PROSPECTUS
11,403,356 RIGHTS FOR 3,801,119 SHARES
BOULDER GROWTH & INCOME FUND, INC.
COMMON STOCK
The Boulder Growth & Income Fund, Inc. (the "Fund") is issuing non-transferable
rights ("Rights") to its holders of record of shares ("Shares") of common stock
("Common Stock") (such holders, "Common Stockholders"). These Rights will allow
Common Stockholders to subscribe for new Shares of Common Stock. For every three
(3) Rights a Common Stockholder receives, such Common Stockholder will be
entitled to buy one (1) new Share. Each Common Stockholder will receive one
Right for each outstanding Share it owns on August 1, 2007 (the "Record Date").
Fractional Shares will not be issued upon the exercise of the Rights.
Accordingly, the number of Rights to be issued to a Common Stockholder on the
Record Date will be rounded up to the nearest whole number of Rights evenly
divisible by three. Common Stockholders on the Record Date and purchasers of
Rights may purchase Shares not acquired by other Common Stockholders in this
Rights offering (the "Offering"), subject to limitations discussed in this
Prospectus. See "The Offering - Over-Subscription Privilege" below.
The Rights are non-transferable, and may not be purchased or sold. Rights will
expire without residual value at the Expiration Date (defined below). The Rights
will not be listed for trading on the NYSE, and there will not be any market for
trading Rights. The Shares to be issued pursuant to the Offering will be listed
for trading on the NYSE, subject to the NYSE being officially notified of the
issuance of those Shares.
On August 10, 2007, the last reported net asset value ("NAV") per Share was
$8.43 and the last reported sales price per Share on the NYSE was $9.95, which
represents a 18.03% premium to the Fund's NAV per Share. The subscription price
per Share (the "Subscription Price") will be the NAV per Share as calculated at
the close of trading on the date of expiration of the Offering (referred to
herein as the "Expiration Date").
STOCKHOLDERS WHO CHOOSE TO EXERCISE THEIR RIGHTS WILL NOT KNOW THE SUBSCRIPTION
PRICE PER SHARE AT THE TIME THEY EXERCISE SUCH RIGHTS SINCE THE OFFERING WILL
EXPIRE (I.E., CLOSE) PRIOR TO THE AVAILABILITY OF THE FUND'S NAV AND OTHER
RELEVANT MARKET INFORMATION ON THE EXPIRATION DATE. ONCE A STOCKHOLDER
SUBSCRIBES FOR SHARES AND THE FUND RECEIVES PAYMENT OR GUARANTEE OF PAYMENT,
SUCH STOCKHOLDER WILL NOT BE ABLE TO CHANGE ITS DECISION. THE OFFERING WILL
EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON SEPTEMBER 14, 2007 (THE "EXPIRATION
DATE"), UNLESS THE OFFERING IS EXTENDED AS DISCUSSED IN THIS PROSPECTUS.
For more information, please call Morrow & Co., Inc. (the "Information Agent")
toll free at 1-800-607-0088.
The Fund is a registered closed-end, non-diversified management investment
company incorporated under the laws of the State of Maryland. The Fund's
investment objective is total return. The Fund seeks to produce both long-term
capital appreciation through investment in common stocks and high current income
consistent with preservation of capital through investments in income producing
securities. See "Investment Objective and Policies." There can be no assurance
that the Fund's investment objective will be achieved. Boulder Investment
Advisers, LLC ("BIA") and Stewart West Indies Trading Company, Ltd. doing
business as Stewart Investment Advisers ("SIA") (collectively the "Advisers")
act as the investment advisers to the Fund. The address of the Fund and BIA is
2344 Spruce Street, Suite A, Boulder, Colorado 80302. The address for SIA is
Bellerive, Queen Street, St. Peter, Barbados.
AN INVESTMENT IN THE FUND IS NOT APPROPRIATE FOR ALL INVESTORS. NO ASSURANCES
CAN BE GIVEN THAT THE FUND'S INVESTMENT OBJECTIVE WILL BE ACHIEVED. FOR A
DISCUSSION OF CERTAIN RISK FACTORS AND SPECIAL CONSIDERATIONS WITH RESPECT TO
OWNING SHARES OF THE FUND, SEE "RISK FACTORS" ON PAGE 24 OF THIS PROSPECTUS.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
============================== ============================= ============================ ============================
Estimated Subscription Price Estimated Sales Load Estimated Proceeds to the
Fund (2)
============================== ============================= ============================ ============================
============================== ============================= ============================ ============================
Per Share $8.43(1) None $8.43
Total $8.43 None $32,043,430(3)
============================== ============================= ============================ ============================
(1) Since the Subscription Price will not be determined until after printing and
distribution of this Prospectus, the "Estimated Subscription Price" above is an
estimate of the subscription price based on the Fund's per-share NAV at the end
of business on August 10, 2007, the Friday immediately preceding the printing
and distribution of this Prospectus. See "The Offering - Subscription Price" and
"The Offering - Payment For Shares" below.
(2) Proceeds to the Fund before deduction of expenses incurred by the Fund in
connection with the Offering. Offering expenses are estimated to be
approximately $158,100. Funds received by check prior to the final due date of
this Offering will be deposited in a segregated interest-bearing account pending
allocation and distribution of Shares. Interest on subscription monies will be
paid to the Fund regardless of whether Shares are issued by the Fund; interest
will not be used as credit toward the purchase of Shares.
----------------------------------
Trusts and other entities affiliated with the Horejsi family hold 20.8% of the
Common Stock, and certain other persons affiliated with the Fund and the
Advisers (collectively referred to herein as the "Horejsi Affiliates" and more
specifically described on Pages 29 and 37 of this Prospectus and in the
Statement of Additional Information), may be deemed to control the Fund. The
Horejsi Affiliates have indicated that they will fully subscribe in the Primary
Subscription (defined below) on the same terms as other Common Stockholders. The
Horejsi Affiliates may subscribe in the Over-Subscription Privilege (defined
below). See "The Offering - Over-Subscription Privilege" below.
This Prospectus concisely sets forth certain information about the Fund that a
prospective investor should know before investing. Investors are advised to read
and retain it for future reference. A Statement of Additional Information, dated
August 13, 2007 (the "SAI"), containing additional information about the Fund
has been filed with the Securities and Exchange Commission and is incorporated
by reference in its entirety into this Prospectus. A copy of the SAI, the table
of contents of which appears on Page 50 of this Prospectus, may be obtained
without charge by contacting Morrow & Co., Inc., the Fund's Information Agent,
at 1-800-607-0088. The SAI will be sent within two business days of receipt of a
request.
The date of this Prospectus is August 13, 2007
TABLE OF CONTENTS
PROSPECTUS SUMMARY................................................................................................3
IMPORTANT TERMS OF THE OFFERING..................................................................................13
IMPORTANT DATES FOR THE OFFERING.................................................................................13
KEY ELEMENTS OF THE OFFERING.....................................................................................13
FEE TABLE........................................................................................................15
FINANCIAL HIGHLIGHTS.............................................................................................16
THE FUND.........................................................................................................18
USE OF PROCEEDS..................................................................................................18
INVESTMENT OBJECTIVE AND POLICIES................................................................................18
INVESTMENT PHILOSOPHY............................................................................................21
PORTFOLIO CONTENTS...............................................................................................21
RISK FACTORS.....................................................................................................24
THE OFFERING.....................................................................................................29
INFORMATION ABOUT THE FUND.......................................................................................36
MANAGEMENT OF THE FUND...........................................................................................36
OWNERSHIP OF THE FUND BY INDEPENDENT DIRECTORS...................................................................38
FEDERAL INCOME TAX MATTERS.......................................................................................41
DETERMINATION OF NET ASSET VALUE.................................................................................43
CAPITALIZATION OF THE FUND AND OTHER MATTERS.....................................................................43
DIVIDENDS AND DISTRIBUTIONS......................................................................................47
CUSTODIAN AND TRANSFER AGENT.....................................................................................48
LEGAL MATTERS....................................................................................................49
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM....................................................................49
ADDITIONAL INFORMATION...........................................................................................49
PRIVACY PRINCIPLES OF THE FUND...................................................................................49
TABLE OF CONTENTS OF THE STATEMENT OF ADDITIONAL INFORMATION.....................................................50
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 a stockholder or prospective stockholder. To understand the Offering fully,
each stockholder or prospective stockholder should read the entire document
carefully, including the risk factors as set forth below.
The Fund
Boulder Growth & Income Fund, Inc. (the "Fund") is a non-diversified,
closed-end management investment company organized in October 1972 and
began investment activities in January 1974. Shares of common stock, par
value $0.01 per share ("Common Stock"), of the Fund ("Shares") are traded
on the New York Stock Exchange (the "NYSE") under the symbol "BIF." As of
August 10, 2007, the Fund had 11,403,356 Shares and 1,000 shares of auction
market preferred stock outstanding. The average weekly trading volume of
the Shares on the NYSE during the period from July 1, 2007 through July 31,
2007 was 654,570 Shares. As of August 10, 2007, the total net assets of the
Fund were approximately $121.1 million, including $25 million in auction
market preferred stock leverage. The Fund's investment advisers are Boulder
Investment Advisers, LLC ("BIA") and Stewart West Indies Trading Company,
Ltd. d/b/a Stewart Investment Advisers ("SIA") (collectively, the
"Advisers"). The address of the Fund and BIA is 2344 Spruce Street, Suite
A, Boulder, Colorado 80302. The address of SIA is Bellerive, Queen Street,
St. Peter, Barbados.
The Offering
The Fund is issuing to its holders of record of Common Stock ("Common
Stockholders") as of the close of business on August 1, 2007 (the "Record
Date") non-transferable rights ( "Rights") to subscribe for an aggregate of
approximately 3,802,000 Shares of Common Stock (the "Offer"). Common
Stockholders will receive one Right for each outstanding Share held as of
the Record Date. The number of Rights to be issued to a Common Stockholder
on the Record Date will be rounded up to the nearest whole number evenly
divisible by three. For every three Rights that a Common Stockholder
receives, such Common Stockholder may subscribe for one new Share of the
Fund at a subscription price equal to the NAV per Share as calculated at
the close of trading on the date of expiration of the Offering (referred to
herein as the "Expiration Date"). No fractional Shares will be issued. A
Common Stockholder's right to acquire Shares during the period in which
Rights may be exercised (the "Subscription Period") is referred to as the
"Primary Subscription." See "The Offering."
Purpose of the Offering
The Board of Directors of the Fund (the "Board") has determined that it
would be in the best interests of the Fund and its existing stockholders to
increase the assets of the Fund. The primary reasons include:
- The Primary Subscription will provide existing Common Stockholders an
opportunity to purchase additional Shares at a price that is
potentially below market value without incurring any commission or
transaction charges.
- Raising more cash will better position the Fund to take advantage of
investment opportunities that may arise.
- Increasing the Fund's assets will provide the Fund flexibility in
maintaining the Distribution Policy (defined below). The Distribution
Policy permits holders of Common Stock to realize a predictable, but
not assured, level of cash flow and some liquidity periodically with
respect to their Common Stock without having to sell Shares. See "The
Offering - Purpose of the Offering" below.
- Increasing Fund assets may lower the Fund's expenses as a proportion
of net assets because the Fund's fixed costs would be spread over a
larger asset base. There can be no assurance that by increasing the
size of the Fund, the Fund's expense ratio will be lowered.
- Since the Offering will increase the Fund's outstanding Shares and the
liquidity of the Shares, it may increase the number of beneficial
owners of the Shares over the long term, which could increase the
level of market interest in and visibility of the Fund and improve the
trading liquidity of the Shares on the NYSE.
- Increasing the Fund's total assets will reduce the Fund's leverage as
a percentage of assets from 20% to approximately 16% (assuming the
Offering is fully subscribed). The Fund is currently leveraged with
$25 million of Auction Market Preferred Shares (the "AMPS") and the
Fund intends to maintain this amount of leverage. Because leveraging
increases risk, the additional assets from the Offering will mitigate
risks commonly associated with leverage.
- The increase in assets will result in the Fund exceeding the AMPS'
asset-coverage ratio requirements under its Articles Supplementary by
a wider margin, thus giving the Fund greater flexibility to buy and
hold investments without violating those requirements.
Investment Objective and Principal Investment Strategies
The Fund's investment objective is total return. The Fund seeks to produce
both income and long-term capital appreciation by investing in a portfolio
of equity and debt securities. The Fund invests primarily in common stocks,
including dividend paying common stocks such as those issued by utilities,
real estate investment trusts ("REITs") and regulated investment companies
under the Code (as defined below) ("RICs"). The Fund also invests in fixed
income securities such as U.S. government securities, preferred stocks and
bonds. The Fund invests primarily in securities of U.S.-based companies and
to a lesser extent in foreign equity securities and sovereign debt, in each
case denominated in foreign currency. The Fund has no restrictions on its
ability to invest in foreign securities. The Fund is concentrated in real
estate related companies, which means it must invest more than 25% of its
total assets in REITs or the equity or debt securities of companies in or
primarily servicing the real estate industry or deriving a substantial
portion of their revenue from, or having a substantial portion of their
assets invested in, real estate ("Real Estate Related Companies"). No
assurance can be given that the Fund will achieve its investment objective.
See "Investment Objective and Policies."
The Fund is a "non-diversified" investment company, as defined in the
Investment Company Act of 1940, as amended (the "1940 Act"), which means
that it is permitted to invest its assets in a more limited number of
issuers than "diversified" investment companies. A diversified company may
not, with respect to 75% of its total assets, invest more than 5% of its
total assets in the securities of any one issuer and may not own more than
10% of the outstanding voting securities of any one issuer. However, under
Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"),
(A) not more than 25% of the Fund's total assets may be invested in
securities of any one issuer (other than U.S. government securities and
RICs) or of any two or more issuers controlled by the Fund which may be
deemed to be engaged in the same, similar or related trades or businesses;
and (B) with respect to 50% of the total value of the Fund's portfolio, (i)
the Fund must limit to 5% the portion of its assets invested in the
securities of a single issuer (other than U.S. government securities and
RICs), and (ii) the Fund may not own more than 10% of the outstanding
voting securities of any one issuer (other than U.S. government securities
and RICs). The Fund intends to concentrate its common stock investments in
a few issuers and to take large positions in those issuers, consistent with
being a "non-diversified" fund. As a result, the Fund may be subject to a
greater risk of loss than a diversified fund or a fund that has diversified
its investments more broadly. Taking larger positions is also likely to
increase the volatility of the Fund's NAV, reflecting fluctuation in the
value of large Fund holdings.
The Fund has adopted a concentration policy pursuant to which it must,
under normal market conditions, invest more than 25% of its total assets in
Real Estate Related Companies. The Fund must obtain stockholder approval
prior to changing this policy. Real Estate Related Companies include, but
are not limited to: REITs and other closed-end registered investment
companies that invest primarily in REITs; home builders; real estate
developers; property management companies; real estate brokerage companies;
commercial and industrial construction companies; financial companies who
make or service real estate mortgages and/or construction loans; title,
homeowners and builders risk insurance companies; manufacturers,
distributors and retailers of construction materials and/or building
supplies; lumber, paper, forest products, and other companies with
significant real estate holdings; holding companies of any of these
companies; and any other companies that the Fund's advisers reasonably
determine are "real estate related companies." Although the Fund may invest
in Real Estate Related Companies of any size, it currently intends to
invest in such companies with market capitalizations of greater than $500
million. Although the Fund generally invests in U.S.-based Real Estate
Related Companies, such companies may invest directly or indirectly in
non-U.S. properties, and the Fund may make direct investments in foreign
Real Estate Related Companies.
Under the 1940 Act, the Fund is subject to certain conditions and
restrictions with regard to its investments in RICs (see "Portfolio
Contents - Registered Investment Companies"). Under Subchapter M, no single
investment can exceed 25% of the Fund's total assets at the time of
purchase. These percentage limitations are calculated at the time of
investment, and the Fund is not required to dispose of assets if holdings
increase above these levels due to appreciation. As of August 10, 2007,
1.8% of the Fund's total assets were invested in RICs, and 30.0% of the
Fund's total assets were invested in Berkshire Hathaway, Inc. (NYSE: BRK).
The Fund has no restrictions on its ability to invest in foreign
securities. As of August 10, 2007, 29.7% of the Fund's total assets were
invested in foreign securities.
Under normal market conditions, the Fund intends to invest at least 80% of
its total assets in common stocks, primarily domestic common stocks and
secondarily in foreign common stocks denominated in foreign currencies. The
Fund's investments in common stocks may include, but is not limited to,
RICs whose objective is income, REITs, and other dividend-paying common
stocks. The portion of the Fund's assets that are not invested in common
stocks may be invested in fixed income securities, cash equivalents and
other income-producing securities. The term "fixed income securities"
includes but is not limited to corporate bonds, U.S. government securities,
notes, bills, debentures, preferred stocks, convertible securities, bank
debt obligations, repurchase agreements and short-term money market
obligations.
Under normal market conditions, the Fund will not have more than 20% of its
assets in cash or cash equivalents. The Fund may, for temporary defensive
purposes, allocate a higher portion of its assets to cash and cash
equivalents. For this purpose, cash equivalents consist of, but are not
limited to, short-term (less than twelve months to maturity) U.S.
government securities, certificates of deposit and other bank obligations,
investment grade corporate bonds, other debt instruments and repurchase
agreements.
Except for the Fund's investment objective, industry concentration and
fundamental investment restrictions as described in this Prospectus and in
the SAI, the percentage limitations and investment policies set forth in
this Prospectus can be changed by the Board without stockholder approval.
In May 2006, the Fund adopted a managed distribution policy (the
"Distribution Policy") pursuant to which Common Stockholders would receive
a consistent, but not assured, periodic cash payment. Presently, under the
Distribution Policy, the Fund makes regular distributions at the rate of
$0.115 per Share per month, or $1.38 per Share annually. The annualized
distribution rate under the Distribution Policy is reviewed periodically by
the Board and generally will not exceed the long term performance of the
Fund based on a rolling 5-year performance history, subject to the Board's
discretion to suspend, modify or terminate the Distribution Policy at any
time. See "Dividends and Distributions - Managed Distribution Policy."
The Advisers do not expect to make significant changes to the makeup of the
Fund's portfolio or seek to invest in "high yielding" securities as a
result of the Distribution Policy. The Fund may carry a slightly higher
cash balance from time to time in order to fulfill the distribution
payments. If the Fund carries higher cash balances during rising equity
markets, the Fund's performance may be negatively affected relative to
other equity funds. Conversely, carrying higher cash balances during
declining equity markets may positively affect the Fund's performance. To
avoid Code and 1940 Act requirements to make distributions in excess of the
Distribution Policy, the Advisers expect to manage the portfolio slightly
differently than in the absence of the Distribution Policy, but in a manner
consistent with the Fund's investment objective and policies. For example,
the Advisers may realize a loss in a security by selling it in order to
offset realized capital gains, whereas, absent the Distribution Policy, the
Advisers may not have realized the loss. The Advisers also may increase the
Fund's position in a security with an unrealized loss, and subsequently
sell the tax lot with the higher tax cost basis 31 days or more after the
purchase to avoid a wash sale, leaving the Fund with approximately the same
position in the security but with a lower tax cost basis. The Advisers may
also purchase stock of an issuer paying an unusually large dividend and,
after the stock begins trading ex-dividend, sell the stock at a loss,
thereby allowing the Fund to offset gains realized on other securities sold
during the year. The Advisers enter into such transactions only when they
believe that there is a high probability of realizing an economic profit
for the Fund. The investment strategies described above were utilized by
the Advisers prior to the implementation of the Distribution Policy to
realize losses for the Fund in an effort to be tax efficient, and may
result in slightly higher portfolio turnover and transaction costs. The
Advisers will not hold positions with unrealized capital gains that they
believe should be sold based on their fundamental analysis of the
underlying issuer. The Advisers believe it would be better to discontinue
the Distribution Policy than to see unrealized gains turn into unrealized
losses.
As of June 30, 2007, the Fund had net realized gains in excess of its
capital loss carry-forwards for the fiscal year ending November 30, 2007.
Unless the Fund (i) realizes capital losses prior to November 30, 2007 in
an amount sufficient to offset all realized gains for the Fund's fiscal
year or (ii) obtains exemptive relief from the Securities and Exchange
Commission (the "SEC") from Section 19(b) of the 1940 Act and Rule 19b-1
under the 1940 Act prior to November 30, 2007 so it can characterize a
portion of its previous distributions as realized capital gains, the Fund
would be required to distribute the entire amount of its net realized
capital gains for the fiscal year to its stockholders in December 2007. The
per share amount of any such net realized capital gains distribution may be
greater than per share amount at which monthly distributions previously
have been made pursuant to the Distribution Policy, and therefore could
shrink the Fund's assets more quickly than would otherwise be the case. The
Advisers may utilize the investment strategies described in the preceding
paragraph to realize capital losses in an amount sufficient to offset the
Fund's realized capital gains for the fiscal year.
Limitations on investments expressed in percentages are measured and are
applicable only at the time of investment. They are not measured or applied
on an ongoing basis. There is no requirement for the Fund to sell or change
its portfolio investments resulting from changes in valuations to such
investments.
Use of Leverage by the Fund
The Fund expects to utilize financial leverage on an ongoing basis for
investment purposes specifically through the issuance of the AMPS. In
October 2005, the Fund issued 1,000 shares of AMPS at a purchase price of
$25,000 per share plus accrued dividends. As of August 10, 2007, the Fund's
total leverage from the issuance of AMPS was approximately 20% of the
Fund's total assets. This amount may change, but the Fund will not incur
additional leverage in the form of preferred shares if as a result its
total leverage would exceed 50% of the Fund's total assets. Although the
Fund may in the future offer other preferred shares, increase the number of
AMPS, or incur other indebtedness, which would further leverage the Fund,
the Fund does not currently intend to offer preferred shares or to incur
indebtedness, other than short-term credits in connection with the
settlement of portfolio transactions.
The Fund generally will not utilize leverage if the Advisers anticipate
that leverage would result in a lower return to Common Stockholders over
time. Use of financial leverage creates an opportunity for increased
returns for the Common Stockholders but, at the same time, creates the
possibility for greater loss (including the likelihood of greater
volatility of NAV and market price of the Shares and of dividends), and
there can be no assurance that a leveraging strategy will be successful
during any period in which it is employed. Because the fees paid to the
Advisers and FAS (defined below) will be calculated on the basis of the
Fund's managed assets, the fees will be higher when leverage (including the
AMPS) is utilized, giving the Advisers an incentive to utilize leverage.
Dividends and Distributions
In May 2006, the Fund adopted the Distribution Policy pursuant to which
Common Stockholders would receive a consistent, but not assured, periodic
cash payment. Presently, under the Distribution Policy, the Fund makes
regular distributions at the rate of $0.115 per Share per month, or $1.38
per Share annually. The annualized distribution rate under the Distribution
Policy is reviewed periodically by the Board and generally will not exceed
the long term performance of the Fund based on a rolling 5-year performance
history, subject to the Board's discretion to suspend, modify or terminate
the Distribution Policy at any time. As of June 30, 2007, the Fund had net
realized gains in excess of its capital loss carry-forwards for the fiscal
year ending November 30, 2007. Unless the Fund (i) realizes capital losses
prior to November 30, 2007 in an amount sufficient to offset all realized
gains for the Fund's fiscal year or (ii) obtains exemptive relief from the
SEC from Section 19(b) of the 1940 Act and Rule 19b-1 under the 1940 Act
prior to November 30, 2007 so it can characterize a portion of its previous
distributions as realized capital gains, the Fund would be required to
distribute the entire amount of its net realized capital gains for the
fiscal year to its stockholders in December 2007. The per share amount of
any such net realized capital gains distribution may be greater than per
share amount at which monthly distributions previously have been made
pursuant to the Distribution Policy, and therefore could shrink the Fund's
assets more quickly than would otherwise be the case.
Rights holders who exercise their Rights will receive newly issued Shares
within fifteen (15) days of the record date of the most recent monthly
payment under the Distribution Policy, which record date may occur during
the Subscription Period. Common Stockholders who receive newly issued
Common Stock in the Offering will not receive a distribution under the
Distribution Policy with respect to such newly issued Shares for the record
date immediately prior to issuance of the newly issued Shares. Common
Stockholders will be entitled to receive monthly distributions for record
dates subsequent to their receipt of newly issued Common Stock in
accordance with the Distribution Policy. The Offering will not impact the
distributions to be paid to current Common Stockholders regardless of
whether they exercise their Rights or allow their Rights to lapse, subject
to suspension, termination, or modification of the Distribution Policy by
the Board at any time.
See "Dividends and Distributions - Managed Distribution Policy" and "Risk
Factors."
Dividend Reinvestment Policy
Common Stockholders receive all dividends and capital gains distributions
in cash. However, the Fund has established a dividend reinvestment plan
under which all Common Stockholders whose Shares are registered in their
own name may elect to have all such dividends and distributions
automatically reinvested in additional Shares. Common Stockholders who
elect to hold their Shares in the name of a broker or nominee should
contact such broker or nominee to determine whether they may participate in
the Plan. See "Dividends and Distributions - Dividend Reinvestment Plan."
Risk Factors
General Risks of Investing in the Fund. The Fund is not a complete
investment program and should only be considered as an addition to an
investor's existing diversified portfolio of investments. Due to
uncertainty inherent in all investments, there can be no assurance that the
Fund will achieve its investment objectives.
- Non-Diversified Status Risk. The Fund is classified as
"non-diversified" under the 1940 Act. As a result, it can invest a
greater portion of its assets in obligations of a single issuer than a
"diversified" fund. The Fund will therefore be more susceptible than a
diversified fund to being adversely affected by any single corporate,
economic, political or regulatory occurrence. The Fund intends to
diversify its investments to the extent necessary to qualify, and
maintain its status, as a regulated investment company under U.S.
federal income tax laws. See "Risk Factors" and "Federal Income Tax
Matters."
- Investments in Common Stocks. The Fund intends to invest, under normal
market conditions, at least 80% of its total assets in publicly traded
common stocks. Common stocks generally have greater risk exposure and
reward potential over time than bonds. The volatility of common stock
prices has historically been greater than bonds, and as the Fund
invests primarily in common stocks, the Fund's NAV may also be
volatile. Further, because the time horizon for the Fund's investments
in common stock is longer, the time necessary for the Fund to achieve
its objective of total return will likely be longer than for a fund
that invests solely for income.
- Concentration Risk. The Fund intends to concentrate its common stock
investments in a few issuers and to take large positions in those
issuers, consistent with being a "non-diversified" fund. As a result,
the Fund may be subject to a greater risk of loss than a diversified
fund or a fund that has diversified its investments more broadly.
Taking larger positions is also likely to increase the volatility of
the Fund's NAV, reflecting fluctuation in the value of large Fund
holdings.
- Investment in Berkshire Hathaway. The Fund presently has invested a
significant percentage of its portfolio in Berkshire Hathaway, Inc.
(NYSE: BRK) ("Berkshire"). As of August 10, 2007, the Fund held 310
Berkshire Class A shares and 500 Berkshire Class B shares,
representing 30.0% of the Fund's total assets. The Advisers do not
currently intend to liquidate any portion of the Fund's position in
Berkshire. Although not an insurance company itself, Berkshire owns
Geico Insurance, General Re Insurance and other insurance companies,
and therefore derives a significant portion of its income, and its
value, from insurance companies. The insurance business can be
significantly affected by interest rates as well as price competition
within the industry. In addition, an insurance company may experience
significant changes in its year to year operating performance based
both on claims paid and on performance of invested assets. Insurance
companies can also be affected by government regulations and tax laws,
which may change from time to time. A significant decline in the
market price of Berkshire or any other company in which the Fund has
made a significant common stock investment (i) would result in a
significant decline in the Fund's NAV; (ii) may result in a
proportionate decline in the market price of the Shares; and (iii) may
result in greater risk and market fluctuation than a fund that has a
more diversified portfolio.
- Investments in Real Estate Related Companies. The Fund has adopted a
concentration policy pursuant to which it must, under normal market
conditions, invest more than 25% of its total assets in Real Estate
Related Companies. The Fund must obtain stockholder approval prior to
changing this policy, thus limiting its flexibility to liquidate such
companies in the future should market conditions warrant. Since the
Fund will concentrate its assets in the real estate industry, the
Fund's performance will be generally linked to performance of the real
estate markets. Property values may fall due to increasing vacancies
or declining rents resulting from economic, legal, cultural or
technological developments. REIT and other Real Estate Related Company
prices also may drop because of the failure of borrowers to pay their
loans and poor management. Many REITs utilize leverage, which
increases investment risk and could adversely affect a REIT's
operations and market value in periods of rising interest rates, as
well as risks normally associated with debt financing. In addition,
there are risks associated with particular sectors of real estate
investments (e.g., retail, office, hotel, healthcare and multifamily
properties), although the Fund does not intend to focus on any
particular sector of real estate investments.
- Leveraging Risk. The Fund is currently leveraged with the AMPS. Use of
leverage may have a number of adverse effects on the Fund and its
stockholders including: (i) leverage may magnify market fluctuations
in the Fund's underlying holdings thus causing a disproportionate
change in the Fund's NAV; (ii) the Fund's cost of leverage may exceed
the return on the underlying securities acquired with the proceeds of
the leverage, thereby diminishing rather than enhancing the return to
stockholders and generally making the Fund's total return to such
stockholders more volatile; (iii) the Fund may be required to sell
investments in order to meet dividend or interest payments on the debt
or preferred stock it has issued when it may be disadvantageous to do
so; (iv) leveraging through the issuance of preferred stock requires
that the holders of the preferred stock have class voting rights on
various matters that could make it more difficult for Common
Stockholders to change the investment objective or fundamental
policies of the Fund, to convert it to an open-end fund or make
certain other changes; and (v) the Fund may be forced to redeem some
or all of the AMPS at inopportune times due to a decline in market
value of Fund investments. Because the fees paid to the Advisers and
FAS (defined below) will be calculated on the basis of the Fund's
managed assets, the fees will be higher when leverage (including the
AMPS) is utilized, giving the Advisers an incentive to utilize
leverage.
- Managed Distribution Policy. In May 2006 stockholders voted in favor
of, and the Fund adopted, the Distribution Policy. A managed
distribution policy allows a fund to provide a regular, periodic (but
not assured) distribution to its common stockholders which is not
dependent on the amount of income earned or capital gains realized by
the fund. An equity fund, such as the Fund, is designed for investors
to participate in a professionally managed portfolio of equity
investments. Over the long-term, equity investments have historically
provided higher total returns than fixed income investments such as
bonds. However, unlike most fixed income funds, which pay stockholders
a regular dividend based on the fund's investment income, equity funds
generally pay only one dividend per year consisting of a relatively
small amount of net investment income and any net realized capital
gains. A managed distribution permits a fund to distribute a
predetermined monthly amount, regardless of when or whether income is
earned or capital gains are realized. However, the practice of making
distributions that exceed income earned or capital gains realized can
result in the Fund making distributions that consist of a return of
capital. A managed distribution policy recognizes that many investors
are willing to accept the potentially higher asset volatility of
equity investments, but would prefer that a consistent level of cash
distributions are available to them each month for reinvestment or
other purposes of their choosing.
The Distribution Policy initially provided for monthly distributions
at the rate of $0.10 per Share per month, or $1.20 per Share annually,
which represented a 14.9% annual distribution rate relative to the
Fund's NAV at the time. In February 2007, because the NAV of the Fund
had increased substantially since the Distribution Policy was adopted,
and the Board wished to maintain a similar annual distribution rate to
that originally adopted, the Fund increased the distribution rate to
$0.115 per Share per month, or $1.38 per Share annually, representing
a 14.6% annual distribution rate relative to the Fund's NAV at the
time. The annual distribution rate under the Distribution Policy is
reviewed periodically by the Board and generally will not exceed the
annual long term performance of the Fund based on a rolling 5-year
performance history, subject to the Board's discretion to suspend,
modify or terminate the Distribution Policy at any time. In conducting
its review of the annual distribution rate and the Fund's performance
history, the Board will take into account, among other factors, that
during 2002, the first year the Advisers served as investment advisers
to the Fund, the Fund's portfolio consisted primarily of bonds that
were below investment grade, and that the Fund recognized significant
losses as these investments were liquidated and the proceeds invested
in common stocks consistent with the Fund's new objective of total
return.
Exemptive relief from the SEC is not required in the near term in
order to continue the Distribution Policy. The Fund has applied to the
SEC for exemptive relief from Section 19(b) of the 1940 Act and Rule
19b-1 under the 1940 Act to enable the Fund to continue the
Distribution Policy over the long term. Section 19(b) of the 1940 Act
limits an investment company's ability to make multiple distributions
of net realized long-term capital gains each year, subject to certain
exceptions contained in Rule 19b-1. Historically, investment companies
that wished to implement a managed distribution policy requiring
multiple capital gain distributions per year routinely received
exemptive relief from Section 19(b). However, as of the date of this
Prospectus, the SEC has not responded either favorably or unfavorably
to the Fund's request for exemptive relief originally filed in 2004
and amended in January 2007. It is generally believed that the SEC has
imposed a moratorium on granting this type of request for exemptive
relief over concerns that inadequate disclosures by investment
companies regarding sources of distributions, e.g., net investment
income, net long-term capital gain, return of capital, have resulted
in fund investors not understanding that distributions may include a
return of capital and do not necessarily represent a dividend yield.
For the fiscal year ended November 30, 2006, the Distribution Policy
did not violate Section 19(b) because the Fund had capital loss
carry-forwards that were used to offset the Fund's realized net
capital gains. Accordingly, distributions made pursuant to the
Distribution Policy did not consist of net long-term capital gains. As
of December 1, 2006, the Fund had tax loss carry-forwards of
approximately $4.3 million expiring beginning in 2010. However, as of
June 30, 2007, the Fund had net realized gains in excess of its
capital loss carry-forwards for the fiscal year ending November 30,
2007. Unless the Fund (i) realizes capital losses prior to November
30, 2007 in an amount sufficient to offset all realized gains for the
Fund's fiscal year or (ii) obtains exemptive relief from the SEC from
Section 19(b) of the 1940 Act and Rule 19b-1 under the 1940 Act prior
to November 30, 2007 so it can characterize a portion of its previous
distributions as realized capital gains, the Fund would be required to
distribute the entire amount of its net realized capital gains for the
fiscal year to its stockholders in December 2007. The per share amount
of any such net realized capital gains distribution may be greater
than per share amount at which monthly distributions previously have
been made pursuant to the Distribution Policy, and therefore could
shrink the Fund's assets more quickly than would otherwise be the
case.
If and when the Fund exhausts its capital loss carry-forwards,
exemptive relief from Section 19(b) and Rule 19b-1 would be required
in order to continue making managed distributions unless the Board
elects to characterize the Fund's final distribution for each calendar
year as including all net capital gain realized during the year (and
increasing the amount of the final distribution if necessary).
Alternatively, the Board could elect to suspend or terminate the
Distribution Policy.
There are certain risks and negative impacts associated with the
Distribution Policy:
- The Distribution Policy will likely have a negative tax impact on
Common Stockholders. If the Fund has net realized long-term
capital gains during its fiscal year, and the Fund has paid out
distributions during the year, the Code will deem such gains to
have been paid out, even in circumstances where the distributions
have not resulted in the violation of Section 19(b) of the 1940
Act. These gains will be treated as ordinary income, and will be
taxed at ordinary income tax rates instead of the more favorable
long-term capital gain rate. Moreover, notwithstanding Common
Stockholders being treated as if they have received ordinary
income, the Fund would still lose its capital loss carry-forwards
in the amount of the gains realized. Accordingly, the payment of
managed distributions when the Fund is utilizing capital loss
carry-forwards to offset realized capital gains will result in
tax inefficiencies for the Common Stockholders.
- The Distribution Policy may impact the way in which the Fund is
managed. The Advisers do not expect to make significant changes
to the makeup of the Fund's portfolio or seek to invest in "high
yielding" securities as a result of the Distribution Policy. The
Fund may carry a slightly higher cash balance from time to time
in order to fulfill the distribution payments. If the Fund
carries higher cash balances during rising equity markets, the
Fund's performance may be negatively affected relative to other
equity funds. Conversely, carrying higher cash balances during
declining equity markets may positively affect the Fund's
performance. To avoid Code and 1940 Act requirements to make
distributions in excess of the Distribution Policy, the Advisers
expect to manage the portfolio slightly differently than in the
absence of the Distribution Policy, but in a manner consistent
with the Fund's investment objective and policies. For example,
the Advisers may realize a loss in a security by selling it in
order to offset realized capital gains, whereas, absent the
Distribution Policy, the Advisers may not have realized the loss.
The Advisers also may increase the Fund's position in a security
with an unrealized loss, and subsequently sell the tax lot with
the higher tax cost basis 31 days or more after the purchase to
avoid a wash sale, leaving the Fund with approximately the same
position in the security but with a lower tax cost basis. The
Advisers may also purchase stock of an issuer paying an unusually
large dividend and, after the stock begins trading ex-dividend,
sell the stock at a loss, thereby allowing the Fund to offset
gains realized on other securities sold during the year. The
Advisers enter into such transactions only when they believe that
there is a high probability of realizing an economic profit for
the Fund. The investment strategies described above were utilized
by the Advisers prior to the implementation of the Distribution
Policy to realize losses for the Fund in an effort to be tax
efficient, and may result in slightly higher portfolio turnover
and transaction costs. The Advisers will not hold positions with
unrealized capital gains that they believe should be sold based
on their fundamental analysis of the underlying issuer. The
Advisers believe it would be better to discontinue the
Distribution Policy than to see unrealized gains turn into
unrealized losses. As of June 30, 2007 the Fund had net realized
gains in excess of its capital loss carry-forwards for the fiscal
year ending November 30, 2007. Unless the Fund (i) realizes
capital losses prior to November 30, 2007 in an amount sufficient
to offset all realized gains for the Fund's fiscal year or (ii)
obtains exemptive relief from the SEC from Section 19(b) of the
1940 Act and Rule 19b-1 under the 1940 Act prior to November 30,
2007 so it can characterize a portion of its previous
distributions as realized capital gains, the Fund would be
required to distribute the entire amount of its net realized
capital gains for the fiscal year to its stockholders in December
2007. The per share amount of any such net realized capital gains
distribution may be greater than per share amount at which
monthly distributions previously have been made pursuant to the
Distribution Policy, and therefore could shrink the Fund's assets
more quickly than would otherwise be the case. The Advisers may
utilize the investment strategies described above to realize
capital losses in an amount sufficient to offset the Fund's
realized capital gains for the fiscal year.
- The Distribution Policy is subject to modification, suspension or
termination at any time by the Board. Because the Distribution
Policy was implemented without an exemption under Section 19(b)
of the 1940 Act and Rule 19b-1, the Fund must have the
flexibility to modify, suspend or terminate the Distribution
Policy immediately if the Board deems such action to be in the
best interests of the Fund and its stockholders. The Distribution
Policy could have a limited duration because, unless the Fund
receives exemptive relief from Section 19(b), it will eventually
exhaust its capital loss carry-forwards and thus will have to
make an annual distribution of all net capital gains realized by
the Fund during the fiscal year or suspend or terminate the
policy so as to avoid violating Section 19(b).
It is difficult to predict when and whether the capital loss
carry-forward will expire. A number of variables go into the rate
at which the capital loss carry-forward may be depleted, any one
of which could dramatically impact expiration. These variables
include the balance of the capital loss carry-forwards (which as
of December 1, 2006 was approximately $4.3 million); the balance
of cash carried by the Fund; how the Fund might recognize gains
or losses; and special dividend opportunities. For example, the
Fund may have a position in a stock with an unrealized capital
gain which the Advisers may have no intention of selling, but
through a tender or merger, may be forced unexpectedly to realize
the capital gain. Realizing any such capital gains may accelerate
the exhaustion of the Fund's capital loss carry-forwards.
Even if the Fund obtains exemptive relief from Section 19(b), the
Board may elect to temporarily suspend the Distribution Policy
for a period of at least one year so that the Fund can offset
capital loss carry-forwards against realized capital gains before
the Fund's capital loss carry-forwards expire (beginning in
2010). This determination would be made at a time closer to when
the carry-forwards are to expire and would be based on
circumstances existing at that time. Currently, as discussed
above, any net realized long-term capital gains will be offset
against the Fund's capital loss carry-forwards but will be taxed
at ordinary income tax rates, resulting in tax inefficiencies for
Common Stockholders. There would be no such negative tax
consequences if the Fund did not pay managed distributions.
Accordingly, if the Fund wishes to maximize its tax efficiency
(i.e., have long-term gains treated and taxed as long-term gains
rather than ordinary income) and take full advantage of its
capital loss carry-forwards, it may elect to temporarily suspend
the Distribution Policy for a period of at least one year, during
which time it would offset its capital loss carry-forwards
against realized gains.
As discussed above, the annual distribution rate under the
Distribution Policy is reviewed periodically by the Board and
generally will not exceed the average annual long term
performance of the Fund based on a rolling 5-year performance
history. If the Fund's long term performance declines, the Board
will make a corresponding reduction in the annual distribution
rate under the Distribution Policy. In addition, the SEC may
impose conditions on any grant of exemptive relief from Section
19(b) that require the Board to consider adjusting the annual
distribution rate on a more frequent basis under certain
circumstances.
- A modification, suspension or termination of the Distribution
Policy could result in a concurrent reduction or cessation of the
$0.115 per Share monthly distribution presently paid to Common
Stockholders. If the Distribution Policy was suspended or
terminated, the Fund would revert back to its prior practice of
distributing only net investment income and net realized capital
gains at the end of its fiscal year. A modification, suspension
or termination of the Distribution Policy could have the effect
of abruptly creating a trading discount (if the Fund is trading
at or above NAV) or widening an existing trading discount.
- If the Fund's annual total return is less than the annual
distribution, the Distribution Policy could have the effect of
shrinking the assets of the Fund and thus increasing the Fund's
expense ratio (i.e., the Fund's fixed expenses will be spread
over a smaller pool of assets). The Board has determined that the
annual distribution rate should not exceed the Fund's average
annual long term performance of the Fund based on a rolling
5-year performance history. However, there may be interim periods
where the annual distribution rate exceeds the short-term return
on the Fund's NAV, which could shrink the assets of the Fund. In
addition, if due to the exhaustion or expiration of the Fund's
net capital loss carry-forwards the Board elects to characterize
the Fund's final distribution for each calendar year as including
all net capital gain realized during the year, such distribution
could shrink the Fund's assets more quickly than would otherwise
be the case if the per share amount of any such net realized
capital gains distribution is greater than per share amount at
which monthly distributions previously have been made pursuant to
the Distribution Policy.
- A distribution which contains a return of capital, which the Fund
expects generally to be the case, will result in added record
keeping for Common Stockholders. Return of capital is not taxable
to Common Stockholders in the year it is paid. However, Common
Stockholders will need to reduce the cost basis of their stock by
the amount of the return of capital so that, when they sell the
stock, they will have properly accounted for the return of
capital. Such an adjustment will cause Common Stockholders' gain
to be more, or their loss to be less, as the case may be. For
example, if a Common Stockholder purchased stock in the Fund for
$7.00 per Share and then receives dividends from the Fund which
have $1.00 per Share return of capital, and then the stockholder
subsequently sells his Shares for $7.50 per Share, his gain will
be $1.50 per Share, since he would have adjusted his cost basis
downward by $1.00 per Share (to $6.00 per Share). Common
Stockholders who hold their stock in non-taxable accounts such as
IRA's will not need to make any such adjustments. Common
Stockholders should contact their own tax advisor if they have
questions regarding the tax treatment of the distributions under
the Distribution Policy.
- Discount From NAV. The common stock of closed-end funds frequently
trades at a market price that is less than the value of the net assets
attributable to those shares (a "discount"). The possibility that the
Shares will trade at a discount from NAV is a risk 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
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.
- Premium Over NAV. The Shares may trade at a market price that is
greater than the value of the net assets attributable to those Shares
(a "premium"). The possibility that the Shares will trade at a premium
over NAV is a risk separate and distinct from the risk that the Fund's
NAV will decrease. For those Common Stockholders who acquire Shares at
a premium, such premium may be unsustainable. If the price of the
Shares falls, the Common Stockholders will experience a loss on their
investments.
- Size of the Fund. As of August 10, 2007, the Fund had total net assets
of approximately $121.1 million, including $25 million in AMPS
leverage. As a fund with a relatively small asset base, the Fund may
be subject to certain operational inefficiencies including: higher
expense ratio, less coverage by analysts and the marketplace in
general which can contribute to a less active trading market for the
Shares and consequently a wider discount, more limited ability to
attract new investors and/or take advantage of investment
opportunities and less ability to take advantage of lower transaction
costs available to larger investors.
- Repurchase of the Shares. The Fund is authorized to repurchase Shares
on the open market when the Shares are trading at a discount from NAV
per Share as determined by the Board from time to time. Any
acquisition of Shares by the Fund will decrease the total assets of
the Fund and, therefore, have the effect of increasing the Fund's
expense ratio and may adversely affect the ability of the Fund to
achieve its investment objectives. Furthermore, the acquisition of
Shares by the Fund may require the Fund to redeem the AMPS in order to
maintain certain asset coverage requirements. To the extent the Fund
may need to liquidate investments to fund the repurchase of Shares,
this may result in portfolio turnover which will result in additional
expenses being borne by the Fund.
- Dependence on Key Personnel. The Advisers are dependent upon the
expertise of Stewart Horejsi in providing advisory services with
respect to the Fund's investments. If the Advisers were to lose the
services of Mr. Horejsi, their ability to service the Fund could be
adversely affected. There can be no assurance that a suitable
replacement could be found for Mr. Horejsi in the event of his death,
resignation, retirement or inability to act on behalf of the Advisers.
- Issuer Risk. The value of the Fund's portfolio may decline for a
number of reasons which directly relate to the issuers of the
securities in the portfolio, such as management performance, financial
leverage and reduced demand for an issuer's goods and services.
- Inflation Risk. Inflation risk is the risk that the value of assets or
income from investments will be worth less in the future as inflation
decreases the value of money. As inflation increases, the real value
of the Fund's portfolio can decline.
- Repurchase Agreements. The use of repurchase agreements involves
certain risks. For example, if the seller of securities under a
repurchase agreement defaults on its obligation to repurchase the
underlying securities, as a result of bankruptcy or otherwise, the
Fund will seek to dispose of such securities, which action could
involve costs or delays. If the seller becomes insolvent and subject
to liquidation or reorganization under applicable bankruptcy or other
laws, the Fund's ability to dispose of the underlying securities may
be restricted. Finally, it is possible that the Fund may not be able
to substantiate its interest in the underlying securities.
- Foreign Securities Risk. The Fund is permitted to invest in foreign
securities without limitation. Investment in non-U.S. issuers may
involve unique risks compared to investing in securities of U.S.
issuers. These risks are more pronounced to the extent that the Fund
invests a significant portion of its non-U.S. investments in one
region or in the securities of emerging market issuers. These risks
may include:
- Less information about non-U.S. issuers or markets may be
available due to less rigorous disclosure, accounting standards
or regulatory practices.
- Many non-U.S. markets are smaller, less liquid and more volatile.
In a changing market, the Advisers may not be able to sell the
Fund's portfolio securities at times, in amounts and at prices
they consider reasonable.
- Currency exchange rates or controls may adversely affect the
value of the Fund's investments.
- The economies of non-U.S. countries may grow at slower rates than
expected or may experience downturns or recessions.
- Withholdings and other non-U.S. taxes may decrease the Fund's
return.
- Currency Risk. The Fund currently holds investments in foreign
securities and thus a portion of the Fund's assets may be quoted or
denominated in non-U.S. currencies. These securities may be adversely
affected by fluctuations in relative currency exchange rates and by
exchange control regulations. The Fund's investment performance may be
negatively affected by a devaluation of a currency in which the Fund's
investments are quoted or denominated. Further, the Fund's investment
performance may be significantly affected, either positively or
negatively, by currency exchange rates because the U.S. dollar value
of securities quoted or denominated in another currency will increase
or decrease in response to changes in the value of such currency in
relation to the U.S. dollar. The Fund does not currently hedge against
the potential decline in value of foreign currencies against the U.S.
dollar and does not foresee hedging currency risk in the future,
though it is not precluded from doing so.
- Sovereign Debt Risk. An investment in debt obligations of non-U.S.
governments and their political subdivisions ("sovereign debt")
involves special risks that are not present in corporate debt
obligations. The non-U.S. issuer of the sovereign debt or the non-U.S.
governmental authorities that control the repayment of the debt may be
unable or unwilling to repay principal or interest when due, and the
Fund may have limited recourse in the event of a default. During
periods of economic uncertainty, the market prices of sovereign debt
may be more volatile than prices of debt obligations of U.S. issuers.
In the past, certain non-U.S. countries have encountered difficulties
in servicing their debt obligations, withheld payments of principal
and interest and declared moratoria on the payment of principal and
interest on their sovereign debt.
- Liquidity Risk. Although the Fund invests primarily in securities
traded on national exchanges, it may invest in less liquid assets from
time to time that are not readily marketable and may be subject to
restrictions on resale. Illiquid securities may be more difficult to
value or may impair the Fund's ability to realize the full value of
its assets in the event of a voluntary or involuntary liquidation of
such assets and thus may cause a decline in the Fund's NAV. The Fund
has no limitation on the amount of its assets that may be invested in
securities which are not readily marketable or are subject to
restrictions on resale, although it may not invest more than 30% of
the value of its total assets in securities which have been acquired
through private placement. In certain situations, the Advisers could
find it more difficult to sell such securities at times, in amounts
and at prices they consider reasonable.
- Market Disruption Risk. The terrorist attacks in the United States on
September 11, 2001 had a disruptive effect on the securities markets.
The Fund cannot predict the effects of similar events in the future on
the U.S. economy. These terrorist attacks and related events,
including the war in Iraq, its aftermath, and continuing occupation of
Iraq by coalition forces, have led to increased short-term market
volatility and may have long-term effects on U.S. and world economies
and markets. A similar disruption of the financial markets could
impact interest rates, auctions, secondary trading, ratings, credit
risk, inflation and other factors relating to the Common Stock and
AMPS.
- Anti-Takeover Provisions Risk. The Fund's charter (the "Charter") and
bylaws (the "Bylaws") include provisions that could limit the ability
of other entities or persons to acquire control of the Fund or to
change the composition of its Board. Such provisions could limit the
ability of stockholders to sell their Shares at a premium over
prevailing market prices by discouraging a third party from seeking to
obtain control of the Fund. These provisions include advance notice
requirements for stockholder proposals and super-majority voting
requirements for certain transactions with affiliates, open-ending the
Fund or a merger, liquidation, asset sale or similar transaction.
- Investments in RICs. The Fund may invest in securities issued by other
closed-end funds (or RICs) subject to such limitations, restrictions
and conditions as imposed by Federal law. Accordingly, the Fund will
be subject to the particular risks associated with investing in other
closed-end funds that are separate from risks associated with the
underlying investments held such RICs. Both the Fund and any RICs in
which it invests have management fees. In addition, the RICs in which
the Fund invests will typically incur other operating expenses that
are borne by their investors, including the Fund. As a result, Fund
stockholders will bear not only the Fund's management fees and
operating expenses, but also the fees and expenses of the RICs in
which the Fund invests. Investors would bear less expense if they
invested directly in the underlying RICs in which the Fund invests.
The Fund may also invest in RICs that are not limited in their
portfolio trading activity and thus may experience high portfolio
turnover rates. Higher turnover rates generally result in
correspondingly greater brokerage commissions and other transactional
expenses which may be borne by the Fund, directly or through its
investment in RICs. Higher turnover rates also may be more likely to
generate capital gains that must be distributed to Fund stockholders,
either as a result of the Fund's receipt of capital gains from RIC
transactions or from the Fund's trading in RICs or other investments.
Investment Advisers
The Fund is co-advised by Boulder Investment Advisers, LLC and Stewart West
Indies Trading Company, Ltd. d/b/a Stewart Investment Advisers. The
Advisers have been providing advisory services to the Fund since January
2002, and to Boulder Total Return Fund, Inc. since March 1999. As of
November 30, 2006, the Advisers had a total of $516.2 million in assets
under management. The Fund pays the Advisers an aggregate monthly fee at
the annual rate of 1.25% of the Fund's average monthly total net assets
(including the principal amount of leverage, if any) (the "Adviser Fee").
At a regular meeting of the Board held on January 27, 2007, the Advisers
agreed to a waiver of advisory fees at certain "break-point" levels such
that, in the future, the Adviser Fee would be calculated at the annual rate
of 1.25% on asset levels up to $400 million, 1.10% on assets levels between
$400-$600 million; and 1.00% on asset levels exceeding $600 million. The
fee waiver agreement has a one-year term and is renewable annually.
Administrator, Custodian, Transfer Agent, Registrar and Dividend Disbursing
Agent
Fund Administrative Services, LLC ("FAS") is an affiliate of the Advisers
and serves as the Fund's co-administrator. Under its Administration
Agreement with the Fund, FAS provides certain administrative and executive
management services to the Fund including: providing the Fund's principal
offices and executive officers, overseeing and administering all contracted
service providers, making recommendations to the Board regarding policies
of the Fund, conducting stockholder relations, authorizing expenses and
other administrative tasks.
Under the Administration Agreement, FAS receives a monthly fee calculated
at an annual rate of 0.20% of the value of the Fund's average monthly total
net assets (including the principal amount of leverage, if any) up to $250
million; 0.18% of the Fund's average monthly total net assets on the next
$150 million; and 0.15% on the value of the Fund's average monthly total
net assets over $400 million. FAS has agreed to waive a portion of its fee
in order to limit the Fund's total monthly administration expenses
(including administration, co-administration, transfer agent and custodian
fees) to 0.30% of the Fund's average monthly total net assets. The equity
owners of FAS are Evergreen Atlantic, LLC and the Lola Brown Trust No. 1B,
each of which is considered to be an "affiliated person" of the Fund as
that term is defined in the 1940 Act.
State Street Bank and Trust Company ("State Street") serves as the Fund's
co-administrator and custodian. As compensation for its services, State
Street receives certain out-of-pocket expenses, transaction fees and
asset-based fees of 0.058% annually (or a minimum of $10,500 per month),
which are accrued daily and paid monthly.
PFPC Inc. ("PFPC"), an indirect, majority-owned subsidiary of PNC Financial
Services Group, Inc., serves as the Fund's transfer agent, dividend-paying
agent and registrar for the Common Stock. As compensation for PFPC's
services as such, the Fund pays PFPC a monthly fee plus certain
out-of-pocket expenses.
Deutsche Bank Trust Company Americas serves as Auction Agent, transfer
agent, dividend paying agent and registrar for the AMPS.
IMPORTANT TERMS OF THE OFFERING
--------------------------------------------------------------------------------------------------------------------------------
Total number of Shares available for Primary
Subscription 3,801,119
Number of Rights a Common Stockholder will receive for One Right for each Share(+)
each outstanding Share owned by such Common Stockholder
on the Record Date
Number of Rights required to purchase one new Share Three Rights for each new Share
Subscription Price The NAV per Share as calculated at the close of trading on the
Expiration Date.
Estimated Subscription Price $8.43. Since the Subscription Price will not be determined until
after printing and distribution of this Prospectus, the "Estimated
Subscription Price" is an estimate of the Subscription Price based on
the Fund's per-share NAV at the end of business on August 10, 2007, the
Friday immediately preceding the printing and distribution of this
Prospectus.
+ The number of Rights to be issued to a Common Stockholder on the Record Date
will be rounded up to the nearest whole number of Rights evenly divisible by
three. See "The Offering - Over-Subscription Privilege" below.
IMPORTANT DATES FOR THE OFFERING
--------------------------------------------------------------------------------------------------------------------------------
Record Date Wednesday, August 1, 2007
Subscription Period August 15, 2007 to September 14, 2007
Expiration Date of the Offering September 14, 2007++
Deadline for delivery of Subscription Certificate and September 14, 2007
payment of Shares, or Notice of Guaranteed Delivery (*)
Deadline for payment pursuant to Notice of Guaranteed Wednesday, September 19, 2007
Delivery (*)
Confirmation to participants September 25, 2007
Deadline for final payment for Shares (if any)** October 5, 2007
++ Unless the Offering is extended to a date no later than September 24, 2007.
* Record Date Stockholders (defined below) exercising Rights must deliver to
the Subscription Agent (defined below) by the Expiration Date either (i)
the Subscription Certificate together with the estimated payment or (ii) a
Notice of Guaranteed Delivery.
** Since the actual Subscription Price due from subscribing Common
Stockholders (vis-a-vis the Estimated Subscription Price above) will not be
determined until after printing and distribution of this Prospectus,
additional monies may be owed by subscribers.
KEY ELEMENTS OF THE OFFERING
--------------------------------------------------------------------------------
ONE-FOR-THREE OFFERING
The Offering will give Common Stockholders who own Common Stock on the
Record Date ("Record Date Stockholders") the non-transferable right to
purchase one new Share for every three Rights held. Common Stockholders
will receive one Right for every Share owned on the Record Date. For
example, if a Common Stockholder owns 300 Shares on the Record Date, such
Common Stockholder will receive 300 Rights entitling such Common
Stockholder to purchase 100 new Shares. Record Date Stockholders may
exercise all or some of their Rights.
NON-TRANSFERABILITY OF RIGHTS
The Rights are non-transferable and may not be purchased or sold. Rights
will expire without residual value at the Expiration Date. The Rights will
not be listed for trading on the NYSE, and there will not be any market for
trading Rights. The Shares to be issued pursuant to the Offering will be
listed for trading on the NYSE, subject to the NYSE being officially
notified of the issuance of those Shares.
SUBSCRIPTION PRICE
Under the Offering, new Shares will be sold at a price equal to the NAV per
Share as calculated at the close of trading on the Expiration Date (the
"Subscription Price"). Management believes that this pricing (versus a
percentage discount relative to the market price or a pre-determined fixed
price) will provide an incentive to Common Stockholders to participate in
the Offering.
OVER-SUBSCRIPTION PRIVILEGE
If all of the Rights initially issued are not exercised by Record Date
Stockholders, any unsubscribed Shares (collectively, the "Unsubscribed
Shares") will be offered to other Record Date Stockholders who wish to
acquire additional Shares (the "Over-Subscription Privilege"). See "The
Offering - Over-Subscription Privilege."
If enough Unsubscribed Shares are available, all over-subscription requests
will be honored in full. If there are not enough Unsubscribed Shares to
fully honor all over-subscription requests, the Unsubscribed Shares will be
allocated pro-rata among over-subscribing Record Date Stockholders based on
the number of Rights originally issued to them by the Fund. The allocation
process may involve a series of allocations to assure that the total number
of Unsubscribed Shares is distributed on a pro-rata basis. See "The
Offering - Over-Subscription Privilege."
The Horejsi Affiliates have indicated that they will fully subscribe in the
Primary Subscription on the same terms as other Common Stockholders. The
Horejsi Affiliates may subscribe in the Over-Subscription Privilege.
However, if the Horejsi Affiliates fully exercise their Rights in the
Primary Subscription and the Over-Subscription Privilege, under certain
circumstances (e.g., low participation by Common Stockholders in the
Offering), the Horejsi Affiliates could substantially increase their
percentage ownership of the Fund at an advantageous price relative to the
market price.
METHOD FOR EXERCISING RIGHTS
Except as described below, subscription certificates evidencing the Rights
("Subscription Certificates") will be sent to Record Date Stockholders or
their nominees. If a Record Date Stockholder wishes to exercise Rights, it
may do so in the following ways:
1. Complete and sign the Subscription Certificate. Enclose it in the
envelope provided, together with payment in full and mail or deliver
the envelope to Colbent Corporation (the "Subscription Agent") at the
address indicated on the Subscription Certificate, calculating the
total payment on the basis of the Estimated Subscription Price of
$8.43 per Share (i.e., the estimated subscription price based on the
Fund's NAV and market price on Augsut 10, 2007). The completed and
signed Subscription Certificate and payment must be received by the
Expiration Date. PAYMENT PURSUANT TO THIS METHOD MUST BE IN UNITED
STATES DOLLARS BY MONEY ORDER OR CHECK DRAWN ON A BANK LOCATED IN THE
UNITED STATES, MUST BE PAYABLE TO THE BOULDER GROWTH & INCOME FUND,
INC. AND MUST ACCOMPANY AN EXECUTED SUBSCRIPTION CERTIFICATE FOR SUCH
SUBSCRIPTION CERTIFICATE TO BE ACCEPTED. Because the subscription
price is estimated, each Record Date Shareholder participating in the
Offering should be prepared to pay additional monies (if any) by the
deadline for final payment for Shares as noted above under "Important
Dates for the Offering."
2. A Record Date Stockholder participating in the Offering may contact
its broker, banker or trust company, which can arrange, on such Record
Date Stockholder's 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") by the close of business on the third Business Day (defined
below) after the Expiration Date. The broker, banker, or trust company
may charge such Record Date Stockholder a fee for this service; the
Fund is not responsible for paying any fees charged by any such
broker, bank, or trust company.
Subscribing Record Date Stockholders will have no right to rescind a
purchase after the Subscription Agent has received the Subscription
Certificate or Notice of Guaranteed Delivery. See "The Offering - Method of
Exercising Rights" and "The Offering - Payment for Shares."
The Subscription Agent will deposit all checks received by it prior to the
final due date into a segregated interest bearing account at Eastern Bank
pending distribution of the Shares from the Offering. All interest will
accrue to the benefit of the Fund and investors will not earn interest on
payments submitted or be able to credit such interest against any
additional monies owed (if applicable).
--------------------------------------------------------------------------------
STOCKHOLDER INQUIRIES SHOULD BE DIRECTED TO MORROW & CO., INC.,
THE FUND'S INFORMATION AGENT,
AT 1-800-607-0088
--------------------------------------------------------------------------------
OFFERING FEES AND EXPENSES
The Fund expects to incur approximately $158,100 of expenses in connection
with the Offering. See "The Offering - Expenses of the Fund" below.
RESTRICTIONS ON FOREIGN STOCKHOLDERS
The Fund will not mail Subscription Certificates to Common Stockholders
whose record addresses are outside the United States or who have an APO or
FPO address. However, Common Stockholders whose addresses are outside the
United States or who have an APO or FPO address will receive written notice
of the Offering and those who wish to subscribe to the Offering either
partially 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 instructions have been received by
the Expiration Date, the Rights of those foreign Common Stockholders will
expire. See "The Offering - Foreign Restrictions" below.
USE OF PROCEEDS
The net proceeds of the Offering are estimated to be approximately $31.9
million. This figure is based on the Estimated Subscription Price per Share
of $8.43 and assumes all Rights offered are exercised and that the expenses
related to the Offering estimated at approximately $158,100 are paid The
Advisers anticipate that it may take up to six months for the Fund to
invest substantially all of the net proceeds of this Offering in accordance
with its investment objective and policies under current market conditions.
Pending such investment, the Fund anticipates investing the proceeds in
short-term securities issued by the U.S. government or its agencies or
instrumentalities or in high quality, short-term or long-term debt
obligations or money market instruments. See "Use of Proceeds" below.
RISK FACTORS
See "Risk Factors" below.
FEE TABLE
STOCKHOLDER TRANSACTION EXPENSES
--------------------------------------------------------------------------------------------------------- --------------------------
Sales Load (as a percentage of the Offering price) $0
Dividend Reinvestment and Cash Purchase Plan Fees $0
CURRENT EXPECTED ANNUAL FUND EXPENSES BEFORE THE RIGHTS OFFERING
(as a percentage of net assets attributable to common shares) As of 11/30/06
--------------------------------------------------------------------------------------------------------- --------------------------
Management Fees 1.40%
Preferred stock broker commission and auction agent fees 0.07%
Administration, co-administration and custodian fees 0.32%
Other Expenses 0.50%
Legal and audit fees 0.16%
Directors fees and expenses 0.15%
Printing fees 0.05%
Insurance expenses 0.02%
Miscellaneous and other expenses 0.12%
Acquired Funds 0.05%
Total Annual Expenses 2.34%
EXAMPLE 1 YEAR 3 YEARS 5 YEARS 10 YEARS
------------------------------------------------------------------ --------------- --------------- --------------- -----------------
A Common Stockholder would pay the following expenses on a
$1,000 investment assuming a 5% annual return. $23.40 $72.08 $123.39 $264.09
The purpose of the foregoing table and example is to assist Rights holders in
understanding the various costs and expenses that an investor in the Fund bears,
directly or indirectly, BUT SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES OR RATES OF RETURN. THE ACTUAL EXPENSES OF THE FUND MAY BE
GREATER OR LESS THAN THOSE SHOWN. The figures provided under "Other Expenses"
are based upon estimated amounts for the current fiscal year. The 5% annual
return shown in this example is used for illustrative purposes only and in no
way should be construed as a guarantee of future performance of the Fund. For
more complete descriptions of certain of the Fund's cost and expenses, see
"Management of the Fund" in this Prospectus and the SAI. Also see "Expenses of
the Fund" below.
FINANCIAL HIGHLIGHTS
The table below sets forth selected financial data for a Share outstanding
throughout the period presented. The per Share operating performance and ratios
for the Fund's fiscal year ended November 30, 2006 are derived from our 2006
annual financial statements which were audited by Deloitte & Touche LLP, the
Fund's publicly registered independent accounting firm, as stated in their
report which is incorporated by reference into the SAI. The per Share operating
performance and ratios for the Fund's fiscal year ended November 30, 2005 are
derived from our 2005 annual financial statements which were audited by KPMG
LLP, the Fund's publicly registered independent accounting firm during that
period, as stated in their report which is incorporated by reference into the
SAI. The per Share operating performance and ratios for the Fund's fiscal years
ended November 30, 2004 and prior years were also audited by the Fund's publicly
registered independent accounting firm KPMG LLP. The following information
should be read in conjunction with the Financial Statements and Notes thereto,
which are incorporated by reference into the SAI. The Table below contains per
share operating performance data, total investment returns, ratios to average
net assets, and other supplemental data.
INTENTIONALLY LEFT BLANK
FINANCIAL HIGHLIGHTS
Year Ended November 30, Year Ended June 30,
-------------------------------------- ---------------------------------------------------------------
2006 2005(e) 2004 2003 Five 2002 2001 2000 1999 1998
months
ended
November
30,
2002(b)
------- ---------- ---------- -------- ---------- ---------- ---------- ---------- ---------- --------
OPERATING PERFORMANCE:
Net asset value, beginning
of year $8.00 $7.58 $6.65 $6.59 $7.15 $8.65 $8.96 $10.07 $10.75 $10.17
------- ---------- ---------- -------- ---------- ---------- ---------- ---------- ---------- --------
Net investment income/(loss) 0.40 0.04 0.01 (0.03) 0.02 0.58 0.70 0.67 0.78 0.75
Net realized and unrealized
gain/(loss) on investments 1.51 0.39 0.95 1.23 (0.58) (1.49) (0.31) (1.02) (0.70) 0.59
------- ---------- ---------- -------- ---------- ---------- ---------- ---------- ---------- --------
Total from investment
operations 1.91 0.43 0.96 1.20 (0.56) (0.91) 0.39 (0.35) 0.08 1.34
------- ---------- ---------- -------- ---------- ---------- ---------- ---------- ---------- --------
DISTRIBUTIONS: PREFERRED
STOCK
Dividends paid from net
investment income to AMP*
Stockholders (0.11) (0.01) -- -- -- -- -- -- -- --
Change in accumulated
undeclared dividends on
AMP* Stockholders (0.00)(c) (0.00)(c) -- -- -- -- -- -- -- --
------- ---------- ---------- -------- ---------- ---------- ---------- ---------- ---------- --------
------- ---------- ---------- -------- ---------- ---------- ---------- ---------- ---------- --------
Net Increase/(Decrease) 1.80 0.42 0.96 1.20 (0.56) (0.91) 0.39 0.35 0.08 1.34
from operations applicable
to common shares
DISTRIBUTIONS: COMMON SHARES
Dividends paid from net
investment income (0.35) -- -- -- -- (0.59) (0.70) (0.76) (0.76) (0.76)
Dividends paid from return
of capital (0.37) -- (0.03) (0.07) -- --
------- ---------- ---------- -------- ---------- ---------- ---------- ---------- ---------- --------
Dilutive Impact of Rights
Offering++ -- -- (1.07) -- --
------- ---------- ---------- -------- ---------- ---------- ---------- ---------- ---------- --------
Net Increase/(Decrease) in
Common Net Asset Value 1.08 0.42 0.93 0.06 (0.56) (1.50) (0.31) (1.11) (0.68) 0.58
------- ---------- ---------- -------- ---------- ---------- ---------- ---------- ---------- --------
Net asset value, end of
year $9.08 $8.00 $7.58 $6.65 $6.59 $7.15 $8.65 $8.96 $10.07 $10.75
------- ---------- ---------- -------- ---------- ---------- ---------- ---------- ---------- --------
Market value, end of year $10.45 $6.96 $6.63 $5.50 $5.22 $6.78 $8.50 $8.25 $9.63 $9.63
------- ---------- ---------- -------- ---------- ---------- ---------- ---------- ---------- --------
======= ========== ========== ======== ========== ========== ========== ========== ========== ========
Total investment return 23.45% 5.54% 14.44% 2.37% (7.83)% (11.36)% 4.41% -3.70% 0.64% 13.57%
based on net asset
value(a)(d)
======= ========== ========== ======== ========== ========== ========== ========== ========== ========
Total investment return 63.31% 4.98% 21.02% 6.89% (23.01)% (14.47)% 11.77% -6.81% 7.85% 14.01%
based on market value(a)(d)
======= ========== ========== ======== ========== ========== ========== ========== ========== ========
RATIOS TO AVERAGE NET
ASSETS AVAILABLE TO COMMON
STOCKHOLDERS:
Operating Expenses 2.47% 2.24% 2.00% 1.93% 4.40%++ 1.95%+ 1.82% 2.51% 1.12% 1.12%
Operating Expenses
including interest expense -- 3.00% 2.38% 2.30% -- -- -- -- -- --
Operating Expenses without
fee waiver 2.52% 3.06% 2.06% -- -- -- -- -- -- --
Net Investment Income(b) 3.44%(f) 0.55%(f) 0.01% 0.08% 0.79%++ 6.96% 8.03% 7.08% 7.46% 7.11%
SUPPLEMENTAL DATA:
Portfolio turnover rate 35% 41% 33% 40% 21% 180% 83% 53% 58% 73%
Net assets, end of year (in
000's) $103,104 $90,673 $85,896 $75,286 $37,309 $40,514 $48,990 $50,591 $56,841 $60,670
------- ---------- ---------- -------- ---------- ---------- ---------- ---------- ---------- --------
Number of shares
outstanding at end of year
(in 000's) 11,353 11,328 11,328 11,328 5,664 5,664 5,664 5,644 5,644 5,644
Ratio of operating expenses
to Total Average Net Assets
including AMP* 1.96% 2.46% -- -- -- -- -- -- -- --
* Taxable Auction Market Preferred Stock ("AMP")
(a) Assumes reinvestment of distributions at the price obtained by the Fund's
Dividend Reinvestment Plan
(b) Fiscal year end changed to November 30. Prior to this, the fiscal year end
was June 30
(c) Amount represents less than $0.01 per Common Share
(d) Total return is not annualized for periods less than one year,
(e) On October 17, 2005 the Fund issued 1,000 shares of AMPs.
(f) For the years ended November 30, 2005 and 2006, the net investment income
ratio reflects income net of operating expenses and payments and change in
undeclared dividends to AMP Stockholders.
+ For the year ended June 30, 2002, the ratio of expenses to average net
assets excluding the costs attributable to a proxy contest and related
matters was 1.65%.
++ The Rights Offering was fully subscribed at a subscription price of $4.34
for 5,663,892 shares, which equals $24,581,291 in gross proceeds.
++ Annualized.
THE FUND
The Fund is a non-diversified, closed-end management investment company
organized as a Maryland corporation in October 1972. From its inception, and
prior to April 26, 2002, the Fund was named USLife Income Fund, Inc. and was
virtually 100% invested in corporate bonds. In January 2002, the Fund's largest
stockholder, the Ernest Horejsi Trust No. 1B, succeeded in replacing the Board
with a slate of its nominees. Soon thereafter, in April 2002, stockholders
approved changing the Fund's investment objective and corporate name, changing
the Fund's classification from diversified to non-diversified and changing or
eliminating a number of the Fund's fundamental investment restrictions.
Thereafter, the Fund began the process of liquidating its corporate bond
portfolio and began investing in common equities consistent with the new
investment objective.
As of August 10, 2007, the Fund had 11,403,356 Shares outstanding. The Common
Stock is traded on the NYSE under the symbol "BIF." The average weekly trading
volume of the Common Stock on the NYSE during the period from July 1, 2007
through July 31, 2007 was 654,570 Shares. As of August 10, 2007, the total net
assets of the Fund, including $25 million in AMPS leverage, were approximately
$121.1 million.
The following provides information about the Fund's outstanding Shares as of
August 10, 2007:
Amount held by
the Fund or for
Amount its Amount
Title of Class Authorized Account Outstanding
----------------------------------------------------------------------------------------------------------------------------
Common Shares.......................... 250,000,000 0 11,403,356
AMPS................................... 1,000 0 1,000
USE OF PROCEEDS
Management estimates the net proceeds of the Offering to be approximately $31.9
million based on an Estimated Subscription Price of $8.43 per Share, assuming
the Offering is fully subscribed and the expenses related to the Offering are
approximately $158,100. The foregoing estimates are based on the closing price
of the Shares on August 10, 2007. Accordingly, the assumptions and projections
contained in this Prospectus are subject to change significantly depending on
changes in market conditions for the Shares and performance of the Fund's
portfolio.
The Advisers will invest the net proceeds of the Offering in accordance with the
Fund's investment objective and policies. The Advisers anticipate that it may
take up to six months for the Fund to invest substantially all of the net
proceeds of this Offering in accordance with its investment objective and
policies under current market conditions. Pending such investment, the Fund
anticipates investing the proceeds in short-term securities issued by the U.S.
government or its agencies or instrumentalities or in high quality, short-term
or long-term debt obligations or money market instruments. The increase in
assets as a result in the Offering may also be used to help the Fund maintain
the Distribution Policy. The Distribution Policy permits Common Stockholders to
realize a predictable, but not assured, level of cash flow and some liquidity
periodically with respect to their Common Stock without having to sell Shares.
See the discussion regarding "Dividends and Distributions" below.
INVESTMENT OBJECTIVE AND POLICIES
Investment Objective. The Fund's investment objective is total return. The Fund
seeks to produce both income and long-term capital appreciation by investing in
a portfolio of equity and debt securities. The Fund invests primarily in common
stocks, including dividend paying common stocks such as those issued by
utilities, REITs and RICs. The Fund also invests in fixed income securities such
as U.S. government securities, preferred stocks and bonds. The Fund invests
primarily in securities of U.S.-based companies and to a lesser extent in
foreign equity securities and sovereign debt, in each case denominated in
foreign currency. The Fund has no restrictions on its ability to invest in
foreign securities. The Fund is concentrated in Real Estate Related Companies,
which means it must invest more than 25% of its total assets in such companies.
The Fund has adopted a Distribution Policy pursuant to which Common Stockholders
receive a consistent, but not assured, monthly cash distribution, subject to the
Board's right to suspend, modify, or terminate the Distribution Policy at any
time. Generating sufficient cash to make distributions under the Distribution
Policy may cause the Advisers to manage the portfolio slightly differently than
in the absence of the Distribution Policy, but in a manner consistent with the
Fund's investment objective and policies. See "Managed Distribution Policy"
below and "Risk Factors - Managed Distribution Policy." No assurance can be
given that the Fund will achieve its investment objective.
Investment Policies. The Fund is a "non-diversified" investment company, as
defined in the 1940 Act, which means that it is permitted to invest its assets
in a more limited number of issuers than "diversified" investment companies. A
diversified company may not, with respect to 75% of its total assets, invest
more than 5% of its total assets in the securities of any one issuer and may not
own more than 10% of the outstanding voting securities of any one issuer.
However, under Subchapter M of the Code, (A) not more than 25% of the Fund's
total assets may be invested in securities of any one issuer (other than U.S.
government securities and RICs) or of any two or more issuers controlled by the
Fund which may be deemed to be engaged in the same, similar or related trades or
businesses; and (B) with respect to 50% of the total value of the Fund's
portfolio, (i) the Fund must limit to 5% the portion of its assets invested in
the securities of a single issuer (other than U.S. government securities and
RICs), and (ii) the Fund may not own more than 10% of the outstanding voting
securities of any one issuer (other than U.S. government securities and RICs).
The Fund intends to concentrate its common stock investments in a few issuers
and to take large positions in those issuers, consistent with being a
"non-diversified" fund. As a result, the Fund may be subject to a greater risk
of loss than a diversified fund or a fund that has diversified its investments
more broadly. Taking larger positions is also likely to increase the volatility
of the Fund's NAV, reflecting fluctuation in the value of large Fund holdings.
The Fund has adopted a concentration policy pursuant to which it must, under
normal market conditions, invest more than 25% of its total assets in Real
Estate Related Companies. The Fund must obtain stockholder approval prior to
changing this policy. Real Estate Related Companies include, but are not limited
to: REITs and other closed-end registered investment companies that invest
primarily in REITs; home builders; real estate developers; property management
companies; real estate brokerage companies; commercial and industrial
construction companies; financial companies who make or service real estate
mortgages and/or construction loans; title, homeowners and builders risk
insurance companies; manufacturers, distributors and retailers of construction
materials and/or building supplies; lumber, paper, forest products, and other
companies with significant real estate holdings; holding companies of any of
these companies; and any other companies that the Fund's advisers reasonably
determine are "real estate related companies." Although the Fund may invest in
Real Estate Related Companies of any size, it currently intends to invest in
such companies with market capitalizations of greater than $500 million.
Although the Fund generally invests in U.S.-based Real Estate Related Companies,
such companies may invest directly or indirectly in non-U.S. properties, and the
Fund may make direct investments in foreign Real Estate Related Companies.
Under the 1940 Act, the Fund is subject to certain conditions and restrictions
with regard to its investments in RICs (see "Portfolio Contents - Registered
Investment Companies"). Under Subchapter M of the Code, no single investment can
exceed 25% of the Fund's total assets at the time of purchase. These percentage
limitations are calculated at the time of investment, and the Fund is not
required to dispose of assets if holdings increase above these levels due to
appreciation. As of August 10, 2007, 1.8% of the Fund's total assets were
invested in RICs, and 30.0% of the Fund's total assets were invested in
Berkshire Hathaway, Inc. (NYSE: BRK). The Fund has no restrictions on its
ability to invest in foreign securities. As of August 10, 2007, 29.7% of the
Fund's total assets were invested in foreign securities.
Under normal market conditions, the Fund intends to invest at least 80% of its
total assets in common stocks, primarily domestic common stocks and secondarily
in foreign common stocks denominated in foreign currencies. The Fund's
investments in common stocks may include, but is not limited to, RICs whose
objective is income, REITs, and other dividend-paying common stocks. The portion
of the Fund's assets that are not invested in common stocks may be invested in
fixed income securities, cash equivalents and other income-producing securities.
The term "fixed income securities" includes but is not limited to corporate
bonds, U.S. government securities, notes, bills, debentures, preferred stocks,
convertible securities, bank debt obligations, repurchase agreements and
short-term money market obligations.
The portion of the Fund's assets that are not invested in common stocks may be
invested in fixed income securities (including bonds, U.S. government
securities, notes, bills, debentures, preferred stocks, convertible securities,
bank debt obligations, repurchase agreements and short-term money market
obligations), cash equivalents and income-producing common stocks. Under normal
market conditions, the Fund will not have more than 20% of its total assets in
cash or cash equivalents. The Fund may, for temporary defensive purposes,
allocate a higher portion of its assets to cash and cash equivalents. For this
purpose, cash equivalents consist of, but are not limited to, short-term (less
than twelve months to maturity) U.S. government securities, certificates of
deposit and other bank obligations, investment grade corporate bonds other debt
instruments and repurchase agreements.
The Fund is also subject to the following fundamental policies, which may only
be changed with stockholder approval. The Fund may not:
1. Issue any senior securities except as permitted under the 1940 Act.
2. Invest in the securities of companies conducting their principal
business activity in the same industry if, immediately after such
investment, the value of its investments in such industry would exceed
25% of the value of its total assets; provided that this limitation
will not apply to Real Estate Related Companies.
3. Participate on a joint or a joint and several basis in any trading
account in securities, except that the Fund may, to the extent
permitted by rules, regulations or orders of the Securities and
Exchange Commission, combine orders with others for the purchases and
sales of securities in order to achieve the best overall execution.
4. Purchase or sell interests in oil, gas or other mineral exploration or
development programs.
5. Purchase or sell real estate, except that the Fund may purchase or
sell interests in REITs and securities secured by real estate or
interests therein issued by companies owning real estate or interests
therein.
6. Purchase or sell commodities or commodity contracts.
7. Make loans other than through the purchase of debt securities in
private placements and the loaning of portfolio securities.
8. Borrow money in an amount exceeding the maximum permitted under the
1940 Act.
9. Underwrite securities of other issuers, except insofar as it may be
deemed to be an underwriter in selling a portfolio security which may
require registration under the Securities Act of 1933, as amended (the
"Securities Act").
10. Invest more than 30% of the value of its total assets in securities
which have been acquired through private placements.
11. Purchase or retain the securities of any issuer, if, to the Fund's
knowledge, those officers and directors of the Fund or its investment
advisers who individually own beneficially more than 1/2 of 1% of the
outstanding securities of such issuer, together own beneficially more
than 5% of such outstanding securities.
12. Pledge, mortgage or hypothecate its assets except in connection with
permitted borrowing and to the extent related to transactions in which
the Fund is authorized to engage.
Except for the Fund's investment objective, industry concentration and
fundamental investment restrictions as described in this prospectus and in the
SAI, the percentage limitations and investment policies set forth in this
prospectus can be changed by the Board without stockholder approval. Limitations
on investments expressed in percentages are measured and are applicable only at
the time of investment. They are not measured or applied on an ongoing basis.
There is no requirement for the Fund to sell or change its portfolio investments
resulting from changes in valuations to such investments.
Other Investment Techniques. The Fund may engage in other types of transactions,
including, but not limited to, investment in restricted and illiquid securities,
repurchase agreements, when-issued and forward commitment transactions,
borrowing, securities lending and other transactions. For a description of such
types of transactions, see "Investment Policies and Techniques" and "Other
Investment Policies and Techniques" in the SAI.
Managed Distribution Policy. In May 2006, the Fund adopted the Distribution
Policy pursuant to which Common Stockholders would receive a consistent, but not
assured, periodic cash payment. Presently, under the Distribution Policy, the
Fund makes regular distributions at the rate of $0.115 per Share per month, or
$1.38 per Share annually. The annualized distribution rate under the
Distribution Policy is reviewed periodically by the Board and generally will not
exceed the long term performance of the Fund based on a rolling 5-year
performance history, subject to the Board's discretion to suspend, modify or
terminate the Distribution Policy at any time. See "Dividends and Distributions
- Managed Distribution Policy."
The Advisers do not expect to make significant changes to the makeup of the
Fund's portfolio or seek to invest in "high yielding" securities as a result of
the Distribution Policy. The Fund may carry a slightly higher cash balance from
time to time in order to fulfill the distribution payments. If the Fund carries
higher cash balances during rising equity markets, the Fund's performance may be
negatively affected relative to other equity funds. Conversely, carrying higher
cash balances during declining equity markets may positively affect the Fund's
performance. To avoid Code and 1940 Act requirements to make distributions in
excess of the Distribution Policy, the Advisers expect to manage the portfolio
slightly differently than in the absence of the Distribution Policy, but in a
manner consistent with the Fund's investment objective and policies. For
example, the Advisers may realize a loss in a security by selling it in order to
offset realized capital gains, whereas, absent the Distribution Policy, the
Advisers may not have realized the loss. The Advisers also may increase the
Fund's position in a security with an unrealized loss, and subsequently sell the
tax lot with the higher tax cost basis 31 days or more after the purchase to
avoid a wash sale, leaving the Fund with approximately the same position in the
security but with a lower tax cost basis. The Advisers may also purchase stock
of an issuer paying an unusually large dividend and, after the stock begins
trading ex-dividend, sell the stock at a loss, thereby allowing the Fund to
offset gains realized on other securities sold during the year. The Advisers
enter into such transactions only when they believe that there is a high
probability of realizing an economic profit for the Fund. The investment
strategies described above were utilized by the Advisers prior to the
implementation of the Distribution Policy to realize losses for the Fund in an
effort to be tax efficient, and may result in slightly higher portfolio turnover
and transaction costs. The Advisers will not hold positions with unrealized
capital gains that they believe should be sold based on their fundamental
analysis of the underlying issuer. The Advisers believe it would be better to
discontinue the Distribution Policy than to see unrealized gains turn into
unrealized losses.
As of June 30, 2007, the Fund had net realized gains in excess of its capital
loss carry-forwards for the fiscal year ending November 30, 2007. Unless the
Fund (i) realizes capital losses prior to November 30, 2007 in an amount
sufficient to offset all realized gains for the Fund's fiscal year or (ii)
obtains exemptive relief from the SEC from Section 19(b) of the 1940 Act and
Rule 19b-1 under the 1940 Act prior to November 30, 2007 so it can characterize
a portion of its previous distributions as realized capital gains, the Fund
would be required to distribute the entire amount of its net realized capital
gains for the fiscal year to its stockholders in December 2007. The per share
amount of any such net realized capital gains distribution may be greater than
per share amount at which monthly distributions previously have been made
pursuant to the Distribution Policy, and therefore could shrink the Fund's
assets more quickly than would otherwise be the case. The Advisers may utilize
the investment strategies described in the preceding paragraph to realize
capital losses in an amount sufficient to offset the Fund's realized capital
gains for the fiscal year..
INVESTMENT PHILOSOPHY
Common Stocks. With respect to the Fund's common stock portfolio (other than
common stocks purchased primarily for their income-producing potential), the
Advisers use an "intrinsic value" approach to selecting and managing the Fund's
assets. The Advisers define intrinsic value as the discounted value of the cash
that can be taken out of a business during its remaining life. Accordingly, in
their securities selection process, the Advisers put primary emphasis on
analysis of balance sheets, cash flows, the quality of management and its
ability to efficiently and effectively allocate capital, various internal
returns which indicate profitability, and the relationships that these factors
have to the price of a given security. The intrinsic value approach is based on
the belief that the securities of certain companies may sell at a discount from
the Advisers' estimate of such companies' "intrinsic value." The Advisers will
attempt to identify and invest in such securities, with the expectation that
such value discount will narrow over time and thus provide capital appreciation
for the Fund. When the Fund makes an investment in common stock of an issuer, it
will likely make a significant investment and typically hold such stock for a
long period of time. Over time, the Fund believes that value investing produces
superior total returns.
Fixed Income Investments. In seeking its total return objective, the Fund may
invest a portion of its assets in U.S. government securities, preferred stocks,
bonds and other income producing securities. In selecting such investments, the
Advisers consider, among other things, current yield, liquidity, price
variability and the underlying fundamental characteristics of the issuer, with
particular emphasis on debt to equity and debt coverage ratios.
PORTFOLIO CONTENTS
At any given time, the Fund has some or all of the types of investments
described below. Under normal market conditions, the Fund invests primarily in a
portfolio of common stocks and income producing securities such as stocks of
REITs and other Real Estate Related Companies, RICs and utilities, bonds and
preferred stocks.
Common Stocks. The Fund may invest all or any portion of its assets in common
stock. Common stock is defined as shares of a corporation that entitle the
holder to a pro rata share of the profits of the corporation, if any, without
preference over any other stockholder or class of stockholders, including
holders of the corporation's preferred stock and other senior equity. Common
stock usually carries with it the right to vote and frequently an exclusive
right to do so. Upon liquidation, holders of common stock also have the right to
participate in the assets of the corporation after all other claims are paid.
In selecting common stocks for investment, the Fund expects to focus primarily
on U.S.-based companies, although the Fund is permitted to invest in companies
outside the U.S. Generally, target companies have consistent high returns on
equity, while using modest amounts of debt relative to their industries. The
Fund seeks investments in businesses the Advisers understand which have fairly
predictable and improving future earnings, and most importantly, are reasonably
priced relative to the businesses' earnings and anticipated growth in earnings.
The Fund does not focus its investments in "large-cap", "mid-cap" or "small-cap"
companies since the Advisers believe it would be unwise to impose such
investment limitations.
Real Estate Related Companies and REITs. As a matter of investment policy, the
Fund is concentrated in Real Estate Related Companies, which means it must,
under normal market conditions, invest more than 25% of its total assets in such
companies. The Fund must obtain stockholder approval prior to changing this
policy. REITs are included in the definition of Real Estate Related Companies
and comprise a substantial portion of the Fund's assets. As of August 10, 2007,
27.4% of the Fund's total assets were invested in REITs and real estate related
companies. REITs invest primarily in commercial real estate or real
estate-related loans. A REIT is not taxed on income distributed to its
stockholders or unit-holders if it complies with regulatory requirements
relating to its organization, ownership, assets and income, and with a
regulatory requirement that it distribute to its stockholders or unit-holders at
least 90% of its taxable income for each taxable year. Generally, REITs can be
classified as equity REITs, mortgage REITs and hybrid REITs. Equity REITs invest
the majority of their assets directly in real property and derive their income
primarily from rents and capital gains from appreciation realized through
property sales. Mortgage REITs invest the majority of their assets in real
estate mortgages and derive their income primarily from interest payments.
Hybrid REITs combine the characteristics of both equity and mortgage REITs. By
investing in REITs indirectly through the Fund, Common Stockholders will bear
not only the proportionate share of the expenses of the Fund, but also,
indirectly, similar expenses of underlying REITs. The Fund invests in REITs
primarily for income.
The Fund may be subject to certain risks associated with the direct investments
of the REITs in which it invests. REITs may be affected by changes in their
underlying properties and by defaults by borrowers or tenants. Mortgage REITs
may be affected by the quality of the credit extended. Furthermore, REITs are
dependent on specialized management skills. Some REITs may have limited
diversification and may be subject to risks inherent in financing a limited
number of properties. REITs depend generally on their ability to generate cash
flow to make distributions to stockholders or unit-holders, and may be subject
to defaults by borrowers and to self-liquidations. In addition, a REIT may be
affected by its failure to qualify for tax-free pass-through of income under the
Code or its failure to maintain exemption from registration under the 1940 Act.
Registered Investment Companies (RICs). The Fund may invest in securities issued
by RICs subject to such limitations, restrictions and conditions as imposed by
Federal law. The common stock of closed-end RICs can trade at a substantial
discount to the underlying NAV of the RIC, and the Fund may, from time to time,
invest in common stocks issued by RICs when they are trading at discounts or
when the Advisers otherwise deem market conditions appropriate. The Fund intends
to normally invest in RICs that pay dividends. RICs that pay regular dividends
typically own interest rate sensitive securities, which tend to increase in
value when interest rates decline, and decrease in value when interest rates
increase. To the extent that the Fund invests in RICs, the Fund's stockholders
will incur expenses with respect to both the Fund and that portion of the Fund's
assets invested in other RICs. However, as common stocks of closed-end RICs can
trade at substantial discounts to their underlying NAVs, the Advisers may deem
the underlying expense of investing in a particular RIC to have minimal impact
when compared to the discount at which the Fund may buy its shares. The NAV and
market value of common stocks issued by RICs will fluctuate with the value of
the underlying assets. The Fund may invest in the auction market preferred stock
of other closed-end funds primarily as a means of investing the Fund's cash for
the short-term in higher yielding alternatives to repurchase agreements or
government securities that include direct obligations of the United States and
obligations issued by U.S. government agencies and instrumentalities
("Government Securities"). The Fund will consider investing cash in these
instruments, and other short-term money market type alternatives, when the yield
spread is adequately attractive over repurchase agreements and Government
Securities. The Fund generally will invest in auction market preferred stocks
that are rated AAA although it may invest in lower rated securities from time to
time.
Prior to July 31, 2006, the Fund was restricted from investing more than 10% of
its total assets in other RICs. However, effective July 31, 2006, new rules
under the 1940 Act lifted these restrictions such that the Fund may now invest
more than 10% of its total assets in other RICs with certain restrictions
including: (i) a 3% limitation on acquiring the total outstanding voting shares
of any other single RIC; (ii) voting shares of acquired RICs in accordance with
certain stockholder principles; and (iii) not acquiring shares of other RICs
with the purpose of requiring the acquired RIC to redeem greater than one
percent of that RIC's outstanding shares in a period of less than 30 days. As a
result of these changes to the 1940 Act rules, and consistent with the Fund's
investment objectives, the Fund may invest a greater percentage of its assets in
RICs subject to any restrictions or limitations imposed by Federal law.
Preferred Stocks. The Fund may invest in preferred securities, including the
preferred securities issued by RICs. Preferred securities are equity securities,
but they have many characteristics of fixed income securities, such as a fixed
dividend payment rate and/or a liquidity preference over the issuer's common
shares. However, because preferred securities are equity securities, they may be
more susceptible to risks traditionally associated with equity investments than
fixed income securities. Unlike common stock, preferred securities typically do
not have voting rights.
Fixed rate preferred stocks have fixed dividend rates. They can be perpetual,
with no mandatory redemption date, or issued with a fixed mandatory redemption
date. Certain issues of preferred stock are convertible into other equity
securities. Perpetual preferred stocks provide a fixed dividend throughout the
life of the issue, with no mandatory retirement provisions, but may be callable.
Sinking fund preferred stocks provide for the redemption of a portion of the
issue on a regularly scheduled basis with, in most cases, the entire issue being
retired at a future date. The value of fixed rate preferred stocks can be
expected to vary inversely with interest rates. Adjustable rate preferred stocks
have a variable dividend rate which is determined periodically, typically
quarterly, according to a formula based on a specified premium or discount to
the yield on particular Government Securities, typically the highest base-rate
yield of one of three Government Securities: the 90-day Treasury bill; the
10-year Treasury note; and either the 20-year or 30-year Treasury bond or other
index. The premium or discount to be added to or subtracted from this base-rate
yield is fixed at the time of issuance and cannot be changed without the
approval of the holders of the adjustable rate preferred stock. Some adjustable
rate preferred stocks have a maximum and a minimum rate and in some cases are
convertible into common stock.
Auction rate preferred stocks pay dividends that adjust based on periodic
auctions. Such preferred stocks are similar to short-term corporate money market
instruments in that an auction rate preferred stockholder has the opportunity to
sell the preferred stock at par in an auction, normally conducted at least every
49 days, through which buyers set the dividend rate in a bidding process for the
next period. The dividend rate set in the auction depends on market conditions
and the credit quality of the particular issuer. Typically, the auction rate
preferred stock's dividend rate is limited to a specified maximum percentage of
an external commercial paper index as of the auction date. Further, the terms of
the auction rate preferred stocks generally provide that they are redeemable by
the issuer at certain times or under certain conditions.
The Fund may, from time to time, invest in preferred securities that are rated,
or whose issuer's senior debt is rated, investment grade by Moody's and Standard
& Poor's ("S&P") at the time of investment, although the Fund is not limited to
investments in investment grade preferred securities. In addition, the Fund may
acquire unrated issues that the Advisers deem to be comparable in quality to
rated issues in which the Fund is authorized to invest.
Money Market Instruments. Under normal market conditions, the Fund may hold up
to 20% of its total assets in cash or money market instruments. The Fund intends
to invest in money market instruments pending investments in common stocks, to
serve as collateral in connection with certain investment techniques, and to
hold as a reserve pending the payment of dividends to investors. When the
Advisers believe that economic circumstances warrant a temporary defensive
posture, the Fund may invest without limitation in short-term money market
instruments.
Money market instruments that the Fund may acquire usually will be securities
rated in the highest short-term rating category by Moody's or S&P or the
equivalent from another major rating service, or securities of issuers that have
received such ratings with respect to other short-term debt or comparable
unrated securities. Money market instruments in which the Fund typically expects
to invest include: Government Securities (as defined below); bank obligations
(including certificates of deposit, time deposits and bankers' acceptances of
U.S. or foreign banks); commercial paper rated P-l by Moody's or A-1 by S&P; and
repurchase agreements.
Repurchase Agreements. The Fund may invest temporarily, without limitation, in
repurchase agreements, which are agreements pursuant to which securities are
acquired by the Fund from a third party with the understanding that they will be
repurchased by the seller at a fixed price on an agreed date. These agreements
may be made with respect to any of the portfolio securities in which the Fund is
authorized to invest. Repurchase agreements may be characterized as loans
secured by the underlying securities. The Fund may enter into repurchase
agreements with (i) member banks of the Federal Reserve System having total
assets in excess of $500 million and (ii) securities dealers, provided that such
banks or dealers meet certain creditworthiness standards established by the
Board. The resale price reflects the purchase price plus an agreed-upon market
rate of interest which is unrelated to the coupon rate or date of maturity of
the purchased security. The collateral is marked to market daily. Such
agreements permit the Fund to keep all its assets earning interest while
retaining "overnight" flexibility in pursuit of investments of a longer term
nature.
Government Securities. The Fund may invest in Government Securities. Included
among direct obligations of the United States are treasury bills, treasury notes
and treasury bonds, which differ principally in terms of their maturities and
are supported by the full faith and credit of the U.S. government. Securities
issued by U.S. government agencies and instrumentalities include other
securities that are supported by the full faith and credit of the United States
(such as Government National Mortgage Association certificates); securities that
are supported by the right of the issuer to borrow from the U.S. Treasury (such
as securities of Federal Home Loan Banks); and securities that are supported by
the credit of the instrumentality (such as Federal National Mortgage Association
and Federal Home Loan Mortgage Corporation bonds). No assurance can be given
that the U.S. government will provide financial support in the future to U.S.
government agencies, authorities or instrumentalities that are not supported by
the full faith and credit of the United States. Securities guaranteed as to
principal and interest by the U.S. government, its agencies, authorities or
instrumentalities include (i) securities for which the payment of principal and
interest is backed by an irrevocable letter of credit issued by the U.S.
government or any of its agencies, authorities or instrumentalities; and (ii)
participations in loans made to non-U.S. governments or other entities that are
so guaranteed. The secondary market for certain of these participations is
limited and therefore may be regarded as illiquid.
Zero Coupon Securities. The Fund may invest up to 10% of its total assets in
zero coupon securities issued by the U.S. government, its agencies or
instrumentalities, as well as custodial receipts or certificates underwritten by
securities dealers or banks that evidence ownership of future interest payments,
principal payments or both on certain government securities. Zero coupon
securities pay no cash income to their holders until they mature and are issued
at substantial discounts from their value at maturity. When held to maturity,
their entire return comes from the difference between their purchase price and
their maturity value. Because interest on zero coupon securities is not paid on
a current basis, the values of securities of this type are subject to greater
fluctuations than are the values of securities that distribute income regularly
and may be more speculative than such securities. Accordingly, the values of
these securities may be highly volatile as interest rates rise or fall. In
addition, the Fund's investments in zero coupon securities will result in
special tax consequences. Although zero coupon securities do not make interest
payments, for tax purposes a portion of the difference between a zero coupon
security's maturity value and its purchase price is taxable income of the Fund
each year.
Custodial receipts evidencing specific coupon or principal payments have the
same general attributes as zero coupon Government Securities but are not
considered to be Government Securities. Although typically under the terms of a
custodial receipt the Fund is authorized to assert its rights directly against
the issuer of the underlying obligation, the Fund may be required to assert
through the custodian bank such rights as may exist against the underlying
issuer. Thus, in the event the underlying issuer fails to pay principal and/or
interest when due, the Fund may be subject to delays, expenses and risks that
are greater than those that would have been involved if the Fund had purchased a
direct obligation of the issuer. In addition, in the event that the trust or
custodial account in which the underlying security has been deposited is
determined to be an association taxable as a corporation, instead of a
non-taxable entity, the yield on the underlying security would be reduced in
respect of any taxes paid.
Lending Of Securities. The Fund is authorized to lend securities it holds to
brokers, dealers and other financial organizations. Loans of the Fund's
securities, if and when made, may not exceed 33-1/3% of the Fund's total assets.
The Fund's loans of securities will be collateralized by cash, letters of credit
or Government Securities that will be maintained at all times in a segregated
account with the Fund's custodian in an amount at least equal to the current
market value of the loaned securities.
By lending its portfolio securities, the Fund can increase its income by
continuing to receive interest on the loaned securities, by investing the cash
collateral in short-term instruments or by obtaining yield in the form of
interest paid by the borrower when Government Securities are used as collateral.
The risk in lending portfolio securities, as with other extensions of credit,
consists of the possible delay in recovery of the securities or the possible
loss of rights in the collateral should the borrower fail financially. The Fund
will adhere to the following conditions whenever it lends its securities: (i)
the Fund must receive at least 100% cash collateral or equivalent securities
from the borrower, which will be maintained by daily marking-to-market; (ii) the
borrower must increase the collateral whenever the market value of the
securities loaned rises above the level of the collateral; (iii) the Fund must
be able to terminate the loan at any time; (iv) the Fund must receive reasonable
interest on the loan, as well as any dividends, interest or other distributions
on the loaned securities and any increase in market value; (v) the Fund may pay
reasonable fees approved by its board of directors, including, for example, fees
to (a) the custodian in connection with support of the lending activities, (b)
the loan or placing broker for arranging the securities loan, and/or (iii) the
borrower for participating in the loan transaction; and (c) voting rights on the
loaned securities may pass to the borrower, except that, if a material event
adversely affecting the investment in the loaned securities occurs, the Board
must terminate the loan and regain the Fund's right to vote the securities.
Portfolio Turnover. Although the Advisers are not restricted with respect to
portfolio turnover, it is not the Fund's policy to engage in transactions with
the objective of seeking profits from short-term trading. It is expected that
the annual portfolio turnover rate of the Fund will be less than 50% excluding
securities having a maturity of one year or less. Because it is difficult to
accurately predict portfolio turnover rates, actual turnover may be higher or
lower. Higher portfolio turnover results in increased Fund expenses, including
brokerage commissions, dealer mark-ups and other transaction costs on the sale
of securities and on the reinvestment in other securities. For the fiscal years
ended November 30, 2005 and November 30, 2006, the Fund's portfolio turnover
rates were 41% and 35%, respectively. The Fund may also invest in RICs which
also may not be limited in their portfolio trading activity. Higher turnover
rates generally result in correspondingly greater brokerage commissions and
other transactional expenses which may be borne by the Fund, directly or through
its investment in RICs. Higher turnover rates also may be more likely to
generate capital gains that must be distributed to Fund stockholders, either as
a result of the Fund's receipt of capital gains from RIC transactions or from
the Fund's trading in RICs or other investments. Additionally, the Fund may have
a slightly higher portfolio turnover rate than other similarly-situated equity
funds due to the periodic need to liquidate securities for the purpose of making
payments under the Distribution Policy and the strategy of purchasing stocks
paying unusually large dividends and, once the stock begins trading ex-dividend,
selling the stock at a loss, allowing the Fund to offset gains on other
securities sold during the year. See "Dividends and Distributions - Managed
Distribution Policy" and "Investment Objective and Policies - Managed
Distribution Policy."
RISK FACTORS
Following is a summary of some of the matters that a stockholder or prospective
stockholder should consider before investing in the Fund through the Offering.
It is not intended to be a complete review of every risk that stockholders face
when investing in Shares:
Non-Diversified Status Risk. The Fund is classified as "non-diversified" under
the 1940 Act. As a result, it can invest a greater portion of its assets in
obligations of a single issuer than a "diversified" fund. The Fund will
therefore be more susceptible than a diversified fund to being adversely
affected by any single corporate, economic, political or regulatory occurrence.
The Fund intends to diversify its investments to the extent necessary to
qualify, and maintain its status, as a regulated investment company under U.S.
federal income tax laws. See "Federal Income Tax Matters."
Investments in Common Stocks. The Fund intends to invest, under normal market
conditions, at least 80% of its total assets in publicly traded common stocks.
Common stocks generally have greater risk exposure and reward potential over
time than bonds. The volatility of common stock prices has historically been
greater than bonds, and as the Fund invests primarily in common stocks, the
Fund's NAV may also be volatile. Further, because the time horizon for the
Fund's investments in common stock is longer, the time necessary for the Fund to
achieve its objective of total return will likely be longer than for a fund that
invests solely for income.
Concentration Risk. The Fund intends to concentrate its common stock investments
in a few issuers and to take large positions in those issuers, consistent with
being a "non-diversified" fund. As a result, the Fund may be subject to a
greater risk of loss than a diversified fund or a fund that has diversified its
investments more broadly. Taking larger positions is also likely to increase the
volatility of the Fund's NAV, reflecting fluctuation in the value of large Fund
holdings.
Investment in Berkshire Hathaway. The Fund presently has invested a significant
percentage of its portfolio in Berkshire Hathaway, Inc. (NYSE: BRK)
("Berkshire"). As of August 10, 2007, the Fund held 310 Berkshire Class A shares
and 500 Berkshire Class B shares, representing 30.0% of the Fund's total assets.
The Advisers do not currently intend to liquidate any portion of the Fund's
position in Berkshire. Although not an insurance company itself, Berkshire owns
Geico Insurance, General Re Insurance and other insurance companies, and
therefore derives a significant portion of its income, and its value, from
insurance companies. The insurance business can be significantly affected by
interest rates as well as price competition within the industry. In addition, an
insurance company may experience significant changes in its year to year
operating performance based both on claims paid and on performance of invested
assets. Insurance companies can also be affected by government regulations and
tax laws, which may change from time to time. A significant decline in the
market price of Berkshire or any other company in which the Fund has made a
significant common stock investment (i) would result in a significant decline in
the Fund's NAV; (ii) may result in a proportionate decline in the market price
of the Shares; and (iii) may result in greater risk and market fluctuation than
a fund that has a more diversified portfolio.
Investments in Real Estate Related Companies. The Fund has adopted a
concentration policy pursuant to which it must, under normal market conditions,
invest more than 25% of its total assets in Real Estate Related Companies. The
Fund must obtain stockholder approval prior to changing this policy, thus
limiting its flexibility to liquidate such companies in the future should market
conditions warrant. Since the Fund will concentrate its assets in the real
estate industry, the Fund's performance will be generally linked to performance
of the real estate markets. Property values may fall due to increasing vacancies
or declining rents resulting from economic, legal, cultural or technological
developments. REIT and other Real Estate Related Company prices also may drop
because of the failure of borrowers to pay their loans and poor management. Many
REITs utilize leverage, which increases investment risk and could adversely
affect a REIT's operations and market value in periods of rising interest rates,
as well as risks normally associated with debt financing. In addition, there are
risks associated with particular sectors of real estate investments (e.g.,
retail, office, hotel, healthcare and multifamily properties), although the Fund
does not intend to focus on any particular sector of real estate investments.
Leveraging Risk. The Fund is currently leveraged with the AMPS. Use of leverage
may have a number of adverse effects on the Fund and its stockholders including:
(i) leverage may magnify market fluctuations in the Fund's underlying holdings
thus causing a disproportionate change in the Fund's NAV; (ii) the Fund's cost
of leverage may exceed the return on the underlying securities acquired with the
proceeds of the leverage, thereby diminishing rather than enhancing the return
to stockholders and generally making the Fund's total return to such
stockholders more volatile; (iii) the Fund may be required to sell investments
in order to meet dividend or interest payments on the debt or preferred stock it
has issued when it may be disadvantageous to do so; (iv) leveraging through the
issuance of preferred stock requires that the holders of the preferred stock
have class voting rights on various matters that could make it more difficult
for Common Stockholders to change the investment objective or fundamental
policies of the Fund, to convert it to an open-end fund or make certain other
changes; and (v) the Fund may be forced to redeem some or all of the AMPS at
inopportune times due to a decline in market value of Fund investments. Because
the fees paid to the Advisers and FAS will be calculated on the basis of the
Fund's managed assets, the fees will be higher when leverage (including the
AMPS) is utilized, giving the Advisers an incentive to utilize leverage.
Managed Distribution Policy. In May 2006 stockholders voted in favor of, and the
Fund adopted, the Distribution Policy. A managed distribution policy allows a
fund to provide a regular, periodic (but not assured) distribution to its common
stockholders which is not dependent on the amount of income earned or capital
gains realized by the fund. An equity fund, such as the Fund, is designed for
investors to participate in a professionally managed portfolio of equity
investments. Over the long-term, equity investments have historically provided
higher total returns than fixed income investments such as bonds. However,
unlike most fixed income funds, which pay stockholders a regular dividend based
on the fund's investment income, equity funds generally pay only one dividend
per year consisting of a relatively small amount of net investment income and
any net realized capital gains. However, the practice of making distributions
that exceed income earned or capital gains realized can result in the Fund
making distributions that consist of a return of capital. A managed distribution
permits a fund to distribute a predetermined monthly amount, regardless of when
or whether income is earned or capital gains are realized. A managed
distribution policy recognizes that many investors are willing to accept the
potentially higher asset volatility of equity investments, but would prefer that
a consistent level of cash distributions are available to them each month for
reinvestment or other purposes of their choosing.
The Distribution Policy initially provided for monthly distributions at the rate
of $0.10 per Share per month, or $1.20 per Share annually, which represented a
14.9% annual distribution rate relative to the Fund's NAV at the time. In
February 2007, because the NAV of the Fund had increased substantially since the
Distribution Policy was adopted, and the Board wished to maintain a similar
annual distribution rate to that originally adopted, the Fund increased the
distribution rate to $0.115 per Share per month, or $1.38 per Share annually,
representing a 14.6% annual distribution rate relative to the Fund's NAV at the
time. The annual distribution rate under the Distribution Policy is reviewed
periodically by the Board and generally will not exceed the annual long term
performance of the Fund based on a rolling 5-year performance history, subject
to the Board's discretion to suspend, modify or terminate the Distribution
Policy at any time. In conducting its review of the annual distribution rate and
the Fund's performance history, the Board will take into account, among other
factors, that during 2002, the first year the Advisers served as investment
advisers to the Fund, the Fund's portfolio consisted primarily of bonds that
were below investment grade, and that the Fund recognized significant losses as
these investments were liquidated and the proceeds invested in common stocks
consistent with the Fund's new objective of total return.
Exemptive relief from the SEC is not required in the near term in order to
continue the Distribution Policy. The Fund has applied to the SEC for exemptive
relief from Section 19(b) of the 1940 Act and Rule 19b-1 under the 1940 Act to
enable the Fund to continue the Distribution Policy over the long term. Section
19(b) of the 1940 Act limits an investment company's ability to make multiple
distributions of net realized long-term capital gains each year, subject to
certain exceptions contained in Rule 19b-1. Historically, investment companies
that wished to implement a managed distribution policy requiring multiple
capital gain distributions per year routinely received exemptive relief from
Section 19(b). However, as of the date of this Prospectus, the SEC has not
responded either favorably or unfavorably to the Fund's request for exemptive
relief originally filed in 2004 and amended in January 2007. It is generally
believed that the SEC has imposed a moratorium on granting this type of request
for exemptive relief over concerns that inadequate disclosures by investment
companies regarding sources of distributions, e.g., net investment income, net
long-term capital gain, return of capital, have resulted in fund investors not
understanding that distributions may include a return of capital and do not
necessarily represent a dividend yield.
For the fiscal year ended November 30, 2006, the Distribution Policy did not
violate Section 19(b) because the Fund had capital loss carry-forwards that were
used to offset the Fund's realized net capital gains. Accordingly, distributions
made pursuant to the Distribution Policy did not consist of net long-term
capital gains. As of December 1, 2006, the Fund had tax loss carry-forwards of
approximately $4.3 million expiring beginning in 2010. However, as of June 30,
2007 the Fund had net realized gains in excess of its capital loss
carry-forwards for the fiscal year ending November 30, 2007. Unless the Fund (i)
realizes capital losses prior to November 30, 2007 in an amount sufficient to
offset all realized gains for the Fund's fiscal year or (ii) obtains exemptive
relief from the SEC from Section 19(b) of the 1940 Act and Rule 19b-1 under the
1940 Act prior to November 30, 2007 so it can characterize a portion of its
previous distributions as realized capital gains, the Fund would be required to
distribute the entire amount of its net realized capital gains for the fiscal
year to its stockholders in December 2007. The per share amount of any such net
realized capital gains distribution may be greater than per share amount at
which monthly distributions previously have been made pursuant to the
Distribution Policy, and therefore could shrink the Fund's assets more quickly
than would otherwise be the case.
If and when the Fund exhausts its capital loss carry-forwards, exemptive relief
from Section 19(b) and Rule 19b-1 would be required in order to continue making
managed distributions unless the Board elects to characterize the Fund's final
distribution for each calendar year as including all net capital gain realized
during the year (and increasing the amount of the final distribution if
necessary). Alternatively, the Board could elect to suspend or terminate the
Distribution Policy.
There are certain risks and negative impacts associated with the Distribution
Policy:
- The Distribution Policy will likely have a negative tax impact on
Common Stockholders. If the Fund has net realized long-term capital
gains during its fiscal year, and the Fund has paid out distributions
during the year, the Code will deem such gains to have been paid out,
even in circumstances where the distributions have not resulted in the
violation of Section 19(b) of the 1940 Act. These gains will be
treated as ordinary income, and will be taxed at ordinary income tax
rates instead of the more favorable long-term capital gain rate.
Moreover, notwithstanding Common Stockholders being treated as if they
have received ordinary income, the Fund would still lose its capital
loss carry-forwards in the amount of the gains realized. Accordingly,
the payment of managed distributions when the Fund is utilizing
capital loss carry-forwards to offset realized capital gains will
result in tax inefficiencies for the Common Stockholders.
- The Distribution Policy may impact the way in which the Fund is
managed. The Advisers do not expect to make significant changes to the
makeup of the Fund's portfolio or seek to invest in "high yielding"
securities as a result of the Distribution Policy. The Fund may carry
a slightly higher cash balance from time to time in order to fulfill
the distribution payments. If the Fund carries higher cash balances
during rising equity markets, the Fund's performance may be negatively
affected relative to other equity funds. Conversely, carrying higher
cash balances during declining equity markets may positively affect
the Fund's performance. To avoid Code and 1940 Act requirements to
make distributions in excess of the Distribution Policy, the Advisers
expect to manage the portfolio slightly differently than in the
absence of the Distribution Policy, but in a manner consistent with
the Fund's investment objective and policies. For example, the
Advisers may realize a loss in a security by selling it in order to
offset realized capital gains, whereas, absent the Distribution
Policy, the Advisers may not have realized the loss. The Advisers also
may increase the Fund's position in a security with an unrealized
loss, and subsequently sell the tax lot with the higher tax cost basis
31 days or more after the purchase to avoid a wash sale, leaving the
Fund with approximately the same position in the security but with a
lower tax cost basis. The Advisers may also purchase stock of an
issuer paying an unusually large dividend and, after the stock begins
trading ex-dividend, sell the stock at a loss, thereby allowing the
Fund to offset gains realized on other securities sold during the
year. The Advisers enter into such transactions only when they believe
that there is a high probability of realizing an economic profit for
the Fund. The investment strategies described above were utilized by
the Advisers prior to the implementation of the Distribution Policy to
realize losses for the Fund in an effort to be tax efficient, and may
result in slightly higher portfolio turnover and transaction costs.
The Advisers will not hold positions with unrealized capital gains
that they believe should be sold based on their fundamental analysis
of the underlying issuer. The Advisers believe it would be better to
discontinue the Distribution Policy than to see unrealized gains turn
into unrealized losses. As of June 30, 2007 the Fund had net realized
gains in excess of its capital loss carry-forwards for the fiscal year
ending November 30, 2007. Unless the Fund (i) realizes capital losses
prior to November 30, 2007 in an amount sufficient to offset all
realized gains for the Fund's fiscal year or (ii) obtains exemptive
relief from the SEC from Section 19(b) of the 1940 Act and Rule 19b-1
under the 1940 Act prior to November 30, 2007 so it can characterize a
portion of its previous distributions as realized capital gains, the
Fund would be required to distribute the entire amount of its net
realized capital gains for the fiscal year to its stockholders in
December 2007. The per share amount of any such net realized capital
gains distribution may be greater than per share amount at which
monthly distributions previously have been made pursuant to the
Distribution Policy, and therefore could shrink the Fund's assets more
quickly than would otherwise be the case. The Advisers may utilize the
investment strategies described above to realize capital losses in an
amount sufficient to offset the Fund's realized capital gains for the
fiscal year.
- The Distribution Policy is subject to modification, suspension or
termination at any time by the Board. Because the Distribution Policy
was implemented without an exemption under Section 19(b) of the 1940
Act and Rule 19b-1, the Fund must have the flexibility to modify,
suspend or terminate the Distribution Policy immediately if the Board
deems such action to be in the best interests of the Fund and its
stockholders. The Distribution Policy could have a limited duration
because, unless the Fund receives exemptive relief from Section 19(b),
it will eventually exhaust its capital loss carry-forwards and thus
will have to make an annual distribution of all net capital gains
realized by the Fund during the fiscal year or suspend or terminate
the policy so as to avoid violating Section 19(b).
It is difficult to predict when and whether the capital loss
carry-forward will expire. A number of variables go into the rate at
which the capital loss carry-forward may be depleted, any one of which
could dramatically impact expiration. These variables include the
balance of the capital loss carry-forwards (which as of December 1,
2006 was approximately $4.3 million); the balance of cash carried by
the Fund; how the Fund might recognize gains or losses; and special
dividend opportunities. For example, the Fund may have a position in a
stock with an unrealized capital gain which the Advisers may have no
intention of selling, but through a tender or merger, may be forced
unexpectedly to realize the capital gain. Realizing any such capital
gains may accelerate the exhaustion of the Fund's capital loss
carry-forwards.
Even if the Fund obtains exemptive relief from Section 19(b), the
Board may elect to temporarily suspend the Distribution Policy for a
period of at least one year so that the Fund can offset capital loss
carry-forwards against realized capital gains before the Fund's
capital loss carry-forwards expire (beginning in 2010). This
determination would be made at a time closer to when the
carry-forwards are to expire and would be based on circumstances
existing at that time. Currently, as discussed above, any net realized
long-term capital gains will be offset against the Fund's capital loss
carry-forwards but will be taxed at ordinary income tax rates,
resulting in tax inefficiencies for Common Stockholders. There would
be no such negative tax consequences if the Fund did not pay managed
distributions. Accordingly, if the Fund wishes to maximize its tax
efficiency (i.e., have long-term gains treated and taxed as long-term
gains rather than ordinary income) and take full advantage of its
capital loss carry-forwards, it may elect to temporarily suspend the
Distribution Policy for a period of at least one year, during which
time it would offset its capital loss carry-forwards against realized
gains.
As discussed above, the annual distribution rate under the
Distribution Policy is reviewed periodically by the Board and
generally will not exceed the average annual long term performance of
the Fund based on a rolling 5-year performance history. If the Fund's
long term performance declines, the Board will make a corresponding
reduction in the annual distribution rate under the Distribution
Policy. In addition, the SEC may impose conditions on any grant of
exemptive relief from Section 19(b) that require the Board to consider
adjusting the annual distribution rate on a more frequent basis under
certain circumstances.
- A modification, suspension or termination of the Distribution Policy
could result in a concurrent reduction or cessation of the $0.115 per
Share monthly distribution presently paid to Common Stockholders. If
the Distribution Policy was suspended or terminated, the Fund would
revert back to its prior practice of distributing only net investment
income and net realized capital gains at the end of its fiscal year. A
modification, suspension or termination of the Distribution Policy
could have the effect of abruptly creating a trading discount (if the
Fund is trading at or above NAV) or widening an existing trading
discount.
- If the Fund's annual total return is less than the annual
distribution, the Distribution Policy could have the effect of
shrinking the assets of the Fund and thus increasing the Fund's
expense ratio (i.e., the Fund's fixed expenses will be spread over a
smaller pool of assets). The Board has determined that the annual
distribution rate should not exceed the Fund's average annual long
term performance of the Fund based on a rolling 5-year performance
history. However, there may be interim periods where the annual
distribution rate exceeds the short-term return on the Fund's NAV,
which could shrink the assets of the Fund. In addition, if due to the
exhaustion or expiration of the Fund's net capital loss carry-forwards
the Board elects to characterize the Fund's final distribution for
each calendar year as including all net capital gain realized during
the year, such distribution could shrink the Fund's assets more
quickly than would otherwise be the case if the per share amount of
any such net realized capital gains distribution is greater than per
share amount at which monthly distributions previously have been made
pursuant to the Distribution Policy.
- A distribution which contains a return of capital, which the Fund
expects generally to be the case, will result in added record keeping
for Common Stockholders. Return of capital is not taxable to Common
Stockholders in the year it is paid. However, Common Stockholders will
need to reduce the cost basis of their stock by the amount of the
return of capital so that, when they sell the stock, they will have
properly accounted for the return of capital. Such an adjustment will
cause Common Stockholders' gain to be more, or their loss to be less,
as the case may be. For example, if a Common Stockholder purchased
stock in the Fund for $7.00 per Share and then receives dividends from
the Fund which have $1.00 per Share return of capital, and then the
stockholder subsequently sells his Shares for $7.50 per Share, his
gain will be $1.50 per Share, since he would have adjusted his cost
basis downward by $1.00 per Share (to $6.00 per Share). Common
Stockholders who hold their stock in non-taxable accounts such as
IRA's will not need to make any such adjustments. Common Stockholders
should contact their own tax advisor if they have questions regarding
the tax treatment of the distributions under the Distribution Policy.
Discount From Net Asset Value. The common stock of closed-end funds frequently
trades at a market price that is less than the value of the net assets
attributable to those shares (a "discount"). The possibility that the Shares
will trade at a discount from NAV is a risk 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.
Premium Over NAV. The Shares may trade at a market price that is greater than
the value of the net assets attributable to those Shares (a "premium"). The
possibility that the Shares will trade at a premium over NAV is a risk separate
and distinct from the risk that the Fund's NAV will decrease. For those Common
Stockholders who acquire Shares at a premium, such premium may be unsustainable.
If the price of the Shares falls, the Common Stockholders will experience a loss
on their investments.
Size of the Fund. As of August 10, 2007, the Fund had total net assets of
approximately $121.1 million, including $25 million in AMPS leverage. As a fund
with a relatively small asset base, the Fund may be subject to certain
operational inefficiencies including: higher expense ratio, less coverage by
analysts and the marketplace in general which can contribute to a less active
trading market for the Shares and consequently a wider discount, more limited
ability to attract new investors and/or take advantage of investment
opportunities and less ability to take advantage of lower transaction costs
available to larger investors.
Repurchase of the Shares. The Fund is authorized to repurchase Shares on the
open market when the Shares are trading at a discount from NAV per Share as
determined by the Board from time to time. The acquisition of Shares by the Fund
will decrease the total assets of the Fund and, therefore, have the effect of
increasing the Fund's expense ratio and may adversely affect the ability of the
Fund to achieve its investment objectives. Furthermore, the acquisition of
Shares by the Fund may require the Fund to redeem the AMPS in order to maintain
certain asset coverage requirements. To the extent the Fund may need to
liquidate investments to fund the repurchase of Shares, this may result in
portfolio turnover which will result in additional expenses being borne by the
Fund.
Dependence on Key Personnel. The Advisers are dependent upon the expertise of
Stewart Horejsi in providing advisory services with respect to the Fund's
investments. If the Advisers were to lose the services of Mr. Horejsi, their
ability to service the Fund could be adversely affected. There can be no
assurance that a suitable replacement could be found for Mr. Horejsi in the
event of his death, resignation, retirement or inability to act on behalf of the
Advisers.
Issuer Risk. The value of the Fund's portfolio may decline for a number of
reasons which directly relate to the issuers of the securities in the portfolio,
such as management performance, financial leverage and reduced demand for an
issuer's goods and services.
Inflation Risk. Inflation risk is the risk that the value of assets or income
from investments will be worth less in the future as inflation decreases the
value of money. As inflation increases, the real value of the Fund's portfolio
can decline.
Repurchase Agreements. The use of repurchase agreements involves certain risks.
For example, if the seller of securities under a repurchase agreement defaults
on its obligation to repurchase the underlying securities, as a result of
bankruptcy or otherwise, the Fund will seek to dispose of such securities, which
action could involve costs or delays. If the seller becomes insolvent and
subject to liquidation or reorganization under applicable bankruptcy or other
laws, the Fund's ability to dispose of the underlying securities may be
restricted. Finally, it is possible that the Fund may not be able to
substantiate its interest in the underlying securities.
Foreign Securities Risk. The Fund is permitted to invest in foreign securities
without limitation. Investment in non-U.S. issuers may involve unique risks
compared to investing in securities of U.S. issuers. These risks are more
pronounced to the extent that the Fund invests a significant portion of its
non-U.S. investments in one region or in the securities of emerging market
issuers. These risks may include:
- Less information about non-U.S. issuers or markets may be available
due to less rigorous disclosure, accounting standards or regulatory
practices.
- Many non-U.S. markets are smaller, less liquid and more volatile. In a
changing market, the Advisers may not be able to sell the Fund's
portfolio securities at times, in amounts and at prices they consider
reasonable.
- Currency exchange rates or controls may adversely affect the value of
the Fund's investments.
- The economies of non-U.S. countries may grow at slower rates than
expected or may experience downturns or recessions.
- Withholdings and other non-U.S. taxes may decrease the Fund's return.
Currency Risk. The Fund currently holds investments in foreign securities and
thus a portion of the Fund's assets may be quoted or denominated in non-U.S.
currencies. These securities may be adversely affected by fluctuations in
relative currency exchange rates and by exchange control regulations. The Fund's
investment performance may be negatively affected by a devaluation of a currency
in which the Fund's investments are quoted or denominated. Further, the Fund's
investment performance may be significantly affected, either positively or
negatively, by currency exchange rates because the U.S. dollar value of
securities quoted or denominated in another currency will increase or decrease
in response to changes in the value of such currency in relation to the U.S.
dollar. The Fund does not currently hedge against the potential decline in value
of foreign currencies against the U.S. dollar and does not foresee hedging
currency risk in the future, though it is not precluded from doing so.
Sovereign Debt Risk. An investment in debt obligations of non-U.S. governments
and their political subdivisions ("sovereign debt") involves special risks that
are not present in corporate debt obligations. The non-U.S. issuer of the
sovereign debt or the non-U.S. governmental authorities that control the
repayment of the debt may be unable or unwilling to repay principal or interest
when due, and the Fund may have limited recourse in the event of a default.
During periods of economic uncertainty, the market prices of sovereign debt may
be more volatile than prices of debt obligations of U.S. issuers. In the past,
certain non-U.S. countries have encountered difficulties in servicing their debt
obligations, withheld payments of principal and interest and declared moratoria
on the payment of principal and interest on their sovereign debt.
Liquidity Risk. Although the Fund invests primarily in securities traded on
national exchanges, it may invest in less liquid assets from time to time that
are not readily marketable and may be subject to restrictions on resale.
Illiquid securities may be more difficult to value or may impair the Fund's
ability to realize the full value of its assets in the event of a voluntary or
involuntary liquidation of such assets and thus may cause a decline in the
Fund's NAV. The Fund has no limitation on the amount of its assets that may be
invested in securities which are not readily marketable or are subject to
restrictions on resale, although it may not invest more than 30% of the value of
its total assets in securities which have been acquired through private
placement. In certain situations, the Fund could find it more difficult to sell
such securities at times, in amounts and at prices they consider reasonable.
Market Disruption Risk. The terrorist attacks in the United States on September
11, 2001 had a disruptive effect on the securities markets. The Fund cannot
predict the effects of similar events in the future on the U.S. economy. These
terrorist attacks and related events, including the war in Iraq, its aftermath,
and continuing occupation of Iraq by coalition forces, have led to increased
short-term market volatility and may have long-term effects on U.S. and world
economies and markets. A similar disruption of the financial markets could
impact interest rates, auctions, secondary trading, ratings, credit risk,
inflation and other factors relating to the Common Stock and AMPS.
Anti-Takeover Provisions Risk. The Charter and Bylaws include provisions that
could limit the ability of other entities or persons to acquire control of the
Fund or to change the composition of its Board. Such provisions could limit the
ability of Common Stockholders to sell their Shares at a premium over prevailing
market prices by discouraging a third party from seeking to obtain control of
the Fund. These provisions include advance notice requirements for stockholder
proposals and super-majority voting requirements for certain transactions with
affiliates, open-ending the Fund or a merger, liquidation, asset sale or similar
transaction.
Investments in RICs. The Fund may invest in securities issued by other
closed-end funds (or RICs) subject to such limitations, restrictions and
conditions as imposed by Federal law. Accordingly, the Fund will be subject to
the particular risks associated with investing in other closed-end funds that
are separate from risks associated with the underlying investments held by such
RICs. Both the Fund and any RICs in which it invests have management fees. In
addition, the RICs in which the Fund invests will typically incur other
operating expenses that are borne by their investors, including the Fund. As a
result, Fund stockholders will bear not only the Fund's management fees and
operating expenses, but also the fees and expenses of the RICs in which the Fund
invests. Investors would bear less expense if they invested directly in the
underlying RICs in which the Fund invests. The Fund may also invest in RICs that
are not limited in their portfolio trading activity and thus may experience high
portfolio turnover rates. Higher turnover rates generally result in
correspondingly greater brokerage commissions and other transactional expenses
which may be borne by the Fund, directly or through its investment in RICs.
Higher turnover rates also may be more likely to generate capital gains that
must be distributed to Fund stockholders, either as a result of the Fund's
receipt of capital gains from RIC transactions or from the Fund's trading in
RICs or other investments.
THE OFFERING
Terms of the Offering. The Fund is issuing to Record Date Stockholders (i.e.,
stockholders who hold Shares on the Record Date) non-transferable Rights to
subscribe for Shares. Each Record Date Stockholder is being issued one
non-transferable Right for every one Share owned on the Record Date. The Rights
entitle a Record Date Stockholder to acquire one Share at the Subscription Price
for every three Rights held. Fractional Shares will not be issued upon the
exercise of the Rights. Accordingly, the number of Rights to be issued to a
Record Date Stockholder on the Record Date will be rounded up to the nearest
whole number of Rights evenly divisible by three. Rights may be exercised at any
time during the Subscription Period which commences on August 15, 2007 and ends
at 5:00 p.m., New York City time, on September 14, 2007, unless extended by the
Fund to a date not later than September 24, 2007, at 5:00 p.m., New York City
time. See "Expiration of the Offering." The right to acquire one additional
Share for every three Rights held during the Subscription Period at the
Subscription Price is hereinafter referred to as the "Primary Subscription."
In addition to the Primary Subscription, Record Date Stockholders who exercise
all their Rights are entitled to subscribe for Unsubscribed Shares (i.e., Shares
which were not otherwise subscribed for by others in the Primary Subscription)
(the "Over-Subscription Privilege"). For purposes of determining the maximum
number of Shares a Common Stockholder may acquire pursuant to the Offering,
broker-dealers whose Shares are held of record by any Nominee will be deemed to
be the holders of the Rights that are issued to such Nominee on their behalf.
The term "Nominee" shall mean, collectively, CEDE & Company ("Cede"), as nominee
for the Depository Trust Company ("DTC"), or any other depository or nominee.
Shares acquired pursuant to the Over-Subscription Privilege are subject to
allocation, which is more fully discussed below under "Over-Subscription
Privilege."
The Horejsi Affiliates have indicated that they will fully subscribe in the
Primary Subscription on the same terms as other Common Stockholders. The Horejsi
Affiliates may subscribe in the Over-Subscription Privilege. However, if the
Horejsi Affiliates fully exercise their Rights in the Primary Subscription and
the Over-Subscription Privilege, under certain circumstances (e.g., low
participation by Common Stockholders in the Offering), the Horejsi Affiliates
could substantially increase their percentage ownership of the Fund at an
advantageous price relative to the market price. The Horejsi Affiliates are
subject to certain limitations on selling Shares in the Fund. Any Shares
acquired in the Offering by the Horejsi Affiliates as "affiliates" of the Fund
as that term is defined under the Securities Act, may only be sold in accordance
with Rule 144 under the Securities Act or another applicable exemption or
pursuant to an effective registration statement under the Securities Act. In
general, under Rule 144, as currently in effect, an "affiliate" of the Fund is
entitled to sell, during a 90 day period, a number of Shares that does not
exceed the greater of 1% of the then outstanding Shares or the average weekly
reported trading volume of the Common Stock during the four calendar weeks
preceding such sale. Sales under Rule 144 are also subject to certain
restrictions on the manner of sale, to notice requirements, and to the
availability of current public information about the Fund. In addition, any
profit resulting from the sale of Shares acquired by the Horejsi Affiliates
pursuant to the Over-Subscription Privilege, if the Shares are held for a period
of less than six months, must be returned to the Fund pursuant to Section 16 of
the Exchange Act.
Rights will be evidenced by Subscription Certificates. The number of Rights
issued to each holder of Shares will be stated on the Subscription Certificates
delivered to the holder. The method by which Rights may be exercised and Shares
paid for is set forth below in "Method of Exercising Rights" and "Payment for
Shares." A RIGHTS HOLDER WILL HAVE NO RIGHT TO RESCIND A PURCHASE AFTER THE
SUBSCRIPTION AGENT HAS RECEIVED PAYMENT OR NOTICE OF GUARANTEED DELIVERY. See
"Payment for Shares" below. Shares issued pursuant to an exercise of Rights will
be listed on the NYSE.
The Rights are non-transferable and may not be purchased or sold. Rights will
expire without residual value at the Expiration Date. The Rights will not be
listed for trading on the NYSE, and there will not be any market for trading
Rights. The Shares to be issued pursuant to the Offering will be listed for
trading on the NYSE, subject to the NYSE being officially notified of the
issuance of those Shares.
Purpose of the Offering. At a meeting held on April 27, 2007, the Board approved
the Offering and determined that it would be in the best interests of the Fund
and its existing stockholders to increase the assets of the Fund. The primary
reasons include:
- The Primary Subscription will provide existing Common Stockholders an
opportunity to purchase additional Shares at a price that is
potentially below market value without incurring any commission or
transaction charges.
- Raising more cash will better position the Fund to take advantage of
investment opportunities that may arise.
- Increasing the Fund's assets will provide the Fund flexibility in
maintaining the Distribution Policy (see discussion below). This
policy permits Common Stockholders to realize a predictable, but not
assured, level of cash flow and some liquidity periodically with
respect to their Common Stock without having to sell Shares.
- Increasing Fund assets may lower the Fund's expenses as a proportion
of net assets because the Fund's fixed costs would be spread over a
larger asset base. There can be no assurance that by increasing the
size of the Fund, the Fund's expense ratio will be lowered.
- Since the Offering will increase the Fund's outstanding Shares and the
liquidity of the Shares, it may increase the number of beneficial
owners of the Shares over the long term, which could increase the
level of market interest in and visibility of the Fund and improve the
trading liquidity of the Shares on the NYSE.
- Increasing the Fund's total assets will reduce the Fund's leverage as
a percentage of assets from 20% to approximately 16% (assuming the
Offering is fully subscribed). The Fund is currently leveraged with
$25 million of the AMPS and the Fund intends to maintain this amount
of leverage. Because leveraging increases risk, the additional assets
from the Offering will mitigate risks commonly associated with
leverage.
- The increase in assets will result in the Fund exceeding the
asset-coverage ratio requirements under its Articles Supplementary by
a wider margin, thus giving the Fund greater flexibility to buy and
hold investments without violating those requirements.
One of the purposes of the Offering is to provide the Fund flexibility in
maintaining the Distribution Policy. The Distribution Policy was adopted by the
Fund in May 2006. The Distribution Policy initially provided for monthly
distributions at the rate of $0.10 per Share per month, or $1.20 per Share
annually, which represented a 14.9% annual distribution rate relative to the
Fund's NAV at the time. In February 2007, because the NAV of the Fund had
increased substantially since the Distribution Policy was adopted, and the Board
wished to maintain a similar annual distribution rate to that originally
adopted, the Fund increased the distribution rate to $0.115 per Share per month,
or $1.38 per Share annually, representing a 14.6% annual distribution rate
relative to the Fund's NAV at the time. The annual distribution rate under the
Distribution Policy is reviewed periodically by the Board and generally will not
exceed the annual long term performance of the Fund based on a rolling 5-year
performance history, subject to the Board's discretion to suspend, modify or
terminate the Distribution Policy at any time. In conducting its review of the
annual distribution rate and the Fund's performance history, the Board will take
into account, among other factors, that during 2002, the first year the Advisers
served as investment advisers to the Fund, the Fund's portfolio consisted
primarily of bonds that were below investment grade, and that the Fund
recognized significant losses as these investments were liquidated and the
proceeds invested in common stocks consistent with the Fund's new objective of
total return.
Generally, distributions under the Distribution Policy will consist mostly of a
return of capital. Distributions may have a small component of net investment
income, but the exact tax characteristics of the distributions is not known
until the Fund's fiscal year-end (i.e., November 30 of each year). A "return of
capital" represents a return of a Common Stockholder's original investment in
the Shares, and should not be confused with a dividend yield. To explain
further, a "return of capital" is what the term implies, a return of Common
Stockholders' capital investment in the Fund. A return of capital generally is
not taxable. It is not considered "yield," "income," or "capital gains," items
which are taxable. When Common Stockholders receive a return of capital, they
are getting back part of their investment and consequently the return of their
already-taxed capital investment is tax free to the Common Stockholders.
Currently, the Fund does not expect that distributions will include any capital
gain component. In addition, it is possible that a portion of the distributions
will represent capital gains earned by the Fund but offset by capital loss
carry-forwards, which will be taxable at ordinary income tax rates. To the
extent Common Stockholders receive a return of capital they will be required to
reduce their cost basis by the same amount upon the sale of their Shares. This
adjustment to their cost basis in Shares means that, when Common Stockholders
decide to sell Shares in the Fund, they will have a larger capital gain (or
smaller capital loss) than prior to the implementation of the Distribution
Policy. This may have negative tax consequences, and Common Stockholders should
seek their own tax advice regarding the reporting of income and the gain or loss
on the sale of the Shares. Common Stockholders should note the following
important risk and other factors concerning the Distribution Policy:
- The Distribution Policy will likely have a negative tax impact on
Common Stockholders.
- The Distribution Policy may impact the way in which the Fund is
managed.
- Distributions, if any, may include return of capital to the extent the
Fund's net investment income and net capital gain are insufficient to
meet the fixed distribution amount paid to Common Stockholders.
- The Board may modify, suspend or terminate the Distribution Policy at
any time and such modification, suspension or termination may have an
abrupt and adverse effect on the market price of the Shares, resulting
in a trading discount (if the Fund is trading at or above NAV) or
widening an existing discount.
- Common Stockholders are responsible for tracking and, if necessary,
adjusting their cost basis of Shares should they receive a
distribution which includes a return of capital as indicated on their
tax form(s).
- The tax characteristic of the distributions and exactly how much is
net investment income, ordinary income, capital gains, if any, and
return of capital, if any, will be indicated on their IRS Form
1099-DIV.
- If the Fund's annual total return is less than the annual
distribution, the Distribution Policy could have the effect of
shrinking the assets of the Fund and thus increasing the Fund's
expense ratio (i.e., the Fund's fixed expenses will be spread over a
smaller pool of assets). The Board has determined that the annual
distribution rate should not exceed the Fund's average annual long
term performance of the Fund based on a rolling 5-year performance
history. However, there may be interim periods where the annual
distribution rate exceeds the short-term return on the Fund's NAV,
which could shrink the assets of the Fund.
For a more detailed discussion of the above risk factors, see "Risk Factors -
Managed Distribution Policy."
Rights holders who exercise their Rights will receive newly issued Shares within
fifteen (15) days of the record date of the most recent monthly payment under
the Distribution Policy, which record date may occur during the Subscription
Period. Common Stockholders who receive newly issued Common Stock in the
Offering will not receive a distribution under the Distribution Policy with
respect to such newly issued Common Stock for the record date immediately prior
to issuance of the newly issued Shares. Common Stockholders will be entitled to
receive monthly distributions for record dates subsequent to their receipt of
newly issued Common Stock in accordance with the Distribution Policy. The
Offering will not impact the distributions to be paid to current holders of
Common Stock regardless of whether they exercise their Rights or allow their
Rights to lapse, subject to suspension, termination, or modification of the
Distribution Policy by the Board at any time.
Board Considerations in Approving the Offering. At meetings held on April 27,
2007 and June 26, 2007, the Board determined that it would be in the best
interests of the Fund and its stockholders to conduct the Offering in order to
increase the assets of the Fund available for current and future investment
opportunities. In making its determination, the Board considered the various
factors discussed under "- Purpose of the Offering". The Board also considered a
number of other factors, including the ability of the Advisers to invest the
proceeds of the Offering and the effect of the Offering on the Fund's stock
price. To assist it in establishing the terms of the Offering, the Board
retained a financial advisor.
The Board voted unanimously to approve the terms of the Offering. Two of the
Fund's Directors who voted to authorize the Offering are affiliated with the
Advisers and, therefore, could benefit indirectly from the Offering. The other
three directors are not "interested persons" of the Fund within the meaning of
the 1940 Act. The Advisers may also benefit from the Offering because its fee is
based on the net assets of the Fund. It is not possible to state precisely the
amount of additional compensation the Advisers might receive as a result of the
Offering because it is not known how many Shares will be subscribed for and
because the proceeds of the Offering will be invested in additional portfolio
securities, which will fluctuate in value.
The Fund may, in the future, choose to make additional rights offerings from
time to time for a number of Shares and on terms that may or may not be similar
to this Offering. Any such future rights offerings will be made in accordance
with the then applicable requirements of the 1940 Act and the Securities Act.
There can be no assurance that the Fund or its stockholders will achieve any of
the foregoing objectives or benefits through the Offering.
The Subscription Price. The Subscription Price for the Shares to be issued under
the Offering will be equal to the NAV per Share as calculated at the close of
trading on the Expiration Date. For example, if the Offering were held using the
"Estimated Subscription Price" (i.e., an estimate of the Subscription Price
based on the Fund's per-share NAV at the end of business on August 10, 2007, the
Friday immediately preceding the printing and distribution of this Prospectus,
at which time the NAV was $8.43) then the Subscription Price would be $8.43 per
Share.
Over-Subscription Privilege. If all of the Rights initially issued are not
exercised, any Shares for which subscriptions have not been received (defined
above as "Unsubscribed Shares") will be offered, by means of the
Over-Subscription Privilege, to Record Date Stockholders who have exercised all
the Rights initially issued to them and who wish to acquire more than the number
of Shares for which the Rights held by them are exercisable ("Over-Subscribing
Stockholders"). Record Date Stockholders who exercise all their Rights will have
the opportunity to indicate on the Subscription Certificate how many
Unsubscribed Shares they are willing to acquire pursuant to the
Over-Subscription Privilege.
If enough Unsubscribed Shares remain after the Primary Subscriptions have been
exercised, all over-subscription requests will be honored in full. The method by
which any Unsubscribed Shares will be distributed and allocated pursuant to the
Over-Subscription Privilege is as follows:
1. Shares will be available for purchase pursuant to the
Over-Subscription Privilege only if the maximum number of Shares is
not subscribed for through the exercise of the Primary Subscription by
the Expiration Date.
2. If there are not enough Unsubscribed Shares to fully satisfy all
over-subscription requests pursuant to the Over-Subscription
Privilege, the Unsubscribed Shares will be allocated among
Over-Subscribing Stockholders based on the number of Rights originally
issued to them, so that the number of Shares issued to
Over-Subscribing Stockholders will generally be in proportion to the
number of Shares owned by them on the Record Date; provided, however,
that if this proportional allocation results in any Over-Subscribing
Stockholder being allocated a greater number of Unsubscribed Shares
than such stockholder over-subscribed for pursuant to the exercise of
the Over-Subscription Privilege, then such Over-Subscribing
Stockholder will be allocated only such number of Unsubscribed Shares
as such stockholder over-subscribed for and the remaining Unsubscribed
Shares will be allocated among all other Over-Subscribing Stockholders
whose request for Unsubscribed Shares has not been satisfied, but in
any event not to exceed 100% of the Shares available in the Offering.
3. The percentage of Unsubscribed Shares each over-subscriber may acquire
will be rounded up to result in delivery of whole Shares (fractional
Shares will not be issued).
The forgoing allocation process may involve a series of allocations in order to
assure that the total number of Unsubscribed Shares is distributed
proportionally as described above. The Fund will not offer or sell any Shares
which are not subscribed for under the Primary Subscription or the
Over-Subscription Privilege. The Over-Subscription Privilege may result in
additional dilution of a Shareholder's ownership percentage and voting rights.
Expiration of the Offering. The Offering will expire at 5:00 p.m., New York City
time, on the Expiration Date (September 14, 2007), unless extended by the Fund
to a date not later than September 24, 2007, 5:00 p.m., New York City time (the
"Extended Expiration Date"). Rights will expire on the Expiration Date (or
Extended Expiration Date as the case may be) and thereafter may not be
exercised.
Method of Exercising Rights. Rights may be exercised 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." Rights may also be exercised through
a Rights holder's broker, who may charge the Rights holder a servicing fee in
connection with such exercise. Completed Subscription Certificates must be
received by the Subscription Agent prior to 5:00 p.m., New York City time, on
the third Business Day after the Expiration Date (unless payment is effected by
means of a Notice of Guaranteed Delivery as described below under "Payment for
Shares"). The Subscription Certificate and payment should be delivered to
Colbent Corporation at the following address:
If By Mail: If By Hand: If By Overnight Courier:
----------- ----------- -----------------------
Colbent Corporation Colbent Corporation Colbent Corporation
Attn: Corporate Actions Attn: Corporate Actions Attn: Corporate Actions
P.O. Box 859208 c/o Colbent Corporation 161 Bay State Drive
Braintree, MA 02185-9208 161 Bay State Drive Braintree, MA 02184
Braintree, MA 02184
Subscription Agent. The Subscription Agent is Colbent Corporation, Attn:
Corporate Actions, P.O. Box 859208, Braintree, MA 02185-9208. The Subscription
Agent will receive from the Fund an amount estimated to be $20,000, comprised of
the fee for its services and the reimbursement for certain expenses related to
the Offering.
--------------------------------------------------------------------------------
INQUIRIES BY ALL HOLDERS OF RIGHTS SHOULD BE DIRECTED TO THE
INFORMATION AGENT (MORROW & CO.) AT 1-800-607-0088; HOLDERS MAY ALSO CONSULT
THEIR BROKERS OR NOMINEES.
--------------------------------------------------------------------------------
Payment for Shares. Payment for Shares shall be calculated by multiplying the
Estimated Subscription Price of $8.43 per Share times the sum of (i) the number
of Shares intended to be purchased in the Primary Subscription (e.g., the number
of Rights exercised divided by three), plus (ii) the number of additional Shares
intended to be over-subscribed under the Over-Subscription Privilege. For
example, if a Common Stockholder receives 300 Rights and wishes to subscribe for
100 Shares in the Primary Subscription, and also wishes to over-subscribe for 50
additional Shares under the Over-Subscription Privilege, he would send in $8.43
x 100 ($843.00) plus $8.43 x 50 ($421.50). Record Date Stockholders who wish to
acquire Shares in the Primary Subscription or pursuant to the Over-Subscription
Privilege may choose between the following methods of payment:
1. If, prior to 5:00 p.m., New York City time, on the third (3rd)
Business Day after the Expiration Date, the Subscription Agent shall
have received a Notice of Guaranteed Delivery by telegram or
otherwise, from a bank or trust company or a NYSE member firm
guaranteeing delivery of (i) payment of the Estimated Subscription
Price of $8.43 per Share for the Shares subscribed for in the Primary
Subscription and any additional Shares subscribed for pursuant to the
Over-Subscription Privilege and (ii) a properly completed and executed
Subscription Certificate, the subscription will be accepted by the
Subscription Agent. The Subscription Agent will not honor a Notice of
Guaranteed Delivery unless a properly completed and executed
Subscription Certificate is received by the Subscription Agent prior
to 5:00 p.m., New York City time, on the third (3rd) Business Day
after the Expiration Date (the "Protect Period").
2. Alternatively, a Rights holder can, together with the properly
completed and executed Subscription Certificate, send payment for the
Shares acquired in the Primary Subscription and any additional Shares
subscribed for pursuant to the Over-Subscription Privilege, to the
Subscription Agent based on the Estimated Subscription Price of $8.43
per Share. To be accepted, such payment, together with the
Subscription Certificate, must be received by the Subscription Agent
prior to 5:00 p.m., New York City time, on the third (3rd) Business
Day after the Expiration Date.
If the Estimated Subscription Price is greater than the actual per Share
purchase price, the excess payment will be applied toward the purchase of
Unsubscribed Shares to the extent that there remain sufficient unsubscribed
Shares available after the Primary Subscription and Over-Subscription Privilege
allocations are completed. To the extent that sufficient Unsubscribed Shares are
not available to apply all of the excess payment toward the purchase of
Unsubscribed Shares, available Shares will be allocated in the manner consistent
with that described in the section entitled "Over-Subscription Privilege" above.
Any excess payment will be refunded to the Record Date Stockholders
participating in the Over-Subscription Privilege to the extent that additional
Shares are not available.
A PAYMENT, PURSUANT TO THE SECOND METHOD DESCRIBED ABOVE, MUST ACCOMPANY ANY
SUBSCRIPTION CERTIFICATE FOR SUCH SUBSCRIPTION CERTIFICATE TO BE ACCEPTED.
Within five (5) business days following the completion of the Protect Period, a
confirmation will be sent by the Subscription Agent to each Common Stockholder
(or, if the Shares on the Record Date are held by CEDE or any other depository
or nominee, to CEDE or such other depository or nominee). The date of the
confirmation is referred to as the "Confirmation Date." The confirmation will
show (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 such Common Stockholder to the Fund (e.g., if
the Estimated Subscription Price was less than the Subscription Price on the
Expiration Date) or any excess to be refunded by the Fund to such Common
Stockholder (e.g., if the Estimated Subscription Price was more than the
Subscription Price on the Expiration Date). Any additional payment required from
a Common Stockholder must be received by the Subscription Agent prior to 5:00
p.m., New York City time, on the date specified as the deadline for final
payment for Shares, and any excess payment to be refunded by the Fund to such
Common Stockholder will be mailed by the Subscription Agent within ten (10)
Business Days after the Confirmation Date. All payments by a Common Stockholder
must be made in United States Dollars by money order or by checks drawn on banks
located in the continental United States payable to Eastern Bank acting on
behalf of the Subscription Agent.
Whichever of the above two methods is used, issuance and delivery of
certificates for the Shares subscribed for are subject to collection of funds
and actual payment pursuant to any notice of guaranteed delivery.
The Subscription Agent will deposit all checks received by it prior to the final
due date into a segregated interest bearing account at Eastern Bank pending
distribution of the Shares from the Offering. All interest will accrue to the
benefit of the Fund and investors will not earn interest on payments submitted
nor will interest be credited toward the purchase of Shares.
YOU WILL HAVE NO RIGHT TO RESCIND YOUR SUBSCRIPTION AFTER THE SUBSCRIPTION AGENT
HAS RECEIVED THE SUBSCRIPTION CERTIFICATE OR NOTICE OF GUARANTEED DELIVERY.
If a Record Date Stockholder who acquires Shares pursuant to the Primary
Subscription or the Over-Subscription Privilege does not make payment of any
amounts due, the Fund reserves the right to take any or all of the following
actions: (i) find other purchasers for such subscribed-for and unpaid-for
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 holder upon
exercise of the Primary Subscription or the Over-Subscription Privilege; (iii)
sell all or a portion of the Shares actually purchased by the holder in the open
market, and apply the proceeds to the amounts owed; or (iv) exercise any and all
other rights or remedies to which it may be entitled, including, without
limitation, the right to set off against payments actually received by it with
respect to such subscribed Shares and to enforce the relevant guaranty of
payment.
Holders who hold Shares for the account of others, such as brokers, trustees, or
depositaries for securities, should notify the respective beneficial owners of
the Shares as soon as possible to ascertain the beneficial owners' intentions
and to obtain instructions with respect to the Rights. If the beneficial owner
so instructs, the record holder of the Rights should complete Subscription
Certificates and submit them to the Subscription Agent with the proper payment.
In addition, beneficial owners of Common Stock or Rights held through such a
holder should contact the holder and request the holder to effect transactions
in accordance with the beneficial owner's instructions.
The instructions accompanying the Subscription Certificates should be read
carefully and followed in detail. DO NOT SEND SUBSCRIPTION CERTIFICATES TO THE
FUND OR THE ADVISERS.
The method of delivery of Subscription Certificates and payment of the
Subscription Price to the Subscription Agent will be at the election and risk of
the Rights holders, but if sent by mail it is recommended that the certificates
and payments be sent by registered mail, properly insured, with return receipt
requested, and that a sufficient number of days be allowed to ensure delivery to
the Subscription Agent and clearance of payment prior to 5:00 p.m., New York
City time, on the Expiration Date. Because uncertified personal checks may take
at least five business days to clear, each Record Date Stockholder or Rights
Purchaser participating in the Offering is strongly urged to pay, or arrange for
payment, by means of a certified or cashier's check or money order.
All questions concerning the timeliness, validity, form and eligibility of any
exercise of Rights will be determined by the Fund, whose determinations will be
final and binding. The Fund in its sole discretion may waive any defect or
irregularity, or permit a defect or irregularity to be corrected within such
time as it may determine, or reject the purported exercise of any Right. If the
Fund elects in its sole discretion to waive any defect or irregularity, it may
do so on a case-by-case basis which means that not all defects or irregularities
may be waived, if at all, or waived in the same manner as with other defects or
irregularities. Subscriptions will not be deemed to have been received or
accepted until all irregularities have been waived or cured within such time as
the Fund determines in its sole discretion. Neither the Fund nor the
Subscription Agent will be under any duty to give notification of any defect or
irregularity in connection with the submission of Subscription Certificates or
incur any liability for failure to give such notification.
Impact of the Offering on the Managed Distribution Policy. Rights holders who
exercise their Rights will receive newly issued Shares within fifteen (15) days
of the record date of the most recent monthly payment under the Distribution
Policy, which record date may occur during the Subscription Period. Common
Stockholders who receive newly issued Common Stock in the Offering will not
receive a distribution under the Distribution Policy with respect to such newly
issued Shares for the record date immediately prior to issuance of the newly
issued Shares. Common Stockholders will be entitled to receive monthly
distributions for record dates subsequent to their receipt of newly issued
Common Stock in accordance with the Distribution Policy. The Offering will not
impact the distributions to be paid to current Common Stockholders regardless of
whether they exercise their Rights or allow their Rights to lapse, subject to
suspension, termination, or modification of the Distribution Policy by the Board
at any time.
Delivery of Stock Certificates. Certificates representing Shares purchased
pursuant to the Primary Subscription will be delivered to subscribers as soon as
practicable after the corresponding Rights have been validly exercised and full
payment for the Shares has been received and cleared. Certificates representing
Shares purchased pursuant to the Over-Subscription Privilege will be delivered
to subscribers as soon as practicable after the Expiration Date and after all
allocations have been conducted.
Foreign Restrictions. Subscription Certificates will only be mailed to Record
Date Stockholders whose addresses are within the United States (other than an
APO or FPO address). Record Date Stockholders whose addresses are outside the
United States or who have an APO or FPO address will receive written notice of
the Offering and those who wish to subscribe to the Offering either in part or
in full should contact the Subscription Agent by written instruction no later
than three Business Days prior to the Expiration Date. The Fund will determine
whether the Offering may be made to any such Record Date Stockholder. If no
instructions have been received by the Expiration Date, the Rights of those
foreign Record Date Stockholders will expire.
Federal Income Tax Consequences Associated with the Offering. The following is a
general summary of the significant federal income tax consequences of the
receipt of Rights by a Record Date Stockholder and a subsequent lapse or
exercise of such Rights. The discussion is based upon applicable provisions of
the Code, the Treasury Regulations promulgated thereunder, and other authorities
currently in effect but does not address any state, local, or foreign tax
consequences of the Offering. Each Common Stockholder should consult its own tax
advisor regarding specific questions as to federal, state, local, or foreign
taxes. Each Common Stockholder should also review the discussion of certain tax
considerations affecting it and the Fund set forth under "Federal Income Tax
Matters."
For purposes of the following discussion, the term "Old Share" shall mean a
currently outstanding Share with respect to which a Right is issued and the term
"New Share" shall mean a newly issued Share that Record Date Stockholders
receives upon the exercise of their Rights.
FOR ALL RECORD DATE STOCKHOLDERS
Neither the receipt nor the exercise of Rights by a Record Date Stockholder
will result in taxable income to such stockholder for federal income tax
purposes regardless of whether or not the stockholder makes the
below-described election which is available under Section 307(b)(2) of the
Code (a "Section 307(b)(2) Election").
If the fair market value of the Rights distributed to all of the Record
Date Stockholders is more than 15% of the total fair market value of all of
the Fund's outstanding Common Stock as of the Record Date, or if a Record
Date Stockholder makes a Section 307(b)(2) Election for the taxable year in
which such Rights were received, the Record Date Stockholder's federal
income tax basis in any Right received pursuant to the Offering will be
equal to a portion of the Record Date Stockholder's existing federal income
tax basis in the related Old Share. If made, a Section 307(b)(2) Election
is effective with respect to all Rights received by a Record Date
Stockholder. A Section 307(b)(2) Election is made by attaching a statement
to the Record Date Stockholder's federal income tax return for the taxable
year of the Record Date (which is the same as the year as when the Rights
were received). Record Date Stockholders should carefully review the
differing federal income tax consequences described below before deciding
whether or not to make a Section 307(b)(2) Election.
FOR RECORD DATE STOCKHOLDERS WHEN THE FAIR MARKET VALUE OF RIGHTS DISTRIBUTED
EXCEED 15% OF THE TOTAL FAIR MARKET VALUE OF THE FUND'S COMMON STOCK OR WHEN
MAKING A SECTION 307(b)(2) ELECTION
LAPSE OF RIGHTS. If the fair market value of rights distributed exceed 15%
of the total fair market value of the Common Stock or if a Record Date
Stockholder makes a Section 307(b)(2) Election, no taxable loss will be
realized for federal income tax purposes if the Record Date Stockholder
retains a Right but allows it to lapse without exercise. Moreover, the
existing federal income tax basis of the related Old Share will not be
reduced if such lapse occurs.
EXERCISE OF RIGHTS. If a Record Date Stockholder exercises a Right, the
Record Date Stockholder's existing federal income tax basis in the related
Old Share must be allocated between such Right and the Old Share in
proportion to their respective fair market values as of the Record Date
(effectively reducing the Record Date Stockholder's basis in his Old
Share). Upon such exercise of the Record Date Stockholder's Rights, the New
Shares received by the Record Date Stockholder pursuant to such exercise
will have a federal income tax basis equal to the sum of the basis of such
Rights as described in the previous sentence and the Subscription Price
paid for the New Shares (as increased by any servicing fee charged to the
Record Date Stockholder by his broker, bank or trust company and other
similar costs). If the Record Date Stockholder subsequently sells such New
Shares (and holds such Shares as capital assets at the time of their sale),
the Record Date Stockholder will recognize a capital gain or loss equal to
the difference between the amount received from the sale of the New Shares
and the Record Date Stockholder's federal income tax basis in the New
Shares as described above. Such capital gain or loss will be long-term
capital gain or loss if the New Shares are sold more than one year after
the date that the New Shares are acquired by the Record Date Stockholder.
FOR RECORD DATE STOCKHOLDERS NOT MAKING A SECTION 307(b)(2) ELECTION WHEN THE
FAIR MARKET VALUE OF THE RIGHTS DISTRIBUTED ARE LESS THAN 15% OF THE TOTAL FAIR
MARKET VALUE OF THE FUND'S OUTSTANDING COMMON STOCK
LAPSE OF RIGHTS. If the fair market value of the Rights distributed are
less than 15% of the total fair market value of the outstanding Common
Stock and a Record Date Stockholder does not make a Section 307(b)(2)
Election for the taxable year in which such Rights were received, no
taxable loss will be realized for federal income tax purposes if the Record
Date Stockholder retains a Right but allows it to lapse without exercise.
Moreover, the federal income tax basis of the related Old Share will not be
reduced if such lapse occurs.
EXERCISE OF RIGHTS. If a non-electing Record Date Stockholder exercises his
Rights, the federal income tax basis of the related Old Shares will remain
unchanged and the New Shares will have a federal income tax basis equal to
the Subscription Price paid for the New Shares (as increased by any
servicing fee charged to the Record Date Stockholder by his broker, bank or
trust company and other similar costs). If the Record Date Stockholder
subsequently sells such New Shares (and holds such Shares as capital assets
at the time of their sale), the Record Date Stockholder will recognize a
capital gain or loss equal to the difference between the amount received
from the sale of the New Shares and the stockholder's federal income tax
basis in the New Shares as described above. Such capital gain or loss will
be long-term capital gain or loss if the New Shares are sold more than one
year after the Record Date Stockholder acquires the New Shares through the
Offering.
Employee Plan Considerations. Record Date Stockholders that are employee benefit
plans subject to the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), including corporate savings and 401(k) plans, Keogh Plans of
self-employed individuals and Individual Retirement Accounts ("IRA") (each a
"Benefit Plan" and collectively, "Benefit Plans"), should be aware that
additional contributions of cash in order to exercise Rights may be treated as
Benefit Plan contributions and, when taken together with contributions
previously made, may subject a Benefit Plan to excise taxes for excess or
nondeductible contributions. In the case of Benefit Plans qualified under
Section 401(a) of the Code, additional cash contributions could cause the
maximum contribution limitations of Section 415 of the Code or other
qualification rules to be violated. Benefit Plans contemplating making
additional cash contributions to exercise Rights should consult with their
counsel prior to making such contributions.
Benefit Plans and other tax exempt entities, including governmental plans,
should also be aware that if they borrow in order to finance their exercise of
Rights, they may become subject to the tax on unrelated business taxable income
("UBTI") under Section 511 of the Code. If any portion of an IRA is used as
security for a loan, the portion so used is also treated as distributed to the
IRA depositor.
ERISA contains prudence and diversification requirements and ERISA and the Code
contain prohibited transaction rules that may impact the exercise of Rights.
Among the prohibited transaction exemptions issued by the Department of Labor
that may exempt a Benefit Plan's exercise of Rights are Prohibited Transaction
Exemption 84-24 (governing purchases of shares in investment companies) and
Prohibited Transaction Exemption 75-1 (covering sales of securities).
Due to the complexity of these rules and the penalties for noncompliance,
Benefit Plans should consult with their counsel regarding the consequences of
their exercise of Rights under ERISA and the Code.
Benefit to the Advisers and Co-Administrator. The Advisers and FAS (defined
below) will benefit from the Offering because their fees are based on the
average total net assets of the Fund.
It is not possible to state precisely the amount of additional compensation the
Advisers and FAS will receive as a result of the Offering because the proceeds
of the Offering will be invested in additional portfolio securities that will
fluctuate in value. However, if all Rights are exercised at the Estimated
Subscription Price of $8.43 (i.e., the estimated subscription price based on the
Fund's NAV and Share price on August 10, 2007), the annual compensation to be
received by the Advisers and FAS would be increased by approximately $450,000.
This is discussed in "The Investment Co-Advisory Agreements" below. Two of the
Fund's Directors who voted to approve the Offering are "interested persons" of
the Advisers within the meaning of the 1940 Act. These Directors, Susan L.
Ciciora and John S. Horejsi, could benefit indirectly from the Offering because
of their beneficial interest in the Advisers and FAS. See "Information Regarding
the Advisers and Other Service Providers" below. While it was cognizant of the
benefit to the Advisers and FAS and indirect benefit to these "interested
persons," the Board nevertheless concluded that the Offering was in the best
interest of the Fund's stockholders.
The Fund may, in the future and at its discretion, choose to make additional
rights offerings from time to time for a number of Shares and on terms which may
or may not be similar to the Offering. Any such future rights offerings will be
made in accordance with the 1940 Act. Under the laws of Maryland, the state in
which the Fund is incorporated, under certain circumstances, the Board is
authorized to approve rights Offerings without obtaining stockholder approval.
The staff of the SEC has interpreted the 1940 Act as not requiring stockholder
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 the
Fund's existing stockholders. Such future offerings would similarly benefit the
Advisers and FAS.
INFORMATION ABOUT THE FUND
The Fund is a non-diversified, closed-end management investment company
organized as a Maryland corporation in October 1972. The Fund seeks to produce
both income and long-term capital appreciation by investing in a portfolio of
equity and debt securities. The Fund invests primarily in common stocks,
including dividend paying common stocks such as those issued by utilities, REITs
and RICs. The Fund also invests in fixed income securities such as U.S.
government securities, preferred stocks and bonds. The Fund invests primarily in
securities of U.S.-based companies and to a lesser extent in foreign equity
securities and sovereign debt, in each case denominated in foreign currency. The
Fund has no restrictions on its ability to invest in foreign securities. The
Fund is concentrated in Real Estate Related Companies, which means it must
invest more than 25% of its total assets in such companies. No assurance can be
given that the Fund will achieve its investment objective. The address of the
Fund is 2344 Spruce Street, Suite A, Boulder, Colorado 80302 and its telephone
number is (303) 444-5483.
The Fund began investment activities in January 1974 as a registered closed-end,
diversified management investment company. From its inception, and prior to
April 26, 2002, the Fund was named USLife Income Fund, Inc. and was virtually
100% invested in corporate bonds. In January 2002, the Fund's largest
stockholder, the Ernest Horejsi Trust No. 1B, succeeded in replacing the Board
with a slate of its nominees. Soon thereafter, in April 2002, stockholders
approved changing the Fund's investment objective and corporate name, changing
the Fund's classification from diversified to non-diversified and changing or
eliminating a number of the Fund's fundamental investment restrictions.
Thereafter, the Fund began the process of liquidating its bond portfolio and
started investing in common equities consistent with the new investment
objective.
MANAGEMENT OF THE FUND
The business and affairs of the Fund are managed under the direction of the
Board. Accordingly, the Board is responsible for the overall management of the
Fund, including supervision of the duties performed by the Advisers. There are
currently five directors of the Fund, two of whom are "interested persons" of
the Fund (as defined in the 1940 Act).
Information about Directors and Officers. Set forth in the following table is
certain information about each Director of the Fund, including his or her age,
position with the Fund, term of office, length of time served and principal
occupation during the last five years:
---------------------------------------- -------------------------------- ----------------------------------------------------------
Name, Address*, Age Position, Length of Principal Occupation(s) and Other Directorships Held Number of Funds in
During the Past Five Years Fund Complex+
Term Served, and Term of Office Overseen by Director
---------------------------------------- -------------------------------- ----------------------------------------------------------
---------------------------------------- -------------------------------- ----------------------------------------------------------
Independent Directors
Joel W. Looney Director of the Fund since Partner, Financial Management Group, LLC (investment 3
Chairman 2002. Chairman of the Board of adviser), since July 1999; CFO, Bethany College, 1995-1999;
Age: 44 the Fund since 2004. Current Director of Boulder Total Return Fund, Inc. ("BTF"), since
term to expire at the 2008 2001; Director and Chairman of the Board, First Financial
annual meeting. Fund, Inc. ("FF"), since 2003.
Dr. Dean L. Jacobson Director of the Fund since Founder and President of Forensic Engineering, Inc. 3
Age: 68 2006. Current term to expire (engineering investigations); Professor Emeritus at Arizona
at the 2008 annual meeting. State University, since 1997; Professor of Engineering at
Arizona State University, prior to 1997; Director of BTF
since 2004; Director of FF since 2003.
Richard I. Barr Director of the Fund since Retired. Manager, Advantage Sales and Marketing, Inc. 3
Age: 69 2002. Current term to expire (food brokerage), 1963-2001; Director of BTF since 1999 and
at the 2008 annual meeting. Chairman of the Board since 2003; Director of FF since 2001.
---------------------------------------- -------------------------------- ----------------------------------------------------------
Interested Directors ++
---------------------------------------- -------------------------------- ----------------------------------------------------------
John S. Horejsi Director of the Fund since Director, Horejsi Charitable Foundation (private charitable 3
Age: 39 2004. Current term to expire foundation), since 1997; Director of BTF and FF since 2006.
at the 2008 annual meeting.
Susan L. Ciciora Director of the Fund since Trustee of the Lola Brown Trust No. 1B and the Ernest 3
Age: 42 2006. Current term to expire Horejsi Trust No. 1B; Director, Horejsi Charitable
at the 2008 annual meeting. Foundation, Inc. (private charitable foundation), since
1997; Director of BTF since 2001; Director of FF since 2003
* The addresses for each Director is c/o Boulder Growth & Income Fund, Inc.,
2344 Spruce Street, Suite A, Boulder, Colorado 80302.
+ The "fund complex" consists of the Fund, BTF and FF.
++ Mr. Horejsi and Ms. Ciciora are "interested persons" of the Fund by virtue
of their relationship with Stewart Horejsi, the Fund's primary portfolio
manager and an employee of BIA and SIA.
---------------------------------
From the late 1980's until January, 2001, Mr. Looney served, without
compensation, as one of three trustees of the Mildred Horejsi Trust, an
affiliate of the Fund's largest stockholder, the Ernest Horejsi Trust No. 1B
(the "EH Trust"). The address for the EH Trust is 3301 C Street, Suite 100,
Anchorage, Alaska 99501.
The EH Trust holds 20.8% of the Fund's outstanding Shares and is the Fund's
largest stockholder. The EH Trust has asserted, and the Fund has acknowledged,
that the EH Trust is a "control person" as contemplated by the 1940 Act. The
sole trustees of the EH Trust are Badlands Trust Company, LLC ("Badlands"),
Larry Dunlap and Susan Ciciora, Stewart Horejsi's daughter (collectively, the
"EH Trustees"). The EH Trustees may also be deemed to be control persons by
virtue of their trusteeship with the EH Trust. The EH Trustees disclaim any such
control relationship. The Stewart R. Horejsi Trust No. 2 (the "SRH Trust"), an
irrevocable grantor trust established by Stewart Horejsi for the benefit of his
issue, is the sole equity owner of Badlands and may be deemed indirectly to be a
control person by virtue of its ownership of Badlands. The SRH Trust disclaims
any such control relationship.
As discussed above, the EH Trust owns 20.8% of the Common Stock, is a "control
person" as contemplated under the 1940 Act and is affiliated with entities who
own the Advisers and FAS (i.e., the Horejsi Affiliates). As a large stockholder,
EH Trust is able to significantly influence any matters upon which the holders
of common stock may vote, including the election of the Fund's directors and any
change in the Fund's investment adviser. Since all members of the Board are
elected annually, the EH Trust may be able to effect a change of control with
respect to the entire Board in a single election. Similarly, several of the
Fund's corporate governance provisions grant stockholders voting power or
decrease the voting requirement necessary to take certain actions. As a large
stockholder, the EH Trust will have greater influence over the adoption or
failure of certain corporate actions requiring a vote of the Fund's
stockholders. In particular, the EH Trust would have a greater influence in
compelling a special meeting with the support of only a small percentage of
other non-Horejsi stockholders. Nonetheless, since most of the other actions
under the Fund's corporate governance provisions require the support of either a
majority or two-thirds of outstanding Shares for a future change, the EH Trust
cannot effect any such change without the support of a substantial number of
non-Horejsi stockholders. However, in these instances, where an action requires
a majority or two-thirds voting approval, the EH Trust may have an effective
veto.
Together with other trusts and entities affiliated with the Horejsi family (more
particularly defined below as the "Horejsi Affiliates"), the EH Trust has
asserted control with respect to two other investment companies, BTF and FF. As
discussed below, the Horejsi Affiliates also own the Advisers and FAS, the
Fund's co-administrator. The following table shows security ownership by the
Independent Directors with respect to the Fund, BTF and FF as of August 10,
2007.
OWNERSHIP OF THE FUND BY INDEPENDENT DIRECTORS
-------------------------------------- -------------------------------- ---------------------------------
Independent Directors and Nominees Dollar Range of Equity Aggregate Dollar Range of
Securities in the Fund (1) Equity Securities in the Fund,
BTF and FF(1)
-------------------------------------- -------------------------------- ---------------------------------
Richard I. Barr $10,001 to $50,000 Over $100,000
Joel W. Looney $50,001 to $100,000 Over $100,000
Dr. Dean L. Jacobson $10,001 to $50,000 $50,001 to $100,000
-------------------------------------- -------------------------------- ---------------------------------
(1) Based on closing prices on August 10, 2007.
Direct ownership of the Common Stock by all officers and directors of the Fund
is less than one percent. John Horejsi and Susan Ciciora, interested directors
of the Fund, are discretionary beneficiaries of the EH Trust and may be deemed
to have indirect beneficial ownership of the common stock held by the EH Trust.
Mr. Horejsi and Ms. Ciciora disclaim all such beneficial ownership. Mr. Horejsi
does not directly own any Shares. Stephen Miller, the Fund's president, is an
officer and director of Badlands and may be deemed to have indirect beneficial
ownership of the Shares held by the EH Trust. However, because two of the EH
Trustees are required in order for the EH Trust to vote or exercise dispositive
authority with respect to Shares owned by the EH Trust, Mr. Miller disclaims
beneficial ownership of such Shares.
The names of the officers of the Fund and certain additional information are
listed in the table below. Each officer was elected to office by the Board at a
meeting held on April 27, 2007 or August 3. Each officer will hold such office
until a successor has been elected by the Board.
---------------------------------------- ----------------------------------- -------------------------------------------------------
Name, Address**, Age Position, Length of Term Served, Principal Occupation(s) and Other Directorships Held
and Term of Office During the Past Five Years
---------------------------------------- ----------------------------------- -------------------------------------------------------
Stephen C. Miller President of the Fund since President of and General Counsel for BIA, since 1999;
Age: 54 January 2002 and Director from Manager, FAS, since 1999; Vice President of SIA, since
January 2002 through October 1998; Director and President of BTF since 1999
2004. Appointed annually. (resigned as Director in 2004); Director and President
of FF since 2003 (resigned as Director and Chairman in
2004); officer of various other entities affiliated
with the Horejsi family; Of Counsel, Krassa &
Miller, LLC since 1991.
Carl D. Johns Chief Financial Officer, Chief Vice President and Treasurer of BIA and Assistant
Age: 44 Accounting Officer, Vice Manager of FAS, since April, 1999; Vice President,
President and Treasurer since Chief Financial Officer and Chief Accounting Officer
January 2002. Appointed annually. of BTF since 1999 and FF since August 2003.
Joel L. Terwilliger Chief Compliance Officer Associate General Counsel for BIA, SIA, FAS, BTF, FF,
Age: 38 since August 3, 2007. and the Fund, since 2006; Senior Associate/Managing
Appointed annually. Counsel, Great-West Life & Annuity Insurance Company,
2002-2006.
---------------------------------------- ----------------------------------- -------------------------------------------------------
Name, Address**, Age Position, Length of Term Served, Principal Occupation(s) and Other Directorships Held
and Term of Office During the Past Five Years
---------------------------------------- ----------------------------------- -------------------------------------------------------
Stephanie J. Kelley Secretary since January 2002. Secretary of BTF since October 2000 and FF since
Age: 50 Appointed annually. August 2003; Assistant Secretary and Assistant
Treasurer of various other entities affiliated with the
Horejsi family; Employee, FAS, since March 1999.
Nicole L. Murphey Assistant Secretary since January Assistant Secretary of BTF since October 2000 and FF
Age: 30 2002. Appointed annually. since August 2003; Employee, FAS, since July 1999.
** The addresses for each officer is c/o Boulder Growth & Income Fund, Inc.,
2344 Spruce Street, Suite A, Boulder, Colorado 80302.
Information Regarding the Advisers and Other Service Providers. The Fund is
co-advised by BIA and SIA. Since January 2002, the Advisers have been providing
advisory services to the Fund and, since March 1999, to BTF. As of November 30,
2006, the Advisers had a total of $516.2 million in assets under management.
Boulder Investment Advisers, LLC. BIA was formed on April 8, 1999, as a Colorado
limited liability company and is registered as an investment adviser under the
Investment Advisers Act of 1940, as amended. Together with SIA, BIA serves as
the investment co-adviser to two registered closed-end investment companies, the
Fund and BTF (together, the "Boulder Funds"). At the present time, BIA has only
one other client, also co-advised with SIA, which is an affiliated private
foundation, the Horejsi Charitable Foundation. Stewart R. Horejsi is an employee
of and investment manager for both Advisers and has extensive experience
managing common stocks for the Fund as well as for the various other trusts and
entities affiliated with the Horejsi family (the "Horejsi Affiliates"). The
members of BIA are Evergreen Atlantic, LLC, a Colorado limited liability
company, located at 2344 Spruce Street, Suite A, Boulder CO 80302 and the Lola
Brown Trust No. 1B, an irrevocable Alaska domiciled trust, whose address is c/o
Badlands Trust Company, LLC, 3301 C Street, Suite 100, Anchorage, Alaska 99501
(the "Members"). The Members each hold a 50% interest in BIA. The Members are
"affiliated persons" of the Fund (as that term is defined in the 1940 Act). Both
Mr. Horejsi and John S. Horejsi, Mr. Horejsi's son and one of the Fund's
"interested" directors, are discretionary beneficiaries under the Lola Brown
Trust No. 1B as well as under other Horejsi family affiliated trusts which own
Evergreen Atlantic, LLC. Accordingly, as a result of this relationship, both
Stewart R. Horejsi and John S. Horejsi may directly or indirectly benefit from
the relationship between the Fund and BIA.
Stewart Investment Advisers. SIA is a Barbados international business company,
incorporated on November 12, 1996 and is registered as an investment adviser
under the Investment Advisers Act of 1940, as amended. As discussed above, SIA,
together with BIA, serves as the investment co-adviser to the Boulder Funds and
the Horejsi Charitable Foundation, which presently are SIA's only clients. SIA
is wholly owned by the Stewart West Indies Trust, an irrevocable trust domiciled
in Alaska, established by Stewart Horejsi in 1996 primarily to benefit his issue
(the "West Indies Trust"). The West Indies Trust's address is c/o Badlands Trust
Company, LLC, 3301 C Street, Suite 100, Anchorage, Alaska 99501. Mr. Horejsi is
not a beneficiary under the West Indies Trust. However, John S. Horejsi and
Susan L. Ciciora, Mr. Horejsi's son and daughter and the Fund's "interested"
directors, are discretionary beneficiaries under the West Indies Trust and thus,
as a result of this relationship, may directly or indirectly benefit from the
relationship between the Fund and SIA.
SIA is not domiciled in the United States and substantially all of its assets
are located outside the United States. As a result, it may be difficult to
realize judgments of courts of the United States predicated upon civil
liabilities under federal securities laws of the United States. The Fund has
been advised that there is substantial doubt as to (i) the enforceability in
Barbados of such civil remedies and criminal penalties as are afforded by the
federal securities laws of the United States; (ii) whether the appropriate
foreign courts would enforce judgments of United States courts obtained in
actions against SIA predicated upon the civil liability provisions of the
federal securities laws, or (iii) whether a Barbados court would enforce, in an
original action, liabilities against SIA predicated solely on federal securities
laws. Pursuant to the advisory agreement between SIA and the Fund, SIA has
appointed the Secretary of the Fund (presently Stephanie Kelley in Boulder,
Colorado) as its agent for service of process in any legal action in the United
States, thus subjecting it to the jurisdiction of the United States courts.
Portfolio Managers. Stewart R. Horejsi is the Fund's primary portfolio manager
and, together with Carl D. Johns, the Fund's Vice President and Treasurer, is
responsible for the day-to-day management of the Fund's assets and is primarily
responsible for the Fund's asset allocation. Mr. Horejsi is 69 and has been an
employee of both BIA and SIA since 2001. Mr. Horejsi has been the President or
Manager of various subsidiaries of various Horejsi family affiliates since June
1986, and the investment manager for various Horejsi Affiliates since 1982. He
was a director of BTF until November, 2001; General Manager of Brown Welding
Supply, LLC from 1994 until 1999; and a director of Sunflower Bank from 1982 to
2000. Mr. Horejsi has been President and a Director of the Horejsi Charitable
Foundation, Inc. since 1997. He received a Masters Degree in Economics from
Indiana University in 1961 and a Bachelor of Science Degree in Industrial
Management from the University of Kansas in 1959.
Carl D. Johns, the Fund's Vice President and Treasurer, is also Vice President
and Treasurer for BIA and, together with Mr. Horejsi, is responsible for
research, managing the Fund's fixed income portfolio and BIA's day-to-day
advisory activities. He has worked for BIA since 1999. Since 1999, he has been
Chief Financial Officer, Chief Accounting Officer, Vice President and Treasurer
of the Fund as well as BTF and FF. Mr. Johns is also the assistant manager of
FAS. Prior to joining BIA, Mr. Johns worked at Flaherty and Crumrine,
Incorporated, from 1992 to 1998. During that period he was an Assistant
Treasurer for the Preferred Income Fund Incorporated, the Preferred Income
Opportunity Fund Incorporated, and the Preferred Income Management Fund
Incorporated. Mr. Johns received a Bachelors Degree in Mechanical Engineering at
the University of Colorado in 1985, and a Masters Degree in Finance from the
University of Colorado in 1991.
Additional information regarding the portfolio managers' compensation, other
accounts managed and ownership of Shares is included in the SAI.
The Investment Co-Advisory Agreements. The Advisers and the Fund are parties to
investment co-advisory agreements dated as of April 26, 2002 (the "Advisory
Agreements"). Under the terms of the Advisory Agreements, the Advisers provide
advisory services regarding asset allocation, manage the investment of the
Fund's assets and provide such investment research, advice and supervision, in
conformity with the Fund's investment objective and policies, as necessary for
the operations of the Fund. The Advisory Agreements provide, among other things,
that the Advisers will bear all expenses in connection with the performance of
their services under the Advisory Agreements, although the Fund will bear
certain other expenses to be incurred in its operation, including organizational
expenses, taxes, interest, brokerage costs and commissions and stock exchange
fees; fees of Directors of the Fund who are not also officers, directors or
employees of the Advisers; Securities and Exchange Commission fees; state Blue
Sky qualification fees; insurance premiums; outside auditing and legal expenses;
costs of maintenance of the Fund's existence; membership fees in trade
associations; stock exchange listing fees and expenses; and litigation and other
extraordinary or non-recurring expenses.
The Advisory Agreements provide that the Fund shall pay to the Advisers for
their services an aggregate monthly fee at the annual rate of 1.25% of the
Fund's average monthly total net assets (the "Adviser Fee") (including the
principal amount of leverage, if any). Under the terms of the Advisory
Agreements, the Advisers split the Adviser Fee as determined by the Advisers and
approved by the Board from time to time. Presently, the Adviser Fee is split
between BIA and SIA 25% and 75%, respectively. Although the Advisers intend to
devote such time and effort to the business of the Fund as is reasonably
necessary to perform their respective duties to the Fund, the services of the
Advisers are not exclusive and the Advisers may provide similar services to
other investment companies and other clients and may engage in other activities.
At a regular meeting of the Board held on January 27, 2007, the Advisers agreed
to a waiver of advisory fees at certain "break-point" levels such that, in the
future, the Adviser Fee would be calculated at the annual rate of 1.25% on asset
levels up to $400 million, 1.10% on assets levels between $400-$600 million; and
1.00% on asset levels exceeding $600 million. The fee waiver agreement has a
one-year term and is renewable annually.
The Advisory Agreements provide that the Advisers shall not be liable for any
error of judgment or mistake of law or omission or any loss suffered by the Fund
in connection with the matters to which the agreements relate, although the
agreements do not protect or purport to protect the Advisers against any
liability to the Fund to which the Advisers would otherwise be subject by reason
of willful misfeasance, bad faith or gross negligence on their part in the
performance of their duties or from reckless disregard by them of their
obligations and duties under the agreements. Each Advisory Agreement also
provides for indemnification by the Fund of the Advisers and their partners,
members, officers, employees, agents and control persons for liabilities
incurred by them in connection with their services to the Fund, subject to
certain limitations and conditions.
Each Advisory Agreement will continue in effect without a term so long as its
continuation is specifically approved at least annually by both (i) the vote of
a majority of the Board or the vote of a majority of the outstanding voting
securities of the Fund (as such term is defined in the 1940 Act) and (ii) by the
vote of a majority of the directors who are not parties to such Advisory
Agreement or interested persons (as such term is defined in the 1940 Act) of any
such party, cast in person at a meeting called for the purpose of voting on such
approval. Any of the Advisory Agreements may be terminated as a whole at any
time by the Fund, without the payment of any penalty, upon the vote of a
majority of the Board or a majority of the outstanding voting securities of the
Fund or by the Advisers on 60 days' written notice by either party to the other.
Except as otherwise provided by order of the Securities and Exchange Commission
or any rule or provision of the 1940 Act, each of the Advisory Agreements will
terminate automatically in the event of their assignment (as such term is
defined in the 1940 Act and the rules thereunder).
Fund Administrative Services, LLC. The Fund's co-administrator is FAS. FAS
(formerly Boulder Administrative Services, LLC) is a Colorado limited liability
company whose principal place of business is 2344 Spruce Street, Suite A,
Boulder, Colorado 80302. The members of FAS are Lola Brown Trust No. 1B (50%)
and Evergreen Atlantic, L.L.C. (50%) (the "Members"), each of which is
considered to be an "affiliated person" of the Fund as that term is defined in
the 1940 Act. The officers of FAS are Stephen C. Miller, manager; Carl D. Johns,
assistant manager; Laura Rhodenbaugh, secretary/treasurer; and Stephanie Kelley,
assistant secretary. Since January 2002, FAS has been providing certain
administrative and executive management services to the Fund, including among
other things negotiation of service provider contracts, oversight of service
providers, maintenance of the Fund's policies and procedures, and provision of
compliance, legal and fund accounting services. FAS has also provided such
administrative and executive management services to BTF since March 1999, and to
FF since August 2003.
The Fund and FAS are parties to an Administration Agreement dated February 1,
2004 (the "Administration Agreement"). FAS is owned by the Members, who, as
indicated above, are also the owners of BIA and are included in the group
referred to herein as the Horejsi Affiliates. As discussed above, Stewart R.
Horejsi and his son John S. Horejsi and daughter Susan L. Ciciora (the Fund's
"interested" directors), are discretionary beneficiaries under the Lola Brown
Trust No. 1B, one of the Members of FAS, and under the trusts that own Evergreen
Atlantic, LLC, the other Member of FAS.
Under the Administration Agreement, the Fund pays FAS a monthly fee calculated
at an annual rate of 0.20% of the value of the Fund's average monthly total net
assets (including the principal amount of leverage, if any) up to $250 million;
0.18% of the Fund's average monthly total net assets on the next $150 million;
and, 0.15% on the value of the Fund's average monthly total net assets over $400
million. Notwithstanding, FAS has agreed to cap the Fund's total administration
costs at 0.30% (including administration, co-administration, transfer agent and
custodian fees). Accordingly, FAS has agreed to waive a portion of its fee
should the total monthly administration expenses exceed 0.30%.
State Street Bank and Trust Company. State Street Bank and Trust Company
(formerly known as Investors Bank & Trust Company) ("State Street"), located at
200 Clarendon Street, Boston, Massachusetts 02116, serves as the Fund's
co-administrator and custodian. On February 4, 2007, State Street Corporation
("SSC") entered into an Agreement and Plan of Reorganization (the
"Reorganization Agreement") with Investors Financial Services Corp. ("IFSC"),
the parent company of Investors Bank & Trust Company. Pursuant to the
Reorganization Agreement, IFSC merged into SSC effective July 2, 2007. As
co-administrator, State Street provides certain services including fund
accounting and preparation of materials for Board meetings. Under an
administration agreement and custody agreement between the Fund and State
Street, the Fund pays State Street a combined monthly fee for both
co-administrative and custodian services calculated at an annual rate of 0.058%
of the value of the Fund's average monthly total net assets (including the
principal amount of leverage, if any) up to $300 million and 0.04% on the value
of the Fund's average monthly total net assets over $300 million, or a minimum
monthly fee of $10,500. Presently, because of the level of the Fund's average
monthly total net assets, the Fund pays the minimum of $10,500 monthly. In
addition, State Street receives certain out-of-pocket expenses, transaction fees
and certain charges for securities transactions. All customary fees of the
custodian are paid by the Fund.
PFPC Inc. The transfer agent, dividend disbursing agent and registrar for the
Shares is PFPC, an indirect, majority-owned subsidiary of the PNC Financial
Services Group, Inc. PFPC is located at 4400 Computer Drive, Westborough, MA
01581-5120. As compensation for PFPC's services, the Fund pays PFPC a monthly
fee plus certain out-of-pocket expenses.
FEDERAL INCOME TAX MATTERS
Taxation of the Fund. The Fund has qualified and elected to be taxed as a
regulated investment company under Subchapter M of the Code. Accordingly, the
Fund must, among other things, (a) derive in each taxable year at least 90% of
its gross income (including tax-exempt interest) from dividends, interest,
payments with respect to certain securities loans, and gains from the sale or
other disposition of stock, securities or foreign currencies, or other income
(including but not limited to gains from options, futures and forward contracts)
derived with respect to its business of investing in such stock, securities or
currencies; and (b) diversify its holdings so that, at the end of each quarter
of the Fund's taxable year (i) at least 50% of the market value of the Fund's
total assets is represented by cash and cash items, U.S. Government securities,
the securities of other regulated investment companies and other securities,
with such other securities limited, in respect of any one issuer, to an amount
not greater than 5% of the value of the Fund's total assets and to not more than
10% of the outstanding voting securities of such issuer; and (ii) not more than
25% of the market value of the Fund's total assets is invested in the securities
of any one issuer (other than U.S. Government securities and the securities of
other regulated investment companies) or of any two or more issuers that the
Fund controls and which are determined to be engaged in the same trade or
business or similar or related trades or businesses.
As a regulated investment company, the Fund generally is not subject to U.S.
federal income tax on income and gains that it distributes each taxable year to
its stockholders, if at least 90% of the sum of the Fund's (i) investment
company taxable income (which includes, among other items, dividends, interest
and any excess of net short-term capital gains over net long-term capital losses
and other taxable income other than any net capital gain (as defined below)
reduced by deductible expenses) determined without regard to the deduction for
dividends paid and (ii) its net tax-exempt interest (the excess of its gross
tax-exempt interest over certain disallowed deductions). The Fund intends to
distribute at least annually substantially all of such income.
Amounts not distributed on a timely basis in accordance with a calendar-year
distribution requirement are subject to a nondeductible 4% excise tax at the
Fund level. To avoid this tax, the Fund must distribute during each calendar
year an amount equal to the sum of (1) at least 98% of its ordinary income (not
taking into account any capital gains or losses) for the calendar year; (2) at
least 98% of its capital gains in excess of its capital losses (adjusted for
certain ordinary losses) for a one-year period generally ending on October 31 of
the calendar year (unless, an election is made by a fund with a November or
December year-end to use the fund's fiscal year); and (3) certain undistributed
amounts from previous years on which the Fund paid no U.S. federal income tax.
While the Fund intends to distribute any income and capital gains in the manner
necessary to minimize imposition of the 4% excise tax, there can be no assurance
that sufficient amounts of the Fund's taxable income and capital gains will be
distributed to avoid entirely the imposition of the tax. In that event, the Fund
will be liable for the tax only on the amount by which it does not meet the
foregoing distribution requirement.
If for any taxable year the Fund does not qualify as a regulated investment
company, all of its taxable income (including its net capital gains) will be
subject to tax at regular corporate rates without any deduction for
distributions to stockholders, and such distributions will be taxable to
stockholders as ordinary dividends to the extent of the Fund's current and
accumulated earnings and profits.
Taxation of Stockholders. Distributions paid to stockholders by the Fund from
its ordinary income or from an excess of net short-term capital gains over net
long-term capital losses (together referred to hereinafter as "regular
dividends") are taxable to stockholder as ordinary income to the extent of the
Fund's earning and profits. Distributions made to stockholders from an excess of
net long-term capital gains over net short-term capital losses ("capital gain
dividends"), including capital gain dividends credited to stockholders but
retained by the Fund, are taxable to stockholders as long-term capital gains,
regardless of the length of time stockholders have owned Fund shares.
Distributions in excess of the Fund's earnings and profits will first reduce the
adjusted tax basis of shares held by a stockholder and, after such adjusted tax
basis is reduced to zero, will constitute capital gains to stockholders
(assuming the shares are held as a capital asset).
Under a recently enacted law, however, special rules apply to regular dividends
paid to individuals. Such a dividend, with respect to taxable years ending on or
before December 31, 2010, may be subject to tax at the rates generally
applicable to long-term capital gains for individuals (currently at a maximum
rate of 15%), provided that the individual receiving the dividend satisfies
certain holding period requirements. The long-term capital gains rates will
generally apply to the portion of the regular dividends paid by the Fund to an
individual in a particular taxable year that is attributable to qualified
dividends received by the Fund in that taxable year. The Fund does not expect to
have significant dividends that will qualify for this tax rate due to its
significant holdings in REITs (distributions from which generally do not
qualify). For this purpose, "qualified dividends" means dividends received by
the Fund after December 31, 2002 from United States corporations and qualifying
foreign corporations, provided that the Fund satisfies certain holding period
requirements in respect of the stock of such corporations. In the case of
securities lending transactions, payments in lieu of dividends are not qualified
dividends.
Generally, not later than 60 days after the close of its taxable year, the Fund
will provide stockholders with a written notice designating the amount of any
regular dividends that may qualify for the reduced rate, capital gain dividends
and other distributions.
The sale or other disposition of common shares of the Fund will generally result
in capital gain or loss to stockholders, and will be long-term capital gain or
loss if the shares have been held for more than one year at the time of sale.
Any loss upon the sale or exchange of Fund shares held for six months or less
will be treated as long-term capital loss to the extent of any capital gain
dividends received (including amounts credited as an undistributed capital gain
dividend) by stockholders. A loss realized on a sale or exchange of shares of
the Fund will be disallowed if other Fund shares are acquired (whether through
the automatic reinvestment of dividends or otherwise) within a 61-day period
beginning 30 days before and ending 30 days after the date that the shares are
disposed of. In such case, the basis of the shares acquired will be adjusted to
reflect the disallowed loss. Present law taxes both long-term and short-term
capital gains of corporations at the rates applicable to ordinary income. For
individual (non-corporate) taxpayers, however, short-term capital gains and
ordinary income are currently taxed at a maximum rate of 35% while long-term
capital gains recognized on or after May 6, 2003 are taxed at a maximum rate of
15%.
Dividends and other taxable distributions are taxable to stockholders even
though they are reinvested in additional shares of the Fund. Although the Fund
does not intend to pay dividends in January, if it does pay such a dividend
which was declared in the previous October, November or December to stockholders
of record on a specified date in one of such months, then such dividend will be
treated for tax purposes as being paid by the Fund and received by stockholders
on December 31 of the year in which the dividend was declared. The Fund intends
to distribute all net investment income and any capital gains during the month
of December of each year.
The Fund is required in certain circumstances to backup withhold on taxable
dividends and certain other payments paid to non-corporate holders of the Fund's
shares who do not furnish the Fund with their correct taxpayer identification
number (in the case of individuals, their Social Security number) and certain
certifications, or who are otherwise subject to backup withholding. Backup
withholding is not an additional tax. Any amounts withheld from payments made to
stockholders may be refunded or credited against a stockholders' U.S. federal
income tax liability, if any, provided that the required information is
furnished to the Internal Revenue Service.
The foregoing is a general and abbreviated summary of the provisions of the Code
and the Treasury regulations in effect as they directly govern the taxation of
the Fund and its stockholders. These provisions are subject to change by
legislative or administrative action, and any such change may be retroactive.
Stockholders are urged to consult their tax advisers regarding specific
questions as to U.S. federal, foreign, state, local income or other taxes.
Taxation Regarding the Distribution Policy. The Fund has adopted a managed
distribution policy (defined above as the "Distribution Policy") whereby the
Fund makes monthly distributions to stockholders from net investment income,
capital gains and/or return of capital, subject to the Board's right to suspend,
modify, or terminate the distributions at any time. See "Dividends and
Distributions - Managed Distribution Policy."
Generally, distributions under the Policy will consist mostly of a return of
capital to stockholders. Distributions may have a small component of net
investment income, but the exact tax characteristics of the distributions will
not be known until the Fund's fiscal year-end (i.e., November 30 of each year).
A "return of capital" represents a return of a stockholder's original investment
in the Fund's shares, and should not be confused with a dividend yield. A
"return of capital" is a return of stockholders' capital investment in the Fund.
A return of capital is generally not taxable and is not considered "yield," or
"income," or "capital gains," items which are taxable. When stockholders receive
a return of capital, they are getting back part of their investment and
consequently the return of their already-taxed capital investment is tax free to
the stockholders.
An IRS Form 1099-DIV will be sent to stockholders indicating the tax
characteristic of the distributions they received and exactly how much would be
net investment income, ordinary income, capital gains, if any, and return of
capital, if any. This Form 1099-DIV should help stockholders in determining the
tax treatment of their distributions under the Distribution Policy. Currently,
the Fund does not expect that distributions will include any capital gain
component. In addition, it is possible that a portion of the distributions will
represent capital gains earned by the Fund but offset by capital loss
carry-forwards, which will be taxable at ordinary income tax rates. To the
extent stockholders receive a return of capital they will be required to adjust
their cost basis by the same amount upon the sale of their Fund shares. This
adjustment to their cost basis in shares of the Fund means that, when
stockholders do decide to sell their shares of stock in the Fund, they will have
a larger capital gain (or smaller capital loss) than prior to the implementation
of the Distribution Policy. This may have negative tax consequences;
stockholders should seek their own tax advice regarding the reporting of income
and the gain or loss on the sale of the Fund's shares.
Although the Fund may indicate what it expects the tax characteristics of its
distributions to be, it is subject to change depending on a number of factors
including market conditions throughout the year and the magnitude of income and
realized gains for the year. Any portion of a distribution that is paid by the
Fund out of net investment income, or from capital gains, will be taxable at the
appropriate rates, and this information, as stated above, will be given to
stockholders on IRS Form 1099-DIV. Stockholders can expect to receive
tax-reporting information for 2006 distributions from either their brokers or
from the Fund's transfer agent indicating the exact composition per share of the
dividends and distributions received during the calendar year. Stockholders
should consult their tax advisor for proper tax treatment of each Fund's
distributions.
The Distribution Policy is likely to have a negative tax impact on stockholders.
If the Fund has net realized long-term capital gains during its fiscal year, and
the Fund has paid out distributions during the year, the Code will deem such
gains to have been paid out, even in circumstances where the distributions have
not resulted in the violation of Section 19(b) of the 1940 Act. These gains will
be treated as ordinary income, and will be taxed at ordinary income tax rates
instead of the more favorable long-term capital gain rate. Moreover,
notwithstanding the stockholders being treated as if they have received ordinary
income, the Fund would still lose its capital loss carry-forwards in the amount
of the gains realized. Accordingly, the payment of managed distributions when
the Fund is utilizing capital loss carry-forwards to offset realized capital
gains will result in tax inefficiencies for the Fund's stockholders.
DETERMINATION OF NET ASSET VALUE
The NAV of common stock of the Fund is computed based upon the value of the
Fund's portfolio securities and other assets. NAV per Share is determined as of
the close of the regular trading session on the NYSE no less frequently than the
last business day of each week and month, provided, however, that if any such
day is a holiday or determination of NAV on such day is impracticable, the NAV
is calculated on such earlier or later day as determined by the Advisers. The
Fund calculates NAV per Share by subtracting the Fund's liabilities (including
accrued expenses, dividends payable and any borrowings of the Fund) and the
liquidation value of any outstanding preferred stock from the Fund's total
assets (the value of the securities the Fund holds plus cash or other assets,
including interest accrued but not yet received) and dividing the result by the
total number of Shares outstanding.
The Fund values its holdings by using market quotations provided by pricing
services, prices provided by market makers or estimates of market values
obtained from yield data relating to instruments or securities with similar
characteristics in accordance with procedures established by the Board.
Short-term securities having a maturity of 60 days or less are valued at
amortized cost, which approximates market value. Any securities or other assets
for which current market quotations are not readily available are valued at
their fair value as determined in good faith under procedures established by and
under the general supervision and responsibility of the Board.
CAPITALIZATION OF THE FUND AND OTHER MATTERS
Repurchase of Common Shares. Shares of closed-end investment companies often
trade at a discount to their NAVs, and the Shares have in the past and may in
the future trade at a discount to their NAV. The market price of the Shares is
determined by such factors as relative demand for and supply of such Shares in
the market, the Fund's NAV, general market and economic conditions and other
factors beyond the control of the Fund. Although the Common Stockholders do not
have the right to require the Fund to redeem their Shares, the Fund may take
action, from time to time, to repurchase Shares in the open market or make
tender offers for its Shares at their NAV. This may, but will not necessarily,
have the effect of reducing any market discount from NAV.
Any acquisition of Shares by the Fund will decrease the total assets of the Fund
and, therefore, have the effect of increasing the Fund's expense ratio and may
adversely affect the ability of the Fund to achieve its investment objectives.
Furthermore, the acquisition of Shares by the Fund may require the Fund to
redeem the AMPS in order to maintain certain asset coverage requirements. To the
extent the Fund may need to liquidate investments to fund repurchase of Shares,
this may result in portfolio turnover which will result in additional expenses
being borne by the Fund. The Board currently considers the following factors to
be relevant to a potential decision to repurchase Shares: the extent and
duration of the discount, the liquidity of the Fund's portfolio, the impact of
any action on the Fund or its stockholders and market considerations. Any Share
repurchases or tender offers will be made in accordance with the requirements of
the Securities Exchange Act of 1934, as amended (the "Exchange Act") and the
1940 Act. See "Repurchase of Shares" in the SAI.
Capitalization. The Charter authorizes the issuance of 250,000,000 shares of
common stock, par value $0.01 per share. The Board has authorized
reclassification of up to 10,000 of these shares in one or more series of
preferred stock, of which 1,000 have been reclassified and issued as AMPS. In
2002, Fund stockholders approved an amendment to the Charter which authorizes
the Board, without stockholder approval, to increase the Fund's authorized
capital. Pursuant to such amendment, and in connection with a rights offering in
2002, the Board approved an amendment to increase the authorized stock of the
Fund to its current level.
Rights with Regard to Dividends, Voting and Liquidation. Shares, when issued
against payment therefor, are fully paid and non-assessable. The Shares have no
preemptive, conversion, exchange or redemption rights. Each Share has one vote
and shares equally in dividends and distributions when and if declared by the
Fund and in the Fund's net assets upon liquidation. All voting rights for the
election of directors are non-cumulative. Consequently, the holders of more than
50% of the Shares can elect 100% of the directors then nominated for election if
they choose to do so (subject to the right of holders of preferred shares to
elect directors) and, in such event, the holders of the remaining Shares will
not be able to elect any directors.
Common Stock. The Fund conducted a one-for-one rights offering in 2002 which
doubled the number of common shares outstanding at the time. The Fund is
conducting the Offering and may conduct rights offerings in the future. Any
additional offerings of shares of capital stock, if made, will require approval
by the Board. Any additional offering of Shares will be subject to the
requirements of the 1940 Act that common shares may not be issued at a price
below the then current NAV (exclusive of underwriting discounts and commissions)
except in connection with an offering to existing stockholders or with the
consent of a majority of the common stockholders.
The Common Stock traded on the NYSE from January 1974 to April 29, 2002 under
the symbol "UIF." From April 30, 2002 to the present, the Common Stock has
traded on the NYSE under the symbol "BIF." On August 10, 2007, there were
11,403,356 Shares issued and outstanding, the NAV per Share was $8.43 and the
closing price per Share on the NYSE was $9.95.
Trading and Net Asset Value Information. In the past, the Shares have traded at
both a premium and at a discount in relation to NAV. Although the Shares
recently have been trading at a premium above NAV, there can be no assurance
that this premium will continue after the Offering or that the Shares will not
again trade at a discount. Shares of closed-end investment companies such as the
Fund frequently trade at a discount from NAV. See "Risk Factors." The Shares are
listed and traded on the NYSE. The average weekly trading volume of the Shares
on the NYSE during the calendar year ended December 31, 2006 was 366,040 Shares.
The following table shows for the quarters indicated: (i) the high and low sale
price of the Shares on the NYSE; (ii) the high and low NAV per Share; and (iii)
the high and low premium or discount to NAV at which the Shares were trading (as
a percentage of NAV).
Fiscal Quarter Ended Price $ Net Asset Value $ Premium/(Discount) to Net
Asset Value %
High Low High Low High Low
---------------------------------- ------------- ------------- ------------- ------------- ------------- -------------
---------------------------------- ------------- ------------- ------------- ------------- ------------- -------------
May 31, 2007 $15.06 $10.61 $9.26 $8.94 +64% +18%
February 28, 2007 $11.59 $9.20 $9.51 $9.06 +24% -2%
November 30, 2006 $10.44 $8.94 $9.06 $8.47 +16% +5%
August 31, 2006 $8.68 $7.63 $8.56 $8.12 +3% -8%
May 31, 2006 $8.08 $7.67 $8.61 $8.21 -5% -10%
February 28, 2006 $7.67 $6.92 $8.33 $7.97 -8% -14%
On August 10, 2007, the Friday immediately prior to the effective date of the
Offering, the last reported sale price per Share on the NYSE was $9.95 and the
Fund's NAV per Share was $8.43. The premium of the Shares on August 10, 2007 was
18.03%.
Preferred Stock. Under the Charter, the Board is authorized to classify and
reclassify any unissued Shares as part of an issuance of preferred stock. The
Board is also authorized to set or change the preferences, conversion or other
rights, voting powers, restrictions, limitations as to dividends and other
distributions, qualifications or terms or conditions of redemption of such
Shares. Under the 1940 Act, the Fund is permitted to have outstanding more than
one series of preferred shares so long as no single series has a priority over
another series as to the distribution of assets of the Fund or the payment of
dividends. Holders of Shares and outstanding preferred shares of the Fund have
no preemptive right to purchase any preferred shares that might be issued. On
July 29, 2005, the Board authorized the reclassification of up to 10,000 of the
Fund's unissued Shares as preferred stock.
As of August 10, 2007, the Fund has outstanding 1,000 shares of Auction Market
Preferred Shares (previously defined as the AMPS). The AMPS were issued with a
liquidation preference per share of $25,000, plus accumulated and unpaid
dividends, and are senior securities of the Fund. The AMPS were issued on
November 14, 2005, and the first dividend payment date was November 15, 2005.
The AMPS normally have a dividend period consisting of 28 days. The Board may,
from time to time, declare a different dividend period upon giving notice to the
holders of the AMPS. Dividends on the AMPS are cumulative from the date they are
first issued and are payable when, as and if declared by the Board, out of funds
legally available therefor. The dividend rate for the AMPS is determined by
auction. The dividend rate for the initial dividend period was 3.85% and the
first auction was held on November 14, 2005. The current dividend rate paid by
the Fund for its AMPS leverage is 5.05% as of the auction held on July 23, 2007.
It was a condition to their issuance that the AMPS be issued with a rating of
not less than "Aaa" from Moody's Investor Services, Inc. ("Moody's") and "AAA"
from Fitch, Inc. ("Fitch"). These ratings are an assessment of the capacity and
willingness of an issuer to pay preferred stock obligations. The ratings are not
a recommendation to purchase, hold, or sell those shares, inasmuch as the rating
does not comment as to market price or suitability for a particular investor.
The rating agency guidelines described above also do not address the likelihood
that an owner of AMPS will be able to sell such shares in an auction or
otherwise. The ratings are based on current information furnished to Moody's and
Fitch by the Fund and the Advisers and information obtained from other sources.
The ratings may be changed, suspended or withdrawn, in the rating agencies'
discretion, as a result of changes in, or the unavailability of, such
information. In connection with the receipt of such rating, the composition of
the Fund's portfolio must reflect guidelines established by Moody's and Fitch
and the Fund is required to maintain a minimum discounted asset coverage with
respect to the AMPS.
Holders of AMPS do not have the right to cause the Fund to redeem their shares.
The Fund may, however, be required by applicable law or by rating agency
guidelines to redeem the AMPS if, for example, the Fund does not meet an asset
coverage ratio required by law or correct a failure to meet a rating agency
guideline in a timely manner. The Fund may also voluntarily redeem the AMPS
without the consent of its holders.
The 1940 Act requires that the holders of any preferred shares, voting together
as a single class separate from the holders of common shares, have the right to
elect at least two directors of the Fund at all times and to elect a majority of
the directors at any time if two years' dividends on the AMPS have not been paid
and the Fund has not eliminated all dividend arrearages. The holders of AMPS and
any other outstanding preferred shares will vote as a separate class on certain
other matters as required under the Charter, the 1940 Act, and Maryland law.
Each AMPS share carries one vote with respect to matters on which AMPS can be
voted. AMPS, when issued against payment therefor, will be fully paid and non
assessable and have no preemptive, conversion or cumulative voting rights.
Effects of Leverage. The only obligation that the Fund has to holders of the
AMPS is to pay the agreed-upon dividend rate as set by auction every 28 days.
Any income earned in excess of such dividend rate and Fund expenses would
directly benefit Common Stockholders. The Fund may not pay any ordinary dividend
to Common Stockholders until after all dividends due the holders of AMPS have
been paid. The following table is designed to assist stockholders in
understanding the effects of leverage on an investment in the Fund. The figures
appearing in the table are hypothetical and actual returns may be greater or
less than those appearing in the table.
Assumed Return on Portfolio Assets (Net of -10% -5% 0% 5% 10%
Expenses)
------- -------- -------- ------- --------
Corresponding Actual Returns to Common -16.2% -10.0% -3.7% 2.5% 8.8%
Stockholders Under Current Capital Structure
(i.e., prior to Offering)
Corresponding Expected Returns to Common -15.1% -9.2% -3.3% 2.7% 8.6%
Stockholders Post Offering
The following factors associated with leveraging, in addition to those items
discussed in "Risk Factors and Special Considerations" above, could increase the
investment risk and volatility of the price of the Shares:
(1) leveraging exaggerates any increase or decrease in the value of the
Shares;
(2) the dividend requirements on preferred stock may exceed the income
from the portfolio securities purchased with the proceeds from the
issuance of preferred stock;
(3) a decline in NAV results if the investment performance of the
additional securities purchased fails to cover their cost to the Fund
(including any dividend requirements of preferred stock);
(4) a decline in NAV could affect the ability of the Fund to make Common
Stock dividend payments;
(5) a failure to pay dividends or make distributions could result in the
Fund's ceasing to qualify as a regulated investment company under the
Code; and
(6) if the asset coverage for preferred stock or debt securities declines
to less than two hundred percent or three hundred percent,
respectively (as a result of market fluctuations or otherwise), the
Fund may be required to sell a portion of its investments when it may
be disadvantageous to do so.
Pursuant to Section 18 of the 1940 Act, it is unlawful for the Fund, as a
registered closed-end investment company, to issue any class of senior security,
or to sell any such security of which it is an issuer, unless it can satisfy
certain "asset coverage" ratios. The asset coverage ratio means the ratio of the
value of the total assets of such investment company (less all liabilities and
indebtedness not represented by senior securities) to the aggregate amount of
debt securities of such investment company (plus the involuntary liquidation
preference of the preferred stock of such company). If the senior securities are
stock, such as the AMPS, such stock must have an asset coverage of at least 200%
immediately after issuance or sale of such stock. If the senior securities
represent an indebtedness (i.e., "debt securities"), such debt securities must
have an asset coverage of at least 300% immediately after issuance or sale of
such debt securities. Subject to certain exceptions, if the Fund fails to
satisfy these asset coverage ratios, it will, among other things, be prohibited
from declaring any dividend (except a dividend payable in stock issued by the
Fund) or declaring any other distribution. Notwithstanding the foregoing, a
registered investment company may, to the extent permitted by the 1940 Act,
segregate assets or "cover" transactions in order to avoid the creation of a
class of senior security.
The rating received by the Fund on its AMPS, or on any other senior security
which it may issue, is an assessment of the capacity of the Fund to satisfy its
obligations on the AMPS or such other senior security. However, the rating on
AMPS does not eliminate or mitigate the risks associated with investing in the
Fund's securities. In addition, should the rating on the AMPS be lowered or
withdrawn by the relevant rating agency, there may be an adverse effect on the
market value of the AMPS. The Fund may also be required to redeem all or part of
the AMPS. If such partial or whole redemption of the AMPS occurs, as a result of
the change in or withdrawal of the rating, the Common Stock of the Fund will
lose any potential benefits associated with a leveraged capital structure.
Voting Rights Associated with the AMPS. Except as otherwise indicated in this
Prospectus and in the SAI, or as provided in the Charter and Articles
Supplementary or as otherwise required by law, holders of AMPS will have equal
voting rights with holders of Common Stock and any other Preferred Stock (one
vote per share) and will vote together with holders of Common Stock and any
other preferred shares as a single class. Holders of outstanding Preferred
Stock, including AMPS, voting as a separate class, are entitled to elect two of
the Fund's directors. The remaining directors are elected by holders of
outstanding Common Stock voting as a separate class. In addition, if at any time
dividends (whether or not earned or declared) on AMPS are due and unpaid in an
amount equal to two full years of dividends, and sufficient cash or specified
securities have not been deposited with the auction agent for the payment of
such dividends, the sole remedy of holders of outstanding Preferred Stock is
that the number of directors constituting the Board will be automatically
increased by the smallest number that, when added to the two directors elected
exclusively by the holders of Preferred Stock as described above, would
constitute a majority of the Board. The holders of Preferred Stock will be
entitled to elect that smallest number of additional directors at a special
meeting of stockholders held as soon as possible and at all subsequent meetings
at which directors are to be elected, unless such special voting rights are
terminated as explained below. The terms of office of the persons who are
directors at the time of that election will continue unless the election of
additional directors by holders of Preferred Stock would cause the number of
directors to exceed 12. If the Fund thereafter pays in full all accumulated and
unpaid dividends on all outstanding Preferred Stock, the special voting rights
stated above will cease and the terms of office of the additional directors
elected by the holders of the Preferred Stock will automatically terminate.
The affirmative vote of a majority of the votes entitled to be cast by the
holders of the outstanding shares of AMPS or such higher percentage as may be
required by the Charter, voting as a separate class, will be required to amend
the Charter so as to adversely affect in any material respect any contract right
of the AMPS or the holders thereof expressly set forth in the Charter. The
affirmative vote of at least a majority of the votes entitled to be cast by the
outstanding holders of AMPS, voting as a separate class, will be required to
issue any shares of Preferred Stock ranking prior to or on a parity with the
AMPS as to the payment of dividends or the distribution of assets upon
dissolution, liquidation or winding up of the affairs of the Fund (other than
previously authorized and unissued shares of AMPS, including any shares of AMPS
purchased or redeemed by the Fund), or increase the authorized amount of AMPS or
any other Preferred Stock. Unless a higher percentage is provided for in the
Charter, the affirmative vote of a majority of the outstanding AMPS (as
determined under the 1940 Act), voting as a separate class, will be required to
approve any plan or reorganization adversely affecting the shares or any action
requiring a vote of security holders under Section 13(a) of the 1940 Act
including, among other things, changes in the Fund's investment objective or
changes in certain restrictions described above under "Investment Objective and
Policies" and in the SAI under "Investment Objective and Policies - Investment
Restrictions." The class vote of holders of shares of AMPS described above will
in each case be in addition to a separate vote of the requisite percentage of
the votes entitled to be cast by holders of Shares and outstanding AMPS, voting
as a single class, necessary to authorize the action in question.
The voting provisions with respect to the AMPS described in this Prospectus will
not apply if at, or prior to, the time at which the act with respect to which
the vote would otherwise be required is effected, all outstanding AMPS have been
redeemed or called for redemption and sufficient funds shall have been deposited
in trust to effect such redemptions.
Anti-Takeover Provisions of the Charter and Bylaws. At a meeting of stockholders
held in May 2004, stockholders approved a comprehensive range of corporate
governance proposals which abolished or changed a number of anti-takeover
provisions previously adopted by the Fund. These included, among others,
proposals to (i) declassify the Board; (ii) elect directors by a plurality of
votes cast; (iii) permit stockholders to effect Bylaw amendments; (iv) set the
number of directors at exactly five; and (v) prohibit the Fund from opting into
the Maryland Unsolicited Takeovers Act. Nonetheless, the Fund presently has
provisions in its Charter and Bylaws which may still have the effect of limiting
the ability of other entities or persons to acquire control of the Fund, to
cause it to engage in certain transactions or to modify its structure (commonly
referred to as "anti-takeover" provisions):
(1) The Charter requires the affirmative vote of at least two-thirds of
the votes entitled to be cast by holders of common stock to approve,
adopt or authorize (a) certain business combinations (e.g., merger,
consolidation or liquidation, or sale, lease, exchange, mortgage,
pledge, transfer or other disposition of the Fund's assets, etc.); (b)
voluntary liquidation or dissolution of the Fund; (c) stockholder
proposals regarding investment decisions; (d) conversion from a
closed-end to an open-end investment company; or (e) a self-tender
for, or acquisition by the Fund of, more than 25% of the Fund's
outstanding shares of stock, during any twelve-month period.
(2) The Fund's Bylaws contain provisions the effect of which is to prevent
matters, including nominations of Directors, from being considered at
stockholders' meetings where the Fund has not received sufficient
prior notice of the matters.
The percentage of votes required under these provisions, which are greater than
the minimum requirements under Maryland law or the 1940 Act, make it more
difficult to effect a change in the Fund's business or management and could have
the effect of depriving holders of common shares of an opportunity to sell
shares at a premium over prevailing market prices by discouraging a third party
from seeking to obtain control of the Fund in a tender offer or similar
transaction. The Board, however, has considered these anti-takeover provisions
and believes that they are in the best interests of stockholders.
Reports to Stockholders. The Fund sends unaudited semi-annual reports and
audited annual reports, including lists of investments held, to stockholders.
Available Information. The Fund is subject to the informational requirements of
the Exchange Act and the 1940 Act and in accordance therewith is required to
file reports, proxy statements and other information with the Securities and
Exchange Commission. Any such reports, proxy statements and other information
can be inspected and copied at the public reference facilities of the Commission
at 100 F Street, N.E., Washington, D.C. 20549, the Commission's New York
Regional Office at 3 World Financial Center, Suite 400, New York, New York 10281
and its Chicago Regional Office at 175 W. Jackson Boulevard, Suite 900, Chicago,
Illinois 60604. Reports, proxy statements and other information concerning the
Fund can also be inspected at the offices of the NYSE, 20 Broad Street, New
York, New York 10005.
Additional information regarding the Fund and the Offering is contained in the
Registration Statement on Form N-2, including amendments, exhibits and schedules
thereto, relating to the Offering filed by the Fund with the Securities and
Exchange Commission. This prospectus does not contain all of the information set
forth in the Registration Statement, including any amendments, exhibits and
schedules thereto. For further information with respect to the Fund and the
Shares offered hereby, reference is made to the Registration Statement.
Statements contained in this Prospectus as to the contents of any contract or
other document referred to are not necessarily complete and in each instance
reference is made to the copy of such contract or other document filed as an
exhibit to the Registration Statement, each such statement being qualified in
all respects by such reference.
A copy of the Registration Statement may be inspected without charge at the
Securities and Exchange Commission's principal office in Washington, D.C., and
copies of all or any part thereof may be obtained from the Commission upon the
payment of certain fees prescribed by the Commission. The Commission maintains a
website (http://www.sec.gov) that contains the Registration Statement, other
documents incorporated by reference, and other information the Fund has filed
electronically with the Commission, including proxy statements and reports filed
under the Exchange Act.
DIVIDENDS AND DISTRIBUTIONS
Managed Distribution Policy. In May 2006, the Fund adopted the Distribution
Policy, which initially provided for monthly distributions at the rate of $0.10
per Share per month, or $1.20 per Share annually, which represented a 14.9%
annual distribution rate relative to the Fund's NAV at the time. In February
2007, because the NAV of the Fund had increased substantially since the
Distribution Policy was adopted, and the Board wished to maintain a similar
annual distribution rate to that originally adopted, the Fund increased the
distribution rate to $0.115 per Share per month, or $1.38 per Share annually,
representing a 14.6% annual distribution rate relative to the Fund's NAV at the
time. The annual distribution rate under the Distribution Policy is reviewed
periodically by the Board and generally will not exceed the annual long term
performance of the Fund based on a rolling 5-year performance history, subject
to the Board's discretion to suspend, modify or terminate the Distribution
Policy at any time. In conducting its review of the annual distribution rate and
the Fund's performance history, the Board will take into account, among other
factors, that during 2002, the first year the Advisers served as investment
advisers to the Fund, the Fund's portfolio consisted primarily of bonds that
were below investment grade, and that the Fund recognized significant losses as
these investments were liquidated and the proceeds invested in common stocks
consistent with the Fund's new objective of total return. There are certain
risks associated with the Distribution Policy; see "Risk Factors - Managed
Distribution Policy."
Generally, distributions under the Distribution Policy will consist mostly of a
return of capital. Distributions may have a small component of net investment
income, but the exact tax characteristics of the distributions is not known
until the Fund's fiscal year-end (i.e., November 30 of each year). A "return of
capital" represents a return of a Common Stockholder's original investment in
the Shares, and should not be confused with a dividend yield. To explain
further, a "return of capital" is what the term implies, a return of Common
Stockholders' capital investment in the Fund. A return of capital generally is
not taxable. It is not considered "yield," or "income," or "capital gains,"
items which are taxable. When Common Stockholders receive a return of capital,
they are getting back part of their investment and consequently the return of
their already-taxed capital investment is tax free to the Common Stockholders.
Currently, the Fund does not expect that distributions will include any capital
gain component. In addition, it is possible that a portion of the distributions
will represent capital gains earned by the Fund but offset by capital loss
carry-forwards, which will be taxable at ordinary income tax rates. To the
extent Common Stockholders receive a return of capital they will be required to
adjust their cost basis by the same amount upon the sale of their Shares. This
adjustment to their cost basis in Shares means that, when Common Stockholders
decide to sell Shares in the Fund, they will have a larger capital gain (or
smaller capital loss) than prior to the implementation of the Distribution
Policy. This may have negative tax consequences, and Common Stockholders should
seek their own tax advice regarding the reporting of income and the gain or loss
on the sale of the Shares. Common Stockholders should note the following
important risk and other factors concerning the Distribution Policy:
- The Distribution Policy will likely have a negative tax impact on
Common Stockholders.
- The Distribution Policy may impact the way in which the Fund is
managed.
- Distributions, if any, may include return of capital to the extent the
Fund's net investment income and net capital gain are insufficient to
meet the fixed distribution amount paid to Common Stockholders.
- The Board may modify, suspend or terminate the Distribution Policy at
any time and such modification, suspension or termination may have an
abrupt and adverse effect on the market price of the Shares, resulting
in a trading discount (if the Fund is trading at or above NAV) or
widening an existing discount.
- Common Stockholders are responsible for tracking and, if necessary,
adjusting their cost basis of Shares should they receive a
distribution which includes a return of capital as indicated on their
tax form(s).
- The tax characteristic of the distributions and exactly how much is
net investment income, ordinary income, capital gains, if any, and
return of capital, if any, will be indicated on their IRS Form
1099-DIV.
- If the Fund's annual total return is less than the annual
distribution, the Distribution Policy could have the effect of
shrinking the assets of the Fund and thus increasing the Fund's
expense ratio (i.e., the Fund's fixed expenses will be spread over a
smaller pool of assets). The Board will conduct an annual review of
the distribution rate under the Distribution Policy to address these
issues (e.g., shrinking assets and increasing expense ratio) but there
may be interim periods when the annualized distribution rate exceeds
the short-term return on the Fund's NAV.
For a more detailed discussion of the above risk factors, see "Risk Factors -
Managed Distribution Policy."
Rights holders who exercise their Rights will receive newly issued Shares within
fifteen (15) days of the record date of the most recent monthly payment under
the Distribution Policy, which record date may occur during the Subscription
Period. Common Stockholders who receive newly issued Common Stock in the
Offering will not receive a distribution under the Distribution Policy with
respect to such newly issued Common Stock for the record date immediately prior
to issuance of the newly issued Shares. Common Stockholders will be entitled to
receive monthly distributions for record dates subsequent to their receipt of
newly issued Common Stock in accordance with the Distribution Policy. The
Offering will not impact the distributions to be paid to current holders of
Common Stock regardless of whether they exercise their Rights or allow their
Rights to lapse, subject to suspension, termination, or modification of the
Distribution Policy by the Board at any time.
Dividend Reinvestment Plan. The Fund has adopted a Dividend Reinvestment
Program, or "DRIP program," whereby participating Common Stockholders may
reinvest their dividends back into the Fund. The DRIP plan allows Common
Stockholders to build their Shares in the Fund automatically with each dividend
payment. If the Shares are trading at a discount to NAV at the time of the
dividend payment, the Plan Agent will arrange to buy Shares on the open market
as long as the Shares remain at a discount. If the market price of the Shares
trade at or above the NAV, then the Fund will issue new Shares at the greater of
NAV or 95% of the market price per Share on the payment date.
The DRIP program is available to all registered Stockholders; that is,
stockholders who hold stock in their own name, and not held in street name
through a brokerage firm. Registered holders will automatically be enrolled in
the DRIP plan. Therefore, Common Stockholders who are registered stockholders,
and do not wish to participate, must contact the Plan Agent by phone or by mail,
and request that dividends be paid in cash, rather than in Shares. Most Common
Stockholders hold their stock through a brokerage firm, which means Shares are
held in "street name." Common Stockholders who hold Shares in street name, may
participate in the DRIP program only if their brokerage firm permits
participation.
CUSTODIAN AND TRANSFER AGENT
State Street Bank and Trust Company serves as the Fund's co-administrator and
custodian and will maintain custody of the securities and cash of the Fund. PFPC
Inc. serves as the transfer agent of the Fund. Deutsche Bank Trust Company
Americas serves as Auction Agent, transfer agent, dividend paying agent and
registrar for the AMPS.
LEGAL MATTERS
Certain legal matters in connection with the Offering will be passed on by
Venable LLP, Baltimore, Maryland.
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The data in the "Financial Highlights" section of this prospectus are derived
from financial statements for the 6 months ending May 31, 2007, that have not
been audited and financial statements for the year ending November 30, 2006,
that have been audited by Deloitte & Touche LLP, the Fund's independent
registered public accounting firm, located at 555 17th Street, Denver, Colorado,
as indicated in their report with respect thereto, and are incorporated by
reference herein in reliance on their report given on their authority as experts
in auditing and accounting.
ADDITIONAL INFORMATION
The prospectus and the SAI do not contain all of the information set forth in
the Registration Statement that the Fund has filed with the Securities and
Exchange Commission. The complete Registration Statement may be obtained from
the Securities and Exchange Commission upon payment of the fee prescribed by its
rules and regulations. The SAI can be obtained without charge by calling (877)
561-7914. Statements contained in this prospectus as to the contents of any
contract or other documents referred to are not necessarily complete, and, in
each instance, reference is made to the copy of such contract or other document
filed as an exhibit to the Registration Statement of which this prospectus forms
a part, each such statement being qualified in all respects by such reference.
PRIVACY PRINCIPLES OF THE FUND
The Fund has established the following policy regarding information about the
Fund's stockholders:
Privacy Statement. Pursuant to SEC Regulation S-P (Privacy of Consumer Financial
Information) the Directors of the Fund, BTF and FF (the "Boulder Funds") have
established the following policy regarding information about the Boulder Funds'
stockholders. We consider all stockholder data to be private and confidential,
and we hold ourselves to the highest standards in its safekeeping and use.
General Statement. The Boulder Funds may collect nonpublic information (e.g.,
name, address, email address, Social Security Number, Boulder Fund holdings
(collectively, "Personal Information")) about stockholders from transactions in
Boulder Fund shares. The Boulder Funds will not release Personal Information
about current or former stockholders (except as permitted by law) unless one of
the following conditions is met: (i) we receive prior written consent from the
relevant stockholder; (ii) we believe the recipient to be such stockholder or
its authorized representative; (iii) to service or support the business
functions of the Boulder Funds (as explained in more detail below), or (iv) we
are required by law to release Personal Information to the recipient. The
Boulder Funds have not and will not in the future give or sell Personal
Information about their current or former stockholders to any company,
individual, or group (except as permitted by law) and as otherwise provided in
this policy.
In the future, the Boulder Funds may make certain electronic services available
to their stockholders and may solicit a stockholder's email address and contact
such stockholder by email, telephone or U.S. mail regarding the availability of
such services. The Boulder Funds may also contact stockholders by email,
telephone or U.S. mail in connection with these services, such as to confirm
enrollment in electronic stockholder communications or to update a stockholder's
Personal Information. In no event will the Boulder Funds transmit a
stockholder's Personal Information via email without consent.
Use of Personal Information. The Boulder Funds will only use Personal
Information (i) as necessary to service or maintain stockholder accounts in the
ordinary course of business and (ii) to support business functions of the
Boulder Funds and their affiliated businesses. This means that the Boulder Funds
may share certain Personal Information, only as permitted by law, with
affiliated businesses of the Boulder Funds, and that such information may be
used for non-Boulder-Fund-related solicitation. When Personal Information is
shared with the Boulder Funds' business affiliates, the Boulder Funds may do so
without providing the stockholders the option of preventing these types of
disclosures as permitted by law.
Safeguards Regarding Personal Information. Internally, we also restrict access
to Personal Information to those who have a specific need for the records. We
maintain physical, electronic, and procedural safeguards that comply with
Federal standards to guard Personal Information. Any doubts about the
confidentiality of Personal Information, as required by law, are resolved in
favor of confidentiality. The Boulder Funds and their Service Providers restrict
access to non-public personal information about its stockholders to employees of
the Boulder Funds' investment advisers and their affiliates with a legitimate
business need for the information. The Boulder Funds maintain physical,
electronic and procedural safeguards designed to protect the non-public personal
information of their stockholders. For more information about the Boulder Funds'
privacy policies, please visit http://www.boulderfunds.net.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS. IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION CAN NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE FUND OR THE FUND'S ADVISERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER
TO SELL OR THE SOLICITATION OF AN OFFER TO BUY ANY SECURITY OTHER THAN THE
SHARES OF COMMON STOCK OFFERED BY THIS PROSPECTUS, NOR DOES IT CONSTITUTE AN
OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY SHARES OF COMMON STOCK BY
ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION WOULD BE
UNLAWFUL. 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 SET FORTH IN THE PROSPECTUS OR IN THE AFFAIRS OF THE FUND
SINCE THE DATE HEREOF.
TABLE OF CONTENTS OF THE STATEMENT OF ADDITIONAL INFORMATION
THE FUND...........................................................................................................1
USE OF PROCEEDS....................................................................................................2
INVESTMENT OBJECTIVE AND POLICIES..................................................................................2
INVESTMENT POLICIES AND RESTRICTIONS...............................................................................3
INVESTMENT POLICIES AND TECHNIQUES.................................................................................4
MANAGEMENT OF THE FUND.............................................................................................13
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS....................................................................13
OWNERSHIP OF THE FUND BY DIRECTORS.................................................................................14
DIRECTOR AND OFFICER COMPENSATION..................................................................................14
COMMITTEES OF THE BOARD OF DIRECTORS...............................................................................15
INVESTMENT ADVISERS AND OTHER SERVICE PROVIDERS....................................................................17
COMPENSATION TO THE ADVISERS AND ADMINISTRATORS....................................................................19
DURATION AND TERMINATION OF THE INVESTMENT ADVISORY AGREEMENTS.....................................................20
POTENTIAL CONFLICTS OF INTEREST....................................................................................20
PROXY VOTING.......................................................................................................21
CODE OF ETHICS.....................................................................................................21
PORTFOLIO TRANSACTIONS, BROKERAGE ALLOCATION AND OTHER PRACTICES...................................................21
REPURCHASE OF SHARES...............................................................................................22
FEDERAL INCOME TAX MATTERS.........................................................................................23
PERFORMANCE-RELATED, COMPARATIVE AND OTHER INFORMATION.............................................................27
FINANCIAL STATEMENTS...............................................................................................28
ADDITIONAL INFORMATION.............................................................................................28
Appendix A - Proxy Voting Policies and Procedures
BOULDER GROWTH & INCOME FUND, INC.
STATEMENT OF ADDITIONAL INFORMATION
Boulder Growth & Income Fund, Inc. (the "Fund") is a closed-end, non-diversified
management investment company. This Statement of Additional Information does not
constitute a prospectus, but should be read in conjunction with the prospectus
relating hereto dated August 13, 2007 (the "Prospectus"). This Statement of
Additional Information does not include all information that a prospective
investor should consider before participating in the rights offering (the
"Offering") described in the Prospectus or otherwise purchasing the Fund's
common stock. A copy of the Prospectus may be obtained without charge by calling
the Fund's co-administrator (Fund Administrative Services, LLC) at (877)
561-7914. You may also obtain a copy of the Prospectus on the Securities and
Exchange Commission's website (http://www.sec.gov). Capitalized terms used but
not defined in this Statement of Additional Information have the meanings given
to them in the Prospectus.
THE INFORMATION IN THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT COMPLETE AND
MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION
STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS
STATEMENT OF ADDITIONAL INFORMATION IS NOT AN OFFER TO SELL THESE SECURITIES AND
IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER
OR SALE IS NOT PERMITTED.
This Statement of Additional Information is dated August 13, 2007.
TABLE OF CONTENTS
THE FUND 1
USE OF PROCEEDS 2
INVESTMENT OBJECTIVE AND POLICIES 2
INVESTMENT POLICIES AND RESTRICTIONS 3
INVESTMENT POLICIES AND TECHNIQUES 4
MANAGEMENT OF THE FUND 13
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS 13
OWNERSHIP OF THE FUND BY DIRECTORS 14
DIRECTOR AND OFFICER COMPENSATION 14
COMMITTEES OF THE BOARD OF DIRECTORS 15
INVESTMENT ADVISERS AND OTHER SERVICE PROVIDERS 17
COMPENSATION TO THE ADVISERS AND ADMINISTRATORS 19
DURATION AND TERMINATION OF THE INVESTMENT ADVISORY AGREEMENTS 20
POTENTIAL CONFLICTS OF INTEREST 20
PROXY VOTING 21
CODE OF ETHICS 21
PORTFOLIO TRANSACTIONS, BROKERAGE ALLOCATION AND OTHER PRACTICES 21
REPURCHASE OF SHARES 22
FEDERAL INCOME TAX MATTERS 23
PERFORMANCE-RELATED, COMPARATIVE AND OTHER INFORMATION 27
FINANCIAL STATEMENTS 28
ADDITIONAL INFORMATION 28
THE FUND
From its inception in 1972 until 2002, the Fund was called USLife Income Fund,
Inc. (the "Predecessor Fund"). The Predecessor Fund was managed to provide "a
high level of current income," was virtually 100% invested in corporate bonds
and was classified as a diversified fund under the Investment Company Act of
1940, as amended (the "1940 Act"). At a special stockholder meeting held in
April 2002, stockholders approved changes in the Fund's name, in the investment
objective to "total return" and in the Fund's classification from diversified to
non-diversified, and eliminated or changed certain of the Fund's fundamental
investment policies. See "Fundamental Policies" below. After the Fund
implemented these changes, the Fund's advisers liquidated a substantial portion
of the Fund's bond portfolio.
USE OF PROCEEDS
The proceeds of the Offering will be invested in accordance with the Fund's
investment objective and policies as soon as practicable. The Advisers (defined
below) anticipate that it may take up to six months for the Fund to invest
substantially all of the net proceeds of this Offering in accordance with its
investment objective and policies under current market conditions. Pending such
investment, the Fund anticipates investing the proceeds in short-term securities
issued by the U.S. government or its agencies or instrumentalities or in high
quality, short-term or long-term debt obligations or money market instruments.
The increase in assets as a result in the Offering may also be used to help the
Fund maintain the Distribution Policy (as defined below). The Distribution
Policy permits Common Stockholders to realize a predictable, but not assured,
level of cash flow and some liquidity periodically with respect to their Common
Stock without having to sell Shares. See "Investment Policies and Restrictions -
Other Investment Techniques and Policies - Managed Distribution Policy" below.
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is total return. The Fund seeks to produce both
income and long-term capital appreciation by investing in a portfolio of equity
and debt securities. The Fund invests primarily in common stocks, including
dividend paying common stocks such as those issued by utilities, real estate
investment trusts ("REITs") and registered investment companies ("RICs"). The
Fund also invests in fixed income securities such as U.S. government securities,
preferred stocks and bonds. The Fund invests primarily in securities of
U.S.-based companies and to a lesser extent in foreign equity securities and
sovereign debt, in each case denominated in foreign currency. The Fund has no
restrictions on its ability to invest in foreign securities. The Fund is
concentrated in Real Estate Related Companies, which means it must invest more
than 25% of its total assets in REITs or the equity or debt securities of
companies in or primarily servicing the real estate industry or deriving a
substantial portion of their revenue from, or having a substantial portion of
their assets invested in, real estate. No assurance can be given that the Fund
will achieve its investment objective.
The Fund is a "non-diversified" investment company, as defined in the 1940 Act,
which means that it is permitted to invest its assets in a more limited number
of issuers than "diversified" investment companies. A diversified company may
not, with respect to 75% of its total assets, invest more than 5% of its total
assets in the securities of any one issuer and may not own more than 10% of the
outstanding voting securities of any one issuer. However, under Subchapter M of
the Internal Revenue Code of 1986, as amended (the "Code"), (A) not more than
25% of the Fund's total assets may be invested in securities of any one issuer
(other than U.S. government securities and RICs) or of any two or more issuers
controlled by the Fund which may be deemed to be engaged in the same, similar or
related trades or businesses, and (B) with respect to 50% of the total value of
the Fund's portfolio, (i) the Fund must limit to 5% the portion of its assets
invested in the securities of a single issuer (other than U.S. government
securities and RICs), and (ii) the Fund may not own more than 10% of the
outstanding voting securities of any one issuer (other than U.S. government
securities and RICs). The Fund intends to concentrate its common stock
investments in a few issuers and to take large positions in those issuers,
consistent with being a "non-diversified" fund. As a result, the Fund may be
subject to a greater risk of loss than a diversified fund or a fund that has
diversified its investments more broadly. Taking larger positions is also likely
to increase the volatility of the Fund's net asset value, reflecting fluctuation
in the value of large Fund holdings.
Under normal market conditions, the Fund intends to invest at least 80% of its
net assets in common stocks, primarily domestic common stocks and secondarily in
foreign common stocks denominated in foreign currencies. The Fund's investments
in common stocks may include, but is not limited to, RICs whose objective is
income, REITs, and other dividend-paying common stocks. The portion of the
Fund's assets that are not invested in common stocks may be invested in fixed
income securities, cash equivalents and other income-producing securities. The
term "fixed income securities" includes, but is not limited to, corporate bonds,
U.S. government securities, notes, bills, debentures, preferred stocks,
convertible securities, bank debt obligations, repurchase agreements and
short-term money market obligations.
The portion of the Fund's assets that are not invested in common stocks may be
invested in fixed income securities (including bonds, U.S. government
securities, notes, bills, debentures, preferred stocks, convertible securities,
bank debt obligations, repurchase agreements and short-term money market
obligations), cash equivalents and income-producing common stocks. Under normal
circumstances, the Fund will not have more than 20% of its assets in cash or
cash equivalents. The Fund may, for temporary defensive purposes, allocate a
higher portion of its assets to cash and cash equivalents. For this purpose,
cash equivalents consist of, but are not limited to, short-term (less than
twelve months to maturity) U.S. government securities, certificates of deposit
and other bank obligations, investment grade corporate bonds other debt
instruments and repurchase agreements.
INVESTMENT POLICIES AND RESTRICTIONS
INDUSTRY CONCENTRATION POLICY. The Fund has adopted a concentration policy
pursuant to which it must, under normal market conditions, invest more than 25%
of its total assets in Real Estate Related Companies. The Fund must obtain
stockholder approval prior to changing this policy. Real Estate Related
Companies include, but are not limited to: REITs and other closed-end registered
investment companies that invest primarily in REITs; home builders; real estate
developers; property management companies; real estate brokerage companies;
commercial and industrial construction companies; financial companies who make
or service real estate mortgages and/or construction loans; title, homeowners
and builders risk insurance companies; manufacturers, distributors and retailers
of construction materials and/or building supplies; lumber, paper, forest
products, and other companies with significant real estate holdings; holding
companies of any of these companies; and any other companies that the Fund's
advisers reasonably determine are "real estate related companies". Although the
Fund may invest in Real Estate Related Companies of any size, it currently
intends to invest in such companies with market capitalizations of greater than
$500 million. Although the Fund generally invests in U.S.-based Real Estate
Related Companies, such companies may invest directly or indirectly in non-U.S.
properties, and the Fund may make direct investments in foreign Real Estate
Related Companies.
FUNDAMENTAL POLICIES. A number of the Fund's investment policies, listed below,
are "fundamental" policies (the "Fundamental Policies"), which means that the
policies may not be changed without the approval of the holders of a majority of
the Fund's outstanding voting securities (which for this purpose and under the
1940 Act means the lesser of (i) 67% of the shares represented at a meeting at
which more than 50% of the outstanding shares are represented or (ii) more than
50% of the outstanding shares). The Fund may not:
1. Issue any senior securities except as permitted under the 1940 Act.
2. Invest in the securities of companies conducting their principal
business activity in the same industry if, immediately after such
investment, the value of its investments in such industry would exceed
25% of the value of its total assets; provided that this limitation
will not apply to Real Estate Related Companies.
3. Participate on a joint or a joint and several basis in any trading
account in securities, except that the Fund may, to the extent
permitted by rules, regulations or orders of the SEC, combine orders
with others for the purchases and sales of securities in order to
achieve the best overall execution.
4. Purchase or sell interests in oil, gas or other mineral exploration or
development programs.
5. Purchase or sell real estate, except that the Fund may purchase or
sell REITs and securities secured by real estate or interests therein
issued by companies owning real estate or interests therein.
6. Purchase or sell commodities or commodity contracts.
7. Make loans other than through the purchase of debt securities in
private placements and the loaning of portfolio securities.
8. Borrow money in an amount exceeding the maximum permitted under the
1940 Act.
9. Underwrite securities of other issuers, except insofar as it may be
deemed to be an underwriter in selling a portfolio security which may
require registration under the Securities Act of 1933.
10. Invest more than 30% of the value of its total assets in securities
which have been acquired through private placements.
11. Purchase or retain the securities of any issuer, if, to the Fund's
knowledge, those officers and directors of the Fund or its investment
adviser who individually own beneficially more than 1/2 of 1% of the
outstanding securities of such issuer, together own beneficially more
than 5% of such outstanding securities.
12. Pledge, mortgage or hypothecate its assets except in connection with
permitted borrowing and to the extent related to transactions in which
the Fund is authorized to engage.
With the exception of the Fund's investment objective (i.e., total return),
Concentration Policy and Fundamental Policies, all other policies, statements,
objectives, terms and conditions may be changed by the Fund's Board of Directors
(the "Board") without stockholder approval. .Limitations on investments
expressed in percentages are measured and are applicable only at the time of
investment. They are not measured or applied on an ongoing basis. There is no
requirement for the Fund to sell or change its portfolio investments resulting
from changes in valuations to such investments.
INVESTMENT POLICIES AND TECHNIQUES
The following information supplements the discussion of the Fund's investment
objective, policies and techniques that are described in the Prospectus.
PORTFOLIO INVESTMENTS. Under normal market conditions, the Fund intends to
invest at least 80% of its net assets in common stocks, primarily domestic
common stocks and secondarily in foreign common stocks denominated in foreign
currencies. The Fund's investments in common stocks may include, but is not
limited to, RICs whose objective is income, REITs, and other dividend-paying
common stocks. The portion of the Fund's assets that are not invested in common
stocks may be invested in fixed income securities, cash equivalents and other
income-producing securities. The term "fixed income securities" includes but is
not limited to corporate bonds, U.S. government securities, notes, bills,
debentures, preferred stocks, convertible securities, bank debt obligations,
repurchase agreements and short-term money market obligations.
COMMON STOCKS. The Fund may invest all or any portion of its assets in common
stock. Common stock is defined as shares of a corporation that entitle the
holder to a pro rata share of the profits of the corporation, if any, without
preference over any other stockholder or class of stockholders, including
holders of the corporation's preferred stock and other senior equity. Common
stock usually carries with it the right to vote and frequently an exclusive
right to do so. Holders of common stock also have the right to participate in
the assets of the corporation upon liquidation after all other claims are paid
or provided for.
In selecting common stocks for investment, the Fund expects to focus primarily
on U.S.-based companies and secondarily on the common stock of foreign companies
denominated in foreign currencies. The Fund is permitted to invest without
limitation in companies outside the U.S. Generally, target companies will have
consistent high returns on equity, while using modest amounts of debt relative
to their industries. The Fund seeks investments in businesses which the Fund's
investment advisers, Boulder Investment Advisers, LLC ("BIA") and Stewart West
Indies Trading Company, Ltd. d/b/a Stewart Investment Advisers ("SIA")
(collectively the "Advisers"), understand, which have fairly predictable and
improving future earnings, and most importantly, are priced reasonably relative
to the businesses' earnings and anticipated growth in earnings. The Fund will
not necessarily focus its investments in "large-cap", "mid-cap" or "small-cap"
companies since the Advisers believe it would be unwise to impose such
investment limitations.
Investments in small or middle capitalization companies involve greater risk
than is customarily associated with larger, more established companies due to
the greater business risks of small size, limited markets and financial
resources, narrow product lines and the frequent lack of depth of management.
The securities of small or medium-sized companies are often traded
over-the-counter, and may not be traded in volumes typical of securities traded
on a national securities exchange. Consequently, the securities of smaller
companies may have limited market stability and may be subject to more abrupt or
erratic market movements than securities of larger, more established companies
or the market averages in general.
When the Fund makes an investment in a common stock, it will likely make a
significant investment and typically hold it for a long period of time. In the
long run, the Fund believes that value investing produces superior total
returns. However, value stocks can remain undervalued for long periods of time
and may never reach what the Advisers believe are their full intrinsic values,
or, as with any security may decline in value. In addition, value stocks may
fall out of favor with investors and may under-perform growth stocks during
given periods.
The Advisers may purchase stock of an issuer paying an unusually large dividend
and, after the stock begins trading ex-dividend, sell the stock at a loss,
thereby allowing the Fund to offset gains realized on other securities sold
during the year. The Advisers enter into such transactions only when they
believe that there is a high probability of realizing an economic profit for the
Fund. This investment strategy may result in slightly higher portfolio turnover
and transaction costs.
REAL ESTATE INVESTMENT TRUSTS. As a matter of investment policy, the Fund is
concentrated in Real Estate Related Companies, which means it will, under normal
market conditions, invest more than 25% of its total assets in such companies.
The Fund must obtain stockholder approval prior to changing this policy. Real
Estate Investment Trusts or REITs are included in the definition of Real Estate
Related Companies and comprise a substantial portion of the Fund's assets. REITs
invest primarily in commercial real estate or real estate-related loans. A REIT
is not taxed on income distributed to its stockholders or unit-holders if it
complies with regulatory requirements relating to its organization, ownership,
assets and income, and with a regulatory requirement that it distribute to its
stockholders or unit-holders at least 90% of its taxable income for each taxable
year. Generally, REITs can be classified as equity REITs, mortgage REITs and
hybrid REITs. Equity REITs invest the majority of their assets directly in real
property and derive their income primarily from rents and capital gains from
appreciation realized through property sales. Mortgage REITs invest the majority
of their assets in real estate mortgages and derive their income primarily from
interest payments. Hybrid REITs combine the characteristics of both equity and
mortgage REITs. By investing in REITs indirectly through the Fund, stockholders
will bear not only the proportionate share of the expenses of the Fund, but
also, indirectly, similar expenses of underlying REITs. The Fund invests in
REITs primarily for income.
The Fund may be subject to certain risks associated with the direct investments
of the REITs. REITs may be affected by changes in their underlying properties
and by defaults by borrowers or tenants. Mortgage REITs may be affected by the
quality of the credit extended. Furthermore, REITs are dependent on specialized
management skills. Some REITs may have limited diversification and may be
subject to risks inherent in financing a limited number of properties. REITs
depend generally on their ability to generate cash flow to make distributions to
stockholders or unit-holders, and may be subject to defaults by borrowers and to
self-liquidations. In addition, a REIT may be affected by its failure to qualify
for tax-free pass-through of income under the Code or its failure to maintain
exemption from registration under the 1940 Act.
REGISTERED INVESTMENT COMPANIES. The Fund may invest in securities issued by
RICs subject to such limitations, restrictions and conditions as imposed by
Federal law. The common stock of closed-end RICs can trade at a substantial
discount to the underlying net asset value of the RIC, and the Fund may, from
time to time, invest in common stocks issued by RICs when they are trading at
discounts or when the Advisers otherwise deem market conditions appropriate. The
Fund intends to normally invest in RICs that pay dividends. RICs that pay
regular dividends typically own interest rate sensitive securities, which tend
to increase in value when interest rates decline, and decrease in value when
interest rates increase. To the extent that the Fund invests in RICs, the Fund's
stockholders will incur expenses with respect to both the Fund and that portion
of the Fund's assets invested in other RICs. However, as common stocks of
closed-end RICs can trade at substantial discounts to their underlying net asset
values, the Advisers may deem the underlying expense of investing in a
particular RIC to have minimal impact when compared to the discount at which the
Fund may buy their shares. The net asset value and market value of common stock
issued by RICs will fluctuate with the value of the underlying assets. The Fund
may invest in the auction market preferred stock of other closed-end funds
primarily as a means of investing the Fund's cash for the short-term in higher
yielding alternatives to repurchase agreements or US treasury securities. The
Fund will consider investing cash in these instruments, and other short-term
money market type alternatives, when the yield spread is adequately attractive
over repurchase agreements and US treasuries. The Fund generally will invest in
auction market preferred stocks that are rated AAA although it may invest in
lower rated securities from time to time.
Prior to July 31, 2006, the Fund was restricted from investing more than 10% of
its total assets in other RICs. However, effective July 31, 2006, new rules
under the 1940 Act lifted these restrictions such that the Fund may now invest
more than 10% of its assets in other RICs with certain restrictions including:
(i) a 3% limitation on acquiring the total outstanding voting shares of any
other single RIC, (ii) voting shares of acquired RICs in accordance with certain
stockholder principles, and (iii) not acquiring shares of other RICs with the
purpose of requiring the acquired RIC to redeem greater than one percent of that
RIC's outstanding shares in a period of less than 30 days. As a result of these
changes to the 1940 Act rules, and consistent with the Fund's investment
objectives, the Fund may invest a greater percentage of its assets in RICs
subject to any restrictions or limitations imposed by Federal law.
BONDS. Prior to April 26, 2002, the Fund was called USLife Income Fund, Inc. and
was virtually 100% invested in corporate bonds. Since the Fund changed its
investment objective on April 26, 2002, the Advisers have liquidated all of the
Fund's bond portfolio.
Bonds, or fixed income securities, are debt obligations issued by the U.S.
government and its agencies, corporations, municipalities and other borrowers.
The market values of fixed income investments will change in response to
interest rate changes and other factors. During periods of falling interest
rates, the values of outstanding fixed income securities generally rise.
Conversely, during periods of rising interest rates, the values of such
securities generally decline. Changes by recognized rating agencies in the
rating of any fixed income security and in the ability of an issuer to make
payments of interest and principal also affect the value of these investments.
Changes in the value of portfolio securities will not necessarily affect cash
income derived from these securities, but will affect the Fund's net asset
values.
Corporations issue bonds and notes to raise money for working capital or for
capital expenditures such as plant construction, equipment purchases and
expansion. In return for the money loaned to the corporation, the corporation
promises to pay bondholders interest and to repay the principal amount of the
bond or note.
PREFERRED STOCKS. The Fund may invest in preferred securities. Preferred
securities are equity securities, but they typically have many characteristics
of fixed income securities, such as a fixed dividend payment rate and/or a
preference over the issuer's common shares as to the payment of dividends and/or
the distribution of assets upon liquidation. However, because preferred stocks
are equity securities, they may be more susceptible to risks traditionally
associated with equity investments than fixed income securities. Unlike common
stock, preferred securities typically do not have general voting rights.
Fixed rate preferred stocks have fixed dividend rates. They can be perpetual,
with no mandatory redemption date, or issued with a fixed mandatory redemption
date. Certain issues of preferred stock are convertible into other equity
securities. Perpetual preferred stocks provide a fixed dividend throughout the
life of the issue, with no mandatory retirement provisions, but may be callable.
Sinking fund preferred stocks provide for the redemption of a portion of the
issue on a regularly scheduled basis with, in most cases, the entire issue being
retired at a future date. The value of fixed rate preferred stocks can be
expected to vary inversely with interest rates. Adjustable rate preferred stocks
have a variable dividend rate which is determined periodically, typically
quarterly, according to a formula based on a specified premium or discount to
the yield on particular U.S. Treasury securities, typically the highest
base-rate yield of one of three U.S. Treasury securities: the 90-day Treasury
bill; the 10-year Treasury note; and either the 20-year or 30-year Treasury bond
or other index. The premium or discount to be added to or subtracted from this
base-rate yield is fixed at the time of issuance and cannot be changed without
the approval of the holders of the adjustable rate preferred stock. Some
adjustable rate preferred stocks have a maximum and a minimum rate and in some
cases are convertible into common stock.
Auction rate preferred stocks pay dividends that adjust based on periodic
auctions. Such preferred stocks are similar to short-term corporate money market
instruments in that an auction rate preferred stockholder has the opportunity to
sell the preferred stock at par in an auction, normally conducted at least every
49 days, through which buyers set the dividend rate in a bidding process for the
next period. The dividend rate set in the auction depends on market conditions
and the credit quality of the particular issuer. Typically, the auction rate
preferred stock's dividend rate is limited to a specified maximum percentage of
an external commercial paper index as of the auction date. Further, the terms of
the auction rate preferred stocks generally provide that they are redeemable by
the issuer at certain times or under certain conditions.
The Fund may, from time to time, invest in preferred securities that are rated,
or whose issuer's senior debt is rated, investment grade by Moody's and Standard
& Poor's ("S&P") at the time of investment, although the Fund is not limited to
investments in investment grade preferred securities. In addition, the Fund may
acquire unrated issues that the Advisers deem to be comparable in quality to
rated issues in which the Fund is authorized to invest.
MONEY MARKET INSTRUMENTS. Under normal conditions, the Fund may hold up to 20%
of its assets in cash or money market instruments. The Fund intends to invest in
money market instruments pending investments in common stocks, to serve as
collateral in connection with certain investment techniques, and to hold as a
reserve pending the payment of dividends to investors. When the Advisers believe
that economic circumstances warrant a temporary defensive posture, the Fund may
invest without limitation in short-term money market instruments.
Money market instruments that the Fund may acquire will be securities rated in
the highest short-term rating category by Moody's Investors Service ("Moody's")
or S&P or the equivalent from another major rating service, securities of
issuers that have received such ratings with respect to other short-term debt or
comparable unrated securities. Money market instruments in which the Fund
typically expects to invest include: U.S. government securities; bank
obligations (including certificates of deposit, time deposits and bankers'
acceptances of U.S. or foreign banks); commercial paper rated P-l by Moody's or
A-1 by S&P ; and repurchase agreements.
REPURCHASE AGREEMENTS. The Fund may invest temporarily, without limitation, in
repurchase agreements, which are agreements pursuant to which securities are
acquired by the Fund from a third party with the understanding that they will be
repurchased by the seller at a fixed price on an agreed date. These agreements
may be made with respect to any of the portfolio securities in which the Fund is
authorized to invest. Repurchase agreements may be characterized as loans
secured by the underlying securities. The Fund may enter into repurchase
agreements with (i) member banks of the Federal Reserve System having total
assets in excess of $500 million and (ii) securities dealers, provided that such
banks or dealers meet certain creditworthiness standards. The resale price
reflects the purchase price plus an agreed upon market rate of interest which is
unrelated to the coupon rate or date of maturity of the purchased security. The
collateral is marked to market daily. Such agreements permit the Fund to keep
all its assets earning interest while retaining "overnight" flexibility in
pursuit of investments of a longer term nature.
The use of repurchase agreements involves certain risks. For example, if the
seller of securities under a repurchase agreement defaults on its obligation to
repurchase the underlying securities, as a result of its bankruptcy or
otherwise, the Fund will seek to dispose of such securities, which action could
involve costs or delays. If the seller becomes insolvent and subject to
liquidation or reorganization under applicable bankruptcy or other laws, the
Fund's ability to dispose of the underlying securities may be restricted.
Finally, it is possible that the Fund may not be able to substantiate its
interest in the underlying securities. To minimize this risk, the securities
underlying the repurchase agreement will be held by the custodian at all times
in an amount at least equal to the repurchase price, including accrued interest.
If the seller fails to repurchase the securities, the Fund may suffer a loss to
the extent proceeds from the sale of the underlying securities are less than the
repurchase price.
GOVERNMENT SECURITIES. The Fund may invest in securities that include direct
obligations of the United States and obligations issued by U.S. government
agencies and instrumentalities ("Government Securities"). Included among direct
obligations of the United States are Treasury bills, Treasury notes and Treasury
bonds, which differ principally in terms of their maturities. Securities issued
by U.S. government agencies and instrumentalities are: securities that are
supported by the full faith and credit of the United States (such as Government
National Mortgage Association certificates); securities that are supported by
the right of the issuer to borrow from the U.S. Treasury (such as securities of
Federal Home Loan Banks); and securities that are supported by the credit of the
instrumentality (such as Federal National Mortgage Association and Federal Home
Loan Mortgage Corporation bonds). No assurance can be given that the U.S.
government will provide financial support in the future to U.S. government
agencies, authorities or instrumentalities that are not supported by the full
faith and credit of the United States. Securities guaranteed as to principal and
interest by the U.S. government, its agencies, authorities or instrumentalities
include (i) securities for which the payment of principal and interest is backed
by an irrevocable letter of credit issued by the U.S. government or any of its
agencies, authorities or instrumentalities; and (ii) participations in loans
made to non-U.S. governments or other entities that are so guaranteed. The
secondary market for certain of these participations is limited and therefore
may be regarded as illiquid.
ZERO COUPON SECURITIES. The Fund may invest up to 10% of its total assets in
zero coupon securities issued by the U.S. government, its agencies or
instrumentalities as well as custodial receipts or certificates underwritten by
securities dealers or banks that evidence ownership of future interest payments,
principal payments or both on certain government securities. Zero coupon
securities pay no cash income to their holders until they mature and are issued
at substantial discounts from their value at maturity. When held to maturity,
their entire return comes from the difference between their purchase price and
their maturity value. Because interest on zero coupon securities is not paid on
a current basis, the values of securities of this type are subject to greater
fluctuations than are the values of securities that distribute income regularly
and may be more speculative than such securities. Accordingly, the values of
these securities may be highly volatile as interest rates rise or fall. In
addition, the Fund's investments in zero coupon securities will result in
special tax consequences. Although zero coupon securities do not make interest
payments, for tax purposes a portion of the difference between a zero coupon
security's maturity value and its purchase price is taxable income of the Fund
each year.
Custodial receipts evidencing specific coupon or principal payments have the
same general attributes as zero coupon Government Securities but are not
considered to be Government Securities. Although typically under the terms of a
custodial receipt the Fund is authorized to assert its rights directly against
the issuer of the underlying obligation, the Fund may be required to assert
through the custodian bank such rights as may exist against the underlying
issuer. Thus, in the event the underlying issuer fails to pay principal and/or
interest when due, the Fund may be subject to delays, expenses and risks that
are greater than those that would have been involved if the Fund had purchased a
direct obligation of the issuer. In addition, in the event that the trust or
custodial account in which the underlying security has been deposited is
determined to be an association taxable as a corporation, instead of a
non-taxable entity, the yield on the underlying security would be reduced in
respect of any taxes paid.
BORROWINGS. The Fund reserves the right to borrow funds to the extent permitted
by its Fundamental Policies. See "Fundamental Policies" above. The proceeds of
borrowings may be used for any valid purpose, including, without limitation,
liquidity, investing and repurchases of capital stock of the Fund. The Fund may
borrow money only in an amount up to one-third of the value of the Fund's total
assets. Borrowing is a form of leverage and, in that respect, entails risks,
including volatility in net asset value, market value and income available for
distribution.
LENDING OF SECURITIES. The Fund is authorized to lend securities it holds to
brokers, dealers and other financial organizations. Loans of the Fund's
securities, if and when made, may not exceed 33-1/3% of the Fund's total assets.
The Fund's loans of securities will be collateralized by cash, letters of credit
or Government Securities that will be maintained at all times in a segregated
account with the Fund's custodian in an amount at least equal to the current
market value of the loaned securities.
By lending its portfolio securities, the Fund can increase its income by
continuing to receive interest on the loaned securities, by investing the cash
collateral in short-term instruments or by obtaining yield in the form of
interest paid by the borrower when Government Securities are used as collateral.
The risk in lending portfolio securities, as with other extensions of credit,
consists of the possible delay in recovery of the securities or the possible
loss of rights in the collateral should the borrower fail financially. The Fund
will adhere to the following conditions whenever it lends its securities: (i)
the Fund must receive at least 100% cash collateral or equivalent securities
from the borrower, which will be maintained by daily marking-to-market; (ii) the
borrower must increase the collateral whenever the market value of the
securities loaned rises above the level of the collateral; (iii) the Fund must
be able to terminate the loan at any time; (iv) the Fund must receive reasonable
interest on the loan, as well as any dividends, interest or other distributions
on the loaned securities and any increase in market value; (v) the Fund may pay
reasonable fees approved by its board of directors, including, for example, fees
to (a) the custodian in connection with support of the lending activities, (b)
the loan or placing broker for arranging the securities loan, and/or (iii) the
borrower for participating in the loan transaction; and (c) voting rights on the
loaned securities may pass to the borrower, except that, if a material event
adversely affecting the investment in the loaned securities occurs, the Board
must terminate the loan and regain the Fund's right to vote the securities.
SHORT SALES AGAINST THE BOX. The Fund may make short sales of securities in
order to reduce market exposure and/or to increase its income if at all times
when a short position is open, the Fund owns an equal or greater amount of such
securities or owns preferred stock, debt or warrants convertible or exchangeable
into an equal or greater number of the shares of common stocks sold short. Short
sales of this kind are referred to as short sales "against the box." The
broker-dealer that executes a short sale generally invests the cash proceeds of
the sale until they are paid to the Fund. Arrangements may be made with the
broker-dealer to obtain a portion of the interest earned by the broker on the
investment of short sale proceeds. The Fund will segregate the securities
against which short sales against the box have been made in a special account
with its custodian. Not more than 10% of the Fund's net assets (taken at current
value) may be held as collateral for such sales at any one time.
ILLIQUID SECURITIES. The Fund may invest in illiquid securities. Historically,
illiquid securities have included securities subject to contractual or legal
restrictions on resale because they have not been registered under the 1933 Act,
securities which are otherwise not readily marketable and repurchase agreements
having a maturity of longer than seven days. Restricted securities are
securities that may not be sold freely to the public absent registration under
the 1933 Act, or an exemption from registration. The Fund has no limitation on
the amount of its assets that may be invested in securities which are not
readily marketable or are subject to restrictions on resale, although it may not
invest more than 30% of the value of its total assets in securities which have
been acquired through private placement.
The Board has delegated the function of making day-to-day determinations of
liquidity to the Advisers pursuant to guidelines approved by the Board. The Fund
is a closed-end fund which means that managing liquidity for the purpose of
stockholder redemptions is not an issue as it might otherwise be with an
open-end fund. Accordingly, the Advisers are not constrained in this regard in
their day-to-day management of the portfolio, knowing that redemptions are not
an issue. Moreover, a majority of the securities in the Fund, both historically
and currently, are exchange-traded securities with relatively good liquidity. In
the few cases where the liquidity of certain securities is less so, the Advisers
will take into account a number of factors in reaching liquidity decisions,
including, but not limited to: (1) the frequency of trades for the security, (2)
the number of dealers willing and ready to purchase and sell the security, (3)
whether any dealers have agreed to make a market in the security, (4) the number
of other potential purchasers for the security, and (5) the nature of the
securities and the nature of the marketplace trades.
WHEN-ISSUED, DELAYED DELIVERY AND FORWARD COMMITMENT TRANSACTIONS. The Fund may
purchase and sell securities, including Government Securities, on a when-issued,
delayed delivery or forward commitment basis. Typically, no income accrues on
securities the Fund has committed to purchase prior to the time delivery of the
securities is made, although the Fund may earn income on securities it has
segregated.
When purchasing a security on a when-issued, delayed delivery, or forward
commitment basis, the Fund assumes the rights and risks of ownership of the
security, including the risk of price fluctuations, and takes such fluctuations
into account when determining its net asset value. Because the Fund is not
required to pay for the security until the delivery date, these risks are in
addition to the risks associated with the Fund's other investments. If the Fund
remains substantially fully invested at a time when when-issued, delayed
delivery, or forward commitment purchases are outstanding, the purchases may
result in a form of leverage.
When the Fund has sold a security on a when-issued, delayed delivery, or forward
commitment basis, the Fund does not participate in future gains or losses with
respect to the security. If the other party to a transaction fails to deliver or
pay for the securities, the Fund could miss a favorable price or yield
opportunity or could suffer a loss. The Fund may dispose of or renegotiate a
transaction after it is entered into, and may sell when-issued, delayed delivery
or forward commitment securities before they are delivered, which may result in
a capital gain or loss. There is no percentage limitation on the extent to which
the Fund may purchase or sell securities on a when-issued, delayed delivery, or
forward commitment basis.
OTHER INVESTMENT TECHNIQUES AND POLICIES
AMPS LEVERAGE. The Fund is leveraged with 1,000 shares of auction market
preferred stock (the "AMPS"). The AMPS are senior to the common stock and result
in the financial leveraging of the common stock. Dividends on AMPS are
cumulative. The Fund is required to meet certain asset coverage tests with
respect to the AMPS. If the Fund fails to meet these requirements and does not
correct such failure, the Fund may be required to redeem, in part or in full,
the AMPS at a redemption price of $25,000 per share plus an amount equal to the
accumulated and unpaid dividends on such shares in order to meet these
requirements. Additionally, failure to meet the foregoing asset requirements
could restrict the Fund's ability to pay dividends to common stock stockholders
and could lead to sales of portfolio securities at inopportune times.
Nevertheless, the Fund's management believes that well-managed leverage can have
a beneficial effect on common stockholders' total return. Leverage can provide
enough additional income to pay a substantial portion of Fund expenses, if there
is enough of a positive spread between the borrowed money and the return on the
assets acquired with such monies. Use of leverage may have a number of adverse
effects on the Fund and its stockholders, including: (i) leverage may magnify
market fluctuations in the Fund's underlying holdings, thus causing a
disproportionate change in the Fund's net asset value; (ii) the Fund's cost of
leverage may exceed the return on the underlying securities acquired with the
proceeds of the leverage, thereby diminishing rather than enhancing the return
to stockholders and generally making the Fund's total return to such
stockholders more volatile; (iii) the Fund may be required to sell investments
in order to meet dividend or interest payments on the debt or preferred stock
when it may be disadvantageous to do so; and (iv) leveraging through the
issuance of preferred stock requires that the holders of the preferred stock
have class voting rights on various matters that could make it more difficult
for the holders of the common stock to change the investment objective or
fundamental policies of the Fund, to convert it to an open-end fund or make
certain other changes.
Although the Fund will focus its use of leverage on producing income, the Fund
may also purchase other income-producing securities (e.g., RICs, REITs and
dividend-paying common stocks) or non-dividend-paying common stocks for
long-term appreciation. The Fund is limited in its use of leverage to the
maximum amount permitted pursuant to Section 18 of the 1940 Act.
RISKS ASSOCIATED WITH LEVERAGE. The AMPS leverage (or any other leverage) will
create an opportunity for increased return but, at the same time, will involve
special risk considerations. Leveraging will magnify declines as well as
increases in the net asset value of the common stock and in the net return on
the Fund's portfolio. Although the principal of the Fund's AMPS is fixed, the
Fund's assets may change in value during the time the AMPS are outstanding, thus
increasing exposure to capital risk. To the extent the return derived from the
assets obtained with the AMPS proceeds exceeds the interest and other expenses
that the Fund will have to pay, the Fund's net return will be greater than if
AMPS leverage was not used. Conversely, however, if the return from the assets
obtained with the AMPS proceeds is not sufficient to cover the dividends and
cost of the AMPS, the net return of the Fund will be less than if AMPS leverage
was not used, and therefore the amount available for distribution to the Fund's
stockholders as dividends will be reduced.
BORROWING THROUGH REPURCHASE AGREEMENTS. The Fund may borrow by entering into
reverse repurchase agreements with any member bank of the Federal Reserve System
and any broker-dealer or any foreign bank that has been determined by the
Advisers to be creditworthy. Under a reverse repurchase agreement, the Fund
would sell securities and agree to repurchase them at a mutually agreed date and
price. At the time the Fund enters into a reverse repurchase agreement, it will
establish and maintain a segregated account with its custodian or a designated
sub-custodian, containing cash or liquid obligations having a value not less
than the repurchase price (including accrued interest). Reverse repurchase
agreements involve the risk that the market value of the securities purchased
with the proceeds of the sale of securities received by the Fund may decline
below the price of the securities the Fund is obligated to repurchase. In the
event the buyer of securities under a reverse repurchase agreement files for
bankruptcy or becomes insolvent, the buyer or its trustee or receiver may
receive an extension of time to determine whether to enforce the Fund's
obligation to repurchase the securities, and the Fund's use of the proceeds of
the reverse repurchase agreement may effectively be restricted pending the
decision. Any reverse repurchase agreements entered into by the Fund will be
treated as borrowings for purposes of calculating the Fund's borrowing
limitation.
MANAGED DISTRIBUTION POLICY. In May 2006 stockholders voted in favor of, and the
Fund adopted, a managed distribution policy (the "Distribution Policy"). A
managed distribution policy allows a fund to provide a regular, periodic (but
not assured) distribution to its common stockholders which is not dependent on
the amount of income earned or capital gains realized by the fund. An equity
fund, such as the Fund, is designed for investors to participate in a
professionally managed portfolio of equity investments. Over the long-term,
equity investments have historically provided higher total returns than fixed
income investments such as bonds. However, unlike most fixed income funds, which
pay stockholders a regular dividend based on the fund's investment income,
equity funds generally pay only one dividend per year consisting of a relatively
small amount of net investment income and any net realized capital gains. A
managed distribution permits a fund to distribute a predetermined monthly
amount, regardless of when or whether income is earned or capital gains are
realized. However, the practice of making distributions that exceed income
earned or capital gains realized can result in the Fund making distributions
that consist of a return of capital. A managed distribution policy recognizes
that many investors are willing to accept the potentially higher asset
volatility of equity investments, but would prefer that a consistent level of
cash distributions are available to them each month for reinvestment or other
purposes of their choosing.
The Distribution Policy initially provided for monthly distributions at the rate
of $0.10 per Share per month, or $1.20 per Share annually, which represented a
14.9% annual distribution rate relative to the Fund's NAV at the time. In
February 2007, because the NAV of the Fund had increased substantially since the
Distribution Policy was adopted, and the Board wished to maintain a similar
annual distribution rate to that originally adopted, the Fund increased the
distribution rate to $0.115 per Share per month, or $1.38 per Share annually,
representing a 14.6% annual distribution rate relative to the Fund's NAV at the
time. The annual distribution rate under the Distribution Policy is reviewed
periodically by the Board and generally will not exceed the annual long term
performance of the Fund based on a rolling 5-year performance history, subject
to the Board's discretion to suspend, modify or terminate the Distribution
Policy at any time. In conducting its review of the annual distribution rate and
the Fund's performance history, the Board will take into account, among other
factors, that during 2002, the first year the Advisers served as investment
advisers to the Fund, the Fund's portfolio consisted primarily of bonds that
were below investment grade, and that the Fund recognized significant losses as
these investments were liquidated and the proceeds invested in common stocks
consistent with the Fund's new objective of total return.
Exemptive relief from the SEC is not required in the near term in order to
continue the Distribution Policy. The Fund has applied to the SEC for exemptive
relief from Section 19(b) of the 1940 Act and Rule 19b-1 under the 1940 Act to
enable the Fund to continue the Distribution Policy over the long term. Section
19(b) of the 1940 Act limits an investment company's ability to make multiple
distributions of net realized long-term capital gains each year, subject to
certain exceptions contained in Rule 19b-1. Historically, investment companies
that wished to implement a managed distribution policy requiring multiple
capital gain distributions per year routinely received exemptive relief from
Section 19(b). However, as of the date of this Prospectus, the SEC has not
responded either favorably or unfavorably to the Fund's request for exemptive
relief originally filed in 2004 and amended in January 2007. It is generally
believed that the SEC has imposed a moratorium on granting this type of request
for exemptive relief over concerns that inadequate disclosures by investment
companies regarding sources of distributions, e.g., net investment income, net
long-term capital gain, return of capital, have resulted in fund investors not
understanding that distributions may include a return of capital and do not
necessarily represent a dividend yield.
For the fiscal year ended November 30, 2006, the Distribution Policy did not
violate Section 19(b) because the Fund had capital loss carry-forwards that were
used to offset the Fund's realized net capital gains. Accordingly, distributions
made pursuant to the Distribution Policy did not consist of net long-term
capital gains. As of December 1, 2006, the Fund had tax loss carry-forwards of
approximately $4.3 million expiring beginning in 2010. However, as of June 30,
2007 the Fund had net realized gains in excess of its capital loss
carry-forwards for the fiscal year ending November 30, 2007. Unless the Fund (i)
realizes capital losses prior to November 30, 2007 in an amount sufficient to
offset all realized gains for the Fund's fiscal year or (ii) obtains exemptive
relief from the SEC from Section 19(b) of the 1940 Act and Rule 19b-1 under the
1940 Act prior to November 30, 2007 so it can characterize a portion of its
previous distributions as realized capital gains, the Fund would be required to
distribute the entire amount of its net realized capital gains for the fiscal
year to its stockholders in December 2007. The per share amount of any such net
realized capital gains distribution may be greater than per share amount at
which monthly distributions previously have been made pursuant to the
Distribution Policy, and therefore could shrink the Fund's assets more quickly
than would otherwise be the case.
If and when the Fund exhausts its capital loss carry-forwards, exemptive relief
from Section 19(b) and Rule 19b-1 would be required in order to continue making
managed distributions unless the Board elects to characterize the Fund's final
distribution for each calendar year as including all net capital gain realized
during the year (and increasing the amount of the final distribution if
necessary). Alternatively, the Board could elect to suspend or terminate the
Distribution Policy.
There are certain risks and negative impacts associated with the Distribution
Policy:
- The Distribution Policy will likely have a negative tax impact on
Common Stockholders. If the Fund has net realized long-term capital
gains during its fiscal year, and the Fund has paid out distributions
during the year, the Code will deem such gains to have been paid out,
even in circumstances where the distributions have not resulted in the
violation of Section 19(b) of the 1940 Act. These gains will be
treated as ordinary income, and will be taxed at ordinary income tax
rates instead of the more favorable long-term capital gain rate.
Moreover, notwithstanding Common Stockholders being treated as if they
have received ordinary income, the Fund would still lose its capital
loss carry-forwards in the amount of the gains realized. Accordingly,
the payment of managed distributions when the Fund is utilizing
capital loss carry-forwards to offset realized capital gains will
result in tax inefficiencies for the Common Stockholders.
- The Distribution Policy may impact the way in which the Fund is
managed. The Advisers do not expect to make significant changes to the
makeup of the Fund's portfolio or seek to invest in "high yielding"
securities as a result of the Distribution Policy. The Fund may carry
a slightly higher cash balance from time to time in order to fulfill
the distribution payments. If the Fund carries higher cash balances
during rising equity markets, the Fund's performance may be negatively
affected relative to other equity funds. Conversely, carrying higher
cash balances during declining equity markets may positively affect
the Fund's performance. To avoid Code and 1940 Act requirements to
make distributions in excess of the Distribution Policy, the Advisers
expect to manage the portfolio slightly differently than in the
absence of the Distribution Policy, but in a manner consistent with
the Fund's investment objective and policies. For example, the
Advisers may realize a loss in a security by selling it in order to
offset realized capital gains, whereas, absent the Distribution
Policy, the Advisers may not have realized the loss. The Advisers also
may increase the Fund's position in a security with an unrealized
loss, and subsequently sell the tax lot with the higher tax cost basis
31 days or more after the purchase to avoid a wash sale, leaving the
Fund with approximately the same position in the security but with a
lower tax cost basis. The Advisers may also purchase stock of an
issuer paying an unusually large dividend and, after the stock begins
trading ex-dividend, sell the stock at a loss, thereby allowing the
Fund to offset gains realized on other securities sold during the
year. The Advisers enter into such transactions only when they believe
that there is a high probability of realizing an economic profit for
the Fund. The investment strategies described above were utilized by
the Advisers prior to the implementation of the Distribution Policy to
realize losses for the Fund in an effort to be tax efficient, and may
result in slightly higher portfolio turnover and transaction costs.
The Advisers will not hold positions with unrealized capital gains
that they believe should be sold based on their fundamental analysis
of the underlying issuer. The Advisers believe it would be better to
discontinue the Distribution Policy than to see unrealized gains turn
into unrealized losses. As of June 30, 2007 the Fund had net realized
gains in excess of its capital loss carry-forwards for the fiscal year
ending November 30, 2007. Unless the Fund (i) realizes capital losses
prior to November 30, 2007 in an amount sufficient to offset all
realized gains for the Fund's fiscal year or (ii) obtains exemptive
relief from the SEC from Section 19(b) of the 1940 Act and Rule 19b-1
under the 1940 Act prior to November 30, 2007 so it can characterize a
portion of its previous distributions as realized capital gains, the
Fund would be required to distribute the entire amount of its net
realized capital gains for the fiscal year to its stockholders in
December 2007. The per share amount of any such net realized capital
gains distribution may be greater than per share amount at which
monthly distributions previously have been made pursuant to the
Distribution Policy, and therefore could shrink the Fund's assets more
quickly than would otherwise be the case. The Advisers may utilize the
investment strategies described above to realize capital losses in an
amount sufficient to offset the Fund's realized capital gains for the
fiscal year.
- The Distribution Policy is subject to modification, suspension or
termination at any time by the Board. Because the Distribution Policy
was implemented without an exemption under Section 19(b) of the 1940
Act and Rule 19b-1, the Fund must have the flexibility to modify,
suspend or terminate the Distribution Policy immediately if the Board
deems such action to be in the best interests of the Fund and its
stockholders. The Distribution Policy could have a limited duration
because, unless the Fund receives exemptive relief from Section 19(b),
it will eventually exhaust its capital loss carry-forwards and thus
will have to make an annual distribution of all net capital gains
realized by the Fund during the fiscal year or suspend or terminate
the policy so as to avoid violating Section 19(b).
It is difficult to predict when and whether the capital loss
carry-forward will expire. A number of variables go into the rate at
which the capital loss carry-forward may be depleted, any one of which
could dramatically impact expiration. These variables include the
balance of the capital loss carry-forwards (which as of December 1,
2006 was approximately $4.3 million); the balance of cash carried by
the Fund; how the Fund might recognize gains or losses; and special
dividend opportunities. For example, the Fund may have a position in a
stock with an unrealized capital gain which the Advisers may have no
intention of selling, but through a tender or merger, may be forced
unexpectedly to realize the capital gain. Realizing any such capital
gains may accelerate the exhaustion of the Fund's capital loss
carry-forwards.
Even if the Fund obtains exemptive relief from Section 19(b), the
Board may elect to temporarily suspend the Distribution Policy for a
period of at least one year so that the Fund can offset capital loss
carry-forwards against realized capital gains before the Fund's
capital loss carry-forwards expire (beginning in 2010). This
determination would be made at a time closer to when the
carry-forwards are to expire and would be based on circumstances
existing at that time. Currently, as discussed above, any net realized
long-term capital gains will be offset against the Fund's capital loss
carry-forwards but will be taxed at ordinary income tax rates,
resulting in tax inefficiencies for Common Stockholders. There would
be no such negative tax consequences if the Fund did not pay managed
distributions. Accordingly, if the Fund wishes to maximize its tax
efficiency (i.e., have long-term gains treated and taxed as long-term
gains rather than ordinary income) and take full advantage of its
capital loss carry-forwards, it may elect to temporarily suspend the
Distribution Policy for a period of at least one year, during which
time it would offset its capital loss carry-forwards against realized
gains.
As discussed above, the annual distribution rate under the
Distribution Policy is reviewed periodically by the Board and
generally will not exceed the average annual long term performance of
the Fund based on a rolling 5-year performance history. If the Fund's
long term performance declines, the Board will make a corresponding
reduction in the annual distribution rate under the Distribution
Policy. In addition, the SEC may impose conditions on any grant of
exemptive relief from Section 19(b) that require the Board to consider
adjusting the annual distribution rate on a more frequent basis under
certain circumstances.
- A modification, suspension or termination of the Distribution Policy
could result in a concurrent reduction or cessation of the $0.115 per
Share monthly distribution presently paid to Common Stockholders. If
the Distribution Policy was suspended or terminated, the Fund would
revert back to its prior practice of distributing only net investment
income and net realized capital gains at the end of its fiscal year. A
modification, suspension or termination of the Distribution Policy
could have the effect of abruptly creating a trading discount (if the
Fund is trading at or above NAV) or widening an existing trading
discount.
- If the Fund's annual total return is less than the annual
distribution, the Distribution Policy could have the effect of
shrinking the assets of the Fund and thus increasing the Fund's
expense ratio (i.e., the Fund's fixed expenses will be spread over a
smaller pool of assets). The Board has determined that the annual
distribution rate should not exceed the Fund's average annual long
term performance of the Fund based on a rolling 5-year performance
history. However, there may be interim periods where the annual
distribution rate exceeds the short-term return on the Fund's NAV,
which could shrink the assets of the Fund. In addition, if due to the
exhaustion or expiration of the Fund's net capital loss carry-forwards
the Board elects to characterize the Fund's final distribution for
each calendar year as including all net capital gain realized during
the year, such distribution could shrink the Fund's assets more
quickly than would otherwise be the case if the per share amount of
any such net realized capital gains distribution is greater than per
share amount at which monthly distributions previously have been made
pursuant to the Distribution Policy.
- A distribution which contains a return of capital, which the Fund
expects generally to be the case, will result in added record keeping
for Common Stockholders. Return of capital is not taxable to Common
Stockholders in the year it is paid. However, Common Stockholders will
need to reduce the cost basis of their stock by the amount of the
return of capital so that, when they sell the stock, they will have
properly accounted for the return of capital. Such an adjustment will
cause Common Stockholders' gain to be more, or their loss to be less,
as the case may be. For example, if a Common Stockholder purchased
stock in the Fund for $7.00 per Share and then receives dividends from
the Fund which have $1.00 per Share return of capital, and then the
stockholder subsequently sells his Shares for $7.50 per Share, his
gain will be $1.50 per Share, since he would have adjusted his cost
basis downward by $1.00 per Share (to $6.00 per Share). Common
Stockholders who hold their stock in non-taxable accounts such as
IRA's will not need to make any such adjustments. Common Stockholders
should contact their own tax advisor if they have questions regarding
the tax treatment of the distributions under the Distribution Policy.
MANAGEMENT OF THE FUND
The business and affairs of the Fund are managed under the direction of the
Board of Directors. Accordingly, the Board is responsible for the overall
management of the Fund, including supervision of the duties performed by the
Advisers. There are five Directors of the Fund. Two of the Directors are
"interested persons" of the Fund (as defined in the 1940 Act). The Directors who
are not "interested persons" of the Fund are referred to herein as "Independent
Directors." See "Management of the Fund" in the Prospectus for additional
information about the Directors and officers of the Fund.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table sets forth certain information regarding the beneficial
ownership of the Fund's shares as of August 1, 2007, by each person who is
known by the Fund to beneficially own 5% or more of the Fund's common stock.
Number of Shares Number of Shares Percentage
Name and Address* of Owner Directly Owned Beneficially Owned Beneficially Owned
------------------------------------------------ ------------------------- ------------------------------ --------------------------
Ernest Horejsi Trust No. 1B (the "EH Trust") 2,375,911 2,375,911 20.84%
Badlands Trust Company, LLC ---** 20.84%
Stewart R. Horejsi Trust No. 2 ---** 20.84%
------------------------------------------------ ------------------------- ------------------------------ --------------------------
Aggregate Shares Owned** 2,375,911 2,375,911 20.84%
================================================ ========================= ============================== ==========================
Philip Goldstein and Andrew Dakos+ 655,000 655,000 5.76%
----------------------------
* The address of each listed owner is c/o Badlands Trust Company, LLC
("Badlands"), 3301 C Street, Suite 100, Anchorage, Alaska 99502.
** Excludes shares owned by the EH Trust. Badlands is one of three trustees of
the EH Trust. Badlands is a private trust company organized under the laws of
Alaska and is wholly owned by the Stewart R. Horejsi Trust No. 2, an irrevocable
trust organized by Stewart R. Horejsi for the benefit of his issue. The managers
of Badlands are Larry Dunlap, Stephen C. Miller, Laura Rhodenbaugh, Laura
Tatooles, and Ron Kukes, each of whom disclaim beneficial ownership of shares
owned by the EH Trust. Mr. Miller is an officer and manager of Badlands. Because
two of the Trust's trustees are required in order for the Trust to vote or
exercise dispositive authority with respect to shares owned by the Trust, Mr.
Miller disclaims beneficial ownership of such shares.
+ As stated in Schedule 13D Amendment No. 8 filed with the Securities and
Exchange Commission on December 4, 2006.
Information as to beneficial ownership in the previous paragraph has been
obtained from a representative of the beneficial owners; all other information
as to beneficial ownership is based on reports filed with the Securities and
Exchange Commission (the "SEC") by such beneficial owners.
As of August 1, 2007, Cede & Co., a nominee partnership of the Depository Trust
Fund, held of record, but not beneficially, 10,647,028 shares or 93.37% of
common stock outstanding of the Fund. As of August 1, 2007, officers and
Directors of the Fund, as a group, owned 2,504,624 shares of the Fund's common
stock (including the aggregate shares of common stock owned by the EH Trust as
set forth above), representing 22.0% of common stock outstanding.
OWNERSHIP OF THE FUND BY DIRECTORS
Set forth in the following table are the current members of the Board
together with the dollar range of equity securities beneficially owned by each
Director as of November 30, 2006, as well as the aggregate dollar range of the
Fund's equity securities in all funds overseen in the Fund's family of
investment companies (i.e., other funds managed by BIA and SIA and which hold
themselves out as related companies).
-------------------------------------- -------------------------------- ---------------------------------
Dollar Range of Equity Aggregate Dollar Range of
Securities in the Fund Equity Securities in All Funds
in the Family of Investment
Companies
-------------------------------------- -------------------------------- ---------------------------------
Independent Directors
-------------------------------------- -------------------------------- ---------------------------------
Dr. Dean L. Jacobson $10,001 to $50,000 $50,001 to $100,000
Richard I. Barr $10,001 to $50,000 Over $100,000
Joel W. Looney $50,001 to $100,000 Over $100,000
-------------------------------------- -------------------------------- ---------------------------------
Interested Directors
-------------------------------------- -------------------------------- ---------------------------------
-------------------------------------- -------------------------------- ---------------------------------
John S. Horejsi Over $100,000+ Over $100,000
Susan L. Ciciora Over $100,000+ Over $100,000
+ 2,375,911 shares of the Fund are held by the EH Trust, with respect to which
Mr. Horejsi and Ms. Ciciora are discretionary beneficiaries. Accordingly, Mr.
Horejsi and Ms. Ciciora may be deemed to have indirect beneficial ownership of
such Shares. Mr. Horejsi and Ms. Ciciora disclaim all such beneficial ownership.
Ms, Ciciora directly owns 9,000 shares of the Fund. Mr. Horejsi does not
directly own any shares of the Fund.
---------------------------
None of the Independent Directors or their family members owned beneficially or
of record any securities of the Advisers or any person directly or indirectly
controlling, controlled by, or under common control with the Advisers.
DIRECTOR AND OFFICER COMPENSATION
The following table sets forth certain information regarding the compensation of
the Independent Directors for the fiscal year ended November 30, 2006. No
persons other than the Independent Directors, as set forth below, currently
receive compensation from the Fund for acting as a Director or officer.
Directors and officers of the Fund do not receive pension or retirement benefits
from the Fund.
Name of Person and Position with the Fund Aggregate Compensation Total Compensation from the Fund and
from the Fund Fund Complex Paid to Directors
------------------------------------------------------ ------------------------- ---------------------------------------
Richard I. Barr, Director $24,000 $84,000
(3 funds)
Dr. Dean Jacobson, Director $15,826 $71,826
(3 funds)
Joel W. Looney, Director and Chairman of the Board $31,000 $97,000
(3 funds)
Susan L. Ciciora, Director $0 $0
John S. Horejsi, Director $0 $0
Each Director of the Fund who was not a director, officer or employee of one of
the Advisers, or any of their affiliates, receives a fee of $8,000 per annum
plus $3,000 for each in person meeting, $500 for each Audit Committee meeting
and $500 for each telephonic meeting of the Board. In addition, the Chairman of
the Board and the Chairman of the Audit Committee receives $1,000 per meeting.
Each non-interested Director of the Fund is reimbursed for travel and
out-of-pocket expenses associated with attending Board and Committee meetings.
The Board held nine meetings (five of which were held by telephone conference
call) during the fiscal year ended November 30, 2006. Each Director currently
serving in such capacity for the entire fiscal year attended at least 75% of the
meetings of Directors and any Committee of which he is a member. The aggregate
remuneration paid to the Directors of the Fund for acting as such during the
fiscal year ended November 30, 2006 amounted to $89,749.17.
COMMITTEES OF THE BOARD OF DIRECTORS
AUDIT COMMITTEE. The Fund has an audit committee consisting solely of all of the
Fund's Independent Directors (i.e., Messrs. Looney, Barr and Jacobson) (the
"Audit Committee"). The purpose of the Audit Committee is to assist Board
oversight of the integrity of the Fund's financial statements, the Fund's
compliance with legal and regulatory requirements, the independent auditor's
qualifications and independence and the performance of the Fund's independent
auditors. The Audit Committee reviews the scope and results of the Fund's annual
audit with the Fund's independent accountants and recommends the engagement of
such accountants. Management, however, is responsible for the preparation,
presentation and integrity of the Fund's financial statements, and the
independent accountants are responsible for planning and carrying out proper
audits and reviews. The Board of Directors adopted a written charter for the
Audit Committee on January 23, 2002 and most recently amended the Charter on
January 23, 2004. A copy of the Audit Committee Charter was attached as an
exhibit to the Fund's proxy statement dated March 8, 2007.
The Audit Committee is composed entirely of the Fund's independent Directors,
consisting of Messrs. Jacobson, Barr, and Looney. The Board of Directors has
determined that Joel Looney qualifies as an "audit committee financial expert,"
as defined under the Securities and Exchange Commission's Regulation S-K, Item
401(h). The Audit Committee is in compliance with applicable rules of the
listing requirements for closed-end fund audit committees; including the
requirement that all members of the audit committee be "financially literate"
and that at least one member of the audit committee have "accounting or related
financial management expertise," as determined by the Board. The Audit Committee
is required to conduct its operations in accordance with applicable requirements
of the Sarbanes-Oxley Act and the Public Company Accounting Oversight Board, and
the members of the Audit Committee are subject to the fiduciary duty to exercise
reasonable care in carrying out their duties. Each member of the Audit Committee
is independent, as that term is defined by the NYSE Listing Standards. The Audit
Committee met three times during the fiscal year ended November 30, 2006. In
connection with the audited financial statements as of and for the period ended
November 30, 2006 included in the Fund's Annual Report for the period ended
November 30, 2006 (the "Annual Report"), at meetings held on January 17, 2007
and January 26, 2007, the Audit Committee considered and discussed the audited
financial statements with management and the independent accountants, and
discussed the audit of such financial statements with the independent
accountants.
The Audit Committee has received the written disclosures and letter from the
independent accountants required by Independence Standards Board Standard No. 1
(Independence Discussions with Audit Committees) and has discussed with the
independent accountants their independence. The Audit Committee discussed with
the independent accountants the accounting principles applied by the Fund and
such other matters brought to the attention of the Audit Committee by the
independent accountants required by Statement of Auditing Standards No. 61,
Communications With Audit Committees, as currently modified or supplemented.
The members of the Audit Committee are not professionally engaged in the
practice of auditing or accounting and are not employed by the Fund in any
accounting, financial management or internal control capacity. Moreover, the
Audit Committee relies on and makes no independent verification of the facts
presented to it or representations made by management or the independent
accountants. Accordingly, the Audit Committee's oversight does not provide an
independent basis to determine that management has maintained appropriate
accounting and financial reporting principles and policies, or internal controls
and procedures, designed to assure compliance with accounting standards and
applicable laws and regulations. Furthermore, the Audit Committee's
considerations and discussions referred to above do not provide assurance that
the audit of the Fund's financial statements has been carried out in accordance
with generally accepted accounting standards or that the financial statements
are presented in accordance with generally accepted accounting principles.
NOMINATING COMMITTEE. The Board of Directors has a nominating committee (the
"Nominating Committee") consisting of Messrs. Looney, Jacobson and Barr, which
is responsible for considering candidates for election to the Board in the event
a position is vacated or created. Each member of the Nominating Committee is
independent, as that term is defined by the NYSE Listing Standards. The
Nominating Committee met three times during the fiscal year ended November 30,
2006.
On January 16, 2006, the Nominating Committee met when it was announced that Mr.
Alfred G. Aldridge, Jr. would not run for re-election as a director of the Fund
at the April shareholder meeting. Mr. Jacobson was nominated to serve as a
director. The Nominating Committee discussed the background and qualifications
of Mr. Jacobson and agreed to bring his nomination to the full Board. The
Nominating Committee met again on January 26, 2006 to conduct an annual review
of the Nominating Committee Charter and to further discuss the nomination of Mr.
Jacobson.
On October 13, 2006, Dennis Causier of Mallorca, Spain, submitted his
resignation as a director of the Fund. The remaining Directors accepted Mr.
Causier's resignation and, at the subsequent regularly scheduled Board meeting
held on October 23, 2006, nominated Susan L. Ciciora as Mr. Causier's
replacement. The Nominating Committee noted that Ms. Ciciora was the daughter of
Stewart Horejsi, the Fund's portfolio manager and an agent and beneficiary of
the Fund's largest stockholder (the EH Trust defined above). The Nominating
Committee also noted that Ms. Ciciora was a trustee and beneficiary of the EH
Trust. Accordingly, Ms. Ciciora would be considered an interested Director of
the Fund. At this meeting, the Nominating Committee considered the
qualifications and determined the suitability of Susan L. Ciciora to be Director
and resolved to recommend Ms. Ciciora to stockholders for election at the 2007
Annual Meeting. The Board of Directors has adopted a charter for the Nominating
Committee that is available on the Fund's website, www.boulderfunds.net.
The Nominating Committee does not have a formal process for identifying
candidates. The Nominating Committee takes into consideration such factors as it
deems appropriate when nominating candidates. These factors may include
judgment, skill, diversity, experience with investment companies and other
organizations of comparable purpose, complexity, size and subject to similar
legal restrictions and oversight, the interplay of the candidate's experience
with the experience of other Board members, and the extent to which the
candidate would be a desirable addition to the Board and any committees thereof.
The Nominating Committee will consider all qualified candidates in the same
manner. The Nominating Committee may modify its policies and procedures for
director nominees and recommendations in response to changes in the Fund's
circumstances, and as applicable legal or listing standards change.
The Nominating Committee will consider director candidates recommended by
stockholders (if a vacancy were to exist) and submitted in accordance with
applicable law and the following procedures. Pursuant to the Fund's Bylaws, at
any annual meeting of the stockholders, only business that has been properly
brought before the meeting will be conducted. To be properly brought before the
annual meeting, the business must be (i) specified in the notice of meeting,
(ii) by or at the direction of the Board, or (iii) otherwise properly brought
before the meeting by a stockholder. For business to be properly brought before
the annual meeting by a stockholder, the stockholder must have given timely
notice thereof in writing to the Secretary of the Fund. To be timely, a
stockholder's notice must be delivered to the Secretary of the Fund no later
than 5:00 p.m., Mountain Time, on the 120th day prior to the first anniversary
of the date of mailing of the notice for the preceding year's annual meeting.
However, if the date of the annual meeting is advanced or delayed by more than
30 days from the first anniversary of the date of the preceding year's annual
meeting, for notice by the stockholder to be timely, it must be delivered not
later than 5:00 p.m., Mountain Time, on the later of the 120th day prior to the
date of such annual meeting or the tenth day following the day on which public
announcement of the date of such meeting is first made. The public announcement
of a postponement or adjournment of an annual meeting shall not commence a new
time period for the giving of a stockholder's notice as described above.
Pursuant to the Fund's Bylaws, such stockholder's notice shall set forth as to
each individual whom the stockholder proposes to nominate for election or
reelection as a director, (A) the name, age, business address and residence
address of such individual, (B) the class, series and number of any shares of
stock of the Fund that are beneficially owned by such individual, (C) the date
such shares were acquired and the investment intent of such acquisition, (D)
whether such stockholder believes any such individual is, or is not, an
"interested person" of the Fund, as defined in the 1940 Act and information
regarding such individual that is sufficient, in the discretion of the Board or
any committee thereof or any authorized officer of the Fund, to make such
determination and (E) all other information relating to such individual that is
required to be disclosed in solicitations of proxies for election of directors
in an election contest (even if an election contest is not involved), or is
otherwise required, in each case pursuant to Regulation 14A (or any successor
provision) under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and the rules thereunder (including such individual's written consent to
being named in the proxy statement as a nominee and to serving as a director if
elected).
INVESTMENT ADVISERS AND OTHER SERVICE PROVIDERS
The Fund is co-advised by Boulder Investment Advisers, LLC ("BIA") and Stewart
West Indies Trading Company, Ltd. d/b/a Stewart Investment Advisers ("SIA")
(collectively, the "Advisers"). The Advisers have been providing advisory
services to the Fund since January 2002, and to Boulder Total Return Fund, Inc.
since March 1999. As of November 30, 2006, the Advisers had a total of $516.2
million in assets under management.
BOULDER INVESTMENT ADVISERS, LLC. BIA was formed on April 8, 1999, as a Colorado
limited liability company and is registered as an investment adviser under the
Investment Advisers Act of 1940, as amended. Stewart R. Horejsi is an employee
of and investment manager for both Advisers and has extensive experience
managing common stocks for the Fund as well as for the various other trusts and
entities affiliated with the Horejsi family (the "Horejsi Affiliates"). The
members of BIA are Evergreen Atlantic, LLC, whose address is 2344 Spruce Street,
Suite A, Boulder CO 80302, and the Lola Brown Trust No. 1B, whose address is c/o
Badlands Trust Company, LLC, 3301 C Street, Suite 100, Anchorage, Alaska 99502
(the "Members"). Each of the Members hold a 50% interest in BIA. The Members are
"affiliated persons" of the Fund (as that term is defined in the 1940 Act). Mr.
Horejsi and John S. Horejsi and Susan L. Ciciora, Mr. Horejsi's son and
daughter, respectively, and the Fund's two "interested" Directors, are
discretionary beneficiaries under the Lola Brown Trust No. 1B as well as under
other Horejsi Affiliates which own Evergreen Atlantic, LLC. Accordingly, as a
result of this relationship, Stewart R. Horejsi, John S. Horejsi and Susan L.
Ciciora may directly or indirectly benefit from the relationship between the
Fund and BIA.
STEWART INVESTMENT ADVISERS. SIA is a Barbados international business company
incorporated on November 12, 1996. SIA is wholly owned by the Stewart West
Indies Trust (the "West Indies Trust"), an irrevocable trust domiciled in Alaska
and established by Mr. Horejsi in 1996 primarily to benefit his issue. The West
Indies Trust's address is c/o Badlands Trust Company, LLC, 3301 C Street, Suite
100, Anchorage, Alaska 99502. Mr. Horejsi is not a beneficiary under the West
Indies Trust. However, John S. Horejsi and Susan L. Ciciora, Mr. Horejsi's son
and daughter, respectively, and the Fund's "interested" Directors, are
discretionary beneficiaries under the West Indies Trust and thus, as a result of
this relationship, may directly or indirectly benefit from the relationship
between SIA and the Fund.
SIA is not domiciled in the United States and substantially all of its assets
are located outside the United States. As a result, it may be difficult to
realize judgments of courts of the United States predicated upon civil
liabilities under federal securities laws of the United States. The Fund has
been advised that there is substantial doubt as to the enforceability in
Barbados of such civil remedies and criminal penalties as are afforded by the
federal securities laws of the United States. Pursuant to the advisory agreement
between SIA and the Fund, SIA has appointed the Secretary of the Fund (presently
Stephanie Kelley in Boulder, Colorado) as its agent for service of process in
any legal action in the United States, thus subjecting it to the jurisdiction of
the United States courts.
CO-ADVISORY AGREEMENTS. The Advisers and the Fund are parties to investment
co-advisory agreements dated as of April 26, 2002 (the "Advisory Agreements").
Under the terms of the Advisory Agreements, the Advisers provide advisory
services regarding asset allocation, manage the investment of the Fund's assets
and provide such investment research, advice and supervision, in conformity with
the Fund's investment objective and policies, as necessary for the operations of
the Fund. The Advisory Agreements provide, among other things, that the Advisers
will bear all expenses in connection with the performance of their services
under the Advisory Agreements.
The Advisory Agreements provide that the Fund shall pay to the Advisers for
their services an aggregate monthly fee at the annual rate of 1.25% of the
Fund's average monthly net assets, including the principal amount of leverage,
if any (the "Adviser Fee"). The Adviser Fee is higher than the fees paid by most
similarly situated U.S. investment companies. Under the terms of the Advisory
Agreements, the Advisers share the Adviser Fee as determined by the Advisers and
approved by the Board from time to time. Presently, BIA and SIA receive 25% and
75%, respectively, of the Adviser Fee. Although the Advisers intend to devote
such time and effort to the business of the Fund as they deem reasonably
necessary to perform their respective duties to the Fund, the services of the
Advisers are not exclusive and the Advisers may provide similar services to
other investment companies and other clients and may engage in other activities.
At a regular meeting of the Board held on January 27, 2007, the Advisers agreed
to a waiver of advisory fees at certain "break-point" levels such that, in the
future, the Adviser Fee would be calculated at the annual rate of 1.25% on asset
levels up to $400 million, 1.10% on assets levels between $400-$600 million; and
1.00% on asset levels exceeding $600 million.
The Advisory Agreements provide that the Advisers shall not be liable for any
error of judgment or mistake of law or omission or any loss suffered by the Fund
in connection with the matters to which the agreements relate, although the
agreements do not protect or purport to protect the Advisers against any
liability to the Fund to which the Advisers would otherwise be subject by reason
of willful misfeasance, bad faith or gross negligence on their part in the
performance of their duties or from reckless disregard by them of their
obligations and duties under the agreements. Each Advisory Agreement also
provides for indemnification by the Fund of the Advisers and their partners,
members, officers, employees, agents and control persons for liabilities
incurred by them in connection with their services to the Fund, subject to
certain limitations and conditions.
PORTFOLIO MANAGERS. Stewart R. Horejsi is the Fund's primary investment manager
and, together with Carl D. Johns, the Fund's Vice President and Treasurer, is
responsible for the day-to-day management of the Fund's assets. Mr. Horejsi is
primarily responsible for the Fund's asset allocation and Mr. Johns, also Vice
President and Treasurer for BIA, is responsible for research and managing the
Fund's fixed income portfolio. Messrs. Horejsi and Johns are referred to herein
as the "Portfolio Managers". The Portfolio Managers act as the portfolio
managers with respect to the Fund and one other registered investment company,
the Boulder Total Return Fund, Inc. ("BTF"). As of November 30, 2006, BTF had
total assets, including leverage, of approximately $369.1 million. Mr. Horejsi
also acts as portfolio manager with respect to a client of the Advisers who is a
Horejsi Affiliate, the Horejsi Charitable Foundation, which has total assets of
approximately $18.62 million as of November 30, 2006. Mr. Horejsi also acts as a
financial consultant to the Horejsi Affiliates and manages their portfolios of
equities having an aggregate value of approximately $781 million as of November
30, 2006.
The Portfolio Managers are compensated with fixed salaries which are established
based on a number of considerations, including, among others, job and portfolio
performance, industry compensation and comparables, and years of experience and
service with the Adviser. The Portfolio Managers are reviewed from time to time
and their salaries may be adjusted based on their recent and long-term job
performance and cost of living increases. Generally, the Portfolio Managers do
not receive bonuses. Conflicts of interest may arise in connection with the
Portfolio Managers' management of the Fund's investments. This is because the
Portfolio Managers also serve as portfolio managers to BTF and the other
accounts described above that may have investment objectives identical or
similar to those of the Fund. See "Potential Conflicts of Interest" below.
Mr. Horejsi does not directly own any shares of the Fund. However, the EH Trust,
which has engaged Mr. Horejsi as a financial consultant and of which Mr. Horejsi
is a discretionary beneficiary, holds 2,375,911 shares of the Fund as of
August 1, 2007. Accordingly, Mr. Horejsi may be deemed to have indirect
beneficial ownership of such shares which have a dollar range in excess of $1
million. Mr. Horejsi disclaims all such beneficial ownership. Mr. Johns holds
between $50,001 and $100,000 of the shares of the Fund as of August 1, 2007.
FUND ADMINISTRATIVE SERVICES, LLC. Fund Administrative Services, LLC ("FAS") is
the Fund's co-administrator. FAS is a Colorado limited liability company formed
in 1994. Its principal place of business is 200 S. Santa Fe, #4, Salina, KS
67401 and it has offices in Colorado at 2344 Spruce Street, Suite A, Boulder,
Colorado 80302. The members of FAS are Lola Brown Trust No. 1B (50%) and
Evergreen Atlantic, LLC (50%). Stewart R. Horejsi, the Fund's portfolio manager,
his son John S. Horejsi and his daughter Susan L. Ciciora, the Fund's
"interested" Directors, are discretionary beneficiaries of the Lola Brown Trust
No. 1B, and of the trusts which own Evergreen Atlantic, LLC. The officers of FAS
are Stephen C. Miller, manager; Carl Johns, assistant manager; Laura
Rhodenbaugh, secretary/treasurer; and Stephanie Kelley, assistant secretary.
Since January of 2002, FAS has been providing certain administrative and
executive management services to the Fund, including among other things
negotiation of service provider contracts, oversight of service providers,
maintenance of the Fund's policies and procedures, and provision of compliance,
legal and fund accounting services. FAS has also provided such administrative
and executive management services to Boulder Total Return Fund, Inc. since March
of 1999 and to First Financial Fund, Inc. since August of 2003.
The Fund and FAS are parties to an administration agreement dated February 1,
2004. Under the administration agreement, the Fund pays FAS a monthly fee
calculated at an annual rate of 0.20% of the value of the Fund's average monthly
net assets up to $250 million; 0.18% of the Fund's average monthly net assets on
the next $150 million; and, 0.15% on the value of the Fund's average monthly
assets over $400 million. FAS has agreed to cap the Fund's total administration
costs at 0.30% (including administration, co-administration, transfer agent and
custodian fees), and therefore waives a portion of its fee should the total
monthly administration expenses exceed 0.30% on an annualized basis.
STATE STREET BANK AND TRUST COMPANY. State Street Bank and Trust Company
(formerly known as Investors Bank & Trust Company) ("State Street"), located at
200 Clarendon Street, Boston, Massachusetts 02116, serves as the Fund's
co-administrator and custodian. On February 4, 2007, State Street Corporation
("SSC") entered into an Agreement and Plan of Reorganization (the
"Reorganization Agreement") with Investors Financial Services Corp. ("IFSC"),
the parent company of Investors Bank & Trust Company. Pursuant to the
Reorganization Agreement, IFSC merged into SSC effective July 2, 2007. As
co-administrator, State Street provides certain services including fund
accounting and preparation of materials for Board meetings. Under an
administration agreement and custody agreement between the Fund and State
Street, the Fund pays State Street a combined monthly fee for both
co-administrative and custodian services calculated at an annual rate of 0.058%
of the value of the Fund's average monthly total net assets (including the
principal amount of leverage, if any) up to $300 million and 0.04% on the value
of the Fund's average monthly total net assets over $300 million, or a minimum
monthly fee of $10,500. Presently, because of the level of the Fund's average
monthly total net assets, the Fund pays the minimum of $10,500 monthly. In
addition, State Street receives certain out-of-pocket expenses, transaction fees
and certain charges for securities transactions. All customary fees of the
custodian are paid by the Fund.
COMPENSATION TO THE ADVISERS AND ADMINISTRATORS
Information is provided in this Statement of Additional Information and the
Prospectus concerning the Advisers and Administrator and their agreements with
the Fund. The amounts paid to such persons during the last three fiscal years
or, if shorter, the period during which the entity was retained to provide
services to the Fund are as follows:
Name of Entity Fees Paid by the Fund+
-------------------------------------------------------
------------------ ----------------- ------------------
fiscal 2004 2005 2006
-------------------------------------------------------------- ------------------ ----------------- ------------------
-------------------------------------------------------------- ------------------ ----------------- ------------------
Boulder Investment Advisers, LLC $302,969 $333,197 $376,193
Stewart Investment Advisers $908,906 $999,592 $1,128,580
Fund Administrative Services, LLC $165,514* $160,788 $192,411
Investors Bank & Trust Company (now known as State Street Bank
and Trust) $24,393** $135,839 $144,255
*Prior to February 1, 2004, from fees it received under the prior administration
agreement between FAS and the Fund, FAS was required to pay substantially all
fees respecting services provided to the Fund by any sub-administrators,
custodian or transfer agent. Under this arrangement, out of the funds identified
in the Table above, FAS paid such outsourced service providers $27,112 during
fiscal year 2004. At a regular meeting of directors held on January 23, 2004,
the Board approved a new administration agreement where by the Fund would
separately pay FAS and all such service providers.
** Investors Bank began providing administration services to the Fund on October
1, 2004.
+ All figures are on a cash basis.
DURATION AND TERMINATION OF THE INVESTMENT ADVISORY AGREEMENTS
The terms of the Advisory Agreements were approved by the Board at a regular
meeting of the Board held on January 26, 2007, including a majority of the
Directors who are not parties to the agreement or "interested persons" of any
such party (as such term is defined in the 1940 Act).
Each Advisory Agreement will continue in effect without a term so long as its
continuation is specifically approved at least annually by both (i) the vote of
a majority of the Board or the vote of a majority of the outstanding voting
securities of the Fund (as such term is defined in the 1940 Act) and (ii) by the
vote of a majority of the directors who are not parties to such Advisory
Agreement or interested persons (as such term is defined in the 1940 Act) of any
such party, cast in person at a meeting called for the purpose of voting on such
approval. Any of the Advisory Agreements may be terminated as a whole at any
time by the Fund, without the payment of any penalty, upon the vote of a
majority of the Board or a majority of the outstanding voting securities of the
Fund or by the Advisers on 60 days' written notice by either party to the other.
Except as otherwise provided by order of the SEC or any rule or provision of the
1940 Act, each of the Advisory Agreements will terminate automatically in the
event of its assignment (as such term is defined in the 1940 Act and the rules
thereunder).
POTENTIAL CONFLICTS OF INTEREST
The Fund is managed by the Advisers, who also serve as investment advisers to
another closed-end investment company and at least one other account with
investment objectives identical or similar to those of the Fund. Mr. Horejsi
also manages a substantial portfolio of securities for the Horejsi Affiliates.
Securities frequently meet the investment objectives of the Fund, the Horejsi
Affiliates and such other funds and accounts. In such cases, the decision to
recommend a purchase to one fund or account rather than another is based on a
number of factors. The determining factors in most cases are the amount of
securities of the issuer then outstanding, the value of those securities and the
market for them. Other factors considered in the investment recommendations
include other investments that each fund or account presently has in a
particular industry and the availability of investment funds in each fund or
account. It is possible that at times identical securities will be held by more
than one fund and/or account. However, positions in the same issue may vary and
the length of time that any fund or account may choose to hold its investment in
the same issue may likewise vary.
To the extent that more than one of the funds or accounts managed by the
Advisers seeks to acquire the same security at about the same time, the Fund may
not be able to acquire as large a position in such security as it desires or it
may have to pay a higher price for the security. However, with respect to the
Horejsi Affiliates and the other private account managed by the Advisers, the
Horejsi Affiliates and such other private account have consented to allow the
funds managed by the Adviser to complete their transactions in any particular
security before the Horejsi Affiliates or such other private account will be
allowed to transact in such security, thus giving the funds managed by the
Advisers the first opportunity to trade in a particular security. The Fund may
not be able to obtain as large an execution of an order to sell or as high a
price for any particular portfolio security if the Advisers decide to sell on
behalf of another account the same portfolio security at the same time. On the
other hand, if the same securities are bought or sold at the same time by more
than one fund or account, the resulting participation in volume transactions
could produce better executions for the Fund. In the event more than one account
purchases or sells the same security on a given date, the purchases and sales
will normally be made as nearly as practicable on a pro rata basis in proportion
to the amounts desired to be purchased or sold by each account. Although the
other fund managed by the Advisers may have the same or similar investment
objectives and policies as the Fund, its portfolio does not generally consist of
the same investments as the Fund and its performance results are likely to
differ from those of the Fund.
PROXY VOTING
The Board has delegated to BIA the authority to vote proxies on behalf of the
Fund. The Board has approved the proxy voting guidelines of the Fund and will
review the guidelines and suggest changes they deem advisable. A summary of the
Fund's and BIA's proxy voting policies and procedures are attached to this
Statement of Additional Information as Appendix A. Information regarding how the
Fund voted proxies relating to portfolio securities during the most recent
12-month period ended June 30 is available without charge, upon request, by
calling 1-877-561-7914, and on the Securities and Exchange Commission's website,
at www.sec.gov.
CODE OF ETHICS
The Fund and the Advisers have adopted a joint code of ethics pursuant to Rule
17j-1 under the 1940 Act that is applicable to officers, directors and
designated employees of the Fund and the Advisers, as applicable (the "Code of
Ethics"). The Code of Ethics permits such personnel to engage in personal
securities transactions for their own account, including securities that may be
purchased or held by the Fund, and is designed to prescribe means reasonably
necessary to prevent conflicts of interest from arising in connection with
personal securities transactions. The Code of Ethics is on file with, and is
available from, the Securities and Exchange Commission's Public Reference Room
in Washington, D.C. Information on the operation of the Public Reference Room
may be obtained by calling the Commission at 1-(202)-942-8090. The Code of
Ethics is also available on the EDGAR database on the Commission's internet
website at http://www.sec.gov. Copies of the Code of Ethics may be obtained,
after paying a duplicating fee, by electronic request to the following e-mail
address: publicinfo@sec.gov, or by writing the Commission's Public Reference
Section, Washington, D.C. 20549-0102.
PORTFOLIO TRANSACTIONS, BROKERAGE ALLOCATION AND OTHER PRACTICES
All orders for the purchase or sale of portfolio securities are placed on behalf
of the Fund by the Advisers pursuant to authority contained in the Advisory
Agreements. The Advisers seek best execution in selecting brokers and dealers to
effect the Fund's transactions and negotiating prices and any brokerage
commissions. The Fund may purchase certain money market instruments directly
from an issuer, in which case no commissions or discounts are paid. No separate
brokerage commission is typically paid on bond transactions, which are typically
executed on a principal basis, in contrast to common stock transactions, where
brokerage commissions are the norm. The Fund paid approximately $19,000,
$56,000, and $55,000 in brokerage commissions for the fiscal years ended
November 30, 2004, 2005 and 2006, respectively.
The Advisers are responsible for effecting the Fund's securities transactions
and will do so in a manner it deems fair and reasonable to stockholders of the
Fund and not according to any formula. The Advisers' primary considerations in
selecting the manner of executing a securities transaction for the Fund are
prompt execution of orders, the size and breadth of the market for the security,
the reliability, integrity, financial condition and execution capability of the
firm, the difficulty in executing the order, and the best net price. The
Advisers have established procedures whereby it monitors, periodically evaluates
and reports to the Board the cost and quality of execution services provided by
brokers selected by the Advisers to execute transactions for the Fund. The
evaluation is made primarily based on a comparison of commissions charged by
other broker with similar capabilities and trade execution.
There are many instances when, in the judgment of the Advisers, more than one
firm can offer comparable execution services. In selecting among such firms,
consideration may be given to those firms which supply research and other
services in addition to execution services (often referred to as "soft
dollars"), although the Fund does not typically rely on such research. The Fund
has adopted a policy to deal with such "soft dollar" arrangements as follows:
(a) All soft dollar arrangements affecting the Funds must fall within the
safe harbor of Section 28(e) of the Securities Exchange Act, as
amended, as determined by the Funds' chief compliance officer.
(b) All soft dollar transactions must be disclosed to the Boards on a
quarterly basis.
(c) When third party research is obtained with soft dollars, the Advisers
must maintain documentation that the research directly assists the
Advisers in their management of the Funds' portfolios.
(d) The Advisers must disclose any other benefits that the Advisers or
their affiliates or other clients might receive regarding the soft
dollar benefits.
(e) The Advisers must test and document that brokers who provide soft
dollar research have the capability to provide best execution taking
into consideration the broker's financial responsibility,
responsiveness, the commission rate or spread involved, and the range
of services offered by such broker.
Although the Advisory Agreements contain no restrictions on portfolio turnover,
it is not the Fund's policy to engage in transactions with the objective of
seeking profits from short-term trading. The annual portfolio turnover rate of
the Fund is generally less than 50%, excluding securities having a maturity of
one year or less. Because it is difficult to accurately predict portfolio
turnover rates, actual turnover may be higher or lower. Higher portfolio
turnover results in increased Fund expenses, including brokerage commissions,
dealer mark-ups and other transaction costs on the sale of securities and on the
reinvestment in other securities. For the fiscal years ended November 30, 2005
and November 30, 2006, the Fund's portfolio turnover rates were 41% and 35%,
respectively.
REPURCHASE OF SHARES
The Fund is a closed-end investment company and therefore its common
stockholders do not have the right to cause the Fund to redeem their shares.
Instead, the Fund's common shares trade in the open market at a price that is a
function of several factors, including net asset value, dividend stability,
relative demand for and supply of such shares in the market, general market and
economic conditions, dividend stability, dividend levels (which are in turn
affected by expenses), and other factors. Because shares of a closed-end
investment company may frequently trade at prices lower than net asset value (a
"Discount"), the Board may consider actions that might be taken to reduce or
eliminate any material Discount in respect of common shares, which may include
the repurchase of such shares in the open market or in private transactions, the
making of a tender offer for such shares at net asset value, or the conversion
of the Fund to an open-end investment company. The Board may decide not to take
any of these actions. In addition, there can be no assurance that share
repurchases or tender offers, if undertaken, will reduce any Discount.
Since the Fund has issued the AMPS, the Fund's ability to repurchase shares of,
or tender for, its common stock may be limited by the asset coverage
requirements of the 1940 Act and by asset coverage and other requirements
imposed by various rating agencies. No assurance can be given that the Board
will decide to undertake share repurchases or tenders or, if undertaken, that
repurchases and/or tender offers will result in the Fund's common stock trading
at a price that is close to, equal to or above net asset value. The Fund may
borrow to finance repurchases and/or tender offers. Any tender offer made by the
Fund for its shares may be at a price equal to or less than the net asset value
of such shares. Any service fees incurred in connection with any tender offer
made by the Fund will be borne by the Fund and will not reduce the stated
consideration to be paid to tendering stockholders.
Subject to its investment limitations, the Fund may borrow to finance the
repurchase of common shares or to make a tender offer. Interest on any
borrowings to finance share repurchase transactions or the accumulation of cash
by the Fund in anticipation of share repurchases or tenders will reduce the
Fund's net income. Any share repurchase, tender offer or borrowing that might be
approved by the Board would have to comply with the Exchange Act and the 1940
Act and the rules and regulations under each of those Acts.
Although the decision to take action in response to a Discount will be made by
the Board at the time it considers such issue, it is the Board's present policy,
which may be changed by the Board, not to authorize repurchases of common shares
or a tender offer for such shares if (1) such transactions, if consummated,
would (a) result in the delisting of the common shares from the NYSE, or (b)
impair the Fund's status as a regulated investment company under the Code (which
would make the Fund a taxable entity, causing the Fund's income to be taxed at
the corporate level in addition to the taxation of stockholders who receive
dividends from the Fund) or as a registered closed-end investment company under
the 1940 Act; (2) the Fund would not be able to liquidate portfolio securities
in an orderly manner and consistent with the Fund's investment objective and
policies in order to repurchase shares; or (3) there is, in the Board's
judgment, any (a) material legal action or proceeding instituted or threatened
challenging such transactions or otherwise materially adversely affecting the
Fund, (b) general suspension of or limitation on prices for trading securities
on the NYSE, (c) declaration of a banking moratorium by Federal or state
authorities or any suspension of payment by U.S. banks in which the Fund
invests, (d) material limitation affecting the Fund or the issuers of its
portfolio securities by Federal or state authorities on the extension of credit
by lending institutions or on the exchange of foreign currency, (e) commencement
of war, armed hostilities or other international or national calamity directly
or indirectly involving the United States, or (f) other event or condition which
would have a material adverse effect (including any adverse tax effect) on the
Fund or its stockholders if shares were repurchased. The Board may in the future
modify these conditions in light of experience.
The repurchase by the Fund of its common shares at prices below net asset value
will result in an increase in the net asset value of those shares that remain
outstanding. However, there can be no assurance that share repurchases or
tenders at or below net asset value will result in the Fund's common shares
trading at a price equal to their net asset value. Nevertheless, the fact that
the Fund's shares may be the subject of repurchase or tender offers at net asset
value from time to time, or that the Fund may be converted to an open-end
company, may be helpful in reducing any spread between market price and net
asset value that might otherwise exist.
In addition, a purchase by the Fund of its common shares will decrease the
Fund's total assets, which would likely have the effect of increasing the Fund's
expense ratio. Any purchase by the Fund of its common shares at a time when AMPS
are outstanding will increase the leverage applicable to the outstanding common
shares then remaining and decrease the asset coverage of the AMPS.
Before deciding whether to take any action if the common shares trade below net
asset value, the Board would likely consider all relevant factors, including the
extent and duration of the Discount, the liquidity of the Fund's portfolio, the
impact of any action that might be taken on the Fund or its stockholders and
market considerations. Based on these considerations, even if the Fund's shares
should trade at a Discount, the Board may determine that, in the interest of the
Fund and its stockholders, no action should be taken.
FEDERAL INCOME TAX MATTERS
The following is a summary discussion of certain U.S. federal income tax
consequences that may be relevant to a stockholder acquiring, holding and
disposing of Common Shares. This discussion does not address the tax
consequences to stockholders that are subject to special rules, including,
without limitation, banks and financial institutions, insurance companies,
dealers in securities or foreign currencies, foreign stockholders, tax-exempt or
tax-deferred plans, accounts, or entities, or investors who engage in
constructive sale or conversion transactions. In addition, the discussion does
not address state, local or foreign tax consequences, and it does not address
any tax consequences other than U.S. federal income tax consequences. The
discussion reflects applicable tax laws of the United States as of the date of
this Statement of Additional Information, which tax laws may be changed or
subject to new interpretations by the courts, Treasury or the Internal Revenue
Service (the "IRS") retroactively or prospectively. No attempt is made to
present a detailed explanation of all U.S. federal income tax concerns affecting
the Fund or its stockholders, and the discussion set forth herein does not
constitute tax advice. Investors are urged to consult their own tax advisers to
determine the specific tax consequences to them of investing in the Fund,
including the applicable federal, state, local and foreign tax consequences to
them and the effect of possible changes in tax laws.
As required by U.S. Treasury Regulations governing tax practice, you are hereby
advised that any written tax advice contained herein was not written or intended
to be used (and cannot be used) by any taxpayer for the purpose of avoiding
penalties that may be imposed under the Code. Any person reviewing this
discussion should seek advice based on such person's particular circumstances
from an independent tax adviser.
The Fund has qualified and elected to be treated each year as a "regulated
investment company" under Subchapter M of the Code and to comply with applicable
distribution requirements so that it generally will not pay U.S. federal income
tax on income of the Fund, including net capital gains, distributed to
stockholders. In order to qualify as a regulated investment company under
Subchapter M of the Code, which qualification this discussion assumes, the Fund
must, among other things, derive at least 90% of its gross income for each
taxable year from dividends, interest, payments with respect to securities
loans, gains from the sale or other disposition of stock, securities or foreign
currencies, or other income (including gains from options, futures and forward
contracts) derived with respect to its business of investing in such stock,
securities or currencies (the "90% income test"). In addition to satisfying the
requirements described above, the Fund must satisfy an asset diversification
test in order to qualify as a regulated investment company. Under this test, at
close of each quarter of the Fund's taxable year, at least 50% of the value of
the Fund's assets must consist of cash and cash items (including receivables),
U.S. Government securities, securities of other regulated investment companies,
and securities of other issuers (as to which the Fund must not have invested
more than 5% of the value of the Fund's total assets in securities of any one
such issuer and as to which the Fund must not have held more than 10% of the
outstanding voting securities of any one such issuer), and no more than 25% of
the value of its total assets may be invested in the securities (other than U.S.
Government securities and securities of other regulated investment companies) of
any one issuer, or of two or more issuers which the Fund controls and which are
engaged in the same or similar or related trades or businesses.
The American Jobs Creation Act of 2004 (the "2004 Tax Act") provides that for
taxable years of a regulated investment company beginning after October 22,
2004, net income derived from an interest in a "qualified publicly traded
partnership," as defined in the Code, will be treated as qualifying income for
purposes of the 90% income test, and for the purposes of the diversification
requirements described above, the outstanding voting securities of any issuer
includes the equity securities of a qualified publicly traded partnership and no
more than 25% of the value of a regulated investment company's total assets may
be invested in the securities of one or more qualified publicly traded
partnerships. In addition, the separate treatment for publicly traded
partnerships under the passive loss rules of the Code applies to a regulated
investment company holding an interest in a qualified publicly traded
partnership, with respect to items attributable to such interest.
If the Fund qualifies as a regulated investment company and, for each taxable
year, it distributes to its stockholders an amount equal to or exceeding the sum
of (i) 90% of its "investment company taxable income" as that term is defined in
the Code (which includes, among other things, dividends, taxable interest, and
the excess of any net short-term capital gains over net long-term capital
losses, as reduced by certain deductible expenses) and (ii) 90% of the excess of
its gross tax-exempt interest, if any, over certain disallowed deductions, the
Fund generally will not be subject to U.S. federal income tax on any income of
the Fund, including "net capital gain" (the excess of net long-term capital gain
over net short-term capital loss), distributed to stockholders. However, if the
Fund has met such distribution requirements but chooses not to distribute some
portion of its investment company taxable income or net capital gain, it
generally will be subject to U.S. federal income tax at regular corporate rates
on the amount retained. The Fund intends to distribute at least annually all or
substantially all of its investment company taxable income, net tax-exempt
interest, and net capital gain. If for any taxable year the Fund did not qualify
as a regulated investment company, it would be treated as a corporation subject
to U.S. federal income tax and all distributions out of earnings and profits
would be taxed to stockholders as ordinary income. In addition, the Fund could
be required to recognize unrealized gains, pay taxes and make distributions
(which could be subject to interest charges) before requalifying as a regulated
investment company.
Under the Code, the Fund will be subject to a nondeductible 4% U.S. federal
excise tax on a portion of its undistributed taxable ordinary income and capital
gains if it fails to meet certain distribution requirements with respect to each
calendar year. The Fund intends to make distributions in a timely manner and
accordingly does not expect to be subject to the excise tax, but as described
below, there can be no assurance that the Fund's distributions will be
sufficient to avoid entirely this tax.
Assuming that the Fund has sufficient earnings and profits, dividends from
investment company taxable income are taxable as ordinary income and
distributions from net capital gain, if any, that are designated as capital gain
dividends are taxable as long-term capital gains for U.S. federal income tax
purposes without regard to the length of time the stockholder has held shares of
the Fund. Since the Fund's income is derived primarily from interest, dividends
of the Fund from its investment company taxable income generally will not
constitute "qualified dividend income" for federal income tax purposes and thus
will not be eligible for the favorable federal long-term capital gain tax rates
on qualified dividend income. In addition, the Fund's dividends are not expected
to qualify for any dividends-received deduction that might otherwise be
available for certain dividends received by stockholders that are corporations.
Capital gain dividends distributed by the Fund to individual stockholders
generally will qualify for the maximum 15% U.S. federal tax rate on long-term
capital gains. Under current law, the maximum 15% U.S. federal tax rate on
qualified dividend income and long-term capital gains will cease to apply to
taxable years beginning after December 31, 2008.
Distributions by the Fund in excess of the Fund's current and accumulated
earnings and profits will be treated as a return of capital to the extent of
(and in reduction of) the stockholder's tax basis in its shares and any such
amount in excess of that basis will be treated as gain from the sale of shares,
as discussed below. The U.S. federal income tax status of all distributions will
be reported to stockholders annually. If the Fund retains any net capital gain
for a taxable year, the Fund may designate the retained amount as undistributed
capital gains in a notice to stockholders who, if subject to U.S. federal income
tax on long-term capital gains, (i) will be required to include in income for
U.S. federal income tax purposes, as long-term capital gain, their proportionate
shares of such undistributed amount, and (ii) will be entitled to credit their
proportionate shares of the tax paid by the Fund on the undistributed amount
against their U.S. federal income tax liabilities, if any, and to claim refunds
to the extent the credit exceeds such liabilities.
Although dividends generally will be treated as distributed when paid, any
dividend declared by the Fund as of a record date in October, November or
December and paid during the following January will be treated for U.S. federal
income tax purposes as received by stockholders on December 31 of the calendar
year in which it is declared. In addition, certain other distributions made
after the close of a taxable year of the Fund may be "spilled back" and treated
as paid by the Fund (except for purposes of the 4% excise tax) during such
taxable year. In such case, stockholders generally will be treated as having
received such dividends in the taxable year in which the distributions were
actually made.
If the Fund invests in certain pay-in-kind securities, zero coupon securities,
deferred interest securities or, in general, any other securities with original
issue discount (or with market discount if the Fund elects to include market
discount in income currently), the Fund generally must accrue income on such
investments for each taxable year, which generally will be prior to the receipt
of the corresponding cash payments. However, the Fund must distribute, at least
annually, all or substantially all of its investment company taxable income and
net tax-exempt interest, including such accrued income, to stockholders to
qualify as a regulated investment company under the Code and avoid U.S. federal
income and excise taxes. Therefore, the Fund may have to dispose of its
portfolio securities under disadvantageous circumstances to generate cash, or
may have to borrow the cash, to satisfy distribution requirements.
The Fund may invest significantly in debt obligations that are in the lowest
rating categories or are unrated, including debt obligations of issuers not
currently paying interest or who are in default. Investments in debt obligations
that are at risk of or in default present special tax issues for the Fund. Tax
rules are not entirely clear about issues such as when the Fund may cease to
accrue interest, original issue discount or market discount, when and to what
extent deductions may be taken for bad debts or worthless securities, how
payments received on obligations in default should be allocated between
principal and income and whether exchanges of debt obligations in a workout
context are taxable. These and other issues will be addressed by the Fund, in
the event it invests in such securities, in order to seek to ensure that it
distributes sufficient income to preserve its status as a regulated investment
company and does not become subject to U.S. federal income or excise tax.
If the Fund utilizes leverage through borrowing or issuing AMPS, a failure by
the Fund to meet the asset coverage requirements imposed by the 1940 Act or by
any rating organization that has rated such leverage, or additional restrictions
that may be imposed by certain lenders on the payment of dividends or
distributions potentially could limit or suspend the Fund's ability to make
distributions on its common shares. Such a limitation or suspension or
limitation could prevent the Fund from distributing at least 90% of its
investment company taxable income and net tax-exempt interest as is required
under the Code and therefore might jeopardize the Fund's qualification for
taxation as a regulated investment company under the Code and/or might subject
the Fund to the 4% excise tax discussed above. Upon any failure to meet such
asset coverage requirements, the Fund may, in its sole discretion, purchase or
redeem shares of preferred stock in order to maintain or restore the requisite
asset coverage and avoid the adverse consequences to the Fund and its
stockholders of failing to satisfy the distribution requirement. There can be no
assurance, however, that any such action would achieve these objectives. The
Fund will endeavor to avoid restrictions on its ability to distribute dividends.
For U.S. federal income tax purposes, the Fund is permitted to carry forward an
unused net capital loss for any year to offset its capital gains, if any, for up
to eight years following the year of the loss. To the extent subsequent capital
gains are offset by such losses, they would not result in U.S. federal income
tax liability to the Fund and are not expected to be distributed as such to
stockholders.
At the time of an investor's purchase of Fund shares, a portion of the purchase
price may be attributable to realized or unrealized appreciation in the Fund's
portfolio or undistributed taxable income of the Fund. Consequently, subsequent
distributions by the Fund with respect to these shares from such appreciation or
income may be taxable to such investor even if the trading value of the
investor's shares is, as a result of the distributions, reduced below the
investor's cost for such shares and the distributions economically represent a
return of a portion of the investment.
Foreign exchange gains and losses realized by the Fund in connection with
certain transactions involving foreign currency-denominated debt securities,
certain options and futures contracts relating to foreign currency, foreign
currency forward contracts, foreign currencies, or payables or receivables
denominated in a foreign currency are subject to Section 988 of the Code, which
generally causes such gains and losses to be treated as ordinary income and
losses and may affect the amount, timing and character of distributions to
stockholders. Under Treasury regulations that may be promulgated in the future,
any gains from such transactions that are not directly related to the Fund's
principal business of investing in stock or securities (or its options contracts
or futures contracts with respect to stock or securities) may have to be limited
in order to enable the Fund to satisfy the 90% income test. If the net foreign
exchange loss for a year were to exceed the Fund's investment company taxable
income (computed without regard to such loss), the resulting ordinary loss for
such year would not be deductible by the Fund or its stockholders in future
years.
Sales and other dispositions of Fund shares are taxable events for stockholders
that are subject to tax. Stockholders should consult their own tax advisers with
reference to their individual circumstances to determine whether any particular
transaction in Fund shares is properly treated as a sale for tax purposes, as
the following discussion assumes, and the tax treatment of any gains or losses
recognized in such transactions. In general, if Fund shares are sold, the
stockholder will recognize gain or loss equal to the difference between the
amount realized on the sale and the stockholder's adjusted tax basis in the
shares sold. Such gain or loss will be treated as long-term capital gain or loss
if the shares sold were held for more than one year and otherwise generally will
be treated as short-term capital gain or loss. Any loss realized by a
stockholder upon the sale or other disposition of shares with a tax holding
period of six months or less will be treated as a long-term capital loss to the
extent of any amounts treated as distributions of long-term capital gains with
respect to such shares. Losses on sales or other dispositions of shares may be
disallowed under "wash sale" rules in the event substantially identical shares
of the Fund are purchased (including those made pursuant to reinvestment of
dividends and/or capital gains distributions) within a period of 61 days
beginning 30 days before and ending 30 days after a redemption or other
disposition of shares. In such a case, the disallowed portion of any loss
generally would be included in the U.S. federal tax basis of the shares acquired
in the other investments. The ability to otherwise deduct capital losses may be
subject to other limitations under the Code.
Under Treasury regulations, if a stockholder recognizes a loss with respect to
shares of $2 million or more for an individual stockholder, or $10 million or
more for a corporate stockholder, in any single taxable year (or a greater
amount over a combination of years), the stockholder must file with the IRS a
disclosure statement on Form 8886. Stockholders who own portfolio securities
directly are in many cases excepted from this reporting requirement but, under
current guidance, stockholders of regulated investment companies are not
excepted. A stockholder who fails to make the required disclosure to the IRS may
be subject to substantial penalties. The fact that a loss is reportable under
these regulations does not affect the legal determination of whether or not the
taxpayer's treatment of the loss is proper. Stockholders should consult with
their tax advisers to determine the applicability of these regulations in light
of their individual circumstances. Options written or purchased and futures
contracts entered into by the Fund on certain securities, indices and foreign
currencies, as well as certain forward foreign currency contracts, may cause the
Fund to recognize gains or losses from marking-to-market even though such
options may not have lapsed, been closed out, or exercised, or such futures and
forward contracts may not have been performed or closed out. The tax rules
applicable to these contracts may affect the characterization of some capital
gains and losses realized by the Fund as long-term or short-term. Certain
options, futures and forward contracts relating to foreign currencies may be
subject to Section 988, as described above, and accordingly may produce ordinary
income or loss. Additionally, the Fund may be required to recognize gain if an
option, futures contract, short sale or other transaction that is not subject to
the mark-to-market rules is treated as a "constructive sale" of an "appreciated
financial position" held by the Fund under Section 1259 of the Code. Any net
mark-to-market gains and/or gains from constructive sales may also have to be
distributed to satisfy the distribution requirements referred to above even
though the Fund may receive no corresponding cash amounts, possibly requiring
the disposition of portfolio securities or borrowing to obtain the necessary
cash. Losses on certain options, futures or forward contracts and/or offsetting
positions (portfolio securities or other positions with respect to which the
Fund's risk of loss is substantially diminished by one or more options, futures
or forward contracts) may also be deferred under the tax straddle rules of the
Code, which may also affect the characterization of capital gains or losses from
straddle positions and certain successor positions as long-term or short-term.
Certain tax elections may be available that would enable the Fund to ameliorate
some adverse effects of the tax rules described in this paragraph. The tax rules
applicable to options, futures, forward contracts and straddles may affect the
amount, timing and character of the Fund's income and gains or losses and hence
of its distributions to stockholders.
The federal income tax treatment of the Fund's investment in transactions
involving swaps, caps, floors, and collars and structured securities is
uncertain and may be subject to recharacterization by the IRS. To the extent the
tax treatment of such securities or transactions differs from the tax treatment
expected by the Fund, the timing or character of income recognized by the Fund
could be affected, requiring the Fund to purchase or sell securities, or
otherwise change its portfolio, in order to comply with the tax rules applicable
to regulated investment companies under the Code.
The IRS has taken the position that if a regulated investment company has two
classes or more of shares, it must designate distributions made to each class in
any year as consisting of no more than such class's proportionate share of
particular types of income, including ordinary income and net capital gain. A
class's proportionate share of a particular type of income is determined
according to the percentage of total dividends paid by the regulated investment
company to such class. Consequently, if both common shares and AMPS are
outstanding, the Fund intends to designate distributions made to the classes of
particular types of income in accordance with the classes' proportionate shares
of such income. Thus, the Fund will designate dividends constituting capital
gain dividends and other taxable dividends in a manner that allocates such
income between the holders of common shares and AMPS in proportion to the total
dividends paid to each class during the taxable year, or otherwise as required
by applicable law.
The Fund may be subject to withholding and other taxes imposed by foreign
countries, including taxes on interest, dividends and capital gains with respect
to its investments in those countries, which would, if imposed, reduce the yield
on or return from those investments. Tax conventions between certain countries
and the U.S. may reduce or eliminate such taxes in some cases. The Fund does not
expect to satisfy the requirements for passing through to its stockholders their
pro rata shares of qualified foreign taxes paid by the Fund, with the general
result that stockholders would not be entitled to any deduction or credit for
such taxes on their own tax returns.
Federal law requires that the Fund withhold (as "backup withholding") 28% of
reportable payments, including dividends, capital gain distributions and the
proceeds of redemptions and exchanges or repurchases of Fund shares, paid to
stockholders who have not complied with IRS regulations. In order to avoid this
withholding requirement, stockholders must certify on their Account
Applications, or on separate IRS Forms W-9, that the Social Security Number or
other Taxpayer Identification Number they provide is their correct number and
that they are not currently subject to backup withholding, or that they are
exempt from backup withholding. The Fund may nevertheless be required to
withhold if it receives notice from the IRS or a broker that the number provided
is incorrect or backup withholding is applicable as a result of previous
underreporting of interest or dividend income.
The description of certain U.S. federal tax provisions above relates only to
U.S. federal income tax consequences for stockholders who are U.S. persons,
i.e., U.S. citizens or residents or U.S. corporations, partnerships, trusts or
estates, and who are subject to U.S. federal income tax. Investors other than
U.S. persons may be subject to different U.S. tax treatment, including a
non-resident alien U.S. withholding tax at the rate of 30% or at a lower treaty
rate on amounts treated as ordinary dividends from the Fund and, unless an
effective IRS Form W-8BEN or other authorized withholding certificate is on
file, to backup withholding at the rate of 28% on certain other payments from
the Fund. Under the provisions the 2004 Tax Act, dividends paid by the Fund to
non-U.S. stockholders that are derived from short-term capital gains and
qualifying net interest income (including income from original issue discount
and market discount), and that are properly designated by the Fund as
"interest-related dividends" or "short-term capital gain dividends," will
generally not be subject to U.S. withholding tax, provided that the income would
not be subject to federal income tax if earned directly by the non-U.S.
stockholder. In addition, pursuant to the 2004 Tax Act, distributions of the
Fund attributable to gains from sales or exchanges of "U.S. real property
interests" (as defined in the Code and regulations) (including certain U.S. real
property holding corporations) will generally be subject to U.S. withholding tax
and may give rise to an obligation on the part of the non-U.S. stockholder to
file a United States tax return. The provisions contained in the 2004 Tax Act
relating to distributions to stockholders who are non-U.S. persons generally
will apply to distributions with respect to taxable years of the Fund beginning
after December 31, 2004 and before January 1, 2008. Stockholders should consult
their own tax advisers on these matters and on state, local, foreign and other
applicable tax laws.
PERFORMANCE-RELATED, COMPARATIVE AND OTHER INFORMATION
PERFORMANCE-RELATED INFORMATION. From time to time, in advertisements, sales
literature or reports to stockholders, the past performance of the Fund may be
illustrated and/or compared with that of other investment companies with similar
investment objectives. For example, yield or total return of the Fund's shares
may be compared to averages or rankings prepared by Lipper, Inc., a widely
recognized independent service which monitors mutual fund performance; the S&P
500 Index; the Dow Jones Industrial Average; or other comparable indices or
investment vehicles. In addition, the performance of the Fund's shares may be
compared to alternative investment or savings vehicles and/or to indices or
indicators of economic activity, e.g., inflation or interest rates. The Fund may
also include securities industry or comparative performance information
generally and in advertising or materials marketing the Fund's shares.
Performance rankings and listings reported in newspapers or national business
and financial publications, such as Barron's, Business Week, Consumers Digest,
Consumer Reports, Financial World, Forbes, Fortune, Investors Business Daily,
Kiplinger's Personal Finance Magazine, Money Magazine, New York Times, Smart
Money, USA Today, U.S. News and World Report, The Wall Street Journal and Worth,
may also be cited (if the Fund is listed in any such publication) or used for
comparison, as well as performance listings and rankings from various other
sources including Bloomberg Financial Markets, CDA/Wiesenberger, Donoghue's
Mutual Fund Almanac, Ibbotson Associates, Investment Company Data, Inc.,
Johnson's Charts, Kanon Bloch Carre and Co., Lipper, Inc., Micropal, Inc.,
Morningstar, Inc., Schabacker Investment Management and Towers Data Systems,
Inc. In addition, from time to time, quotations from articles from financial
publications such as those listed above may be used in advertisements, in sales
literature or in reports to stockholders of the Fund. The Fund may also present,
from time to time, historical information depicting the value of a hypothetical
account in one or more classes of the Fund since inception.
Past performance is not indicative of future results. At any time in the future,
yields and total return may be higher or lower than past yields and total
return, and there can be no assurance that any historical results will continue.
THE ADVISERS. From time to time, the Advisers may use, in advertisements or
information furnished to present or prospective stockholders, information
regarding the Advisers including, without limitation, information regarding
their investment style, countries of operation, organization, professional
staff, clients (including other registered investment companies), assets under
management and performance record. These materials may refer to opinions or
rankings of the Advisers' overall investment management performance contained in
third-party reports or publications.
FINANCIAL STATEMENTS
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM. The statements of assets and
liabilities, statement of operations, statement of investments, and financial
highlights of the Fund as of November 30, 2006, incorporated by reference into
this Statement of Additional Information, have been audited by Deloitte & Touche
LLP ("Deloitte"), the Fund's independent registered public accounting firm, as
set forth in its report thereon appearing elsewhere herein, and is included in
reliance upon such report given upon the authority of such firm as experts in
accounting and auditing. Deloitte & Touche USA LLP, located at 555 17th Street,
Denver, Colorado, has served as the Fund's independent registered public
accounting firm since July 2006. The Audit Committee of the Board will select
the Fund's independent accountants for the Fund's fiscal year ending November
30, 2007 at the Board's regular quarterly meeting in August 2007. The financial
statements and report of the independent registered public accounting firm
incorporated by reference into this Statement of Additional Information have
been so incorporated and the financial highlights included in the prospectus
have been so included in reliance upon the report of Deloitte given on their
authority as experts in auditing and accounting.
INCORPORATION BY REFERENCE. The Fund's audited Portfolio of Investments and
Statement of Assets and Liabilities dated November 30, 2006; audited Statement
of Operations and Statement of Changes in Net Assets for the year ended November
30, 2006; and report of the independent registered public accounting firm for
the year ended November 30, 2006, are included in the Fund's Annual Report for
the fiscal year ended November 30, 2006, and incorporated herein by reference.
You may request a free copy of this Statement of Additional Information or the
Fund's annual and semi-annual reports, request other information about the Fund,
or make stockholder inquiries by calling (877) 561-7914 or by writing to the
Fund. This Statement of Additional Information and annual and semi-annual
reports are also available free of charge on the Fund's website
(http://www.boulderfunds.net) and on the Securities and Exchange Commission's
website (http://www.sec.gov), which also contains other information about the
Fund. You may also email requests for these documents to publicinfo@sec.gov or
make a request in writing to the Securities and Exchange Commission's Public
Reference Section, Washington, D.C. 20549-0102. The Fund's registration number
under the 1940 Act is 811-02328.
ADDITIONAL INFORMATION
A Registration Statement on Form N-2, including amendments thereto, relating to
the shares offered hereby, has been filed by the Fund with the Securities and
Exchange Commission, Washington, D.C. The prospectus and this Statement of
Additional Information do not contain all of the information set forth in the
Registration Statement, including any exhibits and schedules thereto. For
further information with respect to the Fund and the shares offered hereby,
reference is made to the Registration Statement. Statements contained in the
prospectus and this Statement of Additional Information as to the contents of
any contract or other document referred to are not necessarily complete and in
each instance reference is made to the copy of such contract or other document
filed as an exhibit to the Registration Statement, each such statement being
qualified in all respects by such reference.
APPENDIX A
Boulder Growth & Income Fund, Inc.
Proxy Voting Procedures
The Board of Directors of the Boulder Total Return Fund, Inc. and Boulder
Growth & Income Fund, Inc. (collectively, the "Funds") hereby adopt the
following policies and procedures with respect to voting proxies relating to
portfolio securities held by the Funds (collectively, the "Voting Policies").
1. Policy. It is the policy of each of the Boards of Directors of the Funds
(the "Board") to delegate the responsibility for voting proxies relating to
portfolio securities held by the Funds to Boulder Investment Advisers, L.L.C.
(the "Adviser") as a part of the Adviser's general management of the Funds,
subject to the Board's continuing oversight.(1) The voting of proxies is an
integral part of the investment management services that the Adviser provides
pursuant to the advisory contract. Proxy voting policies and procedures are
required by Rule 206 (4)-6 of the Investment Advisers Act of 1940, and will be
effective August 6, 2003.
2. Fiduciary Duty. The right to vote a proxy with respect to portfolio
securities held by the Funds is a significant asset of the Fund. The Adviser, to
which authority to vote on behalf of the Funds is delegated, exercises this
voting responsibility as a fiduciary, and votes proxies in a manner consistent
with the best interest of the Funds and its shareholders, and with the goal of
maximizing the value of the Funds and the shareholders' investments.
3. Procedures. The following are the procedures adopted by the Board for
the administration of this policy:
a. Review of Adviser Proxy Voting Procedures. The Adviser, with advice
and counsel from the Board, shall present to the Board its policies,
procedures and other guideline for voting proxies at least annually (the
"Voting Guidelines"), and must notify the Board promptly of any material
changes. In accordance with the foregoing, the Adviser has developed the
Voting Guidelines which are attached hereto as Exhibit A.
b. Voting Record Reporting. No less than annually, the Adviser shall
report to the Board a record of each proxy voted with respect to portfolio
securities of the Funds during the respective year. With respect to those
proxies the Adviser has identified as involving a conflict of interest(2),
the Adviser shall submit a separate report indicating the nature of the
conflict of interest and how that conflict was resolved with respect to the
voting of the proxy.
4. Revocation. The delegation by the Board of the authority to vote proxies
relating to portfolio securities of the Funds is entirely voluntary and may be
revoked by the Board, in whole or in part, at any time. This disclosure shall be
included in any registration statement filed on behalf of the Funds after July
1, 2003.
5. Annual Filing. The Fund shall file an annual report of each proxy voted
with respect to portfolio securities of the Funds during the twelve-month period
ended June 30 on Form N-PX not later than August 31 of each year. The Fund must
file the complete proxy voting record on an annual basis on this form. Form N-PX
must contain complete proxy voting records for the 12 month period stated above,
and must be signed on behalf of the Fund by the principal executive officers.
This form must provide the following information:
1. Name of the issuer of the portfolio security
2. Exchange ticker symbol
3. CUSIP #
4. Shareholder meeting date
5. Brief indication of the matter voted on
6. Whether matter was proposed by the issuer or by a security
holder
7. Whether the Fund cast its vote on the matter
8. How the Fund cast its vote
9. Whether the Fund cast its vote for or against management
6. Disclosures.
a. The Fund shall include in any future registration statement:
i. A description of the Voting Policies and the Voting
Guidelines(3); and
ii. A statement disclosing that information regarding how the
Fund voted proxies relating to portfolio securities during the most
recent 12-month period ended June 30 is available without charge, upon
request, by calling the Funds' toll-free telephone number; or through
a specified Internet address; or both; and on the SEC website.(4)
b. The Fund shall include in its Annual and Semi-Annual Reports to
shareholders:
i. A statement disclosing that the Voting Policies and Voting
Guidelines are available without charge, upon request, by calling the
Funds' toll-free telephone number; or through a specified Internet
address; and on the SEC website.(5)
ii. A statement disclosing that information regarding how the
Fund voted proxies relating to portfolio securities during the most
recent 12-month period ended June 30 is available without charge, upon
request, by calling the Fund's toll-free telephone number; or through
a specified Internet address; or both; and on the SEC website.(6)
7. Recordkeeping Requirements. SEC Rule 204-2, as amended, requires
advisers to retain:
1. Proxy voting policies and procedures
2. Proxy statements received regarding client securities
3. Records of votes cast on behalf of clients
4. Records of written client requests
5. Any documents prepared by the adviser material to making a
decision how to vote, or that memorialized the basis for the
decision.
8. Review of Policy. At least annually, the Board shall review this Policy
to determine its sufficiency and shall make and approve any changes that it
deems necessary from time to time.
EXHIBIT A - VOTING GUIDELINES
The Funds' and Advisors' proxy voting principles are summarized below, with
specific examples of voting decisions for the types of proposals that are most
frequently presented:
-------------------------------------------- -----------------------------------------------------------------------
Category Guideline Voting
-------------------------------------------- -----------------------------------------------------------------------
BOARD OF DIRECTOR ISSUES The board of directors' primary role is to
protect the interests of all shareholders.
Key functions of the board are to approve
the direction of corporate strategy, ensure
succession of management and evaluate
performance of the corporation as well as
senior management. The board is accountable
to shareholders, and must operate
independently from management.
---------------------------------- ---------------------------------------------- ----------------------------------
Routine Elections Generally we will vote with management's Generally FOR
recommendation
---------------------------------- ---------------------------------------------- ----------------------------------
Board Classification Generally we are opposed to entrenchment Generally AGAINST
mechanisms and will vote against proposals
to classify a board. We prefer annual
election of directors in order that
shareholders have more power to replace
directors deemed to not be acting in the
shareholders' interest.
---------------------------------- ---------------------------------------------- ----------------------------------
Independence of Directors The majority of board members should be We will generally support boards
independent from the corporation, management that have a majority of board
or a majority shareholder. An independent members classified as
member should not be a former employee of independent.
the company or a
representative of a key supplier to or a key
client of the company.
---------------------------------- ---------------------------------------------- ----------------------------------
Director Indemnification Mandatory indemnification of directors and Generally FOR
officers is
necessary to attract quality candidates.
---------------------------------- ---------------------------------------------- ----------------------------------
Director Attendance Board membership requires a significant We look for attendance records
amount of time in order for responsibilities to be in the 75% participation
to be executed, and attendance at Board and range.
Committee meetings is noted.
---------------------------------- ---------------------------------------------- ----------------------------------
Term Limits We are more concerned with the performance Generally AGAINST but will look
of directors and not with the term limits at on a case-by-case basis.
---------------------------------- ---------------------------------------------- ----------------------------------
Separation of Chair and CEO In most cases it is advisable for there to In most cases we would support a
be a separation between the CEO and the recommendation to separate the
Chair to enhance separation of management Chair from the CEO. Lead
interests and shareholders. directors are considered acceptable,
and in this situation an independent
Corporate Governance committee
must also be in place.
---------------------------------- ---------------------------------------------- ----------------------------------
Committees of the Board Audit, Compensation, Governance and We support the establishment of
Nominating committees are the most these committees, however
significant committees of the board. independent director membership
on these committees is the
primary concern. Two-thirds
independent membership is
satisfactory, provided that
the chair of each committee
is independent.
---------------------------------- ---------------------------------------------- ----------------------------------
Audit Process The members of an audit committee should be We will generally support the
independent directors, and the auditor must choice of auditors recommended
also be independent. The auditor should by the Audit Committee. In the
report directly to the Audit committee and event that the auditor supplies
not to management. other services for a fee other
than the audit, each situation
will be reviewed on a
case-by-case basis.
---------------------------------- ---------------------------------------------- ----------------------------------
VOTING AND ENTRENCHMENT ISSUES
---------------------------------- ---------------------------------------------- ----------------------------------
Shareholder Right to Call Generally FOR
Special Meeting
---------------------------------- ---------------------------------------------- ----------------------------------
Shareholder Right to Act by Generally FOR
Written Consent
---------------------------------- ---------------------------------------------- ----------------------------------
---------------------------------- ---------------------------------------------- ----------------------------------
Cumulative Voting Our experience has been that cumulative Generally AGAINST, although we
voting is generally proposed by large may consider if the board has
shareholders who may wish to exert undue been unresponsive to
influence on the board. shareholders.
---------------------------------- ---------------------------------------------- ----------------------------------
Confidentiality of Like any other electoral system, the voting We will support any proposals to
Shareholder Voting at annual and special meetings should be introduce or maintain
confidential and free from any potential confidential voting.
coercion and/or impropriety.
---------------------------------- ---------------------------------------------- ----------------------------------
Size of Board of Directors Generally boards should be comprised of a The independence of the board is
minimum of seven to a maximum of fifteen. a greater concern than the
However the complexity of the company has an number of members. However
impact on required board size. should a change in board size be
proposed as potentially an
anti-takeover measure we would
vote against.
---------------------------------- ---------------------------------------------- ----------------------------------
COMPENSATION ISSUES
---------------------------------- ---------------------------------------------- ----------------------------------
Director Compensation Directors should be compensated fairly for We support recommendations where
the time and expertise they devote on behalf a portion of the remuneration is
of shareholders. We favor directors to be in the form of common
personally owning shares in the corporation, stock. We do not support options
and that they receive a substantialportion for directors, and do not
of their remuneration in the form of shares. support retirement bonuses or
benefits for directors.
---------------------------------- ---------------------------------------------- ----------------------------------
MANAGEMENT COMPENSATION Compensation plans for executives should be Executive compensation will be
designed to attract and retain the right considered on a case-by-case
people with exceptional skills to manage the basis.
company successfully long-term. These plans
should be competitive within the company's
respective industry without being excessive
and should attempt to align the executive's
interests with the long-term interest of
shareholders.
---------------------------------- ---------------------------------------------- ----------------------------------
Stock Options and Incentive Compensation plans should be designed to We will not support plans with
Compensation Plans reward good performance of executives. They options priced below current
should also encourage management to own market value or the lowering of
stock so as to align their financial the exercise price on any
interests with those of the shareholders. It previously granted options. We
is important that these plans are disclosed will not support any plan to
the shareholders in detail for their amendment that is not capped or
approval. that results in anything but negligible
dilution. We believe that shareholders
should have a say in all aspects of
option plans and therefore will not
support omnibus stock option plans
or plans where the Board is given
discretion to set the terms. Plans
will be considered on a case-by-case
basis.
---------------------------------- ---------------------------------------------- ----------------------------------
Adopt/Amend Employee Stock Considered on a case-by-case
Purchase Plans basis.
---------------------------------- ---------------------------------------------- ----------------------------------
Golden Parachutes Although we believe that "golden parachutes" Generally opposed but will
may be a good way to attract, retain and consider on a case-by-case basis.
encourage objectivity of qualified
executives by providing financial security
in the case of a change in the structure or
control of a company, golden parachutes can
be excessive.
---------------------------------- ---------------------------------------------- ----------------------------------
Require Shareholder Generally FOR
Approval of Golden
Parachutes
---------------------------------- ---------------------------------------------- ----------------------------------
TAKEOVER PROTECTIONS Some companies adopt shareholder rights We will review each situation on
plans that incorporate anti-takeover a case-by-case basis. We will
measures, which may include: poison pills, generally support proposals that
crown jewel defense, payment of greenmail, protect the rights and share
going private transactions, leveraged value of shareholders.
buyouts, lock-up arrangements, Fair price
amendments, Re-incorporation. Rights plans
should be designed to ensure that all
shareholders are treated equally in the
event there is a change in control of a
company. These plans should also provide the
Board with sufficient time to ensure that
the appropriate course of action is chosen
to ensure shareholder interests have been
protected. However, many shareholder rights
plans can be used to prevent bids that might
in fact be in the shareholders best
interests. Depending on their contents,
these plans may also adversely influence
current share prices and long-term
shareholder value.
---------------------------------- ---------------------------------------------- ----------------------------------
---------------------------------- ---------------------------------------------- ----------------------------------
Dual Class Shares It is not unusual for certain classes of Generally AGAINST.
shares to have more than one vote per share.
This is referred to as a dual class share
structure and can result in a minority of
shareholders having the ability to make
decisions that may not be in the best
interests of the majority of shareholders.
---------------------------------- ---------------------------------------------- ----------------------------------
Super-Majority Voting Super-majority voting (e.g., 67% of votes Generally AGAINST. We will
Provisions cast or a majority of outstanding shares), generally oppose proposals for
although fairly common, can, from a voting requirements that are
practical point of view, be difficult to greater than a majority of votes
obtain, and essentially are a bar from cast. That said, we will review
effective challenges to entrenched supermajority proposals on a
management, regardless of performance or case-by-case basis.
popularity. A very high requirement can be
unwieldy and therefore not in the best
interest of the majority of shareholders.
---------------------------------- ---------------------------------------------- ----------------------------------
Issuance of Authorized Generally FOR
Shares
---------------------------------- ---------------------------------------------- ----------------------------------
Issuance of Unlimited or Corporations may increase their authorized Generally AGAINST. We will
Additional Shares number of shares in order to implement a generally oppose proposals to
stock split, to support an acquisition or increase the number of
restructuring plan, to use in a stock option authorized shares to
plan or to implement an anti-takeover plan. "unlimited", but will consider
Shareholders should approve of the specific any proposals to increase the
business need for the increase in the number number of authorized shares on a
of shares and should understand that the case-by-case basis for a valid
issuance of new shares can have a business purpose.
significant effect on the value of existing
shares.
---------------------------------- ---------------------------------------------- ----------------------------------
Shareholder Proposals Shareholders should have the opportunity to Shareholder proposals will be
raise their concerns or issues to company reviewed on a case-by-case basis.
management, the board and other
shareholders. As long as these proposals
deal with appropriate issues and are not for
the purposes of airing personal grievances
or to obtain publicity, they should be
included on the proxy ballot for
consideration.
---------------------------------- ---------------------------------------------- ----------------------------------
OTHER MATTERS
---------------------------------- ---------------------------------------------- ----------------------------------
Stock Repurchase Plans Generally FOR
---------------------------------- ---------------------------------------------- ----------------------------------
Stock Splits Generally FOR
---------------------------------- ---------------------------------------------- ----------------------------------
Require Shareholder Generally FOR
Approval to issue Preferred
Stock
---------------------------------- ---------------------------------------------- ----------------------------------
Corporate Loans to Employees Corporate loans, or the guaranteeing of Generally AGAINST.
loans, to
enable employees to purchase company stock or
options should be avoided. These types of
loans can be risky if the company stock
declines or the employee is terminated.
---------------------------------- ---------------------------------------------- ----------------------------------
Blank-cheque Preferred The authorization of blank-cheque preferred Generally AGAINST.
Shares shares gives the board of directors'
complete discretion to fix voting, dividend,
conversion and other rights and privileges.
Once these shares have been authorized, the
shareholders have no authority to determine
how or when they will be allocated. There
may be valid business reasons for the
issuance of these shares but the potential
for abuse outweighs the benefits.
---------------------------------- ---------------------------------------------- ----------------------------------
FOOTNOTES:
(1) This policy is adopted for the purpose of the disclosure requirements
adopted by the Securities and Exchange Commission, Releases No. 33-8188,
34-47304, IC-25922.
(2) As it is used in this document, the term "conflict of interest" refers to a
situation in which the Adviser or affiliated persons of the adviser have a
financial interest in a matter presented by a proxy other than the
obligation it incurs as investment adviser to the Funds which compromises
the Adviser's independence of judgment and action with respect to the
voting of the proxy.
(3) This disclosure shall be included in the registration statement next filed
on behalf of the Funds after July 1, 2003.
(4) This disclosure shall be included in the registration statement next filed
on behalf of the Funds after August 31, 2004.
(5) This disclosure shall be included in the report next filed on behalf of the
Funds after July 1, 2003.
(6) This disclosure shall be included in the report next filed on behalf of the
Funds after August 31, 2004.