AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 24, 2005
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SECURITIES ACT FILE NO. ____ /INVESTMENT COMPANY ACT FILE NO. 811-04700
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-14
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
Pre-Effective Amendment No. ____________
Post-Effective Amendment No. ____________
THE GABELLI EQUITY TRUST INC.
(Exact Name of Registrant as Specified in Charter)
ONE CORPORATE CENTER, RYE, NEW YORK 10580-1422
(Address of Principal Executive Offices:
Number, Street, City, State, Zip Code)
(914) 921-5070
(Registrant's Area Code and Telephone Number)
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BRUCE N. ALPERT
THE GABELLI EQUITY TRUST INC.
ONE CORPORATE CENTER
RYE, NEW YORK 10580-1422
(Name and Address of Agent for Service)
WITH COPIES TO:
DANIEL SCHLOENDORN, ESQ. MICHAEL K. HOFFMAN, ESQ.
WILLKIE FARR & GALLAGHER LLP SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP
787 SEVENTH AVENUE FOUR TIMES SQUARE
NEW YORK, NEW YORK 10019 NEW YORK, NEW YORK 10036
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING: As soon as practicable after
this Registration Statement becomes effective.
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
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PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF SECURITIES AMOUNT BEING OFFERING PRICE AGGREGATE REGISTRATION
BEING REGISTERED REGISTERED PER UNIT(1) OFFERING PRICE(1) FEE(2)
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Common Stock ($0.001 par value)... 1,675,042 shares $8.955 $15,000,000 $1,765.50
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(1) Estimated solely for purposes of calculating the registration fee in
accordance with Rule 457(f) under the Securities Act of 1933, as amended,
based on the average of the high and low prices of Gabelli Equity Trust
Common Stock reported on the New York Stock Exchange on June 14, 2005.
(2) $1,765.50 was wired to the Securities and Exchange Commission's account at
Mellon Bank in Pittsburgh, Pennsylvania in payment of the required
registration fee due in connection with this registration statement.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY THE EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THE REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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THE GABELLI EQUITY TRUST INC.
CONTENTS OF REGISTRATION STATEMENT
This Registration Statement contains the following papers and documents:
- Cover Sheet
- Contents of Registration Statement
- Notice of Special Meeting of Shareholders of Sterling Capital Corporation
- Part A -- Proxy Statement/Prospectus
- Part B -- Statement of Additional Information
- Part C -- Other Information
- Signature Page
- Exhibits
PART A
INFORMATION REQUIRED IN THE PROXY STATEMENT/PROSPECTUS
STERLING CAPITAL CORPORATION
635 MADISON AVENUE
NEW YORK, NEW YORK 10022
(212) 980-3360
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON ________, 2005
To the Shareholders of
Sterling Capital Corporation:
Notice is hereby given that a special meeting (the "Special Meeting") of
shareholders of Sterling Capital Corporation, a New York corporation ("Sterling
Capital"), is scheduled to be held at __:____ [a.m.]/[p.m.], Eastern time, on
__________ , 2005, at [location TBD], for the following purposes:
1. To approve an Agreement and Plan of Reorganization providing for
the transfer of all or substantially all of the assets (other than a
reserve of $250,000 in cash set aside to pay Sterling Capital's known and
contingent expenses in connection with its dissolution and liquidation) of
Sterling Capital to The Gabelli Equity Trust Inc. (the "Equity Trust") in
exchange solely for full shares of common stock of the Equity Trust and
cash in lieu of fractional shares of common stock of the Equity Trust, the
assumption by the Equity Trust of the Stated Liabilities (as defined
herein) of Sterling Capital and the distribution of shares of common stock
of the Equity Trust to the shareholders of Sterling Capital, followed by
the termination, dissolution and complete liquidation of Sterling Capital;
and
2. To transact such other business as may properly come before the
Special Meeting or any adjournments thereof.
The enclosed Proxy Statement/Prospectus, which you should retain for future
reference, sets forth concisely information about the proposed reorganization
that you should know before voting.
The Board of Directors has fixed the close of business on __________ ,
2005 as the record date for the determination of shareholders entitled to notice
of and to vote at the Special Meeting, and only shareholders of record on such
date are entitled to so vote.
Please execute and return the enclosed Proxy promptly in the enclosed
envelope, whether or not you intend to be present at the Special Meeting. If you
can attend and vote in person, you are invited to do so; but if not, you are
urged to submit the enclosed Proxy with your vote marked thereon. You may revoke
your Proxy at any time before it is voted. No postage is required if the Proxy
is mailed in the United States.
By Order of the Board of Directors,
Michael Carey
Vice President,
Secretary and Treasurer
New York, New York
__________ , 2005
THE INFORMATION IN THIS PROXY STATEMENT/PROSPECTUS IS NOT COMPLETE AND MAY BE
CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION IS
EFFECTIVE. THIS PROXY STATEMENT/PROSPECTUS IS NOT AN OFFER TO SELL THESE
SECURITIES AND IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE
WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION -- DATED JUNE 22, 2005
Acquisition of the Assets of
STERLING CAPITAL CORPORATION
635 Madison Avenue
New York, New York 10022
(212) 980-3360
By
THE GABELLI EQUITY TRUST INC.
One Corporate Center
Rye, New York 10580
(914) 921-5070
PROXY STATEMENT/PROSPECTUS
This Proxy Statement/Prospectus is being furnished to shareholders of
Sterling Capital Corporation ("Sterling Capital") for use at the Special Meeting
of Shareholders of Sterling Capital to be held on ________, 2005 at __:__
[a.m.][p.m.], Eastern time, and at any and all postponements or adjournments
thereof (the "Special Meeting"). The Special Meeting will be held at [location
TBD]. The approximate mailing date of this Proxy Statement/Prospectus is
________, 2005.
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED
THESE SECURITIES NOR PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROXY
STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROXY STATEMENT/ PROSPECTUS
AND IN THE MATERIALS EXPRESSLY INCORPORATED HEREIN BY REFERENCE AND, IF GIVEN OR
MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY STERLING CAPITAL OR THE GABELLI EQUITY TRUST INC.
Purpose of the Special Meeting. At the Special Meeting, shareholders of
Sterling Capital will be asked to approve an Agreement and Plan of
Reorganization dated as of May 23, 2005 ( the "Agreement") providing for (a) the
transfer of all or substantially all of the assets of Sterling Capital (other
than a reserve of $250,000 in cash set aside to pay Sterling Capital's known and
contingent expenses in connection with its dissolution and liquidation, referred
to herein as the "Reserve") to The Gabelli Equity Trust Inc. (the "Equity
Trust") in exchange solely for shares of Equity Trust common stock (the "Equity
Trust Common Stock") and cash in lieu of fractional shares of Equity Trust
Common Stock, (b) the assumption by the Equity Trust of the Stated Liabilities
(as defined herein) of Sterling Capital, and (c) the distribution of Equity
Trust Common Stock to the Sterling Capital shareholders, followed by the
termination, dissolution and complete liquidation of Sterling Capital (the
"Reorganization").
If approved by shareholders of Sterling Capital at the Special Meeting, and
as a result of the Reorganization, each Sterling Capital shareholder will become
a stockholder of the Equity Trust and will receive that number of shares of
Equity Trust Common Stock (plus cash in lieu of fractional shares) having an
aggregate net asset value equal to the aggregate net asset value of such
shareholder's shares of common stock of Sterling Capital (the "Sterling Capital
Shares") as of the close of business on the closing date of the Reorganization;
provided, however, that if the average closing price of Equity Trust Common
Stock on the
New York Stock Exchange (the "NYSE") for the 20 business days prior to the date
of the Reorganization exceeds the net asset value per share of Equity Trust
Common Stock on the date of the Reorganization, the number of shares of Equity
Trust Common Stock to be issued to Sterling Capital shall be computed by
dividing (i) the aggregate value of Sterling Capital's assets, net of Sterling
Capital's Stated Liabilities (as defined herein) and the Reserve by (ii) the
lower of (x) the average of such closing prices for the 20 business days prior
to the date of the Reorganization and (y) 103% of the net asset value per share
of Equity Trust Common Stock computed on the date of the Reorganization (the
"Alternative Value"). [Because shares of Equity Trust Common Stock recently have
been trading at a premium to its net asset value, if the Reorganization had been
effected on March 31, 2005, the number of shares of Equity Trust Common Stock to
be distributed to Sterling Capital shareholders would have been calculated
according to the Alternative Value. However, there can be no guarantee that
Equity Trust Common Stock will continue to trade at a premium or will be trading
at a premium on the date of the Reorganization.]
Sterling Capital shareholders will not receive any fractional shares of
Equity Trust Common Stock as part of the Reorganization. In lieu thereof,
Sterling Capital will receive from the Equity Trust for distribution to its
shareholders cash in an amount equal to the aggregate net asset value of the
fractional shares of Equity Trust Common Stock otherwise distributable to
Sterling Capital shareholders. The cash to be distributed in lieu of fractional
shares will be calculated on the same basis as the formula to be used to
calculate the number of full shares.
It is expected that Sterling Capital shareholders will recognize no gain or
loss for federal income tax purposes as a result of the Reorganization, except
with respect to any cash proceeds distributed in lieu of fractional shares of
Equity Trust Common Stock. Sterling Capital shareholders will be treated for
federal income tax purposes as if they received fractional share interests and
then sold such interests for cash.
Information About the Equity Trust and Sterling Capital. The Equity Trust
and Sterling Capital are closed-end management investment companies with similar
investment objectives. The Equity Trust has a primary investment objective of
long-term growth of capital and a secondary investment objective of income. The
Equity Trust invests primarily in equity securities, including common stock,
preferred stock, convertible or exchangeable securities and warrants and rights
to purchase such securities. Sterling Capital's investment objective is
long-term capital growth. Sterling Capital pursues this objective by generally
investing directly or indirectly in equity securities which it believes to offer
attractive investment opportunities.
The Equity Trust is non-diversified for purposes of the Investment Company
Act of 1940 (the "1940 Act"), which means it is not limited by the 1940 Act in
the proportion of its assets that may be invested in securities of a single
issuer, and accordingly, an investment in the Equity Trust may, under certain
circumstances, present greater risk to an investor than an investment in a
diversified company. The Equity Trust is required to comply with the
diversification standards of the Internal Revenue Code of 1986, as amended (the
"Code") applicable to regulated investment companies, under which, with respect
to 50% of its assets, it may not invest more than 5% of its assets in the
securities of a single issuer. As a diversified investment company under the
1940 Act, Sterling Capital is subject to this limitation with respect to 75% of
its assets.
Unlike Sterling Capital, which has only common shares outstanding, the
Equity Trust has issued several series of preferred stock in addition to its
Common Stock, which presents the risks of leverage. The use of leverage
generally increases the volatility of returns to the Equity Trust. Also, if the
Equity Trust is utilizing leverage, a decline in net asset value could affect
the ability of the Equity Trust to make dividend payments on its Common Stock.
Under the Equity Trust's charter and the 1940 Act, holders of its outstanding
preferred stock, voting as a separate class, are entitled to elect two Directors
of the Equity Trust, and holders of its outstanding Common Stock and preferred
stock, voting as a single class, are entitled to elect the remaining Directors,
subject to the provisions of the 1940 Act and the Equity Trust's charter and
by-laws. The holders of the Equity Trust's outstanding preferred stock would be
entitled to elect the minimum number of additional Directors that would
represent a majority of the Directors in the event that dividends on its
preferred stock are in arrears for two full years. No dividend arrearages exist
at this time.
The terms and conditions of the Reorganization are more fully described in
this Proxy Statement/ Prospectus and in the Agreement, a copy of which is
attached as Exhibit A.
This Proxy Statement/Prospectus serves as a prospectus for shares of Equity
Trust Common Stock under the Securities Act of 1933, as amended (the "Securities
Act"), in connection with the issuance of shares of Equity Trust Common Stock in
the Reorganization.
You should retain this Proxy Statement/Prospectus for future reference as
it sets forth concisely information about the Equity Trust and Sterling Capital
that you should know before voting on the proposal described below.
A Statement of Additional Information, which is referred to in this Proxy
Statement/Prospectus as the "SAI," dated ________, 2005, and which contains
additional information about the Reorganization and the Equity Trust, has been
filed with the Securities and Exchange Commission (the "SEC"). The SAI is
incorporated by reference into this Proxy Statement/Prospectus. Copies of the
SAI are available upon request, without charge, by calling [800-GABELLI
(800-422-3554)]. You may also submit your request in writing to The Gabelli
Funds, One Corporate Center, Rye, NY 10580-1422. If you should have any
questions regarding the proxy material or how to execute your vote, you can call
[NAME AND PHONE NUMBER OF CONTACT]. Sterling Capital has provided the
information included in this Proxy Statement/Prospectus relating to it. The
Equity Trust has provided the information included in this Proxy
Statement/Prospectus relating to it.
The date of this Proxy Statement/Prospectus is ________, 2005
TABLE OF CONTENTS
PAGE
----
PROPOSAL 1: APPROVAL OF THE AGREEMENT AND PLAN OF
REORGANIZATION............................................ 2
SYNOPSIS.................................................... 2
EXPENSE TABLE............................................... 6
FINANCIAL HIGHLIGHTS........................................ 7
COMPARISON OF INVESTMENT OBJECTIVES AND POLICIES............ 11
RISK FACTORS AND SPECIAL CONSIDERATIONS..................... 18
UNITED STATES FEDERAL INCOME TAXES.......................... 22
INFORMATION ABOUT THE REORGANIZATION........................ 24
ADDITIONAL INFORMATION ABOUT THE FUNDS...................... 29
COMPARISON OF ORGANIZATIONAL STRUCTURE OF THE EQUITY TRUST
AND STERLING CAPITAL...................................... 35
MANAGEMENT OF THE FUNDS..................................... 38
REQUIRED VOTE............................................... 47
LEGAL PROCEEDINGS........................................... 47
LEGAL OPINIONS.............................................. 48
ADDITIONAL INFORMATION...................................... 48
AGREEMENT AND PLAN OF REORGANIZATION........................ A-1
(i)
GENERAL
This Proxy Statement/Prospectus is furnished to the shareholders of
Sterling Capital in connection with the solicitation of proxies on behalf of the
Board of Directors of Sterling Capital for use at the Special Meeting. The
mailing address for Sterling Capital is 635 Madison Avenue, 18th Floor, New
York, New York, 10022. The mailing address for the Equity Trust is One Corporate
Center, Rye, New York 10580.
This Proxy Statement/Prospectus, the Notice of Special Meeting of
Shareholders and the proxy card(s) are first being mailed to shareholders on or
about ________, 2005 or as soon as practicable thereafter. Any shareholder who
gives a proxy has the power to revoke the proxy either:
- by mail, addressed to the Secretary of Sterling Capital, at Sterling
Capital's mailing address above, or
- in person at the Special Meeting by executing a superseding proxy or by
submitting a notice of revocation to Sterling Capital.
All properly executed proxies received in time for the Special Meeting will
be voted as specified in the proxy or, if no specification is made, in favor of
the proposal referred to in the Proxy Statement/Prospectus, and in accordance
with the judgment of the persons named as proxies on other matters that may
properly come before the Special Meeting.
Shareholders of Sterling Capital will be asked to vote on a proposal to
approve the Agreement, which provides for the transfer of all or substantially
all of the assets (other than the Reserve, as defined herein) of Sterling
Capital in exchange solely for full shares of Equity Trust Common Stock and cash
in lieu of fractional shares of Equity Trust Common Stock.
The presence, either in person or by proxy, of the holders of one-third of
the total number of outstanding shares of common stock entitled to vote at a
meeting of Sterling Capital will constitute a quorum for the transaction of
business by Sterling Capital. For purposes of determining the presence of a
quorum for transacting business at a meeting, abstentions and broker "non-votes"
will be treated as shares that are present. Broker non-votes are proxies
received by Sterling Capital from brokers or nominees, indicating that the
broker or nominee has neither received instructions from the beneficial owner or
other persons entitled to vote nor has the discretionary power to vote on a
particular matter. Abstentions and broker non-votes will have the effect of a
"no" vote for Proposal 1. Therefore, shareholders are urged to forward their
voting instructions promptly.
Proxy solicitations will be made primarily by mail, but solicitations may
also be made by telephone, telegraph, or personal interviews conducted by
directors, officers or employees of Sterling Capital, [the Equity Trust], or
[Gabelli Funds, LLC, the Equity Trust's investment adviser ("Gabelli Funds")].
Each of Sterling Capital and the Equity Trust will pay its own expenses incurred
in connection with the Reorganization, except that each of Sterling Capital and
Gabelli Funds will pay 50% of the reasonable and documented expenses of printing
and mailing proxy statements and proxy cards to Sterling Capital shareholders.
See "Synopsis -- Expenses of the Reorganization."
Only shareholders of record of Sterling Capital at the close of business on
________, 2005 (the "Record Date") are entitled to vote. Each outstanding share
of Sterling Capital is entitled to one vote on all matters voted upon at the
Special Meeting. As of ________, 2005, there were [________] shares of common
stock of Sterling Capital outstanding.
Each of Sterling Capital and the Equity Trust provides periodic reports to
its shareholders. These reports highlight relevant information, including
investment results and a list of portfolio holdings for each entity. Sterling
Capital and the Equity Trust have previously furnished their respective annual
reports containing audited financial statements for the year ended December 31,
2004. You may receive a copy of the most recent annual report for Sterling
Capital or the Equity Trust and a copy of any more recent interim report,
without charge, by calling ________ and 800-GABELLI (800-422-3554) for Sterling
Capital's and the Equity Trust's reports, respectively. These requests will be
honored within three business days of receipt.
1
The Board of Directors of Sterling Capital knows of no business other than
the proposal described above which will be presented for consideration at the
Special Meeting. If any other matter is properly presented, it is the intention
of the persons named in the enclosed proxy to vote on that matter in their
discretion.
PROPOSAL 1: APPROVAL OF THE AGREEMENT AND PLAN OF REORGANIZATION
The Board of Directors of Sterling Capital, including a majority of the
Directors of Sterling Capital who are not "interested persons" of Sterling
Capital (the "Non-Interested Directors"), at meetings held on October 5, 2004
and March 28, April 25 and May 16, 2005:
- determined that the proposed Reorganization is in the best interests of
Sterling Capital and its shareholders,
- approved the Agreement, and
- recommended that the Agreement be approved by the shareholders of
Sterling Capital.
For more information about the Reorganization, see "Information About the
Reorganization."
The Agreement is subject to the approval of the shareholders of Sterling
Capital and the satisfaction or waiver of certain other conditions.
A copy of the Agreement is attached to this Proxy Statement/Prospectus as
Exhibit A, and the description of the Agreement included in this
Prospectus/Proxy Statement is qualified in its entirety by reference to Exhibit
A.
The following provides a more detailed discussion about the proposed
Reorganization, Sterling Capital and the Equity Trust and additional information
that you may find helpful in deciding how to vote on the Agreement.
SYNOPSIS
This summary highlights important information included in this Proxy
Statement/Prospectus. This summary is qualified by reference to the more
complete information included elsewhere in this Proxy Statement/Prospectus and
the Agreement. Shareholders of Sterling Capital should read this entire Proxy
Statement/Prospectus carefully.
The Proposed Reorganization. Each of the Boards of Directors of the Equity
Trust and Sterling Capital, including a majority of the Non-interested Directors
of each Fund, have approved the Agreement. The Agreement provides for a
reorganization of Sterling Capital whereby the Equity Trust will acquire all or
substantially all of the assets of Sterling Capital, other than the Reserve, and
assume all of the accrued and unpaid liabilities of Sterling Capital set forth
in Sterling Capital's statement of assets and liabilities (the "Stated
Liabilities"), solely in exchange for full shares of Equity Trust Common Stock
and cash in lieu of fractional shares of Equity Trust Common Stock. The full
shares of Equity Trust Common Stock and cash in lieu of fractional shares will
be distributed by Sterling Capital to its shareholders in liquidation of
Sterling Capital and Sterling Capital will subsequently dissolve. If approved by
the shareholders of Sterling Capital, the Reorganization is expected to be
consummated promptly after the Meeting.
If the Reorganization is approved by shareholders of Sterling Capital, as a
result of the Reorganization each shareholder of Sterling Capital will become an
Equity Trust stockholder and will receive, on the date of the Reorganization,
that number of full shares of Equity Trust Common Stock (plus cash in lieu of
fractional shares) having an aggregate net asset value equal to the aggregate
net asset value of such shareholder's shares of common stock of Sterling Capital
as of the close of business on the date of the Reorganization. However, if the
average closing price of Equity Trust Common Stock on the NYSE for the 20
business days prior to the date of the Reorganization exceeds the net asset
value per share of Equity Trust Common Stock on the date of the Reorganization,
the number of shares of Equity Trust Common Stock to be issued to Sterling
Capital shall be computed by dividing (i) the aggregate value of Sterling
Capital's assets, net of Sterling Capital's Stated
2
Liabilities and the Reserve on the date of the Reorganization by (ii) the lower
of (x) the average of such closing prices for the 20 business days prior to the
date of the Reorganization and (y) 103% of the net asset value per share of
Equity Trust Common Stock computed on the date of the Reorganization (the
"Alternative Value"). As of March 31, 2005, the closing price of Equity Trust
Common Stock on the NYSE was $9.00, which represents a premium of 7.14% to its
net asset value per share of $8.40 on such date. [Equity Trust Common Stock has
generally traded at a premium to its net asset value for [period]. If the
Reorganization had been effected on March 31, 2005, the number of shares of
Equity Trust Common Stock to be distributed to Sterling Capital shareholders
would have been calculated according to the Alternative Value. However, there
can be no guarantee that Equity Trust Common Stock will continue to trade at a
premium or will be trading at a premium on the date of the Reorganization.] The
cash to be distributed in lieu of fractional shares will be calculated on the
same basis as the formula to be used to calculate the number of full shares. The
Reorganization will be effective five business days after each of the conditions
to the Reorganization has been satisfied or at such other time and date as fixed
by the mutual consent of the parties (the "Effective Date").
The Board of Directors of Sterling Capital recommends approval of the
Reorganization. If the Reorganization is not approved, Sterling Capital will
continue as a separate investment company, and the Board of Directors of
Sterling Capital will consider such other alternatives it determines to be in
the best interests of its shareholders.
Form of Organization. Both Funds are closed-end management investment
companies registered under the 1940 Act. The Equity Trust was organized as a
Maryland corporation on May 20, 1986, and Sterling Capital was organized as a
New York corporation on August 4, 1967. The business and affairs of the Funds
are managed under the direction of their respective Boards of Directors. The
Equity Trust is managed by Gabelli Funds, LLC ("Gabelli Funds"), its investment
adviser. Sterling Capital operates as an internally managed investment company
whereby its own officers and employees, under the general supervision of its
Board of Directors, conduct its operations. Equity Trust Common Stock trades on
the NYSE under the symbol "GAB." Sterling Capital's common stock trades on the
American Stock Exchange (the "AMEX") under the symbol "SPR."
The Equity Trust is non-diversified for purposes of the 1940 Act, which
means it is not limited by the 1940 Act in the proportion of its assets that may
be invested in securities of a single issuer, and accordingly, an investment in
the Equity Trust may, under certain circumstances, present greater risk to an
investor than an investment in a diversified company. The Equity Trust is
required to comply with the diversification standards of the Code applicable to
regulated investment companies, under which, with respect to 50% of its assets,
it may not invest more than 5% of its assets in the securities of a single
issuer. As a diversified investment company under the 1940 Act, Sterling Capital
is subject to this limitation with respect to 75% of its assets.
INVESTMENT OBJECTIVES AND POLICIES
The Equity Trust. The Equity Trust's primary investment objective is to
achieve long-term growth of capital by investing primarily in a portfolio of
equity securities consisting of common stock, preferred stock, convertible or
exchangeable securities and warrants and rights to purchase such securities
selected by Gabelli Funds. Income is the secondary investment objective. The
Equity Trust's investment objectives may be changed only by vote of a majority
of its outstanding voting securities, as defined in the 1940 Act, and by a
majority, as defined in the 1940 Act, of its outstanding preferred stock, voting
separately as a single class. The Equity Trust invests primarily in equity
securities, including common stock, preferred stock, convertible or exchangeable
securities and warrants and rights to purchase such securities.
Sterling Capital. Sterling Capital's investment objective is long-term
capital growth. Sterling Capital's investment objective can be changed with the
approval of a majority of its directors. Sterling Capital pursues its investment
objective by generally investing directly or indirectly in equity securities
which it believes to offer attractive investment opportunities.
3
INVESTMENT ADVISER AND FEE INFORMATION
Sterling Capital. Sterling Capital operates as an internally managed
investment company whereby its own officers and employees, under the general
supervision of its Board of Directors, conduct its operations. For the fiscal
year ended December 31, 2004, Sterling Capital's total expense ratio (the ratio
of total annual operating expenses to average net assets, net of fee waivers (if
any) and including taxes) was 2.6%.
The Equity Trust. Gabelli Funds, located at One Corporate Center, Rye, New
York 10580-1422, serves as the investment adviser to the Equity Trust. Gabelli
Funds provides a continuous investment program for the Equity Trust's portfolio
and oversees the administration of all aspects of the Equity Trust's business
and affairs. For its services, Gabelli Funds receives an annual fee, calculated
daily and paid monthly, equal to 1.00% of the Equity Trust's average weekly net
assets plus the liquidation value of its outstanding preferred stock. Gabelli
Funds has agreed to reduce the management fee on the incremental assets
attributable to the cumulative preferred stock if the total return of the net
asset value of Equity Trust Common Stock, including distributions and advisory
fee subject to reduction, does not exceed the stated dividend rate or
corresponding swap rate of the preferred stock. For the year ended December 31,
2004, the Equity Trust's total return on the net asset value of its Common Stock
exceeded the stated dividend rate or corresponding swap rate of all outstanding
preferred stock, so management fees were accrued on those assets. For the year
ended December 31, 2004, Gabelli Funds earned $15,167,775 for advisory services.
PFPC Inc. ("PFPC"), located at 760 Moore Road, King of Prussia,
Pennsylvania 19406, serves as the Equity Trust's sub-administrator. For these
services and the related expenses borne by PFPC, Gabelli Funds (not the Equity
Trust) pays a prorated monthly fee at the annual rate of .0275% of the first $10
billion of the aggregate average net assets of the Equity Trust and all other
funds advised by Gabelli Funds and administered by PFPC, .0125% of the aggregate
average net assets exceeding $10 billion and .01% of the aggregate average net
assets in excess of $15 billion.
For the fiscal year ended December 31, 2004, the Equity Trust's total
expense ratio to average net assets attributable to Common Stock was 1.57%, and
is currently 1.18% on an annualized basis based on an estimate of operating
expenses for the first three months of fiscal year 2005. The difference between
the total expense ratio for the 2004 fiscal year and the estimate for the first
three months of fiscal 2005 is that the expense ratio for the 2004 fiscal year
includes the advisory fee accrued on assets attributable to the Equity Trust's
outstanding shares of preferred stock, while the ratio for the 2005 fiscal
period does not. Gabelli Funds has agreed to reduce the management fee on the
incremental assets attributable to the preferred stock if the total return of
the net asset value of the Equity Trust Common Stock, including distributions
and the advisory fee subject to reduction, does not exceed the stated dividend
rate or corresponding swap rate of the preferred stock. The Equity Trust's total
return on the net asset value of its Common Stock is monitored on a monthly
basis to assess whether the total return on the net asset value of the Common
Stock exceeds the stated dividend rate of the preferred stock for the period.
That determination and the accrual of the advisory fee is made at the end of the
fiscal year.
The expense ratio of the Equity Trust, assuming the Reorganization was
consummated on [date], is projected to be approximately 1.20% after giving
effect to the Reorganization. The actual expense ratios for the Equity Trust for
the current and future fiscal years, if the Reorganization occurs, may be higher
or lower than this projection and depend upon the Equity Trust's performance,
general stock market and economic conditions, net asset levels, stock price and
other factors.
See "Expense Table" below for the current expenses of each Fund and pro
forma expenses following the Reorganization.
Federal Income Tax Consequences of the Reorganization. The Reorganization
is intended to qualify as a tax-free reorganization within the meaning of
Section 368(a)(1) of the Code. Accordingly, it is expected that none of Sterling
Capital, the Equity Trust or the shareholders of either Fund will recognize any
gain or loss for U.S. federal income tax purposes as a result of the
Reorganization, except with respect to cash received in lieu of fractional
shares of Equity Trust Common Stock by shareholders of Sterling Capital. For
4
more information about the tax consequences of the Reorganization, see
"Information About the Reorganization -- Tax Considerations."
Discount from Net Asset Value. Shares of closed-end funds frequently trade
at a market price that is less than the value of the shares' net assets. The
possibility that shares of the Equity Trust will trade at a discount from its
net asset value is a risk separate and distinct from the risk that the Equity
Trust's net asset value will decrease. As of December 31, 2004, shares of
Sterling Capital traded at a price of $5.70, representing a discount of 24% to
its net asset value of $7.47. The Equity Trust's shares have traded in the
market for periods of time above and below net asset value, and recently have
traded generally at a premium. As of December 31, 2004, Equity Trust Common
Stock traded at a price of $9.02, representing a premium of 3.8% to its net
asset value of $8.69. As of March 31, 2005, shares of Sterling Capital traded at
a price of $5.75, representing a discount of 20% to its net asset value of
$7.19. As of the same date, Equity Trust Common Stock traded at a price of
$9.00, representing a premium of 7.14% to its net asset value per share of $8.40
on such date. There can be no assurance that Equity Trust Common Stock will
continue to trade at a premium before or after the Reorganization.
Disparity in Sterling Capital and Equity Trust Market Levels. Sterling
Capital's shares currently are trading at a discount to net asset value, while
the Equity Trust's shares have been trading at a premium. Under the Agreement,
if the average closing price of Equity Trust Common Stock on the NYSE for the 20
business days prior to the Effective Date of the Reorganization exceeds the net
asset value per share of Equity Trust Common Stock on the Effective Date, the
number of shares of Equity Trust Common Stock to be issued to Sterling Capital
shall be computed by dividing (i) the aggregate value of Sterling Capital's
assets, net of Sterling Capital's Stated Liabilities and the Reserve on the
Effective Date by (ii) the lower of (x) the average of such closing prices for
the 20 business days prior to the date of the Reorganization and (y) 103% of the
net asset value per share of Equity Trust Common Stock computed on the Effective
Date (the "Alternative Value"). The cash to be distributed in lieu of fractional
shares will be calculated on the same basis as the formula to be used to
calculate the number of full shares. There can be no assurance that the value of
the shares of Equity Trust Common Stock to be issued in the Reorganization will
be valued according to the Alternative Value.
Expenses of the Reorganization. Each Fund will bear its own legal,
accounting and state securities or blue sky fees (if any), printing costs,
consulting fees, proxy solicitation fees, filing fees, stock exchange fees,
rating agency fees, portfolio transfer taxes (if any), and any similar expenses
incurred in connection with the Reorganization. Each of Sterling Capital and
Gabelli Funds will bear one-half of the reasonable and documented expenses of
printing and mailing the proxy statements and proxy cards to Sterling Capital
shareholders. The expenses of the Reorganization are expected to be $ for
Sterling Capital and, assuming its consummation, are expected to result in a
reduction of approximately $ in Sterling Capital's net asset value per
share. Such expenses are nondeductible for tax purposes for both Sterling
Capital and the Equity Trust.
5
Summary of Fund Expenses. The purpose of the following table is to help
shareholders of Sterling Capital understand the fees and expenses that they
currently bear as a Sterling Capital shareholder and what they would bear,
directly or indirectly, as a holder of Equity Trust Common Stock if the
Reorganization is consummated. For the Equity Trust, the table shows expenses as
a percentage of net assets attributable to the Equity Trust Equity Trust Common
Stock.
EXPENSE TABLE
THE EQUITY PRO FORMA
STERLING CAPITAL TRUST POST-REORGANIZATION
---------------- -------------- -------------------
SHAREHOLDER TRANSACTION EXPENSES
Sales Load (as a percentage of offering price)... N/A 0 0
Dividend Reinvestment and Voluntary Cash Purchase
Plan Fees...................................... N/A 0 0
ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE
OF AVERAGE NET ASSETS)(1)......................
Management Fees.................................. N/A 1.00 1.00
Interest Payments on Borrowed Funds.............. N/A 0.00 0.00
Other Expenses................................... 2.6 0.57 0.20
Total Annual Fund Operating Expenses........... 2.6 1.57 1.20
---------------
(1) The percentages in the above table expressing annual fund operating expenses
are based on Sterling Capital's and the Equity Trust's operating expenses
for the year ended December 31, 2004. "Other Expenses" include fees for
shareholder services, custody, legal and accounting services, auditing and
tax reporting fees, printing costs, the costs involved in communication with
shareholders and the costs of regulatory compliance, maintaining corporate
existence and the listing of the shares of common stock on the NYSE or the
AMEX, as the case may be.
Example. The purpose of the following example is to help Sterling Capital
shareholders understand the costs and expenses they currently bear as an
investor in Sterling Capital and what they would bear as a stockholder in the
Equity Trust if the Reorganization is consummated. This example is based on the
level of total annual operating expenses for each of Sterling Capital and the
Equity Trust relating to a $1,000 investment in such Fund, and assumes a 5%
annual return and reinvestment of all dividends and distributions.
Shareholders do not pay these expenses directly; they are paid by the Funds
before they distribute net investment income to shareholders. This example
should not be considered a representation of future expenses, and actual
expenses may be greater or less than those shown. SEC regulations require the
example to assume a 5% annual return, but actual annual returns may vary.
THE EQUITY PRO FORMA
STERLING CAPITAL TRUST POST-REORGANIZATION
---------------- -------------- -------------------
1 Year................................... $ $ 16 $ 12
3 Years.................................. $ $ 50 $ 38
5 Years.................................. $ $ 86 $ 66
10 Years................................. $ $187 $145
6
Performance. The table below provides performance data for periods ended
December 31, 2004 based on each Fund's net asset value and market value. Past
performance is not a guarantee of future results, and it is not possible to
predict whether or how investment performance will be affected by the
Reorganization.
STERLING CAPITAL THE EQUITY TRUST
-------------------------- --------------------
AVERAGE AVERAGE
CUMULATIVE ANNUAL CUMULATIVE ANNUAL
---------------- ------- ---------- -------
Net Asset Value
One Year.............................. 20.14% 20.14%
Three Years........................... 35.00% 10.52%
Five Years............................ 25.46% 4.64%
Ten Years............................. 205.84% 11.83%
Market Value
One Year.............................. 24.04% 24.04%
Three Years........................... 14.04% 4.48%
Five Years............................ 27.95% 5.05%
Ten Years............................. 204.30% 11.77%
FINANCIAL HIGHLIGHTS
The tables below are intended to help you understand the financial
performance of Sterling Capital and the Equity Trust. This information is
derived from financial and accounting records of each Fund.
The information for Sterling Capital has been audited by ________, which
serves as Sterling Capital's independent registered public accounting firm. The
information for the Equity Trust has been audited by ________, which serves as
the Equity Trust's independent registered public accounting firm. The reports of
________ and ________, along with the Funds' financial statements, are
incorporated herein by reference and included in the Funds' Annual Reports to
Shareholders. The Annual Reports may be obtained without charge, by writing to
The Gabelli Funds, One Corporate Center, Rye, NY 10580-1422 or calling
800-GABELLI (800-422-3554) for the Equity Trust or [contact information] for
Sterling Capital.
7
STERLING CAPITAL
FINANCIAL HIGHLIGHTS
The following tables include per share operating performance data for a
share of common stock outstanding, total investment return, ratios to average
net assets and other supplemental data for each period indicated. This
information has been derived from information provided in the financial
statements and market price data for Sterling Capital's shares.
Selected data for each share of capital stock outstanding throughout each
year:
YEAR ENDED DECEMBER 31,
--------------------------------------
2004 2003 2002 2001 2000
----- ----- ------ ----- -----
Investment income..................................... $ .12 $ .12 $ .20 $ .29 $ .30
Expenses.............................................. .18 .17 .20 .19 .21
----- ----- ------ ----- -----
Net investment income (loss).......................... (.06) (.05) -- .10 .09
Distribution of net realized capital gains............ -- -- (.03) (.43) (.51)
Distribution of net investment income................. -- -- (.01) (.13) (.08)
Net realized gain (loss) and increase (decrease) in
unrealized appreciation............................. .33 .88 (1.69) .14 (.05)
----- ----- ------ ----- -----
Net increase (decrease) in net asset value............ .27 .83 (1.73) (.32) (.55)
Net asset value:
Beginning of period................................. 7.20 6.37 8.10 8.42 8.97
----- ----- ------ ----- -----
End of period....................................... $7.47 $7.20 $ 6.37 $8.10 $8.42
===== ===== ====== ===== =====
Ratio of expenses to average net assets............... 2.6% 2.7% 2.7% 2.2% 2.4%
Ratio of net investment income (loss) to average net
assets.............................................. (.9)% (.8)% .1% 1.2% 1.0%
Portfolio turnover.................................... 18% 47% 30% 38% 49%
Number of shares outstanding at end of year (in
000's).............................................. 2,500 2,500 2,500 2,500 2,500
THE EQUITY TRUST
FINANCIAL HIGHLIGHTS
The following table includes per share operating performance data for a
share of Common Stock outstanding, total investment return, ratios to average
net assets and other supplemental data for each period indicated. This
information has been derived from information provided in the financial
statements and market price data for Equity Trust Common Stock.
Selected data for a share of Equity Trust Common Stock outstanding
throughout each period:
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------
2004(A)(B)(G) 2003(A)(B)(G) 2002(A)(B)(G) 2001(A) 2000(A)
------------- ------------- ------------- ---------- ----------
OPERATING PERFORMANCE:
Net asset value, beginning of
period............................. $ 7.98 $ 6.28 $ 8.97 $ 10.89 $ 12.75
---------- ---------- ---------- ---------- ----------
Net investment income................ 0.02 0.04 0.07 0.08 0.05
Net realized and unrealized gain
(loss) on investments.............. 1.63 2.50 (1.65) (0.16) (0.51)
---------- ---------- ---------- ---------- ----------
Total from investment operations..... 1.65 2.54 (1.58) (0.08) (0.46)
---------- ---------- ---------- ---------- ----------
DISTRIBUTIONS TO PREFERRED STOCK
SHAREHOLDERS:
Net investment income................ (0.00)(c) (0.00)(c) (0.01) (0.01) (0.00)(c)
Net realized gain on investments..... (0.14) (0.14) (0.16) (0.11) (0.09)
---------- ---------- ---------- ---------- ----------
Total distributions to preferred
stock shareholders................. (0.14) (0.14) (0.17) (0.12) (0.09)
---------- ---------- ---------- ---------- ----------
8
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------
2004(A)(B)(G) 2003(A)(B)(G) 2002(A)(B)(G) 2001(A) 2000(A)
------------- ------------- ------------- ---------- ----------
NET INCREASE (DECREASE) IN NET ASSETS
ATTRIBUTABLE TO COMMON STOCK
SHAREHOLDERS RESULTING FROM
OPERATIONS........................... 1.51 2.40 (1.75) (0.20) (0.55)
---------- ---------- ---------- ---------- ----------
DISTRIBUTIONS TO COMMON STOCK
SHAREHOLDERS:
Net investment income................ (0.01) (0.01) (0.05) (0.06) (0.04)
Net realized gain on investments..... (0.79) (0.68) (0.90) (1.02) (1.27)
Return of capital.................... -- (0.00)(c) (0.00)(c) -- --
---------- ---------- ---------- ---------- ----------
Total distributions to common stock
shareholders....................... (0.80) (0.69) (0.95) (1.08) (1.31)
---------- ---------- ---------- ---------- ----------
CAPITAL SHARE TRANSACTIONS:
Increase in net asset value from
common stock share transactions.... (0.00)(c) 0.01 0.02 0.03 --
Decrease in net asset value from
shares issued in rights offering... -- -- -- (0.62) --
Increase in net asset value from
repurchase or preferred shares..... (0.00)(c) -- -- -- --
Offering costs for preferred shares
charged to paid-in capital......... (0.00)(c) (0.02) (0.01) (0.05) --
---------- ---------- ---------- ---------- ----------
Total capital share transactions..... (0.00)(c) (0.01) 0.01 (0.64) --
---------- ---------- ---------- ---------- ----------
NET ASSET VALUE ATTRIBUTABLE TO COMMON
STOCK SHAREHOLDERS, END OF PERIOD.... $ 8.69 $ 7.98 $ 6.28 $ 8.97 $ 10.89
========== ========== ========== ========== ==========
Net Asset Value Total Return +....... 19.81% 39.90% (21.00)% (3.68)% (4.39)%
========== ========== ========== ========== ==========
Market Value, End of Period.......... $ 9.02 $ 8.00 $ 6.85 $ 10.79 $ 11.14
========== ========== ========== ========== ==========
Total Investment Return ++........... 24.04% 28.58% (28.36)% 10.32% 1.91%
========== ========== ========== ========== ==========
RATIO AND SUPPLEMENTAL DATA:
Net assets including liquidation
value of preferred shares, end of
period (in 000's).................. $1,638,225 $1,514,525 $1,271,600 $1,465,369 $1,318,263
Net assets attributable to common
shares, end of period (in 000's)... $1,219,483 $1,094,525 $ 842,403 $1,166,171 $1,184,041
Ratio of net investment income to
average net assets attributable to
common shares...................... 0.64% 0.67% 0.99% 0.81% 0.42%
Ratio of operating expenses to
average net assets attributable to
common shares(b)(e)................ 1.57% 1.62% 1.19% 1.12% 1.14%
Ratio of operating expenses to
average total net assets including
liquidation value of preferred
shares(b)(e)....................... 1.14% 1.14% 0.87% 0.95% 1.03%
Portfolio turnover rate.............. 28.6% 19.2% 27.1% 23.9% 32.1%
PREFERRED STOCK:
7.25% CUMULATIVE PREFERRED STOCK
Liquidation value, end of period (in
000's)............................. -- -- $ 134,198 $ 134,198 $ 134,223
Total shares outstanding (in
000's)............................. -- -- 5,368 5,368 5,369
Liquidation preference per share..... -- -- $ 25.00 $ 25.00 $ 25.00
Average market value(d).............. -- -- $ 25.75 $ 25.39 $ 22.62
Asset coverage per share............. -- -- $ 74.07 $ 122.44 $ 245.54
9
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------
2004(A)(B)(G) 2003(A)(B)(G) 2002(A)(B)(G) 2001(A) 2000(A)
------------- ------------- ------------- ---------- ----------
7.20% CUMULATIVE PREFERRED STOCK
Liquidation value, end of period (in
000's)............................. $ 165,000 $ 165,000 $ 165,000 $ 165,000 --
Total shares outstanding (in
000's)............................. 6,600 6,600 6,600 6,600 --
Liquidation preference per share..... $ 25.00 $ 25.00 $ 25.00 $ 25.00 --
Average market value(d).............. $ 26.57 $ 27.06 $ 26.40 $ 25.60 --
Asset coverage per share............. $ 97.81 $ 90.15 $ 74.07 $ 122.44 --
AUCTION RATE SERIES C CUMULATIVE
PREFERRED STOCK
Liquidation value, end of period (in
000's)............................. $ 130,000 $ 130,000 $ 130,000 -- --
Total shares outstanding (in
000's)............................. 5 5 5 -- --
Liquidation preference per share..... $ 25,000 $ 25,000 $ 25,000 -- --
Average market value(d).............. $ 25,000 $ 25,000 $ 25,000 -- --
Asset coverage per share............. $ 97,806 $ 90,150 $ 74,068 -- --
5.875% CUMULATIVE PREFERRED STOCK
Liquidation value, end of period (in
000's)............................. $ 73,743 $ 75,000 -- -- --
Total shares outstanding (in
000's)............................. 2,950 3,000 -- -- --
Liquidation preference per share..... $ 25.00 $ 25.00 -- -- --
Average market value(d).............. $ 24.81 $ 25.10 -- -- --
Asset coverage per share............. $ 97.81 $ 90.15 -- -- --
AUCTION RATE SERIES E CUMULATIVE
PREFERRED STOCK
Liquidation value, end of period (in
000's)............................. $ 50,000 $ 50,000 -- -- --
Total shares outstanding (in
000's)............................. 2 2 -- -- --
Liquidation preference per share..... $ 25,000 $ 25,000 -- -- --
Average market value(d).............. $ 25,000 $ 25,000 -- -- --
Asset coverage per share............. $ 97,806 $ 90,150 -- -- --
ASSET COVERAGE(f).................... 391% 361% 296% 490% 982%
---------------
+ Based on net asset value per share, adjusted for reinvestment of
distributions, including the effect of shares issued pursuant to rights
offering, assuming full subscription by shareholder.
(a) Per share amounts have been calculated using the monthly average shares
outstanding method.
(b) See Note 2 to Financial Statements (Swap Agreements).
(c) Amount represents less than $0.005 per share.
(d) Based on weekly prices.
(e) The ratios do not include a reduction of expenses for custodian fee credits
on cash balances maintained with the custodian. Including such custodian
fee credits for the years ended December 31, 2002, 2001 and 2000, the
ratios of operating expenses to average total net assets attributable to
common stock would be 1.19%, 1.11% and 1.14%, respectively, and the ratios
of operating expenses to average total net assets including liquidation
value of preferred shares would be 0.88%, 0.94% and 1.03%, respectively.
For the fiscal years ended December 31, 2004 and 2003, the effect of the
custodian fee credit was minimal.
(f) Asset coverage is calculated by combining all series of preferred stock.
(g) As a result of changes in accounting principles, the Equity Trust has
reclassified periodic payments made under interest rate swap agreements,
previously included within net investment income, to components of realized
and unrealized gain (loss) in the Statement of Operations. The effect of
the reclassification for the years ended December 31, 2004, December 31,
2003 and December 31, 2002 was net investment
10
income per share increased by $0.03, $0.03 and $0.01, respectively, ratios
of net investment income to average net assets attributable to common
shares increased by 0.36%, 0.47% and 0.18%, respectively, ratios of
operating expenses to average net assets attributable to common shares
decreased by 0.36%, 0.47% and 0.18%, respectively, and ratios of operating
expenses to average total net assets including liquidation value of
preferred shares decreased by 0.26%, 0.33% and 0.13%, respectively.
COMPARISON OF INVESTMENT OBJECTIVES AND POLICIES
The principal structural differences between the Funds are that the Equity
Trust has issued and outstanding several series of preferred stock, so that
holders of its Common Stock are subject to the risks of leverage, and that the
Equity Trust is non-diversified under the 1940 Act, while Sterling Capital is
diversified. In addition, if the Equity Trust were to fail to meet the asset
coverage requirements applicable to its preferred stock, its ability to pay
dividends to holders of its Common Stock could be restricted. See "Leverage
Risk," "Restrictions on Dividends and Other Distributions" and "Comparison of
Organizational Structure of the Equity Trust and Sterling Capital." In addition,
the Equity Trust has a managed distribution policy, under which the Equity Trust
pays a minimum annual distribution to holders of its Common Stock of 10% of its
average net asset value. Sterling Capital does not have such a policy. See
"Additional Information about the Funds -- Dividends and Distributions." A
comparison of the Funds' investment objectives and investment policies follows.
Organization. Sterling Capital and the Equity Trust are both closed-end
management investment companies registered under the 1940 Act. There can be no
assurance that either Fund will achieve its stated investment objectives.
Current Investment Objectives and Principal Investments -- the Equity
Trust. The Equity Trust seeks long-term capital growth as its principal
investment objective and seeks income as a secondary consideration. The Equity
Trust's investment objectives are fundamental and cannot be changed without the
approval of the holders of a "majority of the Fund's outstanding voting
securities," as defined in the 1940 Act. A majority of a fund's outstanding
voting securities means the lesser of 67% of the shares represented at a meeting
at which more than 50% of the outstanding shares are represented, or more than
50% of the outstanding shares. In addition, pursuant to the Equity Trust's
Articles Supplementary, a majority, as defined in the 1940 Act, of the
outstanding preferred stock of the Equity Trust (voting separately as a single
class) is also required to change the Fund's investment objectives or any of its
fundamental investment policies.
In selecting securities for the Equity Trust, Gabelli Funds normally will
consider the following factors, among others:
- Gabelli Funds' own evaluations of the private market value, cash flow,
earnings per share and other fundamental aspects of the underlying assets
and business of the company;
- the potential for capital appreciation of the securities;
- the interest or dividend income generated by the securities;
- the prices of the securities relative to other comparable securities;
- whether the securities are entitled to the benefits of call protection or
other protective covenants;
- the existence of any anti-dilution protections or guarantees of the
security; and
- the diversification of the portfolio of the Equity Trust as to issuers.
Gabelli Funds' investment philosophy with respect to equity securities
seeks to identify assets that are selling in the public market at a discount to
their private market value. Gabelli Funds defines private market value as the
value informed purchasers are willing to pay to acquire assets with similar
characteristics. Gabelli Funds also normally evaluates the issuers' free cash
flow and long-term earnings trends. Finally, Gabelli Funds looks for a catalyst,
something indigenous to the company, its industry or country that will surface
additional value.
11
Current Investment Objectives and Principal Investments -- Sterling
Capital. Sterling Capital's investment objective is long-term capital growth.
Sterling Capital pursues its investment objective by generally investing
directly or indirectly in equity securities which it believes to offer
attractive investment opportunities. Sterling Capital's investment objective is
not a fundamental policy and therefore can be changed with the approval of a
majority of its directors and without the approval of the holders of its voting
securities.
In selecting securities for Sterling Capital, Sterling Capital's management
will normally seek to invest in a diversified list of companies having the
potential for above average appreciation. Equity securities selected for
investment are generally deemed to be selling in the public market at a
meaningful discount to management's estimate of intrinsic or private market
valuations, or selling at an attractive valuation relative to the expected rate
of earnings growth. Sterling Capital's investment process includes a review of a
company's financial strength through analysis of rates of return earned on sales
and shareholder's equity, debt to equity ratios, and free cash flow. The
evaluation process also includes industry analysis, a company's competitive
position, product mix, and the impact of macroeconomic factors on a company's
earnings. Sterling Capital does not generally limit its equity investments by
market capitalization.
In accordance with Sterling Capital's investment objective and investment
strategy, Sterling Capital does not engage in rapid portfolio turnover for
trading profits but rather seeks to invest in companies for relatively long
periods of time. In 2004, Sterling Capital's portfolio turnover rate was
approximately 18%.
Foreign Securities. The Equity Trust may invest up to 35% of its total
assets in foreign securities. Among the foreign securities in which the Equity
Trust may invest are those issued by companies located in developing countries,
which are countries in the initial stages of their industrialization cycles.
Investing in the equity and debt markets of developing countries involves
exposure to economic structures that are generally less diverse and less mature,
and to political systems that can be expected to have less stability, than those
of developed countries. The markets of developing countries historically have
been more volatile than the markets of the more mature economies of developed
countries, but often have provided higher rates of return to investors. The
Equity Trust may also invest in the debt securities of foreign governments.
Although such investments are not a principal strategy of the Equity Trust,
there is no independent limit on its ability to invest in the debt securities of
foreign governments.
Sterling Capital may invest up to 100% of its total assets in foreign
securities, although such investments are not a principal part of Sterling
Capital's investment strategy.
Lower Rated Securities. The Equity Trust may invest up to 10% of its total
assets in fixed-income securities rated in the lower rating categories (as
described below) of recognized statistical rating agencies, such as securities
rated "CCC" or lower by the Standard & Poor's Division of The McGraw-Hill
Companies, Inc. ("S&P") or "Caa" or lower by Moody's Investors Service Inc.
("Moody's") , or non-rated securities of comparable quality. These debt
securities are predominantly speculative and involve major risk exposure to
adverse conditions and are often referred to in the financial press as "junk
bonds."
Generally, lower rated securities and unrated securities of comparable
quality offer a higher current yield than is offered by higher rated securities,
but also (i) will likely have some quality and protective characteristics that,
in the judgment of the ratings organizations, are outweighed by large
uncertainties or major risk exposures to adverse conditions and (ii) are
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligation. The market
values of certain of these securities also tend to be more sensitive to
individual corporate developments and changes in economic conditions than higher
quality bonds. In addition, such lower rated securities and comparable unrated
securities generally present a higher degree of credit risk. The risk of loss
due to default by these issuers is significantly greater because such lower
rated securities and unrated securities of comparable quality generally are
unsecured and frequently are subordinated to the prior payment of senior
indebtedness. In light of these risks, Gabelli Funds, in evaluating the
creditworthiness of an issue, whether rated or unrated, will take various
factors into consideration, which may include, as applicable, the issuer's
operating history, financial resources, its sensitivity to economic conditions
and trends, the market support for the facility financed by the issue, the
perceived ability and integrity of the issuer's management and regulatory
matters.
12
In addition, the market value of securities in lower rated categories is
more volatile than that of higher quality securities, and the markets in which
such lower rated or unrated securities are traded are more limited than those in
which higher rated securities are traded. The existence of limited markets may
make it more difficult for the Equity Trust to obtain accurate market quotations
for purposes of valuing its portfolio and calculating its net asset value.
Moreover, the lack of a liquid trading market may restrict the availability of
securities for the Equity Trust to purchase and may also have the effect of
limiting the ability of the Equity Trust to sell securities at their fair market
value to respond to changes in the economy or the financial markets.
Lower rated debt obligations also present risks based on payment
expectations. If an issuer calls the obligation for redemption (often a feature
of fixed income securities), the Equity Trust may have to replace the security
with a lower yielding security, resulting in a decreased return for investors.
Also, as the principal value of bonds moves inversely with movements in interest
rates, in the event of rising interest rates the value of the securities held by
the Equity Trust may decline proportionately more than a portfolio consisting of
higher rated securities. Investments in zero coupon bonds may be more
speculative and subject to greater fluctuations in value due to changes in
interest rates than bonds that pay interest currently.
As part of its investments in lower rated fixed-income securities, the
Equity Trust may invest in securities of issuers in default. The Equity Trust
will only make an investment in securities of issuers in default when Gabelli
Funds believes that such issuers will honor their obligations or emerge from
bankruptcy protection and the value of these securities will appreciate. By
investing in the securities of issuers in default, the Equity Trust bears the
risk that these issuers will not continue to honor their obligations or emerge
from bankruptcy protection or that the value of the securities will not
appreciate.
Sterling Capital has the ability to invest in lower rated securities,
although such investments are not a principal part of Sterling Capital's current
investment strategy.
Futures Contracts and Options Thereon. Gabelli Funds may, subject to the
Equity Trust's investment restrictions and guidelines of the Board of Directors,
purchase and sell financial futures contracts and options thereon which are
traded on a commodities exchange or board of trade for certain hedging, yield
enhancement and risk management purposes. These futures contracts and related
options may be on debt securities, financial indices, securities indices, U.S.
government securities and foreign currencies. A financial futures contract is an
agreement to purchase or sell an agreed amount of securities or currencies at a
set price for delivery in the future.
Gabelli Funds has claimed an exclusion from the definition of the term
"commodity pool operator" under the Commodity Exchange Act and therefore is not
subject to the registration requirements under the Commodity Exchange Act.
Accordingly, the Equity Trust's investments in derivative instruments are not
limited by or subject to regulation under the Commodity Exchange Act or
otherwise regulated by the Commodity Futures Trading Commission. Nevertheless,
the Equity Trust's investment restrictions place certain limitations and
prohibitions on its ability to purchase or sell commodities or commodity
contracts. In addition, investment in futures contracts and related options
generally will be limited by the rating agency guidelines applicable to any of
the Equity Trust's outstanding preferred stock.
Sterling Capital is not permitted to invest in commodities or futures
contracts other than in connection with hedging activities.
Forward Currency Exchange Contracts. Subject to guidelines of the Board of
Directors, may enter into forward foreign currency exchange contracts to protect
the value of its portfolio against future changes in the level of currency
exchange rates. The Equity Trust may enter into such contracts on a spot, i.e.,
cash, basis at the rate then prevailing in the currency exchange market or on a
forward basis, by entering into a forward contract to purchase or sell currency.
A forward contract on foreign currency is an obligation to purchase or sell a
specific currency at a future date, which may be any fixed number of days agreed
upon by the parties from the date of the contract at a price set on the date of
the contract. The Equity Trust's dealings in forward contracts generally will be
limited to hedging involving either specific transactions or portfolio
positions. The
13
Equity Trust does not have an independent limitation on its investments in
foreign futures contracts and options on foreign currency futures contracts.
While Sterling Capital is not restricted from entering into foreign
currency exchange contracts, it has not done so in the past and has no present
intention to do so.
Repurchase Agreements. The Equity Trust may enter into repurchase
agreements with banks and non-bank dealers of U.S. government securities which
are listed as reporting dealers of the Federal Reserve Bank and which furnish
collateral at least equal in value or market price to the amount of their
repurchase obligation. In a repurchase agreement, the Equity Trust purchases a
debt security from a seller who undertakes to repurchase the security at a
specified resale price on an agreed future date. Repurchase agreements are
generally for one business day and generally will not have a duration of longer
than one week. The SEC has taken the position that, in economic reality, a
repurchase agreement is a loan by a fund to the other party to the transaction
secured by securities transferred to the fund. The resale price generally
exceeds the purchase price by an amount which reflects an agreed upon market
interest rate for the term of the repurchase agreement. The Equity Trust's risk
is primarily that, if the seller defaults, the proceeds from the disposition of
the underlying securities and other collateral for the seller's obligation may
be less than the repurchase price. If the seller becomes insolvent, the Equity
Trust might be delayed in or prevented from selling the collateral. In the event
of a default or bankruptcy by a seller, the Equity Trust will promptly seek to
liquidate the collateral. To the extent that the proceeds from any sale of the
collateral upon a default in the obligation to repurchase is less than the
repurchase price, the Equity Trust will experience a loss. If the financial
institution that is a party to the repurchase agreement petitions for bankruptcy
or becomes subject to the U.S. Bankruptcy Code, the law regarding the rights of
the Equity Trust is unsettled. As a result, under extreme circumstances, there
may be a restriction on the Equity Trust's ability to sell the collateral and
the Equity Trust could suffer a loss.
While Sterling Capital is not restricted from entering into repurchase
agreements, it has not done so in the past and has no present intention to do
so.
Loans of Portfolio Securities. To increase income, the Equity Trust may
lend its portfolio securities to securities broker-dealers or financial
institutions if (i) the loan is collateralized in accordance with applicable
regulatory requirements and (ii) no loan will cause the value of all loaned
securities to exceed 20% of the value of its total assets. If the borrower fails
to maintain the requisite amount of collateral, the loan automatically
terminates and the Equity Trust could use the collateral to replace the
securities while holding the borrower liable for any excess of replacement cost
over the value of the collateral. As with any extension of credit, there are
risks of delay in recovery and in some cases even loss of rights in collateral
should the borrower of the securities fail financially.
While these loans of portfolio securities will be made in accordance with
guidelines approved by the Equity Trust's Board of Directors, there can be no
assurance that borrowers will not fail financially. On termination of the loan,
the borrower is required to return the securities to the Equity Trust, and any
gain or loss in the market price during the loan would inure to the Equity
Trust. If the counterparty to the loan petitions for bankruptcy or becomes
subject to the United States Bankruptcy Code, the law regarding the Equity
Trust's rights is unsettled. As a result, under these circumstances, there may
be a restriction on the Equity Trust's ability to sell the collateral and it
would suffer a loss.
Sterling Capital may lend its portfolio securities to broker-dealers or any
other person provided that such loans are secured by collateral in cash or
securities of the U.S. government or its agencies, or any combination thereof,
in an amount, maintained on a current basis, not less than the market value of
the securities loaned, and provided further that no such loan shall be made if
at the time of such loan more than 30% of Sterling Capital's total assets would
be loaned. Sterling Capital is not permitted to make loans to any of its
officers or directors or to other persons who are affiliated with Sterling
Capital.
Borrowing. The Equity Trust may borrow money in accordance with its
investment restrictions, including as a temporary measure for extraordinary or
emergency purposes. It may not borrow for investment purposes.
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Sterling Capital may make unsecured borrowings from banks, but will not
incur aggregate borrowings in excess of 25% of its net assets taken at market or
other fair value, computed on the basis of gross assets less liabilities other
than all such borrowings. Sterling Capital currently has no unsecured borrowings
and has no present intention to make any such borrowings.
Leveraging. As provided in the 1940 Act, and subject to compliance with
its investment limitations, the Equity Trust may issue senior securities
representing stock, such as preferred stock, so long as immediately following
such issuance of stock, its total assets exceed 200% of the amount of such
stock. The use of leverage magnifies the impact of changes in net asset value.
For example, a fund that uses 33% leverage will show a 1.5% increase or decline
in net asset value for each 1% increase or decline in the value of its total
assets. In addition, if the cost of leverage exceeds the return on the
securities acquired with the proceeds of leverage, the use of leverage will
diminish, rather than enhance, the return to the Equity Trust. The use of
leverage generally increases the volatility of returns to the Equity Trust. The
Equity Trust currently has four series of preferred stock outstanding: the 7.20%
Series B Cumulative Preferred Stock, the Series C Auction Rate Cumulative
Preferred Stock, the 5.785% Series D Cumulative Preferred Stock and the Series E
Auction Rate Cumulative Preferred Stock. See "Leverage Risk," "Restrictions on
Dividends and Other Distributions" and "Comparison of Organizational Structure
of the Equity Trust and Sterling Capital."
Sterling Capital has one class of shares outstanding, its common stock.
Temporary Investments. Subject to the Equity Trust's investment
restrictions, when a temporary defensive period is believed by Gabelli Funds to
be warranted ("temporary defensive periods"), the Equity Trust may, without
limitation, hold cash or invest its assets in securities of U.S. government
sponsored instrumentalities, in repurchase agreements in respect of those
instruments, and in certain high-grade commercial paper instruments. During
temporary defensive periods the Equity Trust may also invest in money market
mutual funds that invest primarily in securities of U.S. government sponsored
instrumentalities and repurchase agreements in respect of those instruments.
Under current law, in the absence of an exemptive order, such money market
mutual funds will not be affiliated with Gabelli Funds. Obligations of certain
agencies and instrumentalities of the U.S. government, such as the Government
National Mortgage Association, are supported by the "full faith and credit" of
the U.S. government; others, such as those of the Export-Import Bank of the
U.S., are supported by the right of the issuer to borrow from the U.S. Treasury;
others, such as those of the Federal National Mortgage Association, are
supported by the discretionary authority of the U.S. government to purchase the
agency's obligations; and still others, such as those of the Student Loan
Marketing Association, are supported only by the credit of the instrumentality.
No assurance can be given that the U.S. government would provide financial
support to U.S. government sponsored instrumentalities if it is not obligated to
do so by law. During temporary defensive periods, the Equity Trust may be less
likely to achieve its secondary investment objective of income.
Portfolio Turnover Rate. Neither Fund engages in the trading of securities
for the purpose of realizing short-term profits, but adjusts its portfolio as it
deems advisable in view of prevailing or anticipated market conditions to
accomplish its investment objective. A high rate of portfolio turnover involves
correspondingly greater brokerage commission expenses than a lower rate, which
expenses must be borne by the Equity Trust and its shareholders. High portfolio
turnover may also result in the realization of substantial net short-term
capital gains and any distributions resulting from such gains will be taxable at
ordinary income rates for U.S. federal income tax purposes. Sterling Capital's
portfolio turnover rates for the fiscal years ended December 31, 2003 and 2004
were 47% and 18%, respectively. The Equity Trust's portfolio turnover rates for
the fiscal years ended December 31, 2003 and 2004 were 19% and 29%,
respectively. The portfolio turnover rate is calculated by dividing the lesser
of sales or purchases of portfolio securities by the average monthly value of a
fund's portfolio securities. For purposes of this calculation, portfolio
securities exclude purchases and sales of debt securities having a maturity at
the date of purchase of one year or less.
Fundamental Policies. Each Fund has "fundamental" investment policies that
may not be changed without the prior approval of the holders of a majority of
each Fund's outstanding voting securities (and its preferred stock voting as a
single class, in the case of the Equity Trust).
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The Equity Trust. The Equity Trust may not:
1. Invest 25% or more of its total assets, taken at market value at
the time of each investment, in the securities of issuers in any particular
industry. This restriction does not apply to investments in direct
obligations of the United States or by its agencies or instrumentalities
that are entitled to the full faith and credit of the United States and
that, other than United States Treasury Bills, provide for the periodic
payment of interest and the full payment of principal at maturity or call
for redemption ("U.S. Government Obligations").
2. Purchase securities of other investment companies, except in
connection with a merger, consolidation, acquisition or reorganization, if
more than 10% of the market value of the total assets of the Equity Trust
would be invested in securities of other investment companies, more than 5%
of the market value of the total assets of the Equity Trust would be
invested in the securities of any one investment company or the Equity
Trust would own more than 3% of any other investment company's securities,
provided, however, this restriction shall not apply to securities of any
investment company organized by the Equity Trust that are to be distributed
pro rata as a dividend to its stockholders.
3. Purchase or sell commodities or commodity contracts except that the
Equity Trust may purchase or sell futures contracts and related options
thereon if immediately thereafter (i) no more than 5% of its total assets
are invested in margins and premiums and (ii) the aggregate market value of
its outstanding futures contracts and market value of the currencies and
futures contracts subject to outstanding options written by the Equity
Trust do not exceed 50% of the market value of its total assets. The Equity
Trust may not purchase or sell real estate, provided that the Equity Trust
may invest in securities secured by real estate or interests therein or
issued by companies which invest in real estate or interests therein.
4. Purchase any securities on margin or make short sales, except that
the Equity Trust may obtain such short-term credit as may be necessary for
the clearance of purchases and sales of portfolio securities.
5. Make loans of money, except by the purchase of a portion of
publicly distributed debt obligations in which the Equity Trust may invest,
and repurchase agreements with respect to those obligations, consistent
with its investment objectives and policies. The Equity Trust reserves the
authority to make loans of its portfolio securities to financial
intermediaries in an aggregate amount not exceeding 20% of its total
assets. Any such loans may only be made upon approval of, and subject to
any conditions imposed by, the Board of Directors of the Equity Trust.
Because these loans would at all times be fully collateralized, the risk of
loss in the event of default of the borrower should be slight.
6. Borrow money, except that the Equity Trust may borrow from banks
and other financial institutions on an unsecured basis, in an amount not
exceeding 10% of its total assets, to finance the repurchase of its stock.
The Equity Trust also may borrow money on a secured basis from banks as a
temporary measure for extraordinary or emergency purposes. Temporary
borrowings may not exceed 5% of the value of the total assets of the Equity
Trust at the time the loan is made. The Equity Trust may pledge up to 10%
of the lesser of the cost or value of its total assets to secure temporary
borrowings. The Equity Trust will not borrow for investment purposes.
Immediately after any borrowing, the Equity Trust will maintain asset
coverage of not less than 300% with respect to all borrowings. While the
borrowing of the Equity Trust exceeds 5% of its respective total assets,
the Equity Trust will make no further purchases of securities, although
this limitation will not apply to repurchase transactions as described
above.
7. Issue senior securities, except to the extent permitted by
applicable law.
8. Underwrite securities of other issuers except insofar as the Equity
Trust may be deemed an underwriter under the Securities Act in selling
portfolio securities; provided, however, this restriction shall not apply
to securities of any investment company organized by the Equity Trust that
are to be distributed pro rata as a dividend to its stockholders.
9. Invest more than 10% of its total assets in illiquid securities,
such as repurchase agreements with maturities in excess of seven days, or
securities that at the time of purchase have legal or contractual
restrictions on resale.
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Sterling Capital. Sterling Capital does not concentrate its investments in
any one or more particular industries. Sterling Capital will not purchase
securities of issuers in any one industry, if immediately after such purchase
more than 25% in value of its total assets would be invested in such industry.
The only securities which Sterling Capital is authorized to issue are
10,000,000 shares of Common Stock, $1 par value.
Sterling Capital may guarantee the obligations of others in furtherance of
its investment policy and borrow money when in the opinion of Sterling Capital's
Board of Directors such action will serve the interests of Sterling Capital's
shareholders, but such guarantees and borrowings shall be subject to the
limitations contained in the 1940 Act and in any event any such guarantee or
other debt shall not exceed, in the aggregate, 50% of Sterling Capital's net
assets before any such guarantee or borrowing. Sterling Capital may pledge any
of its assets as security for any permissible guarantee or borrowing. Sterling
Capital will not guarantee the obligations of its officers or directors or other
persons who are affiliates of Sterling Capital within the meaning of the 1940
Act.
Sterling Capital will not underwrite the securities of other issuers,
except that it may acquire restricted securities under certain circumstances
where, if sold, it might be deemed an underwriter for purposes of the Securities
Act. Sterling Capital may invest freely up to 100% of its total assets in
restricted securities.
Sterling Capital intends, if in the opinion of its management favorable
opportunities exist, to invest from time to time in real estate. In connection
therewith, Sterling Capital may, itself or through one or more subsidiaries,
purchase or otherwise acquire, hold, mortgage, lease, convey or otherwise
dispose of any kind or kinds of real property or interests therein (which may be
developed or underdeveloped and either located within or outside the United
States) and related personal property. Sterling Capital may not invest more than
25% of its total assets in this field.
Sterling Capital will not engage in the purchase and sale of commodities or
commodities contracts, except commodity futures or futures options contracts for
hedging purposes. Sterling Capital may make and maintain such margin or premium
deposits and segregate such liquid assets, including cash, U.S. government
securities or other appropriate high-grade debt obligations as are necessary and
required in connection with its permitted transactions in such commodity futures
or futures options contracts.
Sterling Capital will not engage in the making of loans to other persons,
except that it may (i) purchase debt securities which are publicly distributed
or are of a type customarily purchased by institutional investors, (ii) purchase
any other debt securities limited to an aggregate of 50% of the value of its
total assets at the time of such purchase and (iii) lend its portfolio
securities, provided that such loans are secured by collateral in cash or
securities of the U.S. government or its agencies, or any combination thereof,
in an amount, maintained on a current basis, not less than the market value of
the securities loaned, and provided further that no such loan shall be made if
at the time of such loan more than 30% of Sterling Capital's total assets would
be so loaned. Sterling Capital will not make loans to any of its officers or
directors or other persons who are affiliates of Sterling Capital within the
meaning of the 1940 Act.
Sterling Capital may effect from time to time short sales of securities,
including short sales "against the box" and short sales used in connection with
hedging transactions. In connection with short sales, Sterling Capital: (i) will
incur an obligation to replace the securities sold short (whatever its price may
subsequently be); (ii) may have to pay a premium to borrow the security; (iii)
will pay the lender of the security the dividends or interest payable thereon
during the period in which the security is borrowed; (iv) will collateralize the
obligation to replace the security by a deposit of cash and/or U.S. government
obligations equal to the current market value of the securities to be replaced
and will maintain such collateral so that (a) the amount deposited as collateral
will equal the current market value of the securities sold short and (b) the
amount deposited will not be less than the market value of the securities at the
time they were sold short; (v) will not receive the proceeds of the sale until
replacement of the borrowed securities; and (vi) under ordinary circumstances
will not receive any interest on cash collateral and proceeds. Sterling Capital
intends to limit any large short positions to securities having wide public
distribution and a broad market.
No more than 35% of the value of Sterling Capital's net assets will be, in
the aggregate, in deposits collateralizing the obligation to replace securities
borrowed to effect short sales, excluding, however, proceeds
17
from short sales and excluding short sales "against the box" which may be
collateralized by up to an additional 15% of the value of Sterling Capital's net
assets or allocated to a segregated account in connection with short sales.
Short sales "against the box" may be used by Sterling Capital to defer the
realization of gain or loss for federal income tax purposes, even though such
sales tie up a portion of Sterling Capital's assets on which no gain or loss may
be realized until such positions are closed out.
Sterling Capital may from time to time purchase and sell put and call
options written by others, combinations thereof or similar options. Sterling
Capital also may from time to time write covered or uncovered put and call
options, combinations thereof or similar options. Purchasing and selling put and
call options or writing put and call options will not constitute a dominant
investment practice of Sterling Capital.
Securities transactions of Sterling Capital will be conducted so that not
more than 10% of the value of Sterling Capital's net assets will be in premiums
on put and call options written by others, combinations thereof or similar
options. To adhere to such percentage limits Sterling Capital may be required to
dispose of put and call options at a time when it may not otherwise desire to do
so.
Sterling Capital will not write put and call options, combinations thereof
or similar options if, as a result thereof, the aggregate value of securities or
collateral underlying such options would exceed 25% of Sterling Capital's total
assets.
Upon writing an uncovered call option Sterling Capital will (i) purchase,
as soon thereafter as practicable, and hold for the term of the option, the
securities (or securities readily convertible into such securities without
additional consideration) against which call options are written, (ii) purchase
a call on the same securities at the same price or (iii) establish, at the time
of selling the option, and maintain for the term of the option, a segregated
account consisting of cash, U.S. government securities or high-grade debt
securities equal to, on a daily basis, the fluctuating market value of the
underlying securities. Similarly, with respect to the writing of put options,
Sterling Capital will provide that such options will be offset at the time of
sale by (i) the purchase of a put on the same securities at the same price, (ii)
a segregated account consisting of cash, U.S. government securities or
high-grade debt securities equal to the option price or (iii) a corresponding
short sale of the securities underlying the option.
Sterling Capital may also acquire warrants or other rights to subscribe to
securities.
Sterling Capital will not purchase any securities of a company if any of
the directors or officers of Sterling Capital individually own more than 0.5% of
the shares of such company or together own 5% or more of the shares of such
company.
In addition to its investments represented by the securities of other
issuers, Sterling Capital intends, if in the opinion of its management favorable
opportunities exist, to make investments or other commitments, not necessarily
represented by securities, in businesses and other enterprises, as lessee,
licensee, operator, partner, sole proprietor or otherwise, and to conduct the
operations of such businesses or other enterprises itself in which it may have a
full or partial ownership interest, or through agents or otherwise. Sterling
Capital will not invest more than 25% of its total assets in such a manner.
The above policies are deemed fundamental and may not be changed without
the approval of the lesser of (i) 67% or more of the voting securities of
Sterling Capital present at a meeting if the holders of more than 50% of the
outstanding voting securities of Sterling Capital are present or represented by
proxy at such a meeting or (ii) more than 50% of the outstanding voting
securities of Sterling Capital.
RISK FACTORS AND SPECIAL CONSIDERATIONS
Certain investment risks of the Funds are described below.
Leverage Risk. The Equity Trust uses financial leverage for investment
purposes by issuing preferred stock. The amount of leverage represents
approximately 26% of the Equity Trust's Managed Assets (defined as the aggregate
net asset value of the Common Stock plus assets attributable to outstanding
shares of
18
preferred stock, with no deduction for the liquidation preference of such shares
of preferred stock) as of March 31, 2005. The Equity Trust's leveraged capital
structure creates special risks not associated with unleveraged funds having
similar investment objectives and policies. These include the possibility of
greater loss and the likelihood of higher volatility of the net asset value of
the Equity Trust and the asset coverage. Such volatility may increase the
likelihood of the Equity Trust's having to sell investments in order to meet
dividend payments on the preferred stock, or to redeem preferred stock, when it
may be disadvantageous to do so. Also, if the Equity Trust is utilizing
leverage, a decline in net asset value could affect the ability of the Equity
Trust to make Common Stock dividend payments, and such a failure to pay
dividends or make distributions could result in the Equity Trust's ceasing to
qualify as a regulated investment company under the Code.
Because the advisory fee paid to Gabelli Funds is calculated on the basis
of the Equity Trust's Managed Assets, rather than only on the basis of net
assets attributable to the Common Stock, the fee may be higher when leverage is
utilized, giving Gabelli Funds an incentive to utilize leverage. However,
Gabelli Funds has agreed not to accept an incremental fee with respect to any
series of the Equity Trust's outstanding preferred stock unless the Equity
Trust's total return at least equals the cost of capital on such series of the
preferred stock.
Sterling Capital has no shares of preferred stock authorized or outstanding
so it is not subject to leverage risk.
Restrictions on Dividends and Other Distributions. Restrictions imposed on
the declaration and payment of dividends or other distributions to the holders
of the Equity Trust's Common Stock and preferred stock, both by the 1940 Act and
by requirements imposed by rating agencies, might impair the Equity Trust's
ability to maintain its qualification as a regulated investment company for
federal income tax purposes. While the Equity Trust intends to redeem its
preferred stock to the extent necessary to enable the Equity Trust to distribute
its income as required to maintain its qualification as a regulated investment
company under the Code, there can be no assurance that such actions can be
effected in time to meet the Code requirements.
Non-diversified Status. The Equity Trust is classified as a
"non-diversified" investment company under the 1940 Act, which means it is not
limited by the 1940 Act in the proportion of its assets that may be invested in
the securities of a single issuer. However, the Equity Trust has in the past
conducted and intends to conduct its operations so as to qualify as a "regulated
investment company," or RIC, for purposes of the Code, which will relieve it of
any liability for federal income tax to the extent its earnings are distributed
to stockholders. To qualify as a "regulated investment company," among other
requirements, the Equity Trust will limit its investments so that, with certain
exceptions, at the close of each quarter of the taxable year:
- not more than 25% of the market value of its total assets will be
invested in the securities (other than U.S. government securities or the
securities of other RICs) of a single issuer or any two or more issuers
that the Equity Trust controls and which are determined to be engaged in
the same, similar or related trades or businesses; and
- at least 50% of the market value of the Equity Trust's assets will be
represented by cash, securities of other regulated investment companies,
U.S. government securities 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 its assets and not more than 10% of the
outstanding voting securities of such issuer.
As a non-diversified investment company, the Equity Trust may invest in the
securities of individual issuers to a greater degree than a diversified
investment company. As a result, the Equity Trust may be more vulnerable to
events affecting a single issuer and, therefore, subject to greater volatility
than a fund that is more broadly diversified. Accordingly, an investment in the
Equity Trust may present greater risk to an investor than an investment in a
diversified company.
Sterling Capital is a diversified investment company and, therefore, is not
subject to the risks of non-diversification.
Market Value and Net Asset Value. Shares of closed- end funds are bought
and sold in the securities markets and may trade at either a premium or discount
from net asset value. Listed shares of closed-end
19
investment companies frequently trade at a discount from net asset value. This
characteristic of stock of a closed-end fund is a risk separate and distinct
from the risk that its net asset value will decrease. Neither Fund can predict
whether its listed stock will trade at, below or above net asset value but, as
noted above, Equity Trust Common Stock has traded at a premium for [period]
while [over the same period] Sterling Capital shares have traded at a discount.
Stockholders desiring liquidity may, subject to applicable securities laws,
trade their common stock in a Fund on the NYSE (for Equity Trust), the AMEX (for
Sterling Capital) or other markets on which such stock may trade at the
then-current market value, which may differ from the then-current net asset
value. Stockholders will incur brokerage or other transaction costs to sell
stock.
Special Risks of Derivative Transactions. Participation in the options or
futures markets and in currency exchange transactions involves investment risks
and transaction costs to which the Equity Trust would not be subject absent the
use of these strategies. If the Equity Trust's prediction of movements in the
direction of the securities, foreign currency and interest rate markets are
inaccurate, the consequences to the Equity Trust may leave it in a worse
position than if such strategies were not used. Risks inherent in the use of
options, foreign currency, futures contracts and options on futures contracts,
securities indices and foreign currencies include:
- dependence on Gabelli Funds' ability to predict correctly movements in
the direction of interest rates, securities prices and currency markets;
- imperfect correlation between the price of options and futures contracts
and options thereon and movements in the prices of the securities or
currencies being hedged;
- the fact that skills needed to use these strategies are different from
those needed to select portfolio securities;
- the possible absence of a liquid secondary market for any particular
instrument at any time;
- the possible need to defer closing out certain hedged positions to avoid
adverse tax consequences; and
- the possible inability of the Equity Trust to purchase or sell a security
at a time that otherwise would be favorable for it to do so, or the
possible need for the Equity Trust to sell a security at a
disadvantageous time due to a need for the Equity Trust to maintain
"cover" or to segregate securities in connection with the hedging
techniques.
Lower Rated Securities. The Equity Trust may invest up to 10% of its total
assets in fixed-income securities rated in the lower rating categories of
recognized statistical rating agencies. These high yield securities, also
sometimes referred to as "junk bonds," generally pay a premium above the yields
of U.S. government securities or debt securities of investment grade issuers
because they are subject to greater risks than these securities. These risks,
which reflect their speculative character, include the following:
- greater volatility;
- greater credit risk;
- potentially greater sensitivity to general economic or industry
conditions;
- potential lack of attractive resale opportunities (illiquidity); and
- additional expenses to seek recovery from issuers who default.
The market value of lower-rated securities may be more volatile than the
market value of higher- rated securities and generally tends to reflect the
market's perception of the creditworthiness of the issuer and short-term market
developments to a greater extent than more highly rated securities, which
primarily reflect fluctuations in general levels of interest rates.
Ratings are relative and subjective and not absolute standards of quality.
Securities ratings are based largely on the issuer's historical financial
condition and the rating agencies' analysis at the time of rating. Consequently,
the rating assigned to any particular security is not necessarily a reflection
of the issuer's current financial condition.
20
As a part of its investment in lower rated fixed-income securities, the
Equity Trust may invest in the securities of issuers in default. The Equity
Trust will invest in securities of issuers in default only when Gabelli Funds
believes that such issuers will honor their obligations and emerge from
bankruptcy protection and that the value of such issues' securities will
appreciate. By investing in the securities of issuers in default, the Equity
Trust bears the risk that these issuers will not continue to honor their
obligations or emerge from bankruptcy protection or that the value of these
securities will not appreciate.
Foreign Securities. The Equity Trust may invest up to 35% of its total
assets in foreign securities. Investments in the securities of foreign issuers
involve certain considerations and risks not ordinarily associated with
investments in securities of domestic issuers. Foreign companies are not
generally subject to uniform accounting, auditing and financial standards and
requirements comparable to those applicable to U.S. companies. Foreign
securities exchanges, brokers and listed companies may be subject to less
government supervision and regulation than exists in the United States. Dividend
and interest income may be subject to withholding and other foreign taxes, which
may adversely affect the net return on such investments. There may be difficulty
in obtaining or enforcing a court judgment abroad. In addition, it may be
difficult to effect repatriation of capital invested in certain countries. In
addition, with respect to certain countries, there are risks of expropriation,
confiscatory taxation, political or social instability or diplomatic
developments that could affect assets of the Equity Trust held in foreign
countries.
There may be less publicly available information about a foreign company
than a U.S. company. Foreign securities markets may have substantially less
volume than U.S. securities markets and some foreign company securities are less
liquid than securities of otherwise comparable U.S. companies. A portfolio of
foreign securities may also be adversely affected by fluctuations in the rates
of exchange between the currencies of different nations and by exchange control
regulations. Foreign markets also have different clearance and settlement
procedures that could cause the Equity Trust to encounter difficulties in
purchasing and selling securities on such markets and may result in the Equity
Trust missing attractive investment opportunities or experiencing loss. In
addition, a portfolio that includes foreign securities can expect to have a
higher expense ratio because of the increased transaction costs on non-U.S.
securities markets and the increased costs of maintaining the custody of foreign
securities. The Equity Trust does not have an independent limit on the amount of
its assets that it may invest in the securities of foreign issuers.
The Equity Trust also may purchase sponsored American Depository Receipts
("ADRs") or U.S. denominated securities of foreign issuers. ADRs are receipts
issued by United States banks or trust companies in respect of securities of
foreign issuers held on deposit for use in the United States securities markets.
While ADRs may not necessarily be denominated in the same currency as the
securities into which they may be converted, many of the risks associated with
foreign securities may also apply to ADRs. In addition, the underlying issuers
of certain depository receipts, particularly unsponsored or unregistered
depositary receipts, are under no obligation to distribute stockholder
communications to the holders of such receipts, or to pass through to them any
voting rights with respect to the deposited securities.
Interest Rate Transactions. The Equity Trust has entered into an interest
rate swap agreement and may enter into interest rate swap or cap transactions.
The use of interest rate swaps and caps is a highly specialized activity that
involves investment techniques and risks different from those associated with
ordinary portfolio security transactions. In an interest rate swap, the Equity
Trust would agree to pay to the other party to the interest rate swap (which is
known as the "counterparty") periodically a fixed rate payment in exchange for
the counterparty agreeing to pay to the Equity Trust periodically a variable
rate payment that is intended to approximate the Equity Trust's variable rate
payment obligation on one or more series of its preferred stock. In an interest
rate cap, the Equity Trust would pay a premium to the interest rate cap to the
counterparty and, to the extent that a specified variable rate index exceeds a
predetermined fixed rate, would receive from the counterparty payments of the
difference based on the notional amount of such cap. Interest rate swap and cap
transactions introduce additional risk because the Equity Trust would remain
obligated to pay preferred stock dividends when due in accordance with the
Articles Supplementary even if the counterparty defaulted. In addition, at the
time an interest rate swap or cap transaction reaches its scheduled termination
date, there is a risk that the Equity Trust will not be able to obtain a
replacement transaction or that the terms of the replacement will not be as
favorable as on the expiring transaction. The Equity Trust will usually enter
into
21
swaps or caps on a net basis; that is, the two payment streams will be netted
out in a cash settlement on the payment date or dates specified in the
instrument, with the Equity Trust's receiving or paying, as the case may be,
only the net amount of the two payments. The Equity Trust intends to segregate
cash or liquid securities having a value at least equal to the value of its net
payment obligations under any swap transaction, marked to market daily.
Futures Transactions. Futures and options on futures entail certain risks,
including but not limited to the following:
- no assurance that futures contracts or options on futures can be offset
at favorable prices;
- possible reduction of the yield of the Equity Trust due to the use of
hedging;
- possible reduction in value of both the securities hedged and the hedging
instrument;
- possible lack of liquidity due to daily limits or price fluctuations;
- imperfect correlation between the contracts and the securities being
hedged; and
- losses from investing in futures transactions that are potentially
unlimited and the segregation requirements for such transactions.
Forward Currency Exchange Contracts. The use of forward currency contracts
may involve certain risks, including the failure of the counterparty to perform
its obligations under the contract and that the use of forward contracts may not
serve as a complete hedge because of an imperfect correlation between movements
in the prices of the contracts and the prices of the currencies hedged or used
for cover.
Dependence on Key Personnel. Mario J. Gabelli serves as the Equity Trust's
portfolio manager. Gabelli Funds is dependent upon the expertise of Mr. Gabelli
in providing advisory services with respect to the Equity Trust's investments.
If Gabelli Funds were to lose the services of Mr. Gabelli, its ability to
service the Equity Trust could be adversely affected. There can be no assurance
that a suitable replacement could be found for Mr. Gabelli in the event of his
death, resignation, retirement or inability to act on behalf of Gabelli Funds.
UNITED STATES FEDERAL INCOME TAXES
The following discussion is a brief summary of certain U.S. federal income
tax considerations affecting the Equity Trust and its stockholders. No attempt
is made to present a detailed explanation of all U.S. federal, state, local and
foreign tax concerns affecting the Funds and their stockholders, and the
discussion set forth herein does not constitute tax advice. The discussion
reflects applicable tax laws of the United States as of the date of this
Prospectus/Proxy Statement, which tax laws may be changed or subject to new
interpretations by the courts or the Internal Revenue Service (the "IRS")
retroactively or prospectively.
Taxation of The Equity Trust. The Equity Trust has elected to be treated
and has qualified as, and intends to continue to qualify as, a regulated
investment company under Subchapter M of the Code. Accordingly, it must, among
other things, (i) 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 gain from options, futures and forward contracts) derived with
respect to its business of investing in such stock, securities or currencies;
(b) interests in "qualified publicly traded partnerships" (as defined in the
Code); and (ii) diversify its holdings so that, at the end of each quarter of
each taxable year (a) at least 50% of the market value of its 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 its total assets and not more than 10% of the outstanding
voting securities of such issuer, and (b) not more than 25% of the market value
of its total assets is invested in the securities (other than U.S. government
securities and the securities of other regulated investment companies) of (I)any
one issuer, (II) any two or more issuers that it controls and that are
determined to be engaged in the same business or similar or related trades or
businesses or (III) any one or more "qualified publicly traded partnerships" (as
defined in the Code).
22
As a regulated investment company, the Equity Trust generally is not
subject to U.S. federal income tax on income and gains that it distributes each
taxable year to stockholders, if it distributes at least 90% of the sum of its
(i) investment company taxable income (as that term is defined in the Code)
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 Equity Trust intends to distribute at least annually
substantially all of such income. The Equity Trust will be subject to income tax
at regular corporate rates on any taxable income or gains that it does not
distribute to its shareholders.
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 the excise tax, the Equity Trust must distribute during
each calendar year an amount at least equal to the sum of (i) 98% of its
ordinary income (not taking into account any capital gains or losses) for the
calendar year, (ii) 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 to use its fiscal
year), and (iii) certain undistributed amounts from previous years on which it
paid no U.S. federal income tax. While the Equity Trust 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 its
taxable income and capital gains will be distributed to avoid entirely the
imposition of the excise tax. In that event, the Equity Trust will be liable for
the excise tax only on the amount by which it does not meet the foregoing
distribution requirement.
If for any taxable year the Equity Trust does not qualify as a regulated
investment company, all of its taxable income (including its net capital gain)
will be subject to tax at regular corporate rates without any deduction for
distributions to stockholders, and such distributions will be taxable to the
stockholders as ordinary dividends to the extent of its current and accumulated
earnings and profits.
Taxation of Equity Trust Stockholders. Distributions paid to holders of
Equity Trust Common Stock by the Equity Trust from its net investment income or
from an excess of net short-term capital gains over net long-term capital losses
(together referred to hereinafter as "ordinary income dividends") are generally
taxable to them as ordinary income to the extent of the Equity Trust's earning
and profits. Such dividends (if designated by the Equity Trust) may, however,
qualify (provided holding period and other requirements are met at the Fund and
stockholder level) (i) for the dividends received deduction in the case of
corporate stockholders to the extent that the Equity Trust's income consists of
qualifying dividend income from U.S. corporations and (ii) under the Jobs and
Growth Tax Relief Reconciliation Act of 2003 (effective for taxable years after
December 31, 2002 through December 31, 2008), as qualified dividend income
eligible for the reduced maximum rate to individuals of generally 15% (5% for
individuals in lower tax brackets) to the extent that the Equity Trust receives
qualified dividend income. Qualified dividend income is, in general, dividend
income from taxable domestic corporations and certain foreign corporations
(e.g., generally, foreign corporations incorporated in a possession of the
United States or in certain countries with a comprehensive tax treaty with the
United States, or the stock of which is readily tradable on an established
securities market in the United States). 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 you but
retained by the Equity Trust, are taxable to stockholders as long-term capital
gains if they have been properly designated by the Equity Trust, regardless of
the length of time stockholders have owned Equity Trust Common Stock. The tax
rate on net long-term capital gain of individuals is reduced generally from 20%
to 15% (5% for individuals in lower brackets) for such gain realized before
January 1, 2009. Distributions in excess of the Equity Trust's earnings and
profits will first reduce the adjusted tax basis of Equity Trust Common Stock
and, after such adjusted tax basis is reduced to zero, will constitute capital
gains (assuming the Equity Trust Common Stock is held as a capital asset).
Generally, not later than 60 days after the close of its taxable year, the
Equity Trust will provide stockholders with a written notice designating the
amount of any qualified dividend income or capital gain dividends and other
distributions.
The sale or other disposition of Equity Trust Common Stock will generally
result in capital gain or loss, and will be long-term capital gain or loss if
the stock has been held for more than one year at the time of sale. Any loss
upon the sale or exchange of Equity Trust Common Stock 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
23
undistributed capital gain dividend). A loss realized on a sale or exchange of
Equity Trust Common Stock will be disallowed if other Equity Trust Common Stock
is acquired within a 61-day period beginning 30 days before and ending 30 days
after the date that the stock is disposed of. In such case, the basis of the
stock 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 non-corporate taxpayers, short-term capital
gains will currently be taxed at a maximum rate of 35% while long-term capital
gains generally will be taxed at a maximum rate of 15%.
If the Equity Trust pays a dividend in January that 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 Equity Trust and received by stockholders on December 31 of
the year in which the dividend was declared.
The Equity Trust is required in certain circumstances to backup withhold on
taxable dividends and certain other payments paid to non-corporate holders of
its stock who do not furnish the Equity Trust 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 may be refunded or credited against the stockholder's U.S. federal income
tax liability, if any, provided that the required information is furnished to
the IRS.
The foregoing is a general and abbreviated summary of the provisions of the
Code and the Treasury regulations in effect as they directly govern the taxation
of the Equity Trust 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.
INFORMATION ABOUT THE REORGANIZATION
General. Under the Agreement, the Equity Trust will acquire all or
substantially all of the assets of Sterling Capital (other than the Reserve),
and assume the Stated Liabilities of Sterling Capital in exchange for Equity
Trust Common Stock (plus cash in lieu of fractional shares) on the Effective
Date. As a result of the Reorganization and on the Effective Date, each Sterling
Capital shareholder would receive that number of Shares of Equity Trust Common
Stock (plus cash in lieu of fractional shares) having an aggregate net asset
value equal to the aggregate net asset value of such shareholder's Sterling
Capital shares as of the close of business on the Effective Date (as reduced by
the shareholder's pro rata share of the Reserve); provided, however, that if the
average closing price of Equity Trust Common Stock on the New York Stock
Exchange for the 20 business days prior to the Effective Date exceeds the net
asset value per share of Equity Trust Common Stock on the Effective Date, the
number of shares of Equity Trust Common Stock to be issued to Sterling Capital
shall be computed by dividing (i) the aggregate value of Sterling Capital's
assets, net of Sterling Capital's Stated Liabilities and the Reserve on the
Effective Date by (ii) the lower of (x) the average of such closing prices for
the 20 business days prior to the date of the Reorganization and (y) 103% of the
net asset value per share of Equity Trust Common Stock computed on the Effective
Date (the "Alternative Value"). As of March 31, 2005, the closing price of
Equity Trust Common Stock on the New York Stock Exchange was $9.00, which
represents a premium of 7.14% to its net asset value per share of $8.40 on such
date. [Equity Trust Common Stock has generally traded at a premium to its net
asset value for [period]. There can be no assurance that this will continue or
that the value of the shares of Equity Trust Common Stock to be issued in the
Reorganization will be valued according to the Alternative Value.].
The Equity Trust will not issue any fractional shares to Sterling Capital
shareholders. In lieu thereof, Sterling Capital will receive from the Equity
Trust for distribution to its shareholders cash in an amount equal to the
aggregate net asset value of the fractional shares otherwise distributable to
Sterling Capital shareholders. The cash to be distributed in lieu of fractional
shares will be calculated on the same basis as the
24
formula to be used to calculate the number of full shares. No sales charge or
fee of any kind will be charged to Sterling Capital shareholders in connection
with their receipt of Common Stock of the Equity Trust in the Reorganization.
Following the Reorganization, Sterling Capital will proceed to dissolve and
terminate in accordance with the New York Business Corporation Law and other
applicable law, and the Reserve will be transferred to a liquidating trust for
the benefit of Sterling Capital shareholders.
The Agreement may be terminated and the Reorganization abandoned, whether
before or after approval by Sterling Capital's shareholders, at any time prior
to the Effective Date:
- by the mutual written consent of the Board of Directors of each Fund, or
- by either Fund if the conditions to that Fund's obligations under the
Agreement have not been satisfied or waived.
Reasons for the Reorganization. The Board of Directors of Sterling Capital
considered and approved the Reorganization at meetings held on October 5, 2004
and March 28, April 25 and May 16, 2005, and approved the Reorganization at the
meeting held on May 16, 2005. The Board of Directors of the Equity Trust
considered and approved the Reorganization at meetings held on February 16, 2005
and May 18, 2005. The Equity Trust and Sterling Capital executed the Agreement
and announced the proposed Reorganization on May 23, 2005.
For the reasons discussed below, the Board of Directors of each Fund,
including a majority of the Non-interested Directors of each Fund, after
consideration of the potential benefits of the Reorganization to the
shareholders of that Fund, the options available and consequences that could
potentially occur without the Reorganization, and the expenses expected to be
incurred by that Fund in connection with the Reorganization, determined that the
proposed Reorganization is in the best interests of each Fund. The Board of
Directors of Sterling Capital, including the Non-Interested Directors, voted
unanimously to recommend that shareholders of Sterling Capital also approve the
Reorganization.
Sterling Capital Board Considerations. The Sterling Capital Board of
Directors considered several factors prior to approving the Reorganization.
Beginning in 2003, the management of Sterling Capital began to express its
concern to the Board of Directors of Sterling Capital regarding Sterling
Capital's high expense ratio due to its relatively small size and the potential
increase in Sterling Capital's expense ratio due to the various requirements of
the Sarbanes-Oxley Act of 2002 and related legislation which generally imposed
increased compliance expenses on registered investment companies. At this time,
the management of Sterling Capital began to review several options with the
Board in connection with the operation of Sterling Capital in light of the
anticipated increased expense ratio. These options included the merger of the
Fund with an investment company managed by a third party investment adviser and
the liquidation of the Fund.
At a meeting of the Sterling Capital Board of Directors in early 2004, the
management of Sterling Capital recommended to the Board of Directors of Sterling
Capital merging Sterling Capital with a fund managed by a reputable third party
advisor, provided that such fund had a similar investment objective, a good
performance record, the transaction was able to be structured on a tax free
basis and the target fund was large enough to provide investors with improved
liquidity and lower expenses. During these discussions, the management of
Sterling Capital noted that liquidating Sterling Capital could cause investors
to incur unfavorable tax consequences if they were required to pay capital gains
taxes on the proceeds received in connection with liquidation. In addition, Mr.
Reisner informed the Board of Directors that he would like to retire from his
position of president and portfolio manager of Sterling Capital and that hiring
a new portfolio manager to run Sterling Capital internally or hiring a third
party manager to manage Sterling Capital externally likely would increase
Sterling Capital's expense ratio. In connection with these discussions, the
Board of Directors of Sterling Capital authorized Sterling Capital's management
to commence a search for a merger candidate.
25
Throughout the early part of 2004, Sterling Capital's management entered
into discussions with different investment advisers regarding a potential merger
transaction involving Sterling Capital, and the Board of Directors of Sterling
Capital was periodically updated regarding the status of these discussions.
Following a lengthy search process, the management of Sterling Capital
reached a preliminary agreement with the Equity Trust on the key economic terms
of a transaction to combine the two funds. The management of Sterling Capital
presented these economic terms to the Board of Directors of Sterling Capital at
a meeting held on October 5, 2004. At this meeting, the Board of Directors of
Sterling Capital approved these terms in principle, provided that Sterling
Capital was able to negotiate an acceptable agreement with the Equity Trust and
due diligence with respect to the Equity Trust was acceptable to the Board of
Directors of Sterling Capital. The Board of Directors of Sterling Capital
directed Sterling Capital's management and legal counsel to negotiate an
agreement with the Equity Trust and to conduct due diligence with respect to the
Equity Trust and to present a final proposal to the Board at a subsequent
meeting.
At subsequent meetings of the Board of Directors of Sterling Capital held
on March 28, April 25 and May 16, 2005, the Board of Directors of Sterling
Capital considered the terms of the Reorganization Agreement and the due
diligence reports with respect to the Equity Trust. Although the Board of
Directors of Sterling Capital did not consider any one factor determinative in
connection with its deliberations regarding the Reorganization, the Board of
Directors of Sterling Capital considered the following factors to be significant
in its consideration of the Reorganization:
- the reduced expense ratio for the current shareholders of Sterling
Capital upon becoming shareholders of the Equity Trust;
- the lack of liquidity of the Sterling Capital common shares and the
greater liquidity of common shares of the Equity Trust;
- the tax free nature of the Reorganization;
- the discount to net asset value at which the Sterling Capital common
shares historically have traded;
- the reputation and performance of the Equity Trust and Gabelli Funds;
- the impending retirement of Mr. Reisner from the positions of president
and portfolio manager of Sterling Capital; and
- the economic terms of the Reorganization.
At the May 16, 2005 meeting of the Board of Directors of Sterling Capital,
the Board of Directors of Sterling Capital approved the Reorganization, approved
the execution and delivery of the Reorganization Agreement and approved
submitting the Reorganization to the vote of Sterling Capital's shareholders
together with a recommendation for Sterling Capital's shareholders to vote "for"
the Reorganization.
In connection with the Sterling Capital Board of Director's consideration
and approval of the Reorganization, certain common shareholders of Sterling
Capital who, in the aggregate, owned [ ]% of the outstanding common shares
of Sterling Capital as of [ ], 2005, entered into an exculpation agreement,
dated as of May 12, 2005, with the Board of Directors of Sterling Capital
whereby each such shareholder agreed (i) to waive and forgo any claim such
shareholder might have against any director of Sterling Capital and (ii) to
release each director of Sterling Capital from any liability such director may
have to such shareholder in connection with the consideration and approval of
the Reorganization by the Board of Directors of Sterling Capital. Sterling
Capital also purchased an errors and omissions insurance policy for the
directors and officers of Sterling Capital.
Equity Trust Board Considerations. At meetings of the Equity Trust Board
of Directors held on February 16, 2005 and May 18, 2005, the Board considered
information concerning Sterling Capital and the proposed Reorganization,
including the general compatibility of the investment objectives and strategies
of the two Funds. The Board noted that the Reorganization represented an
opportunity to increase the Equity Trust's assets without diluting the interests
of existing stockholders. The Board further noted that the Reorganization was
structured to be a tax-free transaction for the Equity Trust and that each of
the Equity Trust and Sterling
26
Capital would pay its own expenses in the Reorganization, except that the
expenses of printing and mailing the Prospectus/Proxy Statement to Sterling
Capital shareholders would be shared by Sterling Capital and Gabelli Funds.
Representatives of Gabelli Funds advised the Board that if the Reorganization
was accomplished, it could serve as a template for further acquisitions of
closed-end investment companies whose investment objectives and strategies were
similar to those of the Equity Trust and whose acquisition may be beneficial to
the existing stockholders of the Equity Trust. No one factor was identified by
the Board as the principal factor in its decision to approve the Reorganization
and authorize the execution and delivery of the Agreement.
Terms of the Agreement. The following is a summary of certain terms of the
Agreement. This description is qualified by reference to the Agreement, which is
attached to this Prospectus/Proxy Statement as Exhibit A.
The Agreement provides for the transfer of all or substantially all of the
assets of Sterling Capital (other than the Reserve) to the Equity Trust in
exchange solely for full shares of Equity Trust Common Stock, the assumption by
the Equity Trust of the Stated Liabilities of Sterling Capital, and the
distribution of Equity Trust Common Stock to the shareholders of Sterling
Capital, followed by the termination, dissolution and complete liquidation
(other than the Reserve) of Sterling Capital. On the Effective Date of the
Reorganization, Sterling Capital will transfer all its assets, other than cash
in an amount necessary to pay dividends and distributions and the Reserve, to
the Equity Trust. The Equity Trust will assume only the Stated Liabilities and
will not assume any other debts, liabilities or obligations of Sterling Capital.
Sterling Capital will receive for distribution to its shareholders the
number of full shares of Equity Trust Common Stock computed by dividing the
aggregate value of Sterling Capital's assets, net of its Stated Liabilities and
the Reserve, by the net asset value of one share of Equity Trust Common Stock on
the NYSE as determined on the Effective Date; except that if the average closing
price of Equity Trust Common Stock for the 20 business days prior to the
Effective Date of the Reorganization exceeds the net asset value per share of
Equity Trust Common Stock on the Effective Date, the number of shares of Equity
Trust Common Stock to be issued to Sterling Capital shall be computed according
to the "Alternative Value," as follows: the number of shares shall be computed
by dividing (i) the aggregate value of Sterling Capital's assets, net of the
Stated Liabilities and the Reserve, by (ii) the lower of (x) the average of such
closing prices on the NYSE for the 20 business days prior to the Effective Date
and (y) 103% of the net asset value per share of Equity Trust Common Stock
computed on the Effective Date.
The Equity Trust will not issue fractional shares of Common Stock. Instead,
it will deliver cash in lieu of fractional shares to Sterling Capital for
distribution to its shareholders. The cash to be distributed in lieu of
fractional shares will be calculated on the same basis as the formula to be used
to calculate the number of full shares.
As soon as possible after the Effective Date, Sterling Capital will
distribute in complete liquidation (other than the Reserve), pro rata to its
stockholders of record, all of the Equity Trust Common Stock and cash in lieu of
fractional shares. Upon completion of that distribution, Sterling Capital will
thereupon proceed to dissolve and terminate in accordance with the New York
Business Corporation Law and other applicable law, and the Reserve will be
transferred to a liquidating trust for the benefit of Sterling Capital
shareholders. All issued and outstanding shares of Sterling Capital will be then
cancelled on its books.
The Equity Trust will not issue new certificates evidencing ownership of
Equity Trust Common Stock to shareholders of Sterling Capital holding share
certificates until such shareholders have surrendered their outstanding
certificates or, in the event of lost certificates, posted adequate bond.
Sterling Capital will request its shareholders with share certificates to
surrender their certificates or post adequate bond therefor. The Equity Trust
will not pay dividends to a shareholder of Sterling Capital who continues to
hold Sterling Capital share certificates unless and until such Sterling Capital
shareholder has surrendered his or her certificates for exchange.
The Agreement may be terminated at any time prior to the Effective Date,
whether before or after approval of the Agreement by Sterling Capital
shareholders, or the Effective Date may be postponed, by
27
mutual consent of the Board of Directors of each Fund or by either Fund if the
other Fund has violated a condition of the Agreement.
Expenses of the Reorganization. For information about the expenses of the
Reorganization, see "Synopsis -- Expenses of the Reorganization."
Tax Considerations. The following is a general summary of the material
anticipated U.S. federal income tax consequences of the Reorganization. The
discussion is based upon the Code, Treasury regulations, court decisions,
published positions of the IRS and other applicable authorities, all as in
effect on the date hereof and all of which are subject to change or differing
interpretations (possibly with retroactive effect). The discussion is limited to
U.S. persons who hold their Sterling Capital Shares as capital assets for U.S.
federal income tax purposes (generally, assets held for investment). This
summary does not address all of the U.S. federal income tax consequences that
may be relevant to a particular shareholder or to shareholders who may be
subject to special treatment under U.S. federal income tax laws. No ruling has
been or will be obtained from the IRS regarding any matter relating to the
Reorganization. No assurance can be given that the IRS would not assert a
position contrary to any of the tax aspects described below. Shareholders must
consult their own tax advisers as to the U.S. federal income tax consequences of
the Reorganization, as well as the effects of state, local and non-U.S. tax
laws.
It is a condition to closing the Reorganization that Sterling Capital will
receive an opinion of Skadden, Arps, Slate, Meagher & Flom LLP ("Skadden"),
counsel to Sterling Capital, and the Equity Trust will receive an opinion of
Willkie Farr & Gallagher LLP ("Willkie"), counsel to the Equity Trust, dated as
of the closing date of the Reorganization, regarding the characterization of the
Reorganization as a "reorganization" within the meaning of Section 368(a) of the
Internal Revenue Code. As such a reorganization, the U.S. federal income tax
consequences of the Reorganization can be summarized as follows:
- No gain or loss will be recognized by the Equity Trust or Sterling
Capital upon the transfer to the Equity Trust of all or substantially all
of the assets of the Sterling Capital in exchange solely for Equity Trust
Common Stock and the assumption by the Equity Trust of the Stated
Liabilities and the subsequent liquidation of Sterling Capital.
- No gain or loss will be recognized by a shareholder of Sterling Capital
who exchanges all of his, her or its Sterling Capital Shares solely for
Equity Trust Common Stock pursuant to the Reorganization (except with
respect to cash received in lieu of a fractional share of Equity Trust
Common Stock, as discussed below).
- The aggregate tax basis of the Equity Trust Common Stock received by a
shareholder of Sterling Capital pursuant to the Reorganization will be
the same as the aggregate tax basis of the Sterling Capital Shares
surrendered in exchange therefor (reduced by any amount of tax basis
allocable to a fractional share of Equity Trust Common Stock for which
cash is received).
- A shareholder of Sterling Capital that receives cash in lieu of a
fractional share of Equity Trust Common Stock pursuant to the
Reorganization will recognize capital gain or loss with respect to the
fractional share in an amount equal to the difference between the amount
of cash received for the fractional share and the portion of such
shareholder's tax basis in its Sterling Capital Shares that is allocable
to the fractional share. The capital gain or loss will be long-term if
the holding period for such Sterling Capital Shares is more than one year
as of the date of the exchange.
- The holding period of the Equity Trust Common Stock received by a
shareholder of Sterling Capital pursuant to the Reorganization will
include the holding period of the Sterling Capital Shares surrendered in
exchange therefor.
- The Equity Trust's tax basis in the Sterling Capital's assets received by
the Equity Trust pursuant to the Reorganization will, in each instance,
equal the tax basis of such assets in the hands of the Sterling Capital
immediately prior to the Reorganization, and the Equity Trust's holding
period of such assets will, in each instance, include the period during
which the assets were held by the Sterling Capital.
28
The opinions of Skadden and Willkie, in each case, will be based on U.S.
federal income tax law in effect on the closing date of the Reorganization.
Also, in rendering their respective opinions, Skadden and Willkie will each rely
upon certain representations of the management of the Equity Trust and the
Sterling Capital and assume, among other things, that the Reorganization will be
consummated in accordance with the Agreement and as described herein. An opinion
of counsel is not binding on the IRS or any court.
The Equity Trust intends to continue to be taxed under the rules applicable
to regulated investment companies as defined in Section 851 of the Code, which
are the same rules currently applicable to Sterling Capital and its
shareholders.
For five years after the Closing Date, the combined Fund will not be
allowed to offset certain pre-Reorganization built-in gains attributable to one
Fund with certain built-in losses, if any, attributable to the other Fund.
Required Vote. Approval of the Reorganization requires the affirmative
vote of the holders of a majority of the shares of Sterling Capital outstanding
on the record date.
ADDITIONAL INFORMATION ABOUT THE FUNDS
DESCRIPTION OF COMMON STOCK
The Equity Trust. Pursuant to an amendment to the Equity Trust's Articles
of Incorporation that was approved by stockholders in 2004, the Board of
Directors may increase or decrease the aggregate number of shares of stock of
the Equity Trust or the number of shares of stock of any class or series that
the Equity Trust has authority to issue without stockholder approval. The Equity
Trust is currently authorized to issue 182,000,000 shares of Common Stock, $.001
par value. Shares of Equity Trust Common Stock entitle its holders to one vote
per share. Holders of Equity Trust Common Stock are entitled to share equally in
dividends authorized by the Equity Trust's Board of Directors payable to the
holders of such Common Stock and in the net assets of the Equity Trust available
on liquidation for distribution to holders of such Common Stock. Shares have
noncumulative voting rights and no conversion, preemptive or other subscription
rights, and are not redeemable. The outstanding shares of Common Stock of the
Equity Trust are fully paid and non-assessable. In the event of liquidation,
each share of Common Stock is entitled to its proportion of the Equity Trust's
assets after payment of debts and expenses and the amounts payable to holders of
the Equity Trust preferred stock ranking senior to the Common Stock as described
below.
Upon a liquidation, dissolution or winding up of the affairs of the Equity
Trust (whether voluntary or involuntary), holders of the Equity Trust preferred
stock then outstanding will be entitled to receive out of the assets of the
Equity Trust available for distribution to stockholders, after satisfying claims
of creditors but before any distribution or payment of assets is made to holders
of Equity Trust Common Stock, a liquidation distribution in the amount of the
liquidation preference of the preferred stock plus an amount equal to all unpaid
dividends accumulated to and including the date fixed for such distribution or
payment (whether or not earned or declared by the Equity Trust but excluding
interest thereon), and such preferred stockholders will be entitled to no
further participation in any distribution or payment in connection with any such
liquidation, dissolution or winding up. Unless and until the liquidation
payments due to preferred stockholders have been paid in full, no dividends or
distributions will be made to holders of Equity Trust Common Stock.
The Equity Trust is currently authorized to issue up to 18,000,000 shares
of $0.001 par value cumulative preferred stock. The cumulative preferred stock
is senior to the Common Stock and results in the financial leveraging of the
Common Stock. Such leveraging tends to magnify both the risks and opportunities
to holders of Equity Trust Common Stock.
The Equity Trust holds shareholder meetings annually.
Sterling Capital. Sterling Capital is authorized to issue 10,000,000
shares of common stock, par value $1 per share.
29
The following table shows information about the common stock of each Fund
as of March 31, 2005.
(4)
AMOUNT ISSUED AND
(3) OUTSTANDING EXCLUSIVE
(1) (2) AMOUNT HELD BY FUND OF AMOUNT SHOWN
TITLE OF CLASS AMOUNT AUTHORIZED FOR ITS OWN ACCOUNT UNDER (3)
----------------- ------------------ ------------------- ---------------------
STERLING CAPITAL.............. Common Stock, $1 10,000,000 shares
par value
EQUITY TRUST.................. Common Stock, 182,000,000 shares 800,000 shares 141,012,252 shares
$0.001 par value
The shares of common stock of Sterling Capital are listed and traded on the
AMEX under the symbol "SPR." The shares of Common Stock of the Equity Trust are
listed and traded on the NYSE under the symbol "GAB." As of March 31, 2005, the
net asset value of Sterling Capital common stock was $____, and the market price
per share was $____. As of that same date, the net asset value of Equity Trust
Common Stock was $8.40, and the market price per share was $9.00.
SHARE REPURCHASES
Holders of Equity Trust Common Stock do not, and will not, have the right
to require the Equity Trust to repurchase their stock. The Equity Trust,
however, may repurchase its Common Stock from time to time as and when it deems
such a repurchase advisable, subject to maintaining required asset coverage for
each series of outstanding preferred stock. The Board of Directors has adopted a
policy to authorize such repurchases when Equity Trust Common Stock is trading
at a discount of 10% or more from net asset value. The policy does not limit the
amount of shares of Common Stock that can be repurchased. The percentage of the
discount from net asset value at which share repurchases will be authorized may
be changed by the Board of Directors. Pursuant to the 1940 Act, the Equity Trust
may repurchase its Common Stock on a securities exchange (provided that the
Equity Trust has informed its stockholders within the preceding six months of
its intention to repurchase such stock) or pursuant to tenders or as otherwise
permitted in accordance with Rule 23c-1 under the 1940 Act. Under that Rule,
certain conditions must be met regarding, among other things, distribution of
net income for the preceding fiscal year, status of the seller, price paid,
brokerage commissions, prior notice to stockholders of an intention to purchase
stock and purchasing in a manner and on a basis that does not discriminate
unfairly against the other stockholders through their interest in the Equity
Trust.
When the Equity Trust repurchases its Common Stock for a price below net
asset value, the net asset value of the Common Stock that remains outstanding
will be enhanced, but this does not necessarily mean that the market price of
the outstanding Common Stock will be affected, either positively or negatively.
During the year ended December 31, 2004, the Equity Trust did not repurchase any
shares of its Common Stock in the open market.
Sterling Capital. Sterling Capital has not repurchased, and has no present
intention to repurchase, any of its common stock.
DISCOUNT TO NET ASSET VALUE
Shares of closed-end investment companies frequently trade at a discount to
net asset value. This characteristic is a risk separate and distinct from the
risk that a Fund's net asset value may decrease, and this risk may be greater
for shareholders expecting to sell their shares in a relatively short period.
THE SHARES OF COMMON STOCK OF THE FUNDS SHOULD THUS BE VIEWED AS BEING DESIGNED
PRIMARILY FOR LONG-TERM INVESTORS AND SHOULD NOT BE CONSIDERED A VEHICLE FOR
TRADING PURPOSES.
As of March 31, 2005, shares of Sterling Capital traded at a discount to
market price of 20%. The Equity Trust's shares have traded in the market for
periods of time above and below net asset value, and recently have traded
generally at a premium. As of March 31, 2005, shares of the Equity Trust traded
at a market price premium of 7.14%. There can be no assurance that Equity Trust
Common Stock will continue to trade at a premium before or after the
Reorganization.
30
PER SHARE DATA FOR STERLING CAPITAL
COMMON STOCK TRADED ON THE AMEX
PREMIUM (DISCOUNT)
MARKET PRICE NET ASSET VALUE AS % OF NAV
------------------- ------------------- -------------------
PERIOD (CALENDAR YEAR) HIGH LOW HIGH LOW HIGH LOW
---------------------- -------- -------- -------- -------- -------- --------
[DATA TO BE INSERTED]
PER SHARE DATA FOR THE EQUITY TRUST
COMMON STOCK TRADED ON THE NYSE
PREMIUM
(DISCOUNT) AS
PERIOD MARKET PRICE NET ASSET VALUE % OF NAV
------ ------------- --------------- -------------
FISCAL YEAR 2003........................ HIGH LOW HIGH LOW HIGH LOW
Q1.................................... $7.82 $5.35 $6.70 $5.35 26.72% 8.13%
Q2.................................... $8.04 $6.93 $7.04 $5.67 23.62% 9.29%
Q3.................................... $7.79 $7.28 $7.34 $6.76 11.54% 2.90%
Q4.................................... $8.04 $7.39 $7.98 $7.06 5.34% (0.63)%
FISCAL YEAR 2004........................ HIGH LOW HIGH LOW HIGH LOW
Q1.................................... $9.09 $8.06 $8.49 $7.70 12.47% 0.37%
Q2.................................... $8.70 $7.75 $8.32 $7.62 6.53% 0.64%
Q3.................................... $8.71 $7.72 $8.22 $7.31 12.68% 1.63%
Q4.................................... $9.26 $8.29 $8.70 $7.66 9.14% 3.24%
FISCAL YEAR 2005........................ HIGH LOW HIGH LOW HIGH LOW
Q1.................................... $9.27 $8.82 $8.88 $8.26 8.84% 3.83%
CAPITALIZATION
The following table shows the capitalization of Sterling Capital on an
audited basis and the Equity Trust on an audited basis as of December 31, 2004
and on a pro forma basis as of that same date giving effect to the
Reorganization:(1)
STERLING PRO FORMA PRO FORMA
CAPITAL THE EQUITY TRUST ADJUSTMENTS REORGANIZATION
----------- ---------------- ----------- --------------
Net assets attributable to
common stock
shareholders............... $18,666,665 $1,219,482,679 $(250,000) $1,237,899,344(1)
Net asset value per share.... $ 7.47 $ 8.69 $ -- $ 8.69(2)
Shares outstanding........... 2,500,000 140,332,964 (442,433) 142,390,531(3)
---------------
(1) Assumes that the Reorganization had been consummated on December 31, 2004
and is for information purposes only. No assurance can be given as to how
many shares of Equity Trust Common Stock shareholders of Sterling Capital
will receive on the date the Reorganization takes place, and the foregoing
should not be relied upon to reflect the number of shares of Equity Trust
Common Stock that actually will be received on or after such date. Assumes
accrual of estimated Reorganization-related expenses of $250,000.
(2) Net asset value per share after Reorganization-related expenses and
distribution of ordinary income, if any.
(3) Assumes the issuance of 2,057,567 shares of Equity Trust Common Stock in
exchange for the net assets of Sterling Capital. The number of shares issued
was based on the net assets of Sterling Capital, net of
Reorganization-related expenses, and 103% of the net asset value of the
Equity Trust ($8.9507), on December 31, 2004
31
Trading Volume. The following table shows the average annual trading
volume of the Common Stock of the Equity Trust and shares of Sterling Capital
for each of the five most recent calendar years as reported by the NYSE and
AMEX, respectively.
THE EQUITY TRUST STERLING CAPITAL
---------------- ----------------
2000................................................... 109,539 shares
2001................................................... 195,769 shares
2002................................................... 213,011 shares
2003................................................... 181,152 shares
2004................................................... 153,971 shares
DIVIDENDS AND OTHER DISTRIBUTIONS
The Equity Trust. The Equity Trust may retain for reinvestment, and pay
the resulting federal income taxes on, its net capital gain, if any, although
the Equity Trust reserves the authority to distribute its net capital gain in
any year. The Equity Trust has a policy, which may be modified at any time by
its Board of Directors, of paying a minimum annual distribution of 10% of the
average net asset value of the Fund. The Fund's current quarterly distribution
level for 2005 is set at $0.18 per share in each of the first three quarters of
the year with an adjusting distribution in the fourth quarter of an amount
sufficient to pay 10% of the average net asset value of the Fund, as of the last
day of the four preceding calendar quarters, or to satisfy the minimum
distribution requirements of the Code, whichever is greater. Each quarter, the
Board of Directors reviews the amount of any potential distribution and the
income, capital gains or capital available. This policy permits holders of
Equity Trust 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. To avoid paying income tax at the corporate
level, the Equity Trust distributes substantially all of its investment company
taxable income and net capital gain. In the event that the Equity Trust's
investment company taxable income and net capital gain exceed the total of its
monthly distributions, the Equity Trust intends to pay such excess once a year.
If, for any calendar year, the total quarterly distributions exceed both current
earnings and profits and accumulated earnings and profits, the excess will
generally be treated as a tax-free return of capital up to the amount of a
stockholder's tax basis in the stock. The amount treated as a tax-free return of
capital will reduce a stockholder's tax basis in the stock, thereby increasing
such stockholder's potential gain or reducing his or her potential loss on the
sale of the stock. Any amounts distributed to a stockholder in excess of the
basis in the stock will be taxable to the stockholder as capital gain. The
Equity Trust's distribution policy may cause it to make taxable distributions to
shareholders in excess of the minimum amounts of such taxable distributions it
would be required to make in order to avoid liability for federal income tax. In
certain situations, this excess distribution may cause shareholders to be liable
for taxes for which they would not otherwise be liable if the Equity Trust paid
only that amount required to avoid liability for federal income tax.
In the event the Equity Trust distributes amounts in excess of its
investment company taxable income and net capital gain, such distributions will
decrease the Equity Trust's total assets and, therefore, have the likely effect
of increasing its expense ratio. In addition, in order to make such
distributions, the Equity Trust might have to sell a portion of its investment
portfolio at a time when independent investment judgment might not dictate such
action.
The Equity Trust, along with other closed-end registered investment
companies advised by Gabelli Funds, has obtained an exemption from Section 19(b)
of the 1940 Act and Rule 19b-1 thereunder permitting it to make periodic
distributions of long-term capital gains provided that any distribution policy
of the Equity Trust with respect to its Common Stock calls for periodic (e.g.,
quarterly or semi-annually, but in no event more frequently than monthly)
distributions in an amount equal to a fixed percentage of the Equity Trust's
average net asset value over a specified period of time or market price per
share of Common Stock at or about the time of distribution or pay-out of a fixed
dollar amount. The exemption also permits the Equity Trust to make distributions
with respect to its preferred stock in accordance with such stock's terms.
Sterling Capital. If the Reorganization is approved by Sterling Capital's
shareholders, then as soon as practicable before the Effective Date, Sterling
Capital will pay its shareholders a cash distribution of all
32
undistributed investment company taxable income and net capital gain. The
reorganization will restrict the availability of certain favorable tax
attributes of Sterling Capital following the reorganization, including any
capital loss carryover.
PORTFOLIO VALUATION
The Equity Trust. The net asset value of Equity Trust Common Stock is
computed based on the market value of the securities it holds and will generally
be determined daily as of the close of regular trading on the NYSE.
Portfolio securities listed or traded on a nationally recognized securities
exchange or traded in the U.S. over-the-counter market for which market
quotations are readily available are valued at the last quoted sale price or a
market's official closing price as of the close of business on the day the
securities are being valued. If there were no sales that day, the security is
valued at the average of the closing bid and asked prices, or, if there were no
asked prices quoted on such day, the security is valued at the most recently
available price or, if the Board of Directors so determines, by such other
method as the Board of Directors shall determine in good faith, to reflect its
fair market value. Portfolio securities traded on more than one national
securities exchange or market are valued according to the broadest and most
representative market, as determined by Gabelli Funds.
Portfolio securities primarily traded on foreign markets are generally
valued at the preceding closing values of such securities on their respective
exchanges or if after the close, market conditions change significantly, certain
foreign securities may be fair valued pursuant to procedures established by the
Board of Directors. Debt instruments that are not credit impaired with remaining
maturities of 60 days or less are valued at amortized cost, unless the Board of
Directors determines such does not reflect fair value, in which case these
securities will be valued at their fair value as determined by the Board of
Directors. Debt instruments having a maturity greater than 60 days for which
market quotations are readily available are valued at the latest average of the
bid and asked prices. If there were no asked prices quoted on such day, the
security is valued using the closing bid price. Futures contracts are valued at
the closing settlement price of the exchange or board of trade on which the
applicable contract is traded.
Securities and assets for which 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 of the Board of Directors. Fair
valuation methodologies and procedures may include, but are not limited to:
analysis and review of available financial and non-financial information about
the company; comparisons to the valuation and changes in valuation of similar
securities, including a comparison of foreign securities to the equivalent U.S.
dollar value ADR securities at the close of the U.S. exchange; and evaluation of
any other information that could be indicative of the value of the security.
The Equity Trust obtains valuations on the basis of prices provided by a
pricing service approved by the Board of Directors. All other investment assets,
including restricted and not readily marketable securities, are valued in good
faith at fair value under procedures established by and under the general
supervision and responsibility of the Equity Trust's Board of Directors.
In addition, whenever developments in one or more securities markets after
the close of the principal markets for one or more portfolio securities and
before the time as of which the Equity Trust determines its net asset value
would, if such developments had been reflected in such principal markets, likely
have more than a minimal effect on its net asset value per share, the Equity
Trust may fair value such portfolio securities based on available market
information as of the time it determines its net asset value.
Sterling Capital. Investments in securities traded on a national
securities exchange (or reported on the NASDAQ national market) are valued at
the last reported sales price on the day of valuation; other securities traded
in the over-the-counter market and listed securities for which no sale was
reported on that date are valued at the last quoted bid price, except for short
positions and call options written, for which the last quoted asked price is
used. Investments in real estate are valued at fair value as determined by the
Board of Directors.
33
PORTFOLIO TRANSACTIONS
The Equity Trust. Subject to policies established by the Board of
Directors of the Equity Trust, Gabelli Funds is responsible for placing purchase
and sale orders and the allocation of brokerage on behalf of the Equity Trust.
Transactions in equity securities are in most cases effected on U.S. stock
exchanges and involve the payment of negotiated brokerage commissions. In
general, there may be no stated commission in the case of securities traded in
over-the-counter markets, but the prices of those securities may include
undisclosed commissions or mark-ups. Principal transactions are not entered into
with affiliates of the Equity Trust. However, Gabelli & Company, Inc. may
execute transactions in the over-the-counter markets on an agency basis and
receive a stated commission therefrom. To the extent consistent with applicable
provisions of the 1940 Act and the rules and exemptions adopted by the SEC
thereunder, as well as other regulatory requirements, the Equity Trust's Board
of Directors have determined that portfolio transactions may be executed through
Gabelli & Company, Inc. and its broker-dealer affiliates if, in the judgment of
Gabelli Funds, the use of those broker-dealers is likely to result in price and
execution at least as favorable as those of other qualified broker-dealers, and
if, in particular transactions, those broker-dealers charge the Equity Trust a
rate consistent with that charged to comparable unaffiliated customers in
similar transactions. The Equity Trust has no obligations to deal with any
broker or group of brokers in executing transactions in portfolio securities. In
executing transactions, Gabelli Funds seeks to obtain the best price and
execution for the Equity Trust, taking into account such factors as price, size
of order, difficulty of execution and operational facilities of the firm
involved and the firm's risk in positioning a block of securities. While Gabelli
Funds generally seeks reasonably competitive commission rates, the Equity Trust
does not necessarily pay the lowest commission available.
Subject to obtaining the best price and execution, brokers who provide
supplemental research, market and statistical information to Gabelli Funds or
its affiliates may receive orders for transactions by the Equity Trust. The term
"research, market and statistical information" includes advice as to the value
of securities, and advisability of investing in, purchasing or selling
securities, and the availability of securities or purchasers or sellers of
securities, and furnishing analyses and reports concerning issues, industries,
securities, economic factors and trends, portfolio strategy and the performance
of accounts. Information so received will be in addition to and not in lieu of
the services required to be performed by Gabelli Funds under the Investment
Advisory Agreement and the expenses of Gabelli Funds will not necessarily be
reduced as a result of the receipt of such supplemental information. Such
information may be useful to Gabelli Funds and its affiliates in providing
services to clients other than the Equity Trust, and not all such information is
used by Gabelli Funds in connection with the Equity Trust. Conversely, such
information provided to Gabelli Funds and its affiliates by brokers and dealers
through whom other clients of Gabelli Funds and its affiliates effect securities
transactions may be useful to Gabelli Funds in providing services to the Equity
Trust.
Although investment decisions for the Equity Trust are made independently
from those of the other accounts managed by Gabelli Funds and its affiliates,
investments of the kind made by the Equity Trust may also be made by those other
accounts. When the same securities are purchased for or sold by the Equity Trust
and any of such other accounts, it is the policy of Gabelli Funds and its
affiliates to allocate such purchases and sales in the manner deemed fair and
equitable to all of the accounts, including the Equity Trust.
Sterling Capital. Decisions to buy and sell securities for Sterling
Capital are made by its Investment Committee, pursuant to policies approved by
its Board of Directors, which periodically reviews investment decisions. The
officers and Investment Committee of Sterling Capital are also responsible for
placing orders for the purchase and sale of securities and placing its brokerage
business.
DIVIDEND REINVESTMENT PLAN
The Equity Trust. Under the Equity Trust's Automatic Dividend Reinvestment
and Voluntary Cash Purchase Plan (the "Plan"), a stockholder whose shares of
Equity Trust Common Stock is registered in his own name will have all
distributions reinvested automatically by EquiServe Trust Company ("EquiServe"),
which is agent under the Plan, unless the stockholder elects to receive cash.
Distributions with respect to shares registered in the name of a broker-dealer
or other nominee (that is, in "street name") will be reinvested
34
by the broker or nominee in additional shares under the Plan, unless the service
is not provided by the broker or nominee or the stockholder elects to receive
distributions in cash. Investors who own Common Stock registered in street name
should consult their broker-dealers for details regarding reinvestment. All
distributions to investors who do not participate in the Plan will be paid by
check mailed directly to the record holder by EquiServe as dividend disbursing
agent.
Under the Plan, whenever the market price of the Common Stock is equal to
or exceeds net asset value at the time shares are valued for purposes of
determining the number of shares equivalent to the cash dividend or capital
gains distribution, participants in the Plan are issued shares of Equity Trust
Common Stock, valued at the greater of (i) the net asset value as most recently
determined or (ii) 95% of the then-current market price of the Common Stock. The
valuation date is the dividend or distribution payment date or, if that date is
not a NYSE trading day, the next preceding trading day. If the net asset value
of the common stock at the time of valuation exceeds the market price of the
common stock, participants will receive shares from the Equity Trust, valued at
market price. If the Equity Trust should declare a dividend or capital gains
distribution payable only in cash, EquiServe will buy the Common Stock for such
Plan in the open market, on the NYSE or elsewhere, for the participants'
accounts, except that EquiServe will endeavor to terminate purchases in the open
market and cause the Equity Trust to issue shares at the greater of net asset
value or 95% or market value if, following the commencement of such purchases,
the market value of the Common Stock exceeds net asset value.
Participants in the Plan have the option of making additional cash payments
to EquiServe, monthly, for investment in the shares as applicable. Such payments
may be made in any amount from $250 to $10,000. EquiServe will use all funds
received from participants to purchase shares of Equity Trust Common Stock in
the open market on or about the 15th of each month. EquiServe will charge each
stockholder who participates $0.75, plus a pro rata share of the brokerage
commissions. Brokerage charges for such purchases are expected to be less than
the usual brokerage charge for such transactions. It is suggested that
participants send voluntary cash payments to EquiServe in a manner that ensures
that EquiServe will receive these payments approximately 10 days before the 15th
of the month. A participant may without charge withdraw a voluntary cash payment
by written notice, if the notice is received by EquiServe at least 48 hours
before such payment is to be invested.
EquiServe maintains all stockholder accounts in the Plan and furnishes
written confirmations of all transactions in the account, including information
needed by stockholders for personal and tax records. Shares in the account of
each Plan participant will be held by EquiServe in noncertificated form in the
name of the participant. A Plan participant may send its share certificates to
EquiServe so that the shares represented by such certificates will be held by
EquiServe in the participant's stockholder account under the Plan. In the case
of stockholders such as banks, brokers or nominees, which hold shares for others
who are the beneficial owners, EquiServe will administer the Plan on the basis
of the number of shares certified from time to time by the stockholder as
representing the total amount registered in the stockholder's name and held for
the account of beneficial owners who participate in the Plan.
Experience under the Plan may indicate that changes are desirable.
Accordingly, the Equity Trust reserves the right to amend or terminate its Plan
as applied to any voluntary cash payments made and any dividend or distribution
paid subsequent to written notice of the change sent to the members of such Plan
at least 90 days before the record date for such dividend or distribution. The
Plan also may be amended or terminated by EquiServe on at least 90 days written
notice to the participants in such Plan. All correspondence concerning the Plan
should be directed to EquiServe at P.O. Box 43025, Providence, RI 02940-3025.
Sterling Capital. Sterling Capital does not have a dividend reinvestment
plan.
COMPARISON OF ORGANIZATIONAL STRUCTURE OF
THE EQUITY TRUST AND STERLING CAPITAL
Sterling Capital is organized as a New York corporation and the Equity
Trust is organized as a Maryland corporation. Key differences between the Funds'
articles of incorporation and by-laws are discussed below.
35
STERLING CAPITAL
[to be supplied]
THE EQUITY TRUST
The full text of the Equity Trust's Articles of Incorporation and Articles
Supplementary (collectively, the "Charter") and By-Laws are on file with the SEC
and these documents, as may be amended from time to time, will govern the Equity
Trust after the Reorganization.
Indemnification of Directors and Officers. The Equity Trust's By-Laws
provide that the Equity Trust, to the fullest extent permitted by law, will
indemnify its current and former Directors and officers and may indemnify its
employees or agents against liabilities and expenses incurred in connection with
litigation in which they may be involved because of their offices or association
with the Equity Trust. The By-Laws do not permit indemnification against any
liability to which such person would be subject by reason of willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of his office. Maryland law does not permit
indemnification of present or former directors, officers, employees or agents in
connection with any proceeding to which they may be made a party by reason of
their service to the Equity Trust if (i) the act or omission of such person or
entity was material to the matter giving rise to the proceeding and (a) was
committed in bad faith; or (b) was the result of active and deliberate
dishonesty; (ii) such person or entity actually received an improper personal
benefit in money, property or services; or (iii) in the case of any criminal
proceeding, such person or entity had reasonable cause to believe that the act
or omission was unlawful.
Under Maryland law, the Equity Trust is not permitted to indemnify for an
adverse judgment in a suit by or in the right of the Equity Trust for a judgment
of liability on the basis that personal benefit was improperly received, unless
in either case a court orders indemnification and then only for expenses. The
termination of any proceeding by conviction or upon a plea of nolo contendere or
its equivalent or an entry of an order of probation prior to judgment creates a
rebuttable presumption that the director, officer, employee or agent did not
meet the requisite standard of conduct required for permitted indemnification.
The termination of any proceeding by judgment, order or settlement, however,
does not create such a presumption.
The By-Laws and Maryland law permit the Equity Trust to advance reasonable
expenses to current or former Directors, officers, employees and agents upon the
Equity Trust's receipt of a written affirmation by such person or entity of its
good faith belief that it has met the standard of conduct necessary for
indemnification by the Equity Trust, and a written undertaking by such person or
entity (or on its behalf) to repay the amount paid or reimbursed by the Equity
Trust if it is ultimately determined that such person or entity did not meet the
requisite standard of conduct. The By-Laws further require that one of the
following conditions must also be met to advance payment of expenses: (i) the
person or entity seeking indemnification shall provide a security in the form
and amount acceptable to the Equity Trust for its undertaking; (ii) the Equity
Trust is insured against losses arising by reason of the advance; (iii) approval
by a majority of a quorum of the Directors of the Equity Trust who are neither
"interested persons" as defined by Section 2(a)(19) of the 1940 Act nor parties
to the proceeding, or (iv) a written opinion of independent legal counsel, based
on a review of the facts readily available to the Equity Trust at the time the
advance is proposed to be made, to the effect that there is reason to believe
that the person or entity seeking indemnification will ultimately be found to be
entitled to indemnification.
Maryland law permits a Maryland corporation to include in its charter a
provision limiting the liability of its directors and officers to the
corporation and its stockholders for money damages except for liability
resulting from actual receipt of an improper benefit or profit in money,
property or services or active and deliberate dishonesty established by final
judgment as being material to the cause of action. The Equity Trust's Charter
provides for such a limitation, except to the extent such exemption is not
permitted by the 1940 Act, as amended from time to time.
Voting Rights of Common Stock and Preferred Stock. The holders of the
Equity Trust's cumulative preferred stock have voting rights equivalent to those
of the holders of Common Stock (one vote per share)
36
and will vote together with holders of shares of Common Stock as a single class.
In addition, the 1940 Act requires that along with approval of a majority of the
holders of Common Stock, approval of a majority, as defined in the 1940 Act, of
the holders of any outstanding shares of cumulative preferred stock, voting
separately as a class, would be required to (a) adopt any plan of reorganization
that would adversely affect the cumulative preferred stock, and (b) take any
action requiring a vote of security holders, including, among other things,
changes in the Equity Trust's subclassification as a closed-end investment
company or changes in its fundamental investment restrictions. Under the Equity
Trust's Charter and the 1940 Act, holders of the Equity Trust's outstanding
preferred stock, voting as a separate class, are entitled to elect two
Directors, and holders of outstanding Common Stock and preferred stock, voting
as a single class, are entitled to elect the remaining Directors, subject to the
provisions of the 1940 Act and the Equity Trust's Charter and By-Laws. The
holders of the Equity Trust's outstanding preferred stock would be entitled to
elect the minimum number of additional Directors that would represent a majority
of the Directors in the event that dividends on the Equity Trust's preferred
stock are in arrears for two full years. No dividend arrearages exist at this
time.
Dividends and Distributions to Holders of Common Stock and Preferred
Stock. Dividends on shares of the Equity Trust cumulative preferred stock are
cumulative. The Equity Trust is required to meet certain asset coverage tests as
required by the 1940 Act and by the Charter with respect to the cumulative
preferred stock. If the Equity Trust fails to meet these requirements and does
not correct such failure, the Equity Trust may be required to redeem, in part or
in full, the 7.20% Series B, Series C Auction Rate, 5.875% Series D, and Series
E Auction Rate Cumulative Preferred Stock at a redemption price of $25, $25,000,
$25, and $25,000, respectively, per share plus an amount equal to the
accumulated and unpaid dividends whether or not declared on such shares in order
to meet these requirements. Additionally, failure to meet the foregoing asset
requirements could restrict the Equity Trust's ability to pay dividends to
holders of its Common Stock and could lead to sales of portfolio securities at
inopportune times. The income received on the Equity Trust's assets may vary in
a manner unrelated to the fixed and variable rates, which could have either a
beneficial or detrimental impact on net investment income and gains available to
holders of its Common Stock.
Anti-Takeover Provisions of the Charter and By-Laws. The Equity Trust
presently has provisions in its Charter and By-Laws which could have the effect
of limiting, in each case:
- the ability of other entities or persons to acquire control of the Equity
Trust;
- the Equity Trust's freedom to engage in certain transactions; or
- the ability of the Equity Trust's Directors or stockholders to amend the
Charter and By-Laws or effectuate changes in its management.
These provisions may be regarded as "anti-takeover" provisions. The Board
of Directors of the Equity Trust is divided into three classes, each having a
term of three years. Each year the term of one class of Directors will expire.
Accordingly, only those Directors in one class may be changed in any one year,
and it would require two years to change a majority of the Board of Directors.
Such system of electing Directors may have the effect of maintaining the
continuity of management and, thus, make it more difficult for the stockholders
of the Equity Trust to change the majority of Directors. A Director of the
Equity Trust may be removed only for cause and by a vote of a majority of the
votes entitled to be cast for the election of Directors. In addition, the
affirmative vote of the holders of two-thirds of the Equity Trust's outstanding
shares of each class (voting separately) is required to authorize the conversion
of the Equity Trust from a closed-end to an open-end investment company or
generally to authorize any of the following transactions:
- the merger or consolidation of the Equity Trust with any entity;
- the issuance of any securities of the Equity Trust for cash to any entity
or person;
- the sale, lease or exchange of all or any substantial part of the assets
of the Equity Trust to any entity or person (except assets having an
aggregate fair market value of less than $1,000,000); or
- the sale, lease or exchange to the Equity Trust, in exchange for its
securities, of any assets of any entity or person (except assets having
an aggregate fair market value of less than $1,000,000);
37
if such corporation, person or entity is directly, or indirectly through
affiliates, the beneficial owner of more than 5% of the outstanding shares of
any class of capital stock of the Equity Trust. However, such vote would not be
required when, under certain conditions, the Board of Directors approves the
transaction. In addition, the vote of a majority (as defined in the 1940 Act) of
the holders of the Equity Trust's outstanding voting securities, voting as a
single class, is also necessary to authorize its conversion from a closed-end to
an open-end investment company. Further, unless a higher percentage is provided
for under the Charter, the affirmative vote of a majority (as defined in the
1940 Act) of the votes entitled to be cast by holders of outstanding shares of
the Equity Trust's preferred stock, voting as a separate class, will be required
to approve any plan of reorganization adversely affecting such stock or any
action requiring a vote of security holders under Section 13(a) of the 1940 Act,
including, among other things, changing the Equity Trust's investment objectives
or changing its fundamental investment restrictions.
Maryland corporations that are subject to the Securities Exchange Act of
1934 and have at least three outside directors, such as the Equity Trust, may by
board resolution elect to become subject to certain corporate governance
provisions set forth in the Maryland corporate law, even if such provisions are
inconsistent with the corporation's charter and by-laws. Accordingly,
notwithstanding its Charter or By-Laws, under Maryland law the Equity Trust's
Board of Directors may elect by resolution to, among other things:
- require that special meetings of stockholders be called only at the
request of stockholders entitled to cast at least a majority of the votes
entitled to be cast at such meeting;
- reserve for the Board the right to fix the number of directors;
- provide that directors are subject to removal only by the vote of the
holders of two-thirds of the stock entitled to vote; and
- retain for the Board sole authority to fill vacancies created by the
death, removal or resignation of a director, with any director so
appointed to serve for the balance of the unexpired term rather than only
until the next annual meeting of stockholders.
The Board may make any of the foregoing elections without amending the
Equity Trust's Charter or By-Laws and without stockholder approval. Though a
corporation's charter or a resolution by its board may prohibit its directors
from making the elections set forth above, the Equity Trust's Board currently is
not prohibited from making any such elections.
The provisions of the Charter and By-Laws and Maryland law described above
could have the effect of depriving the owners of stock in the Equity Trust of
opportunities to sell their shares at a premium over prevailing market prices by
discouraging a third party from seeking to obtain control of the Equity Trust in
a tender offer or similar transaction. The overall effect of these provisions is
to render more difficult the accomplishment of a merger or the assumption of
control by a principal stockholder.
The provisions of the Charter and By-Laws described above could have the
effect of depriving the owners of shares in the Equity Trust of opportunities to
sell their shares at a premium over prevailing market prices, by discouraging a
third party from seeking to obtain control of the Equity Trust in a tender offer
or similar transaction. The overall effect of these provisions is to render more
difficult the accomplishment of a merger or the assumption of control by a
principal stockholder. The Board of Directors has determined that the foregoing
voting requirements, which are generally greater than the minimum requirements
under Maryland law and the 1940 Act, are in the best interests of the
stockholders generally.
MANAGEMENT OF THE FUNDS
THE EQUITY TRUST
The business and affairs of the Equity Trust are managed under the
direction of its Board of Directors, and the day-to-day operations are conducted
through or under the direction of its officers.
38
The Directors and Executive Officers of the Equity Trust are as follows:
NUMBER OF
TERM OF OFFICE FUNDS IN
AND LENGTH COMPLEX PRINCIPAL OTHER
OF TIME OVERSEEN BY OCCUPATION DURING DIRECTORSHIPS HELD
NAME AND ADDRESS(1) SERVED(2) DIRECTOR PAST FIVE YEARS BY DIRECTOR
------------------- -------------- ----------- ------------------------ ------------------
INTERESTED
DIRECTORS:(3)
Mario J. Gabelli....... Since 1986** 24 Chairman of the Board, Director of Morgan
Director and Chief Chief Executive Officer Group Holdings,
Investment Officer of Gabelli Asset Inc. (holding
Age: 62 Management Inc. and company)
Chief Investment
Officer -- Value
Portfolios of Gabelli
Funds, LLC and GAMCO
Investors, Inc.; Vice
Chairman and Chief
Executive Officer of
Lynch Interactive
Corporation (multimedia
and services)
Karl Otto Pohl......... Since 1992* 35 Former partner and Director of
Director director of Sal Gabelli Asset
Age: 75 Oppenheim Jr. & Cie, Management Inc.
Zurich (private (investment
investment bank); Former management)
President of the
Deutsche Bundesbank and
Chairman of its Central
Bank Council (1980-1991)
NON-INTERESTED
DIRECTORS:
Thomas E. Bratter...... Since 1986** 3 Director, President and 3
Director Founder, The John Dewey
Age: 65 Academy (residential
college preparatory
therapeutic high school)
Anthony J. Colavita.... Since 1999*** 37 President and Attorney None
Director at Law in the law firm
Age: 69 of Anthony J. Colavita,
P.C.
James P. Conn.......... Since 1989* 14 Former Managing Director Director of
Director and Chief Investment LaQuinta Corp.
Age: 67 Officer of Financial (hotels) and First
Security Assurance Republic Bank
Holdings Ltd. (banking)
(1992-1998)
39
NUMBER OF
TERM OF OFFICE FUNDS IN
AND LENGTH COMPLEX PRINCIPAL OTHER
OF TIME OVERSEEN BY OCCUPATION DURING DIRECTORSHIPS HELD
NAME AND ADDRESS(1) SERVED(2) DIRECTOR PAST FIVE YEARS BY DIRECTOR
------------------- -------------- ----------- ------------------------ ------------------
Frank J. Fahrenkopf Since 1998*** 5 President and Chief Director of First
Jr..................... Executive Officer of the Republic Bank
Director American Gaming (banking)
Age: 65 Association since June
1995; Partner in the law
firm of Hogan & Hartson;
Co-Chairman of the
Commission on
Presidential Debates;
Former Chairman of the
Republican National
Committee
Arthur V. Ferrara...... Since 2001** 9 Formerly, Chairman of Director of The
Director the Board and Chief Guardian Life
Age: 74 Executive Officer of The Insurance Company
Guardian Life Insurance of America;
Company of America from Director of The
January 1993 to December Guardian Insurance
1995; President, Chief Annuity Company,
and Executive Officer Inc., Guardian
and a Director prior Investors
thereto Services, and 25
mutual funds
within the
Guardian Fund
Complex
Anthony R. Pustorino... Since 1986* 17 Certified Public Director of Lynch
Director Accountant; Professor Corporation
Age: 79 Emeritus, Pace (diversified
University manufacturing)
Salvatore J. Zizza..... Since 1986*** 25 Chairman, Hallmark Director of Hollis
Director Electrical Supplies Eden
Age: 59 Corp. Pharmaceuticals
and Earl Scheib,
Inc. (automotive
services)
OFFICERS:
Bruce N. Alpert........ Since 1988 N/A Executive Vice President N/A
President and Treasurer and Chief Operating
Age: 53 Officer of Gabelli
Funds, LLC since 1988.
Director and President
of Gabelli Advisers,
Inc. since 1988. Officer
of all mutual funds
advised by Gabelli
Funds, LLC and its
affiliates.
Carter W. Austin....... Since 2000 N/A Vice President of N/A
Vice President Gabelli Funds, LLC since
Age: 38 1996.
40
NUMBER OF
TERM OF OFFICE FUNDS IN
AND LENGTH COMPLEX PRINCIPAL OTHER
OF TIME OVERSEEN BY OCCUPATION DURING DIRECTORSHIPS HELD
NAME AND ADDRESS(1) SERVED(2) DIRECTOR PAST FIVE YEARS BY DIRECTOR
------------------- -------------- ----------- ------------------------ ------------------
Dawn M. Donato......... Since 2004 N/A Assistant Vice President N/A
Assistant Vice of Gabelli Funds, LLC
President since 2004. Registered
Age: 37 Representative for
Gabelli & Company, Inc.
since 2002; Senior Sales
Representative for
Manulife Wood Logan,
Inc. prior to 2002.
James E. McKee......... Since 1995 N/A Vice President, General N/A
Secretary Counsel and Secretary of
Age: 41 Gabelli Asset Management
Inc. since 1999 and
GAMCO Investors, Inc.
since 1993; Secretary of
all mutual funds advised
by Gabelli Advisers,
Inc. and Gabelli Funds,
LLC
Peter D. Goldstein..... Since 2004 N/A Director of Regulatory N/A
Chief Compliance Affairs at Gabelli Asset
Officer Management Inc. since
Age: 51 2004. Chief Compliance
Officer of all the
registered investment
companies in the Gabelli
Fund Complex. Vice
President of Goldman
Sachs Asset Management
from 2000-2004; Deputy
General Counsel at
Gabelli Asset Management
Inc. from 1998-2000
---------------
(1) Address: One Corporate Center, Rye, NY 10580-1422, unless otherwise noted.
(2) The Equity Trust's Board of Directors is divided into three classes, each
class having a term of three years. Each year the term of office of one
class expires and the successor or successors elected to such class serve
for a three-year term. The three year term for each class expires as
follows:
* Term expires at the Fund's 2006 Annual Meeting of Shareholders and until
their successors are duly elected and qualified.
** Term expires at the Fund's 2007 Annual Meeting of Shareholders and until
their successors are duly elected and qualified.
*** Term expires at the Fund's 2008 Annual Meeting of Shareholders and
until their successors are duly elected and qualified.
Each officer will hold office for an indefinite term until the date he or
she resigns or retires or until his or her successor is elected and
qualified.
(3) "Interested person" of the Fund as defined in the 1940 Act. Messrs. Gabelli
and Pohl are each considered an "interested person" because of their
affiliation with Gabelli Funds, the Fund's investment adviser.
41
Non-resident Director. Karl Otto Pohl, a director of the Equity Trust,
resides outside the United States and all or a significant portion of his assets
are located outside the United States. Mr. Pohl does not have an authorized
agent in the United States to receive service of process. As a result, it may
not be possible for investors to effect service of process within the United
States or to enforce against Mr. Pohl in United States courts judgments
predicated upon civil liability provisions of United States securities laws. It
may also not be possible to enforce against Mr. Pohl in foreign courts judgments
of United States courts or liabilities in original actions predicated upon civil
liability provisions of the United States securities laws.
Investment Management. Gabelli Funds, located at One Corporate Center,
Rye, New York 10580-1422, serves as the investment adviser to the Equity Trust
pursuant to an investment advisory agreement. Gabelli Funds was organized in
1999 and is the successor to Gabelli Funds, Inc., which was organized in 1980.
As of March 31, 2005, Gabelli Funds acted as registered investment adviser to 28
management investment companies with aggregate net assets of $12.9 billion.
Gabelli Funds, together with other affiliated investment adviser, had assets
under management totaling approximately $28 billion as of March 31, 2005. GAMCO
Investors, Inc., an affiliate of Gabelli Funds, acts as investment adviser for
individuals, pension trusts, profit sharing trusts and endowments, and as a
sub-adviser to management investment companies having aggregate assets of $13.4
billion under management as of March 31, 2005. Gabelli Fixed Income LLC, an
affiliate of Gabelli Funds, acts as investment adviser for The Treasurer's Fund
and separate accounts having aggregate assets of approximately $500 million
under management as of March 31, 2005. Gabelli Advisers, Inc., an affiliate of
Gabelli Funds, acts as investment manager to the Gabelli Westwood Funds having
aggregate assets of approximately $400 million under management as of March 31,
2005.
Gabelli Funds is a wholly-owned subsidiary of Gabelli Asset Management
Inc., a New York corporation, whose Class A Common Stock is traded on the NYSE
under the symbol "GBL." Mr. Mario J. Gabelli may be deemed a "controlling
person" of Gabelli Funds on the basis of his ownership of a majority of the
stock of the Gabelli Group Capital Partners, Inc., which owns a majority of the
capital stock of Gabelli Asset Management Inc.
Gabelli Funds has sole investment discretion for the Equity Trust's assets
under the supervision of the Equity Trust's Board of Directors and in accordance
with the Equity Trust's stated policies. Gabelli Funds will select investments
for the Equity Trust and will place purchase and sale orders on behalf of the
Equity Trust. For information about the Equity Trust's investment advisory fees,
including amounts paid for the year ended December 31, 2004, see
"Synopsis -- Fees and Expenses -- The Fund."
The following chart sets forth information with respect to name, address
and principal occupations of the executive officer(s) and managing member(s) of
Gabelli Funds. (Unless otherwise noted, the person's position at Gabelli Funds
constitutes his/her principal occupation.) Each person's address is One
Corporate Center, Rye, New York 10580-1422.
NAME POSITION WITH GABELLI PRINCIPAL OCCUPATION
---- --------------------- --------------------
Gabelli Asset Management Inc. .......... Sole member N/A
Mario J. Gabelli........................ Chief Investment Officer -- Value See above.
Portfolios
Bruce N. Alpert......................... Executive Vice President and Chief See above.
Operating Officer
James E. McKee.......................... Secretary See above.
Michael R. Anastasio.................... Chief Accounting Officer Vice President and
Chief Financial
Officer of Gabelli
Asset Management
Inc.
Peter D. Goldstein...................... Chief Compliance Officer See above.
It is anticipated that Mr. Mario J. Gabelli will continue as the Equity
Trust's portfolio manager after the Reorganization.
Advisory Agreement. Under the terms of the Equity Trust's Investment
Advisory Agreement (the "Advisory Agreement"), Gabelli Funds manages the
portfolio of the Equity Trust in accordance with its
42
stated investment objectives and policies, makes investment decisions for the
Equity Trust, places orders to purchase and sell securities on behalf of the
Equity Trust and manages the Equity Trust's other business and affairs, all
subject to the supervision and direction of its Board of Directors. In addition,
under the Advisory Agreement, Gabelli Funds oversees the administration of all
aspects of the Equity Trust's business and affairs and provides, or arranges for
others to provide, at Gabelli Funds' expense, certain enumerated services,
including maintaining the Equity Trust's books and records, preparing reports to
its stockholders and supervising the calculation of the net asset value of its
stock. All expenses of computing the Equity Trust's net asset value, including
any equipment or services obtained solely for the purpose of pricing shares of
stock or valuing the Equity Trust's investment portfolio, will be an expense of
the Equity Trust under the Advisory Agreement unless Gabelli Funds voluntarily
assumes responsibility for such expense.
The Advisory Agreement combines investment advisory and administrative
responsibilities in one agreement. For services rendered by Gabelli Funds on
behalf of the Equity Trust under the Advisory Agreement, the Equity Trust pays
Gabelli Funds a fee computed daily and paid monthly at the annual rate of 1.00%
of its average weekly net assets plus the liquidation value of any outstanding
preferred stock. Gabelli Funds has agreed to reduce the management fee on the
incremental assets attributable to the preferred stock if the total return of
the net asset value of Equity Trust Common Stock, including distributions and
advisory fee subject to reduction, does not exceed the stated dividend rate or
corresponding swap rate of the preferred stock.
The Equity Trust's total return on the net asset value of its Common Stock
is monitored on a monthly basis to assess whether the total return on the net
asset value of its Common Stock exceeds the stated dividend rate of the
outstanding preferred stock for the period. For the year ended December 31,
2004, the Equity Trust's total return on the net asset value of the Common Stock
exceeded the stated dividend rate or corresponding swap rate of all outstanding
preferred stock. Thus management fees were accrued on these assets.
The Advisory Agreement provides that in the absence of willful misfeasance,
bad faith, gross negligence or reckless disregard for its obligations and duties
thereunder, the Investment Adviser is not liable for any error or judgment or
mistake of law or for any loss suffered by the Fund. As part of the Advisory
Agreement, the Fund has agreed that the name "Gabelli" is Gabelli Funds'
property, and that in the event Gabelli Funds ceases to act as an investment
adviser to the Fund, the Fund will change its name to one not including
"Gabelli."
Pursuant to its terms, the Advisory Agreement will remain in effect with
respect to the Fund from year to year if approved annually (i) by the Fund's
Board of Directors or by the holders of a majority of the Fund's outstanding
voting securities and (ii) by a majority of the Directors who are not
"interested persons" (as defined in the 1940 Act) of any party to the Advisory
Agreement, by vote cast in person at a meeting called for the purpose of voting
on such approval.
The cost of calculating the Equity Trust's net asset value per share is an
expense of the Equity Trust pursuant to the Advisory Agreement. During fiscal
2004, the Equity Trust reimbursed Gabelli Funds $34,800 in connection with the
cost of computing the Equity Trust's net asset value.
Administrator. PFPC, located at 760 Moore Road, King of Prussia,
Pennsylvania 19406, serves as the Equity Trust's sub-administrator. For these
services and the related expenses borne by PFPC, Gabelli Funds pays a prorated
monthly fee at the annual rate of .0275% of the first $10.0 billion of the
aggregate average net assets of the Equity Trust and all other funds advised by
Gabelli Funds and administered by PFPC, .0125% of the aggregate average net
assets exceeding $10 billion and .01% of the aggregate average net assets in
excess of $15 billion.
Interest of Certain Persons. Gabelli Funds may be considered to have a
financial interest in the Reorganization, arising from the fact that the amount
of its management fee under the Investment Advisory Agreement between Gabelli
Funds and the Equity Trust will increase as the amount of the Equity Trust's
assets increases, and the amount of those assets will increase by virtue of the
Reorganization.
STERLING CAPITAL
The business and affairs of Sterling Capital are managed under the
direction of its Board of Directors, and the day-to-day operations are conducted
through or under the direction of its officers. Sterling Capital operates
exclusively as an internally managed investment company whereby its own officers
and employees, under the general supervision of its Board of Directors, conduct
its operations.
43
The Directors and Executive Officers of Sterling Capital are as follows:
NUMBER OF
TERM OF OFFICE FUNDS IN
AND LENGTH COMPLEX PRINCIPAL OTHER
OF TIME OVERSEEN BY OCCUPATION DURING DIRECTORSHIPS HELD
NAME AND ADDRESS(1) SERVED(2) DIRECTOR PAST FIVE YEARS BY DIRECTOR
------------------- -------------- ----------- ------------------------ ------------------
INTERESTED DIRECTOR:(5)
Jeffrey Scheuer........ Since 2004 1 Writer and private None
Director investor
Age: 51
NON-INTERESTED
DIRECTORS:
Jay Eliasberg.......... Since 1980 1 Private investor None
Director
Age: 85
Arthur P. Floor........ Since 1980 1 Energy consultant None
Director
Age: 80
Nathan Kingsley........ Since 1984 1 President, Total None
Director Communications
Age: 77 International, a media
consulting firm
Archer Scherl.......... Since 1994 1 Private investor None
Director
Age: 73
OFFICERS:
Wayne S. Reisner....... Since 1993 N/A Mr. Reisner was N/A
President Executive Vice President
Age: 54 of Sterling Capital from
July 1988 to March 1993
and was Vice President
from November 1985 to
July 1988. Mr. Reisner
has been employed by
Sterling Capital since
August 1985. Mr. Reisner
was also a Vice
President and a Director
of Windy Gates
Corporation, a
corporation controlled
by Jeffrey Scheuer and
members of his family,
from March 1993 to
August 2004. Mr. Reisner
has been a Director and
President of Winterset
Management Corporation
(formerly known as
Manchester Capital
Corporation) since
December 1988 and March
1989, respectively. Mr.
Reisner was a director
of Carret and Company
LLC from June 2002 until
May 2004. Mr. Reisner
has been President of
Carret Asset Management,
LLC since May 2004.
44
NUMBER OF
TERM OF OFFICE FUNDS IN
AND LENGTH COMPLEX PRINCIPAL OTHER
OF TIME OVERSEEN BY OCCUPATION DURING DIRECTORSHIPS HELD
NAME AND ADDRESS(1) SERVED(2) DIRECTOR PAST FIVE YEARS BY DIRECTOR
------------------- -------------- ----------- ------------------------ ------------------
Michael Carey.......... Vice President N/A Mr. Carey has been N/A
Vice President, since 1999; employed by Sterling
Secretary and Secretary Capital since February
Treasurer since 2003; 1995.
Age: 38 Treasurer
since 1997
---------------
(4) Address: c/o Sterling Capital, 635 Madison Avenue, New York, New York 10022,
unless otherwise noted.
(5) Mr. Scheuer, together with members of the Scheuer family, may be deemed to
be a controlling shareholder of Sterling Capital and Mr. Scheuer may be
deemed an "interested person" of Sterling Capital as that term is defined in
Section 2(a)(19) of the 1940 Act.
Decisions to buy and sell securities for Sterling Capital are made by its
Investment Committee, pursuant to policies approved by its Board of Directors,
which periodically reviews investment decisions. The officers and Investment
Committee of Sterling Capital are also responsible for placing orders for the
purchase and sale of securities and placing its brokerage business.
Research services furnished by brokers through which Sterling Capital
effects securities transactions may be used by officers and employees in
connection with their duties to Walter Scheuer's estate, members of his family
and associates. Research services furnished to officers and employees by brokers
in connection with their duties to Walter Scheuer's estate, members of his
family and associates may be used by such employees in connection with their
duties to Sterling Capital.
Sterling Capital sublets a portion of office space at 635 Madison Avenue,
New York, NY, from Windy Gates Corporation ("Windy Gates"), a corporation
controlled by Jeffrey Scheuer and members of his family. The term of the Windy
Gates lease expires on June 30, 2005. The term of the sublease to the
Corporation expires on June 30, 2005. The annual rental obligation of these
premises is being allocated between the Corporation and Windy Gates on the basis
of each such party's use of this space. The Corporation's current net annual
rent expense for this space is approximately $26,000.
Incident to these sublease arrangements for office space at 635 Madison
Avenue, Walter Scheuer's estate and Sterling Capital have allocated certain of
the expenses incurred in connection with each of such party's use of various
services located thereat, including office equipment and secretarial,
administrative and internal accounting personnel. For the year ended December
31, 2004, Walter Scheuer (and his estate) and Sterling Capital paid or accrued
approximately $334,000 and $37,000, respectively, in connection with the
allocation of expenses incurred with respect to the use of such services. In
addition, during the period certain persons who are also officers of Sterling
Capital rendered services to Walter Scheuer and his estate personally for which
they received compensation from Walter Scheuer and his estate.
SECURITY OWNERSHIP OF DIRECTORS AND OFFICERS, AND OTHER PRINCIPAL HOLDERS OF
STERLING CAPITAL'S VOTING SECURITIES
The following table sets forth information concerning the shares of
Sterling Capital's Common Stock beneficially owned by the directors, its
executive officers, all directors and officers of the Corporation as a group
without naming them, and each person who is known by the Corporation to be the
beneficial owner of more than five percent of the Corporation's common stock as
at [date TBD -- numbers to be revised]. The address of each of the directors is
c/o Sterling Capital Corporation, 635 Madison Avenue, New York, New York 10022.
The address of Gaymark Associates and Wayne S. Reisner is 635 Madison Avenue,
45
New York, New York 10022. The address of each of Marge P. Scheuer, Susan Scheuer
and Judith Scheuer is 635 Madison Avenue, New York, New York 10022.
AMOUNT AND NATURE OF PERCENT OF
NAME OF BENEFICIAL OWNER BENEFICIAL OWNER CLASS
------------------------ -------------------- ----------
Jay Eliasberg*.......................................... None --
Arthur P. Floor*........................................ None --
Gaymark Associates...................................... 1,921,796(a) 76.9%
Nathan Kingsley*........................................ None --
Archer Scherl*.......................................... None --
Estate of Walter Scheuer................................ 419,161(b) 16.8%
Wayne S. Reisner........................................ None --
Marge P. Scheuer........................................ 221,397(c) 8.9%
Jeffrey Scheuer*........................................ 653,644(d) 26.1%
Susan Scheuer........................................... 400,572(e) 16.0%
Judith Scheuer.......................................... 303,154(f) 12.1%
All Directors and Executive Officers as a Group
consisting of 6 persons............................... 2,078,396(g) 83.1%
---------------
* Current member of the Board of Directors of Sterling Capital.
(a) Of the 1,921,796 shares (approximately 76.9% of Sterling Capital's
outstanding common stock) owned of record by Gaymark Associates
("Gaymark"), a limited partnership, of which Windy Gates Corporation
("Windy Gates") is the general partner and Mr. Scheuer is a limited
partner, 18,032 shares are held for Windy Gates, 346,529 shares are held
for Walter Scheuer's estate (see note (b) below), 166,797 shares are held
for Marge P. Scheuer, who was Walter Scheuer's wife (see note (d) below),
34,068, 482,976, 204,097 and 200,904 shares, respectively, are held for the
four children of Walter Scheuer (see notes (e), (f), and (g) below), 54,600
shares are held for a revocable trust which will become part of Walter
Scheuer's estate, 312,793 shares are held for seven trusts for the benefit
of seven of Walter Scheuer's grandchildren, and 101,000 shares are held for
Mrs. Marcelle Halpern. The shares of the Corporation's common stock that
are reflected in the table as being beneficially owned by Gaymark do not
include 56,064 shares which Gaymark has an option to acquire. Windy Gates
is a New York corporation of which Mr. Scheuer is President, a director and
a shareholder. The other shareholders of Windy Gates are Marge Scheuer and
her children, David Scheuer, Susan Scheuer, Judith Scheuer and the estate
of Walter Scheuer. Windy Gates, as the general partner of Gaymark, has the
sole power to vote the aforementioned shares of Sterling Capital's Common
Stock owned by Gaymark.
(b) Of the 419,161 shares (approximately 16.8% of Sterling Capital's
outstanding Common Stock) of which Walter Scheuer's estate may be deemed to
be a beneficial owner, 346,529 shares (approximately 13.9% of Sterling
Capital's outstanding Common Stock) are held for the estate's account by
Gaymark as described in note (a) above. Also as described in note (a)
above, Gaymark holds 18,032 shares for the account of Windy Gates and
54,600 shares for the account of a revocable trust, the beneficiary of
which is Walter Scheuer's estate.
(c) Of the 221,397 shares (approximately 8.9% of Sterling Capital's outstanding
stock) of which Mrs. Marge Scheuer may be deemed to be a beneficial owner,
166,797 shares are held for her account by Gaymark and 54,600 shares are
held by Gaymark for the account of a revocable trust, the beneficiary of
which is Walter Scheuer's estate, which trust's shareholdings in Sterling
Capital are described in note (b) above, of which trust Mrs. Scheuer is a
trustee. Mrs. Scheuer disclaims any beneficial ownership in the shares held
by Gaymark for the account of such trust.
(d) Of the 653,644 shares (approximately 26.1% of Sterling Capital's
outstanding stock) of which Jeffrey Scheuer may be deemed to be a
beneficial owner, 482,976 shares are held for his account by Gaymark and
(i) 111,668 shares are held by Gaymark for the account of two trusts for
the benefit of Jeffrey Scheuer's children and (ii) 59,000 shares are held
directly by a trust for the benefit of one of Jeffrey Scheuer's children,
of which trusts Jeffrey Scheuer is a trustee. Jeffrey Scheuer disclaims any
beneficial ownership in the shares held by Gaymark for the account of such
trusts.
46
(e) Of the 400,572 shares (approximately 16.0% of Sterling Capital's
outstanding Common Stock) of which Susan Scheuer, a daughter of Walter
Scheuer, may be deemed to be a beneficial owner, 204,097 shares are held
for her account by Gaymark, 98,875 shares are held by Gaymark for the
account of three trusts for the benefit of Susan Scheuer's children and
97,600 shares are held directly by a trust for the benefit of one of Susan
Scheuer's children, of which trusts Susan Scheuer is a trustee. Susan
Scheuer disclaims any beneficial ownership in the shares held by Gaymark
for the account of such trusts.
(f) Of the 303,154 shares (approximately 12.1% of Sterling Capital's
outstanding Common Stock) of which Judith Scheuer, a daughter of Walter
Scheuer, may be deemed to be a beneficial owner, 200,904 shares are held
for her account by Gaymark and 102,250 shares are held by Gaymark for the
account of two trusts for the benefit of Judith Scheuer's children, of
which trusts Judith Scheuer is a trustee. Judith Scheuer disclaims any
beneficial ownership in the shares held by Gaymark for the account of such
trusts.
(g) The computation of 2,078,396 (approximately 83.1% of Sterling Capital's
outstanding Common Stock) shares reported in this column includes all
shares which may be deemed to be beneficially owned as described in the
foregoing notes, but eliminates the duplication that would arise from
including more than one beneficial owner of the same shares. Such shares do
not include 56,064 shares, which Gaymark has an option to acquire.
OTHER SERVICE PROVIDERS
Custodian. Mellon Trust of New England, N.A., located at 135 Santilli
Highway, Everett, Massachusetts 01299, serves as custodian of the Equity Trust's
assets. Citibank, N.A., located at ________, serves as Sterling Capital's
custodian.
Transfer Agent and Registrar. EquiServe Trust Company, N.A., located at
250 Royall Street, Canton, Massachusetts 02021, serves as the Equity Trust's
dividend disbursing agent, as agent under the Equity Trust's automatic dividend
reinvestment and voluntary cash purchase plan and as transfer agent and
registrar for Equity Trust Common Stock. Registrar and Transfer Company, located
at ________, serves as Sterling Capital's transfer agent.
Independent Registered Public Accounting Firm. ________, New York, New
York, serves as the Equity Trust's independent registered public accounting
firm. Sterling Capital has selected ________, New York, New York, as its
independent registered public accounting firm.
REQUIRED VOTE
Approval of Proposal 1 requires the affirmative vote of the holders of a
majority of the shares of Sterling Capital outstanding on the record date.
Subject to such approval, the Reorganization is currently scheduled to be
consummated promptly after the meeting. The Board of Directors of Sterling
Capital recommends that the shareholders of Sterling Capital vote in favor of
Proposal 1. [If Gaymark Associates, the largest shareholder of record of
Sterling Capital, votes all shares which it is entitled to vote in favor of
Proposal 1, this would assure the passage of this proposal since such shares
constitute more than 50% of Sterling Capital's outstanding common stock. See
"Management of the Funds -- Sterling Capital -- Security Ownership of Directors
and Officers, and Other Principal Holders of Sterling Capital's Voting
Securities."]
LEGAL PROCEEDINGS
The SEC, the New York Attorney General and officials of other states have
been conducting inquiries into, and bringing enforcement and other proceedings
regarding, trading abuses involving open-end investment companies. Gabelli Funds
has received information requests and subpoenas from the SEC and the New York
Attorney General in connection with these inquiries. Gabelli Funds and its
affiliates have been complying with these requests for documents and testimony
and have implemented additional compliance policies and procedures in response
to recent industry initiatives and their internal reviews of their mutual fund
practices in a variety of areas. Gabelli Funds has not found any information
that it believes would be material to the ability of Gabelli Funds to fulfill
its obligations under the Advisory Agreement. More specifically, Gabelli Funds
has not found any evidence of facilitating trading in the Gabelli mutual funds
after the 4:00 p.m. pricing time or of improper short-term trading in these
funds by its investment professionals or senior executives. Gabelli Funds
47
has found that one investor, who had been engaged in short term trading in one
of the Gabelli mutual funds (the prospectus of which did not at that time impose
limits on short-term trading) and who had subsequently made an investment in a
hedge fund managed by an affiliate of Gabelli Funds, was banned from the mutual
fund only after certain other investors were banned. Gabelli Funds believes that
this relationship was not material to Gabelli Funds. Inasmuch as both Gabelli
Funds' review of its mutual fund practices and the governmental probes of the
mutual fund industry are ongoing, no assurance can be provided that additional
facts will not come to light in the course of its review that may be material to
Gabelli Funds or that Gabelli Funds will not become the subject of enforcement
or other proceedings by the SEC or the New York Attorney General. In light of
the current turmoil in the mutual fund industry arising from the late trading,
improper market timing and employee trading problems, there can be no assurance
that any such action could not have an adverse impact on Gabelli Funds or on its
ability to fulfill its obligations under the Advisory Agreement.
LEGAL OPINIONS
Certain legal matters in connection with the Reorganization will be passed
upon for the Equity Trust by Willkie Farr & Gallagher LLP and for Sterling
Capital by Skadden, Arps, Slate, Meagher & Flom LLP. As to certain matters of
Maryland law, Willkie Farr & Gallagher LLP will rely on the opinion of Venable
LLP.
ADDITIONAL INFORMATION
The Proxy Statement/Prospectus does not contain all of the information set
forth in the registration statements and the exhibits relating thereto which the
Funds have filed with the SEC, under the Securities Act of 1933, as amended, and
the 1940 Act, to which reference is hereby made.
The Funds are subject to the informational requirements of the Securities
Exchange Act of 1934 (the "Exchange Act") and in accordance therewith, file
reports and other information with the SEC. Reports, proxy statements,
registration statements and other information filed by the Funds can be
inspected and copied at the Public Reference Room of the SEC in Washington, D.C.
Information on the operation of the Public Reference Room may be obtained by
calling the SEC at (202) 942-8090. Reports and other information about the Funds
are available on the EDGAR Database on the SEC's Internet site at
http://www.sec.gov. Copies of such materials also may be obtained, at prescribed
rates, by electronic request at publicinfo@sec.gov , or by writing the SEC's
Public Reference Section, Securities and Exchange Commission, Washington, D.C.
20549-0102.
Other Matters to Come Before the Meeting. The Board of Directors of
Sterling Capital is not aware of any matters that will be presented for action
at the meeting other than the matters set forth herein. Should any other matters
requiring a vote of shareholders arise, the proxy in the accompanying form will
confer upon the person or persons entitled to vote the shares represented by
such proxy the discretionary authority to vote the shares as to any such other
matters in their discretion in the interest of Sterling Capital. PLEASE
COMPLETE, SIGN AND RETURN THE ENCLOSED PROXY CARD(S) PROMPTLY. NO POSTAGE IS
REQUIRED IF MAILED IN THE UNITED STATES.
By order of the Board of Directors of
Sterling Capital Corporation
Michael Carey
Secretary, Sterling Capital
Corporation
48
EXHIBIT
A
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (this "Agreement") is made as of
the 23rd day of May, 2005, by and among The Gabelli Equity Trust Inc. ("GAB"), a
Maryland corporation, and Sterling Capital Corporation ("SPR"), a New York
corporation ("GAB" and "SPR" are referred to collectively as the "Funds") and,
solely for purposes of Section 5(b) hereof, Gabelli Funds, LLC ("Gabelli").
PLAN OF REORGANIZATION
Subject to the terms and conditions of this Agreement and the New York
Business Corporation Law (the "NYBCL"), at the Effective Date (as defined
herein), SPR and GAB shall consummate a reorganization (the "Reorganization").
The Reorganization shall consist of (a) the transfer of all or substantially all
of the assets of SPR (other than the Reserve (as defined herein)) to GAB in
exchange solely for full shares of GAB Common Stock (as defined herein) and cash
in lieu of fractional shares of GAB Common Stock, (b) the assumption by GAB of
the Stated Liabilities (as defined herein) of SPR, and (c) the distribution of
GAB Common Stock to the SPR Stockholders (as defined herein), followed by the
termination, dissolution and complete liquidation (other than the Reserve) of
SPR. The parties intend that the Reorganization shall qualify as a
reorganization under Section 368(a) of the Internal Revenue Code of 1986, as
amended (the "Code").
AGREEMENT
In consideration of the covenants and agreements hereinafter set forth, and
intending to be legally bound, the Funds hereby agree as follows:
1. REPRESENTATIONS AND WARRANTIES OF GAB.
GAB represents and warrants to, and agrees with, SPR that:
(a) GAB is a corporation duly organized, validly existing and in good
standing under the laws of the State of Maryland and has the requisite
corporate power to own all of its properties and assets and to carry out
this Agreement. GAB has all necessary Federal, state and local
authorizations to carry on its business as it is now being conducted.
(b) GAB is duly registered under the Investment Company Act of 1940
(the "1940 Act") (File No. 811-04700) as a non-diversified, closed-end
management investment company and such registration has not been revoked or
rescinded and is in full force and effect. GAB has elected and qualified
for the special tax treatment afforded regulated investment companies
("RICs") under Sections 851-855 of the Code at all times since its
inception, and intends to continue to so qualify until consummation of the
Reorganization and at all times thereafter.
(c) GAB has corporate power and authority to enter into and perform
its obligations under this Agreement. The execution, delivery and
performance of this Agreement has been duly authorized by all necessary
action of its Board of Directors, and this Agreement constitutes its valid
and binding agreement enforceable against it in accordance with its terms,
subject to the effects of bankruptcy, insolvency, moratorium, fraudulent
conveyance and similar laws relating to or affecting creditors' rights
generally and court decisions with respect thereto.
(d) There are no material legal, administrative or other proceedings
pending or, to the knowledge of GAB, threatened against GAB which assert
liability on the part of GAB or which materially affect its financial
condition or its ability to consummate the Reorganization. GAB is not
charged with or, to the best of its knowledge, threatened with any
violation or investigation of any possible violation of any provisions of
any Federal, state or local law or regulation or administrative ruling
relating to any aspect of its business.
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(e) GAB is not a party to or obligated under any provision of its
Articles of Incorporation, as amended, its Articles Supplementary, as
amended, or its by-laws, as amended, or any contract or other commitment or
obligation, and is not subject to any order or decree, which would be
violated by its execution of or performance under this Agreement, except
for those that will be complied with, satisfied, amended or waived to cure
any potential violation as a condition precedent to the Reorganization.
(f) SPR has been furnished with a statement of assets, liabilities and
capital and a schedule of investments of GAB, each as of the end of GAB's
most recently completed fiscal year, said financial statements having been
audited by PricewaterhouseCoopers LLP, an independent registered public
accounting firm.
(g) SPR has been furnished with GAB's Annual Report to Stockholders
for its most recently completed fiscal year, and the audited financial
statements appearing therein fairly present the financial position of GAB
as of the dates indicated therein, in conformity with generally accepted
accounting principles applied on a consistent basis.
(h) There are no material contracts outstanding to which GAB is a
party that have not been disclosed in the N-14 Registration Statement or
not otherwise disclosed in writing to SPR prior to the date of this
Agreement.
(i) GAB has no known liabilities of a material amount, contingent or
otherwise, other than those shown on its statements of assets, liabilities
and capital referred to above, those incurred in the ordinary course of
business as an investment company since the date of such statements, and
those incurred in connection with the Reorganization.
(j) GAB has filed, or has obtained extensions to file, all Federal,
state and local tax returns which are required to be filed by it, and has
paid all Federal, state and local taxes shown on said returns to be due and
owing and all assessments received by it, up to and including the taxable
year in which the Effective Date occurs. All tax liabilities of GAB have
been adequately provided for on its books, and no tax deficiency or
liability of GAB has been asserted and no question with respect thereto has
been raised by the Internal Revenue Service or by any state or local tax
authority for taxes in excess of those already paid, up to and including
the taxable year in which the Effective Date occurs.
(k) No consent, approval, authorization or order of any court or
governmental authority is required for the consummation by GAB of the
Reorganization, except (i) such as may be required under the Securities Act
of 1933, as amended (the "1933 Act"), the Securities Exchange Act of 1934
(the "1934 Act") and the 1940 Act and (ii) such as may be required by state
securities laws.
(l) The registration statement to be filed by GAB on Form N-14
relating to the GAB Common Stock to be issued pursuant to this Agreement,
and any supplement or amendment thereto or to the documents therein (as
amended, the "N-14 Registration Statement") on the effective date of the
N-14 Registration Statement, at the time of the stockholders' meeting
referred to in Section 6(a) of this Agreement and at the Effective Date,
insofar as it relates to GAB or the description of this Agreement or the
Reorganization (i) shall have complied or will comply in all material
respects with the provisions of the 1933 Act, the 1934 Act and the 1940 Act
and the rules and regulations thereunder and (ii) did not or will not
contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the
statements therein not misleading; and the prospectus included therein did
not or will not contain any untrue statement of a material fact or omit to
state any material fact necessary to make the statements therein, in the
light of the circumstances under which they were made, not misleading;
provided, however, that the representations and warranties in this
subsection shall not apply to statements in, or omissions from, the N-14
Registration Statement made in reliance upon and in conformity with
information furnished by SPR in writing for use in the N-14 Registration
Statement.
(m) On the date of this Agreement, GAB is authorized to issue
182,000,000 shares of common stock, par value $.001 per share (the "GAB
Common Stock"), of which 141,012,252 shares were
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outstanding as of March 31, 2005. Each outstanding share of capital stock
is fully paid, nonassessable and has all voting rights required by the 1940
Act.
(n) All of the issued and outstanding shares of GAB Common Stock have
been issued in conformity with all applicable Federal and state securities
laws.
(o) The GAB Common Stock to be issued pursuant to this Agreement will
have been duly authorized and, when issued and delivered pursuant to this
Agreement, will be duly and validly issued and outstanding, fully paid and
nonassessable, and will have the voting rights set forth in GAB's Articles
of Incorporation, as amended, GAB's Articles Supplementary, as amended,
GAB's By-Laws, as amended, and the 1940 Act, and no stockholder of GAB will
have any preemptive right of subscription or purchase in respect thereof.
GAB has issued preferred stock the holders of which, voting as a separate
class, are entitled to elect two directors of GAB.
(p) At or prior to the Effective Date, the GAB Common Stock to be
issued pursuant to this Agreement will be duly qualified for offering to
the public in conformity with all applicable federal and state securities
laws, and there will be a sufficient number of such shares registered under
the 1933 Act to permit the issuance contemplated by this Agreement.
(q) GAB has adopted and implemented policies and procedures required
by Rule 38a-1 under the 1940 Act.
(r) The books and records of GAB made available to SPR and/or its
counsel are substantially true and correct and contain no material
misstatements or omissions with respect to the operations of GAB.
2. REPRESENTATIONS AND WARRANTIES OF SPR.
SPR represents and warrants to, and agrees with, GAB that:
(a) SPR is a corporation duly organized, validly existing and in good
standing in conformity with New York Law, and has the requisite corporate
power to own all of its assets and to carry out this Agreement. SPR has all
necessary Federal, state and local authorizations to carry on its business
as it is now being conducted.
(b) SPR is duly registered under the 1940 Act (File No. 811-01537) as
a diversified, closed-end management investment company, and such
registration has not been revoked or rescinded and is in full force and
effect. SPR has elected and qualified for the special tax treatment
afforded RICs under Sections 851-855 of the Code at all times since its
inception and intends to continue to so qualify for its taxable year ending
upon the Effective Date.
(c) SPR has corporate power and authority to enter into and perform
its obligations under this Agreement. The execution, delivery and
performance of this Agreement has been duly authorized by all necessary
action of SPR's Board of Directors, and, subject to stockholder approval,
this Agreement constitutes its valid and binding agreement enforceable
against it in accordance with its terms, subject to the effects of
bankruptcy, insolvency, moratorium, fraudulent conveyance and similar laws
relating to or affecting creditors' rights generally and court decisions
with respect thereto.
(d) There are no material legal, administrative or other proceedings
pending or, to the knowledge of SPR, threatened against SPR which assert
liability on the part of SPR or which materially affect its financial
condition or its ability to consummate the Reorganization. SPR is not
charged with or, to the best of its knowledge, threatened with any
violation or investigation of any possible violation of any provisions of
any Federal, state or local law or regulation or administrative ruling
relating to any aspect of its business.
(e) SPR is not a party to or obligated under any provision of its
Certificate of Incorporation, as amended, or its by-laws, as amended, or
any contract or other commitment or obligation, and is not subject to any
order or decree which would be violated by its execution of or performance
under this
A-3
Agreement, except for those that will be complied with, satisfied, amended
or waived to cure any potential violation as a condition precedent to the
Reorganization.
(f) GAB has been furnished with a statement of assets, liabilities and
capital and a schedule of investments of SPR, each as of the end of SPR's
most recently completed fiscal year, said financial statements having been
audited by Tardino Tocci & Goldstein LLP, an independent registered public
accounting firm.
(g) GAB has been furnished with SPR's Annual Report to Stockholders
for SPR's most recently completed fiscal year, and the audited financial
statements appearing therein fairly present the financial position of SPR
as of the date thereof, in conformity with generally accepted accounting
principles applied on a consistent basis.
(h) There are no material contracts outstanding to which SPR is a
party that have not been disclosed in the N-14 Registration Statement or
not otherwise disclosed in writing to GAB prior to the date of this
Agreement.
(i) SPR has no known liabilities of a material amount, contingent or
otherwise, other than those shown on its statements of assets, liabilities
and capital referred to above, those incurred in the ordinary course of its
business as an investment company since the date of such statements, and
those incurred in connection with the Reorganization.
(j) SPR has filed, or has obtained extensions to file, all Federal,
state and local tax returns which are required to be filed by it, and has
paid all Federal, state and local taxes shown on said returns to be due and
owing and all assessments received by it, up to and including the taxable
year in which the Effective Date occurs. All tax liabilities of SPR have
adequately been provided for on its books, and no tax deficiency or
liability of SPR has been asserted and no question with respect thereto has
been raised by the Internal Revenue Service or by any state or local tax
authority for taxes in excess of those already paid, up to and including
the taxable year in which the Effective Date occurs.
(k) The approval by the holders of a majority of the shares of SPR
Common Stock outstanding on the record date for the special meeting of SPR
Stockholders is the only vote of stockholders necessary to approve the
Agreement on behalf of SPR.
(l) No consent, approval, authorization or order of any court or
governmental authority is required for the consummation by SPR of the
Reorganization, except such as may be required under the 1933 Act, the 1934
Act, the 1940 Act and the laws of the State of New York.
(m) The N-14 Registration Statement, on its effective date, at the
time of the stockholders' meeting referred to in Section 6(a) of this
Agreement and on the Effective Date, insofar as it relates to SPR (i) shall
have complied or will comply in all material respects with the provisions
of the 1933 Act, the 1934 Act and the 1940 Act and the rules and
regulations thereunder, and (ii) did not or will not contain any untrue
statement of a material fact or omit to state any material fact required to
be stated therein or necessary to make the statements therein not
misleading; and the prospectus included therein did not or will not contain
any untrue statement of a material fact or omit to state any material fact
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading; provided, however, that the
representations and warranties in this subsection shall apply only to
statements in or omissions from the N-14 Registration Statement made in
reliance upon and in conformity with information furnished by SPR in
writing for use in the N-14 Registration Statement as provided in Section 6
of this Agreement.
(n) On the date of this Agreement, the only shares of capital stock
authorized for issuance by SPR are 10,000,000 shares of common stock, par
value $1.00 per share (the "SPR Common Stock"), of which 2,500,000 shares
are outstanding. Each outstanding share of SPR Common Stock is fully paid,
nonassessable and has full voting rights.
(o) All of the issued and outstanding shares of SPR Common Stock have
been offered for sale and sold in conformity with all applicable Federal
and state securities laws.
A-4
(p) The books and records of SPR made available to GAB and/or its
counsel are substantially true and correct and contain no material
misstatements or omissions with respect to the operations of SPR.
3. THE REORGANIZATION.
(a) Subject to the terms and conditions contained herein and on the basis
of the representations and warranties contained herein, SPR agrees to convey,
transfer and deliver the assets of SPR described in Section 3(b) to GAB free and
clear of all liens, encumbrances and claims whatsoever. In exchange, GAB agrees:
(a) to deliver to SPR the number of full shares of GAB determined by dividing
the aggregate value of SPR's assets, net of the liabilities of SPR and the
Reserve (as defined below), computed in the manner and as of the time and date
set forth in Section 3(f), by the net asset value of one share of GAB computed
in the manner and as of the time and date set forth in Section 3(f), subject to
the calculation of Alternative Value as may required by Section 3(f), and cash
in lieu of fractional shares of GAB Common Stock; and (b) to assume the Stated
Liabilities of SPR described in Section 3(c). Such transactions shall take place
on the Effective Date.
(b) The assets of SPR to be acquired by GAB shall consist of all property
owned by SPR, including, without limitation, all cash, securities, commodities,
interests in futures and other financial instruments, claims (whether absolute
or contingent, known or unknown), receivables (including dividends, interest,
principal, subscriptions and other receivables), goodwill and other intangible
property, all books and records belonging to SPR, any deferred or prepaid
expenses shown as an asset on the books of SPR on the Effective Date, and all
interests, rights, privileges and powers, other than cash in an amount necessary
to pay dividends and distributions as provided in Section 6(i), and $250,000 in
cash set aside as a reserve by SPR (the "Reserve") to pay the estimated amount
of SPR's expenses in connection with its dissolution and liquidation (other than
the Stated Liabilities) and other than SPR's rights under this Agreement (the
"Assets").
(c) SPR will endeavor to identify and discharge, to the extent practicable,
all of its liabilities and obligations, including all liabilities relating to
operations, before the Effective Date. GAB will assume only those accrued and
unpaid liabilities of SPR set forth in SPR's statement of assets and liabilities
as of the Effective Date delivered by SPR to GAB pursuant to this Section (the
"Stated Liabilities"). GAB shall assume only the Stated Liabilities and shall
not assume any other debts, liabilities or obligations of SPR.
(d) SPR will prepare and deliver to GAB on the Effective Date (1) a
statement of the Assets and Stated Liabilities of SPR and (2) a list of SPR's
portfolio securities showing the tax costs of each of its assets by lot and the
holding period of such assets, each of (1) and (2) as of the Effective Date, and
certified by the President (or any Vice President) and Treasurer of SPR.
(e) Prior to the Effective Date, SPR shall have made arrangements with
Citibank, N.A., its custodian, to deliver on the Effective Date a certificate of
an authorized officer stating that (a) the Assets shall have been delivered in
proper form to Mellon Trust of New England, N.A., custodian for GAB, prior to or
on the Effective Date and (b) all necessary taxes in connection with the
delivery of the Assets, including all applicable federal and state stock
transfer stamps, if any, have been paid or provision for payment has been made.
SPR's portfolio securities represented by a certificate or other written
instrument shall be presented by the custodian for SPR to the custodian for GAB
for examination no later than five business days preceding the Effective Date
and transferred and delivered by SPR as of the Effective Date for the account of
GAB duly endorsed in proper form for transfer in such condition as to constitute
good delivery thereof. SPR's portfolio securities and instruments deposited with
a securities depository, as defined in Rule 17f-4 under the 1940 Act, shall be
delivered as of the Effective Date by book entry with the customary practices of
such depositories and the custodian for GAB. The cash to be transferred by SPR
shall be delivered by wire transfer of federal funds on the Effective Date.
(f) The number of full shares of GAB Common Stock to be issued to SPR shall
be computed by dividing: (i) the aggregate value of SPR's Assets, net of SPR's
Stated Liabilities and the Reserve, as computed by SPR on the Effective Date by
(ii) the net asset value of one share of GAB Common Stock as determined by GAB
on the Effective Date; provided, however, that if the average closing price of
GAB Common Stock on the New York Stock Exchange for the 20 business days prior
to the Effective Date exceeds
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the net asset value per share of GAB Common Stock on the Effective Date, the
number of shares of GAB Common Stock to be issued to SPR shall be computed by
dividing (i) the aggregate value of SPR's Assets, net of SPR's Stated
Liabilities and the Reserve, as computed by SPR on the Effective Date by (ii)
the lower of (x) the average of such closing prices for the 20 business days
prior to the Effective Date and (y) 103% of the net asset value per share of GAB
Common Stock computed on the Effective Date ("Alternative Value"). GAB will at
the same time deliver to SPR cash in lieu of any fractional shares of GAB Common
Stock.
4. LIQUIDATION AND DISTRIBUTION.
(a) At or as soon as practicable after the Effective Date, SPR will
distribute in complete liquidation of SPR (other than the Reserve), pro rata to
its stockholders of record, determined as of the close of business on the
Effective Date (the "SPR Stockholders"), all of the GAB Common Stock and cash in
lieu of fractional shares received by SPR. Upon completion of the distribution
of the GAB Common Stock and cash, SPR will thereupon proceed to dissolve and
terminate in accordance with the NYBCL and other applicable law, and the Reserve
will be transferred to a liquidating trust for the benefit of the SPR
Stockholders. Such distribution and liquidation will be accomplished by the
transfer of the GAB Common Stock then credited to the account of SPR on the
books of GAB to open accounts on the share records of GAB in the names of the
SPR Stockholders. All issued and outstanding shares of SPR will, simultaneously
with the liquidation, be cancelled on the books of SPR and will be null and
void.
(b) With respect to any SPR Stockholder holding certificates evidencing
ownership of SPR Common Stock as of the Effective Date, and subject to GAB being
informed thereof in writing by SPR, GAB will not issue new certificates
evidencing ownership of the GAB Common Stock or permit such SPR Stockholder to
pledge or redeem such GAB Common Stock, in any case, until such SPR Stockholder
has surrendered his or her outstanding certificates evidencing ownership of SPR
Common Stock or, in the event of lost certificates, posted adequate bond. SPR,
at its own expense, will request SPR Stockholders to surrender their outstanding
certificates evidencing ownership of SPR Common Stock or post adequate bond
therefor. Dividends payable to holders of record of shares of GAB Common Stock
as of any date after the Effective Date and prior to the exchange of
certificates by any SPR Stockholder shall be paid to such SPR Stockholder,
without interest; however, such dividends shall not be paid unless and until
such SPR Stockholder surrenders his or her stock certificates for exchange.
(c) Prior to the Effective Date, SPR shall have made arrangements with
Registrar and Transfer Company, its transfer agent and registrar, to deliver to
GAB a list of the names and addresses of all of the stockholders of record of
SPR Common Stock on the Effective Date and the number of shares of SPR Common
Stock owned by each such stockholder, certified by SPR's transfer agent or
President to the best of their knowledge and belief.
5. PAYMENT OF EXPENSES.
(a) Each of GAB and SPR shall pay, subject to paragraph (b) of this Section
5, all of their respective expenses incurred in connection with the
Reorganization. Such fees and expenses shall include legal, accounting and state
securities or blue sky fees (if any), printing costs, proxy solicitation fees,
consulting fees, filing fees, stock exchange fees, rating agency fees, portfolio
transfer taxes (if any), and any similar expenses incurred in connection with
the Reorganization.
(b) Each of Gabelli and SPR shall pay 50% of the reasonable and documented
expenses of printing and mailing the proxy statements and proxy cards to SPR
shareholders.
(c) Neither GAB nor SPR shall pay any expenses of its respective
stockholders arising out of or in connection with the Reorganization.
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6. COVENANTS OF THE FUNDS.
(a) SPR agrees to call a special meeting of its stockholders to be held as
soon as is practicable after the effective date of the N-14 Registration
Statement for the purpose of considering the Reorganization as described in this
Agreement.
(b) Each Fund covenants to operate its respective business as presently
conducted between the date hereof and the Effective Date, it being understood
that such ordinary course of business will include (i) the declaration and
payment of customary dividends and other distributions and (ii) in the case of
SPR, (A) preparing for its deregistration and (B) the establishment of the
Reserve, except that the distribution of dividends pursuant to Section 6(i) of
this Agreement shall not be deemed to constitute a breach of the provisions of
this Section 6(b).
(c) GAB will file the N-14 Registration Statement with the Securities and
Exchange Commission (the "Commission") as promptly as practicable and will use
its best efforts to provide that the N-14 Registration Statement becomes
effective as promptly as practicable thereafter. SPR agrees to cooperate fully
with GAB and will furnish to GAB the information relating to itself to be set
forth in the N-14 Registration Statement as required by the 1933 Act, the 1934
Act, the 1940 Act, and the rules and regulations thereunder and applicable state
securities or blue sky laws.
(d) GAB will use commercially reasonable efforts to obtain any and all
regulatory, rating agency, director and/or stockholder approvals necessary to
issue the GAB Common Stock in connection with the Reorganization.
(e) GAB agrees that it has no plan or intention to sell or otherwise
dispose of the Assets of SPR to be acquired in the Reorganization, except for
dispositions made in the ordinary course of business.
(f) Each Fund agrees that, on or before the Effective Date, all of its
Federal and other tax returns and reports required to be filed on or before such
date shall have been filed and all taxes shown as due on said returns either
shall have been paid or adequate liability reserves shall have been provided for
the payment of such taxes. In connection with this covenant, SPR agrees to
cooperate with GAB in filing any tax return, amended return or claim for refund,
determining a liability for taxes or a right to a refund of taxes or
participating in or conducting any audit or other proceeding in respect of
taxes. GAB agrees to retain for a period of ten (10) years following the
Effective Date all returns, schedules and work papers and all material records
or other documents relating to tax matters of SPR for its taxable periods first
ending after such Effective Date and for all prior taxable periods. Any
information obtained under this subsection shall be kept confidential except as
otherwise may be necessary in connection with the filing of returns or claims
for refund or in conducting an audit or other proceeding. After the Effective
Date, GAB at its expense shall prepare, or cause its agents to prepare, any
federal, state or local tax returns, including any Forms 1099, required to be
filed and provided to required persons by SPR with respect to its final taxable
year ending with the Effective Date and for any prior periods or taxable years
for which the due date for such return has not passed as of the Effective Date
and further shall cause such tax returns and Forms 1099 to be duly filed with
the appropriate taxing authorities and provided to required persons.
(g) SPR agrees to mail to its respective stockholders of record entitled to
vote at the special meeting of stockholders at which action is to be considered
regarding this Agreement, in sufficient time to comply with requirements as to
notice thereof, a combined Proxy Statement and Prospectus which complies in all
material respects with the applicable provisions of Section 14(a) of the 1934
Act and Section 20(a) of the 1940 Act, and the rules and regulations,
respectively, thereunder.
(h) SPR shall have taken all steps required to terminate all contracts with
service providers effective not later than the Effective Date and SPR shall
record any liabilities arising therefrom.
(i) Prior to the Effective Date, SPR shall have declared a dividend or
dividends, with a record and ex-dividend date prior to the Effective Date,
which, together with all previous dividends, shall have the effect of
distributing to the SPR Stockholders all of SPR's investment company taxable
income for all taxable periods ending on or before the Effective Date (computed
without regard to any deduction for dividends paid), if any,
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plus the excess of its interest income, if any, excludable from gross income
under Section 103(a) of the Code over its deductions disallowed under Sections
265 and 171(a)(2) of the Code for all taxable periods ending on or before the
Effective Date and all of its net capital gains realized in all taxable periods
ending on or before the Effective Date (after reduction for any capital loss
carry forward).
(j) Following the consummation of the Reorganization, GAB expects to stay
in existence and continue its business as a closed-end management investment
company registered under the 1940 Act.
(k) Except as contemplated herein, each Fund agrees that, other than with
respect to the dividend contemplated in Section 6(i), during the period from the
date hereof to and including the Effective Date, it will declare and pay
dividends consistent with past practices and the terms of the common stock and,
in the case of GAB, the preferred stock issued by such Fund.
(l) SPR undertakes that, if the Reorganization is effected, it will file,
or cause its agents to file, an application pursuant to Section 8(f) of the 1940
Act for an order declaring that SPR has ceased to be a registered investment
company.
7. EFFECTIVE DATE OF THE REORGANIZATION.
(a) The Reorganization shall be effective five (5) business days after each
of the conditions in Sections 8 and 9 has been satisfied or waived by the
applicable party, or at such other time and date as fixed by the mutual consent
of the parties (such date, the "Effective Date").
8. GAB'S CONDITIONS.
The obligation of GAB to consummate the Reorganization shall be subject to
the satisfaction or waiver of the following conditions:
(a) This Agreement shall have been adopted, and the Reorganization
shall have been approved, by the affirmative vote of a majority of the
shares of SPR Common Stock outstanding on the record date for the special
meeting of SPR Stockholders; and SPR shall have delivered to GAB a copy of
the resolutions adopting this Agreement and approving the Reorganization
adopted by its Board of Directors and Stockholders and certified by its
Secretary.
(b) SPR shall have furnished to GAB a certificate signed by its
President (or any Vice President) and its Treasurer, dated the Effective
Date, certifying that as of such Effective Date all representations and
warranties made in this Agreement are true and correct in all material
respects as if made at and as of such date and it has complied with all of
the agreements and satisfied all of the conditions on its part to be
performed or satisfied at or prior to such date.
(c) GAB shall have received an opinion of Skadden, Arps, Slate,
Meagher & Flom LLP, as counsel to SPR, in form and substance satisfactory
to GAB and dated the Effective Date, to the effect that (i) SPR is a
corporation duly organized, validly existing and in good standing in
conformity with New York Law; (ii) all corporate actions required to be
taken by SPR to authorize this Agreement and to effect the Reorganization
have been duly authorized by all necessary corporate actions thereof; (iii)
the execution and delivery of this Agreement does not, and the consummation
of the Reorganization will not, violate any material provision of the
Certificate of Incorporation, as amended, or the by-laws, as amended, or
any agreement (known to such counsel) to which SPR is a party or by which
SPR is bound; (iv) to the knowledge of such counsel, all regulatory or
court consents, authorizations, approvals, orders or filings required to be
obtained or made by SPR under the Federal laws of the United States or the
laws of the State of New York for the transfer of SPR's Assets for GAB
Common Stock pursuant to the Agreement have been obtained or made; (v) this
Agreement has been duly authorized, executed and delivered by SPR and,
assuming that the N-14 Registration Statement complies with the 1933 Act,
the 1934 Act and the 1940 Act, represents a valid and binding agreement,
enforceable against SPR in accordance with its terms, except as
enforceability may be limited by bankruptcy, insolvency, fraudulent
conveyance, reorganization or other similar laws pertaining to the
enforcement of creditors' rights generally and by equitable principles; and
(vi) such counsel does not know of any contracts or other
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documents with respect to SPR related to the Reorganization of a character
required to be described in the N-14 Registration Statement which are not
described therein or, if required to be filed, filed as required. In giving
the opinion set forth above, Skadden, Arps, Slate, Meagher & Flom LLP may
state that it is relying on certificates of officers of SPR with regard to
matters of fact and certificates and written statements of governmental
officials with respect to factual matters.
Such counsel shall also state that while such counsel cannot make any
representation as to the accuracy or completeness of statements of fact in
the N-14 Registration Statement or any amendment or supplement thereto with
respect to SPR, nothing has come to their attention that would lead them to
believe that, on the respective effective dates of the N-14 Registration
Statement and any amendment or supplement thereto, with respect to SPR, the
N-14 Registration Statement or any amendment or supplement thereto
contained any untrue statement of a material fact or omitted to state any
material fact necessary to make the statements therein in light of the
circumstances under which they were made, not misleading with respect to
SPR; provided, such counsel need not express any opinion or belief as to
the financial statements, other financial data, statistical data or
information relating to SPR contained or incorporated by reference in the
N-14 Registration Statement.
(d) GAB shall have received an opinion from Willkie Farr & Gallagher
LLP, as counsel to GAB, in form and substance satisfactory to GAB and dated
the Effective Date, substantially to the effect that, based upon certain
facts, assumptions and representations, for Federal income tax purposes the
acquisition by GAB of all or substantially all of the Assets of SPR (other
than the Reserve) solely in exchange for GAB Common Stock and the
assumption by GAB of the Stated Liabilities of SPR, followed by the
distribution by SPR to its stockholders of full shares of GAB Common Stock
(and the payment in cash in lieu of fractional shares) in complete
liquidation of SPR, all pursuant to the Agreement, constitutes a
reorganization within the meaning of Section 368(a) of the Code, and GAB
and SPR will each be a "party to a reorganization" within the meaning of
Section 368(b) of the Code. The delivery of such opinion is conditioned
upon receipt by Willkie Farr & Gallagher LLP of representations it shall
request of GAB and SPR. Notwithstanding anything herein to the contrary,
neither GAB nor SPR may waive the condition set forth in this Section 8(d).
(e) The Assets or Stated Liabilities of SPR as of the Effective Date
shall not include any assets or liabilities which GAB, by reason of charter
limitations or otherwise, may not properly acquire or assume, there being
no such assets or liabilities to the best knowledge of GAB as of the date
of this Agreement.
(f) The N-14 Registration Statement shall have become effective under
the 1933 Act and no stop order suspending such effectiveness shall have
been instituted or, to the knowledge of GAB, shall be contemplated by the
Commission.
(g) The Commission shall not have issued an unfavorable advisory
report under Section 25(b) of the 1940 Act, nor instituted or threatened to
institute any proceeding seeking to enjoin consummation of the
Reorganization under Section 25(c) of the 1940 Act; and no other legal,
administrative or other proceeding shall be instituted or threatened which
would materially affect the financial condition of SPR or would prohibit
the Reorganization.
(h) All proceedings taken by SPR and its counsel in connection with
the Reorganization and all documents incidental thereto shall be
satisfactory in form and substance to GAB.
(i) Prior to the Effective Date, SPR shall have declared a dividend or
dividends which, together with all such previous dividends, shall have the
effect of distributing to its stockholders all of its net investment
company taxable income, if any, for the tax year of SPR ending on the
Effective Date, and all of its net capital gain, if any, realized for the
tax year of SPR ending on the Effective Date.
(j) There shall not have occurred any material adverse change in the
financial condition of SPR or results of operations of SPR, provided that
any adverse changes in market prices of securities in which SPR invests,
individually or in the aggregate, shall not be deemed to be a material
adverse change.
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9. SPR'S CONDITIONS.
The obligations of SPR hereunder shall be subject to the satisfaction or
waiver of the following conditions:
(a) This Agreement shall have been adopted, and the Reorganization
shall have been approved, by the Board of Directors of GAB; and GAB shall
have delivered to SPR a copy of the resolutions, adopted by its Board of
Directors and certified by its Secretary, so adopting this Agreement and
approving the Reorganization. (b) GAB shall have furnished to SPR a
certificate of its President (or any Vice President) and its Treasurer
dated as of the Effective Date, certifying that (i) as of the Effective
Date there has been no material adverse change in its financial position
since the date of GAB's most recent financial statements provided to SPR,
other than changes in its portfolio securities since that date or changes
in the market value of its portfolio securities and (ii) immediately after
the Effective Date, GAB will be in compliance with all asset coverage tests
applicable to the outstanding preferred stock of GAB.
(c) GAB shall have furnished to SPR a certificate signed by its
President (or any Vice President), dated the Effective Date, certifying
that all representations and warranties of GAB made in this Agreement are
true and correct in all material respects with the same effect as if made
at and as of such Effective Date, and that GAB has complied with all of the
agreements and satisfied all of the conditions on its part to be performed
or satisfied at or prior to such date.
(d) All proceedings taken by GAB and its counsel in connection with
the Reorganization and all documents incidental thereto shall be
satisfactory in form and substance to SPR.
(e) The N-14 Registration Statement shall have become effective under
the 1933 Act, and no stop order suspending such effectiveness shall have
been instituted or, to the knowledge of SPR, shall be contemplated by the
Commission.
(f) The Commission shall not have issued an unfavorable advisory
report under Section 25(b) of the 1940 Act, nor instituted or threatened to
institute any proceeding seeking to enjoin consummation of the
Reorganization under Section 25(c) of the 1940 Act; and no other legal,
administrative or other proceeding shall be instituted or threatened which
would materially affect the financial condition of SPR or would prohibit
the Reorganization.
(g) SPR shall have received an opinion from Willkie Farr & Gallagher
LLP, as counsel to GAB, in form and substance satisfactory to SPR and dated
the Effective Date, to the effect that (i) GAB is a corporation duly
organized, validly existing and in good standing under the laws of the
State of Maryland; (ii) the Agreement has been duly authorized, executed
and delivered by GAB, and, assuming that the N-14 Registration Statement
complies with the 1933 Act, the 1934 Act and the 1940 Act, constitutes a
valid and legally binding agreement of GAB, enforceable against GAB in
accordance with its terms, except as enforceability may be limited by
bankruptcy, insolvency, fraudulent conveyance, reorganization or other
similar laws pertaining to the enforcement of creditors' rights generally
and by equitable principles; (iii) to the knowledge of such counsel all
regulatory and court consents, authorizations, approvals, orders or filings
required to be obtained or made by GAB under the Federal laws of the United
States or the laws of the State of Maryland with respect to the issuance of
GAB Common Stock in exchange for the transfer of SPR's Assets pursuant to
the Agreement have been obtained or made; (iv) the N-14 Registration
Statement has become effective under the 1933 Act, and to such counsel's
knowledge no stop order suspending the effectiveness of the N-14
Registration Statement has been issued and no proceedings for that purpose
have been instituted or are pending or contemplated under the 1933 Act, and
with respect to GAB, the N-14 Registration Statement, and each amendment or
supplement thereto, as of their respective effective dates, appear on their
face to be appropriately responsive in all material respects to the
requirements of the 1933 Act, the 1934 Act and the 1940 Act and the
published rules and regulations of the Commission thereunder; (v) such
counsel does not know of any statutes, legal or governmental proceedings or
contracts with respect to GAB or other documents related to the
Reorganization of a character required to be described in the N-14
Registration Statement that are not described therein or, if required to be
filed, filed as required; (vi) the execution and delivery of this
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Agreement does not, and the consummation of the Reorganization will not,
violate any material provision of the Articles of Incorporation, as
amended, the Articles Supplementary, the by-laws, as amended, or any
agreement (known to such counsel) to which GAB is a party or by which GAB
is bound; and (vii) all corporate actions required to be taken by GAB to
authorize this Agreement and to effect the Reorganization have been duly
authorized by all necessary corporate actions on behalf of GAB. In giving
the opinion set forth above, Willkie Farr & Gallagher LLP may state that it
is relying on certificates of officers of GAB with regard to matters of
fact and certificates and written statements of governmental officials with
respect to factual matters. With respect to all matters of Maryland law,
such counsel shall be entitled to state that, with the approval of SPR,
they have relied upon the opinion of Venable LLP and that their opinion is
subject to the same assumptions, qualifications and limitations with
respect to such matters as are contained in the opinion of Venable LLP.
Such counsel also shall state that while such counsel cannot make any
representation as to the accuracy or completeness of statements of fact in
the N-14 Registration Statement or any amendment or supplement thereto with
respect to GAB, nothing has come to their attention that would lead them to
believe that, on the respective effective dates of the N-14 Registration
Statement and any amendment or supplement thereto, the N-14 Registration
Statement or any amendment or supplement thereto contained any untrue
statement of a material fact or omitted to state any material fact required
to be stated therein or necessary to make the statements therein not
misleading with respect to GAB; and the prospectus included in the N-14
Registration Statement contained any untrue statement of a material fact or
omitted to state any material fact necessary to make the statements
therein, in the light of the circumstances under which they were made, not
misleading with respect to GAB; provided, that such counsel need not
express any opinion or belief as to the financial statements, other
financial data, statistical data or information relating to GAB included or
incorporated by reference in the N-14 Registration Statement.
(h) SPR shall have received an opinion from Skadden, Arps, Slate,
Meagher & Flom LLP, as counsel to SPR, in form and substance satisfactory
to SPR and dated the Effective Date, substantially to the effect that,
based upon certain facts, assumptions and representations, for Federal
income tax purposes the acquisition by GAB of all or substantially all of
the Assets of SPR (other than the Reserve) solely in exchange for GAB
Common Stock and the assumption by GAB of the Stated Liabilities of SPR,
followed by the distribution by SPR to its stockholders of full shares of
GAB Common Stock (and the payment in cash in lieu of fractional shares) in
complete liquidation of SPR, all pursuant to the Agreement, constitutes a
reorganization within the meaning of Section 368(a) of the Code, and GAB
and SPR will each be a "party to a reorganization" within the meaning of
Section 368(b) of the Code. The delivery of such opinion is conditioned
upon receipt by Skadden, Arps, Slate, Meagher & Flom LLP of representations
it shall request of SPR and GAB. Notwithstanding anything herein to the
contrary, neither GAB nor SPR may waive the condition set forth in this
Section 9(h).
(i) GAB shall have received from the Commission such orders or
interpretations as are reasonably necessary or desirable under the 1933
Act, the 1934 Act and the 1940 Act, and from any relevant state securities
administrator such orders or interpretations as are reasonably necessary
and desirable under any applicable state securities or blue sky laws, in
connection with the Reorganization, and all such orders shall be in full
force and effect.
(j) There shall not have occurred any material adverse change in the
financial condition of GAB or the consolidated financial condition of
Gabelli, businesses, or results of operations of GAB or Gabelli, provided
that any adverse changes in market prices of securities in which GAB
invests, individually or in the aggregate, shall not be deemed to be a
material adverse change.
10. TERMINATION, POSTPONEMENT AND WAIVERS.
(a) Notwithstanding anything contained in this Agreement to the contrary,
this Agreement may be terminated and the Reorganization abandoned at any time
(whether before or after approval thereof by the SPR Stockholders) prior to the
Effective Date, or such Effective Date may be postponed, (i) by mutual
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consent of the Board of Directors of the Funds; (ii) by the Board of Directors
of SPR if any condition of GAB's obligations set forth in Section 9 of this
Agreement has not been fulfilled or waived by such Board or if GAB has made a
material and intentional misrepresentation herein or in connection herewith; or
(iii) by the Board of Directors of GAB if any conditions of SPR's obligations
set forth in Section 8 of this Agreement has not been fulfilled or waived by
such Board or if SPR has made a material and intentional misrepresentation
herein or in connection herewith.
(b) If the transactions contemplated by this Agreement have not been
consummated by December 31, 2005, either Fund may terminate this Agreement by
action of its Board of Directors, except that if the failure to consummate the
transactions is the result of a breach of this Agreement by a Fund, that Fund
may not terminate the Agreement.
(c) In the event of termination of this Agreement pursuant to the
provisions hereof, the same shall become void and have no further effect, and
there shall not be any liability on the part of either Fund or persons who are
their directors, officers, agents or stockholders in respect of this Agreement,
except for any such material breach or intentional misrepresentation, as to each
of which all remedies at law or in equity of the party adversely affected shall
survive. (d) At any time prior to the Effective Date, either Fund may, by
written instrument signed by its Board of Directors, (i) extend the time for the
performance of any of the obligations or other acts of the other, (ii) waive any
inaccuracies in the representations and warranties of the other contained herein
and (iii) waive compliance with any of the agreements of the other or conditions
to its obligations contained herein; provided in each case that, in the judgment
of the Board of Directors of such Fund, after consultation with its counsel,
such action will not have a material adverse effect on the benefits intended
under this Agreement to the stockholders of the Fund on behalf of which such
action is taken.
(e) This Agreement may not be amended except by an instrument in writing
executed by the parties affected by any such amendment.
(f) The respective representations and warranties contained in Sections 1
and 2 of this Agreement shall expire with, and be terminated by, the
consummation of the Reorganization, and none of GAB or SPR or any of their
officers, directors, agents or stockholders shall have any liability with
respect to such representations or warranties after the Effective Date. This
provision shall not protect any officer, director, agent or stockholder of GAB
or SPR against any liability to the entity for which that officer, director,
agent or stockholder so acts or to its stockholders to which that officer,
director, agent or stockholder otherwise would be subject by reason of willful
misfeasance, bad faith, gross negligence, or reckless disregard of the duties in
the conduct of such office.
(g) If any order or orders of the Commission with respect to this Agreement
shall be issued prior to the Effective Date and shall impose any terms or
conditions which are determined by action of the Boards of Directors of GAB or
SPR to be acceptable, such terms and conditions shall be binding as if a part of
this Agreement without further vote or approval of the SPR Stockholders, unless
such terms and conditions shall result in a change in the method of computing
the number of shares of GAB Common Stock to be issued pursuant to this
Agreement, in which event, unless such terms and conditions shall have been
included in the proxy solicitation materials furnished to the SPR Stockholders
prior to the meeting at which the Reorganization shall have been approved, this
Agreement shall not be consummated and shall terminate, unless SPR promptly
shall call a special meeting of SPR Stockholders at which such conditions so
imposed shall be submitted for approval.
11. OTHER MATTERS.
(a) Pursuant to Rule 145 under the 1933 Act, and in connection with the
issuance of any shares of GAB Common Stock to any person who at the time of the
Reorganization is, to its knowledge, an affiliate of a party to the
Reorganization pursuant to Rule 145(c), GAB will cause to be affixed upon the
certificate(s) issued to such person (if any) a legend as follows:
THESE SHARES ARE SUBJECT TO RESTRICTIONS ON TRANSFER UNDER THE
SECURITIES ACT OF 1933 AND MAY NOT BE SOLD OR OTHERWISE TRANSFERRED
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EXCEPT TO THE GABELLI EQUITY TRUST INC. (OR ITS STATUTORY SUCCESSOR) OR ITS
PRINCIPAL UNDERWRITER UNLESS (I) A REGISTRATION STATEMENT WITH RESPECT
THERETO IS EFFECTIVE UNDER THE SECURITIES ACT OF 1933 OR (II) IN THE
OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE FUND, SUCH REGISTRATION
IS NOT REQUIRED.
and, further, that stop transfer instructions will be issued to GAB's transfer
agent with respect to such shares. SPR will provide GAB on the Effective Date
with the name of any SPR Stockholder who is to the knowledge of SPR an affiliate
of it on such date.
(b) Any notice, request, demand, claim and other communication required or
permitted by any provision of this Agreement shall be in writing and shall be
deemed to have been given if delivered or mailed, first class postage prepaid,
addressed to GAB at One Corporate Center, Rye, New York 10580-1422, Attn: Bruce
N. Alpert, President, with a copy to Daniel Schloendorn, Esq., Willkie Farr &
Gallagher LLP, 787 Seventh Avenue, New York, New York 10019, and to SPR at 635
Madison Avenue, New York, New York 10022, Attn: Michael Carey, Secretary, with a
copy to Michael Hoffman, Esq., c/o Skadden, Arps, Slate, Meagher & Flom LLP,
Four Times Square, New York, New York 10036.
(c) This Agreement supersedes all previous correspondence and oral
communications between the parties regarding the Reorganization, constitutes the
only understanding with respect to the Reorganization, may not be changed except
by a letter of agreement signed by each party and shall be governed by and
construed in accordance with the laws of the State of New York applicable to
agreements made and to be performed in said state.
(d) This Agreement may be executed in any number of counterparts, each of
which, when executed and delivered, shall be deemed to be an original but all
such counterparts together shall constitute but one instrument.
(e) In case at any time after the Effective Date any further action is
necessary to carry out the purposes of this Agreement, each Fund will take such
further action (including the execution and delivery of such further instruments
and documents) as the other Fund may reasonably request, all at the sole cost
and expense of the requesting Fund (unless the non-requesting Fund is obligated
to pay such expenses as described above). SPR acknowledges and agrees that from
and after the Effective Date, GAB shall be entitled to possession of all
documents, books, records, agreements, and financial data of any sort pertaining
to SPR.
(f) All covenants, agreements, representations, and warranties made under
this Agreement and any certificates delivered pursuant to this Agreement shall
be deemed to have been material and relied upon by each Fund, notwithstanding
any investigation made by them or on their behalf.
(g) Any term or provision of this Agreement that is invalid or
unenforceable in any situation in any jurisdiction shall not affect the validity
or enforceability of the remaining terms and provisions hereof or the validity
or enforceability of the offending term or provision in any other situation or
in any other jurisdiction.
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IN WITNESS WHEREOF, each of the undersigned has executed and delivered this
Agreement and Plan of Reorganization.
STERLING CAPITAL CORPORATION
By: /s/ WAYNE S. REISNER
------------------------------------
Name: Wayne S. Reisner
Title: President
THE GABELLI EQUITY TRUST INC.
By: /s/ BRUCE N. ALPERT
------------------------------------
Name: Bruce N. Alpert
Title: President
GABELLI FUNDS, LLC
(solely for purposes of Section 5(b))
By: /s/ JAMES E. MCKEE
------------------------------------
Name: James E. McKee
Title: Secretary
A-14
PART B
INFORMATION REQUIRED IN THE STATEMENT OF ADDITIONAL INFORMATION
THE INFORMATION IN THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT COMPLETE AND
MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION
STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS
STATEMENT OF ADDITIONAL INFORMATION IS NOT AN OFFER TO SELL THESE SECURITIES AND
IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER
OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION -- DATED JUNE 22, 2005
Acquisition of the Assets of
STERLING CAPITAL CORPORATION
635 Madison Avenue
New York, New York 10022
(212) 980-3360
By
THE GABELLI EQUITY TRUST INC.
One Corporate Center
Rye, New York 10580
(914) 921-5070
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information ("SAI"), relating specifically to
the proposed transfer of all or substantially all of the assets (other than the
Reserve, as defined in the Proxy Statement/Prospectus that accompanies this SAI)
of Sterling Capital Corporation ("Sterling Capital") to The Gabelli Equity Trust
Inc. (the "Equity Trust") in exchange solely for full shares of Equity Trust
Common Stock and cash in lieu of fractional shares of Equity Trust Common Stock,
the assumption by the Equity Trust of the Stated Liabilities (as defined in the
Proxy Statement/Prospectus) of Sterling Capital and the distribution of Equity
Trust Common Stock to the stockholders of Sterling Capital, consists of this
cover page and the following described documents, each of which accompanies this
SAI and is incorporated herein by reference.
1. Annual Report of the Equity Trust for the year ended December 31,
2004.
2. Annual Report of Sterling Capital for the year ended December 31,
2004.
This Statement of Additional Information is not a prospectus. A Proxy
Statement/Prospectus, dated ________, 2005, relating to the above-referenced
matter may be obtained without charge by calling or writing the Equity Trust at
the telephone number or address set forth above. This Statement of Additional
Information should be read in conjunction with the Proxy Statement/Prospectus.
FINANCIAL STATEMENTS
The Annual Report of Sterling Capital for the fiscal year ended December
31, 2004 and the Annual Report of the Equity Trust for the fiscal year ended
December 31, 2004 are incorporated by reference herein. The Annual Reports for
Sterling Capital and the Equity Trust include audited financial statements,
notes to the financial statements and the report of the independent registered
public accounting firm. To obtain a copy of the Annual and Semi-Annual Reports
without charge, please call ________ and 800-GABELLI (800-422-3554) for Sterling
Capital's and the Equity Trust's reports, respectively.
PRO FORMA FINANCIAL STATEMENTS
Because the net assets of Sterling Capital are less than 10% of the Equity
Trust's net assets, pro forma financial statements are not required to be and
have not been prepared for inclusion in the SAI filed in connection with the
Reorganization.
PART C
OTHER INFORMATION
ITEM 15. INDEMNIFICATION.
The response to this Item is incorporated by reference to the caption
"Comparison of Organizational Structure of the Equity Trust and Sterling
Capital -- the Equity Trust -- Indemnification of Directors and Officers" in
Part A of this Registration Statement on Form N-14.
Insofar as indemnification for liability arising under the Securities Act
may be permitted to directors, officers and controlling persons of Registrant
pursuant to the foregoing provisions, or otherwise, Registrant has been advised
that, in the opinion of the Commission, such indemnification is against public
policy as expressed in the Securities Act, and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by Registrant of expenses incurred or paid by a director, officer or
controlling person of Registrant in the successful defense of any action, suit
or proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered. Registrant will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
ITEM 16. EXHIBITS.
(1) (a) Articles of Incorporation(2)
(b) Articles Supplementary for the 7.20% Tax Advantaged
Cumulative Preferred Stock(4)
(c) Articles Supplementary for the Series C Auction Rate
Cumulative Preferred Stock(5)
(d) Form of Articles Supplementary for the 5.875% Series D
Cumulative Preferred Stock(6)
(e) Form of Articles Supplementary for the Series E Auction Rate
Cumulative Preferred Stock(6)
(f) Articles of Amendment dated May 12, 2004 to the Articles of
Incorporation are filed herewith.
(2) Amended and Restated By-Laws of Registrant(4)
(3) Not applicable
(4) Agreement and Plan of Reorganization is included in Part A to the
Registration Statement on Form N-14.
(5) Not applicable
(6) Investment Advisory Agreement between Registrant and Gabelli
Funds, LLC(1)
(7) Not applicable
(8) Not applicable
(9) Custodian Contract between Registrant and Mellon Trust of New
England, N.A.(1)
(10) Not applicable
(11) (a) Opinion and consent of Willkie Farr & Gallagher LLP as to
the legality of the securities being registered is filed
herewith.
(b) Opinion and consent of Venable LLP as to the legality of the
securities being registered is filed herewith.
(12) (a) Form of Opinion of Willkie Farr & Gallagher LLP supporting
the tax matters and consequences to shareholders discussed
in the Proxy Statement/Prospectus to be filed by amendment.
(b) Form of Opinion of Skadden, Arps, Slate, Meagher & Flom LLP
supporting the tax matters and consequences to shareholders
discussed in the Proxy Statement/Prospectus to be filed by
amendment.
(13) Not applicable
(14) (a) Consent of independent registered public accounting firm for
Sterling Capital Corporation to be filed by amendment.
(b) Consent of independent registered public accounting firm for
the Registrant to be filed by amendment.
(15) Not applicable
(16) Power of attorney is filed herewith as part of signature page.
(17) (a) Registrar, Transfer Agency and Service Agreement between
Registrant and EquiServe Trust Company(1)
(b) Transfer Agent and Registrar Services Fee Agreement(1)
(c) Codes of Ethics of the Registrant and Gabelli Funds, LLC(3)
(d) Form of Proxy Card is filed herewith
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(1) Incorporated by reference from Pre-Effective Amendment No. 1 to the
Registrant's Registration Statement on Form N-2 Nos. 333-62323 and 811-4700;
as filed with the Securities and Exchange Commission on October 13, 1995.
(2) Incorporated by reference from Pre-Effective Amendment No. 2 to the
Registrant's Registration Statement on Form N-2 Nos. 333-45951 and 811-4700)
as filed with the Securities and Exchange Commission on February 10, 1998.
(3) Incorporated by reference from Pre-Effective Amendment No. 2 to the
Registrant's Registration Statement on Form N-2 Nos. 333-62323 and 811-4700;
as filed with the Securities and Exchange Commission on December 12, 2000.
(4) Incorporated by reference from Pre-Effective Amendment No. 1 to the
Registrant's Registration Statement on Form N-2 (Nos. 333-47012 and
811-4700) as filed with the Securities and Exchange Commission on June 11,
2001.
(5) Incorporated by reference from Pre-Effective Amendment No. 3 to the
Registrant's Registration Statement on Form N-2 (Nos. 333-86554 and
811-4700) as filed with the Securities and Exchange Commission on June 25,
2002.
(6) Incorporated by reference from Pre-Effective Amendment No. 2 to the
Registrant's Registration Statement on Form N-2 (Nos. 333-106081 and
811-4700) as filed with the Securities and Exchange Commission on October 1,
2003.
ITEM 17. UNDERTAKINGS.
1. The undersigned Registrant agrees that prior to any public reoffering of
the securities registered through the use of a prospectus which is a part of
this registration statement by any person or party who is deemed to be an
underwriter within the meaning of Rule 145(c) of the Securities Act [17 CFR
230.145c], the reoffering prospectus will contain the information called for by
the applicable registration form for reofferings by persons who may be deemed
underwriters, in addition to the information called for by the other terms of
the applicable form.
2. The undersigned Registrant agrees that every prospectus that is filed
under paragraph (1) above will be filed as a part of an amendment to the
registration statement and will not be used until the amendment is effective,
and that, in determining any liability under the 1933 Act, each post-effective
amendment shall be deemed to be a new registration statement for the securities
offered therein, and the offering of the securities at that time shall be deemed
to be the initial bona fide offering of them.
SIGNATURES
As required by the Securities Act of 1933, as amended, this Registration
Statement has been signed on behalf of the registrant, in the City of Rye and
State of New York, on the 24th day of June, 2005.
The Gabelli Equity Trust Inc.
By: /s/ Bruce N. Alpert
------------------------------------
Bruce N. Alpert
Principal Executive Officer and
Principal Financial Officer
Each person whose signature appears below hereby constitutes and appoints
Bruce N. Alpert and James McKee and each of them, his true and lawful
attorneys-in fact and agents with full power of substitution and resubstitution,
for him and in his name, place and stead, in any and all capacities, to sign any
and all amendments (including post-effective amendments) to this Registration
Statement on Form N-14 and to file the same with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission,
and hereby grants to such attorneys-in-fact and agents, and each of them, full
power and authority to do and perform each and every act and thing requisite and
necessary to be done, as fully to all intents and purposes as he might or could
do in person, hereby ratifying and confirming all that such attorneys-in fact
and agents or any of them, or his or their substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
As required by the Securities Act of 1933, as amended, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated:
SIGNATURE TITLE DATE
--------- ----- ----
Director and Chairman
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Mario J. Gabelli
Director
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Thomas E. Bratter
/s/ Anthony J. Colavita Director June 24, 2005
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Anthony J. Colavita
/s/ James P. Conn Director June 24, 2005
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James P. Conn
Director
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Frank J. Fahrenkopf, Jr.
/s/ Arthur V. Ferrara Director June 24, 2005
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Arthur V. Ferrara
/s/ Karl Otto Pohl Director June 24, 2005
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Karl Otto Pohl
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Anthony R. Pustorino Director June 24, 2005
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Anthony R. Pustorino
/s/ Salvatore J. Zizza Director June 24, 2005
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Salvatore J. Zizza
EXHIBIT INDEX
(1)(f) Articles of Amendment dated May 12, 2004 to the Articles of
Incorporation
(11)(a) Opinion and consent of Willkie Farr & Gallagher LLP as to
the legality of the securities being registered
(11)(b) Opinion and consent of Venable LLP as to the legality of the
securities being registered
(17)(d) Form of Proxy Card