Filed pursuant to Rule 497(e)
Prospectus
23,118,185 RIGHTS FOR 5,779,547 SHARES
THE GABELLI [LOGO]
UTILITY TRUST
COMMON SHARES
The Gabelli Utility Trust (the "Fund") is issuing transferable rights
("Rights") to its shareholders of common shares of beneficial interest, par
value $.001 per share (the "Common Shares"). These Rights will allow you to
subscribe for new Common Shares of the Fund. For every four Rights that you
receive, you may buy one new Common Share of the Fund plus, in certain
circumstances and only if you are a shareholder on the record date for the
rights offering, additional Common Shares pursuant to an over-subscription
privilege. You will receive one Right for each outstanding Common Share of the
Fund you own on October 20, 2004 (the "Record Date") rounded up to the nearest
number of Rights evenly divisible by four. Fractional shares will not be
issued upon the exercise of the Rights. Accordingly, new Common Shares may be
purchased only pursuant to the exercise of Rights in integral multiples of
four.
The Rights are transferable and will be admitted for trading on the
New York Stock Exchange ("NYSE") under the symbol "GUT RT." The Common Shares
are presently listed on the NYSE under the symbol "GUT." The new Common Shares
issued in this Rights offering (the "Offer") will also be listed under the
symbol "GUT." On October 15, 2004 (the last trading date prior to the Common
Shares trading ex-Rights), the last reported net asset value per share of the
Common Shares was $6.77 and the last reported sales price per Common Share on
the NYSE was $9.98. The purchase price per Common Share (the "Subscription
Price") will be $7.00. The Offer will expire at 5:00 p.m., New York Time, on
November 23, 2004, unless the Offer is extended as described in this
Prospectus (the "Expiration Date"). RIGHTS ACQUIRED IN THE SECONDARY MARKET
MAY NOT PARTICIPATE IN THE OVER-SUBSCRIPTION PRIVILEGE.
The Fund is a non-diversified, closed-end management investment
company registered under the Investment Company Act of 1940, as amended (the
"1940 Act"). The Fund's primary investment objectives are long-term growth of
capital and income, which the Fund attempts to achieve by investing at least
80% of its total assets in common stock and other securities of foreign and
domestic companies involved to a substantial extent (e.g., at least 50% of the
assets, gross income or profits of such company is committed to or derived
from) in providing products, services or equipment for (i) the generation or
distribution of electricity, gas and water or (ii) telecommunications services
or infrastructure operations, such as airports, toll roads and municipal
services. Gabelli Funds, LLC (the "Investment Adviser") serves as investment
adviser to the Fund. An investment in the Fund is not appropriate for all
investors. We cannot assure you that the Fund's investment objectives will be
achieved. FOR A DISCUSSION OF CERTAIN RISK FACTORS AND SPECIAL CONSIDERATIONS
WITH RESPECT TO OWNING COMMON SHARES OF THE FUND, SEE "RISKS " ON PAGE 24 OF
THIS PROSPECTUS. The address of the Fund is One Corporate Center, Rye, New
York 10580-1422 and its telephone number is (914) 921-5070.
This Prospectus sets forth certain information about the Fund an
investor should know before investing. Accordingly, this Prospectus should be
retained for future reference.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIME.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY ANY SECURITIES
REGULATORY AUTHORITY IN CANADA. THIS OFFERING WILL NOT BE MADE IN ANY PROVINCE
OF CANADA WHERE IT IS NOT PERMITTED BY LAW.
SUBSCRIPTION PROCEEDS
PRICE SALES LOAD TO FUND(1)
------------------------------------------------
Per Common Share........... $7.00 None $7.00
Total...................... $52,500,000 None $52,500,000(2)
(1) Before deduction of expenses incurred by the Fund, estimated at $475,000.
(2) 1,720,453 shares representing $12,043,171 of the proceeds can only be
issued if the Common Shares on the Expiration Date are trading at or
above their per share net asset value. In the event the Common Shares on
the Expiration Date are not trading at or above their per share net asset
value, then the maximum proceeds to the Fund will be $40,456,829.
SHAREHOLDERS WHO DO NOT EXERCISE THEIR RIGHTS MAY, AT THE COMPLETION
OF THE OFFER, OWN A SMALLER PROPORTIONAL INTEREST IN THE FUND THAN IF THEY
EXERCISED THEIR RIGHTS. AS A RESULT OF THE OFFER YOU MAY EXPERIENCE DILUTION
OR ACCRETION OF THE AGGREGATE NET ASSET VALUE OF YOUR SHARES DEPENDING UPON
WHETHER THE FUND'S NET ASSET VALUE PER SHARE IS ABOVE OR BELOW THE
SUBSCRIPTION PRICE ON THE EXPIRATION DATE. The Fund cannot state precisely the
extent of any dilution or accretion at this time because the Fund does not
know what the net asset value per Common Share will be when the Offer expires
or what proportion of the Rights will be exercised. The Investment Adviser's
parent company, Gabelli Asset Management Inc. and its affiliates ("Affiliated
Parties") may purchase shares through the primary subscription and the
over-subscription privilege and Mr. Mario J. Gabelli, who may be deemed to
control the Fund's investment adviser, or his affiliated entities may also
purchase additional shares through the primary subscription and
over-subscription privilege on the same terms as other shareholders.
This Prospectus sets forth concisely certain information about the
Fund that a prospective investor should know before investing. Investors are
advised to read and retain it for future reference.
A Statement of Additional Information dated October 20, 2004 (the
"SAI") containing additional information about the Fund has been filed with
the SEC and is incorporated by reference in its entirety into this Prospectus.
A copy of the SAI, the table of contents of which appears on page 41 of this
Prospectus, may be obtained without charge by contacting the Fund at (800)
GABELLI, (800) 422-3554 or (914) 921-5070. The SAI will be sent within two
Business Days (defined below) of receipt of a request. Investors may also
obtain the Statement of Additional Information, material incorporated by
reference, and other information about the Fund from the SEC's website
(www.sec.gov). Shareholder inquiries should be directed to the Subscription
Agent, EquiServe, at (800) 336-6983 or (781) 575-3100.
October 20, 2004
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS.
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED BY THE FUND OR THE FUND'S INVESTMENT ADVISER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN
OFFER TO BUY ANY SECURITY OTHER THAN THE COMMON SHARES OFFERED BY THIS
PROSPECTUS, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN
OFFER TO BUY COMMON SHARES BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER
OR SOLICITATION WOULD BE UNLAWFUL.
TABLE OF CONTENTS
PAGE
PROSPECTUS SUMMARY............................................................1
TABLE OF FEES AND EXPENSES....................................................8
FINANCIAL HIGHLIGHTS..........................................................9
THE OFFER....................................................................11
USE OF PROCEEDS..............................................................19
INVESTMENT OBJECTIVES AND POLICIES...........................................19
RISKS........................................................................22
MANAGEMENT OF THE FUND.......................................................27
DIVIDENDS AND DISTRIBUTIONS..................................................30
TAXATION.....................................................................30
CAPITALIZATION...............................................................32
ANTI-TAKEOVER PROVISIONS OF THE DECLARATION OF TRUST AND BY-LAWS.............36
CUSTODIAN, TRANSFER AGENT, DIVIDEND DISBURSING AGENT AND REGISTRAR...........37
LEGAL MATTERS................................................................37
EXPERTS......................................................................37
FURTHER INFORMATION..........................................................37
PROSPECTUS SUMMARY
This summary highlights selected information that is described more
fully elsewhere in this Prospectus. It may not contain all of the information
that is important to you. To understand the Offer fully, you should read the
entire document carefully, including the risk factors which can be found on
page 24, under the heading "Risks."
PURPOSE OF THE OFFER
The Board of Trustees of the Fund has determined that it would be in
the best interests of the Fund and its existing shareholders to increase the
assets of the Fund so that the Fund may be in a better position to take
advantage of investment opportunities that may arise. The Offer seeks to
reward existing shareholders by giving them the opportunity to purchase
additional shares at a price that may be below market and/or net asset value
without incurring any commission or charge. The distribution of the Rights,
which themselves may have intrinsic value, will also give non-participating
shareholders the potential of receiving a cash payment upon the sale of their
Rights, which may be viewed as partial compensation for the possible dilution
of their interests in the Fund as a result of the Offer.
The Board of Trustees believes that increasing the size of the Fund
may lower the Fund's expenses as a proportion of average net assets because
the Fund's fixed costs can be spread over a larger asset base. There can be no
assurance that by increasing the size of the Fund, the Fund's expense ratio
will be lowered. The Board of Trustees also believes that a larger number of
outstanding shares could increase the level of market interest in and
visibility of the Fund and improve the trading liquidity of the Fund's shares
on the NYSE.
IMPORTANT TERMS OF THE OFFER
Total number of shares available for primary subscription..............5,779,547
Number of Rights you will receive
for each outstanding share you
own on the Record Dat........................One Right for every one share*
Number of shares you may purchase
with your Rights at the
Subscription Price per share..............One share for every four Rights**
Subscription Price.........................................................$7.00
* The number of Rights to be issued to a shareholder on the Record Date
will be rounded up to the nearest number of Rights evenly divisible by
four.
** Holders of Rights on the Record Date will be able to acquire additional
Fund shares pursuant to an over-subscription privilege in certain
circumstances.
Shareholder inquiries should be directed to:
EquiServe
(800) 336-6983 or (781) 575-3100
or Gabelli
(800) GABELLI, (800) 422-3554
OVER-SUBSCRIPTION PRIVILEGE
Shareholders on the Record Date ("Record Date Shareholders") who fully
exercise all Rights initially issued to them are entitled to buy those Fund
shares, referred to as "primary over-subscription shares," that were not
purchased by other Rights holders. If enough primary over-subscription shares
are available, all such requests will be honored in full. If the requests for
primary over-subscription shares exceed the primary over-subscription shares
available, the available primary over-subscription shares will be allocated pro
rata among those fully exercising Record Date Shareholders who over-subscribe
based on the number of Rights originally issued to them by the Fund. Shares
acquired pursuant to the over-subscription privilege are subject to allotment,
which is more fully discussed under "The Offer - Over-Subscription Privilege."
RIGHTS ACQUIRED IN THE SECONDARY MARKET MAY NOT PARTICIPATE IN THE
OVER-SUBSCRIPTION PRIVILEGE.
1
In addition, in the event that the Fund's per share net asset value on
the Expiration Date is equal to or less than the Subscription Price, the Fund,
in its sole discretion, may determine to issue up to 1,720,453 additional
Common Shares, referred to as "secondary over-subscription shares," to satisfy
over-subscription requests in excess of the new Fund shares available for
primary subscription. The Fund, in its sole discretion, would also be able to
issue additional Common Shares in an amount of up to 20% of the sum of shares
issued pursuant to the primary subscription and secondary over-subscription.
Any such new Common Shares will be allocated and issued in conjunction with the
secondary over-subscription shares to Record Date Shareholders who are eligible
to receive secondary over-subscription shares. Should the Fund determine to
issue some or all of the secondary over-subscription shares, they will be
allocated only among Record Date Shareholders who submitted over-subscription
requests. Secondary over-subscription shares will be allocated pro rata among
those fully exercising Record Date Shareholders who over-subscribe based on the
number of Rights originally issued to them by the Fund. Rights acquired in the
secondary market may not participate in the over-subscription privilege.
Fund shares acquired pursuant to the over-subscription privilege are
subject to allotment, which is more fully discussed under "The Offer --
Over-Subscription Privilege."
METHOD FOR EXERCISING RIGHTS
Except as described below, subscription certificates evidencing the
Rights ("Subscription Certificates") will be sent to Record Date Shareholders
or their nominees. If you wish to exercise your Rights, you may do so in the
following ways:
(1) Complete and sign the Subscription Certificate. Mail it in
the envelope provided or deliver it, together with payment in
full to EquiServe (the "Subscription Agent") at the address
indicated on the Subscription Certificate. Your completed and
signed Subscription Certificate and payment must be received
by the Expiration Date.
(2) Contact your broker, banker or trust company, which can
arrange, on your behalf to guarantee delivery of payment and
delivery of a properly completed and executed Subscription
Certificate by the close of business on the third Business
Day after the Expiration Date pursuant to a notice of
guaranteed delivery. A fee may be charged for this service by
your broker, bank or trust company. The notice of guaranteed
delivery must be received by the Expiration Date.
Rights holders will have no right to rescind a purchase after the
Subscription Agent has received payment. See "The Offer -- Method of Exercise
of Rights" and "The Offer -- Payment for Shares."
SALE OF RIGHTS
The Rights are transferable until the Expiration Date and have been
admitted for trading on the NYSE. Although no assurance can be given that a
market for the Rights will develop, trading in the Rights on the NYSE will
begin three Business Days prior to the Record Date and may be conducted until
the close of trading on the last NYSE trading day prior to the Expiration Date.
The value of the Rights, if any, will be reflected by the market price. Rights
may be sold by individual holders or may be submitted to the Subscription Agent
for sale. Any Rights submitted to the Subscription Agent for sale must be
received by the Subscription Agent on or before November 22, 2004, one Business
Day prior to the Expiration Date, due to normal settlement procedures. Rights
that are sold will not confer any right to acquire any Common Shares in the
primary or secondary over-subscription, and any Record Date shareholder who
sells any Rights will not be eligible to participate in the primary or
secondary over-subscription. Trading of the Rights on the NYSE will be
conducted on a when-issued basis until and including the date on which the
Subscription Certificates are mailed to Record Date shareholders and thereafter
will be conducted on a regular-way basis until and including the last NYSE
trading day prior to the Expiration Date. The shares will begin trading ex-
Rights two Business Days prior to the Record Date. If the Subscription Agent
receives Rights for sale in a timely manner, it will use its best efforts to
sell the Rights on the NYSE. The Subscription Agent will also attempt to sell
any Rights (i) when a Rights holder is unable to exercise because the Rights
represent the right to subscribe for less than one new Share (defined herein)
or (ii) attributable to shareholders whose record addresses are outside the
United States and Canada or who have an APO or FPO address as described below
under "Restrictions on Foreign Shareholders" and under "Foreign Restrictions"
in the prospectus. Any commissions will be paid by the selling Rights holders.
Neither the Fund nor the Subscription Agent will be responsible if Rights
cannot be sold and neither has guaranteed any minimum sales price for the
2
Rights. If the Rights can be sold, sales of these Rights will be deemed to have
been effected at the weighted average price received by the Subscription Agent
on the day such Rights are sold, less any applicable brokerage commissions,
taxes and other expenses. For purposes of this Prospectus, a "Business Day"
shall mean any day on which trading is conducted on the NYSE.
Shareholders are urged to obtain a recent trading price for
the Rights on the New York Stock Exchange from their
broker, bank, financial advisor or the financial press.
Banks, broker-dealers and trust companies that hold Common Shares for the
accounts of others are advised to notify those persons that purchase Rights in
the secondary market that such Rights may not participate in the
over-subscription privilege.
OFFERING FEES AND EXPENSES
Offering expenses incurred by the Fund are estimated to be $475,000.
RESTRICTIONS ON FOREIGN SHAREHOLDERS
Subscription Certificates will only be mailed to shareholders whose
record addresses are within the United States and Canada (other than an APO or
FPO address). Shareholders whose addresses are outside the United States and
Canada or who have an APO or FPO address and who wish to subscribe to the Offer
either in part or in full should contact the Subscription Agent, EquiServe, by
written instruction or recorded telephone conversation no later than three
Business Days prior to the Expiration Date. The Fund will determine whether the
offering may be made to any such shareholder. This offering will not be made in
any jurisdiction where it would be unlawful to do so. If the Subscription Agent
has received no instruction by the third Business Day prior to the Expiration
Date or the Fund has determined that the offering may not be made to a
particular shareholder, the Subscription Agent will attempt to sell all of such
shareholder's Rights and remit the net proceeds, if any, to such shareholder.
If the Rights can be sold, sales of these Rights will be deemed to have been
effected at the weighted average price received by the Subscription Agent on
the day the Rights are sold, less any applicable brokerage commissions, taxes
and other expenses.
USE OF PROCEEDS
The proceeds of the Offer, assuming all Primary Subscription Shares
offered hereby are sold, are estimated to be approximately $40,456,829, before
deducting expenses payable by the Fund estimated at approximately $475,000. The
proceeds of the Offer assuming all Secondary Over-Subscription Shares are sold
in addition to all Primary Subscription Shares, are estimated to be
approximately $52,500,000, before deducting expenses payable by the Fund
estimated to be $475,000. The proceeds of the Offering assuming all Secondary
Over-Subscription Shares and all additional Common Shares are sold in addition
to all Primary Subscription Shares are estimated to be $63,000,000 before
deducting expenses payable by the Fund expected to be $475,000. The Investment
Adviser anticipates that investment of the proceeds will be made in accordance
with the Fund's investment objectives and policies as appropriate investment
opportunities are identified, which is expected to be substantially completed
in approximately three months; however, the identification of appropriate
investment opportunities pursuant to the Investment Adviser's investment style
or changes in market conditions may cause the investment period to extend as
long as six months.
IMPORTANT DATES TO REMEMBER
Please note that the dates in the table below may change if the Offer
is extended.
EVENT DATE
----- -----
Record Date........................................................................ October 20, 2004
Subscription Period.................................... October.20,.2004 through November 23, 2004**
Expiration of the Offer*........................................................ November 23, 2004**
Payment for Guarantees of Delivery Due*......................................... November 29, 2004**
Confirmation to Participants..................................................... December 3, 2004**
3
* A shareholder exercising Rights must deliver by 5:00 New York time on
November 23, 2004 either (a) a Subscription Certificate and payment for
Shares or (b) a notice of guaranteed delivery.
** Unless the offer is extended to a date no later than December 8, 2004.
INFORMATION REGARDING THE FUND
The Fund is a closed-end non-diversified management investment company
organized under the laws of the State of Delaware on February 25, 1999. The
Fund's primary investment objectives are long-term growth of capital and
income, which the Fund attempts to achieve by investing at least 80% of its
total assets in common stock and other securities of foreign and domestic
companies involved to a substantial extent in providing (i) products, services
or equipment for the generation or distribution of electricity, gas and water
or (ii) telecommunications services or infrastructure operations, such as
airports, toll roads and municipal services (collectively, the "Utility
Industry"). No assurance can be given that the Fund's investment objectives
will be achieved. See "Investment Objectives and Policies." The Fund's
outstanding Common Shares are listed and traded on the New York Stock Exchange
(the "NYSE"). The average weekly trading volume of the Fund's Common Shares on
the NYSE during the period from January 1, 2003 through December 31, 2003 was
283,478 shares. The Fund has outstanding 1,184,200 shares of 5.625% Series A
Cumulative Preferred Shares, liquidation preference $25 per share (the "Series
A Preferred Shares") and 1,000 shares of Series B Auction Market Preferred
Shares, liquidation preference $25,000 per share (the "Series B Preferred
Shares"). As of September 30, 2004, the total assets of the Fund were
approximately $210,519,269.
INFORMATION REGARDING THE INVESTMENT ADVISER
The Investment Adviser has served as the investment adviser to the
Fund since its inception. The Investment Adviser also provides certain
administrative services to the Fund. The Investment Adviser and its affiliates
have been engaged in the business of providing investment advisory and
portfolio management services for over 25 years and as of June 30, 2004,
managed total assets of approximately $28.2 billion. The Fund pays the
Investment Adviser a monthly fee at the annual rate of 1.00% of the Fund's
average weekly net assets (which for this purpose includes the liquidation
preference of the Fund's outstanding preferred shares). The Investment
Adviser's fee is subject to a voluntary fee waiver under certain circumstances.
See "Management of the Fund -- Investment Adviser." Since the Investment
Adviser's fees are based on the net assets of the Fund, the Investment Adviser
will benefit from the Offer. In addition, three Trustees who are "interested
persons" of the Fund could benefit indirectly from the Offer because of their
interests in the Investment Adviser. See "The Offer -- Purpose of the Offer."
RISKS
The following summarizes some of the matters that you should consider
before investing in the Fund through the Offer.
Dilution............................ Shareholders who do not exercise their Rights may, at the
completion of the Offer, own a smaller proportional
interest in the Fund than if they exercise their Rights.
As a result of the Offer you may experience dilution in
net asset value per share if the Subscription Price per
share is below the net asset value per share on the
Expiration Date. If the Subscription Price per share is
below the Fund's net asset value per share on the
Expiration Date, you will experience an immediate
dilution of the aggregate net asset value of your shares
if you do not participate in the Offer and you will
experience a reduction in the net asset value per share
of your shares whether or not you participate in the
Offer. The Fund cannot state precisely the extent of this
dilution (if any) if you do not exercise your Rights
because the Fund does not know what the net asset value
per share will be when the Offer expires or what
proportion of the Rights will be exercised. Assuming, for
example that all Rights are exercised, the Subscription
Price per share is $7.00 and the Fund's net asset value per
4
share at the expiration of the Offer increases to $7.50,
the Fund's net asset value per share (after payment of
estimated offering expenses) would be reduced by
approximately $0.14 (1.90%) per share. See
"Risks--Dilution." If you do not wish to exercise your
Rights, you should consider selling them as set forth in
this Prospectus. The Fund cannot give any assurance,
however, that a market for the Rights will develop or
that the Rights will have any marketable value.
Leveraging.......................... As provided in the 1940 Act and subject to certain
exceptions, the Fund may issue debt or preferred shares
(such as the outstanding Series A Preferred Shares and
Series B Preferred Shares) so long as the Fund's total
assets immediately after such issuance, less certain
ordinary course liabilities, exceed 300% of the amount of
the debt outstanding and exceed 200% of the sum of the
amount of preferred shares and debt outstanding. Such
debt or preferred shares may be convertible in accordance
with SEC staff guidelines which may permit the Fund to
obtain leverage at more attractive rates. Use of leverage
may magnify the impact on the holders of Common Shares of
changes in net asset value and the cost of leverage may
exceed the return on the securities acquired with the
proceeds of leverage, thereby diminishing rather than
enhancing the return to such shareholders and generally
making the Fund's total return to such shareholders more
volatile. In addition, the Fund may be required to sell
investments in order to meet dividend or interest
payments on the debt or preferred shares when it may be
disadvantageous to do so. Leveraging through the issuance
of preferred shares requires that the holders of the
preferred shares have class voting rights on various
matters that could make it more difficult for the holders
of the Common Shares to change the investment objectives
or fundamental policies of the Fund, to convert it to an
open-end fund or make certain other changes. See "Risks."
Market Loss......................... Shares of closed-end funds often trade at a market price
that is less than the value of the net assets
attributable to those shares, although for most of the
Fund's life its shares have traded at a premium over net
asset value per share. The possibility that shares of the
Fund will trade at a discount from net asset value or at
premiums that are unsustainable over the long term are
risks separate and distinct from the risk that the Fund's
net asset value will decrease. The risk of purchasing
shares of a closed-end fund that might trade at a
discount or unsustainable premium is more pronounced for
investors who wish to sell their shares in a relatively
short period of time because, for those investors,
realization of a gain or loss on their investments is
likely to be more dependent upon the existence of a
premium or discount than upon portfolio performance. See
"Risks--Market Value and Net Asset Value."
Trading Premium..................... Historically, the Fund's Common Shares have traded at a
premium to their net asset value per share. As of October
15, 2004, this premium was 47.42%. There is no guarantee
that this premium is sustainable either during the term
of the Offer or over the long term. The issuance of
additional Common Shares pursuant to the Offer and the
related primary over-subscription and secondary over-
subscription privileges may reduce or eliminate any
premium that common shareholders may have otherwise
received for their Common Shares.
Share Repurchases................... You will be free to sell your shares on the NYSE or other
markets on which the shares may trade, but, because the
Fund is a closed-end fund, you do not have the right to
redeem your Common Shares. The Fund is authorized to
repurchase its shares on the open market when the Common
5
Shares are trading at a discount of 10% or more from net
asset value. Such repurchases are subject to the Fund
maintaining asset coverage on its preferred shares and to
certain notice and other requirements. There is no
assurance that any action undertaken to repurchase Common
Shares will result in the shares trading at a price which
approximates their net asset value. Share repurchases by
the Fund would decrease the capital of the Fund and could
have the effect of increasing the Fund's expense ratio.
Anti-takeover Provisions............ Certain provisions of the Fund's Declaration of Trust may
be regarded as "anti-takeover" provisions. Pursuant to
these provisions only one of the three classes of
trustees is elected each year, and the affirmative vote
of the holders of 75% of the outstanding voting shares of
the Fund (together with a separate class vote by the
holders of any preferred shares outstanding) is necessary
to authorize amendments to the Fund's Declaration of
Trust that would be necessary to convert the Fund from a
closed-end to an open-end investment company. In
addition, the affirmative vote of the holders of 80% of
the outstanding voting shares of each class of the Fund,
voting as a class, is generally required to authorize
certain business transactions with the beneficial owner
of more than 5% of the outstanding shares of the Fund. In
addition, the holders of the preferred shares have the
authority to elect two trustees at all times and would
have separate class voting rights on specified matters
including conversion of the Fund to open-end status and
certain reorganizations of the Fund. The overall effect
of these provisions is to render more difficult the
accomplishment of a merger with, or the assumption of
control by, a principal shareholder, or the conversion of
the Fund to open-end status. These provisions may have
the effect of depriving Fund shareholders of an
opportunity to sell their shares at a premium above the
prevailing market price. See "Anti-Takeover Provisions of
the Declaration of Trust and By-laws."
Non-Diversified Status.............. As a non-diversified investment company under the 1940
Act, the Fund is not limited in the proportion of its
assets that may be invested in securities of a single
issuer. As a result of investing a greater portion of its
assets in the securities of a smaller number of issuers,
the Fund 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 Fund may, under some
circumstances, present greater risk to an investor than
an investment in a diversified company. See
"Risks-Non--Diversified Status."
Foreign Securities.................. There is no limitation on the amount of foreign
securities in which the Fund may invest. Investing in
securities of foreign companies and foreign governments,
which generally are denominated in foreign currencies,
may involve certain risk and opportunity considerations
not typically associated with investing in domestic
companies and could cause the Fund to be affected
favorably or unfavorably by changes in currency exchange
rates and revaluations of currencies. See "Investment
Objectives and Policies" and "Risks."
Industry Risks...................... Under normal market conditions, the Fund will invest 80%
or more of its total assets in companies in the Utility
Industry and, as a result, the value of the Fund's shares
will be more susceptible to factors affecting those
particular types of companies, including governmental
regulation, deregulation, inflationary and other cost
increases in fuel and other operating expenses,
technological innovations that may render existing
products and equipment obsolete and increases in interest
rates resulting in higher interest costs on
borrowings needed for capital construction
6
programs, including costs associated with compliance with
environmental and other regulations. As a consequence of
its concentration policy, the Fund's investments may be
subject to greater risk and market fluctuation than a
fund that has securities representing a broader range of
alternatives. See "Investment Objectives and Policies"
and "Risks--Industry Risks."
Lower Rated Securities.............. The Fund may invest up to 25% of its total assets in
fixed-income securities rated in the lower rating
categories of recognized statistical rating agencies,
such as securities rated "CCC" or lower by S&P or "Caa"
or lower by Moody's, Inc., or non-rated securities of
comparable quality. These debt securities are
predominantly speculative and involve major risk exposure
to adverse conditions. Debt securities rated lower than
"BBB" by S&P or "Baa" by Moody's are often referred to in
the financial press as "junk bonds." See "Risks--Lower
Rated Securities."
Key Personnel Dependence............ The Investment Adviser is dependent upon the expertise of
Mr. Mario J. Gabelli in providing advisory services with
respect to the Fund's investments. If the Investment
Adviser were to lose the services of Mr. Gabelli, its
ability to service the Fund 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
the Investment Adviser.
Taxation............................ The Fund intends to continue to be treated and qualify as
a regulated investment company, for U.S. federal income
tax purposes. Such qualification requires, among other
things, compliance by the Fund with certain distribution
requirements. The Fund is also, however, subject to
certain statutory limitations on distributions on its
Common Shares if the Fund fails to satisfy the 1940 Act's
asset coverage requirements which could jeopardize the
Fund's ability to meet the regulated investment company
distribution requirements. See "Taxation" for a more
complete discussion.
7
TABLE OF FEES AND EXPENSES
SHAREHOLDER TRANSACTION EXPENSES
Voluntary Cash Purchase Plan Purchase Fees.......................... $0.75 (1)
Automatic Dividend Reinvestment and Voluntary Cash Purchase
Plan Sales Fees..................................................... $2.50 (1)
ANNUAL OPERATING EXPENSES (as a percentage of net assets
attributable to Common Shares)
Management Fees..................................................... 1.21% (2)
Other Expenses...................................................... 0.83%
Total Annual Operating Expenses..................................... 2.04% (2)
(1) Shareholders participating in the Fund's Automatic Dividend
Reinvestment and Voluntary Cash Purchase Plan would pay $0.75 per
transaction plus a pro-rata portion of brokerage commissions to
purchase shares and $2.50 per transaction to sell shares. See
"Automatic Dividend Reinvestment and Voluntary Cash Purchase Plan" in
the SAI.
(2) The Investment Advisor is paid an investment advisory fee of 1.00% of
the Fund's average weekly net assets (which for this purpose includes
the liquidation preference of the Fund's outstanding preferred
shares). The Investment Adviser has voluntarily agreed to waive the
portion of its investment advisory fee attributable to an amount of
assets of the Fund equal to the aggregate stated value of its
outstanding Series A Preferred Shares and/or Series B Preferred
Shares for any calendar year in which the net asset value total
return of the Fund allocable to the common shares, including
distributions and the advisory fee subject to potential waiver, is
less than (i) in the case of the Series A Preferred Shares, the
stated annual dividend rate of such series and (ii) in the case of
the Series B Preferred Shares, the net cost of capital to the Fund
with respect to the Series B Preferred Shares for such year expressed
as a percentage (including, without duplication, dividends paid by
the Fund on the Series B Preferred Shares and the net cost to the
Fund of any associated swap or cap transaction if the Fund hedges its
Series B Preferred Shares dividend obligations). For the fiscal year
ended December 31, 2003, the Investment Advisor was not required to
waive any portion of its investment advisory fee pursuant to this
voluntary waiver.
EXAMPLE
The following examples illustrate the projected dollar amount of
cumulative expenses that would be incurred over various periods with respect to
a hypothetical investment in the Fund. These amounts are based upon payment by
the Fund of expenses at levels set forth in the above table.
You would pay the following expenses on a $1,000 investment, assuming
a 5% annual return (3):
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------- ------- ------- --------
$21 $64 $110 $237
The foregoing example is to assist you in understanding the various
costs and expenses that an investor in the Fund will bear directly or
indirectly. The assumed 5% annual return is not a prediction of, and does not
represent, the projected or actual performance of the Fund's Common Shares.
ACTUAL EXPENSES AND ANNUAL RATES OF RETURN MAY BE MORE OR LESS THAN THOSE
ASSUMED FOR PURPOSES OF THE EXAMPLE.
(3) Amounts are exclusive of fees discussed in Note (1) above.
8
FINANCIAL HIGHLIGHTS
The table below sets forth selected financial data for a Common Share
outstanding throughout the periods presented. The per share operating
performance and ratios for the fiscal years ended December 31, 2003, December
31, 2002, December 31, 2001, December 31, 2000 and the period ended December
31, 1999 have been audited by PricewaterhouseCoopers LLP, the Fund's
independent registered public accounting firm, as stated in their report which
is incorporated by reference into the SAI. The following information should be
read in conjunction with the Financial Statements and Notes thereto, which are
incorporated by reference into the SAI.
SELECTED DATA FOR A UTILITY TRUST SHARE OF BENEFICIAL INTEREST
OUTSTANDING THROUGHOUT EACH PERIOD
Six Months
Ended June Year Ended Year Ended Year Ended Year Ended Period Ended
30, 2004 December 31, December 31, December 31, December 31, December 31,
(unaudited) 2003 2002 2001 2000 1999(a)
------------ ------------ ------------ ------------ ------------ --------------
OPERATING PERFORMANCE:
Net asset value, beginning of
period............................ $ 6.83 $ 6.27 $ 7.32 $ 8.21 $ 7.62 $ 7.50
---------- --------- ---------- --------- --------- --------
Net investment income............. 0.06 0.10 0.11 0.12 0.15 0.08
Net realized and unrealized
gain(loss) on investments......... 0.18 1.17 (0.62) (0.32) 1.44 0.19
---------- --------- ---------- --------- --------- --------
Total from investment operations 0.24 1.27 (0.51) (0.20) 1.59 0.27
---------- --------- ---------- --------- --------- --------
DISTRIBUTIONS TO PREFERRED STOCK
SHAREHOLDERS:
Net investment income............. (0.04) (0.01) -- -- -- --
Net realized gain on investments.. -- (0.04) -- -- -- --
---------- --------- ---------- --------- --------- --------
Total distributions to
preferred stock shareholders...... (0.04) (0.05) -- -- -- --
---------- --------- ---------- --------- --------- --------
NET INCREASE (DECREASE) IN NET
ASSETS ATTRIBUTABLE TO COMMON
STOCK SHAREHOLDERS RESULTING
FROM OPERATIONS: 0.20 1.22 (0.51) (0.20) 1.59 0.27
---------- --------- ---------- --------- --------- --------
DISTRIBUTIONS TO COMMON STOCK
SHAREHOLDERS:
Net investment income............ (0.02) (0.09) (0.11) (0.21) (0.06) (0.08)
Net realized gain on investments. -- (0.22) (0.36) (0.49) (0.94) (0.07)
Return of capital................ (0.34)* (0.41) (0.25) -- -- --
---------- --------- ---------- --------- --------- --------
Total distributions to common
stock shareholders.............. (0.36) (0.72) (0.72) (0.70) (1.00) (0.15)
---------- --------- ---------- --------- --------- --------
CAPITAL SHARE TRANSACTIONS:
Increase in net asset value
from common stock share
transactions................... 0.01 0.03 0.03 0.01 -- --
Increase in net asset value
from shares issued in rights
offering....................... -- 0.12 0.15 -- -- --
Offering costs for preferred
shares charged to paid-in
capital....................... -- (0.09) -- -- -- --
---------- --------- ---------- --------- --------- --------
Total capital share transactions 0.01 0.06 0.18 0.01 -- --
---------- --------- ---------- --------- --------- --------
NET ASSET VALUE ATTRIBUTABLE TO
COMMON STOCK SHAREHOLDERS, END
OF PERIOD: $ 6.68 $ 6.83 $ 6.27 $ 7.32 $ 8.21 $ 7.62
---------- --------- ---------- --------- --------- --------
Market value, end of period..... $ 9.22 $ 9.60 $ 8.72 $ 9.33 $ 8.75 $ 7.63
---------- --------- ---------- --------- --------- --------
Net asset value total return +.. 3.14% 18.60% (6.79%) (3.15%) 22.01% 3.62%
---------- --------- ---------- --------- --------- --------
Total Investment Return ++...... 0.04% 19.86% 1.70% 15.82% 29.95% 3.70%
---------- --------- ---------- --------- --------- --------
9
Six Months
Ended June Year Ended Year Ended Year Ended Year Ended Period Ended
30, 2004 December 31, December 31, December 31, December 31, December 31,
(unaudited) 2003 2002 2001 2000 1999(a)
------------ ------------ ------------ ------------ ------------ --------------
RATIOS TO AVERAGE NET
ASSETS AND SUPPLEMENTAL
DATA:
Net assets including
liquidation value of
preferred shares, end of
period (in 000's)............ $ 208,663 $ 211,507 $ 95,111 $ 82,197 $ 90,669 $ 83,330
Net assets attributable to
common shares, end of
period (in 000's)............ $ 154,031 $ 156,507 $ 95,111 $ 82,197 $ 90,669 $ 83,330
Ratio of net investment income
to average net assets
attributable to common
shares (c)................... 1.87%(b) 1.52% 1.65% 1.57% 1.88% 2.27%(b)
Ratio of operating expenses to
average net assets
attributable to common
shares (c) (d)............. 1.77%(b) 2.04% 1.93% 2.00% 1.95% 1.85%(b)
Ratio of operating expenses
to average total net assets
including liquidation value
of preferred shares (d)...... 1.30%(b 1.68% -- -- -- --
Portfolio turnover rate........ 8% 28% 29% 41% 92% 37%
PREFERRED STOCK:
5.625% CUMULATIVE PREFERRED
STOCK
Liquidation value, end of
period (in 000's)............. $ 29,618 $ 30,000 -- -- -- --
Total shares outstanding (in
000's)........................ 1,185 1,200 -- -- -- --
Liquidation preference per
share......................... $ 25.00 $ 25.00 $ 25.00 -- -- --
Average market value (e)........ $ 24.64 $ 25.12 -- -- -- --
Asset coverage per share........ $ 95.50 $ 96.14 -- -- -- --
AUCTION RATE CUMULATIVE
PREFERRED STOCK
Liquidation value, end of
period (in 000's).............. $ 25,000 $ 25,000 -- -- -- --
Total shares outstanding (in
000's)........................ 1 1 -- -- -- --
Liquidation preference per
share......................... $ 25,000 $ 25,000 -- -- -- --
Average market value (e)...... $ 25,000 $ 25,000 -- -- -- --
Asset coverage per share...... $ 95,504 $ 96,140 -- -- -- --
ASSET COVERAGE (f)............ 382% 385% -- -- -- --
+ Based on net asset value per share, adjusted for reinvestment of distribution, including the effect of shares
issued pursuant to the rights offering, assuming full subscription by shareholder. Total return for the period
of less than one year is not annualized.
++ Based on market value per share, adjusted for reinvestment of distributions including the effects of shares
issued pursuant to rights offering, assuming full subscription by shareholders. Total return for the period of
less than one year is not annualized.
(a) The Gabelli Utility Trust commenced investment operations on July 9, 1999.
(b) Annualized.
(c) During the period ended December 31, 1999, the Utility Trust's administrator voluntarily reimbursed certain
expenses. If such reimbursement had not occurred, the annualized ratios of net investment income and operating
expenses to average net assets would have been 1.85% and 2.17%, respectively.
(d) 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 six months ended June 30, 2004 and the years ended
December 31, 2003, 2002, 2001 and 2000, the ratio of operating expenses to average net assets attributable to
common stock would be 1.77%, 2.04%, 1.93%, 2.00% and 1.93%, respectively, and the ratios of operating expenses
to average total net assets including liquidation value of preferred shares would be 1.30% and 1.68%.
(e) Based on weekly prices.
(f) Asset coverage calculated by combining all series of preferred stock.
* Based on current earnings and subject to change and recharacterization at fiscal year end.
10
THE OFFER
TERMS OF THE OFFER
The Fund is issuing to Record Date Shareholders Rights to subscribe
for additional Common Shares. Each Record Date Shareholder is being issued one
transferable Right for each Common Share owned on the Record Date. The Right
entitles the holder to acquire at the Subscription Price one Share for each
four Rights held rounded up to the nearest number of Rights evenly divisible
by four. Fractional shares will not be issued upon the exercise of the Rights.
Accordingly, Shares may be purchased only pursuant to the exercise of Rights
in integral multiples of four. In the case of Common Shares held of record by
Cede & Co. ("Cede"), as nominee for the Depository Trust Company ("DTC"), or
any other depository or nominee, the number of Rights issued to Cede or such
other depository or nominee will be adjusted to permit rounding up (to the
nearest number of Rights evenly divisible by four) of the Rights to be
received by beneficial owners for whom it is the holder of record only if Cede
or such other depository or nominee provides to the Fund on or before the
close of business on November 12, 2004 written representation of the number of
Rights required for such rounding. Rights may be exercised at any time during
the period (the "Subscription Period"), which commences on October 20, 2004,
and ends at 5:00 p.m., New York time, on November 23, 2004 (the "Subscription
Period"), unless extended by the Fund to a date not later than December 8,
2004, 5:00 p.m., New York time. See "Expiration of the Offer." The Right to
acquire one additional Share for each four Rights held during the Subscription
Period at the Subscription Price will be referred to in the remainder of this
Prospectus as the "Primary Subscription."
In addition, any Record Date Shareholder who fully exercises all
Rights initially issued to him is entitled to subscribe for Common Shares
available for Primary Subscription (the "Primary Subscription Shares") that
were not subscribed for by other Rights holders on Primary Subscription. In
addition, in the event that the Common Shares on the Expiration Date are
trading at or above its per share net asset value, the Fund may, in its sole
discretion, issue up to an additional 1,720,453 shares (the "Secondary
Over-Subscription Shares") to satisfy over-subscription requests in excess of
the available Primary Subscription Shares. The Fund, in its sole discretion,
would also be able to issue additional Common Shares in an amount of up to 20%
of the sum of the Primary Subscription Shares and Secondary Over- Subscription
Shares. The entitlement to subscribe for un-subscribed Primary Subscription
Shares, any Secondary Over-Subscription Shares and any additional Common
Shares is available only to those Record Date shareholders who fully exercise
all Rights initially issued to them and only on the basis of their Record Date
holdings and will be referred to in the remainder of this Prospectus as the
"Over-Subscription Privilege". For purposes of determining the maximum number
of Common Shares a Record Date Shareholder may acquire pursuant to the Offer,
broker-dealers whose Common Shares are held of record by Cede, nominee for
DTC, or by any other depository or nominee, will be deemed to be the holders
of the Rights that are issued to Cede or such other depository or nominee on
their behalf. Common Shares acquired pursuant to the Over-Subscription
Privilege are subject to allotment, which is more fully discussed below under
"Over-Subscription Privilege." RIGHTS ACQUIRED IN THE SECONDARY MARKET MAY NOT
PARTICIPATE IN THE OVER-SUBSCRIPTION PRIVILEGE.
Officers of the Investment Adviser have advised the Fund that the
Affiliated Parties, as Record Date Shareholders, have been authorized to
purchase Common Shares through the Primary Subscription and the
Over-Subscription Privilege to the extent Common Shares become available to it
in accordance with the Primary Subscription and the allotment provisions of
the Over-Subscription Privilege. In addition, Mario J. Gabelli individually or
his affiliated entities, as a Record Date Shareholder, may also purchase
Common Shares through the Primary Subscription and the Over-Subscription
Privilege. Such over-subscriptions by the Affiliated Parties and Mr. Gabelli
may disproportionately increase their already existing ownership resulting in
a higher percentage ownership of outstanding Common Shares if any Record Date
Shareholder fails to fully exercise its Rights. Any Common Shares acquired
whether by Primary Subscription or the Over-Subscription Privilege by the
Affiliated Parties or Mr. Gabelli, as "affiliates" of the Fund as that term is
defined under the Securities Act of 1933 (the "Securities Act"), may only be
sold in accordance with Rule 144 under the Securities Act or another
applicable exemption or pursuant to an effective registration statement under
the Securities Act. In general, under Rule 144, as currently in effect, an
"affiliate" of the Fund is entitled to sell, within any three-month period, a
number of Common Shares that does not exceed the greater of 1% of the then
outstanding Common Shares or the average weekly reported trading volume of the
Common Shares during the four calendar weeks preceding such sale. Sales under
Rule 144 are also subject to certain restrictions on the manner of sale, to
notice requirements and to the availability of current public information
about the Fund.
11
Rights will be evidenced by Subscription Certificates. The number of
Rights issued to each holder will be stated on the Subscription Certificate
delivered to the holder. The method by which Rights may be exercised and
shares paid for is set forth below in "Method of Exercise of Rights" and
"Payment for Shares." A Rights holder will have no right to rescind a purchase
after the Subscription Agent has received payment. See "Payment for Shares"
below. Common Shares issued pursuant to an exercise of Rights will be listed
on the NYSE.
The Rights are transferable until the Expiration Date and will be
admitted for trading on the NYSE. Assuming a market exists for the Rights, the
Rights may be purchased and sold through usual brokerage channels and sold
through the Subscription Agent. Although no assurance can be given that a
market for the Rights will develop, trading in the Rights on the NYSE will
begin three Business Days before the Record Date and may be conducted until
the close of trading on the last NYSE trading day prior to the Expiration Date
due to normal settlement procedures. Rights that are sold will not confer any
right to acquire any Common Shares in the primary or secondary
over-subscription, and any Record Date shareholder who sells any Rights will
not be eligible to participate in the secondary over-subscription. Trading of
the Rights on the NYSE will be conducted on a when-issued basis until and
including the date on which the Subscription Certificates are mailed to Record
Date Shareholders and thereafter will be conducted on a regular-way basis
until and including the last NYSE trading day prior to the Expiration Date.
The method by which Rights may be transferred is set forth below under "Method
of Transferring Rights." The Common Shares will begin trading ex-Rights two
Business Days prior to the Record Date.
Nominees who hold the Fund's Common Shares for the account of others,
such as banks, brokers, trustees or depositories for securities, should notify
the respective beneficial owners of such shares as soon as possible to
ascertain such beneficial owners' intentions and to obtain instructions with
respect to the Rights. Nominees should also notify holders purchasing Rights
in the secondary market that such Rights may not participate in the
over-subscription privilege. If the beneficial owner so instructs, the nominee
will complete the Subscription Certificate and submit it to the Subscription
Agent with proper payment. In addition, beneficial owners of the Common Shares
or Rights held through such a nominee should contact the nominee and request
the nominee to effect transactions in accordance with such beneficial owner's
instructions.
PURPOSE OF THE OFFER
The Board of Trustees of the Fund has determined that it would be in
the best interests of the Fund and the shareholders to increase the assets of
the Fund available for investment thereby permitting the Fund to be in a
better position to more fully take advantage of investment opportunities that
may arise. The Offer seeks to reward existing shareholders by giving them the
right to purchase Shares at a price that may be below market and/or net asset
value, generally without incurring any commission charge. The distribution to
shareholders of transferable Rights, which themselves may have intrinsic
value, will also afford non-subscribing shareholders the potential of
receiving a cash payment upon sale of such Rights, receipt of which may be
viewed as partial compensation for the possible dilution of their interests in
the Fund.
The Fund's Investment Adviser will benefit from the Offer because the
Investment Adviser's fee is based on the average net assets of the Fund. See
"Management of the Fund." It is not possible to state precisely the amount of
additional compensation the Investment Adviser will receive as a result of the
Offer because the proceeds of the Offer will be invested in additional
portfolio securities which will fluctuate in value. However, assuming all
Rights are exercised and that the Fund receives the maximum proceeds of the
Offer, the annual compensation to be received by the Investment Adviser would
be increased by approximately $520,250 ($625,250 in the event the additional
Common Shares are issued) net of offering expenses. Three of the Fund's
Trustees, including Mario J. Gabelli, who voted to authorize the Offer are
"interested persons" of the Investment Adviser within the meaning of the 1940
Act and may benefit indirectly from the Offer because of their interest in the
Investment Adviser. See "Management of the Fund" in the SAI. In determining
that the Offer was in the best interest of shareholders, the Fund's Board of
Trustees was cognizant of this benefit as well as the possible participation
of the Affiliated Parties and Mr. Gabelli in the Offer as shareholders on the
same basis as other shareholders.
The Fund may, in the future and at its discretion, choose to make
additional rights offerings from time to time for a number of shares and on
terms which may or may not be similar to the Offer. Any such future rights
offering will be made in accordance with the 1940 Act. Under the laws of
Delaware, the state in which the Fund is organized, and the Trust's
Declaration of Trust, the Board of Trustees is authorized to make rights
offerings without obtaining shareholder approval. The staff of the
Securities and Exchange Commission ("SEC") has interpreted the
12
1940 Act as not requiring shareholder approval of a rights offering at a price
below the then current net asset value so long as certain conditions are met,
including a good faith determination by the Fund's Board of Trustee's that such
offering would result in a net benefit to existing shareholders.
OVER-SUBSCRIPTION PRIVILEGE
If all of the Rights initially issued are not exercised, any Primary
Subscription Shares for which subscriptions have not been received will be
offered, by means of the Over-Subscription Privilege, to Record Date
Shareholders who have exercised all the Rights initially issued to them and
who wish to acquire additional Common Shares. Record Date Shareholders who
exercise all the Rights initially issued to them will have the opportunity to
indicate on the Subscription Certificate how many Shares they are willing to
acquire pursuant to the Over-Subscription Privilege. If sufficient Primary
Subscription Shares remain after the Primary Subscriptions have been
exercised, all over-subscription requests will be honored in full. If
sufficient Primary Subscription Shares are not available to honor all
subscription requests, the available Common Shares will be allocated among
those Record Date Shareholders who over-subscribe based on the number of
Rights originally issued to them by the Fund. RIGHTS ACQUIRED IN THE SECONDARY
MARKET MAY NOT PARTICIPATE IN THE OVER-SUBSCRIPTION PRIVILEGE.
In addition, the Board of Trustees of the Fund has established a
Pricing Committee which is authorized, in the event that the Fund's per share
net asset value on the Expiration Date is at or below the Subscription Price,
to direct the Fund to issue Secondary Over-Subscription Shares to satisfy
over-subscription requests in excess of the available Primary Subscription
Shares. The Fund would also be able to issue additional Common Shares in an
amount of up to 20% of the sum of the Primary Subscription Shares and
Secondary Over-Subscription Shares to satisfy over-subscription requests in
these circumstances. Should the Pricing Committee determine to issue some or
all of these Secondary Over-Subscription Shares and any additional Common
Shares, they will be allocated only among Record Date Shareholders that
submitted over-subscription requests. Secondary Over-Subscription Shares and
any additional Common Shares will be allocated pro rata among those fully
exercising Record Date Shareholders who over-subscribe based on the number of
Rights originally issued to them by the Fund. Any Secondary Over-Subscription
Shares issued by the Fund, collectively with any Primary Subscription Shares
not subscribed for through the Primary Subscription, and any additional Common
Shares, will be referred to in this Prospectus as the "Excess Shares." Rights
acquired in the secondary market may not participate in the Over-Subscription
Privilege.
The percentage of Excess Shares each over-subscribing Record Date
Shareholder may acquire will be rounded down to result in delivery of whole
Common Shares; provided, however, that if a pro rata allocation results in any
holder being allocated a greater number of Excess Shares than the holder
subscribed for pursuant to the exercise of such holder's Over-Subscription
Privilege, then such holder will be allocated only such number of Excess
Shares as such holder subscribed for and the remaining Excess Shares will be
allocated among all other holders then entitled to receive Excess Shares whose
over-subscription requests have not been fully honored. The allocation process
may be iterative in order to assure that the total number of Excess Shares is
distributed in accordance with the method described above.
The formula to be used in allocating the Excess Shares is as follows:
Record Date Shareholder's Position X Excess Shares Remaining
Total Record Date Position
Of All Over-Subscribers
The Fund will not offer or sell any Common Shares which are not
subscribed for under the Primary Subscription or the Over-Subscription
Privilege.
THE SUBSCRIPTION PRICE
The Subscription Price for the Shares to be issued pursuant to the
Rights will be $7.00.
The Fund announced the Offer on August 19, 2004. The net asset value
per Common Share at the close of business on August 18, 2004 (the last date
prior to the Fund's announcement of the Offer), was $6.61. The last
13
reported sale price of a Common Share on the NYSE on that date was $9.72,
representing a 47.10% premium in relation to the then current net asset value
per share and a premium in relation to the Subscription Price.
SALES BY SUBSCRIPTION AGENT
Holders of Rights who are unable or do not wish to exercise any or
all of their Rights may instruct the Subscription Agent to sell any
unexercised Rights. The Subscription Certificates representing the Rights to
be sold by the Subscription Agent must be received on or before November 18,
2004. Upon the timely receipt of the appropriate instructions to sell Rights,
the Subscription Agent will use its best efforts to complete the sale and will
remit the proceeds of sale, net of commissions, to the holders. If the Rights
can be sold, sales of the Rights will be deemed to have been effected at the
weighted average price received by the Subscription Agent on the day such
Rights are sold. The selling Rights holder will pay all brokerage commissions
incurred by the Subscription Agent. These sales may be effected by the
Subscription Agent through Gabelli & Company, Inc., a registered broker-dealer
and an affiliate of the Investment Adviser, at a commission of up to $0.02 per
Right, provided that, if the Subscription Agent is able to negotiate a lower
brokerage commission with an independent broker, the Subscription Agent will
execute these sales through that independent broker. Gabelli & Company, Inc.
may also act on behalf of its clients to purchase or sell Rights in the open
market and be compensated for its services. The Subscription Agent will
automatically attempt to sell any unexercised Rights that remain unclaimed as
a result of Subscription Certificates being returned by the postal authorities
as undeliverable as of the fourth Business Day prior to the Expiration Date.
These sales will be made net of commissions on behalf of the nonclaiming
holders of Rights. Proceeds from those sales will be held by EquiServe, in its
capacity as the Fund's transfer agent, for the account of the nonclaiming
holder of rights until the proceeds are either claimed or escheated. There can
be no assurance that the Subscription Agent will be able to complete the sale
of any of these Rights and neither the Fund nor the Subscription Agent has
guaranteed any minimum sales price for the Rights. All of these Rights will be
sold at the market price, if any, on the NYSE or through an unaffiliated
market maker if no market exists on the NYSE.
METHOD OF TRANSFERRING RIGHTS
The Rights evidenced by a single Subscription Certificate may be
transferred in whole by endorsing the Subscription Certificate for transfer in
accordance with the accompanying instructions. A portion of the Rights
evidenced by a single Subscription Certificate (but not fractional Rights) may
be transferred by delivering to the Subscription Agent a Subscription
Certificate properly endorsed for transfer, with instructions to register the
portion of the Rights evidenced thereby in the name of the transferee (and to
issue a new Subscription Certificate to the transferee evidencing the
transferred Rights). In this event, a new Subscription Certificate evidencing
the balance of the Rights will be issued to the Rights holder or, if the
Rights holder so instructs, to an additional transferee.
Holders wishing to transfer all or a portion of their Rights (but not
fractional Rights) should allow at least three Business Days prior to the
Expiration Date for (i) the transfer instructions to be received and processed
by the Subscription Agent, (ii) a new Subscription Certificate to be issued
and transmitted to the transferee or transferees with respect to transferred
Rights, and to the transferor with respect to retained rights, if any, and
(iii) the Rights evidenced by the new Subscription Certificates to be
exercised or sold by the recipients thereof. Neither the Fund nor the
Subscription Agent shall have any liability to a transferee or transferor of
Rights if Subscription Certificates are not received in time for exercise or
sale prior to the Expiration Date.
Except for the fees charged by the Subscription Agent (which will be
paid by the Fund as described below), all commissions, fees and other expenses
(including brokerage commissions and transfer taxes) incurred in connection
with the purchase, sale or exercise of Rights will be for the account of the
transferor of the Rights, and none of these commissions, fees or expenses will
be paid by the Fund or the Subscription Agent.
The Fund anticipates that the Rights will be eligible for transfer
through, and that the exercise of the Primary Subscription and
Over-Subscription may be effected through, the facilities of DTC (Rights
exercised through DTC are referred to as "DTC Exercised Rights").
14
EXPIRATION OF THE OFFER
The Offer will expire at 5:00 p.m., New York time, on November 23,
2004, unless extended by the Fund to a date not later than December 8, 2004,
5:00 p.m., New York time (the "Expiration Date"). Rights will expire on the
Expiration Date and thereafter may not be exercised.
SUBSCRIPTION AGENT
The Subscription Agent is EquiServe Attn: Corporate Actions, P.O. Box
859208, Braintree, MA 02185-9208. The Subscription Agent will receive from the
Fund an amount estimated to be $125,000 comprised of the fee for its services
and the reimbursement for certain expenses related to the Offer. INQUIRIES BY
ALL HOLDERS OF RIGHTS SHOULD BE DIRECTED TO P.O. BOX 859208, BRAINTREE, MA
02185-9208 (TELEPHONE (800) 336-6983 OR (781) 575-3100); HOLDERS MAY ALSO
CONSULT THEIR BROKERS OR NOMINEES.
METHOD OF EXERCISE OF RIGHTS
Rights may be exercised by filling in and signing the reverse side of
the Subscription Certificate and mailing it in the envelope provided, or
otherwise delivering the completed and signed Subscription Certificate to the
Subscription Agent, together with payment for the Shares as described below
under "Payment for Shares." Rights may also be exercised through a Rights
holder's broker, who may charge the Rights holder a servicing fee in
connection with such exercise.
Completed Subscription Certificates must be received by the
Subscription Agent prior to 5:00 p.m., New York time, on the Expiration Date
(unless payment is effected by means of a notice of guaranteed delivery as
described below under "Payment for Shares"). The Subscription Certificate and
payment should be delivered to EquiServe at the following address:
If By Mail: EquiServe
Attn: Corporate Actions
P.O. Box 859208
Braintree, MA 02185-9208
If By Hand: EquiServe
11th Floor
17 Battery Park Place
New York, NY 10004
If By Overnight Courier: EquiServe
Attn: Corporate Actions
161 Bay State Drive
Braintree, MA 02184
PAYMENT FOR SHARES
Holders of Rights who acquire Shares on Primary Subscription or
pursuant to the Over- Subscription Privilege may choose between the following
methods of payment:
(1) A subscription will be accepted by the Subscription Agent if, prior
to 5:00 p.m., New York time, on the Expiration Date, the Subscription
Agent has received a notice of guaranteed delivery by telegram or
otherwise from a bank, a trust company, or a NYSE member,
guaranteeing delivery of (i) payment of the full Subscription Price
for the Common Shares subscribed for on the Primary Subscription and
any additional Common Shares subscribed for pursuant to the
Over-Subscription Privilege and (ii) a properly completed and
executed Subscription Certificate. The Subscription Agent will not
honor a notice of guaranteed delivery if a properly completed and
executed Subscription Certificate and full payment is not received by
the Subscription Agent by the close of business on the third Business
Day after the Expiration Date. The notice of guaranteed delivery may
be delivered to the Subscription Agent in the same manner as
Subscription Certificates at the addresses set forth above,
or may be transmitted to the Subscription Agent
15
by facsimile transmission (fax number (781) 380-3388; telephone number
to confirm receipt (781) 843-1833, extension 200).
(2) Alternatively, a holder of Rights can send the Subscription
Certificate together with payment in the form of a check for the
Shares subscribed for on Primary Subscription and additional Common
Shares subscribed for pursuant to the Over-Subscription Privilege to
the Subscription Agent based on the Subscription Price of $7.00 per
Share. To be accepted, the payment, together with the executed
Subscription Certificate, must be received by the Subscription Agent
at the addresses noted above prior to 5:00 p.m., New York time, on
the Expiration Date. The Subscription Agent will deposit all stock
purchase checks received by it prior to the final due date into a
segregated interest-bearing account pending proration and
distribution of Common Shares. The Subscription Agent will not accept
cash as a means of payment for Common Shares. EXCEPT AS OTHERWISE SET
FORTH BELOW, A PAYMENT PURSUANT TO THIS METHOD MUST BE IN UNITED
STATES DOLLARS BY MONEY ORDER OR CHECK DRAWN ON A BANK LOCATED IN THE
CONTINENTAL UNITED STATES, MUST BE PAYABLE TO THE GABELLI UTILITY
TRUST, AND MUST ACCOMPANY AN EXECUTED SUBSCRIPTION CERTIFICATE TO BE
ACCEPTED. If the aggregate Subscription Price paid by a Record Date
Shareholder is insufficient to purchase the number of Common Shares
that the holder indicates are being subscribed for, or if a Record
Date Shareholder does not specify the number of Common Shares to be
purchased, then the Record Date Shareholder will be deemed to have
exercised first, the Primary Subscription Rights (if not already
fully exercised) and second, the Over-Subscription Privilege to the
full extent of the payment tendered. If the aggregate Subscription
Price paid by such holder is greater than the Common Shares he has
indicated an intention to subscribe, then the Rights holder will be
deemed to have exercised first, the Primary Subscription Rights (if
not already fully subscribed) and second, the Over-Subscription
Privilege to the full extent of the excess payment tendered.
Any payment required from a holder of Rights must be received by the
Subscription Agent by the Expiration Date, or if the Rights holder has elected
to make payment by means of a notice of guaranteed delivery, on the third
Business Day after the Expiration Date. All payments by a holder of Rights
must be in United States dollars by money order or check drawn on a bank
located in the continental United States of America and payable to The Gabelli
Utility Trust. Whichever of the two methods of payment described above is
used, issuance and delivery of certificates for the Shares purchased are
subject to collection of checks and actual payment pursuant to any notice of
guaranteed delivery.
Within ten Business Days following the Expiration Date (the
"Confirmation Date"), a confirmation will be sent by the Subscription Agent to
each holder of Rights (or, if the Common Shares are held by Cede or any other
depository or nominee, to Cede or such other depository or nominee), showing
(i) the number of Shares acquired pursuant to the Primary Subscription, (ii)
the number of Excess Shares, if any, acquired pursuant to the
Over-subscription Privilege, (iii) the per share and total purchase price for
the Common Shares and (iv) any excess to be refunded by the Fund to such
holder as a result of payment for Common Shares pursuant to the
Over-Subscription Privilege which the holder is not acquiring. Any payment
required from a holder of Rights must be received by the Subscription Agent on
the Expiration Date, or if the Rights holder has elected to make payment by
means of a notice of guaranteed delivery, on the third Business Day after the
Expiration Date. Any excess payment to be refunded by the Fund to a holder of
Rights, or to be paid to a holder of Rights as a result of sales of Rights on
his behalf by the Subscription Agent or exercises by Record Date Shareholders
of their Over-Subscription Privileges, and all interest accrued on the
holder's excess payment will be mailed by the Subscription Agent to the holder
within fifteen Business Days after the Expiration Date. Interest on the excess
payment will accrue through the date that is one Business Day prior to the
mail date of the reimbursement check. All payments by a holder of Rights must
be in United States dollars by money order or check drawn on a bank located in
the continental United States of America and payable to The Gabelli Utility
Trust except that holders of Rights who are residents of Canada may make
payment in U.S. dollars by money order or check drawn on a bank located in
Canada.
A Rights holder will have no right to rescind a purchase after the
Subscription Agent has received payment either by means of a notice of
guaranteed delivery or a check.
If a holder of Rights who acquires Common Shares pursuant to the
Primary Subscription or the Over-Subscription Privilege does not make payment
of any amounts due, the Fund reserves the right to take any or all of the
following actions: (i) find other purchasers for such subscribed-for and
unpaid-for Common Shares; (ii) apply any payment actually received by it
toward the purchase of the greatest whole number of Common Shares which
16
could be acquired by such holder upon exercise of the Primary Subscription or
the Over-Subscription Privilege; (iii) sell all or a portion of the Common
Shares purchased by the holder, in the open market, and apply the proceeds to
the amounts owed; and (iv) exercise any and all other rights or remedies to
which it may be entitled, including, without limitation, the right to set off
against payments actually received by it with respect to such subscribed Common
Shares and to enforce the relevant guaranty of payment.
Nominees who hold Common Shares for the account of others, such as
brokers, trustees or depositories for securities, should notify the respective
beneficial owners of the Common Shares as soon as possible to ascertain such
beneficial owners' intentions and to obtain instructions with respect to the
Rights. If the beneficial owner so instructs, the record holder of the Rights
should complete Subscription Certificates and submit them to the Subscription
Agent with the proper payment. In addition, beneficial owners of Common Shares
or Rights held through such a nominee should contact the nominee and request
the nominee to effect transactions in accordance with the beneficial owner's
instructions. Banks, broker-dealers and trust companies that hold Common
Shares for the accounts of others are advised to notify those persons that
purchase Rights in the secondary market that such Rights may not participate
in the over-subscription privilege.
The instructions accompanying the Subscription Certificates should be
read carefully and followed in detail. DO NOT SEND SUBSCRIPTION CERTIFICATES
TO THE FUND.
THE METHOD OF DELIVERY OF SUBSCRIPTION CERTIFICATES AND PAYMENT OF
THE SUBSCRIPTION PRICE TO THE SUBSCRIPTION AGENT WILL BE AT THE ELECTION AND
RISK OF THE RIGHTS HOLDERS, BUT IF SENT BY MAIL IT IS RECOMMENDED THAT THE
CERTIFICATES AND PAYMENTS BE SENT BY REGISTERED MAIL, PROPERLY INSURED, WITH
RETURN RECEIPT REQUESTED, AND THAT A SUFFICIENT NUMBER OF DAYS BE ALLOWED TO
ENSURE DELIVERY TO THE SUBSCRIPTION AGENT AND CLEARANCE OF PAYMENT PRIOR TO
5:00 P.M., NEW YORK TIME, ON THE EXPIRATION DATE. BECAUSE UNCERTIFIED PERSONAL
CHECKS MAY TAKE AT LEAST FIVE BUSINESS DAYS TO CLEAR, YOU ARE STRONGLY URGED
TO PAY, OR ARRANGE FOR PAYMENT, BY MEANS OF A CERTIFIED OR CASHIER'S CHECK OR
MONEY ORDER.
All questions concerning the timeliness, validity, form and
eligibility of any exercise of Rights will be determined by the Fund, whose
determinations will be final and binding. The Fund in its sole discretion may
waive any defect or irregularity, or permit a defect or irregularity to be
corrected within such time as it may determine, or reject the purported
exercise of any Right. Subscriptions will not be deemed to have been received
or accepted until all irregularities have been waived or cured within such
time as the Fund determines in its sole discretion. Neither the Fund nor the
Subscription Agent will be under any duty to give notification of any defect
or irregularity in connection with the submission of Subscription Certificates
or incur any liability for failure to give such notification.
DELIVERY OF STOCK CERTIFICATES
Certificates representing Common Shares purchased pursuant to the
Primary Subscription will be delivered to subscribers as soon as practicable
after the corresponding Rights have been validly exercised and full payment
for the Common Shares has been received and cleared. Certificates representing
Common Shares purchased pursuant to the Over-Subscription Privilege will be
delivered to subscribers as soon as practicable after the Expiration Date and
after all allocations have been effected. Participants in the Fund's Automatic
Dividend Reinvestment and Voluntary Cash Purchase Plan (the "Plan") will be
issued Rights for the Common Shares held in their accounts in the Plan.
Participants wishing to exercise these Rights must exercise the Rights in
accordance with the procedures set forth above in "Method of Exercise of
Rights" and "Payment for Shares." Rights will not be exercised automatically
by the Plan. Plan participants exercising their Rights will receive their
Primary and Over-Subscription Shares via an uncertificated credit to their
existing account. To request a stock certificate, participants in the Plan
should check the appropriate box on the Subscription Certificate. These Common
Shares will remain subject to the same investment option as previously
selected by the Plan participant.
FOREIGN RESTRICTIONS
Subscription Certificates will only be mailed to Record Date
Shareholders whose addresses are within the United States and Canada
(other than an APO or FPO address). Record Date Shareholders whose
addresses are outside the United States and Canada or who have an APO
or FPO address and who wish to subscribe to the Offer
17
either in part or in full should contact the Subscription Agent, EquiServe,
by written instruction or recorded telephone conversation no later than
three Business Days prior to the Expiration Date. The Fund will determine
whether the offering may be made to any such shareholder. If the
Subscription Agent has received no instruction by the third Business Day
prior to the Expiration Date or the Fund has determined that the Offering
may not be made to a particular shareholder, the Subscription Agent will
attempt to sell all of such shareholder's Rights and remit the net
proceeds, if any, to such shareholders. If the Rights can be sold, sales of
these Rights will be deemed to have been effected at the weighted average
price received by the Subscription Agent on the day the Rights are sold,
less any applicable brokerage commissions, taxes and other expenses.
FEDERAL INCOME TAX CONSEQUENCES TO SHAREHOLDERS
For U.S. federal income tax purposes, neither the receipt nor the
exercise of the Rights will result in taxable income to you. Moreover, you
will not realize a loss if you do not exercise the Rights. The holding period
for a Common Share acquired upon exercise of a Right begins with the date of
exercise. The basis for determining gain or loss upon the sale of a share
acquired upon the exercise of a Right will be equal to the sum of:
o the subscri\tion price per share,
o any servicing fee charged to you by your broker, bank or trust
company, and
o the basis, if any, in the Rights that you exercised.
A gain or loss recognized upon a sale of a Common Share acquired upon
the exercise of a Right will be a capital gain or loss assuming the Common
Share is held as a capital asset at the time of sale. This gain or loss will
be a long-term capital gain or loss if the Common Share has been held at the
time of sale for more than one year.
As noted above, your basis in Common Shares issued under the Offer
includes your basis in the Rights underlying those Shares. Assuming that, as
the Fund expects, the aggregate fair market value of the Rights at the time
they are distributed is less than 15% of the aggregate fair market value of
the Fund's Common Shares at such time, the basis of the Rights issued to you
will be zero unless you elect to allocate your basis of previously owned
Common Shares to the Rights issued to you in the Offer. This allocation is
based upon the relative fair market value of such Common Shares and the Rights
as of the date of distribution of the Rights. Thus, if you make such an
election and the Rights are later exercised, the basis in the Common Shares
you originally owned will be reduced by an amount equal to the basis allocated
to the Rights. This election must be made in a statement attached to your
federal income tax return for the year in which the Rights are distributed. If
the Rights expire without exercise, you will realize no loss and you will not
be permitted to allocate a portion of your basis in the Common Shares to the
unexercised Rights.
The foregoing is a general summary of the material United States
federal income tax consequences of the receipt and exercise of Rights. The
discussion is based upon applicable provisions of the Internal Revenue Code of
1986, as amended (the "Code"), U.S. Treasury regulations thereunder and other
authorities currently in effect, and does not address state, local or foreign
taxes. The Code and Treasury regulations thereunder are subject to change by
legislative or administrative action, possibly with retroactive effect. You
should consult your tax advisors regarding specific questions as to federal,
state, local or foreign taxes. You should also review the discussion of
certain tax considerations affecting yourself and the Fund set forth under
"Taxation."
EMPLOYEE PLAN CONSIDERATIONS
Rights holders that are employee benefit plans subject to the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
including corporate savings and 401(k) plans, Keogh Plans of self-employed
individuals and Individual Retirement Accounts ("IRA") (each a "Benefit Plan"
and collectively, "Benefit Plans"), should be aware that additional
contributions of cash in order to exercise Rights may be treated as Benefit
Plan contributions and, when taken together with contributions previously
made, may subject a Benefit Plan to excise taxes for excess or nondeductible
contributions. In the case of Benefit Plans qualified under Section 401(a) of
the Code, additional cash contributions could cause the maximum contribution
limitations of Section 415 of the Code or other qualification rules to be
violated. Benefit Plans contemplating making additional cash contributions to
exercise Rights should consult with their counsel prior to making such
contributions.
18
Benefit Plans and other tax exempt entities, including governmental
plans, should also be aware that if they borrow in order to finance their
exercise of Rights, they may become subject to the tax on unrelated business
taxable income ("UBTI") under Section 511 of the Code. If any portion of an
IRA is used as security for a loan, the portion so used is also treated as
distributed to the IRA depositor.
ERISA contains prudence and diversification requirements and ERISA
and the Code contain prohibited transaction rules that may impact the exercise
of Rights. Among the prohibited transaction exemptions issued by the
Department of Labor that may exempt a Benefit Plan's exercise of Rights are
Prohibited Transaction Exemption 84-24 (governing purchases of shares in
investment companies) and Prohibited Transaction Exemption 75-1 (covering
sales of securities).
Due to the complexity of these rules and the penalties for
noncompliance, Benefit Plans should consult with their counsel regarding the
consequences of their exercise of Rights under ERISA and the Code.
USE OF PROCEEDS
The proceeds of the Offering, assuming all Primary Subscription
Shares offered hereby are sold, are estimated to be approximately $40,456,829,
before deducting expenses payable by the Fund estimated at approximately
$475,000. The proceeds of the Offering assuming all Secondary Over-
subscription Shares are sold in addition to all Primary Subscription Shares,
are estimated to be approximately $52,500,000, before deducting expenses
payable by the Fund estimated to be $475,000. The proceeds of the Offering
assuming all Secondary Over-Subscription Shares and all additional Common
Shares are sold in addition to all Primary Subscription Shares are estimated
to be $63,000,000 before deducting expenses payable by the Fund expected to be
$475,000. The Investment Adviser anticipates that investment of the proceeds
will be made in accordance with the Fund's investment objectives and policies
as appropriate investment opportunities are identified, which is expected to
be substantially completed in approximately three months; however, the
identification of appropriate investment opportunities pursuant to the
Investment Adviser's investment style or changes in market conditions may
cause the investment period to extend as long as six months.
INVESTMENT OBJECTIVES AND POLICIES
The Fund is a closed-end non-diversified management investment
company organized under the laws of the State of Delaware on February 25,
1999.
The primary objectives of the Fund are long-term growth of capital
and income, which the Fund attempts to achieve by investing at least 80% of
its total assets in common stock and other securities of foreign and domestic
companies involved to a substantial extent (e.g., at least 50% of the assets,
gross income or net profits of a company is committed to or derived from) in
providing products, services or equipment for (i) the generation or
distribution of electricity, gas and water and (ii) telecommunications
services or infrastructure operations, such as airports, toll roads and
municipal services (collectively, the "Utility Industry"). The remaining 20%
of its assets may be invested in other securities including stocks, equity
securities, debt obligations and money market instruments, as well as certain
derivative instruments in the utility industry or other industries. Moreover,
should extraordinary conditions affecting such sectors or securities markets
as a whole warrant, the Fund may temporarily be primarily invested in money
market instruments. When the Fund is invested in these instruments for
temporary or defensive purposes it may not achieve its investment objective.
The investment policy of the Fund relating to the type of securities
in which 80% of the Fund's total assets must be invested may be changed by the
Board of Trustees without shareholder approval. Shareholders will, however,
receive at least 60 days prior notice of any change in this policy.
Although many companies in the Utility Industry traditionally pay
above average dividends, the Fund intends to focus on those companies whose
securities have the potential to increase in value. The Fund's performance
is expected to reflect conditions affecting public utility industries.
These industries are sensitive to factors such as interest rates, local and
national government regulations, the price and availability of fuel,
environmental protection or energy conservation regulations, weather, the
level of demand for services, and the risks associated with constructing
and operating nuclear power facilities. These factors may change rapidly.
The Fund emphasizes quality in selecting utility investments, and generally
looks for companies that have proven dividend
19
records and sound financial structures. Believing that the industry is
under consolidation due to changes in regulation, the Fund intends to
position itself to take advantage of trends in consolidation.
Under normal circumstances the Fund will invest in securities of
issuers located in countries other than the United States and may invest in
such foreign securities without limitation. Investing in securities of foreign
issuers, which generally are denominated in foreign currencies, may involve
certain risk and opportunity considerations not typically associated with
investing in domestic companies and could cause the Fund to be affected
favorably or unfavorably by changes in currency exchange rates and
revaluations of currencies.
INVESTMENT METHODOLOGY OF THE FUND
In selecting securities for the Fund, the Investment Adviser normally
will consider the following factors, among others:
o the Investment Adviser's 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;
o the potential for capital appreciation of the securities;
o the interest or dividend income generated by the securities;
o the prices of the securities relative to other comparable
securities;
o whether the securities are entitled to the benefits of call
protection or other protective covenants;
o the existence of any anti-dilution protections or guarantees of
the security; and
o the number of issuers in the Fund's portfolio.
The Investment Adviser's investment philosophy with respect to debt
and equity securities is to identify assets that are selling in the public
market at a discount to their private market value, which the Investment
Adviser defines as the value informed purchasers are willing to pay to acquire
assets with similar characteristics. The Investment Adviser also normally
evaluates the issuers' free cash flow and long-term earnings trends. Finally,
the Investment Adviser looks for a catalyst -- something in the company's
industry or indigenous to the company or country itself that will surface
additional value.
TEMPORARY DEFENSIVE INVESTMENTS
During temporary defensive periods and during inopportune periods to
be fully invested, the Fund may invest in U.S. government securities and in
money market mutual funds not affiliated with the Investment Adviser that
invest in those securities. 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 will provide financial support
to U.S. government-sponsored instrumentalities if it is not obligated to do so
by law. During temporary defensive periods, the Fund may not achieve its
investment objective.
OPTIONS
On behalf of the Fund, the Investment Adviser may, subject to the
guidelines of the Board of Trustees, purchase or sell, i.e., write, options on
securities, securities indices and foreign currencies which are listed on a
national securities exchange or in the U.S. over-the-counter ("OTC") markets
as a means of achieving additional return or of hedging the value of the
Fund's portfolio. The Fund may write covered call options on common stocks
20
that it owns or has an immediate right to acquire through conversion or
exchange of other securities in an amount not to exceed 25% of total assets or
invest up to 10% of its total assets in the purchase of put options on common
stocks that the Fund owns or may acquire through the conversion or exchange of
other securities that it owns.
A call option is a contract that gives the holder of the option the
right to buy from the writer (seller) of the call option, in return for a
premium paid, the security underlying the option at a specified exercise price
at any time during the term of the option. The writer of the call option has
the obligation upon exercise of the option to deliver the underlying security
upon payment of the exercise price during the option period.
A put option is a contract that gives the holder of the option the
right to sell to the writer (seller), in return for the premium, the
underlying security at a specified price during the term of the option. The
writer of the put, who receives the premium, has the obligation to buy the
underlying security upon exercise, at the exercise price during the option
period.
If the Fund has written an option, it may terminate its obligation by
effecting a closing purchase transaction. This is accomplished by purchasing
an option of the same series as the option previously written. There can be no
assurance that a closing purchase transaction can be effected when the Fund so
desires.
An exchange-traded option may be closed out only on an exchange which
provides a secondary market for an option of the same series. Although the
Fund will generally purchase or write only those options for which there
appears to be an active secondary market, there is no assurance that a liquid
secondary market on an exchange will exist for any particular option.
FUTURES CONTRACTS AND OPTIONS THEREON
The Fund may 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, in
accordance with regulations of the Commodity Futures Trading Commission
("CFTC") and the Fund's fundamental investment restrictions. 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.
FORWARD CURRENCY EXCHANGE CONTRACTS
The Fund 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 Fund 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 Fund's dealings in forward contracts will be
limited to hedging involving either specific transactions or portfolio
positions, and the amount the Fund may invest in forward currency contracts is
limited to the amount of its aggregate investments in foreign currencies. The
Fund will only enter into forward currency contracts with parties which it
believes to be creditworthy.
LEVERAGING
As provided in the 1940 Act and subject to compliance with the Fund's
investment objectives, policies and restrictions, the Fund may issue debt or
preferred shares (such as the outstanding Series A or Series B Preferred
Shares) so long as the Fund's total assets immediately after such issuance,
less certain ordinary course liabilities, exceed 300% of the amount of the
debt outstanding and exceed 200% of the sum of the amount of preferred shares
and debt outstanding. Such debt or preferred shares may be convertible in
accordance with SEC staff guidelines which may permit the Fund to obtain
leverage at more attractive rates.
Further information on the investment objectives and policies of the
Fund are set forth in the SAI.
21
INVESTMENT RESTRICTIONS
The Fund has adopted certain investment restrictions as fundamental
policies of the Fund. Under the 1940 Act, a fundamental policy may not be
changed without the vote of a majority of the outstanding voting securities of
the Fund, as defined in the 1940 Act. The Fund's investment restrictions are
more fully discussed under "Investment Restrictions" in the SAI.
PORTFOLIO TURNOVER
The Fund buys and sells securities to accomplish its investment
objective. The investment policies of the Fund may lead to frequent changes in
investments, particularly in periods of rapidly fluctuating interest or
currency exchange rates. The portfolio turnover may be higher than that of
other investment companies.
Portfolio turnover generally involves some expense to the Fund,
including brokerage commissions or dealer mark-ups and other transaction costs
on the sale of securities and reinvestment in other securities and may result
in taxable gains being passed to shareholders. The portfolio turnover rate is
computed by dividing the lesser of the amount of the long-term securities
purchased or securities sold by the average monthly value of securities owned
during the year (excluding securities whose maturities at acquisition were one
year or less). Higher portfolio turnover may decrease the after-tax return to
individual investors to the extent it results in a decrease of the long term
capital gains portion of distributions to shareholders.
The portfolio turnover rates of the Fund for the fiscal years ended
December 31, 2003, December 31, 2002 and December 31, 2001 were 28%, 29% and
41%, respectively.
OTHER INVESTMENTS
The Fund is permitted to invest in securities subject to
reorganization, lower rated securities and repurchase agreements and enter
into forward commitments for the purchase or sale of securities, including on
a "when issued" or "delayed delivery" basis and the Fund may make short sales
of securities. See "Investment Objectives and Policies" in the SAI for a
discussion of these investments and techniques and the risks associated with
them.
LONG-TERM OBJECTIVE
The Fund is intended for investors seeking long-term capital growth
and income. The Fund is not meant to provide a vehicle for those who wish to
benefit from short-term swings in the stock market. An investment in shares of
the Fund should not be considered a complete investment program. Each
shareholder should take into account the shareholder's investment objectives
as well as the shareholder's other investments when considering the Offering.
RISKS
There are a number of risks that an investor should consider in
evaluating the Fund. You should read this entire Prospectus and the SAI before
you decide whether to exercise your Rights. In addition, you should consider
the matters set forth below.
DILUTION
If you do not exercise all of your Rights, you may own a smaller
proportional interest in the Fund when the Offer is over. In addition, you
will experience an immediate dilution of the aggregate net asset value of your
shares if you do not participate in the Offer and will experience a reduction
in the net asset value per share of your shares whether or not you exercise
your Rights, if the Subscription Price is below the Fund's net asset value per
share on the Expiration Date because:
o the offered Common Shares are being sold at less than their
current net asset value.
o you will indirectly bear the expenses of the Offer.
22
o the number of Common Shares outstanding after the Offer will have
increased proportionately more than the increase in the amount of
the Fund's net assets.
On the other hand, if the Subscription Price is above the Fund's net
asset value per share on the Expiration Date (as it was on the date of this
Prospectus), you may experience an immediate accretion of the aggregate net
asset value per share of your shares even if you do not exercise your Rights
and an immediate increase in the net asset value per share of your shares
whether or not you participate in the Offer because:
o the offered Common Shares are being sold at more than their
current net asset value after deducting the expenses of the
Offer.
o the number of Common Shares outstanding after the Offer will have
increased proportionately less than the increase in the amount of
the Fund's net assets.
Furthermore, if you do not participate in the Over-Subscription
Privilege, your percentage ownership may also be diluted. The Fund cannot
state precisely the amount of any dilution because it is not known at this
time what the net asset value per share will be on the Expiration Date or what
proportion of the Rights will be exercised. The impact of the Offer on net
asset value per share is shown by the following examples, assuming a $7.00
Subscription Price:
Scenario 1: (assumes net asset value
per share is above subscription price)(1)
NAV................................................................... $7.50
Subscription Price.................................................... $7.00
Reduction in NAV($)(2)................................................ $0.14
Reduction in NAV(%)................................................... 1.90%
Scenario 2: (assumes net asset value
per share is below subscription price)(1)
NAV................................................................... $6.50
Subscription Price.................................................... $7.00
Increase in NAV($)(2)................................................. $0.11
Increase in NAV(%).................................................... 1.70%
(1) Both examples assume full primary and primary over-subscription privilege
exercise. Actual amounts may vary due to rounding.
(2) Assumes $475,000 in estimated offering expenses.
If you do not wish to exercise your Rights, you should consider
selling them as set forth in this Prospectus. Any cash you receive from
selling your Rights should serve as partial compensation for any possible
dilution of your interest in the Fund. The Fund cannot give assurance,
however, that a market for the Rights will develop or that the Rights will
have any marketable value.
INDUSTRY RISKS
Under normal market conditions, the Fund will invest at least 80% of
its total assets in foreign and domestic companies involved in the Utility
Industry and, as a result, the value of the Common Shares will be more
susceptible to factors affecting those particular types of companies,
including governmental regulation, inflation, cost increases in fuel and other
operating expenses, technological innovations that may render existing
products and equipment obsolete and increasing interest rates resulting in
high interest costs on borrowings needed for capital construction programs,
including costs associated with compliance with environmental and other
regulations.
Sector Risk. The Fund concentrates its investments in the Utility
Industry. As a result, the Fund's investments may be subject to greater risk
and market fluctuation than a fund that had securities representing a broader
range of investment alternatives. The prices of securities issued by
23
traditional utility companies may change in response to interest rate changes.
Traditionally, when interest rates have gone up, the value of securities
issued by traditional utility companies have gone down. Conversely, when
interest rates have gone down, the value of securities issued by utility
companies have gone up. There is no guarantee that this relationship will
continue.
Government Regulation. There are substantial differences between the
regulatory practices and policies in various jurisdictions, and any given
regulatory agency may make major shifts in policy from time to time. There is
no assurance that regulatory authorities will, in the future, permit rate
increases or that such increases will be adequate to permit the payment of
dividends on common stocks by companies subject to such regulatory provisions.
Additionally, existing and possible future regulatory legislation may make it
even more difficult for these utilities to obtain adequate relief.
Various regulatory regimes also impose limitations on the percentage
of the shares of a public utility held by a fund as an investment. These
limitations may unfavorably restrict the ability of the Fund to make certain
investments.
Deregulation. Changing regulation constitutes one of the
industry-specific risks for the Fund, especially with respect to its
investments in traditionally regulated public utilities and partially
regulated utility companies. Domestic and foreign regulators monitor and
control utility revenues and costs, and therefore may limit utility profits
and dividends paid to investors, which could result in reduced income to the
Fund. Regulatory authorities also may restrict a company's access to new
markets, thereby diminishing the company's long-term prospects. The
deregulation of certain utility companies may eliminate restrictions on
profits and dividends, but may also subject these companies to greater risks
of loss. Deregulation of the utility industry could have a positive or
negative impact on the Fund. The Investment Adviser believes that certain
utility companies' fundamentals should continue to improve as the industry
undergoes deregulation. Companies may seek to strengthen their competitive
positions through mergers and takeovers. The loosening of the government
regulation of utilities should encourage convergence within the industry.
Improving earnings prospects, strong cash flows, share repurchases and
takeovers from industry consolidation may tend to boost share prices. However,
as has occurred in California and elsewhere, certain companies may be less
able to meet the challenge of deregulation as competition increases and
investments in these companies would not be likely to perform well. Individual
sectors of the utility market are subject to additional risks. These risks can
apply to all utility companies - regulated or fully or partially deregulated
and unregulated. For example, telecommunications companies have been affected
by technological developments leading to increased competition, as well as
changing regulation of local and long-distance telephone services and other
telecommunications businesses. Certain telecommunications companies have been
adversely affected by the new competitive climate.
Financing. Currently, companies in the Utility Industry have
encountered difficulties in obtaining financing for construction programs
during inflationary periods. Issuers experiencing difficulties in financing
construction programs may also experience lower profitability, which can
result in reduced income to the Fund. Historically, companies in the Utility
Industry have also encountered such financing difficulties during inflationary
periods.
Equipment and Supplies. Traditional utility companies face the risk
of lengthy delays and increased costs associated with the design,
construction, licensing and operation of their facilities. Moreover,
technological innovations may render existing plants, equipment or products
obsolete. Increased costs and a reduction in the availability of fuel (such as
oil, coal, nuclear or natural gas) also may adversely affect the profitability
of utility companies.
Electric utilities may be burdened by unexpected increases in fuel
and other operating costs. They may also be negatively affected when long-term
interest rates rise. Long-term borrowings are used to finance most utility
investments, and rising interest rates lead to higher financing costs and
reduced earnings. There are also the considerable costs associated with
environmental compliance, nuclear waste clean-up, and safety regulation.
Increasingly, regulators are calling upon electric utilities to bear these
added costs, and there is a risk that these costs will not be fully recovered
through an increase in revenues.
Among gas companies, there has been a move to diversify into oil and
gas exploration and development, making investment returns more sensitive to
energy prices. In the case of the water utility sector, the industry is highly
fragmented, and most water supply companies find themselves in mature markets,
although upgrading of fresh water and waste water systems is an expanding
business.
24
RISKS TO HOLDERS OF COMMON SHARES OF LEVERAGING AND ISSUANCE OF SENIOR
SECURITIES
The Fund utilizes leverage through the issuance of preferred shares,
currently the Series A Preferred and Series B Preferred Shares. Leverage
entails two primary risks. The first risk is that the use of leverage
magnifies the impact on the common shareholders of changes in net asset value.
For example, a fund that uses 33% leverage (that is, $50 of leverage per $100
of common equity) 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. The second risk
is that the cost of leverage will exceed the return on the securities acquired
with the proceeds of leverage, thereby diminishing rather than enhancing the
return to common shareholders. These two risks generally make the Fund's total
return to common shareholders more volatile. In addition, the Fund might be
required to sell investments in order to meet dividend or interest payments on
the debt or preferred shares when it may be disadvantageous to do so.
As provided in the 1940 Act and subject to certain exceptions, the
Fund may issue debt or preferred shares so long as the Fund's total assets
immediately after such issuance, less certain ordinary course liabilities, are
at least 300% of the amount of the debt outstanding and are at least 200% of
the sum of the amount of the preferred shares and debt outstanding. Such debt
or preferred shares may be convertible in accordance with SEC guidelines which
may permit the registrant to obtain leverage at more attractive rates. A
leveraged capital structure creates certain special risks and potential
benefits not associated with unleveraged funds having similar investment
objectives and policies. Any investment income or gains from the capital
represented by preferred shares or debt which is in excess of the dividends
payable thereon will cause the total return of the common shares to be higher
than would otherwise be the case. Conversely, if the investment performance of
the capital represented by preferred shares or debt fails to cover the
dividends payable thereon, the total return of the common shares would be less
or, in the case of negative returns, would result in higher negative returns
to a greater extent than would otherwise be the case. The requirement under
the 1940 Act to pay in full dividends on preferred shares or interest on debt
before any dividends may be paid on the Common Shares means that dividends on
the Common Shares from earnings may be reduced or eliminated. Although an
inability to pay dividends on the Common Shares could conceivably result in
the Fund ceasing to qualify as a regulated investment company under the Code,
which would be materially adverse to the holders of the Common Shares, the
risk to Common Shares may be avoided through the use of mandatory redemption
of the Fund's preferred shares designed to ensure that the Fund maintains the
necessary asset coverage.
NON-DIVERSIFIED STATUS
The Fund is classified as a "non-diversified" investment company
under the 1940 Act, which means that the Fund is not limited by the 1940 Act
in the proportion of its assets that may be invested in the securities of a
single issuer. However, the Fund intends to conduct its operations so as to
qualify as a "regulated investment company" for purposes of the Code, which
will relieve it of any liability for U.S. federal income tax if all of its
earnings are distributed to shareholders. See "Taxation --Taxation of the
Fund." Because the Fund, as a non-diversified investment company, may invest
in the securities of individual issuers to a greater degree than a diversified
investment company, an investment in the Fund may present greater risk to an
investor than an investment in a diversified company because the investment
risk may be concentrated in fewer securities.
MARKET VALUE AND NET ASSET VALUE
Shares of closed-end investment companies often trade at a discount
from net asset value, although for most of the Fund's life its shares have
traded at a premium over net asset value per share. The possibility that
shares of a closed-end fund will trade at a discount from net asset value or
at premiums that are unsustainable over the long term are risks separate and
distinct from the risk that the Fund's net asset value will decrease. The risk
of holding shares of a closed-end fund that might trade at a discount or
unsustainable premium is more pronounced for shareholders who wish to sell
their shares in a relatively short period of time after acquiring them
because, for those investors, realization of a gain or loss on their
investments is likely to be more dependent upon the existence of a premium or
discount than upon portfolio performance. The Common Shares are not subject to
redemption. Shareholders desiring liquidity may, subject to applicable
securities laws, trade their shares in the Fund on the NYSE or other markets
on which such shares may trade at the then current market value, which may
differ from the then current net asset value.
25
TRADING PREMIUM
Historically, the Fund's Common Shares have traded at a premium to
their net asset value. As of October 15, 2004, this premium was 47.42%. There
is no guarantee that this premium is sustainable either during the term of
this Offer or over the long term. The issuance of additional Common Shares
pursuant to the Offer and the Over-Subscription Privilege may reduce or
eliminate any premium that common shareholders may have otherwise received for
their Common Shares.
LOWER RATED SECURITIES
The Fund may invest up to 25% of its total assets in fixed-income
securities rated in the lower rating categories of recognized statistical
rating agencies, such as securities rated "CCC" or lower by S&P or "Caa" or
lower by Moody's, Inc., or non-rated securities of comparable quality. These
debt securities are predominantly speculative and involve major risk exposure
to adverse conditions. Debt securities rated lower than "BBB" by S&P or "Baa"
by Moody's are often referred to in the financial press as "junk bonds."
FOREIGN SECURITIES
There is no limitation on the amount of foreign securities in which
the Fund may invest. Investing in securities of foreign companies and foreign
governments, which generally are denominated in foreign currencies, may
involve certain risk and opportunity considerations not typically associated
with investing in domestic companies and could cause the Fund to be affected
favorably or unfavorably by changes in currency exchange rates and
revaluations of currencies. In addition, less information may be available
about foreign companies and foreign governments than about domestic companies
and foreign companies and foreign governments generally are not subject to
uniform accounting, auditing and financial reporting standards or to other
regulatory practices and requirements comparable to those applicable to
domestic companies. Foreign securities and their markets may not be as liquid
as U.S. securities and their markets. Securities of some foreign companies may
involve greater market risk than securities of U.S. companies. Investment in
foreign securities may result in higher expenses than investing in domestic
securities because of the payment of fixed brokerage commissions on foreign
exchanges, which generally are higher than commissions on U.S. exchanges, and
the imposition of transfer taxes or transaction charges associated with
foreign exchanges. Investment in foreign securities also may be subject to
local economic or political risks, including instability of some foreign
governments, the possibility of currency blockage or the imposition of
withholding taxes on dividend or interest payments, and the potential for
expropriation, nationalization or confiscatory taxation and limitations on the
use or removal of funds or other assets.
Among the foreign securities in which the Fund 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 Fund may also
invest in debt securities of foreign governments.
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 Fund would not be subject absent the use of these strategies. If the
Investment Adviser's predictions of movements in the direction of the
securities, foreign currency and interest rate markets are inaccurate, the
consequences to the Fund may leave the Fund in a worse position than if it had
not used such strategies. Risks inherent in the use of options, foreign
currency, futures contracts and options on futures contracts, securities
indices and foreign currencies include:
o dependence on the Investment Adviser's ability to predict
correctly movements in the direction of interest rates,
securities prices and currency markets;
o 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;
26
o the fact that skills needed to use these strategies are different
from those needed to select portfolio securities;
o the possible absence of a liquid secondary market for any
particular instrument at any time;
o the possible need to defer closing out certain hedged positions
to avoid adverse tax consequences;
o the possible inability of the Fund 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 Fund to sell a security at a
disadvantageous time due to a need for the Fund to maintain
"cover" or to segregate securities in connection with the hedging
techniques; and
o the creditworthiness of counterparties. For a further
description, see "Risks--Futures Transactions" and
"Risks--Forward Currency Exchange Contracts."
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 Fund 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 on price fluctuation, imperfect correlation between the
contracts and the securities being hedged, losses from investing in futures
transactions that are potentially unlimited and the segregation requirements
for such transactions. For a further description, see "Investment Objectives
and Policies -- Investment Practices" in the SAI.
FORWARD CURRENCY EXCHANGE CONTRACTS
The use of forward currency contracts may involve certain risks,
including the failure of the counter party 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. For a further description of such investments, see "Investment
Objectives and Policies -- Investment Practices" in the SAI.
DEPENDENCE ON KEY PERSONNEL
The Investment Adviser is dependent upon the expertise of Mr. Mario
J. Gabelli in providing advisory services with respect to the Fund's
investments. If the Investment Adviser were to lose the services of Mr.
Gabelli, its ability to service the Fund 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 the Investment Adviser.
MANAGEMENT OF THE FUND
The Fund's Board of Trustees (who, with its officers, are described in
the SAI) has overall responsibility for the management of the Fund. The Board of
Trustees decides upon matters of general policy and reviews the actions of the
Investment Adviser. Pursuant to an Investment Advisory Agreement with the Fund,
the Investment Adviser, under the supervision of the Fund's Board of Trustees,
provides a continuous investment program for the Fund's portfolio; provides
investment research and makes and executes recommendations for the purchase and
sale of securities; and provides all facilities and personnel, including
officers required for its administrative management and pays the compensation of
all officers and directors of the Fund who are its affiliates. As compensation
for its services and the related expenses borne by the Investment Adviser, the
Fund pays the Investment Adviser a fee, computed daily and payable monthly,
equal, on an annual basis, to 1.00% of the Fund's average weekly net assets
(which for this purpose includes the liquidation preference of the Fund's
preferred shares), which is higher than that paid by most mutual funds. However,
the Investment Adviser has voluntarily agreed to waive the portion of its
investment advisory fee attributable to an amount of assets of the Fund equal to
the aggregate stated value of, as the case may be, its outstanding Series A
Preferred Shares and/or Series B Preferred Shares for any calendar year in
27
which the net asset value total return of the Fund allocable to the common
shares, including distributions and the advisory fee subject to potential
waiver, is less than (i) in the case of the Series A Preferred Shares, the
stated annual dividend rate of such series and (ii) in the case of the Series B
Preferred Shares, the net cost of capital to the Fund with respect to the Series
B Preferred Shares for such year expressed as a percentage (including, without
duplication, dividends paid by the Fund on the Series B Preferred Shares and the
net cost to the Fund of any associated swap or cap transaction if the Fund
hedges its Series B Preferred Shares dividend obligations). This waiver will
apply to the portion of the Fund's assets attributable to the Series A Preferred
Shares and Series B Preferred Shares, respectively, for so long as any shares of
such series remain outstanding. For purposes of the calculation of the fees
payable to the Investment Adviser by the Fund, average weekly net assets of the
Fund are determined at the end of each month on the basis of its average net
assets for each week during the month. The assets for each weekly period are
determined by averaging the net assets at the end of a week with the net assets
at the end of the prior week. For purposes of the calculation of the fees
payable to the Investment Adviser by the Fund, average weekly net assets of the
Fund are determined at the end of each month on the basis of its average net
assets for each week during the month.
Gabelli Funds, LLC acts as the Fund's Investment Adviser pursuant to
an advisory agreement with the Fund. The Investment Adviser is a New York
limited liability company with principal offices located at One Corporate
Center, Rye, New York 10580-1422. The Investment Adviser was organized in 1999
and is the successor to Gabelli Funds, Inc., which was organized in 1980. As
of June 30, 2004, the Investment Adviser acted as registered investment
adviser to 27 management investment companies with aggregate net assets of
approximately $12.1 billion. The Investment Adviser, together with other
affiliated investment advisers noted below had assets under management
totaling approximately $28.2 billion as of June 30, 2004. GAMCO Investors,
Inc., an affiliate of the Investment Adviser, 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
$13.6 billion under management as of June 30, 2004. Gabelli Fixed Income LLC,
an affiliate of the Investment Adviser, acts as investment adviser for The
Treasurer's Fund and separate accounts having aggregate assets of $1.0 billion
under management as of June 30, 2004. Gabelli Advisers, Inc., an affiliate of
the Investment Adviser, acts as investment manager to the Gabelli Westwood
Funds having aggregate assets of approximately $438 million under management
as of June 30, 2004.
The Investment Adviser 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 the Investment Adviser on the basis of his ownership
of a majority of the stock of Gabelli Group Capital Partners, Inc., which owns
a majority of the capital stock of Gabelli Asset Management Inc.
The Investment Adviser is obligated to pay expenses associated with
providing the services contemplated by the Investment Advisory Agreement
between the Fund and the Investment Adviser (the "Advisory Agreement")
including compensation of and office space for its officers and employees
connected with investment and economic research, trading and investment
management and administration of the Fund, as well as the fees of all trustees
of the Fund who are affiliated with the Investment Adviser.
The Advisory Agreement contains provisions relating to the selection
of securities brokers to effect the portfolio transactions of the Fund. Under
those provisions, the Investment Adviser may (1) direct Fund portfolio
brokerage to Gabelli & Company, Inc. or other broker-dealer affiliates of the
Investment Adviser; and (2) pay commissions to brokers other than Gabelli &
Company, Inc. which are higher than might be charged by another qualified
broker to obtain brokerage and/or research services considered by the
Investment Adviser to be useful or desirable for its investment management of
the Fund and/or its other advisory accounts or those of any investment adviser
affiliated with it. The SAI contains further information about the Advisory
Agreement including a more complete description of the advisory and expense
arrangements, exculpatory and brokerage provisions, as well as information on
the brokerage practices of the Fund.
Canadian shareholders should note, to the extent applicable, that
there may be difficulty enforcing any legal rights against the Investment
Adviser because it is resident outside Canada and all of its assets are
situated outside Canada.
28
REGULATORY MATTERS
The Securities and Exchange Commission, 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. The Investment Adviser has received information
requests and subpoenas from the Securities and Exchange Commission and the New
York Attorney General in connection with these inquiries. The Investment
Adviser and its affiliates have been complying with these requests and have
been independently reviewing their mutual fund practices in a variety of
areas. The Investment Adviser has not found any information that it believes
would be material to the ability of the Investment Adviser to fulfill its
obligations under the Investment Advisory Agreement. More specifically, the
Investment Adviser 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. The Investment Adviser has found that one investor, which 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 which had subsequently made an investment in a hedge fund managed by an
affiliate of the Investment Adviser, was banned from the mutual fund only
after certain other investors were banned. The Investment Adviser believes
that this relationship was not material to the Investment Adviser. Inasmuch as
both the Investment Adviser's 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 the Investment Adviser or that the Investment
Adviser will not become the subject of enforcement or other proceedings by the
Securities and Exchange Commission 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 the
Investment Adviser or on its ability to fulfill its obligations under the
Investment Advisory Agreement.
PORTFOLIO MANAGER
Mario J. Gabelli is the leader of a team which is primarily
responsible for the day-to-day management of the Fund. Mr. Gabelli has served
as Chairman, President and Chief Investment Officer of the Investment Adviser
since 1980. Mr. Gabelli also serves as Portfolio Manager for several other
funds in the Gabelli fund family. Because of the diverse nature of Mr.
Gabelli's responsibilities, he will devote less than all of his time to the
day-to-day management at the Fund. Over the past five years, Mr. Gabelli has
served as Chairman of the Board and Chief Executive Officer of Gabelli Asset
Management Inc.; Chief Investment Officer of GAMCO Investors, Inc.; Vice
Chairman of the Board and Chief Executive Officer of Lynch Corporation, a
diversified manufacturing company, and Lynch Interactive Corporation, a
multimedia and communications services company.
NON-RESIDENT TRUSTEE
Karl Otto Pohl, a trustee of the Fund, resides outside the United
States and all or a significant portion of his assets are located outside the
United States. He has no 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 him
in United States courts judgments predicated upon civil liability provisions
of United States securities laws. It may also not be possible to enforce
against him in foreign courts judgments of United States courts or liabilities
in original actions predicated upon civil liability provisions of the United
States securities laws.
SUB-ADMINISTRATOR
The Investment Adviser has entered into a sub-administration
agreement with PFPC Inc. (the "Sub- Administrator") pursuant to which the
Sub-Administrator provides certain administrative services necessary for the
Fund's operations which do not include the investment advisory and portfolio
management services provided by the Investment Adviser. For these services and
the related expenses borne by the Sub- Administrator, the Investment Adviser
pays a prorated monthly fee at the annual rate of .0275% of the first $10
billion of the aggregate average net assets of the Fund and all other funds
advised by the Investment Adviser and administered by the Sub-Administrator,
.0125% of the aggregate average net assets exceeding $10 billion and .01% of
the aggregate average net assets in excess of $15 billion. The
Sub-Administrator has its principal office at 760 Moore Road, King of Prussia,
Pennsylvania 19406.
29
PORTFOLIO TRANSACTIONS
Principal transactions are not entered into with affiliates of the
Fund. However, Gabelli & Company, Inc. may execute transactions in the
over-the-counter markets on an agency basis and receive a stated commission
therefrom. For a more detailed discussion of the Fund's brokerage allocation
practice, see the SAI under "Portfolio Transactions."
DIVIDENDS AND DISTRIBUTIONS
The Fund may retain for reinvestment, and pay the resulting federal
income taxes on, its net capital gain, if any, although the Fund reserves the
authority to distribute its net capital gain in any year. The Fund has a
policy, which may be modified at any time by its Board of Trustees, of paying
distributions on its Common Shares of $0.06 per share per month. This policy
permits holders of common shares to realize a predictable, but not assured,
level of cash flow and some liquidity periodically with respect to their
Common Shares without having to sell shares. To avoid paying income tax at the
corporate level, the Fund will distribute substantially all of its investment
company taxable income and realized capital gains. In the event that the
Fund's investment company taxable income and realized capital gains exceed the
total of the Fund's monthly distributions, the Fund intends to pay such excess
once a year. If, for any calendar year, the total monthly distributions exceed
investment company taxable income and net capital gain, the excess will
generally be treated as a tax-free return of capital up to the amount of a
shareholder's tax basis in the shares. The amount treated as a tax-free return
of capital will reduce a shareholder's tax basis in the shares, thereby
increasing such shareholder's potential gain or reducing the potential loss on
the sale of the shares. Any amounts distributed to a shareholder in excess of
the basis in the shares will generally be taxable to the shareholder as
capital gain. See "Taxation" below.
In the event the Fund distributes amounts in excess of its investment
company taxable income and net capital gain, such distributions will decrease
the Fund's total assets and, therefore, have the likely effect of increasing
the Fund's expense ratio. In addition, in order to make such distributions,
the Fund might have to sell a portion of its investment portfolio at a time
when independent investment judgment might not dictate such action.
The Fund, along with other closed-end registered investment companies
advised by the Investment Adviser, has obtained an exemption from Section
19(b) of the 1940 Act and Rule 19b-1 thereunder permitting the Fund to make
periodic distributions of long-term capital gains provided that any
distribution policy of the Fund with respect to its Common Shares 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
Fund's average net asset value over a specified period of time or market price
per Common Share at or about the time of distribution or pay-out of a fixed
dollar amount. The Fund's current policy is to make monthly distributions to
holders of its Common Shares. The exemption also permits the Fund to make
distributions with respect to its preferred shares in accordance with such
shares' terms.
TAXATION
TAXATION OF THE FUND
The Fund has qualified and elected to be taxed as a regulated
investment company under Subchapter M of the Code. Accordingly, the Fund must,
among other things, (a) derive in each taxable year at least 90% of its gross
income (including tax-exempt interest) from dividends, interest, payments with
respect to certain securities loans, and gains from the sale or other
disposition of stock, securities or foreign currencies, or other income
(including but not limited to gain from options, futures and forward
contracts) derived with respect to its business of investing in such stock,
securities or currencies; and (b) diversify its holdings so that, at the end
of each fiscal quarter (i) at least 50% of the market value of the Fund's
total assets is represented by cash and cash items, U.S. government
securities, the securities of other regulated investment companies and other
securities, with such other securities limited, in respect of any one issuer,
to an amount not greater than 5% of the value of the Fund's total assets and
not more than 10% of the outstanding voting securities of such issuer, and
(ii) not more than 25% of the market value of the Fund's total assets is
invested in the securities of any issuer (other than U.S. government
securities and the securities of other regulated investment companies) or of
any two or more issuers that the Fund controls and that are determined to be
engaged in the same business or similar or related trades or businesses.
30
As a regulated investment company, the Fund generally is not subject
to U.S. federal income tax on income and gains that it distributes each
taxable year to shareholders, if it distributes at least 90% of the sum of the
Fund's (i) investment company taxable income (which includes, among other
items, dividends, interest and the excess of any net short-term capital gains
over net long-term capital losses and other taxable income other than any net
capital gain (as defined below) reduced by deductible expenses) determined
without regard to the deduction for dividends paid and (ii) its net tax-exempt
interest (the excess of its gross tax exempt interest over certain disallowed
deductions). The Fund intends to distribute at least annually substantially
all of such income.
Amounts not distributed on a timely basis in accordance with a
calendar year distribution requirement are subject to a nondeductible 4%
excise tax at the Fund level. To avoid the tax, the Fund must distribute
during each calendar year an amount equal to the sum of (1) at least 98% of
its ordinary income (not taking into account any capital gains or losses) for
the calendar year, (2) at least 98% of its capital gains in excess of its
capital losses (adjusted for certain ordinary losses) for a one-year period
generally ending on October 31 of the calendar year (unless, an election is
made by a fund with a November or December year-end to use the fund's fiscal
year), and (3) certain undistributed amounts from previous years on which the
fund paid no U.S. federal income tax. While the Fund intends to distribute any
income and capital gains in the manner necessary to minimize imposition of the
4% excise tax, there can be no assurance that sufficient amounts of the Fund's
taxable income and capital gains will be distributed to avoid entirely the
imposition of the tax. In that event, the Fund will be liable for the tax only
on the amount by which it does not meet the foregoing distribution
requirement.
If for any taxable year the Fund does not qualify as a regulated
investment company, all of its taxable income (including its net capital
gains) will be subject to tax at regular corporate rates without any deduction
for distributions to shareholders, and such distributions will be taxable to
the shareholders as ordinary dividends to the extent of the Fund's current and
accumulated earnings and profits.
TAXATION OF THE SHAREHOLDERS
Distributions paid to you by the Fund from its ordinary income or
from an excess of net short-term capital gains over net long-term capital
losses (together referred to hereinafter as "ordinary income dividends") are
taxable to you as ordinary income to the extent of the Fund's earning and
profits. Such dividends (if designated by the Fund) may qualify (provided
holding periods and other requirements are met) (i) for the dividends received
deduction in the case of corporate stockholders to the extent the Fund's
income consist 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) ("2003 Tax
Act"), as qualified dividend income eligible for a reduced rate to individuals
(maximum 15% decreasing to 5% for individuals in lower tax brackets) to the
extent that the Fund receives qualified dividend income. The recently enacted
Working Families Tax Relief Act of 2004 (the "2004 Tax Act") clarifies that a
shareholder of the Fund may include as part of qualifying dividend income any
dividends designated by the Fund as qualifying dividend income. In order for
the Fund to designate 100% of the amount as qualified dividend income, the
Fund's qualified dividend income must be at least 95 percent of its gross
income, and the aggregate amount designated as qualified dividends may not
exceed the aggregate dividends received during the year by the Fund. 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 you 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 Fund, are
taxable to you as long-term capital gains, regardless of the length of time
you have owned Fund shares. Under the 2003 Tax Act, the maximum tax rate on
net long-term capital gain of individuals is reduced generally from 20% to 15%
(5% for individuals in certain lower brackets) for such gain realized after
May 6, 2003 and before January 1, 2009. Distributions in excess of the Fund's
earnings and profits will first reduce the adjusted tax basis of your shares
and, after such adjusted tax basis is reduced to zero, will constitute capital
gains to you (assuming the shares are held as a capital asset). Generally, not
later than 60 days after the close of its taxable year, the Fund will provide
you with a written notice designating the amount of any qualified dividend
income dividends or capital gain dividends and other distributions.
The sale or other disposition of Common Shares of the Fund will
generally result in capital gain or loss to you, and will be long-term capital
gain or loss if the shares have been held for more than one year at the time
31
of sale. Any loss upon the sale or exchange of Fund shares held for six months
or less will be treated as long-term capital loss to the extent of any capital
gain dividends received (including amounts credited as an undistributed
capital gain dividend) by you. A loss realized on a sale or exchange of shares
of the Fund will be disallowed if other Fund shares are acquired (whether
through the automatic reinvestment of dividends or otherwise) within a 61-day
period beginning 30 days before and ending 30 days after the date that the
shares are disposed of. In such case, the basis of the shares acquired will be
adjusted to reflect the disallowed loss. Present law taxes both long-term and
short-term capital gains of corporations at the rates applicable to ordinary
income. For non-corporate taxpayers, however, short-term capital gains will
currently be taxed at the rate applicable to ordinary income (maximum 35%)
while long-term capital gains generally will be taxed at the rate applicable
to long-term capital gain (maximum 15% decreasing to 5% for taxpayers in the
lower brackets).
Dividends and other taxable distributions are taxable to you even
though they are reinvested in additional shares of the Fund. If the Fund pays
you a dividend in January which was declared in the previous October, November
or December to shareholders of record on a specified date in one of such
months, then such dividend will be treated for tax purposes as being paid by
the Fund and received by you on December 31 of the year in which the dividend
was declared.
Proposed legislation (the "American Jobs Creation Act of 2004" or the
"The Act"), which has been passed by the United States House of
Representatives and the United States Senate and is expected to be enacted
into law, would generally provide that certain dividends designated by the
Fund as "interest-related dividends" or "short-term capital gain dividends"
that are received by a foreign person that is a shareholder in the Fund would
be exempt from U.S. gross-basis tax. Interest-related dividends are those
dividends derived from certain interest income (including bank deposit
interest and short term original issue discount that is currently exempt from
the gross-basis tax) earned by the Fund that would not be subject to U.S. tax
if earned by a foreign person directly. Several exceptions to this general
exemption rule would apply. Moreover, the Act provides that the aggregate
amount designated as interest-related dividends for the Fund's taxable year
generally would be limited to the "qualified net interest income" of the Fund
for the taxable year. The qualified net interest income of the Fund equals the
excess of: (1) the amount of qualified interest income of the Fund; over (2)
the amount of expenses of the Fund properly allocable to such interest income.
In general, short-term capital gain dividends are those that are derived from
the Fund's net short-term capital gains over net long-term capital losses. The
Act provides that these provisions will apply to dividends with respect to
taxable years beginning after December 31, 2004 and before January 1, 2008.
The Fund is required in certain circumstances to backup withholding
on taxable dividends and certain other payments paid to non-corporate holders
of the Fund's shares who do not furnish the Fund with their correct taxpayer
identification number (in the case of individuals, their social security
number) and certain certifications, or who are otherwise subject to backup
withholding. Backup withholding is not an additional tax. Any amounts withheld
from payments made to you may be refunded or credited against your U.S.
federal income tax liability, if any, provided that the required information
is furnished to the Internal Revenue Service.
THE FOREGOING IS A GENERAL AND ABBREVIATED SUMMARY OF THE PROVISIONS
OF THE CODE AND THE TREASURY REGULATIONS IN EFFECT AS THEY DIRECTLY GOVERN THE
TAXATION OF THE FUND AND ITS SHAREHOLDERS. THESE PROVISIONS ARE SUBJECT TO
CHANGE BY LEGISLATIVE OR ADMINISTRATIVE ACTION, AND ANY SUCH CHANGE MAY BE
RETROACTIVE. A MORE COMPLETE DISCUSSION OF THE TAX RULES APPLICABLE TO THE
FUND CAN BE FOUND IN THE STATEMENT OF ADDITIONAL INFORMATION WHICH IS
INCORPORATED BY REFERENCE INTO THIS PROSPECTUS. SHAREHOLDERS ARE URGED TO
CONSULT THEIR TAX ADVISERS REGARDING SPECIFIC QUESTIONS AS TO U.S. FEDERAL,
FOREIGN, STATE, LOCAL INCOME OR OTHER TAXES.
CAPITALIZATION
COMMON SHARES
The Fund is authorized to issue an unlimited number of shares of
beneficial interest, par value $.001 per share, in multiple classes and series
thereof as determined from time to time by the Board of Trustees. The Board of
Trustees of the Fund has authorized issuance of an unlimited number of shares
of two classes, the Common Shares and preferred shares. Each share within a
particular class or series thereof has equal voting, dividend, distribution
32
and liquidation rights. When issued, in accordance with the terms thereof, the
Common Shares will be fully paid and non-assessable. Common Shares are not
redeemable and have no preemptive, conversion or cumulative voting rights.
PREFERRED SHARES
The Fund has outstanding 1,184,200 Series A Preferred Shares and
1,000 Series B Preferred Shares. The Board of Trustees reserves the right to
issue additional preferred shares, including Series A Preferred Shares or
Series B Preferred Shares, from time to time, subject to the restrictions in
the Fund's governing documents and the 1940 Act.
The Series A Preferred Shares have a liquidation preference of $25
per share and the Series B Preferred Shares have a liquidation preference of
$25,000 per share. Upon a liquidation, each holder of Series A Preferred
Shares or Series B Preferred Shares will be entitled to receive out of the
assets of the Fund available for distribution to shareholders (after payment
of claims of the Fund's creditors but before any distributions with respect to
the Fund's common shares or any other shares of the Fund ranking junior to the
Series A Preferred Shares and Series B Preferred Shares as to liquidation
payments) an amount per share equal to such share's liquidation preference
plus any accumulated but unpaid dividends (whether or not earned or declared)
to the date of distribution. The Series A Preferred Shares and the Series B
Preferred Shares will rank on a parity with any other series of preferred
shares of the Fund as to the payment of dividends and the distribution of
assets upon liquidation. Series A Preferred Shares and Series B Preferred
Shares each carry one vote per share on all matters on which such shares are
entitled to vote. The Series A Preferred Shares and the Series B Preferred
Shares are fully paid and nonassessable and have no preemptive, exchange or
conversion rights. The Board of Trustees may by resolution classify or
reclassify any authorized but unissued capital shares of the Fund from time to
time by setting or changing the preferences, conversion or other rights,
voting powers, restrictions, limitations as to dividends or terms or
conditions of redemption. The Fund will not issue any class of shares senior
to the Series A Preferred Shares and/or Series B Preferred Shares.
The following table shows the number of shares of (i) capital shares
authorized, (ii) capital shares unissued and (iii) capital shares outstanding
for each class of authorized securities of the Fund as of September 30, 2004.
Amount Held by
Fund or for its Amount
Title of Class Amount Authorized Own Account Outstanding
Common Shares............................ unlimited none 23,118,185
Preferred Shares......................... unlimited none
Series A Preferred Shares......... 1,184,200
Series B Preferred Shares......... 1,000
The Common Shares are listed and traded on the NYSE under the symbol
"GUT." The average weekly trading volume of the Common Shares on the NYSE for
the 12 months ended December 31, 2003 was 283,478 shares. The following table
sets forth for the quarters indicated the high and low closing prices on the
NYSE per share of the Common Shares and the net asset value on such day and
the premium to or discount from net asset value at which the Common Shares
were trading, expressed as a percentage of net asset value, at each of the
high and low closing prices provided.
33
PREMIUM OR (DISCOUNT)
MARKET PRICE (1) NET ASSET VALUE (2) AS % OF NAV
----------------------- ---------------------- ------------------------
QUARTER ENDED HIGH LOW HIGH LOW HIGH LOW
--------------------- -------- ------- -------- ------- --------- --------
3/31/02 10.15 9.20 7.38 7.24 37.53% 27.07%
6/30/02 10.14 8.15 7.40 6.97 37.03 16.93
9/30/02 9.22 7.90 6.52 6.07 41.41 30.15
12/31/02 9.00 7.27 6.25 5.56 44.00 30.76
3/31/03 9.30 8.52 6.36 5.71 46.23 49.21
6/30/03 9.95 8.73 6.67 5.90 49.18 47.97
9/30/03 10.04 7.80 6.48 6.52 54.94 19.63
12/31/03 9.60 7.94 6.83 6.70 40.55 18.51
3/31/04 9.85 9.31 6.84 6.87 44.01 35.52
6/30/04 9.75 8.33 6.93 6.36 40.69 30.98
------------------------
(1) As reported on the NYSE
(2) Based on the Fund's computations and is the net asset value per share
for the business day of the respective highs and lows of the market
prices.
EFFECTS OF LEVERAGE
The only obligation that the Fund has to the holders of the preferred shares
is to pay the applicable dividend rate. Any return earned in excess of the
stated dividend rate would directly benefit common shareholders; however, any
shortfall from the stated rate would negatively affect the Fund's common
shareholders. The following table is designed to assist you in understanding
the effects of the existing leverage on your shares of the Fund's common
shares. The table assumes that 1,184,200 shares of Series A Preferred Shares
are issued and outstanding and 1,000 shares of Series B Preferred Shares are
issued and outstanding and that the blended dividend rate for the Fund's
preferred shares is 3.92%. Assuming that dividends are paid on the leverage at
a blended annual average rate of 3.92%, the income generated by the Fund's
entire portfolio (net of estimated expenses) would have to exceed 1.02% in
order to cover the dividend payments related to the leverage.
The assumed returns appearing in the table are hypothetical and
actual returns may be greater or less than those appearing in the table.
Assumed return on portfolio (net of expenses)......... -10.00% -5.00% 0.00% 5.00% 10.00%
Corresponding return to common shareholder............ -14.87% -8.12% -1.37% 5.38% 12.13%
The following factors associated with leveraging could increase the
investment risk and volatility of the price of the Common Shares:
o leveraging exaggerates any increase or decrease in the net asset
value of the Common Shares;
o the dividend requirements on the Fund's preferred shares may
exceed the income from the portfolio securities purchased with
the proceeds from the issuance of preferred shares;
o a decline in net asset value results if the investment
performance of the additional securities purchased fails to cover
their cost to the Fund (including any dividend requirements of
preferred shares);
o a decline in net asset value could affect the ability of the Fund
to make Common Share dividend payments;
o a failure to pay dividends or make distributions on its Common
Shares could result in the Fund's ceasing to qualify as a
regulated investment company under the Code; and
34
o if the asset coverage for the Fund's preferred shares declines to
less than two hundred percent (as a result of market fluctuations
or otherwise), the Fund may be required to sell a portion of its
investments when it may be disadvantageous to do so.
Pursuant to Section 18 of the 1940 Act, it is unlawful for the Fund,
as a registered closed-end investment company, to issue any class of senior
security, or to sell any senior security that it issues, unless it can satisfy
certain "asset coverage." The asset coverage with respect to a senior security
representing indebtedness means the ratio of the value of the Fund's total
assets (less all liabilities and indebtedness not represented by senior
securities) to the aggregate amount of the Fund's senior securities
representing indebtedness. The asset coverage with respect to a senior
security representing stock means the ratio of the value of the Fund's total
assets (less all liabilities and indebtedness not represented by senior
securities) to the aggregate amount of the Fund's senior securities
representing indebtedness plus the aggregate liquidation preference of the
Fund's outstanding preferred shares.
If, as is the case with the Fund, a registered investment company's
senior securities are equity securities, such securities must have an asset
coverage of at least 200% immediately following its issuance. If a registered
investment company's senior securities represent indebtedness, such
indebtedness must have an asset coverage of at least 300% immediately after
their issuance. Subject to certain exceptions, during any period following
issuance that the Fund fails to satisfy these asset coverage ratios, it will,
among other things, be prohibited from declaring any dividend or declaring any
other distribution in respect of its common shares except a dividend payable
in Common Shares issued by the Fund. A registered investment company may, to
the extent permitted by the 1940 Act, segregate assets or "cover" transactions
in order to avoid the creation of a class of senior security.
Any rating received by the Fund on its preferred shares, or on any
other senior security that it may issue, is an assessment by the applicable
rating agency of the capacity of the Fund to satisfy its obligations on its
senior securities. However, the "AAA" rating on the Fund's Series A and Series
B Preferred Shares does not eliminate or mitigate the risks associated with
investing in the Fund's common shares. In addition, should a rating on the
Fund's preferred shares be lowered or withdrawn by the relevant rating agency,
there may be an adverse effect on the market value of the Fund's preferred
shares and the Fund may also be required to redeem all or part of its
outstanding preferred shares. If the Fund were required to redeem its
preferred shares (in whole or part) as a result of the change in or withdrawal
of the rating, the common shares of the Fund would lose the benefits
associated with a leveraged capital structure.
VOTING RIGHTS
Except as otherwise stated in this Prospectus and as otherwise
required by applicable law, holders of shares of the Series A Preferred Shares
and Series B Preferred Shares and any other outstanding preferred shares of
the Fund will be entitled to one vote per share on each matter submitted to a
vote of shareholders and will vote together with holders of shares of the
Common Shares as a single class.
In connection with the election of the Fund's trustees, holders of
the Fund's Series A Preferred Shares, Series B Preferred Shares and any other
outstanding preferred shares, voting as a single class, will be entitled at
all times to elect two of the Fund's trustees, and the remaining trustees will
be elected by holders of Common Shares and holders of shares of preferred
shares voting together as a single class. In addition, if (i) at any time
dividends on the outstanding Series A Preferred Shares, Series B Preferred
Shares and/or any other preferred shares are unpaid in an amount equal to at
least two full years' dividends thereon and sufficient cash or specified
securities have not been deposited with the applicable paying agent for the
payment of such accumulated dividends or (ii) at any time holders of any other
series of preferred shares are entitled to elect a majority of the trustees of
the Fund under the 1940 Act or the Statements of Preferences creating such
shares, then the number or composition of trustees constituting the Board of
Trustees will be adjusted such that, when added to the two trustees elected
exclusively by the holders of the Series A Preferred Shares, Series B
Preferred Shares and other series of preferred shares as described above,
would then constitute a simple majority of the Board of Trustees as so
adjusted. Such additional trustees will be elected by the holders of the
Series A Preferred Shares, Series B Preferred Shares and the other series of
preferred shares, voting together as a single class, at a special meeting of
shareholders which will be called as soon as practicable and will be held not
less than 10 or more than 20 days after the mailing date of the meeting
notice. Such additional trustees will be elected at a special meeting of
preferred shareholders that will be called and held as soon as practicable.
35
If the Fund thereafter pays, or declares and sets apart for payment
in full, all dividends payable on all outstanding shares of preferred shares
for all past dividend periods, the additional voting rights of the preferred
shareholders as described above will cease, and the terms of office of all of
the additional trustees elected by the preferred shareholders (but not of the
trustees with respect to whose election the holders of Common Shares were
entitled to vote or the two trustees the preferred shareholders have the right
to elect as a separate class in any event) will terminate automatically.
So long as shares of the Fund's preferred shares are outstanding, the
Fund will not, without the affirmative vote of the holders of a majority of
the shares of preferred shares outstanding at the time, voting separately as
one class, amend, alter or repeal the provisions of its Declaration of Trust,
as amended and supplemented (including the Statement of Preferences thereto)
(the "Charter"), whether by merger, consolidation or otherwise, so as to
materially adversely affect any of the contract rights of the preferred
stockholders expressly set forth in the Charter. To the extent permitted under
the 1940 Act, in the event shares of more than one series of preferred shares
are outstanding, the Fund will not approve any of the actions set forth in the
preceding sentence which materially adversely affects the contract rights
expressly set forth in the Charter of a holder of shares of a series of
preferred shares differently than those of a holder of shares of any other
series of preferred shares without the affirmative vote of at least a majority
of votes entitled to be cast by holders of the preferred shares of each series
materially adversely affected and outstanding at such time (each such
materially adversely affected series voting separately as a class). 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 Fund's preferred shares, 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,
open-ending the Fund and changing the Fund's investment objective or changing
the investment restrictions described as fundamental policies under
"Investment Restrictions" in the SAI.
The class vote of holders of the preferred shares described above in
each case will be in addition to a separate vote of the requisite percentage
of shares of Common Shares and preferred shares, voting together as a single
class, necessary to authorize the action in question. The foregoing voting
provisions, however, will not apply to any preferred shares that have been (i)
redeemed or (ii) called for redemption, and for which sufficient deposit
assets have been deposited to the dividend-disbursing agent to effect such
redemption at or prior to the time when the act with respect to which such
vote otherwise would be required will occur.
ANTI-TAKEOVER PROVISIONS OF THE DECLARATION OF TRUST AND BY-LAWS
The Fund presently has provisions in its Declaration of Trust and
By-Laws (together, its "Governing Documents") which could have the effect of
limiting, in each case, (i) the ability of other entities or persons to
acquire control of the Fund, (ii) the Fund's freedom to engage in certain
transactions, or (iii) the ability of the Fund's trustees or shareholders to
amend the Governing Documents or effectuate changes in the Fund's management.
These provisions of the Governing Documents of the Fund may be regarded as
"anti-takeover" provisions. The Board of Trustees of the Fund is divided into
three classes, each having a term of no more than three years (except, to
ensure that the term of a class of the Fund's trustees expires each year, one
class of the Fund's trustees will serve an initial one-year term and
three-year terms thereafter and another class of its trustees will serve an
initial two-year term and three-year terms thereafter). Each year the term of
one class of trustees will expire. Accordingly, only those trustees in one
class may be changed in any one year, and it would require a minimum of two
years to change a majority of the Board of Trustees. Such system of electing
trustees may have the effect of maintaining the continuity of management and,
thus, make it more difficult for the shareholders of the Fund to change the
majority of trustees. See "Trustees and Officers." A trustee of the Fund may
be removed with or without cause by 66 2/3% of the votes entitled to be cast
for the election of such trustees. Special voting requirements also apply to
mergers into or a sale of all or substantially all of the Fund's assets and
conversion of the Fund into an open-end fund (or other closed-end fund
commonly known as an "interval fund"). These special voting requirements are
75% of the outstanding voting shares (together with a separate vote by the
holders of any preferred shares outstanding). In addition, 80% of the holders
of the outstanding voting securities of the Fund voting as a class is
generally required in order to authorize any of the following transactions:
o merger or consolidation of the Fund with or into any other
corporation;
o issuance of any securities of the Fund to any person or entity
for cash;
36
o sale, lease or exchange of all or any substantial part of the
assets of the Fund to any entity or person (except assets having
an aggregate fair market value of less than $1,000,000);
o sale, lease or exchange to the Fund, in exchange for securities
of the Fund, of any assets of any entity or person (except assets
having an aggregate fair market value of less than $1,000,000);
or
o the purchase of the Fund's Common Shares by the Fund from any
other person or entity;
if such corporation, person or entity is directly, or indirectly through
affiliates, the beneficial owner of more than 5% of the outstanding shares of
the Fund. However, such vote would not be required when, under certain
conditions, the Board of Trustees approves the transaction. Reference is made
to the Governing Documents of the Fund, on file with the SEC, for the full
text of these provisions.
The provisions of the Governing Documents described above could have
the effect of depriving the owners of shares in the Fund 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 Fund 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 shareholder.
CUSTODIAN, TRANSFER AGENT, DIVIDEND DISBURSING AGENT AND REGISTRAR
Mellon Trust of New England, N.A. (the "Custodian"), located at 135
Santilli Highway, Everett, Massachusetts 02149, serves as the Custodian of the
Fund's assets pursuant to a custody agreement. Under the custody agreement,
the Custodian holds the Fund's assets in compliance with the 1940 Act. For its
services, the Custodian will receive a monthly fee based upon the average
weekly value of the total assets of the Fund, plus certain charges for
securities transactions.
Equiserve Trust Company, N.A. located at 250 Royall Street, Canton,
Massachusetts 02021, serves as the Fund's dividend disbursing agent, as agent
under the Fund's Plan and as transfer agent and registrar for shares of the
Fund.
LEGAL MATTERS
Certain legal matters will be passed on by Skadden, Arps, Slate,
Meagher & Flom LLP, New York, New York, special counsel to the Fund in
connection with the Offering.
EXPERTS
The financial statements of the Fund as of December 31, 2003 have
been incorporated by reference into the SAI in reliance on the report of
PricewaterhouseCoopers LLP, independent registered public accounting firm,
given on the authority of that firm as experts in accounting and auditing.
PricewaterhouseCoopers LLP is located at 300 Madison Avenue, New York, New
York 10017.
FURTHER INFORMATION
The Fund is subject to the informational requirements of the
Securities Exchange Act of 1934 and in accordance therewith files reports,
proxy statements and other information with the SEC. Such reports, proxy
statements and other information filed by the Fund can be inspected and copied
at public reference facilities maintained by the SEC at 450 Fifth Street,
N.W., Washington, D.C. 20549; and 500 West Madison Street, Chicago, Illinois
60661. The Fund's Common Shares are listed on the NYSE. Reports, proxy
statements and other information concerning the Fund can be inspected and
copied at the Library of the NYSE at 20 Broad Street, New York, New York
10005.
This Prospectus constitutes a part of a registration statement on
Form N-2 (together with the SAI and all the exhibits and the appendix
thereto, the "Registration Statement") filed by the Fund with the SEC under
the Securities Act and the 1940 Act. This Prospectus and the SAI do not
contain all of the information set forth in the Registration
37
Statement. Reference is hereby made to the Registration Statement and related
exhibits for further information with respect to the Fund and the Common Shares
offered hereby.Statements contained herein concerning the provisions of
documents are necessarily summaries of such documents, and each statement is
qualified in its entirety by reference to the copy of the applicable document
filed with the SEC.
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS.
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED BY THE FUND OR THE FUND'S ADVISER. THIS PROSPECTUS
DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY
ANY SECURITY OTHER THAN THE COMMON SHARES OFFERED BY THIS PROSPECTUS, NOR DOES
IT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY COMMON
SHARES BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION WOULD
BE UNLAWFUL.
38
TABLE OF CONTENTS
OF
STATEMENT OF ADDITIONAL INFORMATION
PAGE
INVESTMENT OBJECTIVES AND POLICIES...........................................S-1
INVESTMENT RESTRICTIONS......................................................S-8
MANAGEMENT OF THE FUND......................................................S-10
PORTFOLIO TRANSACTIONS......................................................S-15
AUTOMATIC DIVIDEND REINVESTMENT AND VOLUNTARY CASH PURCHASE PLAN............S-17
TAXATION....................................................................S-18
NET ASSET VALUE.............................................................S-22
GENERAL INFORMATION.........................................................S-22
COUNSEL AND INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM...................S-22
BENEFICIAL OWNERS...........................................................S-22
FINANCIAL STATEMENTS........................................................S-22
APPENDIX A...................................................................A-1
APPENDIX B...................................................................B-1
39
_________________________________
_________________________________
THE GABELLI UTILITY TRUST
23,118,185 RIGHTS FOR 5,779,547 COMMON SHARES
[LOGO]
PROSPECTUS
October 20, 2004
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STATEMENT OF ADDITIONAL INFORMATION
The Gabelli Utility Trust (the "Fund") is a non-diversified,
closed-end management investment company that seeks long-term growth of
capital and income by investing primarily in a portfolio of equity securities
selected by Gabelli Funds, LLC, the investment adviser to the Fund (the
"Adviser"). It is the policy of the Fund, under normal market conditions, to
invest at least 80% of its total assets in common stock and debt and equity
securities of foreign and domestic companies involved to a substantial extent
(e.g., at least 50% of the assets, gross income or net profits of a company is
committed to or derived from) in providing products, services or equipment for
(i) the generation or distribution of electricity, gas and water and (ii)
telecommunications services or infrastructure operations, such as airports,
toll roads and municipal services.
This Statement of Additional Information ("SAI") is not a prospectus,
but should be read in conjunction with the Prospectus for the Fund dated
October 20, 2004 (the "Prospectus"). This SAI does not include any information
that a prospective investor should consider before purchasing shares of the
Fund, and investors should obtain and read the Prospectus prior to purchasing
shares. A copy of the Prospectus may be obtained without charge, by calling
the Fund at 800-GABELLI (800-422-3554) or (914) 921-5070. This SAI
incorporates by reference the entire Prospectus.
The Prospectus and this SAI omit certain of the information contained
in the registration statement filed with the Securities and Exchange
Commission, Washington, D.C. The registration statement may be obtained from
the Securities and Exchange Commission (the "Commission") upon payment of the
fee prescribed, or inspected at the Commission's office or via its website
(www.sec.gov) at no charge.
This Statement of Additional Information is dated October 20, 2004.
TABLE OF CONTENTS
OF
STATEMENT OF ADDITIONAL INFORMATION
PAGE
INVESTMENT OBJECTIVES AND POLICIES..........................................S-1
INVESTMENT RESTRICTIONS.....................................................S-8
MANAGEMENT OF THE FUND.....................................................S-10
PORTFOLIO TRANSACTIONS.....................................................S-15
AUTOMATIC DIVIDEND REINVESTMENT AND VOLUNTARY CASH PURCHASE PLAN...........S-17
TAXATION...................................................................S-18
NET ASSET VALUE............................................................S-22
GENERAL INFORMATION........................................................S-22
COUNSEL AND INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM..................S-22
BENEFICIAL OWNERS..........................................................S-22
FINANCIAL STATEMENTS.......................................................S-22
APPENDIX A..................................................................A-1
APPENDIX B..................................................................B-1
INVESTMENT OBJECTIVES AND POLICIES
Investment Objectives
The Fund's primary investment objectives are long-term growth of
capital and income. Under normal market conditions, the Fund will invest at
least 80% of its total assets in common stock and other securities of foreign
and domestic companies involved to a substantial extent (e.g., at least 50%
of the assets, gross income or net
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profits of a company is committed to or derived from) in providing
products, services or equipment for (i) the generation or distribution of
electricity, gas and water and (ii) telecommunications services or
infrastructure operations, such as airports, toll roads and municipal
services. See "Investment Objectives and Policies" in the Prospectus.
Investment Practices
Securities Subject to Reorganization. The Fund may invest without
limit in securities of companies for which a tender or exchange offer has been
made or announced and in securities of companies for which a merger,
consolidation, liquidation or reorganization proposal has been announced if,
in the judgment of the Investment Adviser, there is a reasonable prospect of
high total return significantly greater than the brokerage and other
transaction expenses involved.
In general, securities which are the subject of such an offer or
proposal sell at a premium to their historic market price immediately prior to
the announcement of the offer or may also discount what the stated or
appraised value of the security would be if the contemplated transaction were
approved or consummated. Such investments may be advantageous when the
discount significantly overstates the risk of the contingencies involved;
significantly undervalues the securities, assets or cash to be received by
shareholders of the prospective portfolio company as a result of the
contemplated transaction; or fails adequately to recognize the possibility
that the offer or proposal may be replaced or superseded by an offer or
proposal of greater value. The evaluation of such contingencies requires
unusually broad knowledge and experience on the part of the Adviser which must
appraise not only the value of the issuer and its component businesses as well
as the assets or securities to be received as a result of the contemplated
transaction but also the financial resources and business motivation of the
offer and/or the dynamics and business climate when the offer or proposal is
in process. Since such investments are ordinarily short-term in nature, they
will tend to increase the turnover ratio of the Fund, thereby increasing its
brokerage and other transaction expenses. The Adviser intends to select
investments of the type described which, in its view, have a reasonable
prospect of capital appreciation which is significant in relation to both risk
involved and the potential of available alternative investments.
Temporary Investments. Although under normal market conditions at
least 80% of the Fund's total assets will consist of common stock and other
securities of foreign and domestic companies involved in the utility industry,
when a temporary defensive posture is believed by the Adviser to be warranted
("temporary defensive periods"), the Fund may without limitation hold cash or
invest its assets in money market instruments and repurchase agreements in
respect of those instruments. The money market instruments in which the Fund
may invest are obligations of the United States government, its agencies or
instrumentalities ("U.S. Government Securities"); commercial paper rated A-1
or higher by Standard & Poor's Corporation ("S&P") or Prime-1 by Moody's
Investors Service, Inc. ("Moody's"); and certificates of deposit and bankers'
acceptances issued by domestic branches of U.S. banks that are members of the
Federal Deposit Insurance Corporation. During temporary defensive periods, the
Fund may also invest to the extent permitted by applicable law in shares of
unaffiliated money market mutual funds. Money market mutual funds are
investment companies and the investments in those companies in some cases by
the Fund are subject to certain fundamental investment restrictions and
applicable law. See "Investment Restrictions." As a shareholder in a mutual
fund, the Fund will bear its ratable share of its expenses, including
management fees, and will remain subject to payment of the fees to Gabelli
Funds, LLC (the "Adviser"), with respect to assets so invested. See
"Management of the Fund-Investment Advisory and Administration Arrangements."
Lower-Rated Securities. The Fund may invest up to 25% of its total
assets in fixed-income securities rated in the lower rating categories of
recognized statistical rating agencies, such as securities rated "CCC" or
lower by S&P or "Caa" or lower by Moody's, or non-rated securities of
comparable quality. These debt securities are predominantly speculative and
involve major risk exposure to adverse conditions. Debt securities that are
rated lower than "BBB" by S&P or "Baa" by Moody's are often referred to in the
financial press as "junk bonds."
Generally, such 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 rating 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
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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, the Adviser, 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 and 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.
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 Fund 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 Fund to purchase and may also have the
effect of limiting the ability of the Fund to sell securities at their fair
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 Fund 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 Fund 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. Interest rates have
recently been at the lowest levels in many years and, therefore, it is likely
that they will rise in the future.
The Fund may invest up to 10% of its total assets in securities of
issuers in default. The Fund will make an investment in securities of issuers
in default only when the Adviser believes that such issuers will honor their
obligations or emerge from bankruptcy protection and the value of these
securities will appreciate. By investing in securities of issuers in default,
the Fund 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.
In addition to using recognized rating agencies and other sources,
the Adviser also performs its own analysis of issues in seeking investments
that it believes to be underrated (and thus higher-yielding) in light of the
financial condition of the issuer. Its analysis of issuers may include, among
other things, current and anticipated cash flow and borrowing requirements,
value of assets in relation to historical cost, strength of management,
responsiveness to business conditions, credit standing and current anticipated
results of operations. In selecting investments for the Fund, the Adviser may
also consider general business conditions, anticipated changes in interest
rates and the outlook for specific industries.
Subsequent to its purchase by the Fund, an issue of securities may
cease to be rated or its rating may be reduced. In addition, it is possible
that statistical rating agencies might change their ratings of a particular
issue or reflect subsequent events on a timely basis. Moreover, such ratings
do not assess the risk of decline in market value. None of these events will
require the sale of the securities by the Fund, although the Adviser will
consider these events in determining whether the Fund should continue to hold
the securities.
The market for certain lower-rated and comparable unrated securities
several years ago experienced a major economic recession. Past recessions have
adversely affected the value of such securities as well as the ability of
certain issuers of such securities to repay principal and pay interest
thereon. The market for those securities could react in a similar fashion in
the event of any future economic recession.
Options. A call option is a contract that, in return for a premium,
gives the holder of the option the right to buy from the writer of the call
option the security or currency underlying the option at a specified exercise
price at any time during the term of the option. The writer of the call option
has the obligation, upon exercise of the option, to deliver the underlying
security or currency upon payment of the exercise price during the option
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period. A put option is the reverse of a call option, giving the holder the
right to sell the security to the writer and obligating the writer to
purchase the underlying security from the holder. Other than options on
futures contracts discussed below, the Fund may invest in options to the
extent permitted by the rules of the Commodity Futures Trading Commission and
applicable law.
A written call option is "covered" if the writer owns the underlying
security covered by the call or has an absolute and immediate right to acquire
that security without additional cash consideration (or for additional cash
consideration held in a segregated account by its custodian) upon conversion
or exchange of other securities held in its portfolio. A call option is also
covered if the Fund holds a call on the same security as the call written
where the exercise price of the call held is (1) equal to or less than the
exercise price of the call written or (2) greater than the exercise price of
the call written if the difference is maintained by the Fund in cash, U.S.
Government Securities or other high grade short-term obligations in a
segregated account held with its custodian. A written put option is "covered"
if the Fund maintains cash or other high grade short-term obligations with a
value equal to the exercise price in a segregated account held with its
custodian, or else holds a put on the same security as the put written where
the exercise price of the put held is equal to or greater than the exercise
price of the put written.
If the Fund has written an option, it may terminate its obligation by
effecting a closing purchase transaction. This is accomplished by purchasing
an option of the same series as the option previously written. However, once
the Fund has been assigned an exercise notice, the Fund will be unable to
effect a closing purchase transaction. Similarly, if the Fund is the holder of
an option it may liquidate its position by effecting a closing sale
transaction. This is accomplished by selling an option of the same series as
the option previously purchased. There can be no assurance that either a
closing purchase or sale transaction can be effected when the Fund so desires.
The Fund will realize a profit from a closing transaction if the
price of the transaction is less than the premium received from writing the
option or is more than the premium paid to purchase the option; the Fund will
realize a loss from a closing transaction if the price of the transaction is
more than the premium received from writing the option or is less than the
premium paid to purchase the option. Since call option prices generally
reflect increases in the price of the underlying security, any loss resulting
from the repurchase of a call option may also be wholly or partially offset by
unrealized appreciation of the underlying security. Other principal factors
affecting the market value of a put or a call option include supply and
demand, interest rates, the current market price and price volatility of the
underlying security and the time remaining until the expiration date. Gains
and losses on investments in options depend, in part, on the ability of the
Adviser to predict correctly the effect of these factors. The use of options
cannot serve as a complete hedge since the price movement of securities
underlying the options will not necessarily follow the price movements of the
portfolio securities subject to the hedge.
An option position may be closed out only on an exchange which
provides a secondary market for an option of the same series or in a private
transaction. Although the Fund will generally purchase or write only those
options for which there appears to be an active secondary market, there is no
assurance that a liquid secondary market on an exchange will exist for any
particular option. In such event, it might not be possible to effect closing
transactions in particular options, so that the Fund would have to exercise
its options in order to realize any profit and would incur brokerage
commissions upon the exercise of call options and upon the subsequent
disposition of underlying securities for the exercise of put options. If the
Fund, as a covered call option writer, is unable to effect a closing purchase
transaction in a secondary market, it will not be able to sell the underlying
security until the option expires or it delivers the underlying security upon
exercise or otherwise covers the position.
In addition to options on individual securities, the Fund may also
purchase and sell call and put options on securities indices. A stock index
reflects in a single number the market value of many different stocks.
Relative values are assigned to the stocks included in an index and the index
fluctuates with changes in the market values of the stocks. The options give
the holder the right to receive a cash settlement during the term of the
option based on the difference between the exercise price and the value of the
index. By writing a put or call option on a securities index, the Fund is
obligated, in return for the premium received, to make delivery of this
amount. The Fund may offset its position in stock index options prior to
expiration by entering into a closing transaction on an exchange or it may let
the option expire unexercised.
The Fund also may buy or sell put and call options on foreign
currencies. A put option on a foreign currency gives the purchaser of the option
the right to sell a foreign currency at the exercise price until the option
S-4
expires. A call option on a foreign currency gives the purchaser of the
option the right to purchase the currency at the exercise price until the
option expires. Currency options traded on U.S. or other exchanges may be
subject to position limits which may limit the ability of the Fund to reduce
foreign currency risk using such options. Over-the-counter options differ
from exchange-traded options in that they are two-party contracts with price
and other terms negotiated between buyer and seller and generally do not have
as much market liquidity as exchange-traded options. Over-the-counter options
are illiquid securities.
Use of options on securities indices entails the risk that trading in
the options may be interrupted if trading in certain securities included in
the index is interrupted. The Fund will not purchase these options unless the
Adviser is satisfied with the development, depth and liquidity of the market
and the Adviser believes the options can be closed out.
Price movements in the portfolio of the Fund are unlikely to
correlate precisely with movements in the level of an index and, therefore,
the use of options on indices cannot serve as a complete hedge and will
depend, in part, on the ability of the Adviser to predict correctly movements
in the direction of the stock market generally or of a particular industry.
Because options on securities indices require settlement in cash, the Adviser
may be forced to liquidate portfolio securities to meet settlement
obligations. The staff of the SEC considers over-the-counter options such as
options on indices illiquid securities.
Although the Adviser will attempt to take appropriate measures to
minimize the risks relating to the Fund's writing of put and call options,
there can be no assurance that the Fund will succeed in any option-writing
program it undertakes.
Futures Contracts and Options on Futures. The Fund will not enter
into futures contracts or options on futures contracts unless (i) the
aggregate initial margins and premiums do not exceed 5% of the fair market
value of its assets and (ii) the aggregate market value of its outstanding
futures contracts and the market value of the currencies and futures contracts
subject to outstanding options written by the Fund do not exceed 50% of the
market value of its total assets. It is anticipated that these investments, if
any, will be made by the Fund solely for the purpose of hedging against
changes in the value of its portfolio securities and in the value of
securities it intends to purchase. Such investments will only be made if they
are economically appropriate to the reduction of risks involved in the
management of the Fund. In this regard, the Fund may enter into futures
contracts or options on futures for the purchase or sale of securities indices
or other financial instruments including but not limited to U.S. Government
Securities.
A "sale" of a futures contract (or a "short" futures position) means
the assumption of a contractual obligation to deliver the securities
underlying the contract at a specified price at a specified future time. A
"purchaser" of a futures contract (or a "long" futures position) means the
assumption of a contractual obligation to acquire the securities underlying
the contract at a specified future time. Certain futures contracts, including
stock and bond index futures, are settled on a net cash payment basis rather
than by the sale and delivery of the securities underlying the futures
contracts.
No consideration will be paid or received by the Fund upon the
purchase or sale of a futures contract. Initially, the Fund will be required
to deposit with the broker an amount of cash or cash equivalents equal to
approximately 1% to 10% of the contract amount (this amount is subject to
change by the exchange or board of trade on which the contract is traded and
brokers or members of such board of trade may charge a higher amount). This
amount is known as "initial margin" and is in the nature of a performance bond
or good faith deposit on the contract. Subsequent payments, known as
"variation margin," to and from the broker will be made daily as the price of
the index or security underlying the futures contract fluctuates. At any time
prior to the expiration of the futures contract, the Fund may elect to close
the position by taking an opposite position, which will operate to terminate
its existing position in the contract.
An option on a futures contract gives the purchaser the right, in
return for the premium paid, to assume a position in a futures contract at a
specified exercise price at any time to the expiration of the option. Upon
exercise of an option, the delivery of the futures position by the writer of
the option to the holder of the option will be accompanied by delivery of the
accumulated balance in the writer's futures margin account attributable to
that contract, which represents the amount by which the market price of the
futures contract exceeds, in the case of a call,
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or is less than, in the case of a put, the exercise price of the option on
the futures contract. The potential loss related to the purchase of an option
on futures on contracts is limited to the premium paid for the option (plus
transaction costs). Because the value of the option purchased is fixed at the
point of sale, there are no daily cash payments by the purchaser to reflect
changes in the value of the underlying contract; however, the value of the
option does change daily and that change would be reflected in the net assets
of the Fund.
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 Fund 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 on price fluctuations, imperfect correlation between the
contracts and the securities being hedged, losses from investing in futures
transactions that are potentially unlimited and the segregation requirements
described below.
In the event the Fund sells a put option or enters into long futures
contracts, under current interpretations of the 1940 Act, an amount of cash,
obligations of the U.S. government and its agencies and instrumentalities or
other liquid securities equal to the market value of the contract must be
deposited and maintained in a segregated account with the custodian of the
Fund to collateralize the positions, in order for the Fund to avoid being
treated as having issued a senior security in the amount of its obligations.
For short positions in futures contracts and sales of call options, the Fund
may establish a segregated account (not with a futures commission merchant or
broker) with cash obligations of the U.S. government and its agencies and
instrumentalities or other high grade debt securities that, when added to
amounts deposited with a futures commission merchant or a broker as margin,
equal the market value of the instruments or currency underlying the futures
contracts or call options, respectively (but are no less than the stock price
of the call option or the market price at which the short positions were
established).
Forward Currency Transactions. The Fund may hold currencies to meet
settlement requirements for foreign securities and may engage in currency
exchange transactions to protect against uncertainty in the level of future
exchange rates between a particular foreign currency and the U.S. dollar or
between foreign currencies in which its securities are or may be denominated.
Forward currency contracts are agreements to exchange one currency for another
at a future date. The date (which may be any agreed-upon fixed number of days
in the future), the amount of currency to be exchanged and the price at which
the exchange takes place will be negotiated and fixed for the term of the
contract at the time that the Fund enters into the contract. Forward currency
contracts (1) are traded in a market conducted directly between currency
traders (typically, commercial banks or other financial institutions) and
their customers, (2) generally have no deposit requirements and (3) are
typically consummated without payment of any commissions. The Fund, however,
may enter into forward currency contracts requiring deposits or involving the
payment of commissions. To assure that its forward currency contracts are not
used to achieve investment leverage, the Fund will segregate liquid assets
consisting of cash, U.S. Government Securities or other liquid securities with
its custodian, or a designated sub-custodian, in an amount at all times equal
to or exceeding its commitment with respect to the contracts.
The dealings of the Fund in forward foreign exchange are limited to
hedging involving either specific transactions or portfolio positions.
Transaction hedging is the purchase or sale of one forward foreign currency
for another currency with respect to specific receivables or payables of the
Fund accruing in connection with the purchase and sale of its portfolio
securities or its payment of dividends and distributions. Position hedging is
the purchase or sale of one forward foreign currency for another currency with
respect to portfolio security positions denominated or quoted in the foreign
currency to offset the effect of an anticipated substantial appreciation or
depreciation, respectively, in the value of the currency relative to the U.S.
dollar. In this situation, the Fund also may, for example, enter into a
forward contract to sell or purchase a different foreign currency for a fixed
U.S. dollar amount where it is believed that the U.S. dollar value of the
currency to be sold or bought pursuant to the forward contract will fall or
rise, as the case may be, whenever there is a decline or increase,
respectively, in the U.S. dollar value of the currency in which its portfolio
securities are denominated (this practice being referred to as a
"cross-hedge").
In hedging a specific transaction, the Fund may enter into a forward
contract with respect to either the currency in which the transaction is
denominated or another currency deemed appropriate by the Adviser. The amount
the Fund may invest in forward currency contracts is limited to the amount of
its aggregate investments in foreign currencies.
S-6
The use of forward currency contracts may involve certain risks,
including the failure of the counterparty to perform its obligations under the
contract, and such use 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. The Fund will only enter
into forward currency contracts with parties which it believes to be
creditworthy institutions.
When Issued, Delayed Delivery Securities and Forward Commitments. The
Fund may enter into forward commitments for the purchase or sale of
securities, including on a "when issued" or "delayed delivery" basis, in
excess of customary settlement periods for the type of security involved. In
some cases, a forward commitment may be conditioned upon the occurrence of a
subsequent event, such as approval and consummation of a merger, corporate
reorganization or debt restructuring, i.e., a when, as and if issued security.
When such transactions are negotiated, the price is fixed at the time of the
commitment, with payment and delivery taking place in the future, generally a
month or more after the date of the commitment. While it will only enter into
a forward commitment with the intention of actually acquiring the security,
the Fund may sell the security before the settlement date if it is deemed
advisable.
Securities purchased under a forward commitment are subject to market
fluctuation, and no interest (or dividends) accrues to the Fund prior to the
settlement date. The Fund will segregate with its custodian cash or liquid
securities in an aggregate amount at least equal to the amount of its
outstanding forward commitments.
Short Sales. The Fund may make short sales of securities. A short
sale is a transaction in which the Fund sells a security it does not own in
anticipation that the market price of that security will decline. The market
value of the securities sold short of any one issuer will not exceed either 5%
of the Fund's total assets or 5% of such issuer's voting securities. The Fund
also will not make a short sale, if, after giving effect to such sale, the
market value of all securities sold short exceeds 25% of the value of its
total assets or the Fund's aggregate short sales of a particular class of
securities exceeds 25% of the outstanding securities of that class. The Fund
may also make short sales "against the box" without respect to such
limitations. In this type of short sale, at the time of the sale, the Fund
owns, or has the immediate and unconditional right to acquire at no additional
cost, the identical security.
The Fund expects to make short sales both to obtain capital gains
from anticipated declines in securities and as a form of hedging to offset
potential declines in long positions in the same or similar securities. The
short sale of a security is considered a speculative investment technique.
Short sales "against the box" may be subject to special tax rules, one of the
effects of which may be to accelerate income to the Fund.
When the Fund makes a short sale, it must borrow the security sold
short and deliver it to the broker-dealer through which it made the short sale
in order to satisfy its obligation to deliver the security upon conclusion of
the sale. The Fund may have to pay a fee to borrow particular securities and
is often obligated to pay over any payments received on such borrowed
securities.
The Fund's obligation to replace the borrowed security will be
secured by collateral deposited with the broker-dealer, usually cash, U.S.
Government Securities or other highly liquid debt securities. The Fund will
also be required to deposit similar collateral with its custodian, Mellon
Trust of New England, N.A. ("Mellon"), and, to the extent, if any, necessary
so that the value of both collateral deposits in the aggregate is at all times
equal to the greater of the price at which the security is sold short or 100%
of the current market value of the security sold short. Depending on
arrangements made with the broker-dealer from which it borrowed the security
regarding payment over of any payments received by the Fund on such security,
the Fund may not receive any payments (including interest) on its collateral
deposited with such broker-dealer. If the price of the security sold short
increases between the time of the short sale and the time the Fund replaces
the borrowed security, the Fund will incur a loss; conversely, if the price
declines, the Fund will realize a capital gain. Any gain will be decreased,
any loss increased, by the transaction costs described above. Although the
Fund's gain is limited to the price at which it sold the security short, its
potential loss is theoretically unlimited.
To secure its obligations to deliver the securities sold short, the
Fund will deposit in escrow in a separate account with the custodian, an amount
at least equal to the securities sold short or securities convertible into, or
exchangeable for, the securities. The Fund may close out a short position by
purchasing and delivering an equal amount of securities sold short, rather than
by delivering securities already held by the Fund, because the Fund may
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want to continue to receive interest and dividend payments on securities in
its portfolio that are convertible into the securities sold short.
Repurchase Agreements. The Fund may engage in repurchase agreement
transactions involving money market instruments with banks, registered
broker-dealers and government securities dealers approved by the Adviser. The
Fund will not enter into repurchase agreements with the Adviser or any of its
affiliates. Under the terms of a typical repurchase agreement, the Fund would
acquire an underlying debt obligation for a relatively short period (usually
not more than one week) subject to an obligation of the seller to repurchase,
and the Fund to resell, the obligation at an agreed price and time, thereby
determining the yield during its holding period. Thus, repurchase agreements
may be seen to be loans by the Fund collateralized by the underlying debt
obligation. This arrangement results in a fixed rate of return that is not
subject to market fluctuations during the holding period. The value of the
underlying securities will be at least equal to at all times to the total
amount of the repurchase obligation, including interest. The Fund bears a risk
of loss in the event that the other party to a repurchase agreement defaults
on its obligations and the Fund is delayed in or prevented from exercising its
rights to dispose of the collateral securities, including the risk of a
possible decline in the value of the underlying securities during the period
in which it seeks to assert these rights. The Adviser, acting under the
supervision of the Board of Trustees of the Fund, reviews the creditworthiness
of those banks and dealers with which the Fund enters into repurchase
agreements to evaluate these risks and monitors on an ongoing basis the value
of the securities subject to repurchase agreements to ensure that the value is
maintained at the required level.
INVESTMENT RESTRICTIONS
The Fund operates under the following restrictions that constitute
fundamental policies that, except as otherwise noted, cannot be changed
without the affirmative vote of the holders of a majority of the outstanding
voting securities of the Fund along with the affirmative vote of a majority of
the votes entitled to be cast by holders of outstanding preferred shares
(including the Series A Preferred Shares and/or Series B Preferred Shares),
voting together as a single class. For purposes of the preferred share voting
rights described in the foregoing sentence, except as otherwise required under
the 1940 Act, the majority of the outstanding preferred shares means, in
accordance with Section 2(a)(42) of the 1940 Act, the vote of (i) 67% or more
of the preferred shares present at the shareholders meeting called for such
vote, if the holders of more than 50% of the outstanding preferred shares are
present or represented by proxy or (ii) more than 50% of the outstanding
preferred shares, whichever is less. Except as otherwise noted, all percentage
limitations set forth below apply immediately after a purchase or initial
investment and any subsequent change in any applicable percentage resulting
from market fluctuations does not require any action. The Fund 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 other than the Utility Industry. This restriction
does not apply to investments in U.S. Government Securities.
(2) purchase or sell commodities or commodity contracts except that the
Fund 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 Fund do not exceed 50% of the market value of its
total assets. The Fund may not purchase or sell real estate, provided
that the Fund may invest in securities secured by real estate or
interests therein or issued by companies which invest in real estate
or interests therein.
(3) make loans of money, except by the purchase of a portion of private
or publicly distributed debt obligations or the entering into of
repurchase agreements. The Fund 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 will only be made upon approval of, and subject to any
conditions imposed by, the Board of Trustees of the Fund. Because
these loans are required to be fully collateralized at all times, the
risk of loss in the event of default of the borrower should be
slight.
(4) borrow money except to the extent permitted by applicable law. The
1940 Act currently requires that the Fund have 300% asset coverage
with respect to all borrowings other than temporary borrowings of up
to 5% of the value of its total assets.
S-8
(5) issue senior securities, except to the extent permitted by applicable
law.
(6) underwrite securities of other issuers except insofar as the Fund may
be deemed an underwriter under the Securities Act 1933, (the "1933
Act") in selling portfolio securities; provided, however, this
restriction shall not apply to securities of any investment company
organized by the Fund that are to be distributed pro rata as a
dividend to its shareholders.
S-9
MANAGEMENT OF THE FUND
Trustees and Officers
Overall responsibility for management and supervision of the Fund
rests with its Board of Trustees. The Board of Trustees approves all
significant agreements between the Fund and the companies that furnish the
Fund with services, including agreements with the Adviser, the Fund's
custodian and the Fund's transfer agent. The day-to-day operations of the Fund
are delegated to the Adviser.
The names and business addresses of the trustees and principal
officers of the Fund are set forth in the following table, together with their
positions and their principal occupations during the past five years and, in
the case of the trustees, their positions with certain other organizations and
companies. Trustees who are "interested persons" of the Fund, as defined by
the 1940 Act, are indicated by an asterisk.
Trustees
Number of Portfolios
Name (And Age), Term of Office and in Fund Complex
Position with the Fund Length of Time Principal Occupation Overseen by Other Directorships
and Business Address(1) Served (2) During Past Five Years Trustee(3) Held by Trustee
----------------------- ------------------- ---------------------- --------------------- ---------------------
INTERESTED
TRUSTEES:
+Mario J. Gabelli (62) Since 1999*** Chairman of the 24 Chairman and CEO of
Trustee and Chief Board, Chief Morgan Group
Investment Officer Executive Officer of Holdings, Inc.
Gabelli Asset (transportation
Management Inc. and services); and Vice
Chief Investment Chairman of Lynch
Officer of the Interactive
Investment Adviser Corporation
and GAMCO Investors, (multimedia).
Inc.
+John D. Gabelli (60) Since 1999** Senior Vice President 10 --
Trustee of Gabelli & Company,
Inc. and Director of
Gabelli Advisers, Inc.
+Karl Otto Pohl (74) Since 1999** Member of the 34 Director of Gabelli
Trustee Shareholder Committee Asset Management
of Sal Oppenheim Jr. Inc.; Chairman,
& Cie, Zurich Incentive Capital
(private investment and Incentive Asset
bank); Former Management (Zurich);
President of the Director of Sal
Deutsche Bundesbank Oppenheim Jr. & Cie,
and Chairman of its Zurich
Central Bank Council
from 1980 through
1991.
DISINTERESTED
TRUSTEES:
Dr. Thomas E. Bratter Since 1999*** Director, President 3 --
(65) and Founder, The John
Dewey Academy (residential
college preparatory
therapeutic high school).
Anthony J. Colavita Since 1999* President and 35 --
(68) Trustee Attorney-at-law in
the law firm of
Anthony J. Colavita,
P.C. since 1961.
James P. Conn (66) Since 1999** Former Managing 12 Director of LaQuinta
Trustee Director and Chief Corp. (hotels) and
Investment Officer of The First Republic
Financial Security Bank
Assurance Holdings
Ltd., 1992-1998.
S-10
Vincent D. Enright Since 1999*** Former Senior Vice 13 Director of Aphton
(60) Trustee President and Chief Corporation
Financial Officer of
KeySpan Energy
Corporation through
1998.
Frank J. Fahrenkopf, Since 1999* President and CEO of 4 Director of The
Jr. (65) Trustee the American Gaming First Republic Bank
Association since June 1995;
Partner in the law firm of
Hogan & Hartson; Chairman of
International Trade Practice
Group; Co-Chairman of the
Commission on Presidential
Debates; Former Chairman of
the Republican National
Committee.
Robert J. Morrissey Since 1999* Partner in the law 10 --
(65) Trustee firm of Morrissey,
Hawkins & Lynch.
Anthony R. Pustorino Since 1999** Certified Public 17 Director of Lynch
(79) Trustee Accountant; Professor Corporation
Emeritus, Pace (diversified
University. manufacturing)
Salvatore J. Zizza (58) Since 1999* Chairman of Hallmark 24 Director of Hollis Eden
Trustee Electrical Supplies Pharmaceuticals;
Corp. Director of Earl
Scheib Inc.
(automotive services)
Officers
Name (And Age), Position with the Fund Term of Office and Principal Occupation During
and Business Address(1) Length of Time Served Past Five Years
-------------------------------------- ------------------------ ---------------------------------------
Bruce N. Alpert (52) Since 2003 Executive Vice President and Chief
President Operating Officer of the Adviser
since June 1988; Director and
President of Gabelli Advisers, Inc.;
Officer of all other registered
investment companies in the Gabelli
fund complex
David I. Schachter (51) Since 1999 Vice President of the Fund since
Vice President 1999; Research Analyst of Gabelli &
Company Inc. from October 1998 to
July 1999; Prior to October, 1998,
Vice President of Thomas J. Herzfeld
Advisers, Inc., a registered
investment adviser and noted
closed-end fund authority.
James E. McKee (41) Since 1999 Vice President, General Counsel and
Secretary Secretary of Gabelli Asset
Management, Inc. (since 1999) and
GAMCO Investors, Inc. (since 1993);
Secretary of all other registered
investment companies in the Gabelli
fund complex.
------------------------------------------------------------------------------------------------------------------------------------
+ "Interested person" of the Fund, as defined in the 1940 Act. Mr. Mario
Gabelli is an "interested person" of the Fund as a result of his
employment as an officer of the Fund and the Adviser. Messrs. John and
Mario Gabelli are registered representatives of an affiliated
broker-dealer. Mr. Pohl is a director of the parent company of the
Adviser. Mr. Mario Gabelli and Mr. John Gabelli are brothers.
(1) Address: One Corporate Center, Rye, NY 10580-1422, unless otherwise
noted.
S-11
(2) The Fund's Board of Trustees 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 2005 Annual Meeting of Shareholders
and until their successors are duly elected and qualified.
**-- 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.
(3) As of October 20, 2004.
The Board of Trustees of the Fund is divided into three classes, with
each class having a term of three years. The terms of Messrs. Colavita,
Fahrenkopf, Morrissey and Zizza as trustees of the Fund expire in 2005; the
terms of Messrs. Conn, John Gabelli, Pohl and Pustorino as trustees of the
Fund expire in 2006; and the terms of Messrs. Bratter, Enright and Mario
Gabelli as trustees of the Fund expire in 2007.
Aggregate Dollar Range of Equity
Securities in all Registered
Investment Companies Overseen by
Dollar Range of Equity Trustees in Family of Investment
Name of Trustee Securities in the Fund Companies
------------------------------------- --------------------------- ---------------------------------
Interested Trustees
-------------------
Mario J. Gabelli Over $100,000 Over $100,000
John D. Gabelli None Over $100,000
Karl Otto Pohl None None
Disinterested Trustees
Dr. Thomas E. Bratter None Over $100,000
Anthony J. Colavita $10,001-$50,000 Over $100,000
James P. Conn $10,001 - $50,000 Over $100,000
Vincent D. Enright None Over $100,000
Frank J. Fahrenkopf, Jr. None $1 - $10,000
Robert J. Morrissey None $50,001 - $100,000
Anthony R. Pustonino $10,001 - $50,000 Over $100,000
Salvatore J. Zizza Over $100,000 Over $100,000
All shares were valued as of December 31, 2003.
The Trustees serving on the Fund's Nominating Committee are Messrs.
Zizza (Chairman), Enright and Colavita. The Nominating Committee is
responsible for recommending qualified candidates to the Board in the event
that a position is vacated or created. The Nominating Committee would consider
recommendations by shareholders if a vacancy were to exist. Such
recommendations should be forwarded to the Secretary of the Fund. The
Nominating Committee did not meet during the year ended December 31, 2003. The
Fund does not have a standing compensation committee.
Messrs. Pustorino (Chairman), Colavita and Enright serve on the
Fund's Audit Committee and these Trustees are not "interested persons" of the
Fund as defined in the 1940 Act. The Audit Committee generally is responsible
for reviewing and evaluating issues related to the accounting and financial
reporting policies and, as appropriate, internal controls of the Fund and the
internal controls of certain service providers, overseeing the quality and
objectivity of the Fund's financial statements and the audit thereof and to
act as a liaison between the Board of Trustees and the Fund's independent
accountants. During the year ended December 31, 2003, the Audit Committee met
twice.
As of September 30, 2004, the trustees and officers of the Fund as a
group beneficially owned approximately 2.16% of the outstanding shares of the
Fund's Common Shares.
S-12
Remuneration of Trustees and Officers
The Fund pays each trustee who is not affiliated with the Adviser or
its affiliates a fee of $3,000 per year plus $500 per meeting attended,
together with each trustee's actual out-of-pocket expenses relating to
attendance at such meetings.
The following table shows certain compensation information for the
trustees and officers of the Fund for the fiscal year ended December 31, 2003.
Mr. Schachter is employed by the Fund and his compensation is evaluated and
approved by the trustees. Other officers who are employed by the Adviser
receive no compensation or expense reimbursement from the Fund.
----------------------------------------------------------------------------------------------------------
COMPENSATION TABLE FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003
----------------------------------------------------------------------------------------------------------
TOTAL COMPENSATION
AGGREGATE FROM THE FUND AND
NAME OF PERSON COMPENSATION FROM FUND COMPLEX PAID TO
AND POSITION THE FUND TRUSTEES/OFFICERS*
-------------------------------------------- ------------------------------- -----------------------------
MARIO J. GABELLI Chairman of the Board $0 $0 (24)
-------------------------------------------- ------------------------------- -----------------------------
DR. THOMAS E. BRATTER Trustee $5,000 $31,000 (3)
-------------------------------------------- ------------------------------- -----------------------------
ANTHONY J. COLAVITA Trustee $6,500 $160,543 (35)
-------------------------------------------- ------------------------------- -----------------------------
JAMES P. CONN Trustee $7,500 $58,451 (12)
-------------------------------------------- ------------------------------- -----------------------------
VINCENT D. ENRIGHT Trustee $6,500 $61,592 (12)
-------------------------------------------- ------------------------------- -----------------------------
FRANK J. FAHRENKOPF, JR. Trustee $5,500 $34,951 (4)
-------------------------------------------- ------------------------------- -----------------------------
JOHN D. GABELLI Trustee $0 $0 (10)
-------------------------------------------- ------------------------------- -----------------------------
ROBERT J. MORRISSEY Trustee $5,000 $48,342 (10)
-------------------------------------------- ------------------------------- -----------------------------
KARL OTTO POHL Trustee $0 $0 (33)
-------------------------------------------- ------------------------------- -----------------------------
ANTHONY R. PUSTORINO Trustee $6,500 $136,000 (17)
-------------------------------------------- ------------------------------- -----------------------------
SALVATORE J. ZIZZA Trustee $7,500 $82,043 (23)
-------------------------------------------- ------------------------------- -----------------------------
* Represents the total compensation paid to such persons during the
calendar year ended December 31, 2003 by investment companies (including
the Fund) or portfolios thereof from which such person receives
compensation that are considered part of the same fund complex as the
Fund because they have common or affiliated investment advisers. The
number in parenthesis represents the number of such investment companies
and portfolios.
For his services as Vice President of the Fund, Mr. Schachter received
compensation in 2003 of $120,000.
Limitation of Officers' and Trustees' Liability
The Governing Documents of the Fund provide that the Fund will
indemnify its trustees 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 positions with the Fund, to the
fullest extent permitted by law. However, nothing in the Governing Documents
of the Fund protects or indemnifies a trustee, officer, employee or agent of
the Fund against any liability to which such person would otherwise be subject
in the event of such person's willful misfeasance, bad faith, gross negligence
or reckless disregard of the duties involved in the conduct of his or her
position.
Investment Advisory and Administrative Arrangements
Gabelli Funds, LLC acts as the Fund's investment adviser pursuant to an
advisory agreement with the Fund (the "Advisory Agreement"). The Adviser is a
New York limited liability company with principal offices located at One
Corporate Center, Rye, New York 10580-1422. The Adviser was organized in 1999
and is the successor to Gabelli Funds, Inc., which was organized in 1980. As of
June 30, 2004, the Adviser acted as registered investment adviser to 27
management investment companies with aggregate net assets of approximately $12.1
billion. The Adviser, together with other affiliated investment advisers set
forth below, had assets under management totaling approximately $28.2 billion,
as of June 30, 2004. GAMCO Investors, Inc., an affiliate of the Adviser, acts as
S-13
investment adviser for individuals, pension trusts, profit sharing trusts and
endowments and as a sub-adviser to management investment companies, having
aggregate assets of $13.6 billion under management as of June 30, 2004.
Gabelli Fixed Income LLC, an affiliate of the Adviser, acts as investment
adviser for The Treasurer's Fund and separate accounts having aggregate
assets of $1.0 billion under management as of June 30, 2004. Gabelli
Advisers, Inc., an affiliate of the Adviser, acts as investment manager to
the Gabelli Westwood Funds, having aggregate assets of approximately $438
million under management as of June 30, 2004.
The Adviser is a wholly-owned subsidiary of Gabelli Asset Management
Inc., a New York corporation, whose Class A Common Stock is traded on the New
York Stock Exchange under the symbol "GBL." Mr. Mario J. Gabelli may be deemed
a "controlling person" of the Adviser on the basis of his ownership of a
majority of the stock of Gabelli Group Capital Partners, Inc., which owns a
majority of the capital stock of Gabelli Asset Management Inc.
Under the terms of the Advisory Agreement, the Adviser manages the
portfolio of the Fund in accordance with its stated investment objectives and
policies, makes investment decisions for the Fund, places orders to purchase
and sell securities on behalf of the Fund and manages its other business and
affairs, all subject to the supervision and direction of the Fund's Board of
Trustees. In addition, under the Advisory Agreement, the Adviser oversees the
administration of all aspects of the Fund's business and affairs and provides,
or arranges for others to provide, at the Adviser's expense, certain
enumerated services, including maintaining the Fund's books and records,
preparing reports to the Fund's shareholders and supervising the calculation
of the net asset value of its shares. All expenses of computing the net asset
value of the Fund, including any equipment or services obtained solely for the
purpose of pricing shares or valuing its investment portfolio, will be an
expense of the Fund under its Advisory Agreement unless the Adviser
voluntarily assumes responsibility for such expense.
The Advisory Agreement was most recently approved by the Trustees,
including a majority of the Trustees who are not parties to the Advisory
Agreement or "interested persons" (as such term is defined in the 1940 Act) of
any party thereto on February 25, 2004. At that meeting, the Board of Trustees
reviewed the written and oral presentations provided by the Adviser in
connection with the Trustees' consideration of the Advisory Agreement. The
Trustees also reviewed their responsibilities under applicable law. The
Trustees considered, in particular, the level of the Fund's contractual
advisory fee rate and the actual total expense ratio borne by the Fund and
compared the information on these matters to similar information for unrelated
funds of a comparable size and investment program. The Board also reviewed the
profitability of the Advisory Agreement and other sources of revenue received
from the Fund to the Investment Adviser, the Fund's absolute and comparative
investment performance and the nature and quality of the services provided to
the Fund by the Investment Adviser and its affiliates. The independent
Trustees met separately to discuss this information. Based on their
consideration of all of the above factors, the independent Trustees
recommended to the full Board, and each of the Trustees present at the meeting
determined, that renewal of the Advisory Agreement was in the best interest of
the Fund and their respective shareholders. In the course of arriving at such
determination, the independent Trustees noted in particular the comparative
investment performance of the Fund, the experience of the Fund's portfolio
manager and the level of services provided by the Investment Adviser.
The Advisory Agreement combines investment advisory and
administrative responsibilities in one agreement. For services rendered by the
Adviser on behalf of the Fund under the Advisory Agreement, the Fund pays the
Adviser a fee computed daily and paid monthly at the annual rate of 1.00% of
the average weekly net assets of the Fund (which for this purpose includes the
liquidation preference of the Fund's outstanding preferred shares). The
Adviser has voluntarily agreed to waive the portion of its investment advisory
fee attributable to an amount of assets of the Fund equal to the aggregate
stated value of the applicable series of its preferred shares for any calendar
year in which the net asset value total return of the Fund allocable to the
Common Shares, including distributions and the advisory fee subject to
potential waiver, is less than the stated annual dividend rate of such series,
prorated during the year such series is issued and the final year such series
is outstanding. This waiver will apply separately to the portion of the Fund's
assets attributable to the Series A Preferred Shares and Series B Preferred
Shares, respectively, for so long as any shares of such series remain
outstanding.
For each of the years ended December 31, 2001, December 31, 2002, and
December 31, 2003, the Adviser was paid $855,435, $878,549, and $1,325,309,
respectively, for advisory and administrative services rendered to the Fund.
S-14
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 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 the
Adviser's property, and that in the event the Adviser 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 until the second anniversary of shareholder approval
of such Agreement, and from year to year thereafter if approved annually (i)
by the Fund's Board of Trustees or by the holders of a majority of its
outstanding voting securities and (ii) by a majority of the Trustees 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 Advisory Agreement terminates automatically on
its assignment and may be terminated without penalty on 60 days' written
notice at the option of either party thereto or by a vote of a majority (as
defined in the 1940 Act) of the Fund's outstanding shares.
Proxy Voting Procedures
The Fund has adopted the proxy voting procedures of the Adviser and
has directed the Adviser to vote all proxies relating to the Fund's voting
securities in accordance with such procedures. The proxy voting procedures are
set forth below as Appendix B to this SAI.
Information on how proxies relating to the Fund's voting securities
were voted by the Adviser during the most recent 12 month period ended June
30th is available, upon request, by calling (800) 422-3554 or on the website
of the Commission at http://www.sec.gov.
Code of Ethics
The Fund and the Adviser have adopted a code of ethics (the "Code of
Ethics") under Rule 17j-1 of the 1940 Act. The Code of Ethics permits
personnel, subject to the Code of Ethics and its restrictive provisions, to
invest in securities, including securities that may be purchased or held by
the Fund. The Code of Ethics can be reviewed and copied at the United States
Securities and Exchange Commission's Public Reference Room in Washington, D.C.
Information on the operations of the Reference Room may be obtained by calling
the Securities and Exchange Commission at (202) 942-8090. The Code of Ethics
is also available on the EDGAR database on the Securities and Exchange
Commission's web site at http://www.sec.gov. Copies of the Code of Ethics may
also be obtained, after paying a duplicating fee, by electronic request at the
following e-mail address: publicinfo@sec.gov, or by writing the Securities and
Exchange Commission's Public Reference Room Section, Washington, D.C. 20549-
0102.
PORTFOLIO TRANSACTIONS
Subject to policies established by the Board of Trustees of the Fund,
the Adviser is responsible for placing purchase and sale orders and the
allocation of brokerage on behalf of the Fund. 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 Fund. 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 Fund's Board of
Trustees have determined that portfolio transactions may be executed through
Gabelli & Company, Inc. and its broker-dealer affiliates if, in the judgment
of the Adviser, 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 Fund a rate consistent with that charged to comparable unaffiliated
customers in similar transactions. The Fund has no obligations to deal with
any broker or group of brokers in executing transactions in portfolio
securities. In executing transactions, the Adviser seeks to obtain the best
price and execution for the Fund, 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.
S-15
While the Adviser generally seeks reasonably competitive commission rates, the
Fund 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 the
Adviser or its affiliates may receive orders for transactions by the Fund. 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 the Adviser under the
Advisory Agreement and the expenses of the Adviser will not necessarily be
reduced as a result of the receipt of such supplemental information. Such
information may be useful to the Adviser and its affiliates in providing
services to clients other than the Fund, and not all such information is used
by the Adviser in connection with the Fund. Conversely, such information
provided to the Adviser and its affiliates by brokers and dealers through whom
other clients of the Adviser and its affiliates effect securities transactions
may be useful to the Adviser in providing services to the Fund.
Although investment decisions for the Fund are made independently
from those of the other accounts managed by the Adviser and its affiliates,
investments of the kind made by the Fund may also be made by those other
accounts. When the same securities are purchased for or sold by the Fund and
any of such other accounts, it is the policy of the Adviser and its affiliates
to allocate such purchases and sales in the manner deemed fair and equitable
to all of the accounts, including the Fund.
For the fiscal years ended December 31, 2001, December 31, 2002 and
December 31, 2003, the Fund paid a total of $81,313, $140,917 and $187,468
respectively, in brokerage commissions, of which Gabelli & Company, Inc. and
its affiliates received $70,203, $123,636 and $150,478 respectively. The
amount received by Gabelli & Company, Inc. and its affiliates from the Fund in
respect of brokerage commissions for the fiscal year ended December 31, 2003
represented approximately 80% of the aggregate dollar amount of brokerage
commissions paid by the Fund for such period and approximately 77% of the
aggregate dollar amount of transactions by the Fund for such period. The
brokerage commissions in 2003 reflect, in part, the Fund's investment of
proceeds from its preferred share offering, completed in July 2003, and its
rights offering, completed in September, 2003. The variance between the
percentage of brokerage commissions received by Gabelli & Company, Inc. and
the percentage of transactions executed by Gabelli & Company, Inc. reflects
the Fund's practice of generally directing bulk trades to unaffiliated
broker-dealers.
Repurchase of Shares
The Fund is a closed-end, non-diversified, management investment
company and as such its shareholders do not, and will not, have the right to
redeem their shares. The Fund, however, may repurchase its shares from time to
time as and when it deems such a repurchase advisable. Such repurchases will
be made when the Fund's shares are trading at a discount of 10% or more (or
such other percentage as the Board of Trustees of the Fund may determine from
time to time) from the net asset value of the shares. Pursuant to the 1940
Act, the Fund may repurchase its shares on a securities exchange (provided
that the Fund has informed its shareholders within the preceding six months of
its intention to repurchase such shares) 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 shareholders of an intention to
purchase shares and purchasing in a manner and on a basis which does not
discriminate unfairly against the other shareholders through their interest in
the Fund. When the Fund repurchases its shares for a price below their net
asset value, the net asset value of those shares that remain outstanding will
be enhanced, but this does not necessarily mean that the market price of those
outstanding shares will be affected, either positively or negatively.
Portfolio Turnover
The portfolio turnover rates of the Fund for the fiscal years ending
December 31, 2003 and 2002 were 28% and 29%, respectively. Portfolio turnover
rate is calculated by dividing the lesser of an investment company's annual
sales or purchases of long-term portfolio securities by the monthly average
value of securities in its portfolio
S-16
during the year, excluding portfolio securities the maturities of which at the
time of acquisition were one year or less. A high rate of portfolio turnover
involves correspondingly greater brokerage commission expense than a lower rate,
which expense must be borne by the Fund and, indirectly, by its shareholders. A
higher rate of portfolio turnover may also result in taxable gains being passed
to shareholders sooner than would otherwise be the case.
AUTOMATIC DIVIDEND REINVESTMENT AND VOLUNTARY CASH PURCHASE PLAN
Under the Automatic Dividend Reinvestment and Voluntary Cash Purchase
Plan adopted by the Fund ( the "Plan"), a shareholder whose Common Shares are
registered in his own name, including all Shares issued pursuant to the Rights
Offering and all shares held by a shareholder participating in the Rights
Offering, will have all distributions reinvested automatically by Equiserve
Trust Company, N.A. ("Equiserve"), which is agent under the Plan, unless the
shareholder 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 by the broker or nominee in additional
shares under the Plan, unless the service is not provided by the broker or
nominee or the shareholder elects to receive distributions in cash. Investors
who own Common Shares 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 Shares 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 such plan are issued Common Shares, 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 Shares. The valuation date
is the dividend or distribution payment date or, if that date is not a New
York Stock Exchange trading day, the next preceding trading day. If the net
asset value of the Common Shares at the time of valuation exceeds the market
price of the Common Shares, participants will receive shares from the Fund, or
acquired by the Plan agent in the open market, valued at market price. If the
Fund should declare a dividend or capital gains distribution payable only in
cash, Equiserve will buy the Fund's Common Shares for the Plan in the open
market, on the New York Stock Exchange or elsewhere, for the participants'
accounts, except that Equiserve will endeavor to terminate purchases in the
open market and cause the Fund to issue shares at the greater of (i) net asset
value or (ii) 95% of the market price of the Common Shares if, following the
commencement of such purchases, the market value of its Common Shares exceeds
net asset value.
Participants in the Plan have the option of making additional cash
payments to Equiserve, twice per month for the Fund, for investment in the
shares. 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
the Fund in the open market on the 1st and 15th of each month. It is suggested
that participants send voluntary payments to Equiserve in a manner that
ensures that Equiserve will receive these payments approximately 10 days
before the investment date. A participant may without charge withdraw a
voluntary 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
shareholder accounts in the Plan and furnishes written confirmations of all
transactions in the account, including information needed by shareholders for
personal and tax records. Common Shares in the account of each Plan
participant will be held by Equiserve in noncertificated form in the name of
the participant, and each shareholder's proxy will include those shares
purchased pursuant to the Plan. A Plan participant may send his share
certificates to Equiserve so that the shares represented by such certificates
will be held by Equiserve in the participant's shareholder account under the
Plan.
In the case of shareholders 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 shareholder as representing the total amount registered in the
shareholder's name and held for the account of beneficial owners who
participate in the Plan. There is no charge to participants for reinvesting
dividends or capital gains distributions payable in either stock or cash.
Equiserve's fees for handling the reinvestment of such dividends and
capital gains distributions are paid by the Fund. There are no brokerage
charges with respect to shares issued directly by the Fund as a result of
dividends or capital gains distributions payable in stock or in cash. However,
each participant bears a pro rata share of brokerage commissions incurred with
respect to Equiserve's open market purchases in connection with the
reinvestment of dividends or capital gains distributions.
S-17
With respect to purchases from voluntary payments, Equiserve will
charge $0.75 for each such purchase for a participant, plus a pro rata share
of the brokerage commissions. Brokerage charges for purchasing small amounts
of stock for individual accounts through the Plan are expected to be less than
the usual brokerage charges for such transactions, as Equiserve will be
purchasing shares for all participants in blocks and prorating the lower
commission thus attainable. The automatic reinvestment of dividends and
distributions will not relieve participants of any income tax which may be
payable on such dividends or distributions.
Experience under the Plan may indicate that changes are desirable.
Accordingly, the Fund reserves the right to amend or terminate its Plan as
applied to any voluntary 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 859208, Braintree, MA
02185-9208.
TAXATION
The following discussion is a brief summary of certain United States
federal income tax considerations affecting the Fund and its shareholders. No
attempt is made to present a detailed explanation of all federal, state, local
and foreign tax concerns affecting the Fund and its Shareholders (including
Shareholders who own large positions in the Fund), and the discussions set
forth here and in the Prospectus do not constitute tax advice. Investors are
urged to consult their own tax advisers with any specific questions relating
to federal, state, local and foreign taxes. The discussion reflects applicable
tax laws of the United States as of the date of this SAI, 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 Fund
The Fund has elected to be treated and has qualified as and intends
to continue to qualify as a regulated investment company (a "RIC") under
Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). If
it so qualifies, the Fund will not be subject to U.S. federal income tax on
the portion of its net investment income (i.e., its investment company taxable
income as defined in the Code without regard to the deduction for dividends
paid) and on its net capital gain (i.e., the excess of its net realized
long-term capital gain over its net realized short-term capital loss), if any,
which it distributes to its shareholders in each taxable year, provided that
an amount equal to at least 90% of the sum of its net investment income and
any net tax-exempt income for the taxable year is distributed to its
shareholders.
Qualification as a RIC requires, among other things, that the Fund:
(i) derive at least 90% of its gross income in each taxable year from
dividends, interest, payments with respect to securities loans, gains from the
sale or other disposition of stock, securities or foreign currencies or other
income (including gains from options, futures or forward contracts) derived
with respect to its business of investing in stock, securities or currencies
and (ii) diversify its holdings so that, at the end of each quarter of each
taxable year, subject to certain exceptions, (a) at least 50% of the market
value of the Fund's total assets is represented by cash, cash items, U.S.
government securities, securities of other RICs and other securities with such
other securities limited, in respect of any one issuer, to an amount not
greater than 5% of the value of the Fund's total assets or more than 10% of
the outstanding voting securities of such issuer, and (b) not more than 25% of
the value of its total assets is invested in the securities (other than U.S.
government securities or the securities of other RICs) of any one issuer or
any two or more issuers that the Fund controls and which are determined to be
engaged in the same or related trades or businesses. If the Fund were unable
to satisfy the 90% distribution requirement or otherwise were to fail to
qualify as a RIC in any year, it would be taxed in the same manner as an
ordinary corporation with no deduction for dividends paid. In addition,
distributions would be taxed to its shareholders as ordinary income.
The IRS has taken the position that if a regulated investment company
has two classes of shares, it may designate distributions made to each class
in any year as consisting of no more than such class's proportionate share of
particular types of income, such as long-term capital gain. A class's
proportionate share of a particular type of income is determined according to
the percentage of total dividends paid by the regulated investment company
S-18
during such year that was paid to such class. Consequently, the Fund will
designate distributions made to the common shareholders and preferred
shareholders as consisting of particular types of income in accordance with
the classes' proportionate shares of such income. Because of this rule, the
Fund is required to allocate a portion of its net capital gain, qualified
dividend income and dividends qualifying for the dividends received deduction
to common shareholders and preferred shareholders. The amount of net capital
gain and qualified dividend income and dividends qualifying for the dividends
received deduction allocable among common shareholders and the preferred
shareholders will depend upon the amount of such net capital gain and
qualified dividend income and dividends qualifying for the dividends received
deduction realized by the Fund and the total dividends paid by the Fund on the
Common Shares and the Preferred Shares during a taxable year.
Under the Code, amounts not distributed by a RIC on a timely basis in
accordance with a calendar year distribution requirement are subject to a 4%
excise tax. To avoid the tax, the Fund must distribute during each calendar
year, an amount at least equal to the sum of (i) 98% of its ordinary income
for the calendar year, (ii) 98% of its capital gain net income (both long-term
and short-term) for the one year period ending on October 31 of such year,
(unless an election is made to use the Fund's fiscal year), and (iii) all
ordinary income and capital gain net income for previous years that were not
previously distributed or subject to tax under Subchapter M. A distribution
will be treated as paid during the calendar year if it is paid during the
calendar year or declared by the Fund in October, November or December of the
year, payable to shareholders of record on a date during such a month and paid
by the Fund during January of the following year. Any such distributions paid
during January of the following year will be deemed to be received on December
31 of the year the distributions are declared, rather than when the
distributions are received. While the Fund intends to distribute its ordinary
income and capital gain net income in the manner necessary to minimize
imposition of the 4% excise tax, there can be no assurance that sufficient
amounts of the Fund's ordinary income and capital gain net income will be
distributed to avoid entirely the imposition of the tax. In such event, the
Fund will be liable for the tax only on the amount by which it does not meet
the foregoing distribution requirements.
Gain or loss on the sales of securities by the Fund will be long-term
capital gain or loss if the securities have been held by the Fund for more
than one year. Gain or loss on the sale of securities held for one year or
less will be short-term capital gain or loss.
Foreign currency gain or loss on non-U.S. dollar denominated bonds
and other similar debt instruments and on any non-U.S. dollar denominated
futures contracts, options and forward contracts that are not section 1256
contracts (as defined below) generally will be treated as net investment
income and loss.
Investments by the Fund in certain "passive foreign investment
companies" ("PFICs") could subject the Fund to federal income tax (including
interest charges) on certain distributions or dispositions with respect to
those investments which cannot be eliminated by making distributions to
stockholders. An election may be available to the Fund to mitigate the effect
of this provision but the election generally accelerates the recognition of
income without the receipt of cash. Dividends paid by PFICs will not qualify
for the reduced tax rates discussed below under "Taxation of Shareholders."
The Fund may invest in debt obligations purchased at a discount with
the result that the Fund may be required to accrue income for federal income
tax purposes before amounts due under the obligations are paid. The Fund may
also invest in securities rated in the medium to lower rating categories of
nationally recognized rating organizations, and in unrated securities ("high
yield securities"). A portion of the interest payments on such high yield
securities may be treated as dividends for federal income tax purposes.
As a result of investing in stock of PFICs or securities purchased at
a discount or any other investment that produces income that is not matched by
a corresponding cash distribution to the Fund, the Fund could be required to
include in current income, income it has not yet received. Any such income
would be treated as income earned by the Fund and therefore would be subject
to the distribution requirements of the Code. This might prevent the Fund from
distributing 90% of its net investment income as is required in order to avoid
Fund-level federal income taxation on all of its income, or might prevent the
Fund from distributing enough ordinary income and capital gain net income to
avoid completely the imposition of the excise tax. To avoid this result, the
Fund may be required to borrow money or dispose of other securities to be able
to make distributions to its shareholders.
S-19
If the Fund does not meet the asset coverage requirements of the 1940
Act and the Statements of Preferences, the Fund will be required to suspend
distributions to the holders of the Common Shares until the asset coverage is
restored. Such a suspension of distributions might prevent the Fund from
distributing 90% of its net investment income as is required in order to avoid
Fund-level federal income taxation on all of its income, or might prevent the
Fund from distributing enough income and capital gain net income to avoid
completely imposition of the excise tax. Upon any failure to meet the asset
coverage requirements of the 1940 Act or the Statements of Preferences, the
Fund may, and in certain circumstances will, be required to partially redeem
Preferred Shares in order to restore the requisite asset coverage and avoid
the adverse consequences to the Fund and its shareholders of failing to
qualify as a RIC. If asset coverage were restored, the Fund would again be
able to pay dividends and would generally be able to avoid Fund-level federal
income taxation on the income that it distributes.
Hedging Transactions
Certain of the Fund's investment practices are subject to special and
complex U.S. federal income tax provisions that may, among other things, (i)
disallow, suspend or otherwise limit the allowance of certain losses or
deductions, (ii) convert lower taxed long-term capital gains into higher taxed
short-term capital or ordinary income, (iii) convert ordinary loss or a
deduction into capital loss (the deductibility of which is more limited), (iv)
cause the Fund to recognize income or gain without a corresponding receipt of
cash, (v) adversely affect the time as to when a purchase or sale of stock or
securities is deemed to occur and (vi) adversely alter the characterization of
certain complex financial transactions. The Fund will monitor its transactions
and may make certain tax elections to mitigate the effect of these rules and
prevent disqualification of the Fund as a regulated investment company.
Foreign Taxes
Since the Fund may invest in foreign securities, its income from such
securities may be subject to non-U.S. taxes. The Fund historically has
invested less than 50% of its total assets in foreign securities. As long as
the Fund continues to invest less than 50% of its assets in foreign securities
it will not be eligible to elect to "pass-through" to shareholders of the Fund
the ability to use the foreign tax deduction or foreign tax credit for foreign
taxes paid with respect to qualifying taxes.
Taxation of Shareholders
The Fund will determine either to distribute or to retain for
reinvestment all or part of its net capital gain. If any such gains are
retained, the Fund will be subject to a tax of 35% of such amount. In that
event, the Fund expects to designate the retained amount as undistributed
capital gains in a notice to its shareholders, each of whom (i) will be
required to include in income for tax purposes as long-term capital gains its
share of such undistributed amounts, (ii) will be entitled to credit its
proportionate share of the tax paid by the Fund against its federal income tax
liability and to claim refunds to the extent that the credit exceeds such
liability and (iii) will increase its basis in its shares of the Fund by an
amount equal to 65% of the amount of undistributed capital gains included in
such shareholder's gross income.
Distributions of ordinary income are taxable to a U.S. shareholder
as ordinary income, whether paid in cash or shares. Such dividends (if
designated by the Fund) may qualify (provided holding periods and other
requirements are met) (i) for the dividends received deduction available to
corporations, but only to the extent that the Fund's income consists of
qualified dividends received 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) ("2003 Tax Act"), 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 Fund 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 of net capital gain designated as capital gain
dividends, if any, are taxable to shareholders at rates applicable to
long-term capital gains, whether paid in cash or in shares, regardless of how
long the shareholder has held the Fund's shares, and are not eligible for the
dividends received deduction. Under the 2003 Tax Act, the maximum 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 after May 6, 2003
S-20
and before January 1, 2009. Distributions in excess of the Fund's earnings
and profits will first reduce the adjusted tax basis of a holder's shares
and, after such adjusted tax basis is reduced to zero, will constitute
capital gain to such holder (assuming the shares are held as a capital
asset). For non-corporate taxpayers, under the 2003 Tax Act, net investment
income (other than qualified dividend income) will currently be taxed at a
maximum rate of 35%, while net capital gain generally will be taxed at a
maximum rate of 15%. For corporate taxpayers, both net investment income and
net capital gain are taxed at a maximum rate of 35%.
Shareholders may be entitled to offset their capital gain dividends
with capital losses. There are a number of statutory provisions affecting when
capital losses may be offset against capital gains, and limiting the use of
losses from certain investments and activities. Accordingly, shareholders with
capital losses are urged to consult their tax advisers.
The price of shares purchased at any time may reflect the amount of a
forthcoming distribution. Those purchasing shares just prior to a distribution
will receive a distribution which will be taxable to them even though it
represents in part a return of invested capital.
Upon a sale or exchange of shares, a shareholder will realize a
taxable gain or loss depending upon his or her basis in the shares. Such gain
or loss will be treated as long-term capital gain or loss if the shares have
been held for more than one year. Any loss realized on a sale or exchange will
be disallowed to the extent the shares disposed of are replaced within a
61-day period beginning 30 days before and ending 30 days after the date that
the shares are disposed of. In such a case, the basis of the shares acquired
will be adjusted to reflect the disallowed loss.
Any loss realized by a shareholder on the sale of Fund shares held by
the shareholder for six months or less will be treated for tax purposes as a
long-term capital loss to the extent of any capital gain dividends received by
the shareholder (or amounts credited to the shareholder as an undistributed
capital gain) with respect to such shares.
Ordinary income dividends and capital gain dividends also may be
subject to state and local taxes. Shareholders are urged to consult their own
tax advisers regarding specific questions about the U.S. federal (including
the application of the alternative minimum tax rules), state, local or foreign
tax consequences to them of investing in the Fund.
Ordinary income dividends (but not capital gain dividends) paid to
shareholders who are non-resident aliens or foreign entities will be subject
to a 30% United States withholding tax under existing provisions of the Code
applicable to foreign individuals and entities unless a reduced rate of
withholding or a withholding exemption is provided under applicable treaty
law. Non-resident shareholders are urged to consult their own tax advisers
concerning the applicability of the United States withholding tax.
Backup Withholding
The Fund may be required to withhold federal income tax on all
taxable distributions and redemption proceeds payable to non-corporate
shareholders who fail to provide the Fund with their correct taxpayer
identification number or to make required certifications, or who have been
notified by the IRS that they are subject to backup withholding. Backup
withholding is not an additional tax. Any amounts withheld may be refunded or
credited against such shareholder'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 applicable
provisions of the Code and Treasury regulations presently in effect. For the
complete provisions, reference should be made to the pertinent Code sections
and the Treasury regulations promulgated thereunder. The Code and the Treasury
regulations are subject to change by legislative, judicial or administrative
action, either prospectively or retroactively. Persons considering an
investment in Common Shares of the Fund should consult their own tax advisers
regarding the purchase, ownership and disposition of Common Shares of the
Fund.
S-21
NET ASSET VALUE
The net asset value of the Fund's shares will be computed, based on
the market value of the securities it holds and determined daily as of the
close of regular trading on the New York Stock Exchange.
Portfolio instruments of the Fund which are traded in a market
subject to government regulation on which trades are reported
contemporaneously generally will be valued at the last sale price on the
principal market for such instruments as of the close of regular trading on
the day the instruments are being valued, or lacking any sales, at the average
of the bid and asked prices on the principal market for such instruments on
the most recent date on which bid and asked prices are available. Other
readily marketable assets will be valued at the average of quotations provided
by dealers maintaining an active market in such instruments. Securities and
other assets for which market quotations are not readily available will be
valued at fair value as determined in good faith by or under the direction of
the Board of Trustees. Short-term investments that mature in more than 60 days
are valued at the latest average of the bid and asked prices or if there were
no asked prices on such day at the closing bid price obtained from a dealer
maintaining an active market in that security or on the basis of prices
obtained from a pricing service approved as reliable by the Board of Trustees.
Short-term investments that are not credit-impaired that mature in 60 days or
less are valued at amortized cost, unless the Board of Trustees determines
that such valuation does not constitute fair value. The Fund may employ
recognized pricing services from time to time for the purpose of pricing
portfolio instruments. Futures contracts are valued at the official closing
settlement price of the exchange or board of trade on which the applicable
contract is traded.
Trading takes place in various foreign markets on days which are not
days on which the New York Stock Exchange is open and therefore the Fund's net
asset value per share is not calculated. The calculation of the Fund's net
asset value may not take place contemporaneously with the determination of the
prices of portfolio securities held by the Fund. Events affecting the values
of portfolio securities that occur between the time their prices are
determined and the close of the NYSE will not be reflected in the Fund's
calculation of net asset value unless the Board of Trustees deems that the
particular event would materially affect the net asset value, in which case
the fair value of those securities will be determined by consideration of
other factors by or under the direction of the Board of Trustees.
Net asset value per common share is calculated by dividing the value
of the securities held plus any cash or other assets minus all liabilities and
preferred shares, including accrued expenses, by the total number of Common
Shares outstanding at such time.
GENERAL INFORMATION
COUNSEL AND INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Skadden, Arps, Slate, Meagher & Flom LLP, Four Times Square, New
York, New York 10036 is special counsel to the Fund in connection with the
rights offering.
PricewaterhouseCoopers LLP, independent registered public accounting
firm, 300 Madison Avenue, New York, New York 10017, serve as auditors of the
Fund and will annually render an opinion on the financial statements of the
Fund.
BENEFICIAL OWNERS
As of September 30, 2004, there are no persons known to the Fund who
may be deemed beneficial owners of 5% or more of shares of the Fund's Common
Shares because they possessed or shared voting or investment power with
respect to the Fund's Common Shares.
FINANCIAL STATEMENTS
The unaudited financial statements included in the Semi-Annual Report
to the Fund's Shareholders for the fiscal period ended June 30, 2004 are
incorporated by reference from the Fund's Semi-Annual Report to
S-22
Shareholders. The audited financial statements included in the Annual Report
to the Fund's Shareholders for the fiscal year ended December 31, 2003,
together with the report of PricewaterhouseCoopers LLP thereon, are
incorporated herein by reference from the Fund's Annual Report to
Shareholders. All other portions of the Annual Report to Shareholders and
Semi-Annual Report to Shareholders are not incorporated herein by reference
and are not part of the Registration Statement. A copy of the Annual Report
to Shareholders may be obtained without charge by writing to the Fund at its
address at One Corporate Center, Rye, New York 10580-1422 or by calling the
Fund toll-free at (800)-GABELLI (422- 3554). The Fund files its complete
schedule of portfolio holdings for the first and third quarters of their
respective fiscal years with the Commission on Form N-Q. The Fund's Form N-Q
is available on the Commission's website at http://www.sec.gov. The Fund's
Form N-Q may be reviewed and copied at the Commission's Public Reference Room
in Washington, D.C.. Information regarding the operation of the Public
Reference Room may be obtained by calling 1-800-SEC-0330.
S-23
APPENDIX A
CORPORATE BOND RATINGS
MOODY'S INVESTORS SERVICE, INC.
-------------------------------
Aaa Bonds that are rated Aaa are judged to be of the best
quality. They carry the smallest degree of investment
risk and are generally referred to as "gilt edge."
Interest payments are protected by a large or
exceptionally stable margin and principal is secure.
While the various protective elements are likely to
change, such changes as can be visualized are most
unlikely to impair the fundamentally strong position of
such issues.
Aa Bonds that are rated Aa are judged to be of high quality
by all standards. Together with the Aaa group they
comprise what are generally known as high grade bonds.
They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or
fluctuation of protective elements may be of greater
amplitude or there may be other elements present which
make the long-term risk appear somewhat larger than in
Aaa Securities.
A Bonds that are rated A possess many favorable investment
attributes and are to be considered as upper-medium-grade
obligations. Factors giving security to principal and
interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment some
time in the future.
Baa Bonds that are rated Baa are considered as medium-grade
obligations i.e., they are neither highly protected nor
poorly secured. Interest payments and principal security
appear adequate for the present, but certain protective
elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack
outstanding investment characteristics and in fact have
speculative characteristics as well.
Ba Bonds that are rated Ba are judged to have speculative
elements; their future cannot be considered as well
assured. Often the protection of interest and principal
payments may be very moderate and thereby not well
safeguarded during both good and bad times over the
future. Uncertainty of position characterizes bonds in
this class.
B Bonds that are rated B generally lack characteristics of
the desirable investment. Assurance of interest and
principal payments or of maintenance of other terms of the
contract over any long period of time may be small.
Moody's applies numerical modifiers (1, 2, and 3) with
respect to the bonds rated "Aa" through "B." The modifier
1 indicates that the company ranks in the higher end of
its generic rating category; the modifier 2 indicates a
mid-range ranking; and the modifier 3 indicates that the
company ranks in the lower end of its generic rating
category.
Caa Bonds that are rated Caa are of poor standing. These
issues may be in default or there may be present elements
of danger with respect to principal or interest.
Ca Bonds that are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in
default or have other marked shortcomings.
C Bonds that are rated C are the lowest rated class of
bonds and issues so rated can be regarded as having
extremely poor prospects of ever attaining any real
investment standing.
A-1
STANDARD & POOR'S RATINGS SERVICES
----------------------------------
AAA This is the highest rating assigned by S&P to a debt
obligation and indicates an extremely strong capacity to
pay interest and repay principal.
AA Debt rated AA has a very strong capacity to pay interest
and repay principal and differs from AAA issues only in
small degree. Principal and interest payments on bonds in
this category are regarded as safe.
A Debt rated A has a strong capacity to pay interest and
repay principal although they are somewhat more
susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher
rated categories.
BBB This is the lowest investment grade. Debt rated BBB has
an adequate capacity to pay interest and repay principal.
Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened
capacity to pay interest and repay principal for debt in
this category than in higher rated categories.
Speculative Grade
-----------------
Debt rated BB, CCC, CC and C are regarded, on balance, as
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. BB indicates the
lowest degree of speculation, and C the highest degree of speculation. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major exposures to adverse
conditions. Debt rated C1 is reserved for income bonds on which no interest is
being paid and debt rated D is in payment default.
In July 1994, S&P initiated an "r" symbol to its ratings. The "r"
symbol is attached to derivatives, hybrids and certain other obligations that
S&P believes may experience high variability in expected returns due to
non-credit risks created by the terms of the obligations.
"AA" to "CCC" may be modified by the addition of a plus or minus sign
to show relative standing within the major categories.
"NR" indicates that no public rating has been requested, that there
is insufficient information on which to base a rating, or that S&P does not
rate a particular type of obligation as a matter of policy.
_________________________________
A-2
APPENDIX B
GABELLI ASSET MANAGEMENT INC. and AFFILIATES
------------------------------------------------------
The Voting of Proxies on Behalf of Clients
------------------------------------------------------
Rules 204(4)-2 and 204-2 under the Investment Advisers Act of 1940
and Rule 30b1-4 under the Investment Company Act of 1940 require investment
advisers to adopt written policies and procedures governing the voting of
proxies on behalf of their clients.
These procedures will be used by GAMCO Investors, Inc., Gabelli
Funds, LLC and Gabelli Advisers, Inc. (collectively, the "Advisers") to
determine how to vote proxies relating to portfolio securities held by their
clients, including the procedures that the Advisers use when a vote presents a
conflict between the interests of the shareholders of an investment company
managed by one of the Advisers, on the one hand, and those of the Advisers;
the principal underwriter; or any affiliated person of the investment company,
the Advisers, or the principal underwriter. These procedures will not apply
where the Advisers do not have voting discretion or where the Advisers have
agreed to with a client to vote the client's proxies in accordance with
specific guidelines or procedures supplied by the client (to the extent
permitted by ERISA).
I. Proxy Voting Committee
The Proxy Voting Committee was originally formed in April 1989 for the
purpose of formulating guidelines and reviewing proxy statements within the
parameters set by the substantive proxy voting guidelines originally published
by GAMCO Investors, Inc. in 1988 and updated periodically, a copy of which are
appended as Exhibit A. The Committee will include representatives of Research,
Administration, Legal, and the Advisers. Additional or replacement members of
the Committee will be nominated by the Chairman and voted upon by the entire
Committee. As of June 30, 2003, the members are:
Bruce N. Alpert, Chief Operating Officer of Gabelli Funds, LLC
Ivan Arteaga, Research Analyst
Caesar M. P. Bryan, Portfolio Manager
Stephen DeTore, Deputy General Counsel
Joshua Fenton, Director of Research
Douglas R. Jamieson, Chief Operating Officer of GAMCO
James E. McKee, General Counsel
Karyn M. Nappi, Director of Proxy Voting Services
William S. Selby, Managing Director of GAMCO
Howard F. Ward, Portfolio Manager
Peter D. Zaglio, Senior Vice President
Peter D. Zaglio currently chairs the Committee. In his absence, the
Director of Research will chair the Committee. Meetings are held as needed
basis to form views on the manner in which the Advisers should vote proxies on
behalf of their clients.
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In general, the Director of Proxy Voting Services, using the Proxy
Guidelines, recommendations of Institutional Shareholder Corporate Governance
Service ("ISS"), other third-party services and the analysts of Gabelli &
Company, Inc., will determine how to vote on each issue. For non-controversial
matters, the Director of Proxy Voting Services may vote the proxy if the vote
is (1) consistent with the recommendations of the issuer's Board of Directors
and not contrary to the Proxy Guidelines; (2) consistent with the
recommendations of the issuer's Board of Directors and is a non-controversial
issue not covered by the Proxy Guidelines; or (3) the vote is contrary to the
recommendations of the Board of Directors but is consistent with the Proxy
Guidelines. In those instances, the Director of Proxy Voting Services or the
Chairman of the Committee may sign and date the proxy statement indicating how
each issue will be voted.
All matters identified by the Chairman of the Committee, the Director
of Proxy Voting Services or the Legal Department as controversial, taking into
account the recommendations of ISS or other third party services and the
analysts of Gabelli & Company, Inc., will be presented to the Proxy Voting
Committee. If the Chairman of the Committee, the Director of Proxy Voting
Services or the Legal Department has identified the matter as one that (1) is
controversial; (2) would benefit from deliberation by the Proxy Voting
Committee; or (3) may give rise to a conflict of interest between the Advisers
and their clients, the Chairman of the Committee will initially determine what
vote to recommend that the Advisers should cast and the matter will go before
the Committee.
For matters submitted to the Committee, each member of the Committee
will receive, prior to the meeting, a copy of the proxy statement, any
relevant third party research, a summary of any views provided by the Chief
Investment Officer and any recommendations by Gabelli & Company, Inc.
analysts. The Chief Investment Officer or the Gabelli & Company, Inc. analysts
may be invited to present their viewpoints. If the Legal Department believes
that the matter before the committee is one with respect to which a conflict
of interest may exist between the Advisers and their clients, counsel will
provide an opinion to the Committee concerning the conflict. If the matter is
one in which the interests of the clients of one or more of Advisers may
diverge, counsel will so advise and the Committee may make different
recommendations as to different clients. For any matters where the
recommendation may trigger appraisal rights, counsel will provide an opinion
concerning the likely risks and merits of such an appraisal action.
Each matter submitted to the Committee will be determined by the vote
of a majority of the members present at the meeting. Should the vote
concerning one or more recommendations be tied in a vote of the Committee, the
Chairman of the Committee will cast the deciding vote. The Committee will
notify the proxy department of its decisions and the proxies will be voted
accordingly.
Although the Proxy Guidelines express the normal preferences for the
voting of any shares not covered by a contrary investment guideline provided
by the client, the Committee is not bound by the preferences set forth in the
Proxy Guidelines and will review each matter on its own merits. Written
minutes of all Proxy Voting Committee meetings will be maintained. The
Advisers subscribe to ISS, which supplies current information on companies,
matters being voted on, regulations, trends in proxy voting and information on
corporate governance issues.
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If the vote cast either by the analyst or as a result of the
deliberations of the Proxy Voting Committee runs contrary to the
recommendation of the Board of Directors of the issuer, the matter will be
referred to legal counsel to determine whether an amendment to the most
recently filed Schedule 13D is appropriate.
II. Social Issues and Other Client Guidelines
If a client has provided special instructions relating to the voting
of proxies, they should be noted in the client's account file and forwarded to
the proxy department. This is the responsibility of the investment
professional or sales assistant for the client. In accordance with Department
of Labor guidelines, the Advisers' policy is to vote on behalf of ERISA
accounts in the best interest of the plan participants with regard to social
issues that carry an economic impact. Where an account is not governed by
ERISA, the Advisers will vote shares held on behalf of the client in a manner
consistent with any individual investment/voting guidelines provided by the
client. Otherwise the Advisers will abstain with respect to those shares.
III. Client Retention of Voting Rights
If a client chooses to retain the right to vote proxies or if there
is any change in voting authority, the following should be notified by the
investment professional or sales assistant for the client.
- Operations
- Legal Department
- Proxy Department
- Investment professional assigned to the account
In the event that the Board of Directors (or a Committee thereof) of
one or more of the investment companies managed by one of the Advisers has
retained direct voting control over any security, the Proxy Voting Department
will provide each Board Member (or Committee member) with a copy of the proxy
statement together with any other relevant information including
recommendations of ISS or other third-party services.
IV. Voting Records
The Proxy Voting Department will retain a record of matters voted
upon by the Advisers for their clients. The Advisers' staff may request
proxy-voting records for use in presentations to current or prospective
clients. Requests for proxy voting records should be made at least ten days
prior to client meetings.
If a client wishes to receive a proxy voting record on a quarterly,
semi-annual or annual basis, please notify the Proxy Voting Department. The
reports will be available for mailing approximately ten days after the quarter
end of the period. First quarter reports may be delayed since the end of the
quarter falls during the height of the proxy season.
A letter is sent to the custodians for all clients for which the
Advisers have voting responsibility instructing them to forward all proxy
materials to:
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[Adviser name]
Attn: Proxy Voting Department
One Corporate Center
Rye, New York 10580-1433
The sales assistant sends the letters to the custodians along with the
trading/DTC instructions. Proxy voting records will be retained in compliance
with Rule 204-2 under the Investment Advisers Act.
V. Voting Procedures
1. Custodian banks, outside brokerage firms and Wexford Clearing Services
Corporation are responsible for forwarding proxies directly to GAMCO.
Proxies are received in one of two forms:
o Shareholder Vote Authorization Forms (VAFs) - Issued by ADP. VAFs must be
voted through the issuing institution causing a time lag. ADP is an
outside service contracted by the various institutions to issue proxy
materials.
o Proxy cards which may be voted directly.
2. Upon receipt of the proxy, the number of shares each form represents is
logged into the proxy system according to security.
3. In the case of a discrepancy such as an incorrect number of shares, an
improperly signed or dated card, wrong class of security, etc., the issuing
custodian is notified by phone. A corrected proxy is requested. Any
arrangements are made to insure that a proper proxy is received in time to be
voted (overnight delivery, fax, etc.). When securities are out on loan on
record date, the custodian is requested to supply written verification.
4. Upon receipt of instructions from the proxy committee (see Administrative),
the votes are cast and recorded for each account on an individual basis.
Since January 1, 1992, records have been maintained on the Proxy Edge system.
The system is backed up regularly. From 1990 through 1991, records were
maintained on the PROXY VOTER system and in hardcopy format. Prior to 1990,
records were maintained on diskette and in hardcopy format.
PROXY EDGE records include:
Security Name and Cusip Number
Date and Type of Meeting (Annual, Special, Contest)
Client Name
Adviser or Fund Account
Number Directors' Recommendation
How GAMCO voted for the client on each issue
The rationale for the vote when it appropriate
Records prior to the institution of the PROXY EDGE system include:
Security name
Type of Meeting (Annual, Special, Contest)
Date of Meeting
Name of Custodian
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Name of Client
Custodian Account Number
Adviser or Fund Account Number
Directors' recommendation
How the Adviser voted for the client on each issue
Date the proxy statement was received and by whom
Name of person posting the vote Date and method by which the vote was cast
o From these records individual client proxy voting records are compiled.
It is our policy to provide institutional clients with a proxy voting
record during client reviews. In addition, we will supply a proxy voting
record at the request of the client on a quarterly, semi-annual or annual
basis.
5. VAFs are kept alphabetically by security. Records for the current proxy
season are located in the Proxy Voting Department office. In preparation for
the upcoming season, files are transferred to an offsite storage facility
during January/February.
6. Shareholder Vote Authorization Forms issued by ADP are always sent directly
to a specific individual at ADP.
7. If a proxy card or VAF is received too late to be voted in the conventional
matter, every attempt is made to vote on one of the following manners:
o VAFs can be faxed to ADP up until the time of the meeting. This is
followed up by mailing the original form.
o When a solicitor has been retained, the solicitor is called. At the
solicitor's direction, the proxy is faxed.
8. In the case of a proxy contest, records are maintained for each opposing
entity.
9. Voting in Person
a) At times it may be necessary to vote the shares in person. In this case, a
"legal proxy" is obtained in the following manner:
o Banks and brokerage firms using the services at ADP:
A call is placed to ADP requesting legal proxies. The VAFs are then sent
overnight to ADP. ADP issues individual legal proxies and sends them back
via overnight. A lead-time of at least two weeks prior to the meeting is
needed to do this. Alternatively, the procedures detailed below for banks
not using ADP may be implemented.
o Banks and brokerage firms issuing proxies directly:
The bank is called and/or faxed and a legal proxy is requested.
All legal proxies should appoint:
"Representative of [Adviser name] with full power of substitution."
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b) The legal proxies are given to the person attending the meeting along with
the following supplemental material:
o A limited Power of Attorney appointing the attendee an Adviser
representative.
o A list of all shares being voted by custodian only. Client names and
account numbers are not included. This list must be presented, along with
the proxies, to the Inspectors of Elections and/or tabulator at least
one-half hour prior to the scheduled start of the meeting. The tabulator
must "qualify" the votes (i.e. determine if the vote have previously been
cast, if the votes have been rescinded, etc. vote have previously been
cast, etc.).
o A sample ERISA and Individual contract.
o A sample of the annual authorization to vote proxies form.
o A copy of our most recent Schedule 13D filing (if applicable).
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PROXY VOTING GUIDELINES
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GENERAL POLICY STATEMENT
It is the policy of Gabelli Asset Management Inc. to vote in the best economic
interests of our clients. As we state in our Magna Carta of Shareholders
Rights, established in May 1988, we are neither for nor against management. We
are for shareholders.
At our first proxy committee meeting in 1989, it was decided that each proxy
statement should be evaluated on its own merits within the framework first
established by our Magna Carta of Shareholders Rights. The attached guidelines
serve to enhance that broad framework.
We do not consider any issue routine. We take into consideration all of our
research on the company, its directors, and their short and long-term goals
for the company. In cases where issues that we generally do not approve of are
combined with other issues, the negative aspects of the issues will be
factored into the evaluation of the overall proposals but will not necessitate
a vote in opposition to the overall proposals.
BOARD OF DIRECTORS
The advisers do not consider the election of the Board of Directors a routine
issue. Each slate of directors is evaluated on a case-by-case basis.
Factors taken into consideration include:
o Historical responsiveness to shareholders This may include such areas as:
-Paying greenmail
-Failure to adopt shareholder resolutions receiving a majority of
shareholder votes
o Qualifications
o Nominating committee in place
o Number of outside directors on the board
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o Attendance at meetings
o Overall performance
SELECTION OF AUDITORS
In general, we support the Board of Directors' recommendation for auditors.
BLANK CHECK PREFERRED STOCK
We oppose the issuance of blank check preferred stock.
Blank check preferred stock allows the company to issue stock and establish
dividends, voting rights, etc. without further shareholder approval.
CLASSIFIED BOARD
A classified board is one where the directors are divided into classes with
overlapping terms. A different class is elected at each annual meeting.
While a classified board promotes continuity of directors facilitating long
range planning, we feel directors should be accountable to shareholders on an
annual basis. We will look at this proposal on a case-by-case basis taking
into consideration the board's historical responsiveness to the rights of
shareholders.
Where a classified board is in place we will generally not support attempts to
change to an annually elected board.
When an annually elected board is in place, we generally will not support
attempts to classify the board.
INCREASE AUTHORIZED COMMON STOCK
The request to increase the amount of outstanding shares is considered on a
case-by-case basis.
Factors taken into consideration include:
o Future use of additional shares
-Stock split
-Stock option or other executive compensation plan -Finance growth of
company/strengthen balance sheet
-Aid in restructuring
-Improve credit rating
-Implement a poison pill or other takeover defense
o Amount of stock currently authorized but not yet issued or reserved
for stock option plans
o Amount of additional stock to be authorized and its dilutive effect
We will support this proposal if a detailed and verifiable plan for the use of
the additional shares is contained in the proxy statement.
CONFIDENTIAL BALLOT
We support the idea that a shareholder's identity and vote should be treated
with confidentiality.
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However, we look at this issue on a case-by-case basis.
In order to promote confidentiality in the voting process, we endorse the use
of independent Inspectors of Election.
CUMULATIVE VOTING
In general, we support cumulative voting.
Cumulative voting is a process by which a shareholder may multiply the number
of directors being elected by the number of shares held on record date and
cast the total number for one candidate or allocate the voting among two or
more candidates.
Where cumulative voting is in place, we will vote against any proposal to
rescind this shareholder right.
Cumulative voting may result in a minority block of stock gaining
representation on the board. When a proposal is made to institute cumulative
voting, the proposal will be reviewed on a case-by-case basis. While we feel
that each board member should represent all shareholders, cumulative voting
provides minority shareholders an opportunity to have their views represented.
DIRECTOR LIABILITY AND INDEMNIFICATION
We support efforts to attract the best possible directors by limiting the
liability and increasing the indemnification of directors, except in the case
of insider dealing.
EQUAL ACCESS TO THE PROXY
The SEC's rules provide for shareholder resolutions. However, the resolutions
are limited in scope and there is a 500 word limit on proponents' written
arguments. Management has no such limitations. While we support equal access
to the proxy, we would look at such variables as length of time required to
respond, percentage of ownership, etc.
FAIR PRICE PROVISIONS
Charter provisions requiring a bidder to pay all shareholders a fair price are
intended to prevent two-tier tender offers that may be abusive. Typically,
these provisions do not apply to board-approved transactions.
We support fair price provisions because we feel all shareholders should be
entitled to receive the same benefits.
Reviewed on a case-by-case basis.
GOLDEN PARACHUTES
Golden parachutes are severance payments to top executives who are terminated
or demoted after a takeover.
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We support any proposal that would assure management of its own welfare so
that they may continue to make decisions in the best interest of the company
and shareholders even if the decision results in them losing their job. We do
not, however, support excessive golden parachutes. Therefore, each proposal
will be decided on a case-by- case basis.
Note: Congress has imposed a tax on any parachute that is more than three
times the executive's average annual compensation.
ANTI-GREENMAIL PROPOSALS
We do not support greenmail. An offer extended to one shareholder should be
extended to all shareholders equally across the board.
LIMIT SHAREHOLDERS' RIGHTS TO CALL SPECIAL MEETINGS
We support the right of shareholders to call a special meeting.
CONSIDERATION OF NONFINANCIAL EFFECTS OF A MERGER
This proposal releases the directors from only looking at the financial
effects of a merger and allows them the opportunity to consider the merger's
effects on employees, the community, and consumers.
As a fiduciary, we are obligated to vote in the best economic interests of our
clients. In general, this proposal does not allow us to do that. Therefore, we
generally cannot support this proposal.
Reviewed on a case-by-case basis.
MERGERS, BUYOUTS, SPIN-OFFS, RESTRUCTURINGS
Each of the above is considered on a case-by-case basis. According to the
Department of Labor, we are not required to vote for a proposal simply because
the offering price is at a premium to the current market price. We may take
into consideration the long term interests of the shareholders.
MILITARY ISSUES
Shareholder proposals regarding military production must be evaluated on a
purely economic set of criteria for our ERISA clients. As such, decisions will
be made on a case-by-case basis.
In voting on this proposal for our non-ERISA clients, we will vote according
to the client's direction when applicable. Where no direction has been given,
we will vote in the best economic interests of our clients. It is not our duty
to impose our social judgment on others.
NORTHERN IRELAND
Shareholder proposals requesting the signing of the MacBride principles for
the purpose of countering the discrimination of Catholics in hiring practices
must be evaluated on a purely economic set of criteria for our ERISA clients.
As such, decisions will be made on a case-by-case basis.
In voting on this proposal for our non-ERISA clients, we will vote according
to client direction when applicable. Where no direction has been given, we
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will vote in the best economic interests of our clients. It is not our duty to
impose our social judgment on others.
OPT OUT OF STATE ANTI-TAKEOVER LAW
This shareholder proposal requests that a company opt out of the coverage of
the state's takeover statutes. Example: Delaware law requires that a buyer
must acquire at least 85% of the company's stock before the buyer can exercise
control unless the board approves.
We consider this on a case-by-case basis. Our decision will be based on the
following:
o State of Incorporation
o Management history of responsiveness to shareholders
o Other mitigating factors
POISON PILL
In general, we do not endorse poison pills.
In certain cases where management has a history of being responsive to the
needs of shareholders and the stock is very liquid, we will reconsider this
position.
REINCORPORATION
Generally, we support reincorporation for well-defined business reasons. We
oppose reincorporation if proposed solely for the purpose of reincorporating
in a state with more stringent anti-takeover statutes that may negatively
impact the value of the stock.
STOCK OPTION PLANS
Stock option plans are an excellent way to attract, hold and motivate
directors and employees. However, each stock option plan must be evaluated on
its own merits, taking into consideration the following:
o Dilution of voting power or earnings per share by more than 10% o Kind of
stock to be awarded, to whom, when and how much o Method of payment o Amount
of stock already authorized but not yet issued under
existing stock option plans
SUPERMAJORITY VOTE REQUIREMENTS
Supermajority vote requirements in a company's charter or bylaws require a
level of voting approval in excess of a simple majority of the outstanding
shares. In general, we oppose supermajority-voting requirements. Supermajority
requirements often exceed the average level of shareholder participation. We
support proposals' approvals by a simple majority of the shares voting.
LIMIT SHAREHOLDERS RIGHT TO ACT BY WRITTEN CONSENT
Written consent allows shareholders to initiate and carry on a shareholder
action without having to wait until the next annual meeting or to call a
special meeting. It permits action to be taken by the written consent of the
same percentage of the shares that would be required to effect proposed action
at a shareholder meeting.
Reviewed on a case-by-case basis.
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