PROSPECTUS
11,294,893 RIGHTS FOR 3,764,965 SHARES
THE GABELLI
UTILITY TRUST
COMMON STOCK
The Gabelli Utility Trust (the "Fund") is issuing transferable rights
("Rights") to its shareholders. These Rights will allow you to subscribe for
new shares of common stock of the Fund. For every three Rights that you
receive, you may buy one new Fund share. You will receive one Right for each
outstanding Fund share you own on May 22, 2002 (the "Record Date"). 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 three. The number of Rights issued to a shareholder on the Record Date will
be rounded up to the nearest number of Rights evenly divisible by three. In
the case of shares of common stock 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 three) 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 June 7, 2002 written representation of the number of Rights required for
such rounding. Also, shareholders on the Record Date may purchase shares not
acquired by other shareholders in this Rights offering (the "Offer"), subject
to limitations discussed in this prospectus.
The Rights are transferable and will be admitted for trading on the
New York Stock Exchange ("NYSE") under the symbol "GUT RT." The Fund's shares
of common stock are listed, and the shares issued pursuant to this Offer will
be listed, on the NYSE under the symbol "GUT." On May 17, 2002 (the last date
prior to the Fund's shares trading ex- Rights), the last reported net asset
value per share of the Fund's shares was $7.12 and the last reported sales
price of a share on the NYSE was $9.86. THE PURCHASE PRICE PER SHARE (the
"Subscription Price") WILL BE $7.50. THE OFFER WILL EXPIRE AT 5:00 P.M., NEW
YORK TIME, ON JUNE 19, 2002, unless the Offer is extended as described in this
Prospectus (the "Expiration Date").
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 objective is long-term growth of
capital and income, which the Fund attempts to achieve by investing at least
65% 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 and (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. No assurances can be given that the Fund's objectives will
be achieved. FOR A DISCUSSION OF CERTAIN RISK FACTORS AND SPECIAL
CONSIDERATIONS WITH RESPECT TO OWNING SHARES OF THE FUND, SEE "RISK FACTORS
AND SPECIAL CONSIDERATIONS" ON PAGE 33 OF THIS PROSPECTUS. The address of the
Fund is One Corporate Center, Rye, New York 10580 and its telephone number
(914) 921-5070.
This Prospectus sets forth certain information about the Fund an
investor should know before investing and should be retained for future
reference.
A Statement of Additional Information dated May 29, 2002 (the "SAI")
has been filed with the Securities and Exchange Commission and is incorporated
by reference in this Prospectus. The table of contents of the SAI appears on
page 51 of this Prospectus. A copy of the SAI may be obtained without charge
by writing to the Fund at its address at One Corporate Center, Rye, New York
10580-1434 or calling the Fund toll-free at (800) 422- 3554.
---------------------------------
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.
SUBSCRIPTION PROCEEDS
PRICE SALES LOAD TO FUND(1)
------------------- --------------------- ------------------
Per Share........ $7.50 None $7.50
Total............ $28,237,238 None $28,237,238
(1) Before deduction of expenses incurred by the Fund, estimated at $500,000.
-------------------------------
SHAREHOLDERS WHO DO NOT EXERCISE THEIR RIGHTS SHOULD EXPECT THAT THEY
WILL, 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 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 shares 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 in such manner and on the same terms as
other shareholders.
---------------------------------
This Prospectus sets forth concisely certain information about the
Fund that a pro spective investor should know before investing. Investors are
advised to read and retain it for future reference. A Statement of Additional
Information dated May 29, 2002 (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 51 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 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
(http://www.sec.gov). Shareholder inquiries should be directed to the
Subscription Agent, EquiServe, at (800) 336-6983 or (781) 575-2000.
---------------------------------
May 29, 2002
PROSPECTUS SUMMARY
This summary highlights some information that is described more fully
elsewhere in this Prospectus. It may not contain all of the information that
is important to you. To understand the Offer fully, you should read the entire
document carefully, including the risk factors.
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 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 and a larger number of beneficial owners of 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............................................3,764,965
Number of Rights you will receive
for each outstanding share you
own on the Record Date..........................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 three Rights
Subscription Price.......................................................$7.50
--------------
* 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 three.
Shareholders' inquiries should be directed to:
EquiServe
(800) 336-6983 or (781) 575-2000
or Gabelli
(800) GABELLI (422-3554)
==============================================================================
OVER-SUBSCRIPTION PRIVILEGE
Shareholders on the Record Date who fully exercise all Rights
initially issued to them are entitled to buy those shares that were not bought
by other Rights holders. If enough shares are available, all shareholder
requests to buy shares that were not bought by other Rights holders will be
honored in full. If the requests for shares exceed the shares available, the
available shares will be allocated pro rata among those shareholders on the
Record Date 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."
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, Boston, Massachusetts (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 ("Notice of Guaranteed
Delivery"). A fee may be charged for this service. 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 June 18,
2002, one business day prior to the Expiration Date, due to normal settlement
procedures. 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 a Rights holder is unable to exercise because the Rights represent the
right to subscribe for less than one Share. 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 Rights. 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.
==============================================================================
OFFERING FEES AND EXPENSES
Offering expenses incurred by the Fund are estimated to be $500,000.
RESTRICTIONS ON FOREIGN SHAREHOLDERS
The Fund will not mail Subscription Certificates to shareholders
whose record addresses are outside the United States and the Province of
Ontario, Canada or who have an APO or FPO address. Shareholders whose
addresses are outside the United States and the Province of Ontario, 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 the Province of Quebec or any other 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
We estimate the net proceeds of the Offer to be approximately
$27,737,230. This figure is based on the Subscription Price per share of $7.50
and assumes all shares offered are sold and that the expenses related to the
Offer estimated at approximately $500,000 are paid. The Investment Adviser
expects to invest such proceeds in accordance with the Fund's investment
objectives and policies within six months after receipt of such proceeds,
depending on market conditions for the types of securities in which the Fund
principally invests. Pending such investment, the proceeds will be held in
high quality short-term debt securities and instruments.
IMPORTANT DATES TO REMEMBER
Please note that the dates in the table below may change if the Offer
is extended.
EVENT DATE
----- ----
Record Date..................................................May 22, 2002
Subscription Period......................May 22, 2002 through June 19, 2002**
Expiration of the Offer*......................................June 19, 2002**
Payment for Guarantees
of Delivery Due*.............................................June 24, 2002**
Confirmation to Participants..................................June 28, 2002**
------------------------------------
* A shareholder exercising Rights must deliver by June 19, 2002 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 June 28, 2002.
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 objective is long-term growth of capital
and income, which the Fund attempts to achieve by investing at least 65% (80%
commencing July 31, 2002) 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 and (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 of beneficial
interest, par value $.001 per share (the "Common Stock"), is listed and traded
on the New York Stock Exchange (the "NYSE"). The average weekly trading
volume of the Fund's common stock on the NYSE during the period from January
1, 2001 through December 31, 2001 was 62,252 shares. As of December 31, 2001,
the net assets of the Fund were approximately $82,197,000.
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 December 31, 2001,
managed total assets of approximately $24.8 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. 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."
RISK FACTORS AND SPECIAL CONSIDERATIONS
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 should
expect that they will, 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. 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. If the Subscription Price is above
the Fund's net asset value per share on the Expiration Date,
you will experience an immediate accretion of the aggregate
net asset value of your shares, whether or not you
participate in the Offer. The Fund cannot state precisely
the extent of this dilution or accretion at this time
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. For example, assuming that all
Rights are exercised, the Subscription Price is $7.50 and
the Fund's net asset value per share remains the same
($7.14) as on May 21, 2002 , the Fund's net asset value per
share (after payment of estimated offering expenses) would
be increased by approximately $0.05 (0.70%) per share.
However, assuming that all rights are exercised, the
Subscription Price is $7.50 per share and the Fund's net
asset value increases to $8.00, the Fund's net asset value
per share (after payment of estimated offering expenses)
would be reduced by approximately $0.16 (2.00%) per share.
See "Risk Factors and Special Considerations -- Dilution."
If you do not wish to exercise your Rights, you should
consider selling these Rights 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
any assurance, however, that a market for the Rights will
develop or that the Rights will have any marketable value.
Market Loss.......Shares of closed-end funds frequently 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 "Risk Factors and Special
Considerations--Market Value and Net Asset Value."
Shares
Repurchases.......You will be free to dispose of 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 Shares. The Fund is authorized to repurchase its
shares on the open market when the shares are trading at a
discount of 10% or more (or such other percentage as the
Board may determine from time to time) from net asset value.
There is no assurance that any action undertaken to
repurchase 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.
Charter
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 directors (which
term includes 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 stock 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, if
the Fund issues preferred stock, the holders of the
preferred shares would have the authority to elect two
directors 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 "Certain 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
"Risk Factors and Special Considerations -- 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 "Risk Factors and
Special Considerations."
Leveraging........As provided in the 1940 Act and subject to certain
exceptions, the Fund may issue debt or preferred stock 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 stock and debt
outstanding. Such debt or preferred stock may be convertible
in accordance with SEC staff guidelines which may permit
each fund to obtain leverage at attractive rates. Use of
leverage may magnify the impact on the holders of common
stock 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 stock when it may be
disadvantageous to do so. Leveraging through the issuance of
preferred stock requires that the holders of the preferred
stock have class voting rights on various matters that could
make it more difficult for the holders of the Common Stock
to change the investment objectives or fundamental policies
of the fund, to convert it to an open- end fund or make
certain other changes. See "Risk Factors and Special
Considerations" and "Special Investment Methods".
Industry Risks....The Fund will invest at least 65% of its assets (80%
commencing July 31, 2002) 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 and increases
in interest rates resulting in higher interest costs on
borrowings needed for capital construction programs,
including compliance with environmental 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 "Risk Factors and Special Considerations."
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.
Taxation..........The Fund intends to continue to be treated and qualify, for
U.S. federal income tax purposes, as a regulated investment
company. Qualification requires, among other things,
compliance by the Fund with certain distribution
requirements. Statutory limitations on distributions on the
Common Stock if the Fund fails to satisfy the 1940 Act's
asset coverage requirements could jeopardize the Fund's
ability to meet the distribution requirements. See
"Taxation" for a more complete discussion. TABLE OF FEES AND
EXPENSES
Registrant
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 Stock)
Management Fees................................................. 1.00%
Other Expenses 1.00%
----------
Total Annual Operating Expenses........................ 2.00%
----------
(1) Shareholders participating in the Fund's Automatic Dividend
Reinvestment and Voluntary Cash Purchase Plan would pay $0.75 per
transaction to purchase shares and $2.50 per transaction to sell
shares. See "Automatic Dividend Reinvestment and Voluntary Cash
Purchase Plan" in the SAI.
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: (2)
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
$20 $63 $108 $233
The foregoing table 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 Common Stock. Actual
expenses and annual rates of return may be more or less than those assumed for
purposes of the Example.
----------------------------
(2) Amounts are exclusive of fees discussed in Note (1) above.
FINANCIAL HIGHLIGHTS
The table below sets forth selected financial data for a share of
Common Stock outstanding throughout the periods presented. The per share
operating performance and ratios for the fiscal years ended December 31, 2001,
December 31, 2000 and the period ended December 31, 1999 have been audited by
PricewaterhouseCoopers LLP, the Fund's independent accountants, 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 Common Share Outstanding Throughout Each Period
Year Ended Year Ended Period Ended
December 31, ecember 31, December 31,
2001 D 2000 1999 (a)
-------------- ------------- --------------
OPERATING PERFORMANCE:
Net asset value, beginning of period... $ 8.21 $ 7.62 $ 7.50
------ ------ ------
Net investment income.................. 0.61 0.15 0.08
Net realized and unrealized gain(loss)
on investments......................... (0.81) 1.44 0.19
------ ------ ------
Total from investment operations....... (0.20) 1.59 0.27
------ ------ ------
Increase in net asset value from Trust
share transactions... ................. 0.01 ---- ----
------ ------ ------
DISTRIBUTIONS TO
SHAREHOLDERS:
Net investment income.................. (0.21) (0.06) (0.08)
Net realized gain on investments....... (0.49) (0.94) (0.07)
----- ------ ------
Total distributions.................... (0.70) (1.00) (0.15)
------ ------ ------
NET ASSET VALUE, END OF PERIOD: $7.32 $8.21 $ 7.62
======= ====== ======
Market value, end of period............ $9.33 $8.75 $ 7.63
======= ====== ======
Net asset value total return + ........ (3.15%) 22.01% 3.62%
======= ====== ======
Total Investment Return ++ .............. 15.82% 29.95% 3.70%
======= ====== ======
RATIOS TO AVERAGE NET ASSETS
AVAILABLE TO COMMON STOCK
SHAREHOLDERS AND
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands) $ 82,197 $ 90,669 $ 83,330
Ratio of net investment income to avera
net assets (c).........................ge 1.57% 1.88% 2.27%(b)
Ratio of operating expenses to average
assets (c)(d)..........................net 2.00% 1.95% 1.75%(b)
Portfolio turnover rate................ 41% 92% 37%
----------------------------
+ Based on net asset value per share, adjusted for reinvestment of
distributions. Total return for the period of less than one year is
not annualized.
++ Based on market value per share, adjusted for reinvestment of
distributions. 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 year ended December 31, 2001 and
the year ended December 31, 2000, the expense ratios would be 2.00%
and 1.93%, respectively.
THE OFFER
TERMS OF THE OFFER
The Fund is issuing to shareholders on the Record Date ("Record Date
Shareholders") Rights to subscribe for the shares (the "Shares") of the Fund's
Common Stock ("Common Stock"). Each Record Date Shareholder is being issued
one transferable Right for each share of Common Stock owned on the Record
Date. The Rights entitle the holder to acquire at the Subscription Price one
Share for each three Rights held. 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 three. The number of Rights
issued to a shareholder on the Record Date will be rounded up to the nearest
number of Rights evenly divisible by three. In the case of shares of common
stock 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 three)
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 June 7, 2002 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 May
22, 2002, and ends at 5:00 p.m., New York time, on June 19, 2002, unless
extended by the Fund to a date not later than June 28, 2002, 5:00 p.m., New
York time. See "Expiration of the Offer." The Right to acquire one additional
Share for each three Rights held during the Subscription Period at the
Subscription Price is hereinafter referred to as the "Primary Subscription."
In addition, any Record Date Shareholder who fully exercises all
Rights initially issued to him is entitled to subscribe for Shares that were
not otherwise subscribed for by others on Primary Subscription (the
"Over-Subscription Privilege"). For purposes of determining the maximum number
of Shares a Record Date Shareholder may acquire pursuant to the Offer,
broker-dealers whose shares are held of record by Cede & Co., Inc. ("Cede"),
nominee for The Depository Trust Company, 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. Shares acquired
pursuant to the Over-Subscription Privilege are subject to allotment, which is
more fully discussed below under "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 Shares through the Primary Subscription and the Over-Subscription
Privilege to the extent the 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 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 shares of the Fund. Any Shares so
acquired by the Affiliated Parties or Mr. Gabelli, as "affiliates" of the Fund
as that term is defined under the Securities Act of 1933, as amended (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 shares that does not exceed the greater of
1% of the then outstanding shares of Common Stock or the average weekly
reported trading volume of the Common Stock during the four calendar weeks
preceding such sale. Sales under Rule 144 are also subject to certain
restrictions on the manner of sale, to notice requirements and to the
availability of current public information about the Fund. In addition, any
profit resulting from the sale of Shares so acquired, if the Shares are held
for a period of less than six months, will be returned to the Fund.
Rights will be evidenced by Subscription Certificates. The number of
Rights issued to each holder will be stated on the Subscription Certificates
delivered to the holder. The method by which Rights may be exercised and
Shares paid for is set forth below in "Method of 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. 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 EquiServe, Boston, Massachusetts (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 Exchange
trading day prior to the Expiration Date. 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 in "Method of Transferring Rights." The
Common Stock will begin trading ex-Rights two Business Days prior to the
Record Date. For purposes of this Prospectus, a "Business Day" shall mean any
day on which trading is conducted on the NYSE.
Nominees who hold shares of the Fund's common stock 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. If the beneficial owner so instructs,
the nominee should complete the Subscription Certificate and submit it to the
Subscription Agent with proper payment. In addition, beneficial owners of the
Fund's common stock 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.
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 additional shares at a price that may be below market and/or
net asset value 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 in vested 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 $277,372. 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 approve rights
offerings without obtaining shareholder approval. The staff of the Securities
and Exchange Commission ("SEC") has interpreted the 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 directors 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 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 more
than the number of Shares for which the Rights issued to them are exercisable.
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 Shares remain after the Primary Subscriptions have
been exercised, all over-subscriptions will be honored in full. If sufficient
Shares are not available to honor all over-subscriptions, the available Shares
will be allocated among those who over-subscribe based on the number of Rights
originally issued to them by the Fund. The percentage of remaining Shares each
over-subscribing shareholder may acquire will be rounded down to result in
delivery of whole Shares. The allocation process may involve a series of
allocations in order to assure that the total number of Shares available for
over-subscriptions is distributed on a pro rata basis.
The method by which Shares will be distributed and allocated pursuant
to the Over- Subscription Privilege is as follows. Shares will be available
for purchase pursuant to the Over-Subscription Privilege only to the extent
that the maximum number of Shares is not subscribed for through the exercise
of the Primary Subscription by the Expiration Date. If the Shares so available
("Excess Shares") are not sufficient to satisfy all subscriptions pursuant to
the Over-Subscription Privilege, the Excess Shares will be allocated pro rata
(subject to the elimination of fractional Shares) among those holders of
Rights exercising the Over-Subscription Privilege, in proportion, not to the
number of Shares requested pursuant to the Over-Subscription Privilege, but to
the number of shares held on the Record Date; provided, however, that if this
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 exercising
Over-Subscription Privileges. The formula to be used in allocating the Excess
Shares is as follows:
Holder's Record Date Position x Excess Shares Remaining
-----------------------------
Total Record Date Position
of All Over-Subscribers
The Fund will not offer or sell any Shares which are not subscribed
for under the Primary Subscription or the Over-Subscription Privilege.
THE SUBSCRIPTION PRICE
The Subscription Price for the Shares to be issued pursuant to the
Rights will be $7.50.
The Fund announced the Offer on January 10, 2002. The net asset value
per share of Common Stock at the close of business on January 9, 2002 and May
17, 2002 (the last date prior to the Fund's Shares trading ex-Rights), was
$7.28 and $7.12, respectively. The last reported sale price of a share of the
Fund's Common Stock on the NYSE on those dates was $9.55 and $9.86,
respectively, representing a 31% and a 38% premium, respectively, in relation
to the net asset value per share of Common Stock at the close of business on
these dates.
SALES BY SUBSCRIPTION AGENT
Holders of Rights who do not wish to exercise any or all of their
Rights may instruct the Subscription Agent to sell any unexercised Rights. The
Subscription Certificates repre senting the Rights to be sold by the
Subscription Agent must be received on or before June 18, 2002. Upon the
timely receipt of 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 the broker. Gabelli & Company, Inc. may also act on behalf
of its clients to purchase or sell Rights in the open market and be
compensated therefor. 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 shareholders. Proceeds from
those sales will be held by EquiServe, in its capacity as the Fund's transfer
agent, for the account of the nonclaiming shareholder 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").
EXPIRATION OF THE OFFER
The Offer will expire at 5:00 p.m., New York time, on June 19, 2002,
unless extended by the Fund to a date not later than June 28, 2002, 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, Att: Corporate Actions, P.O. Box
43025, Providence, R.I. 02940-3025. The Subscription Agent will receive from
the Fund an amount estimated to be $200,000 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 43025,
PROVIDENCE, R.I. 02940-3025 (TELEPHONE (800) 336-6983 OR (781) 575-2000);
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: P.O. Box 43025
Reporting Services, Inc.
Providence, RI 02940-3025
If By Hand: Securities Transfer and Reporting Services, Inc.
c/o EquiServe
100 Williams St. Galleria
New York, NY 10038
If By Overnight Courier: EquiServe
Attn: Corporate Actions
40 Campanelli 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 Shares subscribed for on Primary Subscription and any
additional Shares subscribed for pursuant to the Over-Subscription
Privilege and (ii) a properly completed and executed Subscription
Certificate. The Subscription 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 by facsimile transmission (telecopy number
(781) 575-4826; telephone number to confirm receipt (781) 575-4816).
(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 Shares
subscribed for pursuant to the Over-Subscription Privilege to the
Subscription Agent based on the Subscription Price of $7.50 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 Shares. The Subscription Agent will not accept cash
as a means of payment for 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 shares of
Common Stock that the holder indicates are being subscribed for, or
if a Record Date Shareholder does not specify the number of shares of
Common Stock 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 a Record Date Shareholder is
greater than the shares he has indicated an intention to
subscribe, then the Record Date Shareholder 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.
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 Fund's 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 Shares, if any, acquired pursuant to the Over-Subscription
Privilege, (iii) the per Share and total purchase price for the Shares and
(iv) any excess to be refunded by the Fund to such holder as a result of
payment for 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 the province of Ontario may
make payment in U.S. dollars by money order or check drawn on a bank located
in the province of Ontario.
Whichever of the two methods 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.
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 Shares pursuant to the Primary
Subscription or the Over-Subscription Privilege does not make payment of any
amounts due, the Fund reserves the right to take any or all of the following
actions: (i) find other purchasers for such subscribed-for and unpaid-for
Shares; (ii) apply any payment actually received by it toward the purchase of
the greatest whole number of Shares which could be acquired by such holder
upon exercise of the Primary Subscription or the Over-Subscription Privilege;
(iii) sell all or a portion of the Shares 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 Shares and to enforce the relevant guaranty of
payment.
Holders who hold shares of Common Stock for the account of others,
such as brokers, trustees or depositaries for securities, should notify the
respective beneficial owners of the shares as soon as possible to ascertain
the beneficial owners' intentions and to obtain instructions with respect to
the Rights. If the beneficial owner so instructs, the record holder of the
Rights should complete Subscription Certificates and submit them to the
Subscription Agent with the proper payment. In addition, beneficial owners of
Common Stock or Rights held through such a holder should contact the holder
and request the holder to effect transactions in accordance with the
beneficial owner's instructions.
The instructions accompanying the Subscription Certificates should be
read carefully and followed in detail. DO NOT SEND SUBSCRIPTION CERTIFICATES
TO THE FUND.
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 ex
ercise 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 Shares purchased pursuant to the Primary
Subscription will be delivered to subscribers as soon as practicable after the
corresponding Rights have been validly exercised and full payment for the
Shares has been received and cleared. Certificates representing Shares
purchased pursuant to the Over-Subscription Privilege will be delivered to
subscribers as soon as practicable after the Expiration Date and after all
allocations have been effected. Participants in the Fund's Automatic Dividend
Reinvestment and Voluntary Cash Purchase Plan (the "Plan") will be issued
Rights for the 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." These 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 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 the Province of
Ontario, Canada (other than an APO or FPO address). Record Date Shareholders
whose addresses are outside the United States and the Province of Ontario,
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. 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.
Under the securities laws of the Province of Ontario, investors
residing in Ontario may, subject to compliance with all applicable regulatory
requirements, transfer either the Rights or the Shares to be acquired upon the
exercise of such Rights (i) through a dealer registered in Ontario that
effects the transaction through the facilities of the NYSE or other exchange
or market outside of Canada; (ii) to a person or company outside of Canada, or
(iii) through certain other means as provided under and in compliance with
Ontario securities laws.
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 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:
- the subscription price per share,
- any servicing fee charged to you by your broker,
bank or trust company, and
- the basis, if any, in the Rights that you exercised.
A gain or loss recognized upon a sale of a share acquired upon the
exercise of a Right will be a capital gain or loss assuming the 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 share has been held at the time of sale for more
than one year.
As noted above, your basis in 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 Stock at such time, the basis of the Rights issued to you will be zero
unless you elect to allocate your basis of previously owned shares to the
Rights issued to you in the Offer. This allocation is based upon the relative
fair market value of such 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 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 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 cover 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
Shareholders that are employee benefit plans subject to the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), including
corporate savings and 401(k) plans, Keogh Plans of self-employed individuals
and Individual Retirement Accounts ("IRA") (each a "Benefit Plan" and
collectively, "Benefit Plans"), should be aware that additional contributions
of cash in order to exercise Rights may be treated as Benefit Plan
contributions and, when taken together with contributions previously made, may
subject a Benefit Plan to excise taxes for excess or nondeductible
contributions. In the case of Benefit Plans qualified under Section 401(a) of
the Code, additional cash contributions could cause the maximum contribution
limitations of Section 415 of the Code or other qualification rules to be
violated. Benefit Plans contemplating making additional cash contributions to
exercise Rights should consult with their counsel prior to making such
contributions.
Benefit Plans and other tax exempt entities, including governmental
plans, should also be aware that if they borrow in order to finance their
exercise of Rights, they may become subject to the tax on unrelated business
taxable income ("UBTI") under Section 511 of the Code. If any portion of an
IRA is used as security for a loan, the portion so used is also treated as
distributed to the IRA depositor.
ERISA contains prudence and diversification requirements and ERISA
and the Code contain prohibited transaction rules that may impact the exercise
of Rights. Among the prohibited transaction exemptions issued by the
Department of Labor that may exempt a Benefit Plan's exercise of Rights are
Prohibited Transaction Exemption 84-24 (governing purchases of shares in
investment companies) and Prohibited Transaction Exemption 75-1 (covering
sales of securities).
Due to the complexity of these rules and the penalties for
noncompliance, Benefit Plans should consult with their counsel regarding the
consequences of their exercise of Rights under ERISA and the Code.
USE OF PROCEEDS
The net proceeds of the Offer, assuming all Shares offered hereby are
sold, are estimated to be approximately $28,237,238, before deducting expenses
payable by the Fund estimated at approximately $500,000. The Investment
Adviser anticipates that investment of the proceeds, in accordance with the
Fund's investment objectives and policies, will be invested promptly as
investment opportunities are identified, depending on market conditions and
the availability of appropriate securities, and is anticipated to take not
more than approximately 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 objective of the Fund is long-term growth of capital and
income, which the Fund attempts to achieve by investing at least 65% (80%
commencing July 31, 2002) 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 35% of its assets may be invested in other securities including
stocks, debt obligations and money market instruments, as well as certain
derivative instruments in the utility industry or other industries. Morever,
should extraordinary conditions affecting such sectors or securities markets
as a whole warrant, the Fund may temporarily be primarily invested in money
market instruments.
Commencing on July 1, 2002, the investment policy of the Fund
relating to the type of securities in which 80% of the Fund's net 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 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: (1) 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; (2) the potential for capital appreciation of the securities; (3)
the interest or dividend income generated by the securities; (4) the prices of
the securities relative to other comparable securities; (5) whether the
securities are entitled to the benefits of call protection or other protective
covenants; (6) the existence of any anti- dilution protections or guarantees
of the security; and (7) the diversification of the portfolio of the Fund as
to issuers. The Investment Adviser's investment philosophy with respect to
debt and equity securities seeks 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 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
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
On behalf of the Fund, the Investment Adviser may, subject to
guidelines of the Board of Trustees, 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"). 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.
Under CFTC regulations, the Investment Adviser on behalf of the Fund
may purchase and sell futures contracts and options thereon for bona fide
hedging purposes, as defined under CFTC regulations, without regard to the
percentage of the Fund's assets committed to margin and option premiums. 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 its
total 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, as the case may be, do not exceed
50% of its total assets.
FORWARD CURRENCY EXCHANGE CONTRACTS
Subject to guidelines of the Board of Trustees, 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 stock 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
stock and debt outstanding. Such debt or preferred stock may be convertible in
accordance with SEC staff guidelines which may permit the Fund to obtain
leverage at attractive rates.
Further information on the investment objectives and policies of the
Fund are set forth in the SAI.
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. 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:
o 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.
o 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.
o 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.
o 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.
o issue senior securities, except to the extent permitted by applicable
law.
o 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.
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).
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 --Investment Practices
--When Issued, Delayed Delivery Securities and Forward Commitments" 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
play 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.
RISK FACTORS AND SPECIAL CONSIDERATIONS
Please consider the matters set forth below. 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.
PRINCIPAL RISKS ASSOCIATED WITH THE FUND
DILUTION
If you do not exercise all of your Rights, you will likely own a
smaller proportional interest in the Fund when the Offer is over. In addition,
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 the per share net
asset value of your shares will be diluted (reduced) immediately as a result
of the Offer because:
- the offered shares are being sold at less than their current net
asset value.
- you will indirectly bear the expenses of the Offer.
- the number of shares outstanding after the Offer will have increased
proportionately more than the increase in the size of the Fund's net
assets.
However, if the Subscription per share Price remains above the Fund's
net asset value on the Expiration Date after deducting the expenses of the
Offer, the Fund's net asset value per share will be accreted (increased)
immediately as a result of the Offer whether or not you participate in the
Offer because:
- the offered shares are being sold at more than their current net
asset value after deducting the expenses of the Offer.
- the number of shares outstanding after the Offer will have increased
proportionately less than the increase in the size of the Fund's net
assets.
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 $7.50 Subscription Price:
Scenario 1: (assumes net asset value per share is below subscription price)(1)
NAV....................................................................$7.00
-----
Subscription Price.....................................................$7.50
-----
Increase in NAV($)(2)..................................................$0.09
-----
Increase in NAV(%).....................................................1.29%
-----
Scenario 2: (assumes net asset value per share is above subscription price)(1)
NAV....................................................................$8.00
-----
Subscription Price.....................................................$7.50
-----
Reduction in NAV($)(2).................................................$0.16
-----
Reduction in NAV(%)....................................................2.00%
-----
------------------------------------
(1) Both examples assume full primary and over-subscription privilege
exercise. Actual amounts may vary due to rounding.
(2) Assumes $500,000 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
The Fund will invest a significant portion of its assets in foreign
and domestic companies involved 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, inflation,
cost increases in fuel and other operating expenses and increasing interest
rates resulting in high interest costs on borrowings needed for capital
construction programs, including compliance with environmental regulations.
Various regulatory regimes impose limitations on the percentage of
the shares of a public utility held by an investment for its clients. These
limitations may unfavorably restrict the ability of the Fund to make certain
investments.
In addition, deregulation of the utility industry could have a
positive or negative impact on the Fund's shares. 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.
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 frequently 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 Fund's shares are not subject to
redemption. Shareholders desiring liquidity may, subject to applicable
securities laws, trade their shares in the Fund on the New York Stock Exchange
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.
LOWER RATED SECURITIES
The Fund may invest up to 10% 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 and 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.
For a further description of lower rated securities and the risks
associated therewith, see "Investment Objectives and Policies -- Lower Rated
Securities."
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 prediction 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 such
strategies were not used. Risks inherent in the use of options, foreign
currency, futures contracts and options on futures contracts, securities
indices and foreign currencies include (1) dependence on the Adviser's ability
to predict correctly movements in the direction of interest rates, securities
prices and currency markets; (2) 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; (3) the fact that skills needed
to use these strategies are different from those needed to select portfolio
securities; (4) the possible absence of a liquid secondary market for any
particular instrument at any time; (5) the possible need to defer closing out
certain hedged positions to avoid adverse tax consequences; (6) 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 (7) the creditworthiness of counterparties. For a further description, see
"Risk Factors and Special Considerations -- Futures Transactions" and "Risk
Factors and Special Considerations -- 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 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. For a further
description of such investments, see "Investment Objectives and Policies --
Investment Practices" in the SAI.
RISKS TO HOLDERS OF COMMON STOCK OF LEVERAGING AND ISSUANCE OF
SENIOR SECURITIES
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. If the fund were to
utilize leverage, these two risks would 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 stock 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 stock 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 the preferred stock and debt outstanding. Such debt or
preferred stock may be convertible in accordance with Securities and Exchange
Commission ("SEC") guidelines which may permit the registrant to obtain
leverage at 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, such inability can be avoided through the use of
mandatory redemption requirements designed to ensure that the Fund maintains
the necessary asset coverage.
The class voting rights of preferred shares could make it more
difficult for the Fund to take certain actions that may, in the future, be
proposed by the Board and/or the holders of Common Stock, such as a merger,
exchange of securities, liquidation or alteration of the rights of a class of
the Fund's securities if such actions would be adverse to the preferred
shares, or such as changing to an open-end investment company or acting
inconsistently with its fundamental investment restrictions or other
fundamental policies or seeking to operate other than as an investment
company.
Preferred shares will be issued only if the Board of the Fund
determines in light of all relevant circumstances known to the Board that to
do so would be in the best interests of the Fund and its common shareholders.
The circumstances that the Board will consider before issuing preferred shares
include not only the dividend rate on the preferred shares in comparison to
the historical performance of the Fund but also such matters as the terms on
which the Fund can call the preferred shares, the circumstances in which the
Investment Adviser will earn additional investment advisory fees on the net
assets attributable to the preferred shares and the ability of the Fund to
meet the asset coverage tests and other requirements imposed by the rating
agencies for such preferred shares.
The issuance of preferred shares convertible into shares of common
stock might also reduce the net income and net asset value per share of the
common shares upon conversion. Such income dilution would occur if the Fund
could, from the investments made with the proceeds of the preferred shares,
earn an amount per common share issuable upon conversion greater than the
dividend required to be paid on the amount of preferred stock convertible into
one share of common stock. Such net asset value dilution would occur if
preferred shares were converted at a time when the net asset value per common
share was greater than the conversion price.
The Fund does not currently intend to issue preferred shares or
preferred shares convertible into shares of common stock. However, the Fund
will consider from time to time whether to do so and expects that it would
issue such shares if the Trustees conclude that the Fund can earn an
incremental return for the common shareholders.
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 and the Administrator (as defined below).
Pursuant to an Investment Advisory Contract 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 is higher than that paid by most mutual funds. 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.
The Adviser, together with other affiliated investment advisers, has
assets under management totaling over $24.8 billion as of December 31, 2001.
The Investment Adviser was organized in 1999 and is the successor to the
investment advisory division of Gabelli Funds, Inc. which was organized in
1980. As of December 31, 2001, the Investment Adviser and its affiliate,
Gabelli Advisers, Inc., act as primary investment adviser to 19 management
investment companies with aggregate net assets of $11.1 billion. GAMCO
Investors, Inc., an affiliate of the Investment Adviser, acts as investment
adviser for individuals, pension trusts, profit sharing trusts and endowments,
and as investment sub-adviser to management investment companies having
aggregate assets of $11.5 billion under management as of December 31, 2001.
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 $1.6 billion under management as of December 31, 2001. 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 New
York Stock Exchange 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 the Gabelli Group Capital Partners, Inc., which
owns 78.6% 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 Fund pays all
other expenses incurred in its operation including, among other things,
expenses for legal and independent accountants' services, costs of printing
proxies, stock certificates and shareholder reports, charges of the custodian,
any subcustodian and transfer and dividend paying agent, expenses in
connection with its respective Automatic Dividend Reinvestment and Voluntary
Cash Purchase Plan, SEC fees, fees and expenses of unaffiliated directors,
accounting and pricing costs, membership fees in trade associations, fidelity
bond coverage for its officers and employees, directors' and officers' errors
and omission insurance coverage, interest, brokerage costs, taxes, stock
exchange listing fees and expenses, expenses of qualifying its shares for sale
in various states, litigation and other extraordinary or non-recurring
expenses, and other expenses properly payable by the Fund.
The Investment Advisory Contract 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
Investment Advisory Contract 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.
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 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.
NON-RESIDENT DIRECTORS
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.
ADMINISTRATOR
The Investment Adviser has entered into 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 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 3200 Horizon Drive, King of
Prussia, Pennsylvania 19406.
PORTFOLIO TRANSACTIONS
Principal transactions are not entered into with affiliates of the
Fund. However, Gabelli & Company 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's policy is to make monthly distributions to holders of its
Common Stock. The source of such distribution is determined pursuant to an
exemptive order issued by the SEC (as described below). As a regulated
investment company under the Code, the Fund will not be subject to U.S.
federal income tax on its investment company taxable income that it
distributes to shareholders, provided that at least 90% of its investment
company taxable income for that taxable year is distributed to its
shareholders. See "Taxation." Shareholders exercising Rights will be entitled
to receive dividends on shares issued pursuant to the Offering beginning with
dividends payable after the Expiration Date.
The Fund, along with other registered investment companies advised by
the Adviser (the "Other Funds"), 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 the Fund maintains
distribution policies with respect to the Common Stock calling 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
share of Common Stock at or about the time of distribution or pay-out of a
fixed dollar amount. If the total distributions required by the proposed
periodic pay-out policy exceed the Fund's net investment income and net
capital gains, the excess will be treated as a return of capital. If the
Fund's net invest ment income, net short-term capital gains and net long-term
capital gains for any year exceed the amount required to be distributed under
the proposed periodic pay-out policy, the Fund generally intends to pay such
excess once a year, but may, in its discretion, retain and not distribute net
long-term capital gains to the extent of such excess. The Fund reserves the
right, but does not currently intend, to retain for reinvestment and pay U.S.
federal income taxes on the excess of its net realized long-term capital gains
over its net short-term capital losses, if any.
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.
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 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. 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 Trust, are taxable
to you as long-term capital gains, regardless of the length of time you have
owned Fund shares. 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 ordinary 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
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 and
ordinary income will currently be taxed at a maximum rate of 38.6% while
long-term capital gains generally will be taxed at a maximum rate of 20% and
10% for taxpayers in the 15% bracket. The 20% capital gains rate and the 10%
capital rate will be reduced to 18% and 8% respectively, for capital assets
held for more than five years if the holding period begins after December 31,
2000.1
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.
The Fund is required in certain circumstances to backup withhold on
taxable dividends and certain other payments paid to non-corporate holders of
the Fund's shares who do not furnish the Fund with their correct taxpayer
identification number (in the case of individuals, their social security
number) and certain certifications, or who are otherwise subject to backup
withholding. Backup withholding is not an additional tax. Any amounts withheld
from payments made to 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
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 Stock and Preferred Stock. Each share within a
particular class or series thereof has equal voting, dividend, distribution
and liquidation rights. When issued, in accordance with the terms thereof,
shares of Common
--------
1 The Economic Growth and Tax Relief Reconciliation Act of 2001,
effective for taxable years beginning after December 31, 2000,
creates a new 10 percent income tax bracket and reduces the tax rates
applicable to ordinary income over a six year phase-in period.
Beginning in the taxable year 2006, ordinary income will be subject
to a 35% maximum rate, with approxi mately proportionate reductions
in the other ordinary rates.
Stock will be fully paid and non-assessable. Shares of Common Stock are not
redeemable and have no preemptive, conversion or cumulative voting rights.
The following table shows the number of shares of (i) capital stock
authorized, (ii) capital stock unissued and (iii) capital stock outstanding
for each class of authorized securities of the Fund as of December 31, 2001.
Amount Held by
Company or for
Title of Class Amount Authorized its Own Account Amount Outstanding
Common Stock.................. unlimited none 11,229,797
----------------------- ------------------- ----------------------
Preferred Stock............... unlimited none none
----------------------- ------------------- ----------------------
The Common Stock is listed and traded on the NYSE under the symbol
"GUT." The average weekly trading volume of the Common Stock on the NYSE for
the 12 months ended December 31, 2001 was 62,252 shares. The following table
sets forth for the quarters indicated the high and low closing prices on the
NYSE per share of the Common Stock and the net asset value and the premium or
discount from net asset value at which the Common Stock was trading, expressed
as a percentage of net asset value, at each of the high and low closing prices
provided.
PREMIUM OR DISCOUNT
MARKET PRICE (1) NET ASSET VALUE (2) AS % OF NAV
------------------------ ------------------------- ---------------------------
QUARTER ENDED HIGH LOW HIGH LOW HIGH LOW
------------- ---- --- ---- --- ---- ---
3/31/00 8.31 7.38 7.70 7.27 10% -2.96%
6/30/00 8.13 7.69 7.82 7.58 5.79% -.93%
9/30/00 8.75 7.69 8.36 7.76 5.17% -2.01%
12/31/00 9.19 7.94 8.43 7.98 9.51% -8.36%
3/31/01 9.05 8.20 8.12 7.56 14.70% 2.01%
6/30/01 9.20 8.20 7.98 7.72 16.46% 5.40%
9/30/01 9.18 8.20 7.93 7.23 21.91% 10.97%
12/31/01 9.35 8.84 7.52 7.11 30.52% 19.23%
------------------------------------
(1) As reported on the NYSE
(2) Based on the Fund's computations.
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 stock 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;
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 Stock 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
Boston Safe Deposit and Trust Company (the "Custodian"), located at
One Boston Place, Boston, Massachusetts 02019, 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 150 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 of Common Shares and this rights offering.
EXPERTS
The financial statements of the Fund as of December 31, 2001 have
been incorporated by reference into the SAI in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
that firm as experts in accounting and auditing. PricewaterhouseCoopers LLP is
located at 1177 Avenue of the Americas, New York, New York 10036.
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 Stock is 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 Statement. Reference is
hereby made to the Registration Statement and related exhibits for further
information with respect to the Fund and the 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 SHARES OF COMMON STOCK OFFERED BY THIS PROSPECTUS,
NOR DOES IT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY
SHARES OF COMMON STOCK BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION
THAT THERE HAS BEEN NO CHANGE IN THE FACTS AS SET FORTH IN THE PROSPECTUS OR
IN THE AFFAIRS OF THE FUND SINCE THE DATE HEREOF.
---------------------------------
TABLE OF CONTENTS
PAGE
PROSPECTUS SUMMARY........................................................4
TABLE OF FEES AND EXPENSES...............................................13
FINANCIAL HIGHLIGHTS.....................................................14
THE OFFER................................................................15
USE OF PROCEEDS..........................................................27
INVESTMENT OBJECTIVES AND POLICIES.......................................27
RISK FACTORS AND SPECIAL CONSIDERATIONS..................................33
MANAGEMENT OF THE FUND...................................................39
DIVIDENDS AND DISTRIBUTIONS..............................................42
TAXATION ................................................................43
CAPITALIZATION...........................................................45
CUSTODIAN, TRANSFER AGENT, DIVIDEND-DISBURSING AGENT AND
REGISTRAR.......................................................48
LEGAL MATTERS............................................................48
EXPERTS ................................................................48
FURTHER INFORMATION......................................................48
TABLE OF CONTENTS
OF
STATEMENT OF ADDITIONAL INFORMATION
INVESTMENT OBJECTIVES AND POLICIES.........................................1
PORTFOLIO TRANSACTIONS....................................................21
AUTOMATIC DIVIDEND REINVESTMENT
AND VOLUNTARY CASH PURCHASE PLAN.................................23
TAXATION .................................................................25
NET ASSET VALUE...........................................................31
GENERAL INFORMATION.......................................................32
APPENDIX A...............................................................A-1
=================================
THE GABELLI UTILITY TRUST
3,764,965 SHARES
OF COMMON STOCK
ISSUABLE UPON EXERCISE OF RIGHTS
TO SUBSCRIBE TO SUCH SHARES
PROSPECTUS
May 29, 2002
=================================
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 65% 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.
This Statement of Additional Information ("SAI") is not a prospectus,
but should be read in conjunction with the Prospectus for the Fund dated May
29, 2002 (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
1-800-GABELLI (1-800-422-3554) 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 regis tration statement filed with the Securities and Exchange
Commission, Washington, D.C. The registration statement may be obtained from
the Securities and Exchange Commission upon payment of the fee prescribed, or
inspected at the Securities and Exchange Commission's office at no charge.
This Statement of Additional Information is dated May 29, 2002.
INVESTMENT OBJECTIVES AND POLICIES
INVESTMENT OBJECTIVES
The Fund's primary investment objectives are long-term growth of
capital and in come. Under normal market conditions, the Fund will invest at
least 65% (80% commencing on July 1, 2002) 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. See
"Investment Objectives and Policies" in the Prospectus.
INVESTMENT PRACTICES
Securities Subject to Reorganization. The Fund may invest without
limit in securities 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 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 65% of the Fund's 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
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 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 10% 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 and 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 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 financial resources, its sensitivity to economic
conditions and trends, the operating history of and the community support for
the facility financed by the issue, the ability 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, 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.
The Fund may invest in securities of issuers in default within their
limitations on the purchase of fixed-income securities. 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. 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.
Fixed-income securities, including lower rated securities and
comparable unrated securities, frequently have call or buy-back features that
permit their issuers to call or repurchase the securities from their holders,
such as the Fund. If an issuer exercises these rights during periods of
declining interest rates, the Fund may have to replace the security with a
lower yielding security, thus resulting in a decreased return for the Fund.
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 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
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.
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
it 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 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 liqui date 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, 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 reduc tion 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.
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
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.
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, Boston Safe
Deposit and Trust Company ("Boston Safe"), 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 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.
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.
Number of
Portfolios in
Trustees Fund Other
Name (And Age), Position Term of Office Principal Complex Directorships
with the Fund and and Length of Occupation During Overseen by Held by
Business Address1 Time Served2 Past Five Years Trustee Trustee
---------------- ----------- --------------- ------- -------
INTERESTED
TRUSTEES3:
----------
*Mario J. Gabelli (59) Since 1999*** President and Chief 21 Director of
Chairman of the Board Investment Officer of the Morgan Group
Fund; Chairman of the Board, Holdings, Inc.
Chief Executive Officer of (transportation
Gabelli Asset Management services); Vice
Inc. and Chief Investment Chairman of
Officer of the Adviser and Lynch
GAMCO Investors, Inc; Corporation
Chairman and Trustee of other (diversified
registered investment manufacturing
companies in the Gabelli fund company).
complex.
*John D. Gabelli (58) Since 1999** Senior Vice President of 9 ____
Trustee Gabelli & Company and
Director of Gabelli Advisers,
Inc.; Trustee of other
registered investment
companies in the Gabelli fund
complex.
*Karl Otto Pohl (72) Since 1999** Member of the Shareholder 30 Director of
Trustee Committee of Sal. Oppenheim Gabelli Asset
Jr. & Cie, Zurich (private Management
investment bank); Former Inc.; Chairman,
President of the Deutsche Incentive Capital
Bundesbank and Chairman of and Incentive
its Central Bank Council from Asset
1980 through 1991; Management
Director/Trustee of other (Zurich);
registered investment Director at Sal.
companies in the Gabelli fund Oppenheim Jr. &
complex. Cie, Zurich
DISINTERESTED
TRUSTEES:
---------
Dr. Thomas E. Bratter (62) Since 1999*** Director, President and 3 ___
Trustee Founder, The John Dewey
Academy (residential college
preparatory therapeutic high
school); Director/Trustee of
other registered investment
companies in the Gabelli fund
complex.
Anthony J. Colavita (66) Since 1999* President and Attorney at law 32 ___
Trustee in the law firm of Anthony J.
Colavita, P.C. since 1961;
Director/Trustee of other
registered investment
companies in the Gabelli fund
complex.
James P. Conn (64) Since 1999** Former Managing Director 11 Director of
Trustee and Chief Investment Officer LaQuinta Corp.
of Financial Security (hotels) and First
Assurance Holdings Ltd., Republic Bank
1992-1998; Trustee of other
registered investment
companies in the Gabelli fund
complex.
Number of
Vincent D. Enright (58) Since 1999*** Former Senior Vice President 10 ___
Trustee and Chief Financial Officer of
KeySpan Energy
Corporation through
1998; Trustee of other
registered investment
companies in the Gabelli
fund complex.
Frank J. Fahrenkopf, Jr. (62) Since 1999* President and CEO of the 3 ___
Trustee American Gaming Association
since June 1995; Partner of
Hogan & Hartson; Chairman
of International Trade Practice
Group; Co-Chairman of the
Commission on Presidential
Debates; former Chairman of
the Republican National
Committee; Trustee of other
registered investment
companies in the Gabelli fund
complex.
Robert J. Morrissey (62) Since 1999* Partner in the law firm of 8 ___
Trustee Morrissey, Hawkins & Lynch;
Trustee of other
registered investment
companies in the Gabelli
fund complex.
Anthony R. Pustorino (76) Since 1999** Certified Public Accountant; 16 ___
Trustee Professor Emeritus (since
2002) and Professor of
Accounting, Pace
University, since 1965
(prior to 2002); Trustee
of other registered
investment companies in
the Gabelli fund
complex.
Number of
Salvatore J. Zizza (56) Since 1999* Chairman of Hallmark 8 Board Member
Trustee Electrical Supply Corp.; of Hollis Eden
Former Executive Vice Pharmaceuticals,
President of FMG Group (a Bion
healthcare provider); Former Environmental
President and Chief Executive Technologies
Officer of the Lehigh Group Inc. and The
Inc. (an electrical supply Credit Store Inc.
wholesaler); Trustee of other
registered investment
companies in the Gabelli fund
complex.
Officers
Name (And Age), Position Term of Office Principal
with the Fund and and Length of Occupation During
Business Address1 Time Served Past Five Years
---------------- ----------- ---------------
Bruce N. Alpert (50) Since 1999 Executive Vice President and
Vice President and Treasurer Chief 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; Vice President of The
Treasurer's Fund Inc.;
David Schachter (48) Since 1999 Vice President of the Fund since
Vice President 1999; Financial Services
Research Analyst of Gabelli &
Company from October 1, 1998
to July 9, 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 (38) Since 1999 Vice President and Secretary of
Secretary of the Fund the Adviser (since 1995) and
Vice President and General
Counsel of GAMCO Investors,
Inc. (since 1993); Secretary
of the registered investment
companies in the Gabelli fund
complex; Vice President,
General Counsel and Secretary
of Gabelli Asset Management
Inc.
* "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.
-----------------------
1 Address: One Corporate Center, Rye, NY 10580-1422, unless otherwise noted.
2 The Trust'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
Trust's 2002 Annual Meeting of Shareholders and until their successors are duly
elected and qualified. **-- Term expires at the Trust's 2003 Annual Meeting of
Shareholders and until their successors are duly elected and qualified. ***--
Term expires at the Trust's 2004 Annual Meeting of Shareholders and until their
successors are duly elected and qualified.
3 "Interested person" of the Trust as defined in the Investment Company Act of 1940.
Messrs. M. Gabelli, J. Gabelli and Pohl are each considered an "interested person"
because of their affiliation with Gabelli Funds LLC which acts as the Trust's
investment adviser.
The Board of Trustees of the Fund are divided into three classes,
with a class having a term of three years except as described below. Each year
the term of office of one class of trustees of the Fund will expire. However,
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 three-year terms. The terms of
Messrs. Colavita, Fahrenkopf, Morrissey and Zizza as trustees of the Fund
expire in 2002; the terms of Messrs. Conn, John Gabelli, Pohl and Pustorino as
trustees of the Fund expire in 2003; and the terms of Messrs. Bratter, Enright
and Mario Gabelli as trustees of the Fund expire in 2004. See "Certain
Provisions of the Declaration of Trust and the By-Laws" in the Prospectus.
Name of Director Dollar Range of Equity Aggregate Dollar Range of
Securities in the Fund Equity Securities in all
Registered Investment
Companies Overseen by
Directors in Family of
Investment Companies
INTERESTED TRUSTEES
Mario J. Gabelli E E
John D. Gabelli A E
Karl Otto Pohl A A
DISINTERESTED TRUSTEES
Dr. Thomas E. Bratter C E
James P. Conn C E
Vincent D. Enright A E
Frank J. Fahrenkopf, Jr. A B
Robert J. Morrissey A C
Anthony J. Pustonino B E
Salvatore J. Zizza C E
------------------------------------------
* KEY TO DOLLAR RANGES
A. None
B. $1 - $10,000
C. $10,001 - $50,000
D. $50,001 - $100,000
E. Over $100,000
All Shares were valued as of December 31, 2001.
The Trustees serving on the Trust's Nominating Committee are Messrs.
Zizza (Chairman) 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 Trust. The Nominating Committee did not meet
during the year ended December 31, 2001. The Trust does not have a standing
compensation committee.
Messrs. Pustorino (Chairman), Colavita and Enright serve on the
Trust's Audit Committee and these Trustees are not "interested persons" of the
Trust as defined in the 1940 Act. The Audit Committee is responsible for
reviewing and evaluating issues related to the accounting and financial
reporting policies and internal controls of the Trust and the internal
controls of certain service providers, overseeing the quality and objectivity
of the Trust's financial statements and the audit thereof and to act as a
liaison between the Board of Trustees and the Trust's independent accountants.
During the year ended December 31, 2001, the Audit Committee met twice.
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, 2001.
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, 2001
TOTAL
COMPENSATION
FROM THE FUND
AND FUND
AGGREGATE COMPLEX PAID
NAME OF PERSON AND COMPENSATION TO TRUSTEES/
POSITION* FROM THE FUND OFFICERS**
MARIO J. GABELLI Chairman of the Board $0 $0 (21)
DR. THOMAS E. BRATTER Trustee $5,000 $31,500 (3)
FELIX J. CHRISTIANA** $3,544 $50,533 (11)
ANTHONY J. COLAVITA Trustee $6,500 $145,016 (32)
JAMES P. CONN Trustee $5,000 $53,750 (11)
VINCENT D. ENRIGHT Trustee $5,500 $46,250 (10)
FRANK J. FAHRENKOPF, JR. Trustee $5,000 $31,500 (3)
JOHN D. GABELLI Trustee $0 $0 (9)
ROBERT J. MORRISSEY Trustee $4,500 $37,266 (8)
KARL OTTO POHL Trustee $0 $0 (30)
ANTHONY R. PUSTORINO Trustee $6,000 $125,250 (16)
SALVATORE J. ZIZZA Trustee $5,500 $64,266 (8)
* Represents the total compensation paid to such persons during the
calendar year ended December 31, 2001 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.
** Mr. Christiana served as a Trustee of the Trust until June 7, 2001.
For his services as Vice President of the Fund, Mr. Schachter received
compensation in 2001 of $85,000.
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 corporation 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 December
31, 2001, the Adviser and its affiliates acted as registered investment
advisers to 19 management investment companies with aggregate net assets of
$11.1 billion. The Adviser, together with other affiliated investment
advisers, has assets under management totaling $24.8 billion. GAMCO Investors,
Inc., an affiliate of the 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 $11.5 billion
under management as of December 31, 2001. 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 $1.6 billion under management
as of December 31, 2001. 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 the Gabelli Group Capital
Partners, Inc., which owns 78.6% of the capital stock of Gabelli Asset
Management Inc. as of December 31, 2002.
Under the terms of the Advisory Agreement, the Adviser manages the
portfolio of the Fund in accordance with its stated investment objective 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 main taining the Fund's books and records,
preparing reports to the Fund's shareholders and super vising 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. For its services, the
Adviser is paid a fee computed daily and paid monthly at an annual rate of
1.00% of the average weekly net assets of the Fund.
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.
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.
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 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 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. 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.
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, 2001 and 2000 were 41% and 92%, respectively. Portfolio turnover
rate is calculated by dividing the lesser of an investment company's annual
sales or purchases of portfolio securities by the monthly average value of
securities in its portfolio 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 its shareholders, as applicable. A higher rate of portfolio turnover may
also result in taxable gains being passed to shareholders.
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 Stock is
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 ("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 Stock registered in street name should consult their broker-
dealers for details regarding reinvestment. All distributions to investors who
do not participate in the Plan will be paid by check mailed directly to the
record holder by Equiserve as dividend disbursing agent.
Under the Plan, whenever the market price of the Common Stock is
equal to or exceeds net asset value at the time shares are valued for purposes
of determining the number of shares equivalent to the cash dividend or capital
gains distribution, participants in such plan are issued shares of Common
Stock, valued at the greater of (i) the net asset value as most recently
determined or (ii) 95% of the then current market price of the Common Stock.
The valuation date is the dividend or distribution payment date or, if that
date is not a New York Stock Exchange trading day, the next preceding trading
day. If the net asset value of the Common Stock at the time of valuation
exceeds the market price of the Common Stock, participants will receive shares
from the 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 Stock
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
net asset value if, following the commencement of such purchases, the market
value of its Common Stock 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 cash 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 cash payment by written notice, if the notice is received by
Equiserve at least 48 hours before such payment is to be invested.
Equiserve maintains all 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. 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.
With respect to purchases from voluntary cash 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 cash payments made and any dividend or distribution
paid subsequent to written notice of the change sent to the members of such
Plan at least 90 days before the record date for such dividend or
distribution. The Plan also may be amended or terminated by Equiserve on at
least 90 days' written notice to the participants in such Plan. All
correspondence concerning the Plan should be directed to Equiserve at P.O. Box
9573, Boston, Massachusetts 02205- 9573.
TAXATION
Set forth below is a discussion of certain U.S. federal income tax
issues concerning the Fund and the purchase, ownership and disposition of Fund
shares. This discussion is based upon present provisions of the Internal
Revenue Code of 1986, as amended (the "Code"), the regulations promulgated
thereunder, and judicial and administrative ruling authorities, all of which
are subject to change, which change may be retroactive. This discussion does
not purport to be complete or to deal with all aspects of U.S. federal income
taxation that may be relevant to investors in light of their particular
circumstances. Prospective investors should consult their own tax advisers
with regard to the U.S. federal tax consequences of the purchase, ownership,
or disposition of Fund shares, as well as the tax consequences arising under
the laws of any state, foreign country, or other taxing jurisdiction.
TAX STATUS 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 value of the Fund's total assets is invested in
the securities of any one issuer (other than U.S. Government securities and
the securities of other regulated investment companies) or of any two or more
issuers that the Fund controls and that are determined to be engaged in the
same business or similar or related trades or businesses.
As a regulated investment company, the Fund generally is not subject
to U.S. federal income tax on income and gains that it distributes each
taxable year to shareholders, if at least 90% of the sum of the Fund's (i)
investment company taxable income (which includes, among other items,
dividends, interest, 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 may retain for investment its net capital gain (which
consists of the excess of its net long-term capital gain over its net
short-term capital loss). However, if the Fund retains any net capital gain or
any investment company taxable income, it will be subject to tax at regular
corporate rates on the amount retained. The Fund intends to distribute
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
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.
A distribution will be treated as paid on December 31 of a calendar
year if it is declared by the Fund in October, November or December of that
year with a record date in such a month and paid by the Fund during January of
the following year. Such a distribution will be taxable to shareholders in the
calendar year in which the distribution is declared, rather than the calendar
year in which it is received.
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.
DISTRIBUTIONS
Distributions paid 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 shareholders as ordinary income to the extent of the Fund's earnings and
profits. Distributions made from an excess of net long-term capital gains over
net short-term capital losses ("capital gain dividends"), including capital
gain dividends credited to a shareholder but retained by the Trust (as
described below), are taxable to shareholders as long-term capital gains,
regardless of the length of time the shareholder has owned Fund shares.
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 gains to such holder (assuming the
shares are held as a capital asset). Dividend distributions of investment
company taxable income are taxable to a shareholder as ordinary income,
whether paid in cash or shares. Dividends paid by the Fund to a corporate
shareholder, to the extent such dividends are attributable to dividends
received by the Fund from U.S. corporations, may, subject to limitations, be
eligible for the dividends received deduction. Generally, not later than 60
days after the close of its taxable year, the Fund will provide its
shareholders with a written notice designating the amount of any ordinary
income dividends, capital gain dividends or dividends qualifying for a
dividends received deduction and other distributions.
Investors should be careful to consider the tax implications of
buying shares of the Fund just prior to the record date of a distribution
(including a capital gain dividend). The price of shares purchased at such a
time will reflect the amount of the forthcoming distribution, but the
distribution will generally be taxable to the shareholder.
If the Fund retains any net capital gain, it may designate the
retained amount as undistributed capital gains in a notice to its shareholders
who, if subject to U.S. federal income tax on long-term capital gains, (i)
will be required to include in income their share of such undistributed
long-term capital gain and (ii) will be entitled to credit their proportionate
share of the tax paid by the Fund against their U.S. federal tax liability, if
any, and to claim refunds to the extent the credit exceeds such liability. For
U.S. federal income tax purposes, the tax basis of shares owned by a
shareholder of the Fund will be increased by the amount of undistributed
capital gain included in the gross income of such shareholder less the tax
deemed paid by such shareholder under clause (ii) of the preceding sentence.
FOREIGN TAXES
The Fund may be subject to certain taxes imposed by the countries in
which it in vests or operates. If the Fund qualifies as a regulated investment
company and if more than 50% of the value of the Fund's total assets at the
close of any taxable year consists of stocks or securities of foreign
corporations, the Fund may elect, for U.S. federal income tax pur poses, to
treat any foreign taxes paid by the Fund that qualify as income or similar
taxes under U.S. federal income tax principles as having been paid by the
Fund's shareholders. For any year for which the Fund makes such an election,
each shareholder will be required to include in its gross income an amount
equal to its allocable share of such taxes paid by the Fund and the
shareholders will be entitled, subject to certain limitations, to credit their
portions of these amounts against their U.S. federal income tax liability, if
any, or to deduct their portions from their U.S. taxable income, if any. No
deduction for foreign taxes may be claimed by individuals who do not itemize
deductions. In any year in which it elects to "pass through" foreign taxes to
shareholders, the Fund will notify shareholders within 60 days after the close
of the Fund's taxable year of the amount of such taxes and the sources of its
income. Because application of the credit depends on the particular
circumstances for each shareholder, shareholders are advised to consult their
own tax advisers.
DISPOSITIONS
The sale or other disposition of common shares of the Fund will
generally result in capital gain or loss to shareholders, and will be
long-term capital gain or loss if the shares have been held for more than one
year at the time of sale. Any loss upon the sale or exchange of Fund shares
held for six months or less will be treated as long-term capital loss to the
extent of any capital gain dividends received (including amounts credited as
an undistributed capital gain dividend) by the shareholder. 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 and ordinary income will currently be taxed
at a maximum rate of 38.6% while long- term capital gains generally will be
taxed at a maximum rate of 20% and 10% for taxpayers in the 15% bracket. The
20% capital gains rate and the 10% capital gains rate will be reduced to 18%
and 8% respectively, for capital assets held for more than five years if the
holding period begins after December 31, 2000.2
BACKUP WITHHOLDING
The Fund generally will be required to withhold U.S. federal income
tax ("backup withholding") from dividends, capital gain distributions and
certain other amounts paid to shareholders who are U.S. citizens or resident
aliens if (1) the shareholder fails to furnish the Fund with the shareholder's
correct taxpayer identification number or social security number, (2) the
Internal Revenue Service notifies the shareholder or the Fund that the
shareholder has failed to report properly certain interest and dividend income
to the Internal Revenue Service and to respond to notices to that effect, or
(3) when required to do so, the shareholder fails to certify that he or she is
not subject to backup withholding. Any amounts withheld may be credited
against the shareholder's U.S. federal income tax liability.
FOREIGN INVESTORS
A shareholder that is a nonresident alien individual or a foreign
corporation (a "foreign investor") generally may be subject to U.S.
withholding tax at the rate of 30% (or possibly a lower rate provided by an
applicable tax treaty) on ordinary income dividends. Different tax
consequences may result if the foreign investor is engaged in a trade or
business in the United States or, in the case of an individual, is present in
the United States for 183 or more days during a taxable year and certain other
conditions are met.
FUND INVESTMENTS
The Fund will invest in securities rated in the lower rating
categories of nationally recognized rating organizations ("junk bonds" or
"high yield bonds"). Some of these junk bonds or high-yield bonds may be
purchased at a discount and may therefore cause the Fund to accrue and
distribute income before amounts due under the obligations are paid. In
addition, a portion of the interest on such junk bonds and high-yield bonds
may be treated as dividends for U.S. federal income tax purposes. In such
cases, if the issuer of the junk bonds or high-yield bonds is a domestic
corporation, dividend payments by the Fund will be eligible for the dividends
received deduction to the extent of the deemed dividend portion of such
interest.
--------
2 The Economic Growth and Tax Relief Reconciliation Act of 2001,
effective for taxable years beginning after December 31, 2000,
creates a new 10 percent income tax bracket and reduces the tax rates
applicable to ordinary income over a six year phase-in period.
Beginning in the taxable year 2006, ordinary income will be subject
to a 35% maximum rate, with approximately proportionate reductions in
the other ordinary rates.
The Fund may write (i.e., sell) covered call and covered put options
on its portfolio securities, purchase call and put options on securities and
engage in transactions in financial futures and related options on such
futures. Such options and futures contracts that are "Section 1256 contracts"
will be "marked to market" for U.S. federal income tax purposes at the end of
each taxable year, i.e., each such option or futures contract will be treated
as sold for its fair market value on the last day of the taxable year. Subject
to certain exceptions, generally gain or loss from Section 1256 contracts will
be 60% long-term and 40% short- term capital gain or loss. Application of
these rules to Section 1256 contracts held by the Fund may alter the timing
and character of distributions to shareholders. The mark-to-market rules
outlined above, however, will not apply to certain transactions entered into
by the Fund primarily to reduce the risk of changes in price or interest or
currency exchange rate with respect to its investments.
The U.S. federal income tax rules governing the taxation of interest
rate swaps are not entirely clear and may require the Fund to treat payment
received under such arrangements as ordinary income and to amortize such
payment under certain circumstances. The Fund does not anticipate that its
activity in this regard will affect its qualification as a regulated
investment company.
Code Section 1092, which applies to certain "straddles," may affect
the taxation of the Fund's sales of securities and transactions in options and
futures. Under Code Section 1092, the Fund may, for U.S. federal income tax
purposes, be required to postpone recognition of losses incurred in certain
sales of securities and certain closing transactions in options and futures.
Passive Foreign Investment Companies. The Fund may invest in shares
of foreign corporations that may be classified under the Code as passive
foreign investment companies ("PFICs"). In general, a foreign corporation is
classified as a PFIC if at least one-half of its assets constitute
investment-type assets, or 75% or more of its gross income is investment- type
income. If the Fund receives a so-called "excess distribution" with respect to
PFIC stock, the Fund itself may be subject to a tax on a portion of the excess
distribution, whether or not the corresponding income is distributed by the
Fund to shareholders. In general, under the PFIC rules, any excess
distribution is treated as having been realized ratably over the period during
which the Fund held the PFIC shares. The Fund will itself be subject to tax on
the portion, if any, of an excess distribution that is so allocated to prior
Fund taxable years and an interest factor will be added to the tax, as if the
tax had been payable in such prior taxable years. Certain distributions from a
PFIC as well as gain from the sale of PFIC shares are treated as excess
distributions. Excess distributions are characterized as ordinary income even
though, absent application of the PFIC rules, certain excess distributions
might have been classified as capital gain.
The Fund may be eligible to elect alternative tax treatment with
respect to PFIC shares. Under one election currently available in some
circumstances, the Fund would be required to include in its gross income its
share of the earnings of a PFIC, on a current basis, whether or not
distributions were received from the PFIC in a given year. Under another
election, the Fund would be required to mark to market the Fund's PFIC shares
at the end of each taxable year, with the result that unrealized gains would
be treated as realized and such gains would be required to be reported as
ordinary income. Any mark-to-market losses and any loss from an actual
disposition of PFIC shares would be deductible as ordinary losses to the
extent of any net mark-to-market gains included in income in prior years. If
either one of these elections were made the special rules, discussed above,
relating to the taxation of excess distributions would not apply.
Certain of the Fund's investment practices are subject to special and
complex 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 foregoing is a general summary of the provisions of the Code and
the Treasury Regulations in effect as they directly govern the U.S. federal
income 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. Ordinary income and capital gain dividends may also be subject to
state, local, foreign income or other taxes. Certain states exempt from state
income taxation dividends paid by regulated investment companies which are
derived from interest on United States Government obligations. State law
varies as to whether dividend income attributable to United States Government
obligations is exempt from state income tax. Shareholders are urged to consult
their tax advisers regarding specific questions as to U.S. federal, foreign,
state, local income or other taxes.
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 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 price 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 highest bid price ob tained 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 mature in 60 days or fewer 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.
Trading takes place in various foreign markets on days which are not
Business Days and therefore the Fund's respective 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 share is calculated by dividing the value of the
securities held plus any cash or other assets minus all liabilities, including
accrued expenses, by the total number of shares outstanding at such time.
GENERAL INFORMATION
COUNSEL AND INDEPENDENT ACCOUNTANTS
Skadden, Arps, Slate, Meagher & Flom LLP, 4 Times Square, New York,
New York 10036 is special counsel to the Fund in connection with the rights
offering.
PricewaterhouseCoopers LLP, independent accountants, 1177 Avenue of
the Americas, New York, New York 10036, serve as auditors of the Fund and will
annually render an opinion on the financial statements of the Fund.
BENEFICIAL OWNER
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 Stock because they
possessed or shared voting or investment power with respect to shares of the
Fund's Common Stock.
FINANCIAL STATEMENTS
The audited financial statements included in the Annual Report to the
Fund's Shareholders for the fiscal year ended December 31, 2001, together with
the report of PricewaterhouseCoopers LLP thereon, are also incorporated herein
by reference from the Fund's Annual Report to Shareholders. All other portions
of the 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).
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.
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
noncredit 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.
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