will, at the completion of
the Offer, own a smaller proportional interest in the Fund than if they
exercised their Rights.
o As a result of the Offer you will experience dilution of the aggregate NAV
of your Shares because the Fund's NAV per Share will be above the Purchase
Price on the Expiration Date.
o The Fund cannot state precisely the extent of any dilution at this time
because the Fund does not know what the NAV per Share will be when the
Offer expires or what proportion of the Rights will be exercised.
2
o The Investment Manager and its affiliates (the "Affiliated Parties") may
also purchase new Shares through the Offer on the same terms as other
shareholders to the extent any Affiliated Party is a shareholder of the
Fund.
--------------------------------
EEE, 2004
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 crime.
3
TABLE OF CONTENTS
Prospectus Summary
Fund Expenses
Financial Highlights
The Offer
Use of Proceeds
Investment Objectives and Policies
Risk Factors and Special Considerations
The Fund's Investment Program
Management of the Fund
Dividends and Other Distributions
Taxation
Capital Stock
Anti-takeover Provisions of the Governing Documents
Custodian, Transfer Agent, Dividend Disbursing Agent and Registrar
Legal Matters
Experts
Further Information
Table of Contents of Statement of Additional Information
4
PROSPECTUS SUMMARY
This summary highlights some information that is described more fully
elsewhere in this Prospectus. It may not contain all of the information that is
important to you. To understand the Offer fully, you should read the entire
document carefully, including the risk factors which can be found on page 29,
under the heading "Risk Factors and Special Considerations."
PURPOSES OF THE OFFER
The Offer seeks to reward existing Fund shareholders by giving them the
opportunity to purchase additional Shares at a price below both market and NAV
without paying any commissions.
The Board of Directors of the Fund ("Board") has determined that (i) it
would be in the best interests of the Fund and its existing shareholders to
increase the assets of the Fund available for investment, thereby permitting the
Fund to be in a better position to more fully take advantage of investment
opportunities that may arise and increase the number of issuers in its
portfolio, and (ii) the potential benefits of the Offer to the Fund and its
shareholders will outweigh the dilution to shareholders who do not exercise all
their Rights. The Rights Committee of the Board recommended to the Board, and
the Board approved, the Offer. The Rights Committee of the Board consists of the
three Directors who are not "interested persons" of the Fund under the 1940 Act
("Independent Directors"). See "Officers and Directors" in the SAI.
In reaching a decision to approve the Offer, the Board was advised by the
Investment Manager regarding the investment of proceeds of the Offer in
potential investment opportunities offering the Fund a potentially high level of
income and capital appreciation without having to liquidate current holdings and
to what extent the Fund may take advantage of these opportunities. The Board
also considered the potential benefits of increasing the size of the Fund in
order to lower the Fund's expenses as a percentage of average net assets. The
Investment Manager also advised the Board of its belief that increasing the
total assets of the Fund may permit the Fund to obtain better execution prices
for certain portfolio transactions.
Based on information provided by the Investment Manager, the Board believes
that increasing the size of the Fund may lower the Fund's expenses as a
proportion of average net assets because the Fund's fixed costs can be spread
over a larger asset base. There can be no assurance, however, that by increasing
the size of the Fund, the Fund's expense ratio will be lowered. The Board also
believes that a larger number of outstanding Shares could increase the level of
market interest in and visibility of the Fund and improve the trading liquidity
of the Fund's Shares on the AMEX.
The Fund may, in the future and at its discretion, choose to make other
rights offerings to raise funds for specific purposes on a non-routine basis for
a number of Shares and on terms which may or may not be similar to the Offer.
5
IMPORTANT TERMS OF THE OFFER
Total number of Shares available for primary
subscription...................................... 1,391,348 Shares Number
of Rights you will receive
for each outstanding Share you own
on the Record Date.............................. 1 Right for 1 Share
Number of Shares you may purchase with your
Rights at the Purchase Price per Share*...... 1 Share for every 4
Purchase Price...................................... Rights __% of the lower
of (a) the NAV per Share
or (b) the market price
per Share**
* Those exercising all their Rights may buy additional new Shares pursuant to
an over-subscription privilege in certain circumstances.
** For this purpose, NAV per Share will be determined as of the Pricing Date,
and the market price per Share will be the average of the volume-weighted
average sales price of a Share on the AMEX on the Pricing Date and the four
preceding trading days.
--------------------------------
Shareholders with inquiries should call the Information Agent,
N.S. Taylor & Associates, Inc.,
toll-free 1-866-470-4100
or
the Investment Manager
CEF Advisers, Inc. at 1-212-344-6310
--------------------------------
ADDITIONAL TERMS OF THE OFFER
The Fund is issuing Rights to its shareholders of record ("Record Date
Shareholders") as of the close of business on the Record Date. Holders of the
Rights may subscribe for an aggregate of 1,739,185 Shares, par value $0.01 per
Share, which includes additional Shares that may become available through the
Over-Subscription Privilege discussed below. Each Record Date Shareholder is
being issued one Right for every one whole Share owned on the Record Date. The
Rights entitle the Record Date Shareholder to acquire at the Purchase Price one
Share for every four Rights held. Fractional Shares will not be issued upon the
exercise of the Rights. Accordingly, new Shares may be purchased only pursuant
to the exercise of Rights in integral multiples of four. Rights may be exercised
at any time during the offering period (the "Offering Period"), which commences
on EEE, 2004 and ends at 5:00 p.m., New York City time, on XXX, 2004 (the
"Expiration Date"), unless extended by the Fund until 5:00 p.m., New York City
time, on a date no later than ___________, 2004. The right to acquire one Share
for every four Rights held during the Offering Period at the Purchase Price is
defined as the "Primary Subscription" and the Shares offered in the Primary
Subscription are defined as the Primary Subscription Shares. The Rights will not
be listed for trading on the AMEX or any other exchange.
6
Record Date Shareholders, where the context requires, also include
beneficial owners for whom Cede & Co. ("Cede"), nominee for The Depository Trust
Company, or any other depository or nominee is the holder of record for Shares.
In the case of Shares held of record by Cede or any other depository or nominee,
beneficial owners for whom Cede or any other depository or nominee is the holder
of record will be deemed to be the holders of the Rights that are issued to Cede
or such other depository or nominee on their behalf, including for purposes of
determining the maximum number of Shares a Record Date Shareholder may acquire
pursuant to the Offer. Except as described below, subscription certificates
evidencing the Rights ("Subscription Certificates") will be sent to Record Date
Shareholders or their nominees.
Dividends, if any, are expected to be paid on Shares acquired in the Offer
in ____________, 2004.
OVER-SUBSCRIPTION PRIVILEGE
Those who exercise all their Rights in the Primary Subscription, minus
any un-exercisable Rights related to owning less than four shares, may request
to buy the Primary Subscription Shares not bought by other Rights holders.
Fractional Shares will be ignored in determining whether a Shareholder has fully
exercised his or her Rights. If enough Primary Subscription Shares are
available, all requests will be honored in full. To satisfy requests, the Fund
may, in its sole discretion, issue more Shares in an amount up to 25% of the
Primary Subscription Shares (the "Secondary Subscription Shares"). Primary
Subscription Shares not bought in the Primary Subscription, together with all
Secondary Subscription Shares, are called "Excess Shares." The entitlement to
buy Excess Shares is called the "Over-Subscription Privilege." Over-Subscription
Privilege requests are subject to allotment, which is more fully discussed under
"The Offer - Over-Subscription Privilege."
METHOD FOR EXERCISING RIGHTS
If your Shares are held with a broker, bank or trust company
Contact your broker, bank, trust company, or other financial
institution or nominee (an "Intermediary"), which can arrange, on your
behalf, to guarantee delivery of payment and delivery of a properly
completed and executed Subscription Certificate pursuant to a notice
of guaranteed delivery ("Notice of Guaranteed Delivery"). The Notice
of Guaranteed Delivery must be received by the Expiration Date. A
properly completed and executed Subscription Certificate, together
with payment of the Estimated Purchase Price of $ ____ per Share, must
be received by American Stock Transfer & Trust Company (the
"Subscription Agent") by the close of business on the third business
day after the Expiration Date which is, DDD, 2004 unless the Offer is
extended) or the Subscription Agent will not honor a Notice of
Guaranteed Delivery. Final payment of the actual Purchase Price per
Share must be received by the Subscription Agent within 10 business
days after CCC, 2004 (the "Confirmation Date").
7
If your Shares are held in certificate form or by the Fund's transfer
agent, American Stock Transfer & Trust Company
Complete and sign the Subscription Certificate. Mail it in the
envelope provided or deliver it, together with payment of the
Estimated Purchase Price of $___ per Share, to the Subscription Agent
at the address indicated on the Subscription Certificate. Your
completed and signed Subscription Certificate and payment in good
funds must be received prior to 5:00 p.m. New York City time on the
Expiration Date. Final payment of the actual Purchase Price per Share
must be received by the Subscription Agent within 10 business days
after the Confirmation Date. You may pay by personal check, money
order, certified check or bank cashier's check. If you choose to pay
by personal check, you will need to deliver your check to the
Subscription Agent not less than five business days before the
Expiration Date because your check must clear before the Expiration
Date.
Because the Expiration Date is prior to the Pricing Date, shareholders who
exercise their Rights will not know the Purchase Price at the time they
exercise. Rights holders will have no right to rescind their subscription after
the Subscription Agent has received payment. See "The Offer - Method of Exercise
of Rights" and "The Offer - Payment for Shares." Subscription payments will be
held by the Subscription Agent pending completion of the processing of the
Subscription. No interest on subscription payments will be paid to subscribers.
OFFERING FEES AND EXPENSES
Offering expenses incurred by the Fund are estimated to be $158,000.
RESTRICTIONS ON FOREIGN SHAREHOLDERS
Record Date Shareholders whose record addresses are outside of the United
States (for these purposes, the United States includes its territories and
possessions and the District of Columbia) or who have an APO or FPO address will
receive written notice of the Offer; however, the Fund will not mail
Subscription Certificates to such shareholders. The Rights to which those
Subscription Certificates relate will be held by the Subscription Agent for such
foreign Record Date Shareholders' accounts until instructions are received by
the Expiration Date, as described below, with payment to exercise the Rights.
Shareholders whose addresses are outside the United States or who have an APO or
FPO address and who wish to subscribe to the Offer either in part or in full
should contact the Subscription Agent by written instruction or recorded
telephone conversation no later than three business days prior to the Expiration
Date. If no such instructions are received by the Expiration Date, such Rights
will expire.
8
USE OF PROCEEDS
The Offer is designed to raise funds to be invested consistent with the
Fund's investment objectives and policies depending on conditions for the types
of securities in which the Fund typically invests. The net proceeds of the Offer
are estimated to be approximately $___________. This figure is based on the
Estimated Purchase Price per Share of $ ___ and assumes all Primary Subscription
Shares offered are sold and that the expenses related to the Offer estimated at
approximately $ ____________ are paid.
The Investment Manager expects to invest such proceeds in accordance with
the Fund's investment objectives and policies within three months after receipt
of such proceeds, depending on market conditions for the types of securities in
which the Fund principally invests. Pending such investment, the proceeds will
be held in high quality short-term debt securities and instruments.
IMPORTANT DATES TO REMEMBER
EVENT DATE
Record Date RRR, 2004
Offering Period* EEE, 2004 to XXX, 2004
Expiration Date of the Offer** XXX, 2004
Pricing Date PPP, 2004
Payment for Guarantees of Delivery Due DDD, 2004
Confirmation Date CCC, 2004
* To exercise their Rights, shareholders must deliver by 5:00 p.m. New York
City time on the Expiration Date either (a) a Subscription Certificate and
payment for Shares or (b) a Notice of Guaranteed Delivery.
** Unless extended.
INFORMATION REGARDING THE FUND
The Fund, organized under the laws of the state of Maryland, commenced
operations as a closed-end management investment company on February 7, 1997.
The primary investment objective of the Fund is to provide for its shareholders
a high level of income, with capital appreciation as a secondary objective. The
Fund pursues its investment objectives by investing primarily in a global
portfolio of investment grade fixed income securities. The Fund is
non-diversified and no assurance can be given that the Fund's investment
objectives will be achieved. The Investment Manager actively manages the average
maturity of the Fund's portfolio in response to expected interest rate movements
in pursuit of capital appreciation or to protect against depreciation. The
Investment Manager also may employ certain investment techniques in seeking to
reduce the Fund's exposure to risks involving foreign currency exchange rates.
See "The Fund's Investment Program." The Fund's Shares are listed and traded on
the AMEX (symbol GIF).
9
The Fund currently pays quarterly dividends to shareholders. The amount of
quarterly dividends reflects the managed distribution policy of the Fund. The
policy is intended to provide shareholders with a relatively stable cash flow
and reduce or eliminate the Fund's market price discount to its NAV per Share.
Distributions of a percentage of the Fund's NAV per Share on an annual basis
have been paid primarily from ordinary income and any net capital gains, with
the balance representing a return of capital. The amount of distribution will
vary depending on the NAV per Share at the time of declaration. There can be no
assurance that the Fund will be able to maintain its current level of dividends,
and the Board may, in its sole discretion, change the Fund's current dividend
policy at any time. See "Dividends and Other Distributions."
INFORMATION REGARDING THE INVESTMENT MANAGER
The Investment Manager, a wholly owned subsidiary of Winmill & Co.
Incorporated ("WCI"), a publicly owned company whose securities are listed on
The Nasdaq Stock Market, serves as Investment Manager to the Fund. Bassett S.
Winmill, a Director of the Fund, may be deemed a controlling person of WCI on
the basis of his ownership of 100% of WCI's voting stock and, therefore, a
controlling person of the Investment Manager. The Fund's portfolio manager is
Ms. Marion E. Morris. Ms. Morris has been principally responsible for the Fund's
portfolio investments since 2000 and is also Senior Vice President, Director of
Fixed Income and a member of the Investment Policy Committee of the Investment
Manager. From 1997 to 2000, she acted as general manager of Michael Trapp, a
landscape designer. Previously, she served as Vice President of Salomon
Brothers, The First Boston Corporation and Cantor Fitzgerald.
For its services, the Investment Manager receives an investment management
fee, payable monthly, based on the average weekly net assets of the Fund at the
annual rate of 7/10 of 1% of the first $250 million, 5/8 of 1% from $250 million
to $500 million, and 1/2 of 1% over $500 million. The Investment Manager
provides certain administrative services to the Fund at cost.
Because the Investment Manager's fees are based on the Fund's net assets,
the Investment Manager will benefit from an increase in the Fund's net assets
resulting from the Offer. See "The Offer - Purpose of the Offer."
RISK FACTORS AND SPECIAL CONSIDERATIONS
The following summarizes some of the matters that a shareholder should
consider before investing in the Fund through the Offer.
Dilution If a shareholder does not exercise all of his Rights, when
the Offer is over such shareholder will own a relatively
smaller percentage of the Fund than if such shareholder had
10
exercised all his Rights. Further, as a result of the Offer
a shareholder will experience dilution in NAV per Share
because the Purchase Price will be below the NAV per Share on
the Pricing Date whether or not the shareholderparticipates
in the Offer. The Fund cannot state precisely the extent of
the dilution if shareholders do not exercise all their Rights
because the Fund does not know what the NAV per Share will be
on the Pricing Date or how many Rights will be exercised.
See "Risk Factors and Special Considerations - Dilution."
Leverage From time to time the Fund borrows money from banks
(including its custodian bank), and may engage in reverse
repurchase agreements and may issue senior securities,
including debt and preferred stock, to purchase and carry
securities and pays interest thereon. These practices,
referred to as leverage, are speculative and increase both
investment opportunity and investment risk. If the
on securities purchased with leverage exceeds the interest
paid on the leverage, the Fund's income will be
correspondingly higher. If the investment income fails to
cover the Fund's costs, including interest on leverage, or if
there are losses, the NAV of the Fund's Shares will decrease
faster than would otherwise be the case. When the Fund is
leveraged, the 1940 Act requires the Fund to have asset
coverage of at least 200% for preferred securities it has
issued and 300% for its borrowings or the debt securities
it has issued. Interest on money borrowed is an expense the
Fund would not otherwiseincur, and it may therefore have
little or no investment income during periods of substantial
borrowings. Use of leverage by the Fund will increase the
Fund's total return only if returns on theFund's use of the
proceeds of such leverage exceed the cost of such leverage.
Although there can be no assurance that the use of leverage
will be successful, the Investment Manager believes that the
ability to employ leverage may potentially increase yields
and total returns. See "Risk Factors and Special
Considerations -- Leverage."
11
Market Value Shares of closed-end funds frequently trade at a market price
Net Asset Value that is less than the value of the net assets attributable to
those Shares. The possibility that Shares of the Fund will
trade at a discount from NAV or at premiums that are
unsustainable over the long term are risks separate and
distinct from the risk that the Fund's NAV will decrease.
The risk of purchasing Shares of a closed-end fund that might
trade at a discount or unsustainable premium is more
pronounced for investors who wish to sell their Shares in a
relatively short period of time because, for those investors,
realization of a gain or loss on their investments is likely
to be more dependent upon the existence of a premium or
discount than upon portfolio performance. See "Risk Factors
and Special Considerations - Market Value and Net Asset
Value. "Anti-takeover provisions The Fund's Board has
continuously availed itself of methods specifically provided
by, or consistent with, Maryland law and the 1940 Act to
protect the Fund and its shareholders. Accordingly, the Fund
has certain provisions in its Charter and Bylaws
(collectively, the "Governing Documents") that may be
regarded as "anti-takeover" provisions. These provisions
could have the effect of limiting (i) the ability of other
entities or persons to acquire control of the Fund, (ii) the
Fund's freedom to engage in certain transactions, or (iii)
the ability of the Fund's directors or shareholders to amend
the Governing Documents or effectuate changes in the Fund's
management. The Fund is also subject to certain Maryland law
provisions, including those which have been enacted since the
inception of the Fund, that make it more difficult for
non-incumbents to gain control of the Board. The overall
effect of these provisions is to render more difficult the
accomplishment of a merger with, or the assumption of control
by a shareholder, or the conversion of the Fund to open-end
status. These provisions may have the effect of depriving
Fund shareholders of an opportunity to sell their shares at a
premium above the prevailing market price by discouraging a
third party from seeking to obtain control of the Fund. See
"Certain Provisions of the Governing Documents."
12
Non-Diversified The Fund is non-diversified which means that more than 5% of
Status the Fund's assets may be invested in the securities of one
issuer. As a result, the Fund may hold a smaller number of
issuers than if it were diversified. Investing in the Fund
could involve more risk than investing in a fund that holds a
broader range of securities because change in the financial
condition of a single issuer could cause greater fluctuations
in the Fund's total return. See "Risk Factors and Special
Considerations - Non-Diversified Status."
Securities Issued The Fund may invest a portion of its assets in U.S. mortgage-
by Government backed securities issued by U.S.Government entities such as
Sponsored the Federal Home Loan Mortgage Corporation and similar U.S.
Entities Government sponsored entities such as the Federal National
Mortgage Association and the Federal Home Loan Banks.
Although these issuers may be chartered or sponsored by Acts
of Congress, the securities issued by them are neither issued
nor guaranteed by the U.S. Treasury.
Foreign Investing in the securities of foreign issuers, which are
Securities generally denominated in foreign currencies, may involve
certain risk and opportunity considerations not typically
associated with investing in domestic issuers and could cause
the Fund to be affected favorably or unfavorably by changes
in currency exchange rates and revaluations of currencies.
The Fund may invest internationally which involves specific
risks of political and currency instability, inadequate or
inaccurate financial information, and higher volatility. See
"The Fund's Investment Program" and "Risk Factors and Special
Considerations."
Dividends and The Fund currently pays quarterly dividends to shareholders.
Other The amount of quarterly dividends reflects the managed
Distributions distribution policy of the Fund. The policy is intended to
provide shareholders with a relatively stable cash flow and
reduce or eliminate the Fund's market price discount to its
NAV per Share. Distributions of a percentage of the Fund's
NAV per Share on an annual basis have been paid from ordinary
income and any net capital gains, with the balance
representing a return of capital. The amount of any
distribution will vary depending on the NAV per Share at the
time of declaration. There can be no assurance that the Fund
13
will be able to maintain its current level of dividends, and
the Board may, in its sole discretion, change the Fund's
current dividend policy at any time. Whether the Offer is
subscribed for or not, however, there can be no assurance
that the Fund can or will maintain its current dividend
policy or current level of dividends. See "Dividends and
Other Distributions."
Taxation Neither the receipt nor the exercise of the Rights will
result in taxable income to the shareholders for federal
income tax purposes. Shareholders will not realize a taxable
loss if their Rights expire without being exercised. The Fund
intends to continue to qualify for treatment as a regulated
investment company for federal income tax purposes. Such
qualification requires, among other things, compliance by the
Fund with certain distribution requirements. See "Taxation"
for a more complete discussion.
14
FUND EXPENSES
The following tables are intended to assist investors in understanding the
various costs and expenses that a shareholder of the Fund will bear, directly or
indirectly.
Shareholder Transaction Expenses None
Annual Operating Expenses (as a percentage of net
assets attributable to Shares)
Management Fees 0.70
Other Expenses (1) 0.69
Total Annual Operating Expenses 1.39
(1) Based on annualized expenses for the year ended December 31, 2003 as a
percentage of average net assets and on the net assets of the Fund after giving
effect to the anticipated net proceeds of the Offer, including proceeds from the
issuance of up to 25% of the Shares pursuant to the Over-Subscription Privilege.
Does not include offering expenses of the Fund incurred in connection with the
Offer, estimated at $_____. Such offering expenses will be charged against
paid-in capital of the Fund.
Example
The following example demonstrates the projected dollar amount of total
cumulative expense that would be incurred over various periods with respect to a
hypothetical investment in the Fund's Shares. These amounts are based upon
payment by the Fund of management fees and other expenses at the levels set
forth in the above table.
An investor would directly or indirectly pay the following expenses on
a $1,000 investment in Shares, assuming (i) the market price at the time of
investment was equal to the NAV per Share, (ii) a 5% annual return and (iii)
reinvestment of all distributions at NAV:
- ------------------ ---------------- ---------------- ----------------
One Year Three Years Five Years Ten Years
- ------------------ ---------------- ---------------- ----------------
- ------------------ ---------------- ---------------- ----------------
$14 $45 $78 $171
- ------------------ ---------------- ---------------- ----------------
This example assumes that the percentage amounts listed under Annual
Expenses remain the same in the years shown. The above tables and the assumption
in this example of a 5% annual return and reinvestment at NAV are required by
regulation of the SEC and are applicable to all investment companies, and the
assumed 5% annual return is not a prediction of, and does not represent, the
projected performance of the Fund's Shares. Actual expenses and annual rates of
return may be more or less than those allowed for purposes of this example.
15
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF FUTURE EXPENSES.
THE FUND'S ACTUAL EXPENSES MAY BE MORE OR LESS THAN THOSE SHOWN.
16
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the
Fund's financial performance for the periods presented and reflects financial
results for a single Fund Share. The total returns in the table represent the
rate that an investor would have earned on an investment in the Fund (assuming
reinvestment of all dividends and other distributions). The information for each
of the fiscal periods shown has been audited by Tait, Weller & Baker,
independent accountants. The audited financial statements included in the Annual
Report to the Fund's shareholders for the fiscal year ended December 31, 2003,
together with the report of Tait, Weller & Baker thereon, are incorporated by
reference into the Statement of Additional Information. Further information
about the performance of the Fund is available in the Fund's 2003 Annual Report
to shareholders. The Statement of Additional Information and the Fund's 2003
Annual Report to shareholders may be obtained from the Fund free of charge by
calling the Information Agent toll-free at 1-866-470-4100.
* Per share income and operating expenses and net realized and unrealized
gain (loss) on investments have been computed using the average number of
shares outstanding. These computations had no effect on net asset value per
Share.
** Annualized.
(a) Total return on market value basis is calculated assuming a purchase of
common stock on the opening of the first day and a sale on the closing of
the last day of each period reported. Dividends and distributions, if any,
are assumed for purposes of this calculation, to be reinvested at prices
obtained under the Fund's dividend reinvestment plan. Generally, total
return on net asset value basis will be higher than total return on market
value basis in periods where there is an increase in the discount or a
decrease in the premium of the market value to the net asset value from the
beginning to the end of such periods. Conversely, total return on net asset
value basis will be lower than total return on market value basis in
periods where there is a decrease in the discount or an increase in the
premium of the market value to the net asset value from the beginning to
the end of such periods. Total return calculated for a period of less than
one year is not annualized. The calculation does not reflect brokerage
commissions, if any.
(b) Ratios after custodian credits were 1.72%, 2.66%, 2.24%**, and 2.43% for
the years ended December 31, 2001, and 2000, the six months ended December
31, 1999 and the year ended June 30, 1999, respectively. There were no
custodian credits for the years ended December 31, 2003 and 2002.
17
THE OFFER
TERMS OF THE OFFER
The Fund is issuing Rights to Record Date Shareholders. Each Record Date
Shareholder is being issued one Right for each whole Share owned on the Record
Date. The Rights entitle the holder to acquire at the Purchase Price one Share
for each four Rights held. Fractional Shares will not be issued upon the
exercise of the Rights. Accordingly, Shares may be purchased only by exercise of
the Rights in integral multiples of four. Rights may be exercised at any time
during the Offering Period, unless extended by the Fund to a date not later than
___________, 2004, 5:00 p.m., New York City time. See "Expiration of the Offer."
The Right to acquire one additional Share for each four Rights held during the
Offering Period at the Purchase Price will be referred to in the remainder of
this Prospectus as the "Primary Subscription" and the Shares offered in the
Primary Subscription will be referred to as the Primary Subscription Shares.
The Purchase Price will be ___% of the lower of (a) the Fund's NAV per
Share or (b) the market price per Share. For this purpose, NAV of the Fund's
Shares will be determined as of the Pricing Date and the market price per Share
will be the average of the volume-weighted average sales prices of a Share on
the AMEX on the Pricing Date and the four preceding trading days. Because the
Expiration Date is prior to the Pricing Date, Rights holders who choose to
exercise their Rights will not know the Purchase Price at the time they exercise
their Rights.
Those who exercise all their Rights, minus any un-exercisable rights
related to owning less than four shares, in the Primary Subscription may request
to buy the Primary Subscription Shares not bought by other Rights holders. If
enough Primary Subscription Shares are available, all requests will be honored
in full. To satisfy requests, the Fund may, in its sole discretion, issue more
Shares in an amount up to 25% of the Primary Subscription Shares (the "Secondary
Subscription Shares"). Primary Subscription Shares not bought in the Primary
Subscription, together with all Secondary Subscription Shares, are called
"Excess Shares." The entitlement to buy Excess Shares is called the
"Over-Subscription Privilege." Over-Subscription Privilege requests are subject
to allotment, which is more fully discussed under "The Offer - Over-Subscription
Privilege."
The Rights are evidenced by Subscription Certificates, which will be mailed
to shareholders or their Intermediaries. Shareholders who own Fund Shares held
in joint accounts, dividend reinvestment plan accounts or retirement accounts
will not be permitted to aggregate the Rights issued for Shares held in those
types of accounts with Rights issued with respect to Shares that the shareholder
owns in his or her individually titled account. Shareholders or their
Intermediaries, as appropriate, including trustees for retirement accounts, will
receive separate Subscription Certificates for each separate account.
18
The Rights will not be listed for trading on the AMEX or any other
exchange. The new Shares issued in this Offer upon the exercise of Rights,
however, will be listed for trading on the AMEX under the symbol GIF.
PURPOSE OF THE OFFER
The Offer seeks to reward existing Fund shareholders by giving them the
opportunity to purchase additional Shares at a price below both market and NAV
without paying any commissions.
The Board of Directors of the Fund ("Board") has determined that (i) it
would be in the best interests of the Fund and its existing shareholders to
increase the assets of the Fund available for investment, thereby permitting the
Fund to be in a better position to more fully take advantage of investment
opportunities that may arise and increase the number of issuers in its
portfolio, and (ii) the potential benefits of the Offer to the Fund and its
shareholders will outweigh the dilution to shareholders who do not exercise all
their Rights. The Rights Committee of the Board recommended to the Board, and
the Board approved, the Offer. The Rights Committee of the Board consists of the
three Directors who are not "interested persons" of the Fund under the 1940 Act
("Independent Directors"). See "Officers and Directors" in the SAI.
In reaching a decision to approve the Offer, the Board was advised by the
Investment Manager regarding the investment of proceeds of the Offer in
potential investment opportunities offering the Fund a potentially high level of
income and capital appreciation without having to liquidate current holdings and
to what extent the Fund may take advantage of these opportunities. The Board
also considered the potential benefits of increasing the size of the Fund in
order to lower the Fund's expenses as a percentage of average net assets. The
Investment Manager also advised the Board of its belief that increasing the
total assets of the Fund may permit the Fund to obtain better execution prices
for certain portfolio transactions.
Based on information provided by the Investment Manager, the Board believes
that increasing the size of the Fund may lower the Fund's expenses as a
proportion of average net assets because the Fund's fixed costs can be spread
over a larger asset base. There can be no assurance, however, that by increasing
the size of the Fund, the Fund's expense ratio will be lowered. The Board also
believes that a larger number of outstanding Shares could increase the level of
market interest in and visibility of the Fund and improve the trading liquidity
of the Fund's Shares on the AMEX.
The Board also considered the proposed terms of the Offer, including the
expenses of the Offer, and its dilutive effect, including the effect on
non-exercising shareholders of the Fund. The Board considered, among other
things, the benefits and drawbacks of conducting a non-transferable versus a
transferable rights offering, the pricing structure of the Offer and the effect
on the Fund if the Offer is undersubscribed. The Board also considered the
impact of the Offer on its current policy to distribute, subject to market
19
conditions, an amount equal to a percentage of the Fund's NAV. For further
discussion of the impact of the Offer on the Fund's dividends, see "Dividends
and Other Distributions."
The Fund's Investment Manager will benefit from the Offer because its fee
is based on the average net assets of the Fund. See "Management of the Fund." It
is not possible to state precisely the amount of additional compensation the
Investment Manager will receive as a result of the Offer because the net
proceeds of the Offer will be invested in additional portfolio securities which
will fluctuate in value. Assuming all Primary Subscription Shares are sold and
that the Fund receives net of offering expenses the maximum proceeds of the
Offer, however, the annual compensation to be received by the Investment Manager
would be increased by approximately $ _______. Two of the Fund's Directors who
voted to authorize the Offer are "interested persons" of the Investment Manager
within the meaning of the 1940 Act and may benefit indirectly from the Offer
because of their interest in the Investment Manager. See "Officers and
Directors" in the SAI.
In addition to this Offer, the Fund concluded a rights offering in June
1998. The Fund may, in the future and at its discretion, choose to make other
rights offerings to raise funds for specific purposes on a non-routine basis for
a number of Shares and on terms which may or may not be similar to the Offer.
Any such future rights offering will be made in accordance with the 1940 Act and
the Securities Act of 1933.
Under the laws of Maryland, the state in which the Fund is organized, and
the Fund's Charter, the Board is authorized to make rights offerings without
obtaining shareholder approval. The staff of the SEC has interpreted the 1940
Act as not requiring shareholder approval of a rights offering at a price below
the then current NAV so long as certain conditions are met, including a good
faith determination by the Fund's Board of Directors that such offering would
result in a net benefit to existing shareholders.
OVER-SUBSCRIPTION PRIVILEGE
Those who exercise all their Rights, minus any un-exercisable rights
related to owning less than four shares, in the Primary Subscription may request
to buy the Primary Subscription Shares not bought by other Rights holders.
Fractional shares will be ignored in determining whether a subscribing
shareholder has fully exercised his or her Rights. If enough Primary
Subscription Shares are available, all requests will be honored in full. To
satisfy requests, the Fund may, in its sole discretion, issue more Shares in an
amount up to 25% of the Primary Subscription Shares (the "Secondary Subscription
Shares"). Primary Subscription Shares not bought in the Primary Subscription,
together with all Secondary Subscription Shares, are called "Excess Shares." The
entitlement to buy Excess Shares is called the "Over-Subscription Privilege."
Over-Subscription Privilege requests are subject to allotment, as described
below.
Shareholders who exercise all of the Rights issued to them, minus any
un-exercisable rights related to owning less than four shares, should indicate
on the Subscription Certificate how many additional Shares, if any, they are
requesting to buy through the Over-Subscription Privilege. Fractional shares
20
will be ignored in determining whether a subscribing Shareholder has fully
exercised his or her Rights. If enough Excess Shares are available, all requests
will be honored in full. If sufficient Excess Shares are not available, however,
the available Excess Shares will be allocated pro rata among those who
over-subscribe based on the number of Rights issued to them, i.e., in proportion
to the number of Shares owned on the Record Date. For this purpose,
broker-dealers whose Shares are held of record by an Intermediary, will be
deemed to be the holders of the Rights that are issued to the Intermediary.
The number of Excess Shares each over-subscribing Record Date Shareholder
may acquire will be rounded down to result in delivery of whole Shares. If a pro
rata allocation results in any shareholder being allocated a greater number of
Excess Shares than the shareholder subscribed for, then such shareholder will be
allocated only such number of Excess Shares as such shareholder subscribed for
and the remaining Excess Shares will be allocated among all other shareholders
then entitled to receive Excess Shares whose over-subscription requests have not
been fully honored. The allocation process may involve a series of allocations
in order to ensure that the total number of Shares available for
over-subscriptions is distributed, as nearly as may be practicable, on a pro
rata basis.
The formula to be used in allocating the Excess Shares is as follows:
Record Date Shareholder's Position x Excess Shares Remaining
- -------------------------------------------
Total Record Date Position
of All Over-Subscribers
The Fund will not offer or sell any Shares which are not subscribed for
under the Primary Subscription or the Over-Subscription Privilege.
THE PURCHASE PRICE
The Purchase Price for each Share to be issued pursuant to the Offer will
be ___% of the lower of (a) the Fund's NAV per Share or (b) the market price per
Share. For this purpose, NAV per Share will be determined as of the Pricing Date
and the market price per Share will be the average of the volume-weighted
average sales price of a Share on the AMEX on the Pricing Date and the four
preceding trading days. For example, if the NAV per Share on the Pricing Date is
$_____ and the volume-weighted average sales prices of a Share on the AMEX on
the Pricing Date and the four preceding trading days is $____, the Purchase
Price would be $____ (__% of NAV per Share). If, however, the NAV per Share on
the Pricing Date is $_____ and the average of the volume-weighted average sales
prices of a Share on the AMEX on the Pricing Date and the four preceding trading
days is $_____, the Purchase Price would be $ ______ (__% of the market price
per Share).
21
The actual Purchase Price will not be determined until the Pricing Date.
Therefore, shareholders wishing to exercise Rights must send to the Subscription
Agent prior to the Expiration Date either: (i) the Estimated Purchase Price of
$_____ per Share, together with a completed Subscription Certificate, or (ii) a
Notice of Guaranteed Delivery guaranteeing delivery of a properly completed and
executed Subscription Certificate and payment for the Shares. See "The Offer -
Methods of Exercising Rights" and "The Offer - Payment for Shares."
The Fund announced the proposed Offer after the close of trading on the
AMEX on ____________, 2004. The last reported NAV per Share at the close of
business on _________, 2004 (the last trading date on which the Fund publicly
reported its NAV prior to the announcement of the Offer) and ________________,
2004 (the last trading date on which the Fund publicly reported its NAV prior to
the date of this Prospectus) was $ ____ and $ _____, respectively, and the
volume-weighted average sales price of a Share on the AMEX on those dates were $
____ and $ ____, respectively.
EXPIRATION OF THE OFFER
The Expiration Date is 5:00 p.m., New York City time, on XXX, 2004, unless
extended by the Fund. Rights will expire on the Expiration Date and may not be
exercised after that date. Shareholders who choose to exercise their Rights will
not know the Purchase Price when they decide whether to acquire Shares in the
Primary Subscription or through the Over-Subscription Privilege.
SUBSCRIPTION AGENT
The Subscription Agent is American Stock Transfer & Trust Company. The
Subscription Agent will receive, for its administrative, processing, invoicing
and other services as Subscription Agent, an estimated fee of $ 8,000 and
reimbursement of out-of-pocket expenses related to the Offer. The Subscription
Agent is also the Fund's transfer agent and stock registrar.
INFORMATION AGENT
Any questions or requests for assistance should be directed to the
Information Agent at the toll-free telephone number listed below:
N.S. Taylor & Associates, Inc.
Toll-free 1-866-470-4100
The Information Agent will receive for its services an estimated fee of
$5,000 and reimbursement of out-of-pocket expenses currently estimated at
$30,000.
22
METHOD OF EXERCISE OF RIGHTS
Shareholders whose Shares are held in an account with an Intermediary may
exercise their Rights by requesting the Intermediary to guarantee delivery
(using a Notice of Guaranteed Delivery) of a properly executed Subscription
Certificate and payment for the Shares on the shareholder's behalf. The
Intermediary may charge a fee for this service.
Shareholders whose Shares are held in an account with the Fund's transfer
agent or in certificate form may exercise their Rights by filling in and signing
the reverse side of the Subscription Certificate and mailing it in the envelope
provided, or otherwise delivering the completed and signed Subscription
Certificate to the Subscription Agent, together with payment for the Shares as
described below under "Payment for Shares." The instructions accompanying the
Subscription Certificates should be read carefully and followed in detail. Do
not send Subscription Certificates to the Fund.
The Subscription Certificate and payment should be delivered to the
Subscription Agent, American Stock Transfer & Trust Company, by one of the
following methods:
(1) BY FIRST CLASS MAIL:
American Stock Transfer & Trust Company
59 Maiden Lane
New York, NY 10038
(2) BY EXPRESS MAIL OR OVERNIGHT COURIER:
American Stock Transfer & Trust Company
59 Maiden Lane
New York, NY 10038
(3) BY HAND:
(9:00 a.m. - 5:00 p.m. New York City time)
59 Maiden Lane
Plaza Level
New York, NY 10038
DELIVERY TO AN ADDRESS OTHER THAN THE ABOVE
DOES NOT CONSTITUTE GOOD DELIVERY.
Completed Subscription Certificates must be received by the Subscription
Agent prior to 5:00 p.m., New York City time, on the Expiration Date (unless
payment is to be effected by means of a Notice of Guaranteed Delivery) at the
offices of the Subscription Agent (see "Payment for Shares").
Intermediaries who hold Shares for the account of others should notify the
respective beneficial owners of such Shares as soon as possible to ascertain
such beneficial owners' intentions and to obtain instructions with respect to
the Rights. If the beneficial owner so instructs, the Intermediary should
23
complete the Subscription Certificate and submit it to the Subscription Agent,
together with the proper payment described below under "Payment for Shares."
PAYMENT FOR SHARES
Shares bought through the Offer may be paid for by either of the following:
(1) Send a personal check, money order, certified check, bank cashier's
check , or wire payment together with the Subscription Certificate, to the
Subscription Agent based on the Estimated Purchase Price of $ ____ per Share.
All payments must be in U.S. dollars drawn on a bank located in the United
States and payable to American Stock Transfer & Trust Company. No third party
checks will be accepted. Personal checks must be received by the Subscription
Agent not less than five business days before the Expiration Date so the check
may clear before the Expiration Date. Money orders, certified checks, and bank
cashier's checks must be received by the Subscription Agent prior to 5:00 p.m.,
New York City time, on the Expiration Date.
(2) Intermediaries who delivered a Notice of Guaranteed Delivery to the
Subscription Agent prior to the Expiration Date must send payment, together with
the Subscription Certificate, to the Subscription Agent based on the Estimated
Purchase Price of $ _______ per Share. Such payment must be received by the
Subscription Agent prior to 5:00 p.m., New York City time, on the third business
day after the Expiration Date (___________, 2004, unless the Offer is extended).
The method of delivery of Subscription Certificates and payment will be at
the election and risk of the shareholders, but if sent by mail it is recommended
that such Subscription Certificates and payment be sent by registered mail,
properly insured, with return receipt requested, and that a sufficient number of
days be allowed to ensure delivery to the Fund and clearance of payment prior to
5:00 p.m., New York City time, on the Expiration Date.
A confirmation will be sent by the Subscription Agent to each subscribing
shareholder (or, if the Fund's Shares on the Record Date are held by an
Intermediary, to the Intermediary), by the Confirmation Date showing (i) the
number of Shares acquired pursuant to the Primary Subscription, (ii) the number
of Shares, if any, acquired pursuant to the Over-Subscription Privilege, (iii)
the per Share and total Purchase Price for the Shares, and (iv) any additional
amount payable by the shareholder to the Fund, or any overpayment to be refunded
by the Fund to the shareholder that is a result of payment for Shares which the
holder did not acquire or exceeded the aggregate Purchase Price of the Shares,
as calculated based on the Purchase Price as determined on the Pricing Date. In
the case of any shareholder who exercises his or her right to acquire Shares
pursuant to the Over-Subscription Privilege, any amount which would otherwise
have been refunded to the shareholder because it was not used toward payment for
Shares in the Primary Subscription will be applied by the Fund toward payment
for additional Shares acquired pursuant to the exercise of the Over-Subscription
Privilege. Any additional payment required from a shareholder must be received
by the Subscription Agent within ten business days after the Confirmation Date.
24
After all payments have been made for Shares acquired in the Offer, any
remaining amounts will be refunded by the Subscription Agent to shareholders by
mail within ten business days after the Confirmation Date. No interest will be
paid on any such remaining amounts.
A shareholder will have no right to rescind a purchase subscription
after the Subscription Agent has received payment either by means
of a Notice of Guaranteed Delivery or check.
If a shareholder exercises Rights for Shares in the Primary Subscription or
requests Shares through the Over-Subscription Privilege, but does not make full
payment for such Shares by the tenth business day after the Confirmation Date,
the Fund reserves the right to take any or all of the following actions: (i)
find other purchasers for such Shares; (ii) apply any payment actually received
by it toward the purchase of the greatest whole number of Shares which could be
acquired by such shareholder for such Shares; (iii) sell in the open market some
or all of such Shares and apply the proceeds to the payment due; and (iv)
exercise any and all other rights or remedies to which it may be entitled,
including, without limitation, the right to set-off against payments actually
received by it with respect to such Shares and to enforce the relevant guaranty
of payment.
All questions concerning the timeliness, validity, form and eligibility of
any exercise of Rights will be determined by the Fund, whose determinations will
be final and binding. The Fund in its sole discretion may waive any defect or
irregularity, or permit a defect or irregularity to be corrected within such
time as it may determine, or reject the purported exercise of any Right.
Subscriptions will not be deemed to have been received or accepted until all
irregularities have been waived or cured within such time as the Fund determines
in its sole discretion. The Fund will not be under any duty to give notification
of any defect or irregularity in connection with the submission of Subscription
Certificates or incur any liability for failure to give such notification.
DELIVERY OF SHARE CERTIFICATES
Shareholders whose Shares are held for them by an Intermediary will have
any Shares they acquire in the Offer credited to the account of such
Intermediary. Shareholders whose Shares are held for them in book entry form by
the transfer agent will have any Shares they acquire in the Offer credited in
book entry form to their account with the transfer agent. Shareholders with
Share certificates will have certificates for any Shares they acquire in the
Offer mailed to them promptly.
Participants in the Fund's dividend reinvestment plan will be issued Rights
for the Shares held in their accounts in the Plan. Participants wishing to
exercise these Rights must exercise these Rights in accordance with the
procedures set forth above in "Method of Exercise of Rights." Rights will not be
exercised automatically by the Plan. Fractional Shares will not be issued upon
the exercise of the Rights. Plan participants exercising their Rights will
25
receive their Shares via an uncertificated credit to their existing account. To
request a Share certificate, participants in the Plan should check the
appropriate box on the Subscription Certificate. These Shares will remain
subject to the same investment option as previously selected by the Plan
participant.
FOREIGN RESTRICTIONS
Record Date Shareholders whose record addresses are outside of the United
States (for these purposes, the United States includes its territories and
possessions and the District of Columbia) or who have an APO or FPO address will
receive written notice of the Offer; however, the Fund will not mail
Subscription Certificates to such shareholders. The Rights to which those
Subscription Certificates relate will be held by the Subscription Agent for such
foreign Record Date Shareholders' accounts until instructions are received by
the Expiration Date, as described below, with payment to exercise the Rights.
Shareholders whose addresses are outside the United States or who have an APO or
FPO address and who wish to subscribe to the Offer either in part or in full
should contact the Subscription Agent by written instruction or recorded
telephone conversation no later than three business days prior to the Expiration
Date. If no such instructions are received by the Expiration Date, such Rights
will expire.
FEDERAL INCOME TAX CONSEQUENCES TO SHAREHOLDERS
For federal income tax purposes, neither your receipt nor your exercise of
Rights will result in taxable income to you. Moreover, you will not realize a
loss for those purposes if you do not exercise any Rights. The holding period
for a Share acquired on exercise of a Right will begin with the date of
exercise. Your basis for determining gain or loss on the sale or exchange of a
Share you acquire on the exercise of Rights will equal the sum of:
o the Purchase Price for the Share,
o any servicing fee charged to you by your broker, bank or trust company plus
o your basis, if any, in the Rights that you exercised.
A gain or loss you recognize on such a sale or exchange will be a capital
gain or loss if you hold the Share as a capital asset at the time of the sale or
exchange. This gain or loss will be a long-term capital gain or loss if you held
the Share at that time for more than one year. Any such gain you recognize
through December 31, 2008, will qualify for the 15% maximum federal income tax
rate for individual shareholders enacted by the Jobs and Growth Tax Relief
Reconciliation Act of 2003 ("2003 Act"). See "Taxation - Taxation of the
Shareholders."
26
As noted above, your basis in Shares that you acquire pursuant to your
exercise of Rights includes your basis in those Rights. If, as the Fund expects,
the Rights' aggregate fair market value immediately after they are distributed
is less than 15% of the Shares' aggregate fair market value at that time, your
basis in the Rights issued to you will be zero unless you elect to allocate part
of your basis in your previously owned Shares to those Rights. This allocation
- -- which also is required if, at that time, the Rights' aggregate fair market
value equals or exceeds 15% of the Shares' aggregate fair market value -- is
based on the relative fair market values of the Shares and the Rights as of that
time. Thus, if you make such an election and later exercise your Rights, your
basis in the Shares you previously owned will be reduced by an amount equal to
the basis you allocated to the Rights. This election must be made in a statement
attached to your federal income tax return for the year in which the Rights are
distributed. If your Rights expire without exercise, you will realize no loss
and you will not be permitted to allocate a portion of your basis in the Shares
to the unexercised Rights.
The foregoing is only a summary of the material federal income tax
consequences of the receipt, exercise, and lapse of Rights. The discussion is
based on applicable provisions of the Internal Revenue Code of 1986, as amended
(the "Code"), U.S. Treasury regulations thereunder and other authorities
currently in effect and does not address state, local or foreign taxes. The Code
and Treasury regulations thereunder are subject to change by legislative or
administrative action, possibly with retroactive effect. You should consult your
own tax advisors regarding specific questions as to federal, state, local or
foreign taxes. You should also review the discussion of certain tax
considerations affecting yourself and the Fund set forth under "Taxation."
EMPLOYEE PLAN CONSIDERATIONS
Shareholders that are employee benefit plans subject to the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), including
corporate savings and 401(k) plans, Keogh Plans of self-employed individuals and
individual retirement accounts ("IRAs") (each a "Benefit Plan" and collectively,
"Benefit Plans"), should be aware that additional contributions of cash in order
to exercise Rights may be treated as Benefit Plan contributions and, when taken
together with contributions previously made, may subject a Benefit Plan to
excise taxes for excess or nondeductible contributions. In the case of Benefit
Plans qualified under section 401(a) of the Code, additional cash contributions
could cause the maximum contribution limitations of section 415 of the Code or
other qualification rules to be violated. Benefit Plans contemplating making
additional cash contributions to exercise Rights should consult with their
counsel prior to making such contributions.
Benefit Plans and other tax-exempt entities, including governmental plans,
should also be aware that if they borrow in order to finance their exercise of
Rights, they may become subject to the tax on unrelated business taxable income
("UBTI") under section 511 of the Code. If any portion of an IRA is used as
security for a loan, the portion so used is also treated as distributed to the
IRA depositor.
27
ERISA contains prudence and diversification requirements, and ERISA and the
Code contain prohibited transaction rules that may impact the exercise of
Rights. Among the prohibited transaction exemptions issued by the Department of
Labor that may exempt a Benefit Plan's exercise of Rights are Prohibited
Transaction Exemption 84-24 (governing purchases of shares in investment
companies) and Prohibited Transaction Exemption 75-1 (covering sales of
securities).
Due to the complexity of these rules and the penalties for noncompliance,
Benefit Plans should consult with their counsel regarding the consequences of
their exercise of Rights under ERISA and the Code.
USE OF PROCEEDS
The Offer is designed to raise funds to be invested consistent with the
Fund's investment objectives and policies depending on conditions for the types
of securities in which the Fund typically invests. The proceeds of the Offer,
assuming all Primary Subscription Shares offered hereby are sold, are estimated
at approximately $ __________, before deducting expenses payable by the Fund
estimated at approximately $ _________. The proceeds of the Offer, assuming all
Secondary Subscription Shares are sold in addition to all Primary Subscription
Shares, are estimated at approximately $ ____________, before deducting expenses
payable by the Fund estimated at approximately $ _________. The Investment
Manager anticipates that investment of the net proceeds in accordance with the
Fund's investment objectives and policies will occur as investment opportunities
are identified, which will depend on market conditions and the availability of
appropriate securities, and anticipates that it will take not more than
approximately three months to do so. Pending such investment, the net proceeds
will be held in high quality short-term debt securities and instruments,
including repurchase agreements.
INVESTMENT OBJECTIVES AND POLICIES
The primary investment objective of the Fund, a non-diversified, closed-end
management investment company, is to provide for its shareholders a high level
of income. This primary investment objective is fundamental and may not be
changed without shareholder approval. The Fund's secondary investment objective,
which may be changed by the Board without shareholder approval, is capital
appreciation. There can be no assurance that the Fund will achieve its
investment objectives.
The Fund pursues its investment objectives by investing primarily in a
global portfolio of investment grade fixed income securities. The Fund will
normally invest at least 65% of its net assets in investment grade fixed income
securities rated, at the time of purchase, BBB or better by Standard & Poor's
Ratings Group ("S&P"), Baa or better by Moody's Investors Service, Inc.
("Moody's") or, if unrated, determined by the Investment Manager to be of
comparable quality. The Fund may also invest up to 35% of its assets in fixed
income securities rated BB, B, or CCC by S&P or Ba, B, or Caa by Moody's or, if
unrated, determined by the Investment Manager to be of comparable quality and
28
may invest in other securities (including common stocks, warrants, options and
securities convertible into common stock), when such investments are consistent
with its investment objectives or are acquired as part of a unit consisting of a
combination of fixed income securities and other securities. The Fund will
normally invest in at least three different countries, but may invest in fixed
income securities of only one country for temporary defensive purposes. The Fund
may use leverage from time to time to purchase or carry securities. Such
leverage is speculative and increases both investment opportunity and investment
risk.
RISK FACTORS AND SPECIAL CONSIDERATIONS
Investors should consider the following special considerations associated
with an exercise of Rights and an additional investment in the Fund. There are a
number of risks that an investor should consider in evaluating the Fund. You
should read this entire Prospectus and the SAI carefully before you decide
whether to exercise your Rights.
DILUTION
If a shareholder does not exercise all of his Rights, when the Offer is
over such shareholder will own a relatively smaller percentage of the Fund than
if such shareholder had exercised his Rights. Further, as a result of the Offer
a shareholder will experience a decrease in NAV per Share since the Purchase
Price will be below the NAV per Share on the Pricing Date, the Fund will bear
the expenses of the Offer and the number of Shares outstanding after the Offer
will increase proportionately more than the size of the Fund's net assets.
Although it is not possible to state precisely the amount of such a decrease in
value, because it is not known at this time how many Shares will be subscribed
for or what the Purchase Price will be, such decrease or dilution might be
substantial. The actual Purchase Price may be greater or less than the Estimated
Purchase Price. This dilution of NAV per Share will disproportionately affect
shareholders who do not exercise their Rights.
The following example assumes that all of the Primary Subscription Shares
are sold at the Estimated Purchase Price of $ ____.
NON-DIVERSIFIED STATUS
On January 10, 2001, shareholders approved changing the Fund's
classification to a "non-diversified" investment company under the 1940 Act,
which means that the Fund is not limited by the 1940 Act in the proportion of
29
its assets that may be invested in the securities of a single issuer. The Fund,
however, intends to conduct its operations so as to continue to qualify as a
"regulated investment company" for purposes of the Code, which will relieve it
of any liability for federal income and excise taxes on its net earnings and
realized gains that it distributes to its shareholders if it distributes to them
substantially all of those earnings and gains. See "Taxation - Taxation of the
Fund." Because the Fund, as a non-diversified investment company, may invest in
the securities of individual issuers to a greater degree than a diversified
investment company, an investment in the Fund may present greater risk to an
investor than an investment in a diversified company because the investment risk
may be concentrated in fewer securities.
FOREIGN INVESTMENTS
Investors should understand and consider carefully the substantial risks
involved in investing in foreign securities. Foreign securities, which are
generally denominated in foreign currencies, and utilization of forward
contracts on foreign currencies involve certain considerations comprising both
risk and opportunity not typically associated with investing in U.S. securities.
These considerations include: fluctuations in currency exchange rates;
restrictions on foreign investment and repatriation of capital; costs of
converting foreign currencies into U.S. dollars; greater price volatility and
trading illiquidity; less public information on issuers of securities;
difficulty in enforcing legal rights outside of the United States; lack of
uniform accounting, auditing, and financial reporting standards; the possible
imposition of foreign taxes, exchange controls, and currency restrictions; and
possible political, economic, and social instability of developing as well as
developed countries, including without limitation nationalization, expropriation
of assets, and war. Furthermore, individual foreign economies may differ
favorably or unfavorably from the U.S. economy in such respects as growth of
gross national product, rate of inflation, capital reinvestment, resource
self-sufficiency, and balance of payments position. Securities of many foreign
companies may be less liquid and their prices more volatile than securities
issued by comparable U.S. issuers. Transactions in foreign securities may be
subject to less efficient settlement practices. These risks are often heightened
when the Fund's investments are concentrated in a small number of countries. In
addition, because transactional and custodial expenses for foreign securities
are generally higher than for domestic securities, the expense ratio of the Fund
can be expected to be higher than investment companies investing exclusively in
domestic securities. Foreign securities trading practices, including those
involving securities settlement where Fund assets may be released prior to
receipt of payment, may expose the Fund to increased risk in the event of a
failed trade or insolvency of a foreign broker/dealer. Legal remedies for
defaults and disputes may have to be pursued in foreign courts, whose procedures
differ substantially from those of U.S. courts.
Since investments in foreign securities usually involve foreign currencies
and since the Fund may temporarily hold funds in bank deposits in foreign
currencies in order to facilitate portfolio transactions, the value of the
assets of the Fund as measured in U.S. dollars may be affected favorably or
unfavorably by changes in foreign currency exchange rates and exchange control
30
regulations. For example, if the value of the U.S. dollar decreases relative to
a foreign currency in which a Fund investment is denominated or which is
temporarily held by the Fund to facilitate portfolio transactions, the value of
such Fund assets and the Fund's NAV per Share will increase, all else being
equal. Conversely, an increase in the value of the U.S. dollar relative to such
a foreign currency will result in a decline in the value of such Fund assets and
its NAV per Share. The Fund may incur additional costs in connection with
conversions of currencies and securities into U.S. dollars. The Fund will
conduct its foreign currency exchange transactions either on a spot (i.e., cash)
basis, or by entering into forward contracts. The Fund generally will not enter
into a forward contract with a term of greater than one year.
The Fund may invest in securities of issuers located in emerging market
countries. The risks of investing in foreign securities may be greater with
respect to securities of issuers in, or denominated in the currencies of,
emerging market countries. The economies of emerging market countries generally
are heavily dependent upon international trade and, accordingly, have been and
may continue to be adversely affected by trade barriers, exchange controls,
managed adjustments in relative currency values, and other protectionist
measures imposed or negotiated by the countries with which they trade. These
economies also have been and may continue to be adversely affected by economic
conditions in the countries with which they trade. The securities markets of
emerging market countries are substantially smaller, less developed, less liquid
and more volatile than the securities markets of the U.S. and other developed
countries. Disclosure and regulatory standards in many respects are less
stringent in emerging market countries than in the U.S. and other developed
countries. There also may be a lower level of monitoring and regulation of
emerging markets and the activities of investors in such markets, and
enforcement of existing regulations may be extremely limited. Investing in local
markets, particularly in emerging market countries, may require the Fund to
adopt special procedures, seek local government approvals or take other actions,
each of which may involve additional costs to the Fund. Emerging market
countries may also restrict investment opportunities in issuers in industries
deemed important to national interests.
Foreign government securities, depending on where and how they are issued,
may be subject to some of the risks discussed above with respect to foreign
securities. In addition, investments in foreign government debt securities
involve special risks. The issuer of the debt or the governmental authorities
that control the repayment of the debt may be unable or unwilling to pay
interest or repay interest or repay principal when due in accordance with the
terms of such debt, and the Fund may have limited legal recourse in the event of
default. Political conditions, especially a sovereign entity's willingness to
meet the terms of its debt obligations, are of considerable significance.
FIXED INCOME SECURITIES
The Fund will normally invest at least 65% of its net assets in investment
grade fixed income securities. Securities rated BBB or better by S&P or Baa or
better by Moody's are investment grade but Moody's considers securities rated
Baa to have speculative characteristics. Changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity for issuers of such
securities to make principal and income payments than is the case for
higher-rated securities. The Fund also may invest up to 35% of its assets in
31
fixed income securities rated below investment grade but not lower than CCC by
S&P or Caa by Moody's. These securities are deemed by those agencies to be in
poor standing and predominantly speculative; the issuers may be in default on
such securities or deemed without capacity to make scheduled payments of income
or repay principal, involving major risk exposure to adverse conditions. These
securities are commonly referred to as "junk" and involve high risk. The Fund is
also permitted to purchase fixed income securities that are not rated by S&P or
Moody's but that the Investment Manager determines to be of comparable quality
to that of rated securities in which the Fund may invest. Such securities are
included in percentage limitations applicable to the comparable rated
securities. The values of fixed income securities will change as market interest
rates fluctuate. During periods of falling interest rates, the values of
outstanding fixed income securities generally rise. Conversely, during periods
of rising interest rates, the values of such securities generally decline. The
magnitude of these fluctuations generally will be greater for securities with
longer maturities.
Ratings of fixed income securities represent the rating agencies' opinions
regarding their quality, are not a guarantee of quality, and may be lowered
after the Fund acquires the security. The Investment Manager will consider such
an event in determining whether the Fund should continue to hold the security,
but is not required to dispose of it. Credit ratings attempt to evaluate the
safety of principal and income payments and do not evaluate the risk of
fluctuations in market value. Also, rating agencies may fail to make timely
changes in credit ratings in response to subsequent events, so that an issuer's
financial condition may be better or worse than the rating indicates. The Fund
may invest in unrated securities determined by the Investment Manager to be of
comparable quality to the appropriate rating category of S&P and Moody's. In
such instances, the Fund will be more reliant on the Investment Manager's
determination of credit quality than is the case with respect to rated
securities. See the Appendix to the SAI for a further description of S&P and
Moody's ratings.
Lower rated fixed income securities generally offer a higher current yield
than higher grade issues. Lower rated securities, however, involve higher risks
in that they are especially subject to adverse changes in general economic
conditions and in the industries in which the issuers are engaged, to changes in
the financial condition of the issuers, and to price fluctuations in response to
changes in interest rates. During periods of economic downturn or rising
interest rates, highly leveraged issuers may experience financial stress which
could adversely affect their ability to make payments of principal and income
and increase the possibility of default. In addition, such issuers may not have
more traditional methods of financing available to them, and may be unable to
repay debt at maturity by refinancing. The risk of loss due to default by such
issuers is significantly greater because such securities frequently are
unsecured and subordinated to the prior payment of senior indebtedness.
From time to time, the prices of many lower rated securities have declined
substantially, reflecting an expectation that many issuers of such securities
might experience financial difficulties. As a result, the yields on lower rated
32
securities rose dramatically, but such higher yields did not reflect the value
of the income stream that holders of such securities expected, but rather the
risk that holders of such securities could lose a substantial portion of their
value as a result of the issuers' financial restructuring or default. There can
be no assurance that such price declines will not recur. The market for lower
rated securities generally is thinner and less active than that for higher
quality securities, which may limit the Fund's ability to sell such securities
at fair value in response to changes in the economy or financial markets.
Adverse publicity and investor perceptions, whether or not based on fundamental
analysis, may also decrease the value and liquidity of lower rated securities,
especially in a thinly traded market.
LEVERAGE
From time to time the Fund borrows money from banks (including its
custodian bank), may engage in reverse repurchase agreements and may issue
senior securities, which may include debt and preferred stock, to purchase and
carry securities and pays interest thereon. These practices are referred to as
leverage, are speculative, and increase both investment opportunity and
investment risk. If the investment income on securities purchased with leverage
exceeds the interest paid on the leverage, the Fund's income will be
correspondingly higher. If the investment income fails to cover the Fund's
costs, including interest on leverage, or if there are losses, the NAV of the
Fund's Shares will decrease faster than would otherwise be the case. When the
Fund is leveraged, the 1940 Act requires the Fund to have asset coverage of at
least 200% for preferred securities it has issued and 300% for its borrowings or
the debt securities it has issued. Interest on money borrowed is an expense the
Fund would not otherwise incur, and it may therefore have little or no
investment income during periods of substantial borrowings. Although there can
be no assurance that the use of leverage will be successful, the Investment
Manager believes that the ability to employ leverage may potentially increase
yields and total returns.
Leverage is a speculative investment technique and, as such, entails two
primary risks. The first risk is that the use of leverage magnifies the impact
on the common shareholders of changes in NAV (as shown in the table below). The
second risk is that if the cost of leverage exceeds the return on the securities
acquired with the proceeds of that leverage, it will diminish rather than
enhance the return to common shareholders. These two risks would generally make
the Fund's total return to common shareholders more volatile. However, if the
Fund is able to provide total returns on its assets exceeding the costs of
leverage, the use of leverage would over the longer term enhance the Fund's
yields and total returns, although there can be no assurance that this can be
achieved.
At December 31, 2003, there was no balance outstanding on the Fund's
committed bank line of credit and the interest rate was at the borrower's option
of (i) Overnight Federal Funds or (ii) LIBOR (30, 60, 90 days), each as in
effect from time to time, plus 0.75% per annum, calculated on the basis of
actual days elapsed for a 360-day year. For the year ended December 31, 2003,
the weighted average interest rate was 1.84% based on the balances outstanding
during the period and the weighted average amount outstanding was $44,719.
The following table illustrates the effect of leverage on the annual
returns of a shareholder of common stock, assuming a fund with total net assets
of $27 million borrows $9 million on a committed bank line of credit with a
2.25% interest rate:
33
The purpose of the foregoing table is to assist the investor in
understanding the effects of leverage. The figures in the table are
hypothetical, the assumed form and amount of leverage employed may be different
from and less than the amount of leverage shown, the assumed interest rate may
be higher or lower and the actual returns to a holder of a Share may be greater
or less than those appearing in the table.
ILLIQUID SECURITIES
The Fund may invest without limit in illiquid securities, including
securities with legal or contractual conditions or restrictions on resale.
Investing in such securities entails certain risks. The primary risk is that the
Fund may not be able to dispose of a security at the desired price at the time
it wishes to make such disposition. In addition, such securities often sell at a
discount from liquid and freely tradable securities of the same class or type,
although they are also usually purchased at an equivalent discount which
enhances yield while the securities are held by the Fund. Such securities may
also be more difficult to price accurately.
MARKET VALUE AND NET ASSET VALUE
The Fund converted from a diversified series of Shares of an open-end
management investment company to a diversified, closed-end management investment
company in February 1997. Shares of closed-end investment companies are bought
and sold in the open market and may trade at either a premium to or discount
from NAV, although they frequently trade at a discount. This is a risk separate
and distinct from the risk that the value of the Fund's portfolio securities,
and as a result, its NAV, may decrease. The Fund cannot predict whether its
Shares will trade at, above or below NAV. From the commencement of the Fund's
operations as a closed-end investment company, the Fund's Shares generally have
traded in the market at a discount to NAV. Shareholders will incur brokerage and
possibly other transaction costs to buy and sell Shares in the open market.
34
A decline in NAV could affect the Fund's ability to pay dividends, make
capital gain distributions or effect any Share repurchases with respect to its
Shares if the Fund has outstanding any preferred stock or debt securities,
because the Fund would be required by the 1940 Act to have asset coverage
immediately after such dividend, distribution or repurchase of 200% for any
preferred stock and 300% for any debt securities, in each case after giving
effect to such dividend, distribution or repurchase. In addition, if the Fund's
current investment income was not sufficient to meet dividend requirements on
any outstanding preferred stock, the Fund may be required to sell a portion of
its portfolio securities when it might be disadvantageous to do so, which would
reduce the NAV attributable to the Fund's Shares.
The Fund has undertaken, as required by the SEC registration form, to
suspend the Offer until it amends this Prospectus, if subsequent to
____________, 2004 (the effective date of the Fund's Registration Statement),
the Fund's NAV declines more than 10% from its NAV as of that date. Accordingly,
the Expiration Date would be extended and the Fund would notify Record Date
Shareholders of any such decline and permit Record Date Shareholders to cancel
their exercise of Rights.
THE FUND'S INVESTMENT PROGRAM
The Fund's primary and fundamental investment objective is to provide a
high level of income. The Fund's secondary, non-fundamental, investment
objective is capital appreciation. The Fund pursues its investment objectives by
investing primarily in a global portfolio of investment grade fixed income
securities. There can be no assurance that the Fund will achieve its investment
objectives.
The Fund will normally invest at least 65% of its net assets in investment
grade fixed income securities rated, at the time of purchase, BBB or better by
S&P, Baa or better by Moody's or, if unrated, determined by the Investment
Manager to be of comparable quality. The Fund may also invest up to 35% of its
assets in fixed income securities rated BB, B, or CCC by S&P or Ba, B, or Caa by
Moody's or, if unrated, determined by the Investment Manager to be of comparable
quality and may invest in other securities (including common stocks, warrants,
options and securities convertible into common stock), when such investments are
consistent with its investment objectives or are acquired as part of a unit
consisting of a combination of fixed income securities and other securities. The
Fund currently expects to invest predominately in the United States, Europe,
Latin America, and the Pacific Rim. The Fund will normally invest in at least
three different countries, but may invest in fixed income securities of only one
country for temporary defensive purposes. Pending investment or for temporary
defensive purposes, the Fund may commit all or any portion of its assets to cash
(U.S. dollars or foreign currencies) or invest in money market instruments of
U.S. or foreign issuers, including repurchase agreements. In seeking to achieve
the Fund's investment objectives, the Investment Manager bases its investment
decisions on fundamental market attractiveness, interest rates and trends,
currency trends, and credit quality.
35
The Investment Manager undertakes several measures in seeking to achieve
the Fund's objectives:
First, the fixed income securities purchased by the Fund will be primarily
rated "investment grade" at the time of purchase, i.e. in the top four
categories by S&P or Moody's or, if unrated, determined by the Investment
Manager to be of comparable quality. Ratings are not a guarantee of quality and
ratings can change after a security is purchased by the Fund. Moreover, although
investment grade, securities rated Baa by Moody's are deemed by that rating
agency to have speculative characteristics.
Second, the Investment Manager actively manages the average maturity of the
Fund's portfolio in response to expected interest rate movements in pursuit of
capital appreciation or to protect against depreciation. Debt securities
generally change in value inversely to changes in interest rates. Increases in
interest rates generally cause the market values of debt securities to decrease,
and vice versa. Movements in interest rates typically have a greater effect on
the prices of longer term bonds than on those with shorter maturities. When
anticipating a decline in interest rates, the Investment Manager will attempt to
lengthen the portfolio's maturity to capitalize on the appreciation potential of
such securities. Conversely, when anticipating rising rates, the Investment
Manager will seek to shorten the Fund's maturity to protect against capital
depreciation. The Fund's portfolio may consist of securities with long,
intermediate, and short maturities. Consistent with seeking to maximize current
income, the proportion invested in each category can be expected to vary
depending upon the Investment Manager's evaluation of the market outlook.
Third, the Investment Manager may employ certain investment techniques in
seeking to reduce the Fund's exposure to risks involving foreign currency
exchange rates. An increase in the value of a foreign currency relative to the
U.S. dollar (the dollar weakens) will increase the U.S. dollar value of
securities denominated in that foreign currency. Conversely, a decline in the
value of a foreign currency relative to the U.S. dollar (the dollar strengthens)
causes a decline in the U.S. dollar value of these securities. The percentage of
the Fund's investments in foreign securities that will be hedged back to the
U.S. dollar will vary depending on anticipated trends in currency prices and the
relative attractiveness of such techniques and other strategies.
There is, of course, no guarantee that these investment strategies will
accomplish their objectives or that they will be successfully implemented.
U.S. AND FOREIGN GOVERNMENT SECURITIES
The U.S. Government securities in which the Fund may invest include direct
obligations of the U.S. Government (such as U.S. Treasury bills, notes and
bonds) and obligations issued by U.S. Government agencies and instrumentalities.
Agencies and instrumentalities include executive departments of the U.S.
36
Government and independent Federal organizations supervised by Congress. The
types of support for these obligations can range from the full faith and credit
of the United States (for example, U.S. Treasury securities) to the
creditworthiness of the issuer (for example, securities of the Federal National
Mortgage Association, Federal Home Loan Mortgage Corporation and the Tennessee
Valley Authority). In the case of obligations not backed by the full faith and
credit of the United States, the Fund must look principally to the agency or
instrumentality issuing or guaranteeing the obligation for ultimate repayment
and may not be able to assert a claim against the United States itself in the
event the agency or instrumentality does not meet its commitments. Accordingly,
these securities may involve more risk than securities backed by the U.S.
Government's full faith and credit.
The foreign government securities in which the Fund invests include
obligations issued or supported by national, state or provincial governments or
similar political subdivisions or obligations of supranational agencies, such as
the International Bank for Reconstruction and Development (the World Bank).
Supranational agencies rely on funds from participating countries, often
including the United States, from which they must request funds. Such requests
may not always be honored. See "Risk Factors and Special Considerations--Foreign
Investments."
SECURITIES OF PRIVATE ISSUERS
The securities of U.S. and foreign private issuers in which the Fund
invests may be denominated in U.S. dollars or other currencies, including
obligations of U.S. and foreign issuers payable in U.S. dollars outside the
United States ("Euros") and obligations of foreign issuers payable in U.S.
dollars and issued in the United States ("Yankees"). The securities of private
issuers may include corporate bonds, notes and commercial paper, as well as
certificates of deposit, time deposits, bankers' acceptances and other
obligations of U.S. banks and their branches located outside the United States,
U.S. branches of foreign banks, foreign branches of foreign banks and U.S.
agencies of foreign banks and wholly owned banking subsidiaries of foreign banks
located in the United States. The securities of private issuers also may include
common stocks and other equity securities such as warrants, options and
securities convertible into common stock, when such investments are consistent
with the Fund's investment objectives or are acquired as part of a unit
consisting of fixed income and equity securities. See "Risk Factors and Special
Considerations -- Foreign Investments."
FIXED INCOME SECURITIES
The Fund will normally invest at least 65% of its net assets in investment
grade fixed income securities. Securities rated BBB or better by S&P or Baa or
better by Moody's are investment grade but Moody's considers securities rated
Baa to have speculative characteristics. Changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity for issuers of such
securities to make principal and income payments than is the case for
higher-rated securities. The Fund also may invest up to 35% of its assets in
fixed income securities rated below investment grade but not lower than CCC by
S&P or Caa by Moody's. These securities are deemed by those agencies to be in
37
poor standing and predominantly speculative; the issuers may be in default on
such securities or deemed without capacity to make scheduled payments of income
or repay principal, involving major risk exposure to adverse conditions. These
securities are commonly referred to as "junk" and involve high risk. The Fund is
also permitted to purchase fixed income securities that are not rated by S&P or
Moody's but that the Investment Manager determines to be of comparable quality
to that of rated securities in which the Fund may invest. Such securities are
included in percentage limitations applicable to the comparable rated
securities. Investors should be aware of and should consider the negative impact
on a portfolio of fixed income securities of a rise in market interest rates.
See "Risk Factors and Special Considerations -- Fixed Income Securities."
PREFERRED SECURITIES
The fixed income securities in which the Fund may invest includes preferred
share issues of U.S. and foreign companies. Such securities involve greater risk
of loss of income than debt securities because issuers are not obligated to pay
dividends. In addition, preferred securities are subordinate to debt securities,
and are more subject to changes in economic and industry conditions and in the
financial conditions of the issuers of such securities.
CONVERTIBLE SECURITIES
The Fund may invest in convertible securities which are bonds, debentures,
notes, preferred stocks, or other fixed income securities that may be converted
into or exchanged for a specified amount of common stock of the same or a
different issuer within a particular period of time at a specified price or
formula. A convertible security entitles the holder to receive interest
generally paid or accrued on debt or the dividend paid on preferred stock until
the convertible security matures or is redeemed, converted or exchanged.
Convertible securities have unique investment characteristics in that they
generally (i) have higher yields than common stocks, but lower yields than
comparable non-convertible securities, (ii) are less subject to fluctuation in
value than the underlying stock since they have fixed income characteristics,
and (iii) provide the potential for capital appreciation if the market price of
the underlying common stock increases.
The value of a convertible security is a function of its "investment value"
(determined by its yield in comparison with the yields of other securities of
comparable maturity and quality that do not have a conversion privilege) and its
"conversion value" (the security's worth, at market value, if converted into the
underlying common stock). The investment value of a convertible security is
influenced by changes in interest rates, with investment value declining as
interest rates increase and increasing as interest rates decline. The credit
standing of the issuer and other factors also may have an effect on the
convertible security's investment value. The conversion value of a convertible
security is determined by the market price of the underlying common stock. If
38
the conversion value is low relative to the investment value, the price of the
convertible security is governed principally by its investment value and
generally the conversion value decreases as the convertible security approaches
maturity. To the extent the market price of the underlying common stock
approaches or exceeds the conversion price, the price of the convertible
security will be increasingly influenced by its conversion value. In addition, a
convertible security will sell at a premium over its conversion value determined
by the extent to which investors place value on the right to acquire the
underlying common stock while holding a fixed income security. The Fund will
exchange or convert the convertible securities held in its portfolio into shares
of the underlying common stock when, in the Investment Manager's opinion, the
investment characteristics of the underlying common shares will assist the Fund
in achieving its investment objectives. Otherwise, the Fund may hold or trade
convertible securities. In selecting convertible securities for the Fund, the
Investment Manager evaluates the investment characteristics of the convertible
security as a fixed income instrument and the investment potential of the
underlying equity security for capital appreciation. In evaluating these matters
with respect to a particular convertible security, the Investment Manager
considers numerous factors, including the economic and political outlook, the
value of the security relative to other investment alternatives, trends in the
determinants of the issuer's profits, and the issuer's management capability and
practices.
MORTGAGE-RELATED SECURITIES
Mortgage-related securities are a form of derivative collateralized by
pools of commercial or residential mortgages. Pools of mortgage loans are
assembled as securities for sale to investors by various governmental,
government-related and private organizations. These securities may include
complex instruments such as collateralized mortgage obligations and stripped
mortgage-backed securities, mortgage pass-through securities, interests in real
estate mortgage investment conduits ("REMICs") or other kinds of mortgage-backed
securities, including those with fixed, floating and variable interest rates,
those with interest rates that change based on multiples of changes in a
specified index of interest rates and those with interest rates that change
inversely to changes in interest rates. The Fund may invest a portion of its
assets in mortgage-backed securities issued by U.S. Government entities such as
the Federal Home Loan Mortgage Corporation and similar U.S. Government sponsored
entities such as the Federal National Mortgage Association and the Federal Home
Loan Banks. Although these issuers may be chartered or sponsored by Acts of
Congress, the securities issued by them are neither issued nor guaranteed by the
U.S. Treasury.
ASSET-BACKED SECURITIES
Asset-backed securities are a form of derivative. The securitization
techniques used for asset-backed securities are similar to those used for
mortgage-related securities. These securities include debt securities and
securities with debt-like characteristics. The collateral for these securities
has included home equity loans, automobile and credit card receivables, boat
loans, computer leases, airplane leases, mobile home loans, recreational vehicle
loans and hospital account receivables. The Fund may invest in these and other
types of asset-backed securities that may be developed in the future.
Asset-backed securities present certain risks that are not presented by
mortgage-backed securities. Primarily, these securities may provide the Fund
with a less effective security interest in the related collateral than do
39
mortgage-backed securities. Therefore, there is the possibility that recoveries
on the underlying collateral may not, in some cases, be available to support
payments on these securities.
INVESTMENT IN OTHER INVESTMENT COMPANIES
Securities of other investment companies, including shares of closed-end
investment companies, unit investment trusts, and open-end investment companies,
represent interests in professionally managed portfolios that may invest in any
type of instrument. Investing in other investment companies involves
substantially the same risks as investing directly in the underlying
instruments, but may involve additional expenses at the investment
company-level, such as portfolio management fees and operating expenses, which
are duplicative of similar expenses of the Fund. Certain types of investment
companies, such as closed-end investment companies, issue a fixed number of
shares that trade on a stock exchange or over-the-counter at a premium or a
discount to their NAV per share. Others are continuously offered at NAV, but may
also be traded in the secondary market. The extent to which the Fund can invest
in securities of other investment companies is limited by federal securities
laws.
OTHER INVESTMENT PRACTICES
Options, Futures, and Options on Futures. The Fund currently does not
anticipate that it will invest more than 5% of its total assets in options,
futures and options on futures. The Fund may purchase call options on securities
that the Investment Manager intends to include in the Fund's portfolio in order
to fix the cost of a future purchase or speculatively in an attempt to enhance
returns by, for example, participating in an anticipated price increase of a
security. The Fund may purchase put options to hedge against a decline in the
market value of securities held in the Fund's portfolio or speculatively in an
attempt to enhance returns. The Fund may write (sell) covered put and call
options on securities in which it is authorized to invest. The Fund may purchase
and write straddles, purchase and write put and call options on bond indexes,
and take positions in options on foreign currencies to hedge against the risk of
foreign exchange rate fluctuations on foreign securities the Fund holds in its
portfolio or that it intends to purchase or speculatively in an attempt to
enhance returns. The Fund may purchase and sell interest rate futures contracts,
bond index futures contracts and foreign currency futures contracts, and may
purchase put and call options and write covered put and call options on such
contracts.
The Fund may enter into forward currency contracts to set the rate at which
currency exchanges will be made for contemplated or completed transactions or
speculatively in an attempt to enhance returns. The Fund may also enter into
forward currency contracts in amounts approximating the value of one or more
portfolio positions to fix the U.S. dollar value of those positions. For
example, when the Investment Manager believes that the currency of a particular
foreign country may suffer a substantial decline against the U.S. dollar, the
Fund may enter into a forward contract to sell, for a fixed amount of dollars,
40
the amount of foreign currency approximating the value of some or all of the
Fund's portfolio securities denominated in such foreign currency. The Fund has
no specific limitation on the percentage of assets it may commit to foreign
currency exchange contracts, except that it will not enter into a forward
contract if the amount of assets set aside to cover the contract would impede
portfolio management.
Strategies with options, financial futures, and forward currency contracts
may be limited by market conditions, regulatory limits and tax considerations,
and the Fund may not employ any of the strategies described above. There can be
no assurance that any strategy used will be successful. The loss from investing
in futures transactions is potentially unlimited. Options and futures may fail
as hedging techniques in cases where price movements of the securities
underlying the options and futures do not follow the price movements of the
portfolio securities subject to the hedge. The Fund may invest in options and
futures speculatively, and gains and losses on investments in options and
futures will depend on the Investment Manager's ability to predict correctly the
direction of stock prices, interest rates, and other economic factors. In
addition, the Fund will likely be unable to control losses by closing its
position where a liquid secondary market does not exist and there is no
assurance that a liquid secondary market for hedging instruments will always
exist. It also may be necessary to defer closing out hedged positions to avoid
adverse tax consequences. The percentage of the Fund's assets segregated to
cover its obligations under options, futures, or forward currency contracts
could impede effective portfolio management or meeting other current
obligations. See "The Fund's Investment Program-Options, Futures and Forward
Currency Contract Strategies" in the SAI.
Repurchase Agreements. The Fund may enter into repurchase agreements with
U.S. banks or dealers involving securities in which the Fund is authorized to
invest. A repurchase agreement is an instrument under which the Fund purchases
securities from a bank or dealer and simultaneously commits to resell the
securities to the bank or dealer at an agreed upon date and price. The Fund's
custodian maintains custody of the underlying securities until their repurchase;
thus the obligation of the bank or dealer to pay the repurchase price is, in
effect, secured by such securities. The Fund's risk is limited to the ability of
the seller to pay the agreed upon amount on the repurchase date; if the seller
defaults, the security constitutes collateral for the seller's obligation to
pay. If, however, the seller defaults and the value of the collateral declines,
the Fund may incur a loss and expenses in selling the collateral.
Private Placements and Rule 144A Securities. The Fund may purchase
securities in private placements or pursuant to the Rule 144A exemption from
Federal registration requirements. Because an active trading market may not
exist for such securities, the sale of such securities may be subject to delay
and greater discounts than the sale of registered securities. Investing in such
securities could have the effect of increasing the level of Fund illiquidity to
the extent that qualified institutional buyers become less interested in buying
these securities.
41
When-Issued Securities. The Fund may purchase securities on a "when-issued"
basis. In such transactions delivery and payment occur at a date subsequent to
the date of the commitment to make the purchase. Although the Fund will enter
into when-issued transactions with the intention of acquiring the securities,
the Fund may sell the securities prior thereto for investment reasons, which may
result in a gain or loss. Acquiring securities in this manner involves a risk
that yields available on the delivery date may be higher than those received in
such transactions, as well as the risk of price fluctuation. When the Fund
purchases securities on a when-issued basis, its custodian will set aside in a
segregated account cash or liquid securities whose value is marked to the market
daily with a market value at least equal to the amount of the commitment. If
necessary, assets will be added to the account daily so that the value of the
account will not be less than the amount of the Fund's purchase commitment.
Failure of the issuer to deliver the security may result in the Fund incurring a
loss or missing an opportunity to make an alternative investment.
Portfolio Turnover. Given the investment objectives of the Fund, the rate
of portfolio turnover will not be a limiting factor when the Investment Manager
deems changes in the composition of the portfolio appropriate, and the
investment strategy pursued by the Fund therefore includes the possibility of
short-term transactions. The Fund's portfolio turnover rate will vary from year
to year depending on world market conditions. For the fiscal years ended
December 31, 2001, 2002 and 2003, the Fund's portfolio turnover rate was 160%,
162%, and 146%, respectively. Higher portfolio turnover involves correspondingly
greater transaction costs and increases the potential for short-term capital
gains and taxes on distributions thereof. See "Taxation."
Illiquid Securities. The Fund may invest without limit in illiquid
securities, including securities with legal or contractual conditions or
restrictions on resale. Investing in such securities entails certain risks. The
primary risk is that the Fund may not be able to dispose of a security at the
desired price at the time it wishes to make such disposition. In addition, such
securities often sell at a discount from liquid and freely tradable securities
of the same class or type, although they are also usually purchased at an
equivalent discount which enhances yield while the securities are held by the
Fund. Such securities may also be more difficult to price accurately.
Other Information. The Fund is not obligated to deal with any particular
broker, dealer or group thereof. Certain broker/dealers that the Investment
Manager and its affiliates do business with may own from time to time more than
5% of the publicly traded Class A non-voting Common Stock of WCI, the parent of
the Investment Manager.
The Fund's primary investment objective of providing a high level of income
is fundamental and may not be changed without shareholder approval. The Fund is
also subject to certain investment restrictions, set forth in the SAI, that are
fundamental and cannot be changed without shareholder approval. The Fund's
secondary investment objective of capital appreciation and the other investment
policies described herein, unless otherwise stated, are not fundamental and may
42
be changed by the Directors without shareholder approval. Notice to shareholders
of any change in the Fund's secondary investment objective will be provided as
required by law.
MANAGEMENT OF THE FUND
For its services, the Investment Manager receives an investment management
fee, payable monthly, based on the average weekly net assets of the Fund at the
annual rate of 7/10 of 1% of the first $250 million, 5/8 of 1% from $250 million
to $500 million, and 1/2 of 1% over $500 million. For the fiscal years ended
December 31, 2001, 2002 and 2003, the Fund paid to the Investment Manager
investment management fees of $208,607, $197,320, and $192,626, respectively.
The Investment Manager provides certain administrative services to the Fund at
cost. For the fiscal years ended December 31, 2001, 2002 and 2003, the Fund
reimbursed the Investment Manager $29,045, $39,677 and $56,540, respectively,
for such services.
CEF Advisers, Inc., a wholly owned subsidiary of WCI, a publicly owned
company whose securities are listed on The Nasdaq Stock Market, serves as
Investment Manager to the Fund.
Bassett S. Winmill, a Director of the Fund, may be deemed a controlling
person of WCI on the basis of his ownership of 100% of WCI's voting stock and,
therefore, a controlling person of the Investment Manager.
The Fund's portfolio manager is Ms. Marion E. Morris. Ms. Morris has been
principally responsible for the Fund's portfolio investments since 2000 and is
also Senior Vice President, Director of Fixed Income and a member of the
Investment Policy Committee of the Investment Manager.
DIVIDENDS AND OTHER DISTRIBUTIONS
The Fund currently pays quarterly dividends to shareholders. The amount of
quarterly dividends reflects the managed distribution policy of the Fund. The
policy is intended to provide shareholders with a relatively stable cash flow
and reduce or eliminate the Fund's market price discount to its NAV per Share.
Distributions of a percentage of the Fund's NAV per Share on an annual basis
have been paid from ordinary income and any net capital gains, with the balance
representing a return of capital. A return of capital distribution is a return
to the shareholder of part of his or her original investment in the Fund. The
amount of any distribution will vary depending on the NAV per Share at the time
of declaration. There can be no assurance that the Fund will be able to maintain
its current level of dividends, and the Board may, in its sole discretion,
change the Fund's current dividend policy at any time. In June 2003, the Fund's
managed distribution policy was changed to set a distribution rate of
approximately 7% (as compared with 10% previously) of the Fund's NAV per Share
on an annual basis. For the year ended December 31, 2003, actual distributions
were approximately 7.13% of average net assets, of which 61.29% was derived from
net investment income and the balance was a return of capital.
43
If the Fund's portfolio investments generate returns exceeding the amount
that is required to pay any target level of dividends set by the Board, the Fund
may decide to retain and accumulate the excess (except to the extent that doing
so would jeopardize its continued qualification for treatment as a "regulated
investment company" (see Taxation-Taxation of the Fund")) and pay applicable
taxes thereon, including any federal income and excise taxes. Additionally, if
the Fund's current return is not sufficient to pay any target level of dividends
set by the Board, the Fund may distribute to shareholders all or a portion of
any retained earnings or make a return of capital distribution to maintain such
target level.
The Investment Manager believes that the increase in total net assets of
the Fund resulting from a well-subscribed Offer may result in certain economies
of scale and, accordingly, a lower expense ratio for the Fund. Although dilution
from the Offer may cause the amount of dividends per Share to be lower, the
Investment Manager believes that the current managed distribution policy of
quarterly distributions of approximately 7% of the Fund's NAV per Share on an
annual basis should be otherwise unaffected by the Offer. Should the Fund's
annual total return (on a NAV basis), inclusive of earned income and capital
appreciation, be less than 7%, however, the current level of dividends per Share
pursuant to the managed distribution policy, may decline. Whether the Offer is
subscribed for or not, however, there can be no assurance that the Fund can or
will maintain its current dividend policy or current level of dividends.
DIVIDEND REINVESTMENT PLAN
The Directors have adopted a dividend reinvestment plan (the "Plan"). A
shareholder holding certificates for Shares and for whom an account is held at
American Stock Transfer & Trust Company as agent under the Plan (the "Agent")
will automatically be a participant in the Plan with respect to all dividends
and capital gain distributions the Fund declares (in this section, each a
"distribution") (including any portion thereof subsequently determined to be a
return of capital), unless the shareholder specifically elects to receive all
distributions in cash paid by check mailed directly to the shareholder by the
Agent. The Agent will open an account for each shareholder under the Plan in the
same name in which such shareholder's Shares are registered. Whenever the Fund
declares a distribution payable in Shares or cash, participating shareholders
will take the distribution entirely in Shares and the Agent will automatically
receive the Shares, including fractional Shares, for the shareholder's account
in accordance with the following: (1) If the Market Price per Share (as defined
below) is equal to or exceeds the NAV per Share at the time Shares are valued
for the purpose of determining the number of Shares equivalent to the
distribution (the "Valuation Date"), participants will be issued additional
Shares equal to the amount of such distribution divided by the greater of that
NAV per Share or 95% of that Market Price per Share or (2) if the Market Price
per Share is less than the NAV per Share on the Valuation Date, participants
44
will be issued additional Shares equal to the amount of such distribution
divided by that Market Price per Share. The Valuation Date is the day before the
distribution payment date or, if that day is not an AMEX trading day, the next
trading day. If the Fund declares a distribution payable only in cash, the Agent
will, as purchasing agent for the participating shareholders, buy Shares in the
open market, on the AMEX or elsewhere, for such shareholders' accounts after the
payment date, except that the Agent will endeavor to terminate purchases in the
open market and cause the Fund to issue the remaining Shares if, following the
commencement of the purchases, the Market Price per Share exceeds the NAV per
Share. These remaining Shares will be issued by the Fund at a price equal to the
Market Price per Share.
If the Agent has terminated open market purchases and caused the issuance
of remaining Shares by the Fund, the number of Shares received by each
participant in respect of the cash distribution will be based on the weighted
average of prices paid for Shares purchased in the open market and the price at
which the Fund issues the remaining Shares. If the Agent is unable to terminate
purchases in the open market before it has completed its purchases, or remaining
Shares cannot be issued by the Fund because the Fund declared a distribution
payable only in cash, and the Market Price per Share exceeds the NAV per Share,
the average Share purchase price per Share paid by the Agent may exceed the NAV
per Share, resulting in the acquisition of fewer Shares than if the distribution
had been paid in Shares issued by the Fund. The Agent will apply all cash
received as a distribution to purchase Shares on the open market as soon as
practicable after the payment date of the distribution, but in no event later
than 45 days after that date, except when necessary to comply with applicable
provisions of the federal securities laws.
For all purposes of the Plan: (a) the "Market Price per Share" on a
Valuation Date shall be the average of the last sale price per Share on the AMEX
on each of the five trading days the Shares traded ex-distribution on the AMEX
immediately prior to such date (or if no sale occurred on any such day, then the
mean between the closing bid and asked quotations for Shares on that day); and
(b) the NAV per Share on a Valuation Date shall be as determined by or on behalf
of the Fund.
The open-market purchases provided for in the Plan may be made on any
securities exchange on which the Shares are traded, in the over-the-counter
market or in negotiated transactions, and may be on such terms as to price,
delivery and otherwise as the Agent shall determine. Funds held by the Agent
uninvested will not bear interest, and it is understood that, in any event, the
Agent shall have no liability in connection with any inability to purchase
Shares within 45 days after the initial date of such purchase as herein
provided, or with the timing of any purchases effected. The Agent shall have no
responsibility as to the value of the Shares acquired for any participant's
account.
The Agent will hold Shares acquired pursuant to the Plan in noncertificated
form in the Agent's name or that of its nominee. At no additional cost, a
participant in the Plan may send to the Agent for deposit into its Plan account
those certificated Shares in its possession. These Shares will be combined with
those unissued full and fractional Shares acquired under the Plan and held by
the Agent. Shortly thereafter, such participant will receive a statement showing
its combined holdings. The Agent will forward to each participant any proxy
45
solicitation material and will vote any Shares held for the participant only in
accordance with the proxy returned by him or her to the Fund. Upon a
participant's written request, the Agent will deliver to him or her, without
charge, a certificate or certificates for the full (but not fractional) Shares
the Agent holds for the participant.
The Agent will confirm to each participant each acquisition for his or her
account as soon as practicable but not later than 60 days after the date
thereof. Although a participant may from time to time have an individual
fractional interest (computed to three decimal places) in a Share, no
certificates for fractional Shares will be issued. However, distributions on
fractional Shares will be credited to participants' accounts. In the event of a
termination of a participant's account under the Plan, the Agent will adjust for
any such undivided fractional interest in cash at the opening market value of
the Shares at the time of termination.
Any stock dividends distributed by the Fund on Shares held by the Agent for
a participant will be credited to the participant's account. If the Fund makes
available to a participant the right to purchase additional Shares or other
securities, such as the Offer, the Shares held for a participant in the Plan
will be added to other Shares held by the participant in calculating the number
of Rights to be issued to such participant. The Agent's service fee for handling
distributions will be paid by the Fund. Each participant will be charged a pro
rata share of brokerage commissions on all open market purchases. Each
participant may terminate his or her account under the Plan by notifying the
Agent in writing. A termination will be effective immediately if notice is
received by the Agent at any time prior to any distribution record date;
otherwise such termination will be effective, with respect to any subsequent
distribution, on the first trading day after a distribution paid for the record
date has been credited to the participant's account. Upon any termination the
Agent will cause a certificate or certificates for the full Shares held for the
participant under the Plan and cash adjustment for any fraction to be delivered
to him or her.
The terms and conditions of the Plan may be amended or supplemented by the
Agent or the Fund at any time or times but, except when necessary or appropriate
to comply with applicable law or the rules or policies of the SEC or any other
regulatory authority, only by mailing to the participants appropriate written
notice at least 30 days prior to the effective date thereof. The amendment or
supplement shall be deemed to be accepted by a participant unless, prior to the
effective date thereof, the Agent receives written notice of the termination of
such participant's account under the Plan. Any such amendment may include an
appointment by the Fund of a successor agent in the Agent's place and stead
under these terms and conditions, with full power and authority to perform all
or any of the acts to be performed by the Agent. Upon any such appointment of a
successor agent for the purpose of receiving distributions, the Fund will be
authorized to pay to such successor agent all distributions payable on Shares
held in the participant's names or under the Plan for retention or application
by such successor agent as provided in these terms and conditions. In the case
46
of participants, such as Intermediaries, that hold Shares for others who are the
beneficial owners, the Agent will administer the Plan on the basis of the number
of Shares certified from time to time by the participants as representing the
total amount registered in the participant's name and held for the account of
beneficial owners who are to participate in the Plan. All correspondence
concerning the Plan should be directed to the Agent at 59 Maiden Lane, New York,
New York 10038.
TAXATION
Federal Income Tax Consequences of the Offer
For a discussion of the federal income tax consequences of the Offer, see
"The Offer - Federal Income Tax Consequences to Shareholders."
Taxation of the Fund
The Fund has qualified, and intends to continue to qualify, for treatment
as a regulated investment company under Subchapter M of the Code. If it so
qualifies, the Fund will not be subject to federal income tax on the portion of
its investment company taxable income (generally consisting of net investment
income, the excess of net short-term capital gain over net long-term capital
loss and net gains and losses from certain foreign currency transactions, all
determined without regard to any deduction for dividends paid) and its net
capital gain (i.e., the excess of net long-term capital gain over net short-term
capital loss), if any, that it distributes to its shareholders in each taxable
year.
Taxation of the Shareholders
Dividends and other Distributions. Dividends the Fund pays to you from its
investment company taxable income are taxable as ordinary income (at federal
income tax rates up to 35%), except that Fund dividends attributable to
"qualified dividend income" (i.e., dividends received on the stock of domestic
corporations and certain foreign corporations -- generally, foreign corporations
incorporated in a U.S. possession, eligible for the benefits of certain
comprehensive income tax treaties with the United States or the stock of which
is readily tradable on an established securities market in the United States --
with respect to which the Fund satisfies certain holding period, debt-financing
and other restrictions) ("QDI") generally are subject to a 15% maximum federal
income tax rate, enacted by the 2003 Act, for individual shareholders who
satisfy those restrictions with respect to the Shares on which the Fund
dividends were paid. A portion of the Fund's dividends -- not exceeding the
aggregate dividends it receives from domestic corporations only -- also may be
eligible for the dividends-received deduction allowed to corporations, subject
to similar restrictions. However, dividends a corporate shareholder deducts
pursuant to the dividends-received deduction are subject indirectly to the
federal alternative minimum tax. It is not expected that any significant part of
the Fund's dividends will qualify for the 15% tax rate or the dividends-received
deduction.
47
Distributions to you of the Fund's net capital gain are taxable as
long-term capital gains, regardless of how long you have held your Shares and
whether paid in cash or reinvested in additional Shares. Those distributions
also are subject to a 15% maximum federal income tax rate for individual
shareholders (as a result of enactment of the 2003 Act) to the extent the
distributions are attributable to net capital gain the Fund recognizes on sales
or exchanges of capital assets through its last taxable year beginning before
January 1, 2009.
Distributions in excess of the Fund's earnings and profits first reduce the
adjusted tax basis of a holder's Shares and, after such adjusted tax basis is
reduced to zero, will constitute capital gain to such holder (assuming the
Shares are held as capital assets). For corporate taxpayers, distributions of
both income and net capital gain are taxed at a maximum rate of 35%.
Income dividends (but not capital gain distributions) paid to shareholders
who are non-resident aliens or foreign entities are subject to a 30% U.S.
withholding tax unless a reduced rate of withholding or a withholding exemption
is provided under an applicable treaty. Non-resident shareholders are urged to
consult their own tax advisers concerning the applicability of this tax.
Sale or Exchange of Shares. Any capital gain an individual shareholder
recognizes on a sale or exchange before December 31, 2008, of his or her Shares
that have been held for more than one year will qualify for the 15% maximum rate
enacted by the 2003 Act. That act did not change the tax rate on short-term
capital gains (gains from the sale or exchange of capital assets held for one
year or less), which will continue to be taxed at the ordinary income rate. Any
loss realized on a sale or exchange of Shares will be disallowed to the extent
those Shares are replaced within a 61-day period beginning 30 days before and
ending 30 days after the sale or exchange date and instead will increase the
basis in the newly purchased Shares.
If Shares are sold at a loss after being held for six months or less, the
loss will be treated as long-term, instead of short-term, capital loss to the
extent of any capital gain distributions received thereon. Investors also should
be aware that the price of Shares at any time may reflect the amount of a
forthcoming dividend or capital gain distribution, so if you purchase Shares
shortly before the record date therefor, you will pay full price for the Shares
and receive some portion of the price back as a taxable distribution even though
it represents in part a return of invested capital.
Backup Withholding. The Fund must withhold and remit to the U.S. Treasury
28% of dividends and capital gain distributions otherwise payable to any
individual or certain other non-corporate shareholder who fails to certify that
the "TIN" furnished to the Fund is correct or who furnishes an incorrect TIN
(together with the withholding described in the next sentence, "backup
withholding"). Withholding at that rate also is required from the Fund's
dividends and capital gain distributions otherwise payable to such a shareholder
if (1) the shareholder fails to certify that he or she has not received notice
from the Internal Revenue Service ("IRS") that the shareholder is subject to
backup withholding as a result of a failure to properly report dividend or
48
interest income on a federal income tax return or (2) the IRS notifies the Fund
to institute backup withholding because the IRS determines that the
shareholder's TIN is incorrect or the shareholder has failed to properly report
such income. A TIN is either the Social Security number, IRS individual taxpayer
identification number or employer identification number of the record owner of
the account. Any tax withheld as a result of backup withholding does not
constitute an additional tax imposed on the record owner and may be claimed as a
credit on the record owner's federal income tax return.
General
The foregoing discussion is a brief summary of certain federal income tax
considerations affecting the Fund and its shareholders under the law in effect
on the date hereof (which is subject to change, even retroactively) and is not
intended as tax advice. See the SAI for a further discussion thereof. The Fund's
income dividends and capital gain distributions, and gains a shareholder
recognizes on the sale or exchange of Shares, also may be subject to state and
local taxes. Investors are urged to consult their own tax advisers regarding
specific questions about other federal (including the alternative minimum tax),
and state, local or foreign, tax consequences to them of investing in Shares.
CAPITAL STOCK
The Fund commenced operations as a diversified, closed-end management
investment company on February 7, 1997. Prior to that date, the Fund was a
diversified series of shares designated Bull & Bear Global Income Fund (and
prior to October 29, 1992 and since September 1, 1983, Bull & Bear High Yield
Fund) of Bull & Bear Funds II, Inc., an open-end management investment company
organized in 1974 and operating under the name Bull & Bear Incorporated until
October 29, 1993. The Fund concluded a rights offering in June 1998.
Shareholders approved a change in classification of the Fund from a diversified
investment company to a non-diversified investment company on January 10, 2001.
The Fund is authorized to issue up to twenty million (20,000,000) shares
($.01 par value). The Board can reclassify unissued shares as preferred stock
with such terms and conditions as determined by the Board. The following
description relates to the issued and outstanding shares of common stock of the
Fund and is subject to the terms and conditions of any such preferred stock, if
and when issued. The Fund's stock is fully paid and non-assessable. In case of
dissolution or other liquidation of the Fund, shareholders will be entitled to
receive ratably per share the net assets of the Fund. Shareholders vote for
Directors with each share entitled to one vote. Each share of common stock
entitles the holder to one vote for all purposes. Shares have no preemptive
rights.
Set forth below is information with respect to the common stock as of
December 31, 2003:
Amount Held by Fund
Amount Authorized For Its Own Account Amount Outstanding
- ----------------- ------------------- ------------------
20,000,000 Shares 0 Shares 5,565,395
49
The number of Shares outstanding as of December 31, 2003, adjusted to give
effect to the issuance of all the Shares pursuant to the Offer, including up to
25% of the Shares available for issuance pursuant to the Over-Subscription
Privilege, would be 7,304,580.
The Fund's Shares are listed and traded on the AMEX. The following table
sets forth for the quarters indicated the high and low sales prices on the AMEX
per Share and the NAV and the % premium or discount from NAV at which the Shares
were trading, expressed as a percentage of NAV, at each of the high and low
sales prices provided.
The last reported NAV per Share at the close of business on ____, 2004 (the
last trading date on which the Fund publicly reported its NAV prior to the
announcement of the Offer) and ____, 2004 (the last trading date on which the
Fund publicly reported its NAV prior to the date of this Prospectus) was $___
and $___, respectively, and the last reported sale price of a Share on that
exchange on those dates was $__ and $__, respectively.
ANTI-TAKEOVER PROVISIONS OF THE GOVERNING DOCUMENTS
The Fund's Board has continuously availed itself of methods specifically
provided by, or consistent with, Maryland law and the 1940 Act to protect the
Fund and its shareholders. Accordingly, the Fund currently has provisions in its
Governing Documents which could have the effect of limiting (i) the ability of
other entities or persons to acquire control of the Fund, (ii) the Fund's
freedom to engage in certain transactions, or (iii) the ability of the Fund's
50
directors or shareholders to amend the Governing Documents or effectuate changes
in the Fund's management. These provisions of the Governing Documents of the
Fund may be regarded as "anti-takeover" provisions. The Fund is also subject to
certain Maryland law provisions, including those which have been enacted since
the inception of the Fund, that make it more difficult for non-incumbents to
gain control of the Board. In July 2003, the Fund's Board amended and restated
the Bylaws of the Fund. In doing so, the Board consulted with counsel to the
Fund and Maryland counsel to the Fund and elected to become subject to various
provisions of the Maryland General Corporation Law (the "MGCL"). The Board also
adopted a Conflict of Interest and Corporate Opportunities Policy applicable to
its Independent Directors. These provisions may have the effect of depriving
Fund shareholders of an opportunity to sell their shares at a premium above the
prevailing market price by discouraging a third party from seeking to obtain
control of the Fund.
The following is a summary of the amendments to the Bylaws which are set
forth in the Amended and Restated Bylaws as of July 8, 2003, and the election to
be subject to various provisions of the MGCL, effective on July 15, 2003,
pursuant to Articles Supplementary (the "Articles Supplementary"). This summary
is qualified in its entirety by reference to the complete Amended and Restated
Bylaws. Among other things, the Bylaw amendments:
1. Establish procedures for shareholder-requested special meetings,
including procedures for setting the record date for the shareholders making the
request, the record date for the meeting and the time, place and date of the
meeting. Consistent with the MGCL, shareholders requesting a meeting would be
required to disclose the purpose of the meeting and the matters to be proposed
to be acted on at the meeting.
2. Provide that the Board may appoint the chair of the meeting of
shareholders and provide for chairmanship in the absence of such an appointment.
The amendments provide that the chair of the meeting establishes the rules for
conduct of the meeting, and vests the chair with power to adjourn the meeting.
3. Enhance already existing Bylaw provisions that require a shareholder to
give written advance notice and other information to the Fund of the
shareholder's nominees for directors and other proposals for business at
shareholder meetings.
4. Disclose that the Board has elected on behalf of the Fund to be subject
to the Maryland Control Share Acquisition Act, which provides that control
shares acquired in a control share acquisition may not be voted except to the
extent approved by a vote of two-thirds of the votes entitled to be cast on the
matter, excluding shares owned by the acquirer, and officers and directors that
are employees of the Fund. Generally, control shares are voting shares of stock
which would entitle the acquirer of the shares to exercise voting power within
one of the following ranges of voting power: (1) one-tenth or more but less than
one-third, (2) one-third or more but less than a majority, or (3) a majority or
51
more of all voting power. This limitation does not apply to matters for which
the 1940 Act requires the vote of a majority of the Fund's outstanding voting
securities (as defined in that Act) or to holders whose acquisition of control
shares was approved prior to acquisition by a majority of the Continuing
Directors (as defined in the Charter). The Continuing Directors have approved
the acquisition of control shares, not to exceed 25% of the outstanding shares
of the Fund, by the Investment Manager and its affiliates.
5. Establish qualifications for Fund directors. These qualifications are
designed to assure that individuals have the type of background and experience
necessary to provide competent service as directors of the Fund. They also
require incumbent directors and nominees to comply with the Fund's Conflict of
Interest and Corporate Opportunities Policy. One of the qualification options
includes service as a current director of the Fund.
6. Provide that, subject to the requirements of the 1940 Act, any director
vacancy shall be filled for the remainder of the term by the affirmative vote of
a majority of the members of a committee consisting of Continuing Directors in
accordance with the Charter.
7. Require that certain proposed advisory, sub-advisory, or management
contracts with an affiliate of current and certain former independent Fund
directors be approved by 75% of the Fund's independent directors who are not so
affiliated. If such a contract or similar contracts are approved, the Bylaws
would provide automatic liquidity to dissatisfied shareholders by requiring the
Fund to commence a tender offer to the fullest extent permitted by applicable
law, for at least 50 percent of its outstanding Shares at a price of at least
98% of the Fund's per Share NAV.
8. Provide that a director who is an affiliated person (as such term is
defined by Section 2(a)(3) of the 1940 Act) of a holder of more than 5% of the
outstanding Shares of the Fund shall not be entitled to fees or expenses arising
out of his or her service as a director of the Fund.
CUSTODIAN, TRANSFER AGENT, DIVIDEND DISBURSING
AGENT AND REGISTRAR
State Street Bank and Trust Company (the "Custodian"), located at 801
Pennsylvania Avenue, Kansas City, MO 64105, serves as the Custodian of the
Fund's assets pursuant to a custody agreement. American Stock Transfer & Trust
Company, located at 59 Maiden Lane, New York, NY 10038, serves as the Fund's
dividend disbursing agent, as agent under the Fund's Plan and as transfer agent
and registrar for Shares of the Fund.
LEGAL MATTERS
Certain legal matters will be passed on by The Law Offices of Stephanie A.
Djinis, McLean, VA, counsel to the Fund in connection with the Offering. Certain
tax matters will be passed on by Kirkpatrick & Lockhart LLP, Washington, D.C.,
special tax counsel to the Fund.
52
EXPERTS
The financial statements of the Fund as of December 31, 2003 have been
incorporated by reference into the SAI in reliance on the report of Tait, Weller
& Baker, independent accountants, given on the authority of that firm as experts
in accounting and auditing. Tait, Weller & Baker is located at 1818 Market
Street, Suite 2400, Philadelphia, PA 19103.
FURTHER INFORMATION
The Fund is subject to the information requirements of the Securities
Exchange Act of 1934 and in accordance therewith files reports, proxy statements
and other information filed by the Fund can be inspected and copied at public
reference facilities maintained by the SEC at 450 Fifth Street, N.W.,
Washington, D.C. 20549 and the SEC's Northeast Regional Office, The Woolworth
Building, 233 Broadway, New York, NY 10279. The Shares are listed on the AMEX.
o No dealer, salesperson or other person has been authorized to give any
information or to make any representations not contained in this
Prospectus.
o If given or made, such information or representation must not be relied
upon as having been authorized by the Fund or the Fund's Investment
Manager.
o This Prospectus is not an offer to sell or the solicitation of an offer to
buy any security other than the Shares offered by this prospectus, nor is
it an offer to sell or the solicitation of an offer to buy Shares by anyone
in any jurisdiction in which such offer or solicitation would be unlawful.
o Neither the delivery of this Prospectus nor any sale made hereunder shall,
under any circumstances, create an implication that there has been no
change in the facts as stated in the Prospectus or in the affairs of the
Fund since the date of this Prospectus.
TABLE OF CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION
The Fund's Investment Program
Investment Restrictions
The Investment Company Complex
Officers and Directors
Proxy Voting
Investment Manager
Investment Management Agreement
Determination of Net Asset Value
Allocation of Brokerage
Taxes Reports to Shareholders
Custodian and Transfer Agent
Auditors
Financial Statements
Appendix A - Descriptions of Bond Ratings
Appendix B - Amended Proxy Voting Policies and Procedures
53
GLOBAL INCOME FUND, INC.
1,391,348 SHARES
OF COMMON STOCK
ISSUABLE UPON EXERCISE OF RIGHTS
TO SUBSCRIBE TO SUCH SHARES
PROSPECTUS
________________, 2004
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
54
GLOBAL INCOME FUND, INC.
11 Hanover Square
New York, NY 10005
1-212-344-6310
STATEMENT OF ADDITIONAL INFORMATION
dated ___________, 2004
Global Income Fund, Inc. (the "Fund") is a non-diversified, closed-end
management investment company organized as a Maryland corporation. This
Statement of Additional Information (the "SAI") regarding the Fund is not a
prospectus and should be read in conjunction with the Fund's prospectus dated
__________, 2004 (the "Prospectus"). The Prospectus is available without charge
upon written request to the Fund at 11 Hanover Square, New York, NY 10005, or by
calling 1-212-344-6310.
TABLE OF CONTENTS
The Fund's Investment Program...................................................
Investment Restrictions.........................................................
The Investment Company Complex..................................................
Officers and Directors..........................................................
Proxy Voting....................................................................
Investment Manager..............................................................
Investment Management Agreement.................................................
Determination of Net Asset Value................................................
Allocation of Brokerage.........................................................
Taxes..........................................................................
Reports to Shareholders.........................................................
Custodian and Transfer Agent....................................................
Auditors........................................................................
Financial Statements............................................................
Appendix A - Descriptions of Bond Ratings.......................................
Appendix B - Amended Proxy Voting Policies and Procedures.......................
2
THE FUND'S INVESTMENT PROGRAM
The following information supplements the information concerning the
investment objectives, policies and limitations of the Fund found in the
Prospectus.
LOAN PARTICIPATIONS
The Fund may invest in loan participations in which it purchases from a
lender a portion of a larger loan to a U.S. or foreign private or governmental
entity. The Fund receives a portion of the amount due the lender, except for any
servicing fees received by the lender. Investing in loan participations may
enable the Fund to obtain undivided interests in loans that CEF Advisers, Inc.
(the "Investment Manager") considers attractive but that would not be available
to the Fund otherwise. Although normally available without recourse to the
lender, such loans may be backed by a letter of credit and may include the right
to demand accelerated payment of principal and interest. Loan participations may
be subject to credit risks of the borrower, the lender or both. Loans to foreign
borrowers may involve risks not typically associated with domestic investments.
Investments in loan participations may be highly illiquid. The Fund has no
current intention to engage in loan participations in excess of 5% of its total
net assets.
SHORT SALES
The Fund may engage in short sales transactions under which it sells a
security it does not own. To complete such a transaction, the Fund must borrow
the security to make delivery to the buyer. The Fund then is obligated to
replace the borrowed security by purchasing the security at the market price at
the time of replacement. The price at such time may be more or less than the
price at which the security was sold by the Fund. Until the security is
replaced, the Fund is required to pay to the lender amounts equal to any
dividends or interest that accrue during the period of the loan. To borrow the
security, the Fund also may be required to pay a premium, which would increase
the cost of the security sold. The proceeds of a short sale will be retained by
the broker, to the extent necessary to meet the margin requirements, until the
short position is closed out. Until the Fund closes its short position or
replaces the borrowed security, the Fund will (a) segregate cash or liquid
securities at such a level that the segregated amount plus the amount deposited
with the broker as collateral (i) will equal the current value of the security
sold short and (ii) will not be less than the market value of the security at
the time the security was sold short or (b) otherwise cover the Fund's short
position.
ZERO COUPON, OTHER ORIGINAL ISSUE DISCOUNT ("OID") AND PAYMENT-IN-KIND
SECURITIES
The Fund may invest in zero coupon and other securities issued with OID
(the difference between the issue price and the stated redemption price at
maturity). Zero coupon securities are securities on which no periodic interest
payments are made, whereas other securities that are sold with OID may provide
for some interest to be paid prior to maturity, and such securities are sold and
trade at a discount from their face value. The buyer of these securities
receives a rate of return by the gradual appreciation of the security, which
3
results from the fact that it will be paid at face value on a specified maturity
date. There are many types of zero coupon securities. Some are issued in zero
coupon form, including Treasury bills, notes and bonds that have been stripped
of (separated from) their unmatured interest coupons (unmatured interest
payments) and receipts or certificates representing interests in such stripped
debt obligations or coupons. Others are created by brokerage firms that strip
the coupons from interest-paying bonds and sell the principal and the coupons
separately. Payment-in-kind securities have some characteristics similar to
those of zero coupon securities, but interest on such securities may be paid in
the form of obligations of the same type rather than cash.
As a holder of zero coupon or other OID securities, the Fund must include
in its gross income the OID that accrues on them during the taxable year, even
if it receives no corresponding payment on them during the year. See "Taxes,"
below.
Zero coupon securities are generally more sensitive to changes in interest
rates than debt obligations of comparable maturities that make current interest
payments. This means that when interest rates fall, the value of zero coupon
securities rises more rapidly than securities paying interest on a current
basis. However, when interest rates rise, their value falls more dramatically.
Other OID securities also are subject to greater fluctuations in market value in
response to changing interest rates than bonds of comparable securities that
make current distributions of interest in cash.
OPTIONS, FUTURES AND FORWARD CURRENCY CONTRACT STRATEGIES
Regulation of the Use of Options, Futures and Forward Currency Contract
Strategies. As discussed in the Prospectus, the Fund may engage in certain
options strategies to attempt to enhance return by speculation or for hedging
purposes. The Investment Manager also may use securities index futures
contracts, interest rate futures contracts, foreign currency futures contracts
(collectively, "futures contracts" or "futures"), options on futures contracts
and forward currency contracts for hedging purposes, to enhance returns by
speculation or in other circumstances permitted by the Commodity Futures Trading
Commission ("CFTC"). Certain special characteristics of and risks associated
with using these instruments are discussed below. In addition to the investment
guidelines (described below) adopted by the Fund to govern investment in these
4
instruments, its use of options, forward currency contracts and futures is
subject to the applicable regulations of the Securities and Exchange Commission
("SEC"), the several options and futures exchanges upon which such instruments
may be traded, the CFTC and the various state regulatory authorities.
In addition to the products, strategies and risks described below and in
the Prospectus, the Investment Manager may discover additional opportunities in
connection with options, futures and forward currency contracts. These new
opportunities may become available should the Investment Manager develop new
techniques, as regulatory authorities broaden the range of permitted
transactions and as new options, futures and forward currency contracts are
developed. The Investment Manager may utilize these opportunities to the extent
they are consistent with the Fund's investment objective, permitted by the
Fund's investment limitations and permitted by the applicable regulatory
authorities.
Cover for Options, Futures and Forward Currency Contract Strategies. The
Fund will comply with SEC guidelines regarding cover for these instruments, and
will, if the guidelines so require, (1) set aside or segregate cash or liquid
securities whose value is marked to the market daily in the prescribed amount,
or (2) enter into an offsetting ("covered") position in securities, currencies
or other options or futures contracts. Assets used for cover cannot be sold or
closed while the position in the corresponding instrument is open, unless they
are replaced with other appropriate assets. As a result, the commitment of a
large portion of the Fund's assets could impede portfolio management or the
Fund's ability to meet current obligations.
Option Income and Hedging Strategies. The Fund may purchase and write
(sell) both exchange-traded options and options traded on the over-the-counter
("OTC") market. Exchange-traded options in the United States are issued by a
clearing organization affiliated with the exchange on which the option is
listed, which, in effect, guarantees completion of every exchange-traded option
transaction. In contrast, OTC options are contracts between the Fund and its
contra-party with no clearing organization guarantee. Thus, when the Fund
purchases an OTC option, it relies on the dealer from which it has purchased the
OTC option to make or take delivery of the securities or currencies underlying
the option. Failure by the dealer to do so would result in the loss of any
premium paid by the Fund as well as the loss of the expected benefit of the
transaction.
The Fund may purchase call options on securities (both equity and debt)
that the Investment Manager intends to include in the Fund's portfolio in order
to fix the cost of a future purchase. Call options also may be used as a means
of enhancing returns by, for example, participating in an anticipated price
increase of a security. In the event of a decline in the price of the underlying
security, use of this strategy would serve to limit the potential loss to the
Fund to the option premium paid; conversely, if the market price of the
underlying security increases above the exercise price and the Fund either sells
or exercises the option, any profit eventually realized would be reduced by the
premium paid.
The Fund may purchase put options on securities in order to hedge against a
decline in the market value of securities held in its portfolio or to attempt to
enhance return. A put option enables the Fund to sell the underlying security at
the predetermined exercise price; thus, the potential for loss to the Fund below
the exercise price is limited to the option premium paid. If the market price of
the underlying security is higher than the exercise price of the put option, any
profit the Fund realizes on the sale of the security would be reduced by the
premium paid for the put option less any amount for which the put option may be
sold.
5
The Fund may on certain occasions wish to hedge against a decline in the
market value of securities held in its portfolio at a time when put options on
those particular securities are not available for purchase. The Fund may
therefore purchase a put option on other selected securities, the values of
which historically have positive correlation to the value of such portfolio
securities. If the Investment Manager's judgment is correct, changes in the
value of the put options should generally offset changes in the value of the
portfolio securities being hedged. However, the correlation between the two
values may not be as close in these transactions as in transactions in which the
Fund purchases a put option on a security held in its portfolio. If the
Investment Manager's judgment is not correct, the value of the securities
underlying the put option may decrease less than the value of the Fund's
portfolio securities, and, therefore the put option may not provide complete
protection against a decline in the value of those securities below the level
sought to be protected by the put option.
The Fund may write covered call options on securities in which it is
authorized to invest for hedging or to increase return in the form of premiums
received from the purchasers of the options. A call option gives the purchaser
of the option the right to buy, and the writer (seller) the obligation to sell,
the underlying security at the exercise price during or at the end of the option
period. The strategy may be used to provide limited protection against a
decrease in the market price of the security, in an amount equal to the premium
received for writing the call option less any transaction costs. Thus, if the
market price of the underlying security held by the Fund declines, the amount of
such decline will be offset wholly or in part by the amount of the premium
received by the Fund. If, however, there is an increase in the market price of
the underlying security to a level in excess of the option's exercise price, and
the option is exercised, the Fund would be obligated to sell the security at
less than its market value. In addition, the Fund could lose the ability to
participate in an increase in the value of such securities above the exercise
price of the call option because such an increase would likely be offset by an
increase in the cost of closing out the call option (or could be negated if the
buyer chose to exercise the call option at an exercise price below the current
market value).
The Fund generally would give up the ability to sell any portfolio
securities used to cover the call option while the call option was outstanding.
The Fund also may write covered put options on securities in which it is
authorized to invest. A put option gives the purchaser of the option the right
to sell, and the writer (seller) the obligation to buy, the underlying security
at the exercise price during the option period. So long as the obligation of the
writer continues, the writer may be assigned an exercise notice by the
broker/dealer through whom such option was sold, requiring it to make payment of
the exercise price against delivery of the underlying security. The operation of
put options in other respects, including their related risks and rewards, is
substantially identical to that of call options. If a put option is not
exercised, the Fund will realize income in the amount of the premium received.
This technique could be used to enhance current return during periods of market
uncertainty. The risk in such a transaction would be that the market price of
the underlying security would decline below the exercise price less the premiums
received, in which case the Fund would expect to suffer a loss.
6
The Fund may purchase put and call options and write covered put and call
options on securities indexes in much the same manner as the more traditional
securities options discussed above, except that index options may serve as a
hedge against overall fluctuations in the securities markets (or a market
sector) rather than anticipated increases or decreases in the value of a
particular security. A securities index assigns values to the securities
included in the index and fluctuates with changes in such values. Settlements of
securities index options are effected with cash payments and do not involve
delivery of securities. Thus, upon settlement of a securities index option, the
purchaser will realize, and the writer will pay, an amount based on the
difference between the exercise price and the closing price of the index. The
effectiveness of hedging techniques using securities index options will depend
on the extent to which price movements in the securities index selected
correlate with price movements of the securities in which the Fund invests.
The Fund may purchase and write covered straddles on securities indexes. A
long straddle is a combination of a call and a put purchased on the same
securities index where the exercise price of the put is less than or equal to
the exercise price of the call. The Fund would enter into a long straddle when
the Investment Manager believes that it is likely that securities prices will be
more volatile during the term of the options than is implied by the option
pricing. A short straddle is a combination of a call and a put written on the
same securities index where the exercise price of the put is less than or equal
to the exercise price of the call . The Fund would enter into a short straddle
when the Investment Manager believes that it is unlikely that securities prices
will be as volatile during the term of the options as is implied by the option
pricing. In such a case, the Fund will set aside cash or liquid assets
equivalent in value to the amount, if any, by which the put is "in-the-money,"
that is, that amount by which the exercise price of the put exceeds the current
market value of the underlying securities index.
Foreign Currency Options and Related Risks. The Fund may take positions in
options on foreign currencies to enhance returns by speculation or to hedge
against the risk of foreign exchange rate fluctuations on foreign securities
that the Fund holds in its portfolio or that it intends to purchase. For
example, if the Fund enters into a contract to purchase securities denominated
in a foreign currency, it could effectively fix the maximum U.S. dollar cost of
the securities by purchasing call options on that foreign currency. Similarly,
if the Fund held securities denominated in a foreign currency and anticipated a
decline in the value of that currency against the U.S. dollar, the Fund could
hedge against such a decline by purchasing a put option on the currency
involved. The Fund's ability to establish and close out positions in such
options is subject to the maintenance of a liquid secondary market. The Fund
will not purchase or write such options unless, in the Investment Manager's
opinion, the market for them is sufficiently liquid to ensure that the risks in
connection with such options are not greater than the risks in connection with
the underlying currency. In addition, options on foreign currencies are affected
by all of those factors that influence foreign exchange rates and investments
generally.
7
The value of a foreign currency option depends upon the value of the
underlying currency relative to the U.S. dollar. As a result, the price of the
option position may vary with changes in the value of either or both currencies
and may have no relationship to the investment merits of a foreign security.
Because foreign currency transactions occurring in the interbank market involve
substantially larger amounts than those that may be involved in the use of
foreign currency options, investors may be disadvantaged by having to deal in an
odd lot market (generally consisting of transactions of less than $1 million)
for the underlying foreign currencies at prices that are less favorable than for
round lots.
There is no systematic reporting of last sale information for foreign
currencies or any regulatory requirement that quotations available through
dealers and other market resources be firm or revised on a timely basis.
Available quotation information is generally representative of very large
transactions in the interbank market and thus may not reflect relatively smaller
transactions (that is, less than $1 million) where rates may be less favorable.
The interbank market in foreign currencies is a global, around-the-clock market.
To the extent that the U.S. options markets are closed while the markets for the
underlying currencies remain open, significant price and rate movements may take
place in the underlying markets that cannot be reflected in the options markets
until they reopen.
Special Characteristics and Risks of Options Trading. The Fund may
effectively terminate its right or obligation under an option by entering into a
closing transaction. If the Fund wishes to terminate its obligation to purchase
or sell securities or currencies under a put or a call option it has written,
the Fund may purchase a put or a call option of the same series (that is, an
option identical in its terms to the option previously written); this is known
as a closing purchase transaction. Conversely, in order to terminate its right
to purchase or sell specified securities or currencies under a call or put
option it has purchased, the Fund may sell an option of the same series as the
option held; this is known as a closing sale transaction. Closing transactions
essentially permit the Fund to realize profits or limit losses on its options
positions prior to the exercise or expiration of the option.
In considering the use of options to enhance returns by speculation or to
hedge the Fund's portfolio, particular note should be taken of the following:
(a) The value of an option position will reflect, among other things, the
current market price of the underlying security, securities index or currency,
the time remaining until expiration, the relationship of the exercise price to
the market price, the historical price volatility of the underlying security,
securities index or currency and general market conditions. For this reason, the
successful use of options depends upon the Investment Manager's ability to
forecast the direction of price fluctuations in the underlying securities or
currency markets or, in the case of securities index options, fluctuations in
the market sector represented by the selected index.
8
(b) Options normally have expiration dates of up to three years. The
exercise price of the options may be below, equal to or above the current market
value of the underlying security, securities index or currency. Purchased
options that expire unexercised have no value. Unless an option purchased by the
Fund is exercised or unless a closing transaction is effected with respect to
that position, the Fund will realize a loss in the amount of the premium paid
and any transaction costs.
(c) A position in an exchange-listed option may be closed out only on an
exchange that provides a secondary market for identical options. Although the
Fund intends to purchase or write only those exchange-traded options for which
there appears to be a liquid secondary market, there is no assurance that a
liquid secondary market will exist for any particular option at any particular
time. Closing transactions may be effected with respect to options traded in the
OTC markets only by negotiating directly with the other party to the option
contract or in a secondary market for the option if such market exists. Although
the Fund will enter into OTC options with dealers that appear to be willing to
enter into, and that are expected to be capable of entering into, closing
transactions with the Fund, there can be no assurance that the Fund would be
able to liquidate an OTC option at a favorable price at any time prior to
expiration. In the event of insolvency of the contra-party, the Fund may be
unable to liquidate an OTC option. Accordingly, it may not be possible to effect
closing transactions with respect to certain options, which would result in the
Fund's having to exercise those options that it has purchased in order to
realize any profit. With respect to options written by the Fund, the inability
to enter into a closing transaction may result in material losses to the Fund.
For example, because the Fund must maintain a covered position with respect to
any call option it writes on a security, currency or securities index, it may
not sell the underlying securities or currency (or invest any cash or securities
used to cover the option) during the period it is obligated under such option.
This requirement may impair the Fund's ability to sell a portfolio security or
make an investment at a time when such a sale or investment might be
advantageous.
(d) Securities index options are settled exclusively in cash. If the Fund
writes a call option on an index, it will not know in advance the difference, if
any, between the closing value of the index on the exercise date and the
exercise price of the call option itself and thus will not know the amount of
cash payable upon settlement. In addition, a holder of a securities index option
who exercises it before the closing index value for that day is available, runs
the risk that the level of the underlying index may subsequently change.
(e) The Fund's activities in the options markets may result in a higher
portfolio turnover rate and additional brokerage costs and taxes; however, the
Fund also may save on commissions by using options as a hedge rather than buying
or selling individual securities in anticipation or as a result of market
movements.
Futures and Related Options Strategies. The Fund may engage in futures
strategies for hedging purposes to attempt to reduce the overall investment risk
that would normally be expected to be associated with ownership of the
9
securities in which it invests (or intends to acquire) or to enhance returns by
speculation. This may involve, among other things, using futures strategies to
manage the effective duration of the Fund. If the Investment Manager wishes to
shorten the Fund's effective duration, the Fund may sell a futures contract or a
call option thereon, or purchase a put option on that futures contract. If the
Investment Manager wishes to lengthen the Fund's effective duration, the Fund
may buy a futures contract or a call option thereon or sell a put option.
Futures contracts and options thereon can also be purchased and sold to attempt
to enhance income or returns by speculation. The Fund may purchase or sell
futures contracts or options thereon to increase or reduce its exposure to an
asset class without purchasing or selling the underlying securities, either as a
hedge or to enhance returns by speculation.
The Fund may use interest rate futures contracts and options thereon to
hedge its portfolio against changes in the general level of interest rates. The
Fund may purchase an interest rate futures contract when it intends to purchase
debt securities but has not yet done so. This strategy may minimize the effect
of all or part of an increase in the market price of the debt security that the
Fund intends to purchase in the future. A rise in the price of the debt security
prior to its purchase may either be offset by an increase in the value of the
futures contract purchased by the Fund or avoided by taking delivery of the debt
securities under the futures contract. Conversely, a fall in the market price of
the underlying debt security may result in a corresponding decrease in the value
of the futures position. The Fund may sell an interest rate futures contract in
order to continue to receive the income from a debt security, while endeavoring
to avoid part or all of the decline in market value of that security that would
accompany an increase in interest rates.
The Fund may purchase a call option on an interest rate futures contract to
hedge against a market advance in debt securities that the Fund plans to acquire
at a future date. The purchase of a call option on an interest rate futures
contract is analogous to the purchase of a call option on an individual debt
security, which can be used as a temporary substitute for a position in the
security itself. The Fund also may write put options on interest rate futures
contracts as a hedge or to enhance returns by speculation and may write covered
call options on interest rate futures contracts as a hedge against a decline in
the price of debt securities held in its portfolio. The Fund may also purchase
put options on interest rate futures contracts in order to hedge against a
decline in the value of debt securities held in its portfolio and to enhance
return by speculation.
The Fund may sell securities index futures contracts in anticipation of a
general market or market sector decline. To the extent that a portion of the
Fund's portfolio correlates with a given index, the sale of futures contracts on
that index could reduce the risks associated with a market decline and thus
provide an alternative to the liquidation of securities positions. For example,
if the Fund correctly anticipates a general market decline and sells securities
index futures to hedge against this risk, the gain in the futures position
should offset some or all of the decline in the value of the portfolio. The Fund
may purchase securities index futures contracts if a market or market sector
advance is anticipated. Such a purchase of a futures contract would serve as a
10
temporary substitute for the purchase of individual securities, which securities
may then be purchased in an orderly fashion or as part of an attempt to seek
capital gain by speculation. This strategy may minimize the effect of all or
part of an increase in the market price of securities that the Fund intends to
purchase. A rise in the price of the securities should be in part or wholly
offset by gains in the futures position.
As in the case of a purchase of a securities index futures contract, the
Fund may purchase a call option on a securities index futures contract to hedge
against a market advance in securities that the Fund plans to acquire at a
future date. The Fund also may purchase put options on securities index futures
contracts as part of an attempt to seek capital gain by speculation. The
purchase of put options on securities index futures contracts is analogous to
the purchase of protective put options on individual securities where a level of
protection is sought below which no additional economic loss would be incurred
by the Fund as part of an attempt to seek capital gain by speculation.
The Fund may sell foreign currency futures contracts to hedge against
possible variations in the exchange rate of foreign currencies in relation to
the U.S. dollar. In addition, the Fund may sell foreign currency futures
contracts when the Investment Manager anticipates a general weakening of the
foreign currency exchange rate that could adversely affect the market value of
the Fund's foreign securities holdings or interest payments to be received in
that foreign currency or to enhance return by speculation. In this case, the
sale of futures contracts on the underlying currency may reduce the risk to the
Fund of a reduction in market value caused by foreign currency exchange rate
variations and, by so doing, provide an alternative to the liquidation of
securities positions and resulting transaction costs. When the Investment
Manager anticipates a significant foreign exchange rate increase while intending
to invest in a security denominated in that currency, the Fund may purchase a
foreign currency futures contract to hedge against the increased rates pending
completion of the anticipated transaction. Such a purchase would serve as a
temporary measure to protect the Fund against any rise in the foreign currency
exchange rate that may add additional costs to acquiring the foreign security
position. The Fund may also purchase call or put options on foreign currency
futures contracts to obtain a fixed foreign currency exchange rate at limited
risk. The Fund may purchase a call option on a foreign currency futures contract
to hedge against a rise in the foreign currency exchange rate while intending to
invest in a security denominated in that currency or to enhance return by
speculation. The Fund may purchase put options on foreign currency futures
contracts as a hedge against a decline in the foreign currency exchange rates or
the value of its foreign portfolio securities or to enhance returns by
speculation. The Fund may write a covered put option on a foreign currency
futures contract as a partial anticipatory hedge and may write a covered call
option on a foreign currency futures contract as a partial hedge against the
effects of declining foreign currency exchange rates on the value of foreign
securities.
The Fund may also purchase these instruments to enhance income or return by
speculation, for example, by writing options on futures contracts. In addition,
the Fund can use these instruments to change its exposure to securities, or
interest or foreign currency exchange rate changes, for example, by changing the
Fund's exposure from one foreign currency exchange rate to another.
11
The Fund may also write put options on interest rate, securities index or
foreign currency futures contracts while, at the same time, purchasing call
options on the same interest rate, securities index or foreign currency futures
contract in order to synthetically create an interest rate, securities index or
foreign currency futures contract. The options will have the same strike prices
and expiration dates. The Fund will only engage in this strategy when it appears
to be more advantageous to the Fund to do so as compared to purchasing the
futures contract.
The Fund may also purchase and write covered straddles on interest rate or
securities index futures contracts. A long straddle is a combination of a call
and a put purchased on the same futures contract at the same exercise price. The
Fund would enter into a long straddle when the Investment Manager believes that
it is likely that the futures contract will be more volatile during the term of
the options than is implied by the option pricing. The Fund would enter into a
short straddle when it believes that it is unlikely that the futures contract
will be as volatile during the term of the options as is implied by the option
pricing.
Special Characteristics and Risks of Futures and Related Options Trading.
No price is paid upon entering into a futures contract. Instead, upon entering
into a futures contract, the Fund is required to segregate in the name of the
futures broker through whom the transaction is effected an amount of cash or
liquid securities whose value is marked to the market daily generally equal to
10% or less of the contract value. This amount is known as "initial margin."
When writing a call or a put option on a futures contract, margin also must be
deposited in accordance with applicable exchange rules. Unlike margin in
securities transactions, initial margin on futures contracts does not involve
borrowing to finance the futures transactions. Rather, initial margin on futures
contracts is in the nature of a performance bond or good-faith deposit on the
contract that is returned to the Fund upon termination of the transaction,
assuming all obligations have been satisfied. Under certain circumstances, such
as periods of high volatility, the Fund may be required by an exchange to
increase the level of its initial margin payment. Additionally, initial margin
requirements may be increased generally in the future by regulatory action.
Subsequent payments, called "variation margin," to and from the broker, are made
on a daily basis as the value of the futures or options position varies, a
process known as "marking to the market." For example, when the Fund purchases a
contract and the value of the contract rises, it receives from the broker a
variation margin payment equal to that increase in value. Conversely, if the
value of the futures position declines, the Fund is required to make a variation
margin payment to the broker equal to the decline in value. Variation margin
does not involve borrowing to finance the futures transaction but rather
represents a daily settlement of the Fund's obligations to or from a clearing
organization.
Buyers and sellers of futures positions and options thereon can enter into
offsetting closing transactions, similar to closing transactions on options on
12
securities, by selling or purchasing an offsetting contract or option. Futures
contracts or options thereon may be closed only on an exchange or board of trade
providing a secondary market for such futures contracts or options.
Under certain circumstances, futures exchanges may establish daily limits
on the amount that the price of a futures contract or related option may vary
either up or down from the previous day's settlement price. Once the daily limit
has been reached in a particular contract, no trades may be made that day at a
price beyond that limit. The daily limit governs only price movements during a
particular trading day and therefore does not limit potential losses, because
prices could move to the daily limit for several consecutive trading days with
little or no trading and thereby prevent prompt liquidation of unfavorable
positions. In such event, it may not be possible for the Fund to close a
position and, in the event of adverse price movements, it would have to make
daily cash payments of variation margin (except in the case of purchased
options). However, if futures contracts have been used to hedge portfolio
securities, such securities will not be sold until the contracts can be
terminated. In such circumstances, an increase in the price of the securities,
if any, may partially or completely offset losses on the futures contract.
However, there is no guarantee that the price of the securities will, in fact,
correlate with the price movements in the contracts and thus provide an offset
to losses on the contracts.
In considering the Fund's use of futures contracts and related options,
particular note should be taken of the following:
(1) Successful use by the Fund of futures contracts and related options
will depend upon the Investment Manager's ability to predict movements in the
direction of the overall securities, currencies and interest rate markets, which
requires different skills and techniques than predicting changes in the prices
of individual securities. Moreover, futures contracts relate not only to the
current price level of the underlying instrument or currency but also to the
anticipated price levels at some point in the future. There is, in addition, the
risk that the movements in the price of the futures contract will not correlate
with the movements in the prices of the securities or currencies being hedged.
For example, if the price of a securities index futures contract moves less than
the price of the securities that are the subject of the hedge, the hedge will
not be fully effective, but if the price of the securities being hedged has
moved in an unfavorable direction, the Fund would be in a better position than
if it had not hedged at all. If the price of the securities being hedged has
moved in a favorable direction, the advantage may be partially offset by losses
in the futures position. In addition, if the Fund has insufficient cash, it may
have to borrow or sell assets from its portfolio to meet daily variation margin
requirements. Any such sale of assets may or may not be made at prices that
reflect a rising market. Consequently, the Fund may need to sell assets at a
time when such sales are disadvantageous to it. If the price of the futures
contract moves more than the price of the underlying securities, the Fund will
experience either a loss or a gain on the futures contract that may or may not
be completely offset by movements in the price of the securities that are the
subject of the hedge.
(2) In addition to the possibility that there may be an imperfect
correlation, or no correlation at all, between price movements in the futures
13
position and the securities or currencies being hedged, movements in the prices
of futures contracts may not correlate perfectly with movements in the prices of
the hedged securities or currencies due to price distortions in the futures
market. There may be several reasons unrelated to the value of the underlying
securities or currencies that cause this situation to occur. First, as noted
above, all participants in the futures market are subject to initial and
variation margin requirements. If, to avoid meeting additional margin deposit
requirements or for other reasons, investors choose to close a significant
number of futures contracts through offsetting transactions, distortions in the
normal price relationship between the securities or currencies and the futures
markets may occur. Second, because the margin deposit requirements in the
futures market are less onerous than margin requirements in the securities
market, there may be increased participation by speculators in the futures
market; such speculative activity in the futures market also may cause temporary
price distortions. As a result, a correct forecast of general market trends may
not result in successful hedging through the use of futures contracts over the
short term. In addition, activities of large traders in both the futures and
securities markets involving arbitrage and other investment strategies may
result in temporary price distortions.
(3) Positions in futures contracts may be closed out only on an exchange or
board of trade that provides a secondary market for such futures contracts.
Although the Fund intends to purchase and sell futures only on exchanges or
boards of trade where there appears to be an active secondary market, there is
no assurance that a liquid secondary market on an exchange or board of trade
will exist for any particular contract at any particular time. In such event, it
may not be possible to close a futures positions, and in the event of adverse
price movements, the Fund would continue to be required to make variation margin
payments.
(4) Like options on securities and currencies, options on futures contracts
have limited life. The ability to establish and close out options on futures
will be subject to the development and maintenance of liquid secondary markets
on the relevant exchanges or boards of trade. There can be no certainty that
such markets for all options on futures contracts will develop.
(5) Purchasers of options on futures contracts pay a premium at the time of
purchase. This amount and the transaction costs are all that is at risk. Sellers
of options on futures contracts, however, must post initial margin and are
subject to additional margin calls that could be substantial in the event of
adverse price movements. In addition, although the maximum amount at risk when
the Fund purchases an option is the premium paid for the option and the
transaction costs, there may be circumstances when the purchase of an option on
a futures contract would result in a loss to the Fund when the use of a futures
contract would not, such as when there is no movement in the level of the
underlying securities index value or the securities or currencies being hedged.
(6) As is the case with options, the Fund's activities in the futures
markets may result in a higher portfolio turnover rate and additional
transaction costs in the form of added brokerage commissions and taxes; however,
the Fund also may save on commissions by using futures contracts or options
14
thereon as a hedge rather than buying or selling individual securities or
currencies in anticipation or as a result of market movements.
Special Risks Related to Foreign Currency Futures Contracts and Related
Options. Buyers and sellers of foreign currency futures contracts are subject to
the same risks that apply to the use of futures generally. In addition, there
are risks associated with foreign currency futures contracts and their use as a
hedging device similar to those associated with options on foreign currencies
described above.
Options on foreign currency futures contracts may involve certain
additional risks. The ability to establish and close out positions on such
options is subject to the maintenance of a liquid secondary market. Compared to
the purchase or sale of foreign currency futures contracts, the purchase of call
or put options thereon involves less potential risk to the Fund because the
maximum amount at risk is the premium paid for the option (plus transaction
costs). However, there may be circumstances when the purchase of a call or put
option on a foreign currency futures contract would result in a loss, such as
when there is no movement in the price of the underlying currency or futures
contract, when the purchase of the underlying futures contract would not.
Forward Currency Contracts. The Fund may use forward currency contracts to
protect against uncertainty in the level of future foreign currency exchange
rates or to enhance returns by speculation.
The Fund may enter into forward currency contracts with respect to specific
transactions. For example, when the Fund enters into a contract for the purchase
or sale of a security denominated in a foreign currency, or the Fund anticipates
the receipt in a foreign currency of dividend or interest payments on a security
that it holds or anticipates purchasing, it may desire to "lock in" the U.S.
dollar price of the security or the U.S. dollar equivalent of such payment, as
the case may be, by entering into a forward contract for the purchase or sale,
for a fixed amount of U.S. dollars or foreign currency, of the amount of foreign
currency involved in the underlying transaction. The Fund will thereby be able
to protect itself against a possible loss resulting from an adverse change in
the relationship between the currency exchange rates during the period between
the date on which the security is purchased or sold, or on which the payment is
declared or accrues, and the date on which such payments are made or received.
The Fund also may hedge by using forward currency contracts in connection
with portfolio positions to lock in the U.S. dollar value of those positions, to
increase the Fund's exposure to foreign currencies that the Investment Manager
believes may rise in value relative to the U.S. dollar or to shift the Fund's
exposure to foreign currency fluctuations from one country to another. For
example, when the Investment Manager believes that the currency of a particular
foreign country may suffer a substantial decline relative to the U.S. dollar or
another currency, it may enter into a forward contract to sell the amount of the
former foreign currency approximating the value of some or all of the Fund's
portfolio securities denominated in such foreign currency. This investment
practice generally is referred to as "cross-hedging" when another foreign
currency is used.
15
The precise matching of the forward contract amounts and the value of the
securities involved will not generally be possible because the future value of
such securities in foreign currencies will change as a consequence of market
movements in the value of those securities between the date the forward contract
is entered into and the date it matures. Accordingly, it may be necessary for
the Fund to purchase additional foreign currency on the spot (that is, cash)
market (and bear the expense of such purchase) if the market value of the
security is less than the amount of foreign currency the Fund is obligated to
deliver and if a decision is made to sell the security and make delivery of the
foreign currency. Conversely, it may be necessary to sell on the spot market
some of the foreign currency received upon the sale of the portfolio security if
the market value of the security exceeds the amount of foreign currency the Fund
is obligated to deliver. The projection of short-term currency market movements
is extremely difficult, and the successful execution of a short-term hedging
strategy is highly uncertain. Forward contracts involve the risk that
anticipated currency movements will not be accurately predicted, causing the
Fund to sustain losses on these contracts and transaction costs. Under normal
circumstances, consideration of the prospects for currency parities will be
incorporated into the longer term investment decisions made with regard to
overall diversification or other investment strategies. However, the Investment
Manager believes that it is important to have the flexibility to enter into such
forward contracts when it determines that the best interests of the Fund will be
served.
At or before the maturity date of a forward contract requiring the Fund to
sell a currency, it may either sell a portfolio security and use the sale
proceeds to make delivery of the currency or retain the security and offset its
contractual obligation to deliver the currency by purchasing a second contract
pursuant to which it will obtain, on the same maturity date, the same amount of
the currency that it is obligated to deliver. Similarly, the Fund may close out
a forward contract requiring it to purchase a specified currency by entering
into a second contract entitling it to sell the same amount of the same currency
on the maturity date of the first contract. The Fund would realize a gain or
loss as a result of entering into such an offsetting forward currency contract
under either circumstance to the extent the exchange rate or rates between the
currencies involved moved between the execution dates of the first contract and
the offsetting contract.
The cost to the Fund of engaging in forward currency contracts varies with
factors such as the currencies involved, the length of the contract period and
the market conditions then prevailing. Because forward currency contracts are
usually entered into on a principal basis, no fees or commissions are involved.
The use of forward currency contracts does not eliminate fluctuations in the
prices of the underlying securities the Fund owns or intends to acquire, but it
does fix a rate of exchange in advance. In addition, although forward currency
contracts limit the risk of loss due to a decline in the value of the hedged
currencies, at the same time they limit any potential gain that might result
should the value of the currencies increase.
16
Although the Fund values its assets daily in terms of U.S. dollars, it does
not intend to convert its holdings of foreign currencies into U.S. dollars on a
daily basis. The Fund may convert foreign currency from time to time, and
investors should be aware of the costs of currency conversion. Although foreign
exchange dealers do not charge a fee for conversion, they do realize a profit
based on the difference between the prices at which they are buying and selling
various currencies. Thus, a dealer may offer to sell a foreign currency to the
Fund at one rate, while offering a lesser rate of exchange should the Fund
desire to resell that currency to the dealer.
REVERSE REPURCHASE AGREEMENTS
The Fund may enter into reverse repurchase agreements. Under such an
agreement, the Fund sells an underlying security to a creditworthy securities
dealer or bank and agrees to repurchase it at an agreed-upon date and price
reflecting a market rate of interest. Such agreements are considered to be
borrowings and involve leveraging, which is speculative and increases both
investment opportunity and investment risk. When the Fund enters into a reverse
repurchase agreement, it will set aside cash or liquid securities the value of
which is marked to market daily with a market value at least equal to the
repurchase price. If necessary, additional assets will be set aside daily so
that the value of the cash or liquid securities set aside will not be less than
the amount of the Fund's purchase commitment. Such agreements are subject to the
risk that the benefit of purchasing a security with the proceeds of the sale by
the Fund will be less than the cost to the Fund of transacting the reverse
repurchase agreement. Such agreements will be entered into when, in the judgment
of the Investment Manager, the risk is justified by the potential advantage of
total return.
LENDING
The Fund may lend portfolio securities or other assets for a fee to other
parties. The loan would be continuously secured by cash, securities issued or
guaranteed by the U.S. Government, its agencies or instrumentalities, or any
combination of cash and such securities, as collateral equal at all times to at
least the market value of the assets lent. Including such collateral as part of
the Fund's total assets, the securities on loans will not exceed one-third of
its total assets. There are risks to the Fund of delay in receiving additional
collateral and risks of delay in recovery of, and failure to recover, the assets
lent should the borrower fail financially or otherwise violate the terms of the
lending agreement. Loans will be made only to borrowers deemed to be of good
standing. Any loan made by the Fund will provide that it may be terminated by
either party upon reasonable notice to the other party.
INVESTMENT RESTRICTIONS
The following fundamental investment restrictions may not be changed
without the approval of the lesser of (a) 67% or more of the voting securities
of the Fund present at a meeting if the holders of more than 50% of the
outstanding voting securities of the Fund are present or represented by proxy or
17
(b) more than 50% of the outstanding voting securities of the Fund. Except for
investment restriction No. 6 appearing below, any investment restriction which
involves a maximum percentage of securities or assets will not be considered to
be violated unless an excess over the percentage occurs immediately after, and
is caused by, an acquisition of securities or assets of, the Fund. The Fund may
not:
(1) Purchase a security, if as a result, 25% or more of the value of the
Fund's total assets would be invested in the securities of issuers in a single
industry, provided that this limitation does not apply to securities issued or
guaranteed by the U.S. Government, its agencies or instrumentalities;
(2) Purchase or sell real estate (although it may purchase securities of
companies whose business involves the purchase or sale of real estate);
(3) Invest in commodities or commodities futures contracts, although it may
enter into financial and foreign currency futures contracts and options thereon,
options on foreign currencies, and forward contracts on foreign currencies;
(4) Lend its assets, except as permitted by applicable law;
(5) Underwrite the securities of other issuers except to the extent the
Fund may be deemed to be an underwriter under the federal securities laws in
connection with the disposition of the Fund's authorized investments; or
(6) Issue senior securities as defined in the Investment Company Act of
1940, as amended (the "1940 Act") (including borrowing money), except as
permitted by applicable law.
With respect to (4) above, the Fund may lend its portfolio securities,
enter into repurchase agreements and invest in loan assignments and
participation interests and debt obligations (none of which would be considered
loans for the purpose of this restriction). With respect to (6) above, the 1940
Act currently requires that the Fund maintain 300% asset coverage with respect
to all borrowings other than temporary borrowings of up to 5% of the value of
its total assets, and that the Fund maintain 200% asset coverage with respect to
any class of preferred stock it offers. The Fund, notwithstanding any other
investment policy or restriction (whether or not fundamental), may invest all of
its assets in the securities or beneficial interests of a single pooled
investment fund having substantially the same investment objectives, policies
and restrictions as the Fund.
THE INVESTMENT COMPANY COMPLEX
The investment companies in the Winmill & Co. Incorporated ("WCI")
("Investment Company Complex") are:
Global Income Fund, Inc.
18
Foxby Corp.
Midas Dollar Reserves, Inc.
Midas Fund, Inc.
Midas Special Equities Fund, Inc.
OFFICERS AND DIRECTORS
The Fund's Board is responsible for the management and supervision of the
Fund. The Board approves all significant agreements with those companies that
furnish services to the Fund. These companies are as follows: CEF Advisers,
Inc., the Investment Manager; Unified Fund Services, Inc., net asset value
accounting; Tait, Weller & Baker, independent accountants; American Stock
Transfer & Trust Company, transfer agent and registrar, Subscription Agent for
the rights offering, and agent for the Fund's Dividend Reinvestment Plan; and,
State Street Bank & Trust Co., Custodian.
The directors who are not interested persons of the Investment Manager as
defined in section 2(a)(19) of the 1940 Act ("Independent Directors") are also
members of the Audit Committee of the Board, which meets twice a year. The Audit
Committee members are George B. Langa, David R. Stack and Peter K. Werner,
consisting of all of the Independent Directors. The function of the Audit
Committee is routinely to review financial statements and other audit-related
matters as they arise throughout the year. The Fund has an Executive Committee
comprised of one member, Thomas B. Winmill, the function of which is to exercise
the powers of the Board between meetings of the Board to the extent permitted by
law to be delegated and not delegated by the Board to any other committee. The
Fund has a committee of Continuing Directors to take such actions as are
required by the Charter and Bylaws of the Fund. The Fund has no standing
nominating or compensation committee or any committee performing similar
functions.
The Fund's Board of Directors is divided into five classes with the term of
office of one class expiring each year.
The Directors of the Fund, their respective offices, ages and principal
occupations during the last five years are set forth below. Unless otherwise
noted, the address of record of each is 11 Hanover Square, New York, NY 10005.
19
* Bassett S. Winmill and Thomas B. Winmill are "interested persons" of the
Fund as defined by the 1940 Act, because of their positions with the Investment
Manager. Bassett S. Winmill, Chairman of the Board of the Fund, is the father of
Thomas B. Winmill, the President, Chief Executive Officer and General Counsel of
the Fund.
** Refers to directorships held by a director in any company with a class
of securities registered pursuant to Section 12 of the Securities Exchange Act
of 1934 or any company registered as an investment company under the 1940 Act.
20
The executive officers of the Fund each serve at the pleasure of the Board
of Directors. Unless otherwise noted, the address of each is 11 Hanover Square,
New York, NY 10005. The executive officers of the Fund, other than those who
serve as Directors, and their relevant biographical information are set forth
below:
WILLIAM G. VOHRER - Chief Accounting Officer, Chief Financial Officer,
Treasurer and Vice President. He also is Chief Accounting Officer, Chief
Financial Officer, Treasurer and Vice President of the other investment
companies in the Investment Company Complex, the Investment Manager and WCI and
its affiliates. From 1999-2001, he consulted on accounting matters. Prior to
1999, he was Chief Financial Officer and Financial Operations Principal for
Nafinsa Securities, Inc., a Mexican securities broker/dealer. He was born on
August 17, 1950.
MARION E. MORRIS - Senior Vice President. She is also a Senior Vice
President of the other investment companies in the Investment Company Complex,
the Investment Manager and WCI and its affiliates. She is Director of Fixed
Income and a member of the Investment Policy Committee of the Investment
Manager. From 1997 to 2000, she acted as general manager of Michael Trapp, a
landscape designer. Previously, she served as Vice President of Salomon
Brothers, The First Boston Corporation, and Cantor Fitzgerald. She was born on
June 17, 1945.
MONICA PELAEZ - Vice President, Secretary, Associate General Counsel and
Chief Compliance Officer. She also is Vice President, Secretary, Associate
General Counsel and Chief Compliance Officer of the other investment companies
in the Investment Company Complex, the Investment Company Complex, the
Investment Manager, and WCI and its affiliates. Previously, she was Special
Assistant Corporation Counsel to New York City Administration for Children's
Services from 1998 to 2000. She earned her Juris Doctor from St. John's
University School of Law in 1997. She is a member of the New York State Bar. She
was born on November 5, 1971.
To the knowledge of the Fund's management, as of February 20, 2004, no
shareholder beneficially owned 5% or more of the outstanding shares of the Fund.
The following table sets forth information describing the dollar range of
equity securities beneficially owned by each Director of the Fund and, on an
aggregate basis, the Investment Company Complex as of February 20, 2004.
21
As of December 31, 2003, no Independent Director owned beneficially or of
record any securities in the Fund's Investment Manager or in any person
controlled by, under common control with, or controlling the Investment Manager.
As of February 14, 2004, the Fund's directors and officers, as a group, owned
less than 1% of the Fund's outstanding common stock.
Currently, the Fund pays its Directors who are not "interested persons" or
affiliated with the Investment Manager an annual retainer of $2,000 and a per
meeting fee of $2,500, and reimburses them for their meeting expenses. The Fund
also pays such Directors $250 per special telephonic meeting attended and per
committee meeting attended. The Fund does not pay any other remuneration to its
executive officers and Directors, and the Fund has no bonus, pension,
profit-sharing or retirement plan. The Fund had seven Board meetings, two audit
committee meetings, two meetings of a special committee to consider amending the
Fund's by-laws; three meetings of the rights offering committee and no executive
committee meetings during the Fund's most recently completed fiscal year ended
December 31, 2003. Each Director attended all Board and committee meetings held
during such periods during the time such Director was in office.
The aggregate amount of compensation paid to each Director by the Fund and
by the other investment companies in the Investment Company Complex for which
such Director was a board member (the number of which is set forth in
parenthesis next to the Director's name) for the year ended December 31, 2003,
is as follows:
22
* As of December 31, 2003, there were two investment companies managed by the
Investment Manager.
PROXY VOTING
The Fund's Board of Directors has delegated the Fund's obligation to vote
proxies, as described in the Fund's proxy voting policies and procedures, to an
independent third party voting service. The Fund has retained the right to
override the delegation to the independent third party voting service on a case
by case basis. With respect to a vote upon which the Fund overrides the third
party voting service delegation, to the extent that such vote presents a
conflict of interest with management, the Fund will disclose such conflict to,
and obtain consent from, the Fund's Independent Directors or a committee
thereof, prior to voting. With respect to a vote upon which the Fund overrides
the third party voting service delegation that vote does not present a conflict
of interest with management, the Fund will vote the proxies in accordance with
the Amended Proxy Voting Policies and Procedures attached to this SAI as
Appendix B. The Fund's Policies also are available, without charge, by calling
the Fund at 1-212-344-6310 and on the Fund's website at
http://www.globalincomefund.net.
In addition, for the one year period that will end June 30, 2004, the Fund
will make available information regarding how the Fund voted proxies relating to
its portfolio securities to shareholders without charge, upon request by calling
the Fund at 1-212-344-6310 and on the SEC's website at http://www.sec.gov.
INVESTMENT MANAGER
The Investment Manager, a registered investment adviser, acts as general
manager of the Fund, being responsible for the various functions assumed by it,
including the regular furnishing of advice with respect to portfolio
transactions. The Investment Manager is a wholly owned subsidiary of WCI. WCI's
other principal subsidiaries include Midas Management Corporation, a registered
investment adviser and Investor Service Center, Inc., a registered
broker-dealer. WCI's corporate affiliates also include Bexil Corporation and
Tuxis Corporation. The Fund and the other investment companies in the Investment
Company Complex had net assets in excess of approximately $ 132 million as of
January 31, 2004.
WCI is a publicly owned company whose securities are listed on the NASDAQ
Stock Market. Bassett S. Winmill, an affiliated person of the Fund, may be
deemed a controlling person of WCI on the basis of his ownership of 100% of
WCI's voting stock and, therefore, of the Investment Manager.
The Fund and the Investment Manager each has adopted a code of ethics (the
"Code of Ethics") that permits its personnel, subject to the Code of Ethics, to
invest in securities for their own accounts, including securities that may be
23
purchased or held by the Fund. The Investment Manager's Code of Ethics restricts
the personal securities transactions of its employees, and requires portfolio
managers and other investment personnel to comply with the Code's preclearance
and disclosure procedures. Its primary purpose is to ensure that personal
trading by the Investment Manager's employees does not disadvantage the Fund.
The Code of Ethics is also available on the EDGAR database on the Securities and
Exchange Commission's web site at http://www.sec.gov. Copies of the Code of
Ethics may also be obtained, after paying a duplicating fee, by electronic
request at the following e-mail address: publicinfo@sec.gov, or by writing the
Securities and Exchange Commission's Public Reference Room Section, Washington,
D.C. 20549-0102.
INVESTMENT MANAGEMENT AGREEMENT
Under the Investment Management Agreement, the Fund assumes and pays all
expenses required for the conduct of its business including, but not limited to,
custodian and transfer agency fees, accounting and legal fees, investment
management fees, fees of Independent Directors, association fees, printing,
salaries of certain administrative and clerical personnel, necessary office
space, all expenses relating to the registration or qualification of the shares
of the Fund under Blue Sky laws and reasonable fees and expenses of counsel in
connection with such registration and qualification, miscellaneous expenses and
such non-recurring expenses as may arise, including actions, suits or
proceedings affecting the Fund and the legal obligation which the Fund may have
to indemnify its officers and Directors with respect thereto.
As compensation for its services to the Fund, the Investment Manager
receives an investment management fee, payable monthly, based on the average
weekly net assets of the Fund, at the annual rate of 7/10 of 1% of the first
$250 million, 5/8 of 1% from $250 million to $500 million, and 1/2 of 1% over
$500 million. The Investment Manager has agreed in the Investment Management
Agreement that it will waive all or part of its fee or reimburse the Fund
monthly if, and to the extent that, the Fund's aggregate operating expenses
exceed the most restrictive limit imposed by any state in which shares of the
Fund are qualified for sale. Currently, the Fund is not subject to any such
state-imposed limitations. For the fiscal years ended December 31, 2001, 2002
and 2003, the Fund paid to the Investment Manager investment management fees of
$208,607, $197,320, and $192,626, respectively.
24
Pursuant to the Investment Management Agreement, if requested by the Fund's
Board of Directors, the Investment Manager may provide other services to the
Fund such as, without limitation, the functions of billing, accounting, certain
shareholder communications and services, administering state and federal
registrations, filings and controls and other administrative services. Any
services so requested and performed will be for the Fund's account and the
Investment Manager's costs to render such services shall be reimbursed by the
Fund subject to examination by those Directors of the Fund who are not
"interested persons" of the Investment Manager or any affiliate thereof. For the
fiscal years ended December 31, 2001, 2002 and 2003, the Fund reimbursed the
Investment Manager $29,045, $39,677 and $56,540, respectively, for such
services.
The Investment Management Agreement provides that the Investment Manager
will not be liable to the Fund or any shareholder of the Fund for any error of
judgment or mistake of law or for any loss suffered by the Fund in connection
with the matters to which the agreement relates. Nothing contained in the
Investment Management Agreement, however, may be construed to protect the
Investment Manager against any liability to the Fund by reason of the Investment
Manager's willful misfeasance, bad faith, or gross negligence in the performance
of its duties or by reason of its reckless disregard of its obligations and
duties under the Investment Management Agreement.
In considering approval of the continuance of the Investment Management
Agreement, the Directors reviewed, among other things, the expenses incurred by
the Investment Manager in managing the Fund, the quality of the service provided
by, and the investment performance of the Fund under the direction of the
Investment Manager and the personnel that had been performing such services. The
directors also considered the following factors: (1) the nature, quality and
scope of services provided by the Investment Manager to the Fund; (2) the
Investment Manager's capacity to continue to provide the advisory services
currently being performed and other factors which would affect positively or
negatively the continuation of those services; (3) the fairness of the contract
terms; (4) the extent to which economies of scale, if available, have been taken
into account in setting the fee schedule; (5) the existence of any potential
direct or indirect benefit that the Investment Manager might receive from its
management of the Fund; (6) the comparison of the advisory fees to those of
similar funds; and (7) the profitability of investment advisory business and
related revenues to the Investment Manager. In continuing the Fund's Investment
Management Agreement, the Board considered the overall level of services
provided by the Investment Manager, as well as the potential indirect or direct
benefits that the Investment Manager might receive from managing the Fund,
including the provision of certain administrative services by the Investment
Manager at cost.
The Investment Management Agreement will continue in effect, unless sooner
terminated as described below, for successive periods of twelve months, provided
such continuance is specifically approved at least annually by (a) the Directors
or by the holders of a majority of the outstanding voting securities of the Fund
as defined in the 1940 Act and (b) a vote of a majority of the Directors who are
not parties to the Investment Management Agreement, or interested persons of any
such party. The Investment Management Agreement may be terminated without
penalty at any time either by a vote of the Board of Directors of the Fund or by
the holders of a majority of the outstanding voting securities of the Fund, as
defined in the 1940 Act, on 60 days' written notice to the Investment Manager,
or by the Investment Manager on 60 days' written notice to the Fund, and shall
immediately terminate in the event of its assignment.
DETERMINATION OF NET ASSET VALUE
The net asset value of the Fund's shares will normally be calculated
(a) no less frequently than weekly, (b) on the last business day of each month
25
and (c) at any other time determined by the Board of Directors. Net asset value
is calculated by dividing the value of the Fund's net assets (the value of its
assets less its liabilities) by the total number of shares of its common stock
outstanding. With respect to security valuation, securities traded on a national
securities exchange or the Nasdaq National Market System ("NMS") are valued at
the last reported sales price on the day the valuations are made. Such
securities that are not traded on a particular day and securities traded in the
over-the-counter market that are not on NMS are valued at the mean between the
current bid and asked prices. Certain of the securities in which the Fund
invests are priced through pricing services that may utilize a matrix pricing
system that takes into consideration factors such as yields, prices, maturities,
call features and ratings on comparable securities. Bonds may be valued
according to prices quoted by a dealer in bonds that offers pricing services. If
market quotations are not available or deemed reliable, then such securities are
valued as determined in good faith under the direction of or pursuant to
procedures established by the Fund's Board of Directors.
Debt obligations with remaining maturities of 60 days or less are valued at
cost adjusted for amortization of premiums and accretion of discounts.
Securities denominated in foreign currencies are translated into U.S. dollars at
prevailing exchange rates. Forward contracts are marked to market, and any
change in market value is recorded by the Fund as an unrealized gain or loss.
When a contract is closed, the Fund records a realized gain or loss equal to the
difference between the value of the contract at the time it was opened and the
value at the time it was closed. The Fund could be exposed to risk if the
counterparties are unable to meet the terms of the contracts or if the value of
the currency changes unfavorably. Interest income is recorded on the accrual
basis. Discounts and premiums on securities purchased are amortized over the
life of the respective securities. Dividends and other distributions to
shareholders are recorded on the ex-distribution date. In preparing financial
statements in conformity with accounting principles generally accepted in the
United States, management makes estimates and assumptions that affect the
reported amounts of assets and liabilities at the date of the financial
statements, as well as the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Foreign securities, if any, are valued at the price in a principal market
where they are traded, or, if last sale prices are unavailable, at the mean
between the last available bid and ask quotations. Foreign security prices are
expressed in their local currency and translated into U.S. dollars at prevailing
exchange rates. Foreign currency exchange rates are generally determined prior
to the close of trading on the NYSE. Occasionally, events affecting the value of
foreign securities and such exchange rates occur between the time at which they
are determined and the close of trading on the NYSE, which events will not be
reflected in a computation of the Fund's net asset value on that day. If events
materially affecting the value of such securities or exchange rates occur during
such time period, the securities will be valued at their fair value as
determined in good faith under the direction of or pursuant to procedures
established by the Fund's Board of Directors.
26
ALLOCATION OF BROKERAGE
The Fund seeks to obtain prompt execution of orders at the most favorable
net prices. The Fund is not currently obligated to deal with any particular
broker, dealer or group thereof. Fund transactions in debt and OTC securities
generally are with dealers acting as principals at net prices with little or no
brokerage costs. In certain circumstances, however, the Fund may engage a broker
as agent for a commission to effect transactions for such securities. Purchases
of securities through brokers generally include a commission or concession paid
to the underwriter, and purchases from dealers include a spread between the bid
and asked price. While the Investment Manager generally seeks reasonably
competitive spreads or commissions, payments of the lowest spread or commission
are not necessarily consistent with obtaining the best net results. Accordingly,
the Fund will not necessarily be paying the lowest spread or commission
available.
The Investment Manager directs portfolio transactions to broker/dealers who
provide research and other services in the execution of orders. There is no
certainty that the services provided, if any, will be beneficial to the Fund,
and it may be that other affiliated investment companies will derive benefit
therefrom. It is not possible to place a dollar value on such services received
by the Investment Manager from broker/dealers effecting transactions in
portfolio securities. Such services may permit the Investment Manager to
supplement its own research and other activities and may make available to the
Investment Manager the opinions and information of individuals and research
staffs of other securities firms. For the fiscal years ended December 31, 2001,
2002 and 2003, the Fund paid $7,845, $0 and $795, respectively, in brokerage
commissions to broker/dealers who provided research and other services.
Investment decisions for the Fund and for other funds managed by the
Investment Manager or its affiliates are made independently based on each fund's
investment objectives and policies. The same investment decision, however, may
occasionally be made for two or more funds. In such a case, the Investment
Manager may combine orders for two or more Funds for a particular security if it
appears that a combined order would reduce brokerage commissions and/or result
in a more favorable transaction price. Combined purchase or sale orders are then
averaged as to price and allocated as to amount according to a formula deemed
equitable to each fund. While in some cases this practice could have a
detrimental effect upon the price or quantity of the security available with
respect to the Fund, the Investment Manager believes that the larger volume of
combined orders can generally result in better execution and prices.
27
TAXES
The Fund has qualified and intends to continue to qualify for treatment as
a regulated investment company ("RIC") under Subchapter M of the Internal
Revenue Code of 1986, as amended ("Code"). To qualify for that treatment, the
Fund must satisfy certain specific requirements, including the following:
1) The Fund must distribute to its shareholders for each taxable year at
least 90% of its "investment company taxable income" ("Distribution
Requirement"). That income generally consists of net investment
income, the excess of net short-term capital gain over net long-term
capital loss and net gains from certain foreign currency transactions,
all determined without regard to any deduction for dividends paid;
2) At least 90% of the Fund's gross income each taxable year must be
derived from investment-type income - specifically, dividends,
interest, payments with respect to securities loans and gains from the
sale or other disposition of securities or foreign currencies, or
other income (including gains from options, futures or forward
contracts) the Fund derives with respect to its business of investing
in securities or those currencies ("Income Requirement"); and
3) At the close of each quarter of the Fund's taxable year, (a) at least
50% of the value of its total assets must be represented by cash and
cash items, U.S. Government securities, securities of other RICs and
other securities, with these other securities limited, in respect of
any one issuer, to an amount that does not exceed 5% of the value of
the Fund's total assets and that does not represent more than 10% of
the issuer's outstanding voting securities, and (b) not more than 25%
of the value of its total assets may be invested in securities (other
than U.S. Government securities or securities of other RICs) of any
one issuer.
In any year during which the Fund so qualifies, it will not be liable for
federal income tax on its (a) investment company taxable income or (b) net
capital gain (i.e., the excess of net long-term capital gain over net short-term
capital loss), reduced by any capital loss carryovers from prior years, that it
distributes to its shareholders.
If the Fund failed to qualify for treatment as a RIC for any taxable year,
(1) it would be taxed as an ordinary corporation on the full amount of its
taxable income for that year without being able to deduct the distributions it
makes to its shareholders and (2) its shareholders would treat all those
distributions, including distributions of net capital gain, as dividends to the
extent of the Fund's earnings and profits, which dividends would be taxable as
ordinary income (or, if they are "qualified dividend income" as described in the
Prospectus ("QDI"), at the capital gain rate, which is a maximum of 15% for
individual shareholders) and would be eligible for the dividends-received
deduction available to corporations under certain circumstances. In addition,
the Fund could be required to recognize unrealized gains, pay substantial taxes
and interest and make substantial distributions before requalifying for RIC
treatment.
28
The Fund will be subject to a nondeductible 4% excise tax ("Excise Tax") to
the extent it fails to distribute by the end of any calendar year an amount
equal to the sum of (1) at least 98% of its ordinary income for the calendar
year, (2) at least 98% of its capital gain net income for the one-year period
ending on October 31 of that year and (3) generally, income and gain not
distributed or not subject to corporate tax in the prior calendar year. The Fund
intends to avoid imposition of the Excise Tax by making adequate distributions.
The use of hedging strategies, such as writing (selling) and purchasing
options and futures contracts and entering into forward currency contracts,
involves complex rules that will determine for income tax purposes the amount,
character and timing of recognition of the gains and losses the Fund realizes in
connection therewith. Gain from the disposition of foreign currencies (except
certain gains therefrom that may be excluded by future regulations), and gains
from options, futures and forward currency contracts the Fund derives with
respect to its business of investing in securities or foreign currencies, will
be treated as qualifying income under the Income Requirement. The Fund will
monitor its transactions, make appropriate tax elections and make appropriate
entries in its books and records when it acquires any foreign currency, option,
futures contract, forward contract or hedged investment to mitigate the effect
of these rules, prevent its disqualification as a RIC and minimize the
imposition of federal income and excise taxes.
Some futures, foreign currency contracts and "nonequity" options (i.e.,
certain listed options, such as those on a "broad-based" securities index) in
which the Fund invests may be subject to section 1256 of the Code (collectively
"section 1256 contracts"). Any section 1256 contracts that the Fund holds at the
end of its taxable year generally must be "marked-to-market" (that is, treated
as having been sold at that time for their fair market value) for federal income
tax purposes, with the result that unrealized gains or losses will be treated as
though they were realized. Sixty percent of any net gain or loss recognized on
these deemed sales, and 60% of any net realized gain or loss from any actual
sales of section 1256 contracts, will be treated as long-term capital gain or
loss, and the balance will be treated as short-term capital gain or loss. These
rules may operate to increase the amount the Fund must distribute to satisfy the
Distribution Requirement (i.e., with respect to the portion treated as
short-term capital gain), which will be taxable to its shareholders as ordinary
income, and to increase the net capital gain the Fund recognizes, without in
either case increasing the cash available to it. The Fund may elect not to have
the foregoing rules apply to any "mixed straddle" (that is, a straddle, which
the Fund clearly identifies in accordance with applicable regulations, at least
one (but not all) of the positions of which are section 1256 contracts),
although doing so may have the effect of increasing the relative proportion of
net short-term capital gain (taxable as ordinary income) and thus increasing the
amount of dividends it must distribute. Section 1256 contracts also are
marked-to-market for purposes of the Excise Tax.
Under Code section 988, gains or losses (1) from the disposition of foreign
currencies, including forward currency contracts, (2) except in certain
circumstances, from options and forward contracts on foreign currencies (and on
financial instruments involving foreign currencies), (3) on the disposition of
29
each foreign-currency-denominated debt security that are attributable to
fluctuations in the value of the foreign currency between the dates of
acquisition and disposition of the security and (4) that are attributable to
exchange rate fluctuations between the time the Fund accrues interest, dividends
or other receivables or expenses or other liabilities denominated in a foreign
currency and the time it actually collects the receivables or pays the
liabilities generally will be treated as ordinary income or loss. These gains or
losses will increase or decrease the amount of the Fund's investment company
taxable income to be distributed to its shareholders as ordinary income, rather
than affecting the amount of its net capital gain. If section 988 losses exceed
other investment company taxable income during a taxable year, the Fund would
not be able to distribute any dividends, and any distributions made during that
year before the losses were realized would be recharacterized as a return of
capital to shareholders, rather than as a dividend, thereby reducing each
shareholder's basis in his or her Fund shares.
Offsetting positions the Fund enters into or holds in any actively traded
security, option, futures or forward contract may constitute a "straddle" for
federal income tax purposes. Straddles are subject to certain rules that may
affect the amount, character and timing of recognition of the Fund's gains and
losses with respect to positions of the straddle by requiring, among other
things, that (1) loss realized on disposition of one position of a straddle be
deferred to the extent of any unrealized gain in an offsetting position until
the latter position is disposed of, (2) the Fund's holding period in certain
straddle positions not begin until the straddle is terminated (possibly
resulting in gain being treated as short-term rather than long-term capital
gain) and (3) losses recognized with respect to certain straddle positions, that
otherwise would constitute short-term capital losses, be treated as long-term
capital losses. Applicable regulations also provide certain "wash sale" rules,
which apply to transactions where a position is sold at a loss and a new
offsetting position is acquired within a prescribed period, and "short sale"
rules applicable to straddles. Different elections are available to the Fund,
which may mitigate the effects of the straddle rules, particularly with respect
to "mixed straddles." Because only a few of the regulations implementing the
straddle rules have been promulgated, the tax consequences to the Fund of
straddle transactions are not entirely clear.
When a covered call option written (sold) by the Fund expires, it will
realize a short-term capital gain equal to the amount of the premium it received
for writing the option. When the Fund terminates its obligations under such an
option by entering into a closing transaction, it will realize a short-term
capital gain (or loss), depending on whether the cost of the closing transaction
is less (or more) than the premium it received when it wrote the option. When a
covered call option written by the Fund is exercised, it will be treated as
having sold the underlying security, producing long-term or short-term capital
gain or loss, depending on the holding period of the underlying security and
whether the sum of the option price received on the exercise plus the premium
received when it wrote the option is more or less than the underlying security's
basis.
If the Fund has an "appreciated financial position" -- generally, an
interest (including an interest through an option, futures or forward contract
or short sale) with respect to any stock, debt instrument (other than "straight
30
debt") or partnership interest the fair market value of which exceeds its
adjusted basis -- and enters into a "constructive sale" of the position, the
Fund will be treated as having made an actual sale thereof, with the result that
it will recognize gain at that time. A constructive sale generally consists of a
short sale, an offsetting notional principal contract or a futures or forward
contract the Fund or a related person enters into with respect to the same or
substantially identical property. In addition, if the appreciated financial
position is itself a short sale or such a contract, acquisition of the
underlying property or substantially identical property will be deemed a
constructive sale. The foregoing will not apply, however, to any transaction
during any taxable year that otherwise would be treated as a constructive sale
if the transaction is closed within 30 days after the end of that year and the
Fund holds the appreciated financial position unhedged for 60 days after that
closing (i.e., at no time during that 60-day period is the Fund's risk of loss
regarding that position reduced by reason of certain specified transactions with
respect to substantially identical or related property, such as having an option
to sell, being contractually obligated to sell, making a short sale or granting
an option to buy substantially identical stock or securities).
The Fund may acquire zero coupon or other securities issued with OID. As a
holder of those securities, the Fund must include in its gross income the OID
that accrues on them during the taxable year, even if it receives no
corresponding payment on them during the year. Similarly, the Fund must include
in its gross income securities it receives as "interest" on any payment-in-kind
securities in which it invests. Because the Fund annually must distribute
substantially all of its investment company taxable income, including any
accrued OID and other non-cash income, to satisfy the Distribution Requirement
and avoid imposition of the Excise Tax, it may be required in a particular year
to distribute as a dividend an amount that is greater than the total amount of
cash it actually receives. Those distributions will be made from the Fund's cash
assets or from the proceeds of sales of its portfolio securities, if necessary.
The Fund may realize capital gains or losses from those sales, which would
increase or decrease its investment company taxable income and/or net capital
gain.
Interest and dividends the Fund receives may be subject to income,
withholding or other taxes imposed by foreign countries and U.S. possessions
(collectively "foreign taxes") that would reduce the yield on its securities.
Tax conventions between certain countries and the United States may reduce or
eliminate foreign taxes, however, and many foreign countries do not impose taxes
on capital gains in respect of investments by foreign investors.
If more than 50% of the value of the Fund's total assets at the close of
its taxable year consists of securities of foreign corporations (which has not
occurred in the past), it will be eligible to, and may, file an election with
the Internal Revenue Service that would enable its shareholders, in effect, to
receive the benefit of the foreign tax credit with respect to any foreign taxes
it paid. Pursuant to the election, the Fund would treat those taxes as dividends
paid to its shareholders and each shareholder (1) would be required to include
in gross income, and treat as paid by the shareholder, the shareholder's
proportionate share of those taxes, (2) would be required to treat the
shareholder's share of those taxes and of any dividend the Fund paid that
represents income from foreign or U.S. possessions sources as the shareholder's
own income from those sources and (3) could either use the foregoing information
31
in calculating the foreign tax credit against the shareholder's federal income
tax or, alternatively, deduct the foreign taxes deemed paid by the shareholder
in computing the shareholder's taxable income. The Fund will report to its
shareholders shortly after each taxable year their respective shares of the
foreign taxes it paid and its income from sources within foreign countries and
U.S. possessions if it makes this election.
Individuals who have no more than $300 ($600 for married persons filing
jointly) of creditable foreign taxes included on Forms 1099 and all of whose
foreign source income is "qualified passive income" may elect each year to be
exempt from the extremely complicated foreign tax credit limitation, in which
event they would be able to claim a foreign tax credit without having to file
the detailed Form 1116 that otherwise is required. A shareholder will not be
entitled to credit or deduct its allocable portion of foreign taxes the Fund
paid if the shareholder has not held Fund shares for 16 days or more during the
30-day period beginning 15 days before the ex-distribution date, which period
will be extended if the shareholder's risk of loss with respect to those shares
is reduced by reason of holding an offsetting position. No deduction for foreign
taxes may be claimed by a shareholder who does not itemize deductions. Foreign
shareholders may not deduct or claim a credit for foreign taxes in determining
their U.S. income tax liability unless the dividends the Fund paid to them are
effectively connected with a U.S. trade or business.
The Fund may invest in the stock of "passive foreign investment companies"
("PFICs"). A PFIC is any foreign corporation (with certain exceptions) that, in
general, meets either of the following tests: (1) at least 75% of its gross
income for the taxable year is passive income or (2) an average of at least 50%
of its assets produce, or are held for the production of, passive income. Under
certain circumstances, the Fund will be subject to federal income tax on a
portion of any "excess distribution" it receives on the stock of a PFIC or of
any gain from disposition of the stock (collectively, "PFIC income"), plus
interest thereon, even if the Fund distributes the PFIC income as a taxable
dividend to its shareholders. The balance of the PFIC income will be included in
the Fund's taxable income and, accordingly, will not be taxable to it to the
extent it distributes that income to its shareholders. Fund distributions
attributable to PFIC income will not be eligible for the 15% maximum federal
income tax rate on "QDI."
If the Fund invests in a PFIC and elects to treat the PFIC as a "qualified
electing fund" ("QEF"), then in lieu of the foregoing tax and interest
obligation, the Fund will be required to include in income each year its pro
rata share of the QEF's annual ordinary earnings and net capital gain -- which
the Fund likely would have to distribute to satisfy the Distribution Requirement
and avoid imposition of the Excise Tax -- even if the QEF did not distribute
those earnings and gain to the Fund. In most instances it will be very
difficult, if not impossible, to make this election because of certain
requirements thereof.
The Fund may elect to "mark to market" any stock in a PFIC it owns at the
end of its taxable year. "Marking-to-market, " in this context, means including
in ordinary income each taxable year the excess, if any, of the fair market
32
value of the stock over the Fund's adjusted basis therein as of the end of that
year. Pursuant to the election, the Fund also would be allowed to deduct (as an
ordinary, not capital, loss) the excess, if any, of its adjusted basis in PFIC
stock over the fair market value thereof as of the taxable year-end, but only to
the extent of any net mark-to-market gains with respect to that stock the Fund
included in income for prior taxable years under the election (and under
regulations proposed in 1992 that provided a similar election with respect to
the stock of certain PFICs). The Fund's adjusted basis in each PFIC's stock
subject to the election would be adjusted to reflect the amounts of income
included and deductions taken thereunder.
The foregoing discussion is a brief summary of certain federal income tax
considerations affecting the Fund and its shareholders under the law in effect
on the date hereof (which is subject to change, even retroactively) and is not
intended as tax advice. The Fund may be subject to state, local or foreign tax
in jurisdictions in which it may be deemed to be doing business, and its income
dividends and capital gain distributions, and gains a shareholder recognizes on
the sale or exchange of Fund shares, also may be subject to state and local
taxes. Investors are urged to consult their own tax advisers regarding specific
questions about other U.S. federal (including the alternative minimum tax), and
state, local or foreign, tax consequences to them of investing in Fund shares.
REPORTS TO SHAREHOLDERS
The Fund issues, at least semi-annually, reports to its shareholders
including a list of investments it held and statements of its assets and
liabilities, income and expense and changes in its net assets. The Fund's fiscal
year ends on December 31.
CUSTODIAN AND TRANSFER AGENT
State Street Bank & Trust Company, 801 Pennsylvania Avenue, Kansas City, MO
64105 ("Custodian"), acts as custodian of the Fund's investments and may appoint
one or more subcustodians. The Custodian also provides certain credit facilities
to the Fund. As part of its agreement with the Fund, the Custodian also may
apply credits or charges for its services to the Fund for, respectively,
positive or deficit cash balances maintained by the Fund with the Custodian.
Unified Funds Services provides net asset value accounting to the Fund.
American Stock Transfer & Trust Company, located at 59 Maiden Lane, New
York, NY--10038, serves as the Fund's dividend disbursing agent, as agent under
the Fund's Plan and as transfer agent and registrar for shares of the Fund.
AUDITORS
Tait, Weller & Baker, 1818 Market Street, Suite 2400, Philadelphia, PA
19103, are the independent accountants for the Fund. Financial statements of the
Fund are audited annually.
33
FINANCIAL STATEMENTS
The Fund's Financial Statements in the Annual Report for the fiscal year
ended December 31, 2003 (the "Report"), which accompanies this SAI or has
previously been provided to the person to whom the Prospectus is being sent, is
incorporated herein by reference with respect to all information other than the
information set forth in the Letter to shareholders included therein. The Fund
will furnish, without charge, a copy of the Report upon request at 11 Hanover
Square, New York, NY 10005, 1-212-344-6310.
34
APPENDIX A
Description of Securities Ratings
S&P RATINGS
Corporate and Municipal Bonds
AAA Debt obligations rated AAA have the highest ratings assigned by S&P to a
debt obligation. Capacity to pay interest and repay principal is extremely
strong.
AA Debt obligations rated AA have a very strong capacity to pay interest and
repay principal and differ from the highest rated issues only in a small
degree.
A Debt obligations rated A have a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than debts in
higher rated categories.
BBB Debt obligations rated BBB are regarded as having an adequate capacity to
pay interest and repay principal. Whereas they normally exhibit adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debts in this category than for debts in
higher rated categories.
BB Debt rated BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions which could
lead to inadequate capacity to meet timely interest and principal payments.
B Debt rated B has greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse
business, financial, or economic conditions will likely impair capacity or
willingness to pay interest and repay principal.
CCC Debt rated CCC has a currently indefinable vulnerability to default, and is
dependent upon favorable business, financial and economic conditions to
meet timely payment of interest and repayment of principal. In the event of
adverse business, financial or economic conditions, it is not likely to
have the capacity to pay interest and repay principal.
CC The rating CC is typically applied to debt subordinated to senior debt that
is assigned an actual or implied CCC rating.
C The rating C is typically applied to debt subordinated to senior debt which
is assigned an actual or implied CCC-debt rating.
35
NR No public rating has been requested, there may be insufficient information
on which to base a rating, or that S&P does not rate a particular type of
obligation as a matter of policy.
Commercial Paper, Including Tax-Exempt Commercial Paper
A Issues assigned this highest rating are regarded as having the greatest
capacity for timely payment. Issues in this category are further refined
with the designations 1, 2, and 3 to indicate the relative degree of
safety.
A-1 This designation indicates that the degree of safety regarding timely
payment is very strong.
MOODY'S RATINGS
Corporate and Municipal Bonds
Aaa Bonds that are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as
"gilt edge". Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized
are most unlikely to impair the fundamentally strong position of such
issues.
Aa Bonds that are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high
grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other
elements present which make the long-term risks appear somewhat larger than
in Aaa securities.
A Bonds that are rated A possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security
to principal and interest are considered adequate but elements may be
present which suggest a susceptibility to impairment sometime in the
future.
Baa Bonds that are rated Baa are considered as medium grade obligations, i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any
great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Ba Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Uncertainty of position
characterizes bonds in this class.
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B Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance
of other terms of the contract over any long period of time may be small.
Caa Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be presented elements of danger with respect to
principal or interest.
Ca Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked
shortcomings.
C Bonds which are rated C are the lowest rated class of bonds and issue so
rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
NR No public rating has been requested, there may be insufficient information
on which to base a rating, or that Moody's does not rate a particular type
of obligation as a matter of policy.
Commercial Paper, Including Tax-Exempt Commercial Paper
Prime-1 Issuers rated Prime-1 (or related supporting institutions) have a
superior capacity for repayment of short-term promissory
obligations. Prime-1 repayment capacity will normally be
evidenced by the following characteristics:
o Leading market positions in well established industries.
o High rates of return on funds employed.
o Conservative capitalization structures with moderate reliance on
debt and ample asset protection.
o Broad margins in earnings coverage of fixed financial charges and
high internal cash generation.
o Well established access to a range of financial markets and
assured sources of alternate liquidity.
Short-Term Tax-Exempt Notes
MIG-1 The short-term tax-exempt note rating MIG-1 is the highest rating
assigned by Moody's for notes judged to be the best quality.
Notes with this rating enjoy strong protection from established
cash flows of funds for their servicing or from established and
broad-based access to the market for refinancing, or both.
MIG-2 MIG-2 rated notes are of high quality but with margins of
protection not as large as MIG-1.
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APPENDIX B
Amended Proxy Voting Policies and Procedures
Global Income Fund, Inc.
Global Income Fund, Inc.(the "Fund") delegates the responsibility for voting
proxies of portfolio companies held in each Fund's portfolio to Institutional
Shareholder Services, Inc. ("ISS"). The Proxy Voting Guidelines of ISS (see
attached) are incorporated by reference herein as the Fund's proxy voting
policies and procedures, as supplemented by the terms hereof. . The Fund retains
the right to override the delegation to ISS on a case-by-case basis, in which
case the ADDENDUM -- NON-DELEGATED PROXY VOTING POLICIES AND PROCEDURES
supercede the Proxy Voting Guidelines of ISS in their entirety. In all cases,
the Fund's proxies will be voted in the best interests of the Fund.
With respect to a vote upon which the Fund overrides the delegation to ISS,
to the extent that such vote presents a material conflict of interest between
the Fund and its investment adviser or any affiliated person of the Fund's
Investment Manager, the Fund will disclose such conflict to, and obtain consent
from, its Independent Directors(1), or a committee thereof, prior to voting the
proxy.
January 1, 2004
- --------
(1) Each Fund's Independent Directors are those directors who are not interested
persons of the Fund, its investment adviser and distributor.
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ADDENDUM --
NON-DELEGATED PROXY VOTING POLICIES AND PROCEDURES
These proxy voting policies and procedures are intended to provide general
guidelines regarding the issues they address. As such, they cannot be
"violated." In each case the vote will be based on maximizing shareholder value
over the long term, as consistent with overall investment objectives and
policies.
BOARD AND GOVERNANCE ISSUES
o Board of Director Composition
Typically, we will not object to slates with at least a majority of independent
directors.
We generally will not object to shareholder proposals that request that the
board audit, compensation and/or nominating committees include independent
directors exclusively.
o Approval of Independent Auditors
We will evaluate on a case-by-case basis instances in which the audit firm has a
significant audit relationship with the company to determine whether we believe
independence has been compromised.
We will review and evaluate the resolutions seeking ratification of the auditor
when fees for financial systems design and implementation substantially exceed
audit and all other fees, as this can compromise the independence of the
auditor.
We will carefully review and evaluate the election of the audit committee chair
if the audit committee recommends an auditor whose fees for financial systems
design and implementation substantially exceed audit and all other fees, as this
can compromise the independence of the auditor.
o Increase Authorized Common Stock
We will generally support the authorization of additional common stock necessary
to facilitate a stock split.
We will generally support the authorization of additional common stock.
o Blank Check Preferred Stock
Blank check preferred is stock with a fixed dividend and a preferential claim on
company assets relative to common shares. The terms of the stock (voting,
dividend and conversion rights) are determined at the discretion of the Board
when the stock is issued. Although such an issue can in theory be used for
financing purposes, often it has been used in connection with a takeover
39
defense. Accordingly, we will generally evaluate the creation of blank check
preferred stock.
o Classified or "Staggered" Board
On a classified (or staggered) board, directors are divided into separate
classes (usually three) with directors in each class elected to overlapping
three-year terms. Companies argue that such Boards offer continuity in direction
which promotes long-term planning. However, in some instances they may serve to
deter unwanted takeovers since a potential buyer would have to wait at least two
years to gain a majority of Board seats.
We will vote on a case-by-case basis on issues involving classified boards.
o Supermajority Vote Requirements
Supermajority vote requirements in a company's charter or bylaws require a level
of voting approval in excess of simple majority. Generally, supermajority
provisions require at least 2/3 affirmative vote for passage of issues.
We will vote on a case-by-case basis regarding issues involving supermajority
voting.
o Restrictions on Shareholders to Act by Written Consent
Written consent allows shareholders to initiate and carry out a shareholder
action without waiting until the annual meeting or by calling a special meeting.
It permits action to be taken by the written consent of the same percentage or
outstanding shares that would be required to effect the proposed action at a
shareholder meeting.
We will generally not object to proposals seeking to preserve the right of
shareholders to act by written consent.
o Restrictions on Shareholders to Call Meetings
We will generally not object to proposals seeking to preserve the right of the
shareholders to call meetings.
o Limitations, Director Liability and Indemnification
Because of increased litigation brought against directors of corporations and
the increase costs of director's liability insurance, many states have passed
laws limiting director liability for those acting in good faith. Shareholders,
however, often must opt into such statutes. In addition, many companies are
seeking to add indemnification of directors to corporate bylaws.
40
We will generally support director liability and indemnification resolutions
because it is important for companies to be able to attract the most qualified
individuals to their Boards.
o Reincorporation
Corporations are in general bound by the laws of the state in which they are
incorporated. Companies reincorporate for a variety of reasons including
shifting incorporation to a state where the company has its most active
operations or corporate headquarters, or shifting incorporation to take
advantage of state corporate takeovers laws.
We typically will not object to reincorporation proposals.
o Cumulative Voting
Cumulative voting allows shareholders to cumulate their votes behind one or a
few directors running for the board - that is, cast more than one vote for a
director thereby helping a minority of shareholders to win board representation.
Cumulative voting generally gives minority shareholders an opportunity to effect
change in corporate affairs.
We typically will not object to proposals to adopt cumulative voting in the
election of directors.
o Dual Classes of Stock
In order to maintain corporate control in the hands of a certain group of
shareholders, companies may seek to create multiple classes of stock with
differing rights pertaining to voting and dividends.
We will vote on a case-by-case basis dual classes of stock. However, we will
typically not object to dual classes of stock.
o Limit Directors' Tenure
In general, corporate directors may stand for re-election indefinitely.
Opponents of this practice suggest that limited tenure would inject new
perspectives into the boardroom as well as possibly creating room for directors
from diverse backgrounds; however, continuity is important to corporate
leadership and in some instances alternative means may be explored for injecting
new ideas or members from diverse backgrounds into corporate boardrooms.
Accordingly, we will vote on a case-by-case basis regarding attempts to limit
director tenure.
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o Minimum Director Stock Ownership
The director share ownership proposal requires that all corporate directors own
a minimum number of shares in the corporation. The purpose of this resolution is
to encourage directors to have the same interest as other shareholders.
We normally will not object to resolutions that require corporate directors to
own shares in the company.
EXECUTIVE COMPENSATION
o Disclosure of CEO, Executive, Board and Management Compensation
On a case-by-case basis, we will support shareholder resolutions requesting
companies to disclose the salaries of top management and the Board of Directors.
o Compensation for CEO, Executive, Board and Management
We typically will not object to proposals regarding executive compensation if we
believe the compensation clearly does not reflect the current and future
circumstances of the company.
o Formation and Independence of Compensation Review Committee
We normally will not object to shareholder resolutions requesting the formation
of a committee of independent directors to review and examine executive
compensation.
o Stock Options for Board and Executives
We will generally review the overall impact of stock option plans that in total
offer greater than 25% of shares outstanding because of voting and earnings
dilution.
We will vote on a case-by-case basis option programs that allow the repricing of
underwater options.
In most cases, we will oppose stock option plans that have option exercise
prices below the marketplace on the day of the grant.
Generally, we will support options programs for outside directors subject to the
same constraints previously described.
o Employee Stock Ownership Plan (ESOPs)
We will generally not object to ESOPs created to promote active employee
ownership. However, we will generally oppose any ESOP whose purpose is to
prevent a corporate takeover.
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o Changes to Charter or By-Laws
We will conduct a case-by-case review of the proposed changes with the voting
decision resting on whether the proposed changes are in shareholder's best
interests.
o Confidential Voting
Typically, proxy voting differs from voting in political elections in that the
company is made aware of shareholder votes as they are cast. This enables
management to contact dissenting shareholders in an attempt to get them to
change their votes.
We generally will not object to confidential voting.
o Equal Access to Proxy
Equal access proposals ask companies to give shareholders access to proxy
materials to state their views on contested issues, including director
nominations. In some cases they would actually allow shareholders to nominate
directors. Companies suggest that such proposals would make an increasingly
complex process even more burdensome.
In general, we will not oppose resolutions for equal access proposals.
o Golden Parachutes
Golden parachutes are severance payments to top executives who are terminated or
demoted pursuant to a takeover. Companies argue that such provisions are
necessary to keep executives from "jumping ship" during potential takeover
attempts.
We will not object to the right of shareholders to vote on golden parachutes
because they go above and beyond ordinary compensation practices. In evaluating
a particular golden parachute, we will examine if considered material total
management compensation, the employees covered by the plan, and the quality of
management and all other factors deemed pertinent.
MERGERS AND ACQUISITIONS
o Mergers, Restructuring and Spin-offs
A merger, restructuring, or spin-off in some way affects a change in control of
the company's assets. In evaluating the merit of each issue, we will consider
the terms of each proposal. This will include an analysis of the potential
long-term value of the investment.
On a case by case basis, we will review management proposals for merger or
restructuring to determine the extent to which the transaction appears to offer
fair value and other proxy voting policies stated are not violated.
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o Poison Pills
Poison pills (or shareholder rights plans) are triggered by an unwanted takeover
attempt and cause a variety of events to occur which may make the company
financially less attractive to the suitor. Typically, directors have enacted
these plans without shareholder approval. Most poison pill resolutions deal with
putting poison pills up for a vote or repealing them altogether.
We typically will not object to most proposals to put rights plans up for a
shareholder vote. In general, poison pills will be reviewed for the additional
value provided to shareholders, if any.
o Anti-Greenmail Proposals
Greenmail is the payment a corporate raider receives in exchange for his/her
shares. This payment is usually at a premium to the market price, so while
greenmail can ensure the continued independence of the company, it discriminates
against other shareholders.
We generally will support anti-greenmail provisions.
o Opt-Out of State Anti-takeover Law
A strategy for dealing with anti-takeover issues has been a shareholder
resolution asking a company to opt-out of a particular state's anti-takeover
laws.
We generally will not object to bylaws changes requiring a company to opt out of
state anti-takeover laws. Resolutions requiring companies to opt into state
anti-takeover statutes generally will be subject to further review for
appropriateness.
o Other Situations
In the event an issue is not addressed in the above guidelines, we will
determine on a case-by-case basis any proposals that may arise from management
or shareholders. To the extent that a proposal from management does not infringe
on shareholder rights, we will generally support management's position. We may
also elect to abstain or not vote on any given matter.
January 1, 2004
44
ISS Proxy Voting Guidelines
Summary
The following is a condensed version of all proxy voting recommendations
contained in The ISS Proxy Voting Manual.
1. Operational Items
Adjourn Meeting
Generally vote AGAINST proposals to provide management with the authority to
adjourn an annual or special meeting absent compelling reasons to support the
proposal.
Amend Quorum Requirements
Vote AGAINST proposals to reduce quorum requirements for shareholder meetings
below a majority of the shares outstanding unless there are compelling reasons
to support the proposal.
Amend Minor Bylaws
Vote FOR bylaw or charter changes that are of a housekeeping nature (updates or
corrections).
Change Company Name
Vote FOR proposals to change the corporate name.
Change Date, Time, or Location of Annual Meeting
Vote FOR management proposals to change the date/time/location of the annual
meeting unless the proposed change is unreasonable.
Vote AGAINST shareholder proposals to change the date/time/location of the
annual meeting unless the current scheduling or location is unreasonable.
Ratifying Auditors
Vote FOR proposals to ratify auditors, unless any of the following apply:
o An auditor has a financial interest in or association with the company, and is
therefore not independent o Fees for non-audit services are excessive, or
o There is reason to believe that the independent auditor has rendered an
opinion which is neither accurate nor indicative of the company's financial
position.
Vote CASE-BY-CASE on shareholder proposals asking companies to prohibit or limit
their auditors from engaging in non-audit services.
Vote CASE-BY-CASE on shareholder proposals asking for audit firm rotation,
taking into account the tenure of the audit firm, the length of rotation
specified in the proposal, any significant audit-related issues at the company,
and whether the company has a periodic renewal process where the auditor is
evaluated for both audit quality and competitive price.
Transact Other Business
Vote AGAINST proposals to approve other business when it appears as a voting
item.
2. Board of Directors
Voting on Director Nominees in Uncontested Elections
Votes on director nominees should be made on a CASE-BY-CASE basis, examining the
45
following factors: composition of the board and key board committees, attendance
at board meetings, corporate governance provisions and takeover activity,
long-term company performance relative to a market index, directors' investment
in the company, whether the chairman is also serving as CEO, and whether a
retired CEO sits on the board.
However, there are some actions by directors that should result in votes being
WITHHELD. These instances include directors who:
o Attend less than 75 percent of the board and committee meetings without a
valid excuse
o Implement or renew a dead-hand or modified dead-hand poison pill
o Ignore a shareholder proposal that is approved by a majority of the shares
outstanding
o Ignore a shareholder proposal that is approved by a majority of the votes cast
for two consecutive years
o Failed to act on takeover offers where the majority of the shareholders
tendered their shares
o Are inside directors or affiliated outsiders and sit on the audit,
compensation, or nominating committees
o Are inside directors or affiliated outsiders and the full board serves as the
audit, compensation, or nominating committee or the company does not have one of
these committees
o Are audit committee members and the non-audit fees paid to the auditor are
excessive.
o Are inside directors or affiliated outside directors and the full
board is less than majority independent
o Sit on more than six boards
o Are members of a compensation committee that has allowed a pay- for-
performance disconnect as described in Section 8 (Executive and Director
Compensation). In addition, directors who enacted egregious corporate governance
policies or failed to replace management as appropriate would be subject to
recommendations to WITHHOLD votes.
Age Limits
Vote AGAINST shareholder or management proposals to limit the tenure of outside
directors either through term limits or mandatory retirement ages.
Board Size
Vote FOR proposals seeking to fix the board size or designate a range for the
board size.
Vote AGAINST proposals that give management the ability to alter the size of the
board outside of a specified range without shareholder approval.
Classification/Declassification of the Board
Vote AGAINST proposals to classify the board.
Vote FOR proposals to repeal classified boards and to elect all directors
annually.
Cumulative Voting
Vote AGAINST proposals to eliminate cumulative voting.
Vote proposals to restore or permit cumulative voting on a CASE-BY-CASE basis
relative to the company's other governance provisions.
Director and Officer Indemnification and Liability Protection
Proposals on director and officer indemnification and liability
protection should be evaluated on a CASE-BY-CASE basis, using Delaware law as
the standard.
Vote AGAINST proposals to eliminate entirely directors' and officers' liability
for monetary damages for violating the duty of care.
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Vote AGAINST indemnification proposals that would expand coverage beyond just
legal expenses to actions, such as negligence, that are more serious violations
of fiduciary obligation than mere carelessness.
Vote FOR only those proposals providing such expanded coverage in cases when a
director's or officer's legal defense was unsuccessful if both of the following
apply:
o The director was found to have acted in good faith and in a manner that he
reasonably believed was in the best interests of the company, and
o Only if the director's legal expenses would be covered.
Establish/Amend Nominee Qualifications
Vote CASE-BY-CASE on proposals that establish or amend director qualifications.
Votes should be based on how reasonable the criteria are and to what degree they
may preclude dissident nominees from joining the board.
Vote AGAINST shareholder proposals requiring two candidates per board seat.
Filling Vacancies/Removal of Directors
Vote AGAINST proposals that provide that directors may be removed only for
cause.
Vote FOR proposals to restore shareholder ability to remove directors with or
without cause.
Vote AGAINST proposals that provide that only continuing directors may elect
replacements to fill board vacancies.
Vote FOR proposals that permit shareholders to elect directors to fill board
vacancies. Independent Chairman (Separate Chairman/CEO) Generally vote FOR
shareholder proposals requiring the position of chairman be filled by an
independent director unless there are compelling reasons to recommend against
the proposal, such as a counterbalancing governance structure. This should
include all of the following:
o Designated lead director, elected by and from the independent board members
with clearly delineated and comprehensive duties
o Two-thirds independent board
o All- independent key committees
o Established governance guidelines
Majority of Independent Directors/Establishment of Committees
Vote FOR shareholder proposals asking that a majority or more of directors be
independent unless the board composition already meets the proposed threshold by
ISS's definition of independence.
Vote FOR shareholder proposals asking that board audit, compensation, and/or
nominating committees be composed exclusively of independent directors if they
currently do not meet that standard.
Open Access
Vote CASE-BY-CASE on shareholder proposals asking for open access taking into
account the ownership threshold specified in the proposal and the proponent's
rationale for targeting the company in terms of board and director conduct.
Stock Ownership Requirements
Generally vote AGAINST shareholder proposals that mandate a minimum amount of
stock that directors must own in order to qualify as a director or to remain on
the board.
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While ISS favors stock ownership on the part of directors, the company should
determine the appropriate ownership requirement.
Vote CASE-BY-CASE shareholder proposals asking that the company adopt a holding
or retention period for its executives (for holding stock after the vesting or
exercise of equity awards), taking into account any stock ownership requirements
or holding period/retention ratio already in place and the actual ownership
level of executives.
Term Limits
Vote AGAINST shareholder or management proposals to limit the tenure of outside
directors either through term limits or mandatory retirement ages.
3. Proxy Contests
Voting for Director Nominees in Contested Elections
Votes in a contested election of directors must be evaluated on a CASE-BY-CASE
basis, considering the following factors:
o Long-term financial performance of the target company relative to its industry
o Management's track record
o Background to the proxy contest
o Qualifications of director nominees (both slates)
o Evaluation of what each side is offering shareholders as well as the
likelihood that the proposed objectives and goals can be met; and stock
ownership positions.
Reimbursing Proxy Solicitation Expenses
Voting to reimburse proxy solicitation expenses should be analyzed on a CASE-BY-
CASE basis. In cases where ISS recommends in favor of the dissidents, we also
recommend voting for reimbursing proxy solicitation expenses.
Confidential Voting
Vote FOR shareholder proposals requesting that corporations adopt confidential
voting, use independent vote tabulators and use independent inspectors of
election, as long as the proposal includes a provision for proxy contests as
follows:
In the case of a contested election, management should be permitted to request
that the dissident group honor its confidential voting policy. If the dissidents
agree, the policy remains in place. If the dissidents will not agree, the
confidential voting policy is waived. Vote FOR management proposals to adopt
confidential voting.
4. Anti-takeover Defenses and Voting Related Issues
Advance Notice Requirements for Shareholder Proposals/Nominations
Votes on advance notice proposals are determined on a CASE-BY-CASE basis, giving
support to those proposals that allow shareholders to submit proposals as close
to the meeting date as reasonably possible and within the broadest window
possible.
Amend Bylaws without Shareholder Consent
Vote AGAINST proposals giving the board exclusive authority to amend the bylaws.
Vote FOR proposals giving the board the ability to amend the bylaws in addition
to shareholders.
Poison Pills
Vote FOR shareholder proposals requesting that the company submit its poison
pill to a shareholder vote or redeem it.
48
Vote FOR shareholder proposals asking that any future pill be put to a
shareholder vote.
Shareholder Ability to Act by Written Consent
Vote AGAINST proposals to restrict or prohibit shareholder ability to take
action by written consent. Vote FOR proposals to allow or make easier
shareholder action by written consent.
Shareholder Ability to Call Special Meetings
Vote AGAINST proposals to restrict or prohibit shareholder ability to call
special meetings.
Vote FOR proposals that remove restrictions on the right of shareholders to act
independently of management.
Supermajority Vote Requirements
Vote AGAINST proposals to require a supermajority shareholder vote. Vote FOR
proposals to lower supermajority vote requirements.
5. Mergers and Corporate Restructurings
Appraisal Rights
Vote FOR proposals to restore, or provide shareholders with, rights of
appraisal.
Asset Purchases Vote CASE-BY-CASE on asset purchase proposals,
considering the following factors:
o Purchase price o Fairness opinion
o Financial and strategic benefits
o How the deal was negotiated
o Conflicts of interest
o Other alternatives for the business
o Noncompletion risk.
Asset Sales
Votes on asset sales should be determined on a CASE-BY-CASE basis, considering
the following factors:
o Impact on the balance sheet/working capital
o Potential elimination of diseconomies
o Anticipated financial and operating benefits
o Anticipated use of funds
o Value received for the asset
o Fairness opinion
o How the deal was negotiated
o Conflicts of interest.
Bundled Proposals
Review on a CASE-BY-CASE basis bundled or "conditioned" proxy proposals. In the
case of items that are conditioned upon each other, examine the benefits and
costs of the packaged items. In instances when the joint effect of the
conditioned items is not in shareholders' best interests, vote against the
proposals. If the combined effect is positive, support such proposals.
Conversion of Securities
Votes on proposals regarding conversion of securities are determined on a
49
CASE-BY-CASE basis. When evaluating these proposals the investor should review
the dilution to existing shareholders, the conversion price relative to market
value, financial issues, control issues, termination penalties, and conflicts of
interest.
Vote FOR the conversion if it is expected that the company will be subject to
onerous penalties or will be forced to file for bankruptcy if the transaction is
not approved.
Corporate Reorganization/Debt Restructuring/Prepackaged Bankruptcy Plans/Reverse
Leveraged Buyouts/Wrap Plans
Votes on proposals to increase common and/or preferred shares and to issue
shares as part of a debt restructuring plan are determined on a CASE-BY-CASE
basis, taking into consideration the following:
o Dilution to existing shareholders' position
o Terms of the offer
o Financial issues
o Management's efforts to pursue other alternatives
o Control issues
o Conflicts of interest.
Vote FOR the debt restructuring if it is expected that the company will file for
bankruptcy if the transaction is not approved.
Formation of Holding Company
Votes on proposals regarding the formation of a holding company should be
determined on a CASE-BY-CASE basis, taking into consideration the following:
o The reasons for the change
o Any financial or tax benefits
o Regulatory benefits
o Increases in capital structure
o Changes to the articles of incorporation or bylaws of the company. Absent
compelling financial reasons to recommend the transaction, vote AGAINST the
formation of a holding company if the transaction would include either of the
following:
o Increases in common or preferred stock in excess of the allowable maximum as
calculated by the ISS Capital Structure model
o Adverse changes in shareholder rights
Going Private Transactions (LBOs and Minority Squeezeouts)
Vote going private transactions on a CASE-BY-CASE basis, taking into account the
following: offer price/premium, fairness opinion, how the deal was negotiated,
conflicts of interest, other alternatives/offers considered, and noncompletion
risk. Joint Ventures Votes CASE-BY-CASE on proposals to form joint ventures,
taking into account the following: percentage of assets/business contributed,
percentage ownership, financial and strategic benefits, governance structure,
conflicts of interest, other alternatives, and noncompletion risk.
Liquidations V
otes on liquidations should be made on a CASE-BY-CASE basis after reviewing
management's efforts to pursue other alternatives, appraisal value of assets,
and the compensation plan for executives managing the liquidation.
Vote FOR the liquidation if the company will file for bankruptcy if the proposal
is not approved.
Mergers and Acquisitions/ Issuance of Shares to Facilitate Merger or Acquisition
50
Votes on mergers and acquisitions should be considered on a CASE-BY-CASE basis,
determining whether the transaction enhances shareholder value by giving
consideration to the following:
o Prospects of the combined company, anticipated financial and operating
benefits
o Offer price
o Fairness opinion
How the deal was negotiated
o Changes in corporate governance
o Change in the capital structure
o Conflicts of interest.
Private Placements/Warrants/Convertible Debentures
Votes on proposals regarding private placements should be determined on a CASE-
BY-CASE basis. When evaluating these proposals the investor should review:
dilution to existing shareholders' position, terms of the offer, financial
issues, management's efforts to pursue other alternatives, control issues, and
conflicts of interest. Vote FOR the private placement if it is expected that the
company will file for bankruptcy if the transaction is not approved.
Spinoffs
Votes on spinoffs should be considered on a CASE-BY-CASE basis depending on:
o Tax and regulatory advantages
o Planned use of the sale proceeds
o Valuation of spinoff
o Fairness opinion
o Benefits to the parent company
o Conflicts of interest
o Managerial incentives
o Corporate governance changes
o Changes in the capital structure.
Value Maximization Proposals
Vote CASE-BY-CASE on shareholder proposals seeking to maximize shareholder value
byhiring a financial advisor to explore strategic alternatives, selling the
company or liquidating the company and distributing the proceeds to
shareholders. These proposals should be evaluated based on the following
factors: prolonged poor performance with no turnaround in sight, signs of
entrenched board and management, strategic plan in place for improving value,
likelihood of receiving reasonable value in a sale or dissolution, and whether
company is actively exploring its strategic options, including retaining a
financial advisor.
6. State of Incorporation
Control Share Acquisition Provisions
Vote FOR proposals to opt out of control share acquisition statutes unless doing
so would enable the completion of a takeover that would be detrimental to
shareholders.
Vote AGAINST proposals to amend the charter to include control share acquisition
provisions.
Vote FOR proposals to restore voting rights to the control shares.
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Control Share Cashout Provisions
Vote FOR proposals to opt out of control share cashout statutes. Disgorgement
Provisions Vote FOR proposals to opt out of state disgorgement provisions.
Fair Price Provisions
Vote proposals to adopt fair price provisions on a CASE-BY-CASE basis,
evaluating factors such as the vote required to approve the proposed
acquisition, the vote required to repeal the fair price provision, and the
mechanism for determining the fair price. Generally, vote AGAINST fair price
provisions with shareholder vote requirements greater than a majority of
disinterested shares.
Freezeout Provisions
Vote FOR proposals to opt out of state freezeout provisions.
Greenmail
Vote FOR proposals to adopt antigreenmail charter of bylaw amendments or
otherwise restrict a company's ability to make greenmail payments. Review on a
CASE-BY-CASE basis antigreenmail proposals when they are bundled with other
charter or bylaw amendments.
Reincorporation Proposals
Proposals to change a company's state of incorporation should be evaluated on a
CASE-BY-CASE basis, giving consideration to both financial and corporate
governance concerns, including the reasons for reincorporating, a comparison of
the governance provisions, and a comparison of the jurisdictional laws.
Vote FOR reincorporation when the economic factors outweigh any neutral or
negative governance changes.
Stakeholder Provisions
Vote AGAINST proposals that ask the board to consider nonshareholder
constituencies or other nonfinancial effects when evaluating a merger or
business combination.
State Antitakeover Statutes
Review on a CASE-BY-CASE basis proposals to opt in or out of state takeover
statutes (including control share acquisition statutes, control share cash-out
statutes, freezeout provisions, fair price provisions, stakeholder laws, poison
pill endorsements, severance pay and labor contract provisions, antigreenmail
provisions, and disgorgement provisions).
7. Capital Structure
Adjustments to Par Value of Common Stock
Vote FOR management proposals to reduce the par value of common stock.
Common Stock Authorization
Votes on proposals to increase the number of shares of common stock authorized
for issuance are determined on a CASE-BY-CASE basis using a model developed by
ISS. Vote AGAINST proposals at companies with dual-class capital structures to
increase the number of authorized shares of the class of stock that has superior
voting rights.
Vote FOR proposals to approve increases beyond the allowable increase when a
company's shares are in danger of being delisted or if a company's ability to
continue to operate as a going concern is uncertain.
Dual-class Stock
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Vote AGAINST proposals to create a new class of common stock with superior
voting rights.
Vote FOR proposals to create a new class of nonvoting or subvoting common stock
if:
o It is intended for financing purposes with minimal or no dilution to
current shareholders
o It is not designed to preserve the voting power of an insider or significant
shareholder Issue Stock for Use with Rights Plan
Vote AGAINST proposals that increase authorized common stock for the explicit
purpose of implementing a shareholder rights plan (poison pill).
Preemptive Rights
Review on a CASE-BY-CASE basis shareholder proposals that seek preemptive
rights.
In evaluating proposals on preemptive rights, consider the size of a company,
the characteristics of its shareholder base, and the liquidity of the stock.
Preferred Stock
Vote AGAINST proposals authorizing the creation of new classes of preferred
stock with unspecified voting, conversion, dividend distribution, and other
rights ("blank check" preferred stock).
Vote FOR proposals to create "declawed" blank check preferred stock (stock that
cannot be used as a takeover defense).
Vote FOR proposals to authorize preferred stock in cases where the company
specifies the voting, dividend, conversion, and other rights of such stock and
the terms of the preferred stock appear reasonable.
Vote AGAINST proposals to increase the number of blank check preferred stock
authorized for issuance when no shares have been issued or reserved for a
specific purpose.
Vote CASE-BY-CASE on proposals to increase the number of blank check preferred
shares after analyzing the number of preferred shares available for issue given
a company's industry and performance in terms of shareholder returns.
Recapitalization
Votes CASE-BY-CASE on recapitalizations (reclassifications of securities),
taking into account the following: more simplified capital structure, enhanced
liquidity, fairness of conversion terms, impact on voting power and dividends,
reasons for the reclassification, conflicts of interest, and other alternatives
considered.
Reverse Stock Splits
Vote FOR management proposals to implement a reverse stock split when the number
of authorized shares will be proportionately reduced.
Vote FOR management proposals to implement a reverse stock split to avoid
delisting. Votes on proposals to implement a reverse stock split that do not
proportionately reduce the number of shares authorized for issue should be
determined on a CASE-BY-CASE basis using a model developed by ISS.
Share Repurchase Programs
Vote FOR management proposals to institute open- market share repurchase plans
in which all shareholders may participate on equal terms.
Stock Distributions: Splits and Dividends
Vote FOR management proposals to increase the common share authorization for a
stock split or share dividend, provided that the increase in authorized shares
would not result in an excessive number of shares available for issuance as
determined using a model developed by ISS.
Tracking Stock
Votes on the creation of tracking stock are determined on a CASE-BY-CASE basis,
weighing the strategic value of the transaction against such factors as: adverse
governance changes, excessive increases in authorized capital stock, unfair
method of distribution, diminution of voting rights, adverse conversion
features, negative impact on stock option plans, and other alternatives such as
spinoff.
8. Executive and Director Compensation
Votes with respect to equity-based compensation plans should be determined on a
CASE-BY-CASE basis. Our methodology for reviewing compensation plans primarily
focuses on the transfer of shareholder wealth (the dollar cost of pay plans to
shareholders instead of simply focusing on voting power dilution). Using the
expanded compensation data disclosed under the SEC's rules, ISS will value every
award type. ISS will include in its analyses an estimated dollar cost for the
proposed plan and all continuing plans. This cost, dilution to shareholders'
equity, will also be expressed as a percentage figure for the transfer of
shareholder wealth, and will be considered along with dilution to voting power.
Once ISS determines the estimated cost of the plan, we compare it to a
company-specific dilution cap. Our model determines a company-specific allowable
pool of shareholder wealth that may be transferred from the company to plan
participants, adjusted for:
o Long-term corporate performance (on an absolute basis and relative to a
standard industry peer group and an appropriate market index),
o Cash compensation, and
o Categorization of the company as emerging, growth, or mature.
These adjustments are pegged to market capitalization.
Vote AGAINST plans that expressly permit the repricing of underwater stock
options without shareholder approval.
Generally vote AGAINST plans in which the CEO participates if there is a
disconnect between the CEO's pay and company performance (an increase in pay and
a decrease in performance) and the main source of the pay increase (over half)
is equity-based. A decrease in performance is based on negative one- and three-
year total shareholder returns. An increase in pay is based on the CEO's total
direct compensation (salary, cash bonus, present value of stock options, face
value of restricted stock, face value of long-term incentive plan payouts, and
all other compensation) increasing over the previous year. Also WITHHOLD votes
from the Compensation Committee members.
Director Compensation
Votes on compensation plans for directors are determined on a CASE-BY-CASE
basis, using a proprietary, quantitative model developed by ISS.
Stock Plans in Lieu of Cash
Votes for plans that provide participants with the option of taking all or a
portion of their cash compensation in the form of stock are determined on a
CASE-BY-CASE basis.
Vote FOR plans which provide a dollar- for-dollar cash for stock exchange.
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Votes for plans that do not provide a dollar-for-dollar cash for stock exchange
should be determined on a CASE-BY-CASE basis using a proprietary, quantitative
model developed by ISS.
Director Retirement Plans
Vote AGAINST retirement plans for nonemployee directors.
Vote FOR shareholder proposals to eliminate retirement plans for nonemployee
directors.
Management Proposals Seeking Approval to Reprice Options
Votes on management proposals seeking approval to reprice options are evaluated
on a CASE-BY-CASE basis giving consideration to the following:
o Historic trading patterns
o Rationale for the repricing
o Value-for-value exchange
o Option vesting
o Term of the option
o Exercise price
o Participation.
Employee Stock Purchase Plans
Votes on employee stock purchase plans should be determined on a CASE-BY-CASE
basis. Vote FOR employee stock purchase plans where all of the following apply:
o Purchase price is at least 85 percent of fair market value
o Offering period is 27 months or less, and
o The number of shares allocated to the plan is ten percent or less of the
outstanding shares Vote AGAINST employee stock purchase plans where any of the
following apply:
o Purchase price is less than 85 percent of fair market value, or
o Offering period is greater than 27 months, or
o The number of shares allocated to the plan is more than ten percent of the
outstanding shares
Incentive Bonus Plans and Tax Deductibility Proposals (OBRA-Related Compensation
Proposals)
Vote FOR proposals that simply amend shareholder-approved compensation plans to
include administrative features or place a cap on the annual grants any one
participant may receive to comply with the provisions of Section 162(m). Vote
FOR proposals to add performance goals to existing compensation plans to comply
with the provisions of Section 162(m) unless they are clearly inappropriate.
Votes to amend existing plans to increase shares reserved and to qualify for
favorable tax treatment under the provisions of Section 162(m) should be
considered on a CASE-BY-CASE basis using a proprietary, quantitative model
developed by ISS. Generally vote FOR cash or cash and stock bonus plans that are
submitted to shareholders for the purpose of exempting compensation from taxes
under the provisions of Section 162(m) if no increase in shares is requested.
Employee Stock Ownership Plans (ESOPs)
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Vote FOR proposals to implement an ESOP or increase authorized shares for
existing ESOPs, unless the number of shares allocated to the ESOP is excessive
(more than five percent of outstanding shares.)
401(k) Employee Benefit Plans
Vote FOR proposals to implement a 401(k) savings plan for employees.
Shareholder Proposals Regarding Executive and Director Pay
Generally, vote FOR shareholder proposals seeking additional disclosure of
executive and director pay information, provided the information requested is
relevant to shareholders' needs, would not put the company at a competitive
disadvantage relative to its industry, and is not unduly burdensome to the
company.
Vote AGAINST shareholder proposals seeking to set absolute levels on
compensation or otherwise dictate the amount or form of compensation.
Vote AGAINST shareholder proposals requiring director fees be paid in stock
only.
Vote FOR shareholder proposals to put option repricings to a shareholder vote.
Vote on a CASE-BY-CASE basis for all other shareholder proposals regarding
executive and director pay, taking into account company performance, pay level
versus peers, pay level versus industry, and long term corporate outlook.
Option Expensing
Generally vote FOR shareholder proposals asking the company to expense stock
options, unless the company has already publicly committed to expensing options
by a specific date.
Performance-Based Stock Options
Generally vote FOR shareholder proposals advocating the use of performance-based
stock options (indexed, premium-priced, and performance-vested options), unless:
o The proposal is overly restrictive (e.g., it mandates that awards to all
employees must be performance-based or all awards to top executives must be a
particular type, such as indexed options)
o The company demonstrates that it is using a substantial portion of performance
- -based awards for its top executives
Golden Parachutes and Executive Severance Agreements
Vote FOR shareholder proposals to require golden parachutes or executive
severance agreements to be submitted for shareholder ratification, unless the
proposal requires shareholder approval prior to entering into employment
contracts.
Vote on a CASE-BY-CASE basis on proposals to ratify or cancel golden parachutes.
An acceptable parachute should include the following:
o The parachute should be less attractive than an ongoing employment opportunity
with the firm
o The triggering mechanism should be beyond the control of management
o The amount should not exceed three times base salary plus guaranteed benefits
Pension Plan Income Accounting
Generally vote FOR shareholder proposals to exclude pension plan income in the
calculation of earnings used in determining executive bonuses/compensation.
Supplemental Executive Retirement Plans (SERPs)
Generally vote FOR shareholder proposals requesting to put extraordinary
benefits contained in SERP agreements to a shareholder vote unless the company's
executive pension plans do not contain excessive benefits beyond what is offered
under employee-wide plans.
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9. Social and Environmental Issues CONSUMER ISSUES AND PUBLIC SAFETY
Animal Rights
Vote CASE-BY-CASE on proposals to phase out theuse of animals in product
testing, taking into account:
o The nature of the product and the degree that animal testing is necessary or
federally mandated (such as medical products),
o The availability and feasibility of alternatives to animal testing to ensure
product safety, and
o The degree that competitors are using animal- free testing. Generally vote FOR
proposals seeking a report on the company's animal welfare standards unless:
o The company has already published a set of animal welfare standards and
monitors compliance
o The company's standards are comparable to or better than those of peer firms,
and
o There are no serious controversies surrounding the company's treatment of
animals
Drug Pricing
Vote CASE-BY-CASE on proposals asking the company to implement price restraints
on pharmaceutical products, taking into account:
o Whether the proposal focuses on a specific drug and region o
Whether the economic benefits of providing subsidized drugs (e.g., public
goodwill) outweigh the costs in terms of reduced profits, lower R&D spending,
and harm to competitiveness
o The extent that reduced prices can be offset through the company's marketing
budget without affecting R&D spending
o Whether the company already limits price increases of its products
o Whether the company already contributes life-saving pharmaceuticals to the
needy and Third World countries
o The extent that peer companies implement price restraints
Genetically Modified Foods
Vote AGAINST proposals asking companies to voluntarily label genetically
engineered (GE) ingredients in their products or alternatively to provide
interim labeling and eventually eliminate GE ingredients due to the costs and
feasibility of labeling and/or phasing out the use of GE ingredients.
Vote CASE-BY-CASE on proposals asking for a report on the feasibility of
labeling products containing GE ingredients taking into account:
o The relevance of the proposal in terms of the company's business and the
proportion of it affected by the resolution
o The quality of the company's disclosure on GE product labeling and related
voluntary initiatives and how this disclosure compares with peer company
disclosure
o Company's current disclosure on the feasibility of GE product labeling,
including information on the related costs
o Any voluntary labeling initiatives undertaken or considered by the company.
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Vote CASE-BY-CASE on proposals asking for the preparation of a report on the
financial, legal, and environmental impact of continued use of GE ingredients/
seeds.
o The relevance of the proposal in terms of the company's business and the
proportion of it affected by the resolution
o The quality of the company's disclosure on risks related to GE product use and
how this disclosure compares with peer company disclosure
o The percentage of revenue derived from international operations, particularly
in Europe, where GE products are more regulated and consumer backlash is more
pronounced. Vote AGAINST proposals seeking a report on the health and
environmental effects of genetically modified organisms (GMOs). Health studies
of this sort are better undertaken by regulators and the scientific community.
Vote AGAINST proposals to completely phase out GE ingredients from the company's
products or proposals asking for reports outlining the steps necessary to
eliminate GE ingredients from the company's products. Such resolutions
presuppose that there are proven health risks to GE ingredients (an issue better
left to federal regulators) that outweigh the economic benefits derived from
biotechnology.
Handguns
Generally vote AGAINST requests for reports on a company's policies aimed at
curtailing gun violence in the United States unless the report is confined to
product safety information. Criminal misuse of firearms is beyond company
control and instead falls within the purview of law enforcement agencies.
HIV/AIDS
Vote CASE-BY-CASE on requests for reports outlining the impact of the health
pandemic (HIV/AIDS, malaria and tuberculosis) on the company's Sub-Saharan
operations and how the company is responding to it, taking into account:
o The nature and size of the company's operations in Sub-Saharan Africa and
the number of local employees
o The company's existing healthcare policies, including benefits and healthcare
access for local workers
o Company donations to healthcare providers operating in the region
Vote CASE-BY-CASE on proposals asking companies to establish, implement, and
report on a standard of response to the HIV/AIDS, tuberculosis and malaria
health pandemic in Africa and other developing countries, taking into account:
o The company's actions in developing countries to address HIV/AIDS,
tuberculosis and malaria, including donations of pharmaceuticals and work with
public health organizations
o The company's initiatives in this regard compared to those of peer companies
Predatory Lending
Vote CASE-BY CASE on requests for reports on the company's procedures for
preventing predatory lending, including the establishment of a board committee
for oversight, taking into account: o Whether the company has adequately
disclosed mechanisms in place to prevent abusive lending practices
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o Whether the company has adequately disclosed the financial risks of its
subprime business o Whether the company has been subject to violations of
lending laws or serious lending controversies o Peer companies' policies to
prevent abusive lending practices.
Tobacco
Most tobacco-related proposals should be evaluated on a CASE-BY-CASE basis,
taking into account the following factors:
Second-hand smoke:
o Whether the company complies with all local ordinances and regulations
o The degree that voluntary restrictions beyond those mandated by law might hurt
the company's competitiveness
o The risk of any health-related liabilities.
Advertising to youth:
o Whether the company complies with federal, state, and local laws on the
marketing of tobacco or if it has been fined for violations o Whether the
company has gone as far as peers in restricting advertising o Whether the c
ompany entered into the Master Settlement Agreement, which restricts marketing
of tobacco to youth o Whether restrictions on marketing to youth extend to
foreign countries
o Cease production of tobacco-related products or avoid selling products to
tobacco companies:
o The percentage of the company's business affected
o The economic loss of eliminating the business versus any potential tobacco-
related liabilities.
Spinoff tobacco-related businesses:
o The percentage of the company's business affected
o The feasibility of a spinoff
o Potential future liabilities related to the company's tobacco business.
Stronger product warnings:
Vote AGAINST proposals seeking stronger product warnings. Such decisions are
better left to public health authorities.
Investment in tobacco stocks:
Vote AGAINST proposals prohibiting investment in tobacco equities. Such
decisions are better left to portfolio managers.
ENVIRONMENT AND ENERGY
Arctic National Wildlife Refuge
Vote CASE-BY-CASE on reports outlining potential environmental damage from
drilling in the Arctic National Wildlife Refuge (ANWR), taking into account:
o Whether there are publicly available environmental impact reports
o Whether the company has a poor environmental track record, such as violations
of federal and state regulations or accidental spills
o The current status of legislation regarding drilling in ANWR.
CERES Principles
Vote CASE-BY-CASE on proposals to adopt the CERES Principles, taking into
account:
o The company's current environmental disclosure beyond legal requirements,
including environmental health and safety (EHS) audits and reports that may
59
duplicate CERES o The company's environmental performance record, including
violations of federal and state regulations, level of toxic emissions, and
accidental spills o Environmentally conscious practices of peer companies,
including endorsement of CERES o Costs of membership and implementation.
Environmental-Economic Risk Report
Vote CASE-BY-CASE on proposals requesting reports assessing economic risks of
environmental pollution or climate change, taking into account whether the
company has clearly disclosed the following in its public documents:
o Approximate costs of complying with current or proposed environmental laws
o Steps company is taking to reduce greenhouse gasses or other environmental
pollutants
o Measurements of the company's emissions levels
o Reduction targets or goals for environmental pollutants including greenhouse
gasses
Environmental Reports
enerally vote FOR requests for reports disclosing the company's environmental
policies unless it already has well-documented environmental management systems
that are available to the public. Global Warming Generally vote FOR reports on
the level of greenhouse gas emissions from the company's operations and
products, unless the report is duplicative of the company's current
environmental disclosure and reporting or is not integral to the company's line
of business. However, additional reporting may be warranted if:
o The company's level of disclosure lags that of its competitors, or
o The company has a poor environmental track record, such as violations of
federal and state regulations.
Recycling
Vote CASE-BY-CASE on proposals to adopt a comprehensive recycling strategy,
taking into account: o The nature of the company's business and the percentage
affected
o The extent that peer companies are recycling
o The timetable prescribed by the proposal
o The costs and methods of implementation o Whether the company has a poor
environmental track record, such as violations of federal and state regulations.
Renewable Energy
Vote CASE-BY-CASE on proposals to invest in renewable energy sources, taking
into account:
o The nature of the company's business and the percentage affected
o The extent that peer companies are switching from fossil fuels to cleaner
sources
o The timetable and specific action prescribed by the proposal
o The costs of implementation
o The company's initiatives to address climate change
Generally vote FOR requests for reports on the feasibility of developing
renewable energy sources, unless the report is duplicative of the company's
current environmental disclosure and reporting or is not integral to the
company's line of business.
Sustainability Report
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Generally vote FOR proposals requesting the company to report on its policies
and practices related to social, environmental, and economic sustainability,
unless the company is already reporting on its sustainability initiatives
through existing reports such as:
o A combination of an EHS or other environmental report, code of conduct, and/or
supplier/vendor standards, and equal opportunity and diversity data and
programs, all of which are publicly available, or
o A report based on Global Reporting Initiative (GRI) or similar guidelines.
Vote FOR shareholder proposals asking companies to provide a sustainability
report applying the GRI guidelines unless:
o The company already has a comprehensive sustainability report or equivalent
addressing the essential elements of the GRI guidelines or
o The company has publicly committed to using the GRI format by a specific date
GENERAL CORPORATE ISSUES
Link Executive Compensation to Social Performance
Vote CASE-BY-CASE on proposals to review ways of linking executive compensation
to social factors, such as corporate downsizings, customer or employee
satisfaction, community involvement, human rights, environmental performance,
predatory lending, and executive/employee pay disparities. Such resolutions
should be evaluated in the context of:
o The relevance of the issue to be linked to pay
o The degree that social performance is already included in the company's pay
structure and disclosed
o The degree that social performance is used by peer companies in setting pay
o Violations or complaints filed against the company relating to the particular
social performance measure
o Artificial limits sought by the proposal, such as freezing or capping
executive pay
o Independence of the compensation committee
o Current company pay levels.
Charitable/Political Contributions
Generally vote AGAINST proposals asking the company to affirm political
nonpartisanship in the workplace so long as:
o The company is in compliance with laws governing corporate political
activities, and
o The company has procedures in place to ensure that employee contributions to
company-sponsored political action committees (PACs) are strictly voluntary and
not coercive.
Vote AGAINST proposals to report or publish in newspapers the company's
political contributions. Federal and state laws restrict the amount of corporate
contributions and include reporting requirements.
Vote AGAINST proposals disallowing the company from making political
contributions. Businesses are affected by legislation at the federal, state, and
local level and barring contributions can put the company at a competitive
disadvantage.
Vote AGAINST proposals restricting the company from making charitable
contributions. Charitable contributions are generally useful for assisting
worthwhile causes and for creating goodwill in the community. In the absence of
bad faith, self-dealing, or gross negligence, management should determine which
contributions are in the best interests of the company.
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Vote AGAINST proposals asking for a list of company executives, directors,
consultants, legal counsels, lobbyists, or investment bankers that have prior
government service and whether such service had a bearing on the business of the
company. Such a list would be burdensome to prepare without providing any
meaningful information to shareholders.
LABOR STANDARDS AND HUMAN RIGHTS
China Principles
Vote AGAINST proposals to implement the China Principles unless:
o There are serious controversies surrounding the company's China operations,
and
o The company does not have a code of conduct with standards similar to those
promulgated by the International Labor Organization (ILO).
Country-specific human rights reports
Vote CASE-BY-CASE on requests for reports detailing the company's operations in
a particular country and steps to protect human rights, based on: o The nature
and amount of company business in that country
o The company's workplace code of conduct
o Proprietary and confidential information involved
o Company compliance with U.S. regulations on investing in the country
o Level of peer company involvement in the country.
International Codes of Conduct/Vendor Standards
Vote CASE-BY-CASE on proposals to implement certain human rights standards at
company facilities or those of its suppliers and to commit to outside,
independent monitoring. In evaluating these proposals, the following should be
considered:
o The company's current workplace code of conduct or adherence to other global
standards and the degree they meet the standards promulgated by the proponent
o Agreements with foreign suppliers to meet certain workplace standards
o Whether company and vendor facilities are monitored and how
o Company participation in fair labor organizations
o Type of business
o Proportion of business conducted overseas
o Countries of operation with known human rights abuses
o Whether the company has been recently involved in significant labor and human
rights controversies or violations
o Peer company standards and practices
o Union presence in company's international factories Generally vote FOR reports
outlining vendor standards compliance unless any of the following apply:
o The company does not operate in countries with significant human rights
violations
o The company has no recent human rights controversies or violations, or
o The company already publicly discloses information on its vendor standards
compliance.
MacBride Principles
Vote CASE-BY-CASE on proposals to endorse or increase activity on the MacBride
Principles, taking into account:
o Company compliance with or violations of the Fair Employment Act of 1989
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o Company anti-discrimination policies that already exceed the legal
requirements
o The cost and feasibility of adopting all nine principles
o The cost of duplicating efforts to follow two sets of standards (Fair
Employment and the MacBride Principles)
o The potential for charges of reverse discrimination
o The potential that any company sales or contracts in the rest of the United
Kingdom could be negatively impacted
o The level of the company's investment in Northern Ireland
o The number of company employees in Northern Ireland
o The degree that industry peers have adopted the MacBride Principles
o Applicable state and municipal laws that limit contracts with companies that
have not adopted the MacBride Principles.
MILITARY BUSINESS
Foreign Military Sales/Offsets
Vote AGAINST reports on foreign military sales or offsets. Such disclosures may
involve sensitive and confidential information. Moreover, companies must comply
with government controls and reporting on foreign military sales.
Landmines and Cluster Bombs
Vote CASE-BY-CASE on proposals asking a company to renounce future involvement
in antipersonnel landmine production, taking into account:
o Whether the company has in the past manufactured landmine components
o Whether the company's peers have renounced future production
Vote CASE-BY-CASE on proposals asking a company to renounce future involvement
in cluster bomb production, taking into account:
o What weapons classifications the proponent views as cluster bombs
o Whether the company currently or in the past has manufactured cluster bombs or
their components o The percentage of revenue derived from cluster bomb
manufacturing
o Whether the company's peers have renounced future production
Nuclear Weapons
Vote AGAINST proposals asking a company to cease production of nuclear weapons
components and delivery systems, including disengaging from current and proposed
contracts. Components and delivery systems serve multiple military and non-
military uses, and withdrawal from these contracts could have a negative impact
on the company's business.
Operations in Nations Sponsoring Terrorism (Iran)
Vote CASE-BY-CASE on requests for a board committee review and report outlining
the company's financial and reputational risks from its operations in Iran,
taking into account current disclosure on:
o The nature and purpose of the Iranian operations and the amount of business
involved (direct and indirect revenues and expenses) that could be affected by
political disruption
o Compliance with U.S. sanctions and laws
Spaced-Based Weaponization
Generally vote FOR reports on a company's involvement in spaced-based
weaponization unless:
o The information is already publicly available or
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o The disclosures sought could compromise proprietary information.
WORKPLACE DIVERSITY
Board Diversity
Generally vote FOR reports on the company's efforts to diversify the board,
unless:
o The board composition is reasonably inclusive in relation to companies of
similar size and business or
o The board already reports on its nominating procedures and diversity
initiatives.
Vote CASE-BY-CASE on proposals asking the company to increase the representation
of women and minorities on the board, taking into account:
o The degree of board diversity
o Comparison with peer companies
o Established process for improving board diversity
o Existence of independent nominating committee
o Use of outside search firm o History of EEO violations.
Equal Employment Opportunity (EEO)
Generally vote FOR reports outlining the company's affirmative action
initiatives unless all of the following apply: o The company has well-documented
equal opportunity programs
o The company already publicly reports on its company-wide affirmative
initiatives and provides data on its workforce diversity, and
o The company has no recent EEO-related violations or litigation.
Vote AGAINST proposals seeking information on the diversity efforts of suppliers
and service providers, which can pose a significant cost and administration
burden on the company.
Glass Ceiling
Generally vote FOR reports outlining the company's progress towards the Glass C
eiling Commission's business recommendations, unless:
o The composition of senior management and the board is fairly inclusive
o The company has well-documented programs addressing diversity initiatives and
leadership development
o The company already issues public reports on its company-wide affirmative
initiatives and provides data on its workforce diversity, and
o The company has had no recent, significant EEO-related violations or
litigation
Sexual Orientation
Vote FOR proposals seeking to amend a company's EEO statement in order to
prohibit discrimination based on sexual orientation, unless the change would
result in excessive costs for the company.
Vote AGAINST proposals to extend company benefits to or eliminate benefits from
domestic partners. Benefits decisions should be left to the discretion of the
company.
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Part C. Other Information
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
1. (a) The following audited financial statements of Global Income Fund,
Inc.(the "Fund") are included in the Fund's Annual Report to
Stockholders for the fiscal year ended December 31, 2003, filed
with the Securities and Exchange Commission ("SEC") under Section
30(b)(1) of the Investment Company Act of 1940, as amended ("1940
Act"), and are incorporated in Part C hereof by reference:
Portfolio of Investments, December 31, 2003; Statement of Assets
and Liabilities, December 31, 2003; Statement of Operations for
the fiscal year ended December 31, 2003; Statement of Changes in
Net Assets for the years ended December 31, 2003 and 2002;
Financial Highlights for the periods shown thereon Notes to
Financial Statements; Report of Independent Accountants.
2. (a) (i) Articles of Incorporation incorporated herein by
reference to Registrant's filing on Form N-2, accession
number 0000950172-97-000049, File Nos. 333-46765 and
811-08025, as filed with the Securities and Exchange
Commission on January 23, 1997.
(ii) Articles of Amendment incorporated herein by reference to
Registrant's filing on Form N-2, accession number
0001031235-03-000032, File No. 811-08025, as filed with the
Securities and Exchange Commission on December 10, 2003.
(iii) Articles Supplementary incorporated herein by reference to
Registrant's filing on Form N-2, accession number
0001031235-03-000032, File No. 811-08025, as filed with the
Securities and Exchange Commission on December 10, 2003.
(b) Amended By-Laws incorporated herein by reference to Registrant's
filing on Form N-SAR, accession number 0001031235-03-000022, File
No. 811-08025, as filed with the Securities and Exchange
Commission on August 29, 2003.
(c) Not applicable.
(d) Specimen stock certificate incorporated herein by reference to
Registrant's filing on Form N-2, accession number 0001031235-03-
000032, File No. 811-08025, as filed with the Securities and
Exchange Commission on December 10, 2003.
(e) Dividend Reinvestment Plan (filed herewith).
(f) Not Applicable.
(g) Investment Management Agreement incorporated herein by reference
to Registrant's filing on Form N-2, accession number 0001031235-
03-000032, File No. 811-08025, as filed with the Securities and
Exchange Commission on December 10, 2003.
(h) (i) Form of Subscription Certificate (filed herewith).
(ii) Form of Notice of Guaranteed Delivery (filed herewith).
(iii) Information Agent Agreement (filed herewith).
(iv) Subscription Agent Agreement (filed herewith).
(i) Not Applicable.
(j) Custody Agreement incorporated herein by reference to
Registrant's filing on Form N-SAR, accession number 0001031235-02
-000012, File No. 811-08025, as filed with the Securities and
Exchange Commission on August 29, 2002.
(k) (i) Transfer Agent and Stock Registrar Agreement incorporated
herein by reference to Registrant's filing on Form N-2,
accession number 0001031235-03-000032, File No. 811-08025,
as filed with the Securities and Exchange Commission on
December 10, 2003.
(ii) Committed Credit Facility Agreement incorporated herein by
reference to Registrant's filing on Form N-2, accession
number 0001031235-03-000032, File No.811-08025, as filed
with the Securities and Exchange Commission on December 10,
2003.
(iii) Uncommitted Credit Facility Agreement incorporated herein by
reference to Registrant's filing on Form N-2, accession
number 0001031235-03-000032, File No. 811-08025, as filed
with the Securities and Exchange Commission on December 10,
2003.
(iv) Fund Accounting Agreement incorporated herein by reference
to Registrant's filing on Form N-SAR, accession number
0001031235-02-000012, File No. 811-08025, as filed with the
Securities and Exchange Commission on March 1, 2002.
(l) Opinion of The Law Offices of Stephanie A. Djinis (filed
herewith).
(m) Not applicable.
(n) (i) Consent of Independent Accountants for Registrant (filed
herewith).
(ii) Consent of Kirkpatrick & Lockhart LLP, tax counsel. (filed
herewith)
(o) Not applicable.
(p) Not applicable.
(q) Not applicable.
(r) Code of Ethics incorporated herein by reference to Registrant's filing
on Form N-2, accession number 0001031235-03-000032, File No.
811-08025, as filed with the Securities and Exchange Commission on
December 10, 2003.
Item 25. MARKETING ARRANGEMENTS
None.
Item 26. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the estimated expenses to be incurred in
connection with the offering described in this Registration Statement
- ------------------------------------------------------- ------------------------
Securities and Exchange Commission Registration fees $545
- ------------------------------------------------------- ------------------------
- ------------------------------------------------------- ------------------------
American Stock Exchange additional listing fee $0
- ------------------------------------------------------- ------------------------
- ------------------------------------------------------- ------------------------
Printing (other than stock certificates) $8,000
- ------------------------------------------------------- ------------------------
- ------------------------------------------------------- ------------------------
Accounting fees and expenses $3,000
- ------------------------------------------------------- ------------------------
- ------------------------------------------------------- ------------------------
Legal fees and expenses $87,500
- ------------------------------------------------------- ------------------------
- ------------------------------------------------------- ------------------------
Subscription Agent fee and expenses $8,000
- ------------------------------------------------------- ------------------------
- ------------------------------------------------------- ------------------------
Information Agent fee and expenses $35,000
- ------------------------------------------------------- ------------------------
- ------------------------------------------------------- ------------------------
Miscellaneous $15,460
- ------------------------------------------------------- ------------------------
- ------------------------------------------------------- ------------------------
Total $157,505
- ------------------------------------------------------- ------------------------
ITEM 27. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
Not applicable.
ITEM 28. NUMBER OF HOLDERS OF SECURITIES
Title of Class Number of Record Holders
(as of December 31, 2003)
Shares of Common Stock
$0.01 par value 58
ITEM 29. INDEMNIFICATION
The Registrant is incorporated under Maryland law. Section 2-418 of the
Maryland General Corporation Law requires the Registrant to indemnify its
directors, officers and employees against expenses, including legal fees, in a
successful defense of a civil or criminal proceeding. The law also permits
indemnification of directors, officers, employees and agents unless it is proved
that (a) the act or omission of the person was material and was committed in bad
faith or was the result of active or deliberate dishonesty, (b) the person
received an improper personal benefit in money, property or services or (c) in
the case of a criminal action, the person had reasonable cause to believe that
the act or omission was unlawful.
The Registrant's Articles of Incorporation: (1) provide that, to the
maximum extent permitted by applicable law, a Continuing Director or officer
will not be liable to the Registrant or its stockholders for monetary damages;
(2) require the Registrant to indemnify and advance expenses to its present and
past Continuing Directors, officers, employees, agents, and persons who are
serving or have served at the request of the Registrant as a director, officer,
employee or agent for another entity; (3) provide that the Registrant may
purchase and maintain insurance on behalf of any Continuing Director, officer,
employee or agent of the Registrant and persons who are serving or have served
at the request of the Registrant as a director, officer, employee or agent for
another entity; and (4) require that any repeal or modification of the Articles
of Incorporation or By-laws or adoption or modification of any provision of the
Articles of Incorporation or By-laws inconsistent with the indemnification
provisions, be prospective only to the extent such repeal or modification would,
if applied retrospectively, adversely affect any limitation on the liability of
or indemnification and advance of expenses available to any person covered by
the indemnification provisions of the Articles of Incorporation and By-laws.
Article 8 of the By-Laws sets forth the procedures by which the Registrant
will indemnify its Continuing Directors (as defined in the Articles of
Incorporation), officers, employees and agents, as well as any such persons who
serve or served in a similar capacity for another entity.
The Registrant's Investment Management Agreement between the Registrant and
CEF Advisers, Inc. (the "Investment Manager") provides that the Investment
Manager shall not be liable to the Registrant or any shareholder of the
Registrant for any error of judgment or mistake of law or for any loss suffered
by the Registrant in connection with the matters to which the Investment
Management Agreement relates. However, the Investment Manager is not protected
against any liability to the Registrant by reason of willful misfeasance, bad
faith, or gross negligence in the performance of its duties or by reason of its
reckless disregard of its obligations and duties under the Investment Management
Agreement.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant and the Investment Manager pursuant to the foregoing provisions or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy expressed
in such Act and is, therefore, unenforceable. In the event that a claim for
indemnification for such liabilities (other than payment by the Registrant of
expenses incurred or paid by a director, officer or controlling person of the
Registrant in connection with the successful defense of any action, suit or
proceeding) is asserted against the Registrant by such director, officer or
controlling person in connection with the shares being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in such Act and will be governed by the final adjudication of such
issue.
The Registrant undertakes to carry out all the indemnification provisions
of its Articles of Incorporation and Bylaws and the above-described Investment
Management Agreement in accordance with Investment Company Act Release No. 11330
(September 4, 1980) and successor releases.
ITEM 30. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
The directors and officers of CEF Advisers, Inc., the Investment Manager,
are also directors and officers of Foxby Corp., a registered investment company
managed by the Investment Manager. Previously, the Investment Manager served as
investment adviser to Tuxis Corporation, a registered investment company that is
now internally managed and to Bexil Corporation, a public company; Thomas B.
Winmill and Bassett S. Winmill currently serve as directors of each of those
companies, and Thomas B. Winmill serves as President of Bexil Corporation.
Thomas B. Winmill also serves as President and Director of three other
registered investment companies: Midas Dollar Reserves, Inc., Midas Fund, Inc.
and Midas Special Equities Fund, Inc.
ITEM 31. LOCATION OF ACCOUNTS AND RECORDS
The minute books of Registrant and copies of its filings with the
Commission are located at 11 Hanover Square, New York, NY 10005 (the offices of
the Registrant and its Investment Manager). All other records required by
Section 31(a) of the Investment Company Act of 1940 are located at State Street
Bank and Trust Company, 801 Pennsylvania, Kansas City, MO 64105 (the offices of
the Registrant's Custodian), Unified Fund Services, Inc., 431 N. Pennsylvania
Street, Indianapolis, IN 46204 (the offices of the Registrant's fund accounting
agent) and American Stock Transfer & Trust Company, 59 Maiden Lane, New York, NY
10038 (the offices of the Registrant's transfer agent). Copies of certain of the
records located at the Registrant's Custodian and Transfer Agent are kept at 11
Hanover Square, New York, NY 10005 (the offices of the Registrant and the
Investment Manager).
ITEM 32 MANAGEMENT SERVICES
None.
ITEM 33 UNDERTAKINGS
1. To suspend the offering of shares of common stock covered hereby until
the prospectus contained herein is amended if (a) subsequent to the effective
date of its registration statement, the net asset value per share of common
stock declines more than ten percent from its net asset value per share of
common stock as of the effective date of this registration statement or (b) the
net asset value of its common stock increases by an amount greater than its net
proceeds as stated in the prospectus contained herein.
2. Not applicable.
3. Not applicable.
4. Not applicable.
5. That for the purpose of determining any liability under the Securities
Act of 1933, as amended, the information omitted from the form of prospectus
filed as part of this registration statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the Registrant under Rule 497(h)
under the Securities Act of 1933 shall be deemed to be part of this registration
statement as of the time it was declared effective.
6. To send by first class mail or other mean designed to ensure equally
prompt delivery, within two business days of receipt of a written or oral
request, any Statement of Additional Information or Annual Report.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 (the "Securities
Act") and the Investment Company Act of 1940 (the "Investment Company Act"), the
Registrant has duly caused this Registration Statement to be filed pursuant to
the Securities Act and has duly caused this Amendment to the Registration
Statement to be filed pursuant to the Investment Company Act and to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of New
York, State of New York, on the 25th day of February, 2004.
GLOBAL INCOME FUND, INC.
By: /s/Thomas B. Winmill
--------------------------------
Thomas B. Winmill
President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the date indicated.
Signature Capacity Date
/s/ Thomas B. Winmill on behalf of Director February 27, 2004
Bassett S. Winmill by Power of
Attorney signed 12/11/01
- ---------------------------------
(Bassett S. Winmill)
/s/ Thomas B. Winmill President and February 27, 2004
- -------------------------------- Director
(Thomas B. Winmill)
/s/ Thomas B. Winmill on behalf of Director February 27, 2004
George B. Langa by Power of
Attorney signed 12/11/01
- --------------------------------
(George B. Langa)
/s/ Thomas B. Winmill on behalf of Director February 27, 2004
Peter K. Werner by Power of
Attorney signed 12/11/01
- --------------------------------
(Peter K. Werner)
/s/ Thomas B. Winmill on behalf of Director February 27, 2004
David R. Stack by Power of
Attorney signed 12/11/01
- --------------------------------
(David R. Stack)
/s/ William G. Vohrer Chief Financial February 27, 2004
- -------------------------------- Officer
(William G. Vohrer)
EXHIBIT INDEX
Exhibit
(e) Dividend Reinvestment Plan.
(h) (i) Form of Subscription Certificate.
(ii) Form of Notice of Guaranteed Delivery.
(iii) Information Agent Agreement.
(iv) Subscription Agent Agreement.
(l) Opinion of The Law Offices of Stephanie A. Djinis.
(n) (i) Consent of Independent Accountants for Registrant.
(ii) Consent of Kirkpatrick & Lockhart, tax counsel.