PROSPECTUS Filed pursuant to Rule 497(e)
15,298,491 RIGHTS FOR 5,099,497 SHARES
THE GABELLI
UTILITY TRUST
COMMON SHARES
The Gabelli Utility Trust (the "Fund") is issuing transferable rights
("Rights") to its common shareholders of common shares of beneficial interest,
par value $.001 per share (the "Common Shares"). These Rights will allow you
to subscribe for new Common Shares of the Fund. For every three Rights that
you receive, you may buy one new Common Share of the Fund plus, in certain
circumstances, additional Common Shares pursuant to an over-subscription
privilege. You will receive one Right for each outstanding Common Share of the
Fund you own on August 20, 2003 (the "Record Date") rounded up to the nearest
number of Rights evenly divisible by three. Fractional shares will not be
issued upon the exercise of the Rights. Accordingly, new Common Shares may be
purchased only pursuant to the exercise of Rights in integral multiples of
three.
The Rights are transferable and will be admitted for trading on the
New York Stock Exchange ("NYSE") under the symbol "GUT RT." The Common Shares
are presently listed on the NYSE under the symbol "GUT." The new Common Shares
issued in this Rights offering (the "Offer") will also be listed under the
symbol "GUT." On August 15, 2003 (the last trading date prior to the Common
Shares trading ex-Rights), the last reported net asset value per share of the
Common Shares was $6.18 and the last reported sales price per Common Share on
the NYSE was $8.90. The purchase price per Common Share (the "Subscription
Price") will be $7.00. The offer will expire at 5:00 p.m., New York Time, on
September 23, 2003, 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
80% of its total assets in common stock and other debt or equity 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. We cannot assure you that the Fund's
investment objective will be achieved. FOR A DISCUSSION OF CERTAIN RISK
FACTORS AND SPECIAL CONSIDERATIONS WITH RESPECT TO OWNING COMMON SHARES OF THE
FUND, SEE "RISK FACTORS AND SPECIAL CONSIDERATIONS" ON PAGE 28 OF THIS
PROSPECTUS. The address of the Fund is One Corporate Center, Rye, New York
10580-1422 and its telephone number is (914) 921-5070.
This Prospectus sets forth certain information about the Fund an
investor should know before investing. Accordingly, this Prospectus should be
retained for future reference.
A Statement of Additional Information dated August 20, 2003 (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 48 of this Prospectus. A copy of the SAI may be obtained
without charge by writing to the Fund at One Corporate Center, Rye, New York
10580-1422 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.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY ANY SECURITIES
REGULATORY AUTHORITY IN CANADA. THIS OFFERING WILL NOT BE MADE IN ANY PROVINCE
OF CANADA WHERE IT IS NOT PERMITTED BY LAW.
SUBSCRIPTION PROCEEDS
PRICE SALES LOAD TO FUND(1)
--------------------------------------------------
Per Common Share.............. $7.00 None $7.00
Total......................... $52,500,000 None $52,500,000(2)
(1) Before deduction of expenses incurred by the Fund, estimated at $500,000.
(2) 2,400,503 shares representing $16,803,521 of the proceeds can only be
issued if the Common Shares on the Expiration Date are trading at or
above their per share net asset value. In the event the Common Shares on
the Expiration Date are not trading at or above their per share net asset
value, then the maximum proceeds to the Fund will be $35,696,479.
_______________________________
SHAREHOLDERS WHO DO NOT EXERCISE THEIR RIGHTS MAY, AT THE COMPLETION
OF THE OFFER, OWN A SMALLER PROPORTIONAL INTEREST IN THE FUND THAN IF THEY
EXERCISED THEIR RIGHTS. AS A RESULT OF THE OFFER YOU MAY EXPERIENCE DILUTION
OR ACCRETION OF THE AGGREGATE NET ASSET VALUE OF YOUR SHARES DEPENDING UPON
WHETHER THE FUND'S NET ASSET VALUE PER SHARE IS ABOVE OR BELOW THE
SUBSCRIPTION PRICE ON THE EXPIRATION DATE. The Fund cannot state precisely the
extent of any dilution or accretion at this time because the Fund does not
know what the net asset value per Common Share will be when the Offer expires
or what proportion of the Rights will be exercised. The Investment Adviser's
parent company, Gabelli Asset Management Inc. and its affiliates ("Affiliated
Parties") may purchase shares through the primary subscription and the
over-subscription privilege and Mr. Mario J. Gabelli, who may be deemed to
control the Fund's investment adviser, or his affiliated entities may also
purchase additional shares through the primary subscription and
over-subscription privilege and on the same terms as other shareholders.
_________________________________
This Prospectus sets forth concisely certain information about the
Fund that a prospective investor should know before investing. Investors are
advised to read and retain it for future reference.
A Statement of Additional Information dated August 20, 2003 (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 48 of this
Prospectus, may be obtained without charge by contacting the Fund at (800)
GABELLI (800) 422-3554) or (914) 921-5070. The SAI will be sent within two
Business Days (defined below) of receipt of a request. Investors may also
obtain the Statement of Additional Information, material incorporated by
reference, and other information about the Fund from the SEC's website
(http://www.sec.gov). Shareholder inquiries should be directed to the
Subscription Agent, EquiServe, at (800) 336-6983 or (781) 575-2000.
_________________________________
August 20, 2003
2
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS.
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED BY THE FUND OR THE FUND'S INVESTMENT ADVISER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN
OFFER TO BUY ANY SECURITY OTHER THAN THE COMMON SHARES OFFERED BY THIS
PROSPECTUS, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN
OFFER TO BUY SHARES OF COMMON SHARES BY ANYONE IN ANY JURISDICTION WHICH SUCH
OFFER OR SOLICITATION WOULD BE UNLAWFUL.
_________________________________
TABLE OF CONTENTS
PAGE
----
PROSPECTUS SUMMARY.............................................................1
TABLE OF FEES AND EXPENSES.....................................................9
FINANCIAL HIGHLIGHTS..........................................................10
THE OFFER.....................................................................13
USE OF PROCEEDS...............................................................24
INVESTMENT OBJECTIVES AND POLICIES............................................24
RISK FACTORS AND SPECIAL CONSIDERATIONS.......................................28
MANAGEMENT OF THE FUND........................................................34
DIVIDENDS AND DISTRIBUTIONS...................................................36
TAXATION .....................................................................37
CAPITALIZATION................................................................39
ANTI-TAKEOVER PROVISIONS OF THE DECLARATION OF TRUST
AND BY-LAWS..........................................................44
CUSTODIAN, TRANSFER AGENT, DIVIDEND-DISBURSING AGENT AND REGISTRAR............45
LEGAL MATTERS.................................................................45
EXPERTS .....................................................................45
FURTHER INFORMATION...........................................................45
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS.............................46
TABLE OF CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION......................48
i
PROSPECTUS SUMMARY
This summary highlights some information that is described more fully
elsewhere in this Prospectus. It may not contain all of the information that
is important to you. To understand the Offer fully, you should read the entire
document carefully, including the risk factors which can be found on page 28,
under the heading "Risk Factors and Special Considerations."
PURPOSE OF THE OFFER
The Board of Trustees of the Fund has determined that it would be in
the best interests of the Fund and its existing shareholders to increase the
assets of the Fund so that the Fund may be in a better position to take
advantage of investment opportunities that may arise. The Offer seeks to
reward existing shareholders by giving them the opportunity to purchase
additional shares at a price that may be below market and/or net asset value
without incurring any commission or charge. The distribution of the Rights,
which themselves may have intrinsic value, will also give non-participating
shareholders the potential of receiving a cash payment upon the sale of their
Rights, which may be viewed as partial compensation for the possible dilution
of their interests in the Fund as a result of the Offer.
The Board of Trustees believes that increasing the size of the Fund
may lower the Fund's expenses as a proportion of average net assets because
the Fund's fixed costs can be spread over a larger asset base. There can be no
assurance that by increasing the size of the Fund, the Fund's expense ratio
will be lowered. The Board of Trustees also believes that a larger number of
outstanding shares 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................................5,099,497
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...........................................................................$7.00
______________
* The number of Rights to be issued to a shareholder on the Record Date
will be rounded up to the nearest number of Rights evenly divisible
by three.
** Holders of Rights will be able to acquire additional Fund shares
pursuant to an over-subscription privilege in certain circumstances.
==============================================================================
Shareholders' inquiries should be directed to:
EquiServe
(800) 336-6983 or (781) 575-2000
or Gabelli
(800) GABELLI (422-3554)
==============================================================================
1
OVER-SUBSCRIPTION PRIVILEGE
Shareholders on the Record Date ("Record Date Shareholders") who
fully exercise all Rights initially issued to them are entitled to buy those
Fund shares, referred to as "primary over-subscription shares" that were not
purchased by other Rights holders. If enough primary over-subscription shares
are available, all such requests will be honored in full. If the requests for
primary over-subscription shares exceed the primary over-subscription shares
available, the available primary over-subscription shares will be allocated
pro rata among those fully exercising Record Date Shareholders who
over-subscribe based on the number of Rights originally issued to them by the
Fund. Shares acquired pursuant to the over- subscription privilege are subject
to allotment, which is more fully discussed under "The Offer -- Over-
Subscription Privilege."
In addition, in the event that the Fund's per share net asset value
on the Expiration Date is equal to or less than the Subscription Price, the
Fund, in its sole discretion, may determine to issue up to 2,400,503
additional Common Shares, referred to as "secondary over-subscription shares,"
to satisfy over-subscription requests in excess of the new Fund shares
available for primary subscription. The Fund, in its sole discretion, would
also be able to issue additional Common Shares in an amount of up to 20% of
the sum of shares issued pursuant to the primary subscription and secondary
over-subscription. Any such new Common Shares will be allocated and issued in
conjunction with the secondary over- subscription shares to Record Date
Shareholders who are eligible to receive secondary over-subscription shares.
Should the Fund determine to issue some or all of the secondary
over-subscription shares, it will be allocated only among Record Date
Shareholders who submitted over-subscription requests. Rights holders who are
not Record Date Shareholders may not participate in the secondary
over-subscription. Secondary over-subscription shares will be allocated pro
rata among those fully exercising Record Date Shareholders who over-subscribe
based on the number of Rights originally issued to them by the Fund.
Fund shares acquired pursuant to the over-subscription privilege are
subject to allotment, which is more fully discussed under "The Offer --
Over-Subscription Privilege."
METHOD FOR EXERCISING RIGHTS
Except as described below, subscription certificates evidencing the
Rights ("Subscription Certificates") will be sent to Record Date Shareholders
or their nominees. If you wish to exercise your Rights, you may do so in the
following ways:
(1) Complete and sign the Subscription Certificate. Mail it in
the envelope provided or deliver it, together with payment
in full to EquiServe (the "Subscription Agent") at the
address indicated on the Subscription Certificate. Your
completed and signed Subscription Certificate and payment
must be received by the Expiration Date.
(2) Contact your broker, banker or trust company, which can
arrange, on your behalf, to guarantee delivery of payment
and delivery of a properly completed and executed
Subscription Certificate by the close of business on the
third Business Day after the Expiration Date pursuant to a
notice of guaranteed delivery. A fee may be charged for this
service. 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."
2
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 September 22,
2003, 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 (i) a Rights holder is unable to exercise because the Rights represent
the right to subscribe for less than one new Share (defined herein) or (ii)
attributable to shareholders whose record addresses are outside the United
States and Canada or who have an AFO or FPO address as described below under
"Restrictions on Foreign Shareholders." 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. If the Rights can be sold, sales of these Rights
will be deemed to have been effected at the weighted average price received by
the Subscription Agent on the day such Rights are sold, less any applicable
brokerage commissions, taxes and other expenses. For purposes of this
Prospectus, a "Business Day" shall mean any day on which trading is conducted
on the NYSE.
==============================================================================
Shareholders are urged to obtain a recent trading price for
the Rights on the New York Stock Exchange from their
broker, bank, financial advisor
or the financial press.
==============================================================================
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 Canada or who have an
APO or FPO address. Shareholders whose addresses are outside the United States
and Canada or who have an APO or FPO address and who wish to subscribe to the
Offer either in part or in full should contact the Subscription Agent,
EquiServe, by written instruction or recorded telephone conversation no later
than three Business Days prior to the Expiration Date. The Fund will determine
whether the offering may be made to any such shareholder. This offering will
not be made in any jurisdiction where it would be unlawful to do so. If the
Subscription Agent has received no instruction by the third Business Day prior
to the Expiration Date or the Fund has determined that the offering may not be
made to a particular shareholder, the Subscription Agent will attempt to sell
all of such shareholder's Rights and
3
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
$52,000,000. This figure is based on the Subscription Price per share of $7.00
and assumes all new Common 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....................................................................August 20, 2003
Subscription Period.................................August 20, 2003 through September 23, 2003**
Expiration of the Offer*....................................................September 23, 2003**
Payment for Guarantees of Delivery Due*.....................................September 26, 2003**
Confirmation to Participants..................................................October 10, 2003**
_______________
* A shareholder exercising Rights must deliver by 5:00 New York time on
September 23, 2003 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 October 7, 2003.
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
80% of its total assets in common stock and other securities of foreign and
domestic companies involved to a substantial extent in providing (i)
products, services or equipment for the generation or distribution of
electricity, gas and water 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 are listed
and traded on the New York Stock Exchange (the "NYSE"). The average weekly
trading volume of the Fund's Common Shares on the NYSE during the period
from January 1, 2002 through December 31, 2002 was 151,271 shares. On July
31, 2003, the Fund issued 1,200,000 shares of 5.625% Series A Cumulative
Preferred Shares, liquidation preference $25 per share (the "Series A
Preferred Shares") and 1,000 shares of Series B Auction Market Preferred
4
Shares, liquidation preference $25,000 per share (the "Series B
Preferred Shares"). As of July 31, 2003, the net assets of the Fund were
approximately $150,652,203.
INFORMATION REGARDING THE INVESTMENT ADVISER
The Investment Adviser has served as the investment adviser to the
Fund since its inception. The Investment Adviser also provides certain
administrative services to the Fund. The Investment Adviser and its affiliates
have been engaged in the business of providing investment advisory and
portfolio management services for over 25 years and as of June 30, 2003,
managed total assets of approximately $21.9 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. The Investment Adviser's fee is subject to a
voluntary fee waiver under certain circumstances. See "Management of the Fund
-- Investment Adviser." Since the Investment Adviser's fees are based on the
net assets of the Fund, the Investment Adviser will benefit from the Offer. In
addition, three Trustees who are "interested persons" of the Fund could
benefit indirectly from the Offer because of their interests in the Investment
Adviser. See "The Offer -- Purpose of the Offer."
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 may, at the completion
of the Offer, own a smaller
proportional interest in the Fund
than if they exercise their Rights.
As a result of the Offer you may
experience dilution in net asset
value per share if the subscription
price is below the net asset value
per share on the Expiration Date. If
the Subscription Price per share is
below the Fund's net asset value per
share of the Fund's shares on the
Expiration Date, you will experience
an immediate dilution of the
aggregate net asset value of your
shares if you do not participate in
the Offer and you will experience a
reduction in the net asset value per
share of your shares whether or not
you participate in the Offer. The
Fund cannot state precisely the
extent of this dilution (if any) if
you do not exercise your Rights
because the Fund does not know what
the net asset value per share will be
when the Offer expires or what
proportion of the Rights will be
exercised. For example, assuming that
all Rights are exercised, the
Subscription Price is $7.00 and the
Fund's net asset value per share at
the expiration of the Offer increases
to $7.50, the Fund's net asset value
per share (after payment of estimated
offering expenses) would be reduced
by approximately $0.12 (1.60%) per
share. See "Risk Factors and Special
Considerations -- Dilution." If you
do not wish to exercise your Rights,
you should consider selling them as
set forth in this Prospectus. The
Fund cannot give any assurance,
however, that a market for the Rights
will develop or that the Rights will
have any marketable value.
5
Leveraging............................. As provided in the 1940 Act and
subject to certain exceptions, the
Fund may issue debt or preferred
shares (such as the outstanding
Series A and Series B Preferred
Shares) so long as the Fund's total
assets immediately after such
issuance, less certain ordinary
course liabilities, exceed 300% of
the amount of the debt outstanding
and exceed 200% of the sum of the
amount of preferred shares and debt
outstanding. Such debt or preferred
shares may be convertible in
accordance with SEC staff guidelines
which may permit the Fund to obtain
leverage at more attractive rates.
Use of leverage may magnify the
impact on the holders of Common
Shares of changes in net asset value
and the cost of leverage may exceed
the return on the securities acquired
with the proceeds of leverage,
thereby diminishing rather than
enhancing the return to such
shareholders and generally making the
Fund's total return to such
shareholders more volatile. In
addition, the Fund may be required to
sell investments in order to meet
dividend or interest payments on the
debt or preferred shares when it may
be disadvantageous to do so.
Leveraging through the issuance of
preferred shares requires that the
holders of the preferred shares have
class voting rights on various
matters that could make it more
difficult for the holders of the
Common Shares to change the
investment objectives or fundamental
policies of the fund, to convert it
to an open-end fund or make certain
other changes. See "Risk Factors and
Special Considerations" and "Special
Investment Methods."
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.
Trading Premium........................ Historically, the Fund's Common Shares
have traded at a premium to their net
asset value per share. As of August
15, 2003, this premium was 44.0%. There
is no guarantee that this premium is
sustainable either during the term of
the Offer or over the long term. The
issuance of additional Common Shares
pursuant to the Offer and the related
over-subscription and secondary over-
subscription privileges may reduce or
eliminate any premium that common
6
shareholders may have otherwise
received for their Common Shares.
Share Repurchases...................... You will be free to sell your shares
on the NYSE or other markets on which
the shares may trade, but, because the
Fund is a closed- end fund, you do not
have the right to redeem your Common
Shares. The Fund is authorized to
repurchase its shares on the open
market when the shares are trading at
a discount of 10% or more from net
asset value. Such repurchases are
subject to the Fund maintaining asset
coverage on its preferred shares and
to certain notice and other
requirements. There is no assurance
that any action undertaken to
repurchase shares will result in the
shares trading at a price which
approximates their net asset value.
Share repurchases by the Fund would
decrease the capital of the Fund and
could have the effect of increasing
the Fund's expense ratio.
Anti-takeover Provisions............... Certain provisions of the Fund's
Declaration of Trust may be regarded
as "anti-takeover" provisions.
Pursuant to these provisions only one
of the three classes of trustees is
elected each year, and the affirmative
vote of the holders of 75% of the
outstanding voting shares of the Fund
(together with a separate class vote
by the holders of any preferred shares
outstanding) is necessary to authorize
amendments to the Fund's Declaration
of Trust that would be necessary to
convert the Fund from a closed-end to
an open-end investment company. In
addition, the affirmative vote of the
holders of 80% of the outstanding
voting shares of each class of the
Fund, voting as a class, is generally
required to authorize certain business
transactions with the beneficial owner
of more than 5% of the outstanding
shares of the Fund. In addition, the
holders of the preferred shares have
the authority to elect two trustees at
all times and would have separate
class voting rights on specified
matters including conversion of the
Fund to open-end status and certain
reorganizations of the Fund. The
overall effect of these provisions is
to render more difficult the
accomplishment of a merger with, or
the assumption of control by, a
principal shareholder, or the
conversion of the Fund to open-end
status. These provisions may have the
effect of depriving Fund shareholders
of an opportunity to sell their shares
at a premium above the prevailing
market price. See "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
7
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."
Industry Risks......................... Under normal market conditions, the
Fund will invest 80% or more of its
total assets in companies in the
Utility Industry and, as a result, the
value of the Fund's shares will be
more susceptible to factors affecting
those particular types of companies,
including governmental regulation,
deregulation, inflationary and other
cost increases in fuel and other
operating expenses, technological
innovations that may render existing
products and equipment obsolete and
increases in interest rates resulting
in higher interest costs on borrowings
needed for capital construction
programs, including costs associated
with compliance with environmental and
other regulations. As a consequence of
its concentration policy, the Fund's
investments may be subject to greater
risk and market fluctuation than a
fund that has securities representing
a broader range of alternatives. See
"Investment Objectives and Policies"
and "Risk Factors and Special
Considerations."
Key Personnel Dependence............... The Investment Adviser is dependent
upon the expertise of Mr. Mario J.
Gabelli in providing advisory services
with respect to the Fund's
investments. If the Investment Adviser
were to lose the services of Mr.
Gabelli, its ability to service the
Fund could be adversely affected.
There can be no assurance that a
suitable replacement could be found
for Mr. Gabelli in the event of his
death, resignation, retirement or
inability to act on behalf of the
Investment Adviser.
Taxation............................... The Fund intends to continue to be
treated and qualify as a regulated
investment company, for U.S. federal
income tax purposes. Such
qualification requires, among other
things, compliance by the Fund with
certain distribution requirements.
The Fund is also, however, subject to
certain statutory limitations on
distributions on its Common Shares if
the Fund fails to satisfy the 1940
Act's asset coverage requirements
which could jeopardize the Fund's
ability to meet the regulated
investment company distribution
requirements. See "Taxation" for a
more complete discussion.
8
TABLE OF FEES AND EXPENSES
SHAREHOLDER TRANSACTION EXPENSES
Voluntary Cash Purchase Plan Purchase Fees................................. $0.75 (1)
Automatic Dividend Reinvestment and Voluntary Cash Purchase Plan
Sales Fees................................................................. $2.50 (1)
ANNUAL OPERATING EXPENSES (as a percentage of net assets
attributable to Common Shares)
Management Fees............................................................ 1.00% (2)
Other Expenses 0.93%
----------------
Total Annual Operating Expenses................................... 1.93% (2)
----------------
(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.
(2) The Investment Adviser has voluntarily agreed to waive the portion of
its investment advisory fee attributable to an amount of assets of
the Fund equal to the aggregate stated value of its outstanding
Series A Preferred Shares and/or Series B Preferred Shares for any
calendar year in which the net asset value total return of the Fund
allocable to the common shares, including distributions and the
advisory fee subject to potential waiver, is less than (i) in the
case of the Series A Preferred Shares, the stated annual dividend
rate of such series and (ii) in the case of the Series B Preferred
Shares, the net cost of capital to the Fund with respect to the
Series B Preferred Shares for such year expressed as a percentage
(including, without duplication, dividends paid by the Fund on the
Series B Preferred Shares and the net cost to the Fund of any
associated swap or cap transaction if the Fund hedges its Series B
Preferred Shares dividend obligations). This waiver will apply
separately to the portion of the Fund's assets attributable to the
Series A Preferred Shares and Series B Preferred Shares for so long
as any shares of such series remain outstanding.
9
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 $61 $104 $225
The foregoing example is to assist you in understanding the various
costs and expenses that an investor in the Fund will bear directly or
indirectly. The assumed 5% annual return is not a prediction of, and does not
represent, the projected or actual performance of the Fund's Common Shares.
ACTUAL EXPENSES AND ANNUAL RATES OF RETURN MAY BE MORE OR LESS THAN THOSE
ASSUMED FOR PURPOSES OF THE EXAMPLE.
____________________________
(2) Amounts are exclusive of fees discussed in Note (1) above.
FINANCIAL HIGHLIGHTS
The table below sets forth selected financial data for a Common Share
outstanding throughout the periods presented. The per share operating
performance and ratios for the fiscal years ended December 31, 2002, 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.
10
SELECTED DATA FOR A COMMON SHARE OUTSTANDING THROUGHOUT EACH PERIOD
Six Months
Ended June 30, Year Ended Year Ended Year Ended Period Ended
2003 December 31, December 31, December 31, December 31,
(Unaudited) 2002 2001 2000 1999(a)
--------------- --------------- ---------------- --------------- ----------------
OPERATING PERFORMANCE:
Net asset value, beginning of
period........................ $ 6.27 $ 7.32 $ 8.21 $ 7.62 $ 7.50
-------------- --------------- ---------------- --------------- ----------------
Net investment income......... 0.05 0.11 0.12(e) 0.15 0.08
Net realized and unrealized
gain(loss) on investments..... 0.67 (0.62) (0.32)(e) 1.44 0.19
-------------- --------------- ---------------- --------------- ----------------
Total from investment operations 0.72 (0.51) (0.20) 1.59 0.27
-------------- --------------- ---------------- --------------- ----------------
CHANGE IN NET ASSET
VALUE FROM TRANSACTIONS
IN SHARES OF BENEFICIAL
INTEREST:
Increase in net asset value from --
shares issued in rights offering 0.15 -- -- --
Increase in net asset value from
Trust share transactions........ -- 0.03 0.01 -- --
------------- --------------- ---------------- --------------- ----------------
DISTRIBUTIONS TO
SHAREHOLDERS:
Net investment income......... (0.05) (0.11) (0.21) (0.06) (0.08)
Net realized gain on
investments................... -- (0.36) (0.49) (0.94) (0.07)
Return of capital............. (0.31) (0.25) -- -- --
-------------- --------------- ---------------- --------------- ----------------
Total distributions........... (0.36) (0.72) (0.70) (1.00) (0.15)
-------------- --------------- ---------------- --------------- ----------------
NET ASSET VALUE, END OF
PERIOD: $ 6.63 $ 6.27 $ 7.32 $ 8.21 $ 7.62
============== =============== ================ =============== ================
Market value, end of period... $ 9.61 $ 8.72 $ 9.33 $ 8.75 $ 7.63
============== =============== ================ =============== ================
Net asset value total return + 10.29% (6.79%) (3.15%) 22.01% 3.62%
============== =============== ================ =============== ================
Total Investment Return ++.... 14.95% 1.70% 15.82% 29.95% 3.70%
============== =============== ================ =============== ================
RATIOS TO AVERAGE NET
ASSETS AND SUPPLEMENTAL
DATA:
Net assets, end of period (in
thousands).................... $ 101,252 $ 95,111 $ 82,197 $ 90,669 $ 83,330
Ratio of net investment income
to average net assets (c)..... 1.72%(b) 1.65% 1.57% 1.88% 2.27%(b)
Ratio of operating expenses to
average net assets (c)(d)..... 1.93%(b) 1.93% 2.00% 1.95% 1.85%(b)
Portfolio turnover rate....... 3% 29% 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 including the effects of shares issued pursuant to rights
offering, assuming full subscription by shareholders. Total return for
the period of less than one year is not annualized.
(a) The Gabelli Utility Trust commenced investment operations on July 9, 1999.
(b) Annualized.
11
(c) During the period ended December 31, 1999, the Utility Trust's
administrator voluntarily reimbursed certain expenses. If such
reimbursement had not occurred, the annualized ratios of net investment
income and operating expenses to average net assets would have been 1.85%
and 2.17%, respectively.
(d) The ratios do not include a reduction of expenses for custodian fee
credits on cash balances maintained with the custodian. Including such
custodian fee credits for the six months ended June 30, 2003 and the year
ended December 31, 2002, December 31, 2001 and the year ended December
31, 2000, the expense ratios would be 1.93%, 1.93%, 2.00% and 1.93%,
respectively.
(e) 2001's Net investment income per share and net realized and unrealized
gain (loss) on investments were originally presented in the Financial
Highlights without regard to the character of distributions paid during
the year. Amounts as previously reported of $0.61 and $(0.81),
respectively, have been revised to reflect reclassification of amounts
based on the character of 2001 distributions.
12
THE OFFER
TERMS OF THE OFFER
The Fund is issuing to Record Date Shareholders Rights to subscribe
for additional Common Shares. Each Record Date Shareholder is being issued one
transferable Right for each Common Share owned on the Record Date. The Right
entitles the holder to acquire at the Subscription Price one Share for each
three Rights held rounded up to the nearest number of Rights evenly divisible
by three. 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. In the case of Common Shares held of
record by Cede & Co. ("Cede"), as nominee for the Depository Trust Company
("DTC"), or any other depository or nominee, the number of Rights issued to
Cede or such other depository or nominee will be adjusted to permit rounding
up (to the nearest number of Rights evenly divisible by 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 September 19, 2003 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 August 20,
2003, and ends at 5:00 p.m., New York time, on September 23, 2003 (the
"Subscription Period"), unless extended by the Fund to a date not later than
October 7, 2003, 5:00 p.m., New York time. See "Expiration of the Offer." The
Right to acquire one additional Share for each Right held during the
Subscription Period at the Subscription Price will be referred to in the
remainder of this Prospectus as the "Primary Subscription."
In addition, any Record Date Shareholder who fully exercises all
Rights initially issued to him is entitled to subscribe for Common Shares
available for Primary Subscription (the "Primary Subscription Shares") that
were not subscribed for by other Rights holders on Primary Subscription. In
addition, in the event that the Common Shares on the Expiration Date are
trading at or above its per share net asset value, the Fund may, in its sole
discretion, issue up to an additional 2,400,503 shares (the "Secondary
Over-Subscription Shares") to satisfy over-subscription requests in excess of
the available Primary Subscription Shares. The Fund, in its sole discretion,
would also be able to issue additional Common Shares in an amount of up to 20%
of the sum of the Primary Subscription Shares and Secondary Over- Subscription
Shares. The entitlement to subscribe for un-subscribed Primary Subscription
Shares, any Secondary Over-Subscription Shares and any additional Common
Shares will be referred to in the remainder of this Prospectus as the
"Over-Subscription Privilege"). For purposes of determining the maximum number
of Common Shares a Record Date Shareholder may acquire pursuant to the Offer,
broker-dealers whose Common Shares are held of record by Cede, nominee for
DTC, or by any other depository or nominee, will be deemed to be the holders
of the Rights that are issued to Cede or such other depository or nominee on
their behalf. Common Shares acquired pursuant to the Over-Subscription
Privilege are subject to allotment, which is more fully discussed below under
"Over-Subscription Privilege."
Officers of the Investment Adviser have advised the Fund that the
Affiliated Parties, as Record Date Shareholders, have been authorized to
purchase Common Shares through the Primary Subscription and the
Over-Subscription Privilege to the extent Common Shares become available to
it in accordance with the Primary Subscription and the allotment provisions
of the Over-Subscription Privilege. In addition, Mario J. Gabelli
individually or his affiliated entities, as a Record Date Shareholder, may
also purchase Common Shares through the Primary Subscription and the
Over-Subscription Privilege. Such over-subscriptions by the Affiliated
Parties and Mr. Gabelli may disproportionately increase their already
13
existing ownership resulting in a higher percentage ownership of outstanding
Common Shares if any Record Date Shareholder fails to fully exercise its
Rights. Any Common Shares acquired whether by Primary Subscription or the
Over-Subscription Privilege by the Affiliated Parties or Mr. Gabelli, as
"affiliates" of the Fund as that term is defined under the Securities Act of
1933, 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 Common
Shares that does not exceed the greater of 1% of the then outstanding Common
Shares or the average weekly reported trading volume of the Common Shares
during the four calendar weeks preceding such sale. Sales under Rule 144 are
also subject to certain restrictions on the manner of sale, to notice
requirements and to the availability of current public information about the
Fund. In addition, any profit resulting from the sale of Common Shares under
Rule 144, if the Common 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 Certificate
delivered to the holder. The method by which Rights may be exercised and
shares paid for is set forth below in "Method of Exercise of Rights" and
"Payment for Shares." A Rights holder will have no right to rescind a purchase
after the Subscription Agent has received payment. See "Payment for Shares"
below. Common Shares issued pursuant to an exercise of Rights will be listed
on the NYSE.
The Rights are transferable until the Expiration Date and will be
admitted for trading on the NYSE. Assuming a market exists for the Rights, the
Rights may be purchased and sold through usual brokerage channels and sold
through the Subscription Agent. Although no assurance can be given that a
market for the Rights will develop, trading in the Rights on the NYSE will
begin three Business Days before the Record Date and may be conducted until
the close of trading on the last NYSE trading day prior to the Expiration
Date. Trading of the Rights on the NYSE will be conducted on a when-issued
basis until and including the date on which the Subscription Certificates are
mailed to Record Date Shareholders and thereafter will be conducted on a
regular way basis until and including the last NYSE trading day prior to the
Expiration Date. The method by which Rights may be transferred is set forth
below under "Method of Transferring Rights." The Common Shares will begin
trading ex-Rights two Business Days prior to the Record Date.
Nominees who hold the Fund's Common Shares for the account of others,
such as banks, brokers, trustees or depositories for securities, should notify
the respective beneficial owners of such shares as soon as possible to
ascertain such beneficial owners' intentions and to obtain instructions with
respect to the Rights. If the beneficial owner so instructs, the nominee will
complete the Subscription Certificate and submit it to the Subscription Agent
with proper payment. In addition, beneficial owners of the Common Shares or
Rights held through such a nominee should contact the nominee and request the
nominee to effect transactions in accordance with such beneficial owner's
instructions.
PURPOSE OF THE OFFER
The Board of Trustees of the Fund has determined that it would be
in the best interests of the Fund and the shareholders to increase the
assets of the Fund available for investment thereby permitting the Fund to
be in a better position to more fully take advantage of investment
opportunities that may arise. The Offer seeks to reward existing shareholders
by giving them the right to purchase Shares at a price that may be below
market and/or net asset value without incurring any commission charge. The
14
distribution to shareholders of transferable Rights, which themselves may
have intrinsic value, will also afford non-subscribing shareholders the
potential of receiving a cash payment upon sale of such Rights, receipt of
which may be viewed as partial compensation for the possible dilution of
their interests in the Fund.
The Fund's Investment Adviser will benefit from the Offer because the
Investment Adviser's fee is based on the average net assets of the Fund. See
"Management of the Fund." It is not possible to state precisely the amount of
additional compensation the Investment Adviser will receive as a result of the
Offer because the proceeds of the Offer will be invested in additional
portfolio securities which will fluctuate in value. However, assuming all
Rights are exercised and that the Fund receives the maximum proceeds of the
Offer, the annual compensation to be received by the Investment Adviser would
be increased by approximately $520,000 net of offering expenses. Three of the
Fund's Trustees, including Mario J. Gabelli, who voted to authorize the Offer
are "interested persons" of the Investment Adviser within the meaning of the
1940 Act and may benefit indirectly from the Offer because of their interest
in the Investment Adviser. See "Management of the Fund" in the SAI. In
determining that the Offer was in the best interest of shareholders, the
Fund's Board of Trustees was cognizant of this benefit as well as the possible
participation of the Affiliated Parties and Mr. Gabelli in the Offer as
shareholders on the same basis as other shareholders.
The Fund may, in the future and at its discretion, choose to make
additional rights offerings from time to time for a number of shares and on
terms which may or may not be similar to the Offer. Any such future rights
offering will be made in accordance with the 1940 Act. Under the laws of
Delaware, the state in which the Fund is organized, and the Trust's
Declaration of Trust, the Board of Trustees is authorized to make rights
offerings without obtaining shareholder approval. The staff of the Securities
and Exchange Commission ("SEC") has interpreted the 1940 Act as not requiring
shareholder approval of a rights offering at a price below the then current
net asset value so long as certain conditions are met, including a good faith
determination by the Fund's Board of Trustee's that such offering would result
in a net benefit to existing shareholders.
OVER-SUBSCRIPTION PRIVILEGE
If all of the Rights initially issued are not exercised, any Primary
Subscription Shares for which subscriptions have not been received will be
offered, by means of the Over-Subscription Privilege, to Record Date
Shareholders who have exercised all the Rights initially issued to them and
who wish to acquire additional Common Shares. Record Date Shareholders who
exercise all the Rights initially issued to them will have the opportunity to
indicate on the Subscription Certificate how many Shares they are willing to
acquire pursuant to the Over-Subscription Privilege. If sufficient Primary
Subscription Shares remain after the Primary Subscriptions have been
exercised, all over-subscription requests will be honored in full. If
sufficient Primary Subscription Shares are not available to honor all
subscription requests, the available Common Shares will be allocated among
those Record Date Shareholders who over-subscribe based on the number of
Rights originally issued to them by the Fund.
In addition, the Board of Trustees of the Fund has established a
Pricing Committee which is authorized, in the event that the Fund's per share
net asset value on the Expiration Date is at or below the Subscription Price,
to direct the Fund to issue Secondary Over-Subscription Shares to satisfy over-
subscription requests in excess of the available Primary Subscription Shares.
The Fund would also be able to issue additional Common Shares in an amount of
up to 20% of the sum of the Primary Subscription Shares and Secondary
Over-Subscription Shares to satisfy over-subscription requests in
15
these circumstances. Should the Pricing Committee determine to issue some or
all of these Secondary Over-Subscription Shares and any additional Common
Shares, they will be allocated only among Record Date Shareholders that
submitted over-subscription requests. Rights holders who are not Record Date
Shareholders may not participate in the secondary over-subscription. Secondary
Over-Subscription Shares and any additional Common Shares will be allocated
pro rata among those fully exercising Record Date Shareholders who
over-subscribe based on the number of Rights originally issued to them by the
Fund. Any Secondary Over-Subscription Shares issued by the Fund, collectively
with any Primary Subscription Shares not subscribed for through the Primary
Subscription, and any additional Common Shares, will be referred to in this
Prospectus as the "Excess Shares."
The percentage of Excess Shares each over-subscribing Record Date
Shareholder may acquire will be rounded down to result in delivery of whole
Common Shares; provided, however, that if a pro rata allocation results in any
holder being allocated a greater number of Excess Shares than the holder
subscribed for pursuant to the exercise of such holder's Over-Subscription
Privilege, then such holder will be allocated only such number of Excess
Shares as such holder subscribed for and the remaining Excess Shares will be
allocated among all other holders then entitled to receive Excess Shares whose
over-subscription requests have not been fully honored. The allocation process
may be iterative in order to assure that the total number of Excess Shares is
distributed in accordance with the method described above.
The formula to be used in allocating the Excess Shares is as follows:
Record Date Shareholder's Position x Excess Shares Remaining
----------------------------------
Total Record Date Position
of All Over-Subscribers
The Fund will not offer or sell any Common Shares which are not
subscribed for under the Primary Subscription or the Over-Subscription
Privilege.
THE SUBSCRIPTION PRICE
The Subscription Price for the Shares to be issued pursuant to the
Rights will be $7.00.
The Fund announced the Offer on May 23, 2003. The net asset value per
Common Share at the close of business on May 22, 2003 (the last date prior to
the Fund's announcement of the Offer), was $6.39. The last reported sale price
of a Common Share on the NYSE on that date was $9.05, representing a 41.6%
premium in relation to the then current net asset value per share and a
premium in relation to the Subscription Price.
SALES BY SUBSCRIPTION AGENT
Holders of Rights who are unable or do not wish to exercise any or
all of their Rights may instruct the Subscription Agent to sell any
unexercised Rights. The Subscription Certificates representing the Rights to
be sold by the Subscription Agent must be received on or before September
19, 2003. Upon the timely receipt of the appropriate instructions to sell
Rights, the Subscription Agent will use its best efforts to complete the
sale and will remit the proceeds of sale, net of commissions, to the
holders. If the Rights can be sold, sales of the Rights will be deemed to
have been effected at the weighted average price received by the
Subscription Agent on the day such Rights are sold. The selling
16
Rights holder will pay all brokerage commissions incurred by the Subscription
Agent. These sales may be effected by the Subscription Agent through Gabelli &
Company, Inc., a registered broker-dealer and an affiliate of the Investment
Adviser, at a commission of up to $0.02 per Right, provided that, if the
Subscription Agent is able to negotiate a lower brokerage commission with an
independent broker, the Subscription Agent will execute these sales through
that independent broker. Gabelli & Company, Inc. may also act on behalf of its
clients to purchase or sell Rights in the open market and be compensated for
its services. The Subscription Agent will automatically attempt to sell any
unexercised Rights that remain unclaimed as a result of Subscription
Certificates being returned by the postal authorities as undeliverable as of
the fourth Business Day prior to the Expiration Date. These sales will be made
net of commissions on behalf of the nonclaiming holders of Rights. Proceeds
from those sales will be held by EquiServe, in its capacity as the Fund's
transfer agent, for the account of the nonclaiming holder of rights until the
proceeds are either claimed or escheated. There can be no assurance that the
Subscription Agent will be able to complete the sale of any of these Rights
and neither the Fund nor the Subscription Agent has guaranteed any minimum
sales price for the Rights. All of these Rights will be sold at the market
price, if any, on the NYSE or through an unaffiliated market maker if no
market exists on the NYSE.
METHOD OF TRANSFERRING RIGHTS
The Rights evidenced by a single Subscription Certificate may be
transferred in whole by endorsing the Subscription Certificate for transfer in
accordance with the accompanying instructions. A portion of the Rights
evidenced by a single Subscription Certificate (but not fractional Rights) may
be transferred by delivering to the Subscription Agent a Subscription
Certificate properly endorsed for transfer, with instructions to register the
portion of the Rights evidenced thereby in the name of the transferee (and to
issue a new Subscription Certificate to the transferee evidencing the
transferred Rights). In this event, a new Subscription Certificate evidencing
the balance of the Rights will be issued to the Rights holder or, if the
Rights holder so instructs, to an additional transferee.
Holders wishing to transfer all or a portion of their Rights (but not
fractional Rights) should allow at least three Business Days prior to the
Expiration Date for (i) the transfer instructions to be received and processed
by the Subscription Agent, (ii) a new Subscription Certificate to be issued
and transmitted to the transferee or transferees with respect to transferred
Rights, and to the transferor with respect to retained rights, if any, and
(iii) the Rights evidenced by the new Subscription Certificates to be
exercised or sold by the recipients thereof. Neither the Fund nor the
Subscription Agent shall have any liability to a transferee or transferor of
Rights if Subscription Certificates are not received in time for exercise or
sale prior to the Expiration Date.
Except for the fees charged by the Subscription Agent (which will be
paid by the Fund as described below), all commissions, fees and other expenses
(including brokerage commissions and transfer taxes) incurred in connection
with the purchase, sale or exercise of Rights will be for the account of the
transferor of the Rights, and none of these commissions, fees or expenses will
be paid by the Fund or the Subscription Agent.
The Fund anticipates that the Rights will be eligible for transfer
through, and that the exercise of the Primary Subscription and
Over-Subscription may be effected through, the facilities of DTC (Rights
exercised through DTC are referred to as "DTC Exercised Rights").
17
EXPIRATION OF THE OFFER
The Offer will expire at 5:00 p.m., New York time, on September 23,
2003, unless extended by the Fund to a date not later than October 7, 2003,
5:00 p.m., New York time (the "Expiration Date"). Rights will expire on the
Expiration Date and thereafter may not be exercised.
SUBSCRIPTION AGENT
The Subscription Agent is EquiServe Attn: Corporate Actions, P.O. Box
859208, Braintree, MA 02185-9208. The Subscription Agent will receive from the
Fund an amount estimated to be $125,000 comprised of the fee for its services
and the reimbursement for certain expenses related to the Offer. INQUIRIES BY
ALL HOLDERS OF RIGHTS SHOULD BE DIRECTED TO P.O. BOX 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: Attn: Corporate Actions
P.O. Box 859208
Braintree, MA 02185-9208
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
161 Bay State Drive
Braintree, MA 02184
PAYMENT FOR SHARES
Holders of Rights who acquire Shares on Primary Subscription or
pursuant to the Over- Subscription Privilege may choose between the following
methods of payment:
18
(1) A subscription will be accepted by the Subscription Agent if, prior
to 5:00 p.m., New York time, on the Expiration Date, the Subscription
Agent has received a notice of guaranteed delivery by telegram or
otherwise from a bank, a trust company, or a NYSE member,
guaranteeing delivery of (i) payment of the full Subscription Price
for the Common Shares subscribed for on the Primary Subscription and
any additional Common Shares subscribed for pursuant to the Over-
Subscription Privilege and (ii) a properly completed and executed
Subscription Certificate. The Subscription Agent will not honor a
notice of guaranteed delivery if a properly completed and executed
Subscription Certificate and full payment is not received by the
Subscription Agent by the close of business on the third Business Day
after the Expiration Date. The notice of guaranteed delivery may be
delivered to the Subscription Agent in the same manner as
Subscription Certificates at the addresses set forth above, or may be
transmitted to the Subscription Agent by facsimile transmission (fax
number (781) 380-3388; telephone number to confirm receipt (781)
843-1833, extension 200).
(2) Alternatively, a holder of Rights can send the Subscription
Certificate together with payment in the form of a check for the
Shares subscribed for on Primary Subscription and additional Common
Shares subscribed for pursuant to the Over-Subscription Privilege to
the Subscription Agent based on the Subscription Price of $7.00 per
Share. To be accepted, the payment, together with the executed
Subscription Certificate, must be received by the Subscription Agent
at the addresses noted above prior to 5:00 p.m., New York time, on
the Expiration Date. The Subscription Agent will deposit all stock
purchase checks received by it prior to the final due date into a
segregated interest-bearing account pending proration and
distribution of Common Shares. The Subscription Agent will not accept
cash as a means of payment for Common Shares.
EXCEPT AS OTHERWISE SET FORTH BELOW, A PAYMENT PURSUANT TO THIS
METHOD MUST BE IN UNITED STATES DOLLARS BY MONEY ORDER OR CHECK DRAWN
ON A BANK LOCATED IN THE CONTINENTAL UNITED STATES, MUST BE PAYABLE
TO THE GABELLI UTILITY TRUST, AND MUST ACCOMPANY AN EXECUTED
SUBSCRIPTION CERTIFICATE TO BE ACCEPTED. If the aggregate
Subscription Price paid by a Record Date Shareholder is insufficient
to purchase the number of Common Shares that the holder indicates are
being subscribed for, or if a Record Date Shareholder does not
specify the number of Common Shares to be purchased, then the Record
Date Shareholder will be deemed to have exercised first, the Primary
Subscription Rights (if not already fully exercised) and second, the
Over-Subscription Privilege to the full extent of the payment
tendered. If the aggregate Subscription Price paid by such holder is
greater than the Common Shares he has indicated an intention to
subscribe, then the Rights holder will be deemed to have exercised
first, the Primary Subscription Rights (if not already fully
subscribed) and second, the Over-Subscription Privilege to the full
extent of the excess payment tendered.
Any payment required from a holder of Rights must be received by the
Subscription Agent 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. All payments by a holder of Rights
must be in United States dollars by money order or check drawn on a bank
located in the continental United States of America and payable to The Gabelli
Utility Trust. Whichever of the two methods of payment described above is
used, issuance and delivery of certificates for the Shares purchased are
subject to collection of checks and actual payment pursuant to any notice of
guaranteed delivery.
Within ten Business Days following the Expiration Date (the
"Confirmation Date"), a confirmation will be sent by the Subscription
Agent to each holder of Rights (or, if the Common Shares
19
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 Common Shares and (iv) any excess to be refunded by
the Fund to such holder as a result of payment for Common Shares pursuant to
the Over-Subscription Privilege which the holder is not acquiring. Any
payment required from a holder of Rights must be received by the
Subscription Agent on the Expiration Date, or if the Rights holder has
elected to make payment by means of a notice of guaranteed delivery, on the
third Business Day after the Expiration Date. Any excess payment to be
refunded by the Fund to a holder of Rights, or to be paid to a holder of
Rights as a result of sales of Rights on his behalf by the Subscription
Agent or exercises by Record Date Shareholders of their Over- Subscription
Privileges, and all interest accrued on the holder's excess payment will be
mailed by the Subscription Agent to the holder within fifteen Business Days
after the Expiration Date. Interest on the excess payment will accrue
through the date that is one Business Day prior to the mail date of the
reimbursement check. All payments by a holder of Rights must be in United
States dollars by money order or check drawn on a bank located in the
continental United States of America and payable to The Gabelli Utility
Trust except that holders of Rights who are residents of Canada may make
payment in U.S. dollars by money order or check drawn on a bank located in
Canada.
Whichever of the two methods described above is used, issuance and
delivery of certificates for the Common 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 Common Shares pursuant to the
Primary Subscription or the Over-Subscription Privilege does not make payment
of any amounts due, the Fund reserves the right to take any or all of the
following actions: (i) find other purchasers for such subscribed-for and
unpaid-for Common Shares; (ii) apply any payment actually received by it
toward the purchase of the greatest whole number of Common Shares which could
be acquired by such holder upon exercise of the Primary Subscription or the
Over-Subscription Privilege; (iii) sell all or a portion of the Common Shares
purchased by the holder, in the open market, and apply the proceeds to the
amounts owed; and (iv) exercise any and all other rights or remedies to which
it may be entitled, including, without limitation, the right to set off
against payments actually received by it with respect to such subscribed
Common Shares and to enforce the relevant guaranty of payment.
Holders who hold Common Shares for the account of others, such as
brokers, trustees or depositories for securities, should notify the respective
beneficial owners of the Common Shares as soon as possible to ascertain such
beneficial owners' intentions and to obtain instructions with respect to the
Rights. If the beneficial owner so instructs, the record holder of the Rights
should complete Subscription Certificates and submit them to the Subscription
Agent with the proper payment. In addition, beneficial owners of Common Shares
or Rights held through such a 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.
20
THE METHOD OF DELIVERY OF SUBSCRIPTION CERTIFICATES AND PAYMENT OF
THE SUBSCRIPTION PRICE TO THE SUBSCRIPTION AGENT WILL BE AT THE ELECTION AND
RISK OF THE RIGHTS HOLDERS, BUT IF SENT BY MAIL IT IS RECOMMENDED THAT THE
CERTIFICATES AND PAYMENTS BE SENT BY REGISTERED MAIL, PROPERLY INSURED, WITH
RETURN RECEIPT REQUESTED, AND THAT A SUFFICIENT NUMBER OF DAYS BE ALLOWED TO
ENSURE DELIVERY TO THE SUBSCRIPTION AGENT AND CLEARANCE OF PAYMENT PRIOR TO
5:00 P.M., NEW YORK TIME, ON THE EXPIRATION DATE. BECAUSE UNCERTIFIED PERSONAL
CHECKS MAY TAKE AT LEAST FIVE BUSINESS DAYS TO CLEAR, YOU ARE STRONGLY URGED
TO PAY, OR ARRANGE FOR PAYMENT, BY MEANS OF A CERTIFIED OR CASHIER'S CHECK OR
MONEY ORDER.
All questions concerning the timeliness, validity, form and
eligibility of any exercise of Rights will be determined by the Fund, whose
determinations will be final and binding. The Fund in its sole discretion may
waive any defect or irregularity, or permit a defect or irregularity to be
corrected within such time as it may determine, or reject the purported
exercise of any Right. Subscriptions will not be deemed to have been received
or accepted until all irregularities have been waived or cured within such
time as the Fund determines in its sole discretion. Neither the Fund nor the
Subscription Agent will be under any duty to give notification of any defect
or irregularity in connection with the submission of Subscription Certificates
or incur any liability for failure to give such notification.
DELIVERY OF STOCK CERTIFICATES
Certificates representing Common Shares purchased pursuant to the
Primary Subscription will be delivered to subscribers as soon as practicable
after the corresponding Rights have been validly exercised and full payment
for the Common Shares has been received and cleared. Certificates representing
Common Shares purchased pursuant to the Over-Subscription Privilege will be
delivered to subscribers as soon as practicable after the Expiration Date and
after all allocations have been effected. Participants in the Fund's Automatic
Dividend Reinvestment and Voluntary Cash Purchase Plan (the "Plan") will be
issued Rights for the Common Shares held in their accounts in the Plan.
Participants wishing to exercise these Rights must exercise the Rights in
accordance with the procedures set forth above in "Method of Exercise of
Rights" and "Payment for Shares." Rights will not be exercised automatically
by the Plan. Plan participants exercising their Rights will receive their
Primary and Over-Subscription Shares via an uncertificated credit to their
existing account. To request a stock certificate, participants in the Plan
should check the appropriate box on the Subscription Certificate. These Common
Shares will remain subject to the same investment option as previously
selected by the Plan participant.
FOREIGN RESTRICTIONS
Subscription Certificates will only be mailed to Record Date
Shareholders whose addresses are within the United States and Canada (other
than an APO or FPO address). Record Date Shareholders whose addresses are
outside the United States and Canada or who have an APO or FPO address and who
wish to subscribe to the Offer 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
21
have been effected at the weighted average price received by the
Subscription Agent on the day the Rights are sold, less any applicable
brokerage commissions, taxes and other expenses.
FEDERAL INCOME TAX CONSEQUENCES TO SHAREHOLDERS
For U.S. federal income tax purposes, neither the receipt nor the
exercise of the Rights will result in taxable income to you. Moreover, you
will not realize a loss if you do not exercise the Rights. The holding period
for a Common Share acquired upon exercise of a Right begins with the date of
exercise. The basis for determining gain or loss upon the sale of a share
acquired upon the exercise of a Right will be equal to the sum of:
o the subscription price per share,
o any servicing fee charged to you by your broker, bank or
trust company, and
o the basis, if any, in the Rights that you exercised.
A gain or loss recognized upon a sale of a Common Share acquired upon
the exercise of a Right will be a capital gain or loss assuming the Common
Share is held as a capital asset at the time of sale. This gain or loss will
be a long-term capital gain or loss if the Common Share has been held at the
time of sale for more than one year.
As noted above, your basis in Common Shares issued under the Offer
includes your basis in the Rights underlying those Shares. Assuming that, as
the Fund expects, the aggregate fair market value of the Rights at the time
they are distributed is less than 15% of the aggregate fair market value of
the Fund's Common Shares at such time, the basis of the Rights issued to you
will be zero unless you elect to allocate your basis of previously owned
Common Shares to the Rights issued to you in the Offer. This allocation is
based upon the relative fair market value of such Common Shares and the Rights
as of the date of distribution of the Rights. Thus, if you make such an
election and the Rights are later exercised, the basis in the Common Shares
you originally owned will be reduced by an amount equal to the basis allocated
to the Rights. This election must be made in a statement attached to your
federal income tax return for the year in which the Rights are distributed. If
the Rights expire without exercise, you will realize no loss and you will not
be permitted to allocate a portion of your basis in the Common Shares to the
unexercised Rights.
The foregoing is a general summary of the material United States
federal income tax consequences of the receipt and exercise of Rights.
The discussion is based upon applicable provisions
22
of the Internal Revenue Code of 1986, as amended (the "Code"), U.S. Treasury
regulations thereunder and other authorities currently in effect, and does
not address state, local or foreign taxes. The Code and Treasury regulations
thereunder are subject to change by legislative or administrative action,
possibly with retroactive effect. You should consult your tax advisors
regarding specific questions as to federal, state, local or foreign taxes.
You should also review the discussion of certain tax considerations
affecting yourself and the Fund set forth under "Taxation."
EMPLOYEE PLAN CONSIDERATIONS
Rights holders that are employee benefit plans subject to the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
including corporate savings and 401(k) plans, Keogh Plans of self-employed
individuals and Individual Retirement Accounts ("IRA") (each a "Benefit Plan"
and collectively, "Benefit Plans"), should be aware that additional
contributions of cash in order to exercise Rights may be treated as Benefit
Plan contributions and, when taken together with contributions previously
made, may subject a Benefit Plan to excise taxes for excess or nondeductible
contributions. In the case of Benefit Plans qualified under Section 401(a) of
the Code, additional cash contributions could cause the maximum contribution
limitations of Section 415 of the Code or other qualification rules to be
violated. Benefit Plans contemplating making additional cash contributions to
exercise Rights should consult with their counsel prior to making such
contributions.
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.
23
USE OF PROCEEDS
The net proceeds of the Offer, assuming all Primary Subscription
Shares offered hereby are sold, are estimated to be approximately $35,696,479,
before deducting expenses payable by the Fund estimated at approximately
$500,000. The net proceeds of the Offer assuming all Secondary Over-
subscription Shares are sold in addition to all Primary Subscription Shares,
are estimated to be approximately $52,500,000, before deducting expenses
payable by the Fund estimated to be $500,000. The net proceeds of the Offering
assuming all Secondary Over-subscription Shares and all additional Common
Shares are sold in addition to all Primary Subscription Shares are estimated
to be $63,000,000 before deducting expenses payable by the Fund expected to be
$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 80% of its
total assets in common stock and other debt or equity securities of foreign
and domestic companies involved to a substantial extent (e.g., at least 50% of
the assets, gross income or net profits of a company is committed to or
derived from) in providing products, services or equipment for (i) the
generation or distribution of electricity, gas and water and (ii)
telecommunications services or infrastructure operations, such as airports,
toll roads and municipal services (collectively, the "Utility Industry"). The
remaining 20% of its assets may be invested in other securities including
stocks, equity securities, debt obligations and money market instruments, as
well as certain derivative instruments in the utility industry or other
industries. 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. When the Fund is invested in these
instruments for temporary or defensive purposes it may not achieve its
investment objective.
The investment policy of the Fund relating to the type of securities
in which 80% of the Fund's total assets must be invested may be changed by the
Board of Trustees without shareholder approval. Shareholders will, however,
receive at least 60 days prior notice of any change in this policy.
Although many companies in the Utility Industry traditionally pay
above average dividends, the Fund intends to focus on those companies whose
securities have the potential to increase in value. The Fund's performance is
expected to reflect conditions affecting public utility industries. These
industries are sensitive to factors such as interest rates, local and national
government regulations, the price and availability of fuel, environmental
protection or energy conservation regulations, weather, the level of demand
for services, and the risks associated with constructing and operating nuclear
power facilities. These factors may change rapidly. The Fund emphasizes
quality in selecting utility investments, and generally looks for companies
that have proven dividend 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.
24
Under normal circumstances the Fund will invest in securities of
issuers located in countries other than the United States and may invest in
such foreign securities without limitation. Investing in securities of foreign
issuers, which generally are denominated in foreign currencies, may involve
certain risk and opportunity considerations not typically associated with
investing in domestic companies and could cause the Fund to be affected
favorably or unfavorably by changes in currency exchange rates and
revaluations of currencies.
INVESTMENT METHODOLOGY OF THE FUND
In selecting securities for the Fund, the Investment Adviser normally
will consider the following factors, among others:
o the Investment Adviser's own evaluations of the private market
value, cash flow, earnings per share and other fundamental
aspects of the underlying assets and business of the company;
o the potential for capital appreciation of the securities;
o the interest or dividend income generated by the securities;
o the prices of the securities relative to other comparable
securities;
o whether the securities are entitled to the benefits of call
protection or other protective covenants;
o the existence of any anti-dilution protections or guarantees of
the security; and
o the number of issuers in the Fund's portfolio.
The Investment Adviser's investment philosophy with respect to debt
and equity securities is to identify assets that are selling in the public
market at a discount to their private market value, which the Investment
Adviser defines as the value informed purchasers are willing to pay to acquire
assets with similar characteristics. The Investment Adviser also normally
evaluates the issuers' free cash flow and long-term earnings trends. Finally,
the Investment Adviser looks for a catalyst -- something in the company's
industry or indigenous to the company or country itself that will surface
additional value.
TEMPORARY DEFENSIVE INVESTMENTS
During temporary defensive periods and during inopportune periods to
be fully invested, the Fund may invest in U.S. government securities and in
money market mutual funds not affiliated with the Investment Adviser that
invest in those securities. Obligations of certain agencies and
instrumentalities of the U.S. government, such as the Government National
Mortgage Association, are supported by the "full faith and credit" of the U.S.
government; others, such as those of the Export-Import Bank of the U.S., are
supported by the right of the issuer to borrow from the U.S. Treasury; others,
such as those of the Federal National Mortgage Association, are supported by
the discretionary authority of the U.S. government to purchase the agency's
obligations; and still others, such as those of the Student Loan Marketing
Association, are supported only by the credit of the instrumentality. No
assurance can be given that the U.S. government will provide financial support
to U.S. government-sponsored instrumentalities if it is not obligated to do so
by law. During temporary defensive periods, the Fund may not achieve its
investment objective.
25
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
The Fund may purchase and sell financial futures contracts and
options thereon which are traded on a commodities exchange or board of trade
for certain hedging, yield enhancement and risk management purposes, in
accordance with regulations of the Commodity Futures Trading Commission
("CFTC") and the Fund's fundamental investment restrictions. These futures
contracts and related options may be on debt securities, financial indices,
securities indices, U.S. government securities and foreign currencies. A
financial futures contract is an agreement to purchase or sell an agreed
amount of securities or currencies at a set price for delivery in the future.
FORWARD CURRENCY EXCHANGE CONTRACTS
The Fund may enter into forward foreign currency exchange contracts
to protect the value of its portfolio against future changes in the level of
currency exchange rates. The Fund may enter into such contracts on a spot,
i.e., cash, basis at the rate then prevailing in the currency exchange market
or on a forward basis, by entering into a forward contract to purchase or
sell currency. A forward contract on
26
foreign currency is an obligation to purchase or sell a specific currency at a
future date, which may be any fixed number of days agreed upon by the parties
from the date of the contract at a price set on the date of the contract. The
Fund's dealings in forward contracts will be limited to hedging involving
either specific transactions or portfolio positions, and the amount the Fund
may invest in forward currency contracts is limited to the amount of its
aggregate investments in foreign currencies. The Fund will only enter into
forward currency contracts with parties which it believes to be creditworthy.
LEVERAGING
As provided in the 1940 Act and subject to compliance with the Fund's
investment objectives, policies and restrictions, the Fund may issue debt or
preferred shares (such as the outstanding Series A or Series B Preferred
Shares) so long as the Fund's total assets immediately after such issuance,
less certain ordinary course liabilities, exceed 300% of the amount of the
debt outstanding and exceed 200% of the sum of the amount of preferred shares
and debt outstanding. Such debt or preferred shares may be convertible in
accordance with SEC staff guidelines which may permit the Fund to obtain
leverage at more attractive rates.
Further information on the investment objectives and policies of the
Fund are set forth in the SAI.
INVESTMENT RESTRICTIONS
The Fund has adopted certain investment restrictions as fundamental
policies of the Fund. Under the 1940 Act, a fundamental policy may not be
changed without the vote of a majority of the outstanding voting securities of
the Fund, as defined in the 1940 Act. The Fund's investment restrictions are
more fully discussed under "Investment Restrictions" in the SAI.
PORTFOLIO TURNOVER
The Fund buys and sells securities to accomplish its investment
objective. The investment policies of the Fund may lead to frequent changes in
investments, particularly in periods of rapidly fluctuating interest or
currency exchange rates. The portfolio turnover may be higher than that of
other investment companies.
Portfolio turnover generally involves some expense to the Fund,
including brokerage commissions or dealer mark-ups and other transaction costs
on the sale of securities and reinvestment in other securities and may result
in taxable gains being passed to shareholders. The portfolio turnover rate is
computed by dividing the lesser of the amount of the long-term securities
purchased or securities sold by the average monthly value of securities owned
during the year (excluding securities whose maturities at acquisition were one
year or less). Higher portfolio turnover may decrease the after-tax return to
individual investors to the extent it results in a decrease of the long term
capital gains portion of distributions to shareholders.
The portfolio turnover rates of the Fund for the fiscal years ending
December 31, 2002, December 31, 2001 and December 31, 2000 were 29%, 41% and
92% respectively.
OTHER INVESTMENTS
The Fund is permitted to invest in securities subject to
reorganization, lower rated securities and repurchase agreements and enter
into forward commitments for the purchase or sale of securities, including on
27
a "when issued" or "delayed delivery" basis and the Fund may make short sales
of securities. See "Investment Objectives and Policies" in the SAI for a
discussion of these investments and techniques and the risks associated with
them.
LONG-TERM OBJECTIVE
The Fund is intended for investors seeking long-term capital growth
and income. The Fund is not meant to provide a vehicle for those who wish to
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
There are a number of risks that an investor should consider in
evaluating the Fund. You should read this entire Prospectus and the SAI before
you decide whether to exercise your Rights. In addition, you should consider
the matters set forth below.
PRINCIPAL RISKS ASSOCIATED WITH THE FUND
DILUTION
If you do not exercise all of your Rights, you may own a smaller
proportional interest in the Fund when the Offer is over. In addition, you
will experience an immediate dilution of the aggregate net asset value of your
shares if you do not participate in the Offer and will experience a reduction
in the net asset value per share of your shares whether or not you exercise
your Rights, if the Subscription Price is below the Fund's net asset value per
share on the Expiration Date because:
o the offered Common Shares are being sold at less than their
current net asset value.
o you will indirectly bear the expenses of the Offer.
o the number of Common Shares outstanding after the Offer will
have increased proportionately more than the increase in the
amount of the Fund's net assets.
On the other hand, if the Subscription Price is above the Fund's net
asset value per share on the Expiration Date (as it was on the date of this
Prospectus), you may experience an immediate accretion of the aggregate net
asset value per share of your shares if you do not exercise your Rights and an
immediate increase in the net asset value per share of your shares whether or
not you participate in the Offer because:
o the offered Common Shares are being sold at more than their
current net asset value after deducting the expenses of the
Offer.
o the number of Common Shares outstanding after the Offer will
have increased proportionately less than the increase in the
amount of the Fund's net assets.
Furthermore, if you do not participate in the Over-Subscription
Privilege, your percentage ownership may also be diluted. The Fund cannot
state precisely the amount of any dilution because it is not known at
28
this time what the net asset value per share will be on the Expiration Date or
what proportion of the Rights will be exercised. The impact of the Offer on
net asset value per share is shown by the following examples, assuming a $7.00
Subscription Price:
Scenario 1: (assumes net asset value per share is above subscription price)(1)
NAV.......................................................................$7.50
Subscription Price........................................................$7.00
Reduction in NAV($)(2)....................................................$0.12
Reduction in NAV(%)......................................................1.60 %
Scenario 2: (assumes net asset value per share is below subscription price)(1)
NAV.......................................................................$6.50
Subscription Price........................................................$7.00
Increase in NAV($)(2).....................................................$0.13
Increase in NAV(%)........................................................2.00%
________________________
(1) Both examples assume full primary and primary 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
Under normal market conditions, the Fund will invest at least 80% of
its total assets in foreign and domestic companies involved in the Utility
Industry and, as a result, the value of the Common Shares will be more
susceptible to factors affecting those particular types of companies,
including governmental regulation, inflation, cost increases in fuel and other
operating expenses, technological innovations that may render existing
products and equipment obsolete and increasing interest rates resulting in
high interest costs on borrowings needed for capital construction programs,
including costs associated with compliance with environmental and other
regulations.
Sector Risk. The Fund concentrates its investments in the Utility
Industry. As a result, the Fund's investments may be subject to greater risk
and market fluctuation than a fund that had securities representing a broader
range of investment alternatives. The prices of securities issued by
traditional utility companies may change in response to interest rate changes.
Traditionally, when interest rates have gone up, the value of securities
issued by traditional utility companies have gone down. Conversely, when
interest rates have gone down, the value of securities issued by utility
companies have gone up. There is no guarantee that this relationship will
continue.
Government Regulation. There are substantial differences between the
regulatory practices and policies in various jurisdictions, and any given
regulatory agency may make major shifts in policy from time to time. There is
no assurance that regulatory authorities will, in the future, permit rate
increases or that such increases will be adequate to permit the payment of
dividends on common stocks by companies subject to
29
such regulatory provisions. Additionally, existing and possible future
regulatory legislation may make it even more difficult for these utilities to
obtain adequate relief.
Various regulatory regimes also impose limitations on the percentage
of the shares of a public utility held by a fund as an investment for its
clients. These limitations may unfavorably restrict the ability of the Fund to
make certain investments.
Deregulation. Changing regulation constitutes one of the
industry-specific risks for the Fund, especially with respect to its
investments in traditionally regulated public utilities and partially
regulated utility companies. Domestic and foreign regulators monitor and
control utility revenues and costs, and therefore may limit utility profits
and dividends paid to investors, which could result in reduced income to the
Fund. Regulatory authorities also may restrict a company's access to new
markets, thereby diminishing the company's long-term prospects. The
deregulation of certain utility companies may eliminate restrictions on
profits and dividends, but may also subject these companies to greater risks
of loss. Deregulation of the utility industry could have a positive or
negative impact on the Fund. The Investment Adviser believes that certain
utility companies' fundamentals should continue to improve as the industry
undergoes deregulation. Companies may seek to strengthen their competitive
positions through mergers and takeovers. The loosening of the government
regulation of utilities should encourage convergence within the industry.
Improving earnings prospects, strong cash flows, share repurchases and
takeovers from industry consolidation may tend to boost share prices. However,
as has occurred in California and elsewhere, certain companies may be less
able to meet the challenge of deregulation as competition increases and
investments in these companies would not be likely to perform well. Individual
sectors of the utility market are subject to additional risks. These risks can
apply to all utility companies - regulated or fully or partially deregulated
and unregulated. For example, telecommunications companies have been affected
by technological developments leading to increased competition, as well as
changing regulation of local and long-distance telephone services and other
telecommunications businesses. Certain telecommunications companies have been
adversely affected by the new competitive climate.
Financing. Currently, companies in the Utility Industry have
encountered difficulties in obtaining financing for construction programs
during inflationary periods. Issuers experiencing difficulties in financing
construction programs may also experience lower profitability, which can
result in reduced income to the Fund. Historically, companies in the Utility
Industry have also encountered such financing difficulties during inflationary
periods.
Equipment and Supplies. Traditional utility companies face the risk
of lengthy delays and increased costs associated with the design,
construction, licensing and operation of their facilities. Moreover,
technological innovations may render existing plants, equipment or products
obsolete. Increased costs and a reduction in the availability of fuel (such as
oil, coal, nuclear or natural gas) also may adversely affect the profitability
of utility companies.
Electric utilities may be burdened by unexpected increases in fuel
and other operating costs. They may also be negatively affected when long-term
interest rates rise. Long-term borrowings are used to finance most utility
investments, and rising interest rates lead to higher financing costs and
reduced earnings. There are also the considerable costs associated with
environmental compliance, nuclear waste clean-up, and safety regulation.
Increasingly, regulators are calling upon electric utilities to bear these
added costs, and there is a risk that these costs will not be fully recovered
through an increase in revenues.
Among gas companies, there has been a move to diversify into oil and
gas exploration and development, making investment returns more sensitive
to energy prices. In the case of the water utility
30
sector, the industry is highly fragmented, and most water supply companies
find themselves in mature markets, although upgrading of fresh water and waste
water systems is an expanding business.
RISKS TO HOLDERS OF COMMON SHARES OF LEVERAGING AND ISSUANCE OF
SENIOR SECURITIES
The Fund utilizes leverage through the issuance of preferred shares,
currently the Series A Preferred and Series B Preferred Shares. Leverage
entails two primary risks. The first risk is that the use of leverage
magnifies the impact on the common shareholders of changes in net asset value.
For example, a fund that uses 33% leverage (that is, $50 of leverage per $100
of common equity) will show a 1.5% increase or decline in net asset value for
each 1% increase or decline in the value of its total assets. The second risk
is that the cost of leverage will exceed the return on the securities acquired
with the proceeds of leverage, thereby diminishing rather than enhancing the
return to common shareholders. These two risks generally make the Fund's total
return to common shareholders more volatile. In addition, the Fund might be
required to sell investments in order to meet dividend or interest payments on
the debt or preferred shares when it may be disadvantageous to do so.
As provided in the 1940 Act and subject to certain exceptions, the
Fund may issue debt or preferred shares so long as the Fund's total assets
immediately after such issuance, less certain ordinary course liabilities,
exceed 300% of the amount of the debt outstanding and exceed 200% of the sum
of the amount of the preferred shares and debt outstanding. Such debt or
preferred shares may be convertible in accordance with SEC guidelines which
may permit the registrant to obtain leverage at more attractive rates. A
leveraged capital structure creates certain special risks and potential
benefits not associated with unleveraged funds having similar investment
objectives and policies. Any investment income or gains from the capital
represented by preferred shares or debt which is in excess of the dividends
payable thereon will cause the total return of the common shares to be higher
than would otherwise be the case. Conversely, if the investment performance of
the capital represented by preferred shares or debt fails to cover the
dividends payable thereon, the total return of the common shares would be less
or, in the case of negative returns, would result in higher negative returns
to a greater extent than would otherwise be the case. The requirement under
the 1940 Act to pay in full dividends on preferred shares or interest on debt
before any dividends may be paid on the Common Shares means that dividends on
the Common Shares from earnings may be reduced or eliminated. Although an
inability to pay dividends on the Common Shares could conceivably result in
the Fund ceasing to qualify as a regulated investment company under the Code,
which would be materially adverse to the holders of the Common Shares, the
risk to Common Shares may be avoided through the use of mandatory redemption
of the Fund's preferred shares designed to ensure that the Fund maintains the
necessary asset coverage.
NON-DIVERSIFIED STATUS
The Fund is classified as a "non-diversified" investment company
under the 1940 Act, which means that the Fund is not limited by the 1940 Act
in the proportion of its assets that may be invested in the securities of a
single issuer. However, the Fund intends to conduct its operations so as to
qualify as a "regulated investment company" for purposes of the Code, which
will relieve it of any liability for U.S. federal income tax if all of its
earnings are distributed to shareholders. See "Taxation --Taxation of the
Fund." Because the Fund, as a non-diversified investment company, may invest
in the securities of individual issuers to a greater degree than a diversified
investment company, an investment in the Fund may present greater risk to an
investor than an investment in a diversified company because the investment
risk may be concentrated in fewer securities.
31
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 Common Shares are not subject to
redemption. Shareholders desiring liquidity may, subject to applicable
securities laws, trade their shares in the Fund on the NYSE or other markets
on which such shares may trade at the then current market value, which may
differ from the then current net asset value.
TRADING PREMIUM
Historically, the Fund's Common Shares have traded at a premium to
their net asset value. As of August 15, 2003, this premium was 44.0%. There is
no guarantee that this premium is sustainable either during the term of this
Offer or over the long term. The issuance of additional Common Shares pursuant
to the Offer and the Over-Subscription Privilege may reduce or eliminate any
premium that common shareholders may have otherwise received for their Common
Shares.
LOWER RATED SECURITIES
The Fund may invest up to 25% of its total assets in fixed-income
securities rated in the lower rating categories of recognized statistical
rating agencies, such as securities rated "CCC" or lower by S&P or "Caa" or
lower by Moody's, Inc., or non-rated securities of comparable quality. These
debt securities are predominantly speculative and involve major risk exposure
to adverse conditions. Debt securities rated lower than "BBB" by S&P or "Baa"
by Moody's are often referred to in the financial press as "junk bonds."
FOREIGN SECURITIES
There is no limitation on the amount of foreign securities in
which the Fund may invest. Investing in securities of foreign companies and
foreign governments, which generally are denominated in foreign currencies,
may involve certain risk and opportunity considerations not typically
associated with investing in domestic companies and could cause the Fund to
be affected favorably or unfavorably by changes in currency exchange rates
and revaluations of currencies. In addition, less information may be
available about foreign companies and foreign governments than about
domestic companies and foreign companies and foreign governments generally
are not subject to uniform accounting, auditing and financial reporting
standards or to other regulatory practices and requirements comparable to
those applicable to domestic companies. Foreign securities and their
markets may not be as liquid as U.S. securities and their markets.
Securities of some foreign companies may involve greater market risk than
securities of U.S. companies. Investment in foreign securities may result
in higher expenses than investing in domestic securities because of the
payment of fixed brokerage commissions on foreign exchanges, which
generally are higher than commissions on U.S. exchanges, and the imposition
of transfer taxes or transaction charges associated with foreign exchanges.
Investment in foreign securities also may be subject to local economic or
political risks, including instability of some foreign governments, the
possibility of currency blockage or the imposition of withholding taxes on
32
dividend or interest payments, and the potential for expropriation,
nationalization or confiscatory taxation and limitations on the use or removal
of funds or other assets.
Among the foreign securities in which the Fund may invest are those
issued by companies located in developing countries, which are countries in
the initial stages of their industrialization cycles. Investing in the equity
and debt markets of developing countries involves exposure to economic
structures that are generally less diverse and less mature, and to political
systems that can be expected to have less stability, than those of developed
countries. The markets of developing countries historically have been more
volatile than the markets of the more mature economies of developed countries,
but often have provided higher rates of return to investors. The Fund may also
invest in debt securities of foreign governments.
SPECIAL RISKS OF DERIVATIVE TRANSACTIONS
Participation in the options or futures markets and in currency
exchange transactions involves investment risks and transaction costs to which
the Fund would not be subject absent the use of these strategies. If the
Investment Adviser's predictions of movements in the direction of the
securities, foreign currency and interest rate markets are inaccurate, the
consequences to the Fund may leave the Fund in a worse position than if it had
not used such strategies. Risks inherent in the use of options, foreign
currency, futures contracts and options on futures contracts, securities
indices and foreign currencies include:
o dependence on the Investment Adviser's ability to predict
correctly movements in the direction of interest rates,
securities prices and currency markets;
o imperfect correlation between the price of options and
futures contracts and options thereon and movements in the
prices of the securities or currencies being hedged;
o the fact that skills needed to use these strategies are
different from those needed to select portfolio securities;
o the possible absence of a liquid secondary market for any
particular instrument at any time;
o the possible need to defer closing out certain hedged
positions to avoid adverse tax consequences;
o the possible inability of the Fund to purchase or sell a
security at a time that otherwise would be favorable for it
to do so, or the possible need for the Fund to sell a
security at a disadvantageous time due to a need for the Fund
to maintain "cover" or to segregate securities in connection
with the hedging techniques; and
o the creditworthiness of counterparties. For a further
description, see "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
33
the hedging instrument, possible lack of liquidity due to daily limits on
price fluctuation, imperfect correlation between the contracts and the
securities being hedged, losses from investing in futures transactions that
are potentially unlimited and the segregation requirements for such
transactions. For a further description, see "Investment Objectives and
Policies -- Investment Practices" in the SAI.
FORWARD CURRENCY EXCHANGE CONTRACTS
The use of forward currency contracts may involve certain risks,
including the failure of the counter party to perform its obligations under
the contract, and that the use of forward contracts may not serve as a
complete hedge because of an imperfect correlation between movements in the
prices of the contracts and the prices of the currencies hedged or used for
cover. For a further description of such investments, see "Investment
Objectives and Policies -- Investment Practices" in the SAI.
DEPENDENCE ON KEY PERSONNEL
The Investment Adviser is dependent upon the expertise of Mr. Mario
J. Gabelli in providing advisory services with respect to the Fund's
investments. If the Investment Adviser were to lose the services of Mr.
Gabelli, its ability to service the Fund could be adversely affected. There
can be no assurance that a suitable replacement could be found for Mr. Gabelli
in the event of his death, resignation, retirement or inability to act on
behalf of the Investment Adviser.
MANAGEMENT OF THE FUND
The Fund's Board of Trustees (who, with its officers, are described
in the SAI) has overall responsibility for the management of the Fund. The
Board of Trustees decides upon matters of general policy and reviews the
actions of the Investment Adviser and the Administrator (as defined below).
Pursuant to an Investment Advisory Agreement with the Fund, the Investment
Adviser, under the supervision of the Fund's Board of Trustees, provides a
continuous investment program for the Fund's portfolio; provides investment
research and makes and executes recommendations for the purchase and sale of
securities; and provides all facilities and personnel, including officers
required for its administrative management and pays the compensation of all
officers and directors of the Fund who are its affiliates. As compensation for
its services and the related expenses borne by the Investment Adviser, the
Fund pays the Investment Adviser a fee, computed daily and payable monthly,
equal, on an annual basis, to 1.00% of the Fund's average weekly net assets,
which is higher than that paid by most mutual funds. However, the Investment
Adviser has voluntarily agreed to waive the portion of its investment advisory
fee attributable to an amount of assets of the Fund equal to the aggregate
stated value of, as the case may be, its outstanding Series A Preferred Shares
and/or Series B Preferred Shares for any calendar year in which the net asset
value total return of the Fund allocable to the common shares, including
distributions and the advisory fee subject to potential waiver, is less than
(i) in the case of the Series A Preferred Shares, the stated annual dividend
rate of such series and (ii) in the case of the Series B Preferred Shares, the
net cost of capital to the Fund with respect to the Series B Preferred Shares
for such year expressed as a percentage (including, without duplication,
dividends paid by the Fund on the Series B Preferred Shares and the net cost
to the Fund of any associated swap or cap transaction if the Fund hedges its
Series B Preferred Shares dividend obligations). This waiver will apply to the
portion of the Fund's assets attributable to the Series A Preferred Shares and
Series B Preferred Shares, respectively, for so long as any shares of such
series remain outstanding. For purposes of the calculation of the fees payable
to the Investment Adviser by the Fund, average weekly net assets of the Fund
are determined at the end of each month on the basis of its average net assets
for each week during the month. The assets for each weekly period are
determined by averaging the net assets at the end of a week with the net
assets at the end of the prior week.
34
For purposes of the calculation of the fees payable to the Investment Adviser
by the Fund, average weekly net assets of the Fund are determined at the end
of each month on the basis of its average net assets for each week during the
month.
Gabelli Funds, LLC acts as the Fund's Investment Adviser pursuant to
an advisory agreement with the Fund. The Investment Adviser is a New York
corporation with principal offices located at One Corporate Center, Rye, New
York 10580-1422. The Investment Adviser was organized in 1999 and is the
successor to Gabelli Funds, Inc., which was organized in 1980. As of June 30,
2003, the Investment Adviser acted as registered investment adviser to 19
management investment companies with aggregate net assets of $9.3 billion. The
Investment Adviser, together with other affiliated investment advisers noted
below had assets under management totaling approximately $21.9 billion as of
June 30, 2003. GAMCO Investors, Inc., an affiliate of the Investment Adviser,
acts as investment adviser for individuals, pension trusts, profit sharing
trusts and endowments, and as a sub-adviser to management investment companies
having aggregate assets of $10.8 billion under management as of June 30, 2003.
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 $1.2 billion under management as of June 30, 2003. Gabelli
Advisers, Inc., an affiliate of the Investment Adviser, acts as investment
manager to the Gabelli Westwood Funds having aggregate assets of $493 million
under management as of June 30, 2003.
The Investment Adviser is a wholly-owned subsidiary of Gabelli Asset
Management Inc., a New York corporation, whose Class A Common Stock is traded
on the NYSE under the symbol "GBL." Mr. Mario J. Gabelli may be deemed a
"controlling person" of the Investment Adviser on the basis of his ownership
of a majority of the stock of Gabelli Group Capital Partners, Inc., which owns
a majority of the capital stock of Gabelli Asset Management Inc.
The Investment Adviser is obligated to pay expenses associated with
providing the services contemplated by the Investment Advisory Agreement
between the Fund and the Investment Adviser (the "Advisory Agreement")
including compensation of and office space for its officers and employees
connected with investment and economic research, trading and investment
management and administration of the Fund, as well as the fees of all trustees
of the Fund who are affiliated with the Investment Adviser.
The Advisory Agreement contains provisions relating to the selection
of securities brokers to effect the portfolio transactions of the Fund. Under
those provisions, the Investment Adviser may (1) direct Fund portfolio
brokerage to Gabelli & Company, Inc. or other broker-dealer affiliates of the
Investment Adviser; and (2) pay commissions to brokers other than Gabelli &
Company, Inc. which are higher than might be charged by another qualified
broker to obtain brokerage and/or research services considered by the
Investment Adviser to be useful or desirable for its investment management of
the Fund and/or its other advisory accounts or those of any investment adviser
affiliated with it. The SAI contains further information about the Advisory
Agreement including a more complete description of the advisory and expense
arrangements, exculpatory and brokerage provisions, as well as information on
the brokerage practices of the Fund.
Canadian shareholders should note, to the extent applicable, that
there may be difficulty enforcing any legal rights against the Investment
Adviser because it is resident outside Canada and all of its assets are
situated outside Canada.
35
PORTFOLIO MANAGER
Mario J. Gabelli is the leader of a team which is primarily
responsible for the day-to-day management of the Fund. Mr. Gabelli has served
as Chairman, President and Chief Investment Officer of the Investment Adviser
since 1980. Mr. Gabelli also serves as Portfolio Manager for several other
funds in the Gabelli fund family. Because of the diverse nature of Mr.
Gabelli's responsibilities, he will devote less than all of his time to the
day-to-day management at the Fund. Over the past five years, Mr. Gabelli has
served as Chairman of the Board and Chief Executive Officer of Gabelli Asset
Management Inc.; Chief Investment Officer of GAMCO Investors, Inc.; Vice
Chairman of the Board and Chief Executive Officer of Lynch Corporation, a
diversified manufacturing company, and Lynch Interactive Corporation, a
multimedia and communications services company.
NON-RESIDENT TRUSTEE
Karl Otto Pohl, a trustee of the Fund, resides outside the United
States and all or a significant portion of his assets are located outside the
United States. He has no authorized agent in the United States to receive
service of process. As a result, it may not be possible for investors to
effect service of process within the United States or to enforce against him
in United States courts judgments predicated upon civil liability provisions
of United States securities laws. It may also not be possible to enforce
against him in foreign courts judgments of United States courts or liabilities
in original actions predicated upon civil liability provisions of the United
States securities laws.
SUB-ADMINISTRATOR
The Investment Adviser has entered into a sub-administration
agreement with PFPC Inc. (the "Sub- Administrator") pursuant to which the
Sub-Administrator provides certain administrative services necessary for the
Fund's operations which do not include the investment advisory and portfolio
management services provided by the Investment Adviser. For these services and
the related expenses borne by the Sub- Administrator, the Investment Adviser
pays a prorated monthly fee at the annual rate of .0275% of the first $10
billion of the aggregate average net assets of the Fund and all other funds
advised by the Investment Adviser and administered by the Sub-Administrator,
..0125% of the aggregate average net assets exceeding $10 billion and .01% of
the aggregate average net assets in excess of $15 billion. The
Sub-Administrator has its principal office at 760 Moore Road, King of Prussia,
Pennsylvania 19406.
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 may retain for reinvestment, and pay the resulting federal
income taxes on, its net capital gain, if any, although the Fund reserves the
authority to distribute its net capital gain in any year. The Fund has a
policy, which may be modified at any time by its Board of Trustees, of paying
distributions on its common shares of $0.06 per share per month. This policy
permits holders of common shares to realize a predictable, but not assured,
level of cash flow and some liquidity periodically with respect to their common
36
shares without having to sell shares. To avoid paying income tax at the
corporate level, the Fund will distribute substantially all of its investment
company taxable income and realized capital gains. In the event that the
Fund's investment company taxable income and realized capital gains exceed the
total of the Fund's monthly distributions, the Fund intends to pay such excess
once a year. If, for any calendar year, the total monthly distributions exceed
investment company taxable income and net capital gain, the excess will
generally be treated as a tax-free return of capital up to the amount of a
shareholder's tax basis in the shares. The amount treated as a tax-free return
of capital will reduce a shareholder's tax basis in the shares, thereby
increasing such shareholder's potential gain or reducing his or her potential
loss on the sale of the shares. Any amounts distributed to a shareholder in
excess of the basis in the shares will generally be taxable to the shareholder
as capital gain. See "Taxation" below.
In the event the Fund distributes amounts in excess of its investment
company taxable income and net capital gain, such distributions will decrease
the Fund's total assets and, therefore, have the likely effect of increasing
the Fund's expense ratio. In addition, in order to make such distributions,
the Fund might have to sell a portion of its investment portfolio at a time
when independent investment judgment might not dictate such action.
The Fund, along with other closed-end registered investment companies
advised by the Investment Adviser, has obtained an exemption from Section
19(b) of the 1940 Act and Rule 19b-1 thereunder permitting the Fund to make
periodic distributions of long-term capital gains provided that any
distribution policy of the Fund with respect to its common shares calls for
periodic (e.g., quarterly or semi-annually, but in no event more frequently
than monthly) distributions in an amount equal to a fixed percentage of the
Fund's average net asset value over a specified period of time or market price
per common share at or about the time of distribution or pay-out of a fixed
dollar amount. The Fund's current policy is to make monthly distributions to
holders of its common shares. The exemption also permits the Fund to make
distributions with respect to its preferred shares in accordance with such
shares' terms.
TAXATION
TAXATION OF THE FUND
The Fund has qualified and elected to be taxed as a regulated
investment company under Subchapter M of the Code. Accordingly, the Fund must,
among other things, (a) derive in each taxable year at least 90% of its gross
income (including tax-exempt interest) from dividends, interest, payments with
respect to certain securities loans, and gains from the sale or other
disposition of stock, securities or foreign currencies, or other income
(including but not limited to gain from options, futures and forward
contracts) derived with respect to its business of investing in such stock,
securities or currencies; and (b) diversify its holdings so that, at the end
of each fiscal quarter (i) at least 50% of the market value of the Fund's
total assets is represented by cash and cash items, U.S. government
securities, the securities of other regulated investment companies and other
securities, with such other securities limited, in respect of any one issuer,
to an amount not greater than 5% of the value of the Fund's total assets and
not more than 10% of the outstanding voting securities of such issuer, and
(ii) not more than 25% of the market value of the Fund's total assets is
invested in the securities of any issuer (other than U.S. government
securities and the securities of other regulated investment companies) or of
any two or more issuers that the Fund controls and that are determined to be
engaged in the same business or similar or related trades or businesses.
As a regulated investment company, the Fund generally is not subject
to U.S. federal income tax on income and gains that it distributes each
taxable year to shareholders, if it distributes at least 90% of the sum
37
of the Fund's (i) investment company taxable income (which includes, among
other items, dividends, interest and the excess of any net short-term capital
gains over net long-term capital losses and other taxable income other than
any net capital gain (as defined below) reduced by deductible expenses)
determined without regard to the deduction for dividends paid and (ii) its net
tax exempt interest (the excess of its gross tax exempt interest over certain
disallowed deductions). The Fund intends to distribute at least annually
substantially all of such income.
Amounts not distributed on a timely basis in accordance with a
calendar year distribution requirement are subject to a nondeductible 4%
excise tax at the Fund level. To avoid the tax, the Fund must distribute
during each calendar year an amount equal to the sum of (1) at least 98% of
its ordinary income (not taking into account any capital gains or losses) for
the calendar year, (2) at least 98% of its capital gains in excess of its
capital losses (adjusted for certain ordinary losses) for a one-year period
generally ending on October 31 of the calendar year (unless, an election is
made by a fund with a November or December year-end to use the fund's fiscal
year), and (3) certain undistributed amounts from previous years on which the
fund paid no U.S. federal income tax. While the Fund intends to distribute any
income and capital gains in the manner necessary to minimize imposition of the
4% excise tax, there can be no assurance that sufficient amounts of the Fund's
taxable income and capital gains will be distributed to avoid entirely the
imposition of the tax. In that event, the Fund will be liable for the tax only
on the amount by which it does not meet the foregoing distribution
requirement.
If for any taxable year the Fund does not qualify as a regulated
investment company, all of its taxable income (including its net capital
gains) will be subject to tax at regular corporate rates without any deduction
for distributions to shareholders, and such distributions will be taxable to
the shareholders as ordinary dividends to the extent of the Fund's current and
accumulated earnings and profits.
TAXATION OF THE SHAREHOLDERS
Distributions paid to you by the Fund from its ordinary income or
from an excess of net short-term capital gains over net long-term capital
losses (together referred to hereinafter as "ordinary income dividends")
are taxable to you as ordinary income to the extent of the Fund's earning
and profits. Such dividends (if designated by the Fund) may qualify
(provided holding periods and other requirements are met) (i) for the
dividends received deduction in the case of corporate stockholders to the
extent the Fund's income consist of qualifying dividend income from U.S.
corporations, and (ii) under the recently enacted Jobs and Growth Tax
Relief Reconciliation Act of 2003 (effective for taxable years after
December 31, 2002 through December 31, 2008) ("2003 Tax Act"), as qualified
dividend income eligible for a reduced rate to individuals (maximum 15%
decreasing to 5% for individuals in lower tax brackets) to the extent that
the Fund receives qualified dividend income. Qualified dividend income is,
in general, dividend income from taxable domestic corporations and certain
foreign corporations (e.g., generally, foreign corporations incorporated in
a possession of the United States or in certain countries with a
comprehensive tax treaty with the United States, or, the stock of which is
readily tradable on an established securities market in the United States).
Distributions made to you from an excess of net long-term capital gains
over net short-term capital losses ("capital gain dividends"), including
capital gain dividends credited to you but retained by the Fund, are
taxable to you as long-term capital gains, regardless of the length of time
you have owned Fund shares. Under the 2003 Tax Act, the maximum tax rate on
net long-term capital gain of individuals is reduced generally from 20% to
15% (5% for individuals in lower brackets) for such gain realized after May
6, 2003 and before January 1, 2009. Distributions in excess of the Fund's
earnings and profits will first reduce the adjusted tax basis of your
shares and, after such adjusted tax basis is reduced to zero, will
constitute capital gains to you (assuming the shares are held as a capital
asset). Generally, not later than 60 days after the close of its taxable
38
year, the Fund will provide you with a written notice designating the amount
of any qualified dividend income dividends or capital gain dividends and other
distributions.
The sale or other disposition of Common Shares of the Fund will
generally result in capital gain or loss to you, and will be long-term capital
gain or loss if the shares have been held for more than one year at the time
of sale. Any loss upon the sale or exchange of Fund shares held for six months
or less will be treated as long-term capital loss to the extent of any capital
gain dividends received (including amounts credited as an undistributed
capital gain dividend) by you. A loss realized on a sale or exchange of shares
of the Fund will be disallowed if other Fund shares are acquired (whether
through the automatic reinvestment of dividends or otherwise) within a 61-day
period beginning 30 days before and ending 30 days after the date that the
shares are disposed of. In such case, the basis of the shares acquired will be
adjusted to reflect the disallowed loss. Present law taxes both long-term and
short-term capital gains of corporations at the rates applicable to ordinary
income. For non-corporate taxpayers, however, short-term capital gains will
currently be taxed at the rate applicable to ordinary income (maximum 35%)
while long-term capital gains generally will be taxed at the rate applicable
to long-term capital gain (maximum 15% decreasing to 5% for taxpayers in the
lower brackets.
Dividends and other taxable distributions are taxable to you even
though they are reinvested in additional shares of the Fund. If the Fund pays
you a dividend in January which was declared in the previous October, November
or December to shareholders of record on a specified date in one of such
months, then such dividend will be treated for tax purposes as being paid by
the Fund and received by you on December 31 of the year in which the dividend
was declared.
The Fund is required in certain circumstances to backup withholding
on taxable dividends and certain other payments paid to non-corporate holders
of the Fund's shares who do not furnish the Fund with their correct taxpayer
identification number (in the case of individuals, their social security
number) and certain certifications, or who are otherwise subject to backup
withholding. Backup withholding is not an additional tax. Any amounts withheld
from payments made to you may be refunded or credited against your U.S.
federal income tax liability, if any, provided that the required information
is furnished to the Internal Revenue Service.
THE FOREGOING IS A GENERAL AND ABBREVIATED SUMMARY OF THE PROVISIONS
OF THE CODE AND THE TREASURY REGULATIONS IN EFFECT AS THEY DIRECTLY GOVERN THE
TAXATION OF THE FUND AND ITS SHAREHOLDERS. THESE PROVISIONS ARE SUBJECT TO
CHANGE BY LEGISLATIVE OR ADMINISTRATIVE ACTION, AND ANY SUCH CHANGE MAY BE
RETROACTIVE. A MORE COMPLETE DISCUSSION OF THE TAX RULES APPLICABLE TO THE
FUND CAN BE FOUND IN THE STATEMENT OF ADDITIONAL INFORMATION WHICH IS
INCORPORATED BY REFERENCE INTO THIS PROSPECTUS. SHAREHOLDERS ARE URGED TO
CONSULT THEIR TAX ADVISERS REGARDING SPECIFIC QUESTIONS AS TO U.S. FEDERAL,
FOREIGN, STATE, LOCAL INCOME OR OTHER TAXES.
CAPITALIZATION
COMMON SHARES
The Fund is authorized to issue an unlimited number of shares of
beneficial interest, par value $.001 per share, in multiple classes and series
thereof as determined from time to time by the Board of Trustees. The Board of
Trustees of the Fund has authorized issuance of an unlimited number of shares
of two classes, the Common Shares and preferred shares. Each share within a
particular class or series thereof has equal voting, dividend, distribution
and liquidation rights. When issued, in accordance with the terms thereof, the
39
Common Shares will be fully paid and non-assessable. Common Shares are not
redeemable and have no preemptive, conversion or cumulative voting rights.
PREFERRED SHARES
The Fund has issued 1,200,000 Series A Preferred Shares and 1,000
Series B Preferred Shares. The Board of Trustees reserves the right to issue
additional preferred shares, including Series A Preferred Shares or Series B
Preferred Shares, from time to time, subject to the restrictions in the Fund's
governing documents and the 1940 Act.
The Series A Preferred Shares have a liquidation preference of $25
per share and the Series B Preferred Shares have a liquidation preference of
$25,000 per share. Upon a liquidation, each holder of Series A Preferred
Shares or Series B Preferred Shares will be entitled to receive out of the
assets of the Fund available for distribution to shareholders (after payment
of claims of the Fund's creditors but before any distributions with respect to
the Fund's common shares or any other shares of the Fund ranking junior to the
Series A Preferred Shares and Series B Preferred Shares as to liquidation
payments) an amount per share equal to such share's liquidation preference
plus any accumulated but unpaid dividends (whether or not earned or declared)
to the date of distribution. The Series A Preferred Shares and the Series B
Preferred Shares will rank on a parity with any other series of preferred
shares of the Fund as to the payment of dividends and the distribution of
assets upon liquidation. Series A Preferred Shares and Series B Preferred
Shares each carry one vote per share on all matters on which such shares are
entitled to vote. The Series A Preferred Shares and the Series B Preferred
Shares are fully paid and nonassessable and have no preemptive, exchange or
conversion rights. The Board of Trustees may by resolution classify or
reclassify any authorized but unissued capital shares of the Fund from time to
time by setting or changing the preferences, conversion or other rights,
voting powers, restrictions, limitations as to dividends or terms or
conditions of redemption. The Fund will not issue any class of shares senior
to the Series A Preferred Shares and/or Series B Preferred Shares.
The following table shows the number of shares of (i) capital shares
authorized, (ii) capital shares unissued and (iii) capital shares outstanding
for each class of authorized securities of the Fund as of July 31, 2003.
Amount Held by
Company or for Amount
Title of Class Amount Authorized its Own Account Outstanding
Common Shares............................. unlimited none 15,298,490
Preferred Shares.......................... unlimited none
Series A Preferred Shares........ 1,200,000
Series B Preferred Shares........ 1,000
The Common Shares are listed and traded on the NYSE under the
symbol "GUT." The average weekly trading volume of the Common Shares on the
NYSE for the 12 months ended December 31, 2002 was 151,271 shares. The
following table sets forth for the quarters indicated the high and low
closing prices on the NYSE per share of the Common Shares and the net
asset value and the premium or discount from net asset
40
value at which the Common Shares 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
------------- ---- --- ---- --- ---- ---
3/31/01 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%
3/31/02 10.15 9.20 7.46 6.99 37.53% 27.07%
6/30/02 10.14 8.15 7.44 6.68 37.03% 16.93%
9/30/02 9.22 7.90 6.90 5.88 41.41% 30.15%
12/31/02 9.00 7.27 6.31 5.56 44.00% 30.76%
_______________________
(1) As reported on the NYSE
(2) Based on the Fund's computations.
EFFECTS OF LEVERAGE
The only obligation that the Fund has to the holders of the preferred
shares is to pay the applicable dividend rate. Any return earned in excess of
the stated dividend rate would directly benefit common stockholders; however,
any shortfall from the stated rate would negatively affect the Fund's common
shareholders. The following table is designed to assist you in understanding
the effects of the existing leverage on your shares of the Fund's common
shares. The table assumes that 1,200,000 shares of Series A Preferred Shares
are issued and outstanding and 1,000 shares of Series B Preferred Shares are
issued and outstanding and that the blended dividend rate for the Fund's
preferred shares is 3.55%. The assumed returns appearing in the table are
hypothetical and actual returns may be greater or less than those appearing in
the table.
Assumed return on portfolio (net of expenses).... -10.00% -5.00% 0.00% 5.00% 10.00%
Corresponding return to common stockholder....... -17.79% -9.92% -2.04% 5.83% 13.71%
The following factors associated with leveraging could increase the
investment risk and volatility of the price of the Common Shares:
41
o leveraging exaggerates any increase or decrease in the value of
the Common Shares;
o the dividend requirements on the Fund's preferred shares may
exceed the income from the portfolio securities purchased with
the proceeds from the issuance of preferred shares;
o a decline in net asset value results if the investment
performance of the additional securities purchased fails to
cover their cost to the Fund (including any dividend
requirements of preferred shares);
o a decline in net asset value could affect the ability of the
Fund to make Common Share dividend payments;
o a failure to pay dividends or make distributions on its common
shares could result in the Fund's ceasing to qualify as a
regulated investment company under the Code; and
o if the asset coverage for the Fund's preferred shares declines
to less than two hundred percent (as a result of market
fluctuations or otherwise), the Fund may be required to sell a
portion of its investments when it may be disadvantageous to do
so.
Pursuant to Section 18 of the 1940 Act, it is unlawful for the Fund,
as a registered closed-end investment company, to issue any class of senior
security, or to sell any senior security that it issues, unless it can satisfy
certain "asset coverage." The asset coverage with respect to a senior security
representing indebtedness means the ratio of the value of the Fund's total
assets (less all liabilities and indebtedness not represented by senior
securities) to the aggregate amount of the Fund's senior securities
representing indebtedness. The asset coverage with respect to a senior
security representing stock means the ratio of the value of the Fund's total
assets (less all liabilities and indebtedness not represented by senior
securities) to the aggregate amount of the Fund's senior securities
representing indebtedness plus the aggregate liquidation preference of the
Fund's outstanding preferred shares.
If, as is the case with the Fund, a registered investment company's
senior securities are equity securities, such securities must have an asset
coverage of at least 200% immediately following its issuance. If a registered
investment company's senior securities represent indebtedness, such
indebtedness must have an asset coverage of at least 300% immediately after
their issuance. Subject to certain exceptions, during any period following
issuance that the Fund fails to satisfy these asset coverage ratios, it will,
among other things, be prohibited from declaring any dividend or declaring any
other distribution in respect of its common shares except a dividend payable
in Common Shares issued by the Fund. A registered investment company may, to
the extent permitted by the 1940 Act, segregate assets or "cover" transactions
in order to avoid the creation of a class of senior security.
Any rating received by the Fund on its preferred shares, or on any
other senior security that it may issue, is an assessment by the applicable
rating agency of the capacity of the Fund to satisfy its obligations on its
senior securities. However, the "AAA" rating on the Fund's Series A and Series
B Preferred Shares does not eliminate or mitigate the risks associated with
investing in the Fund's common shares. In addition, should a rating on the
Fund's preferred shares be lowered or withdrawn by the relevant rating agency,
there may be an adverse effect on the market value of the Fund's preferred
shares and the Fund may also be required to redeem all or part of its
outstanding preferred shares. If the Fund were required to redeem its
preferred shares (in whole or part) as a result of the change in or withdrawal
of the rating, the common shares of the Fund would lose the benefits
associated with a leveraged capital structure.
42
VOTING RIGHTS
Except as otherwise stated in this Prospectus and as otherwise
required by applicable law, holders of shares of the Series A and Series B
Preferred Shares and any other outstanding preferred shares of the Fund will
be entitled to one vote per share on each matter submitted to a vote of
shareholders and will vote together with holders of shares of the Common
Shares as a single class.
In connection with the election of the Fund's trustees, holders of
the Fund's Series A Preferred Shares, Series B Preferred Shares and any other
outstanding preferred shares, voting as a single class, will be entitled at
all times to elect two of the Fund's trustees, and the remaining trustees will
be elected by holders of Common Shares and holders of shares of preferred
shares voting together as a single class. In addition, if (i) at any time
dividends on the outstanding Series A Preferred, Series B AMPS and/or any
other preferred shares are unpaid in an amount equal to at least two full
years' dividends thereon and sufficient cash or specified securities have not
been deposited with the applicable paying agent for the payment of such
accumulated dividends or (ii) at any time holders of any other series of
preferred shares are entitled to elect a majority of the trustees of the Fund
under the 1940 Act or the Statements of Preferences creating such shares, then
the number or composition of trustees constituting the Board of Trustees will
be adjusted such that, when added to the two trustees elected exclusively by
the holders of the Series A Preferred Shares, Series B Preferred Shares and
other series of preferred shares as described above, would then constitute a
simple majority of the Board of Trustees as so adjusted. Such additional
trustees will be elected by the holders of the Series A Preferred Shares,
Series B Preferred Shares and the other series of preferred shares, voting
together as a single class, at a special meeting of shareholders which will be
called as soon as practicable and will be held not less than 10 or more than
20 days after the mailing date of the meeting notice. Such additional trustees
will be elected at a special meeting of preferred shareholders that will be
called and held as soon as practicable.
If the Fund thereafter pays, or declares and sets apart for payment
in full, all dividends payable on all outstanding shares of preferred shares
for all past dividend periods, the additional voting rights of the preferred
shareholders as described above will cease, and the terms of office of all of
the additional trustees elected by the preferred shareholders (but not of the
directors with respect to whose election the holders of Common Shares were
entitled to vote or the two trustees the preferred shareholders have the right
to elect as a separate class in any event) will terminate automatically.
So long as shares of the Fund's preferred shares are outstanding,
the Fund will not, without the affirmative vote of the holders of a majority
of the shares of preferred shares outstanding at the time, voting separately
as one class, amend, alter or repeal the provisions of its Declaration of
Trust, as amended and supplemented (including the Statement of Preferences
thereto) (the "Charter'), whether by merger, consolidation or otherwise, so
as to materially adversely affect any of the contract rights of the
preferred stockholders expressly set forth in the Charter. To the extent
permitted under the 1940 Act, in the event shares of more than one series of
preferred shares are outstanding, the Fund will not approve any of the
actions set forth in the preceding sentence which materially adversely
affects the contract rights expressly set forth in the Charter of a holder
of shares of a series of preferred shares differently than those of a holder
of shares of any other series of preferred shares without the affirmative
vote of at least a majority of votes entitled to be cast by holders of the
preferred shares of each series materially adversely affected and
outstanding at such time (each such materially adversely affected series
voting separately as a class). Unless a higher percentage is provided for
under the Charter, the affirmative vote of a majority (as defined in the
1940 Act) of the votes entitled to be cast by holders of outstanding shares
of the Fund's preferred shares, voting as a separate class, will be required
to approve any plan of reorganization adversely affecting such stock or any
43
action requiring a vote of security holders under Section 13(a) of the 1940
Act, including, among other things, open-ending the Fund and changing the
Fund's investment objective or changing the investment restrictions described
as fundamental policies under "Investment Restrictions" in the SAI.
The class vote of holders of shares of the preferred shares described
above in each case will be in addition to a separate vote of the requisite
percentage of shares of Common Shares and preferred shares, voting together as
a single class, necessary to authorize the action in question. The foregoing
voting provisions, however, will not apply to any preferred shares that have
been (i) redeemed or (ii) called for redemption, and for which sufficient
deposit assets have been provided to the dividend-disbursing agent to effect
such redemption at or prior to the time when the act with respect to which
such vote otherwise would be required will occur.
44
ANTI-TAKEOVER PROVISIONS OF THE DECLARATION OF TRUST
AND BY-LAWS
The Fund presently has provisions in its Declaration of Trust and
By-Laws (together, its "Governing Documents") which could have the effect of
limiting, in each case, (i) the ability of other entities or persons to
acquire control of the Fund, (ii) the Fund's freedom to engage in certain
transactions, or (iii) the ability of the Fund's trustees or shareholders to
amend the Governing Documents or effectuate changes in the Fund's management.
These provisions of the Governing Documents of the Fund may be regarded as
"anti-takeover" provisions. The Board of Trustees of the Fund is divided into
three classes, each having a term of no more than three years (except, to
ensure that the term of a class of the Fund's trustees expires each year, one
class of the Fund's trustees will serve an initial one-year term and
three-year terms thereafter and another class of its trustees will serve an
initial two-year term and three-year terms thereafter). Each year the term of
one class of trustees will expire. Accordingly, only those trustees in one
class may be changed in any one year, and it would require a minimum of two
years to change a majority of the Board of Trustees. Such system of electing
trustees may have the effect of maintaining the continuity of management and,
thus, make it more difficult for the shareholders of the Fund to change the
majority of trustees. See "Trustees and Officers." A trustee of the Fund may
be removed with or without cause by 66 2/3% of the votes entitled to be cast
for the election of such trustees. Special voting requirements also apply to
mergers into or a sale of all or substantially all of the Fund's assets and
conversion of the Fund into an open-end fund (or other closed-end fund
commonly known as an "interval fund"). These special voting requirements are
75% of the outstanding voting shares (together with a separate vote by the
holders of any preferred shares outstanding). In addition, 80% of the holders
of the outstanding voting securities of the Fund voting as a class is
generally required in order to authorize any of the following transactions:
o merger or consolidation of the Fund with or into any other
corporation;
o issuance of any securities of the Fund to any person or entity
for cash;
o sale, lease or exchange of all or any substantial part of the
assets of the Fund to any entity or person (except assets
having an aggregate fair market value of less than
$1,000,000);
o sale, lease or exchange to the Fund, in exchange for
securities of the Fund, of any assets of any entity or person
(except assets having an aggregate fair market value of less
than $1,000,000); or
o the purchase of the Fund's Common Shares by the Fund from any
other person or entity;
if such corporation, person or entity is directly, or indirectly through
affiliates, the beneficial owner of more than 5% of the outstanding shares of
the Fund. However, such vote would not be required when, under certain
conditions, the Board of Trustees approves the transaction. Reference is made
to the Governing Documents of the Fund, on file with the SEC, for the full
text of these provisions.
The provisions of the Governing Documents described above could have
the effect of depriving the owners of shares in the Fund of opportunities to
sell their shares at a premium over prevailing market prices, by discouraging
a third party from seeking to obtain control of the Fund in a tender offer or
similar transaction. The overall effect of these provisions is to render more
difficult the accomplishment of a merger or the assumption of control by a
principal shareholder.
45
CUSTODIAN, TRANSFER AGENT, DIVIDEND-DISBURSING
AGENT AND REGISTRAR
State Street Bank 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 P.O. Box 43025, Providence,
R.I. 02940-3025, serves as the Fund's dividend disbursing agent, as agent
under the Fund's Plan and as transfer agent and registrar for shares of the
Fund.
LEGAL MATTERS
Certain legal matters will be passed on by Skadden, Arps, Slate,
Meagher & Flom LLP, New York, New York, special counsel to the Fund in
connection with the Offering.
EXPERTS
The financial statements of the Fund as of December 31, 2002 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 Shares are listed on the NYSE. Reports, proxy
statements and other information concerning the Fund can be inspected and
copied at the Library of the NYSE at 20 Broad Street, New York, New York
10005.
This Prospectus constitutes a part of a registration statement on
Form N-2 (together with the SAI and all the exhibits and the appendix thereto,
the "Registration Statement") filed by the Fund with the SEC under the
Securities Act and the 1940 Act. This Prospectus and the SAI do not contain
all of the information set forth in the Registration Statement. Reference is
hereby made to the Registration Statement and related exhibits for further
information with respect to the Fund and the Common Shares offered hereby.
Statements contained herein concerning the provisions of documents are
necessarily summaries of such documents, and each statement is qualified in
its entirety by reference to the copy of the applicable document filed with
the SEC.
46
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this Prospectus constitute forward-looking
statements, which involve known and unknown risks, uncertainties and other
factors that may cause the actual results, levels of activity, performance or
achievements of the Fund to be materially different from any future results,
levels of activity, performance or achievements expressed or implied by such
forward-looking statements. Such factors include, among others, those listed
under "Risk Factors" and elsewhere in this Prospectus. As a result of the
foregoing and other factors, no assurance can be given as to the future
results, levels of activity or achievements, and neither the Fund nor any
other person assumes responsibility for the accuracy and completeness of such
statements. To the extent required by law, the Fund undertakes to supplement
this Prospectus to reflect any material changes to the Fund after the date of
this Prospectus.
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 OF COMMON SHARES OFFERED BY THIS PROSPECTUS, NOR
DOES IT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY
COMMON SHARES BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION WOULD BE UNLAWFUL. 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.
47
TABLE OF CONTENTS
OF
STATEMENT OF ADDITIONAL INFORMATION
PAGE
----
STATEMENT OF ADDITIONAL INFORMATION.........................................B-1
INVESTMENT OBJECTIVES AND POLICIES..........................................B-1
INVESTMENT RESTRICTIONS.....................................................B-9
MANAGEMENT OF THE FUND.....................................................B-11
PORTFOLIO TRANSACTIONS.....................................................B-19
AUTOMATIC DIVIDEND REINVESTMENT AND VOLUNTARY CASH PURCHASE PLAN...........B-21
TAXATION ..................................................................B-22
NET ASSET VALUE............................................................B-27
GENERAL INFORMATION........................................................B-28
COUNSEL AND INDEPENDENT ACCOUNTANTS........................................B-28
BENEFICIAL OWNERS..........................................................B-28
FINANCIAL STATEMENTS.......................................................B-28
FINANCIAL STATEMENTS.......................................................B-29
APPENDIX A..................................................................A-1
48
_________________________________
_________________________________
THE GABELLI UTILITY TRUST
5,099,497 SHARES
OF COMMON SHARES
ISSUABLE UPON EXERCISE OF RIGHTS
TO SUBSCRIBE TO SUCH SHARES
PROSPECTUS
August 20, 2003
_________________________________
_________________________________
STATEMENT OF ADDITIONAL INFORMATION
The Gabelli Utility Trust (the "Fund") is a non-diversified,
closed-end management investment company that seeks long-term growth of
capital and income by investing primarily in a portfolio of equity securities
selected by Gabelli Funds, LLC, the investment adviser to the Fund (the
"Adviser"). It is the policy of the Fund, under normal market conditions, to
invest at least 80% of its total assets in common stock and debt and equity
securities of foreign and domestic companies involved to a substantial extent
(e.g., at least 50% of the assets, gross income or net profits of a company is
committed to or derived from) in providing products, services or equipment for
(i) the generation or distribution of electricity, gas and water and (ii)
telecommunications services or infrastructure operations, such as airports,
toll roads and municipal services.
This Statement of Additional Information ("SAI") is not a prospectus,
but should be read in conjunction with the Prospectus for the Fund dated
August 20, 2003 (the "Prospectus"). This SAI does not include any information
that a prospective investor should consider before purchasing shares of the
Fund, and investors should obtain and read the Prospectus prior to purchasing
shares. A copy of the Prospectus may be obtained without charge, by calling
the Fund at 800-GABELLI (800-422-3554) or (914) 921-5070. This SAI
incorporates by reference the entire Prospectus.
The Prospectus and this SAI omit certain of the information contained
in the registration statement filed with the Securities and Exchange
Commission, Washington, D.C. The registration statement may be obtained from
the Securities and Exchange Commission (the "Commission") upon payment of the
fee prescribed, or inspected at the Commission's office or via its website
(www.sec.gov) at no charge.
This Statement of Additional Information is dated August 20, 2003.
INVESTMENT OBJECTIVES AND POLICIES
Investment Objectives
The Fund's primary investment objectives are long-term growth of
capital and income. Under normal market conditions, the Fund will invest at
least 80% of its total assets in common stock and debt and equity securities
of foreign and domestic companies involved to a substantial extent (e.g., at
least 50% of the assets, gross income or net profits of a company is committed
to or derived from) in providing products, services or equipment for (i) the
generation or distribution of electricity, gas and water and (ii)
telecommunications services or infrastructure operations, such as airports,
toll roads and municipal services. See "Investment Objectives and Policies" in
the Prospectus.
Investment Practices
Securities Subject to Reorganization. The Fund may invest without
limit in securities of companies for which a tender or exchange offer has been
made or announced and in securities of companies for which a merger,
consolidation, liquidation or reorganization proposal has been announced if,
in the judgment of the Investment Adviser, there is a reasonable prospect of
high total return significantly greater than the brokerage and other
transaction expenses involved.
In general, securities which are the subject of such an offer or
proposal sell at a premium to their historic market price immediately prior to
the announcement of the offer or may also discount what the stated or
appraised value of the security would be if the contemplated transaction were
approved or consummated. Such investments may be advantageous when the
discount significantly overstates the risk of the contingencies involved;
significantly undervalues the securities, assets or cash to be received by
shareholders of the prospective portfolio company as a result of the
contemplated transaction; or fails adequately to recognize the possibility
that the offer or proposal may be replaced or superseded by an offer or
proposal of greater value. The evaluation of such contingencies requires
unusually broad knowledge and experience on the part of the Adviser which must
appraise not only the value of the issuer and its component businesses as well
as the assets or securities to be received as a result of the contemplated
transaction but also the financial resources and business motivation of the
offer and/or the dynamics and business climate when the offer or proposal is
in process. Since such investments are ordinarily short-term in nature, they
will tend to increase the turnover ratio of the Fund, thereby increasing its
brokerage and other transaction expenses. The Adviser intends to select
investments of the type described which, in its view, have a reasonable
prospect of capital appreciation which is significant in relation to both risk
involved and the potential of available alternative investments.
Temporary Investments. Although under normal market conditions at
least 80% of the Fund's total assets will consist of common stock and other
securities of foreign and domestic companies involved in the utility industry,
when a temporary defensive posture is believed by the Adviser to be warranted
("temporary defensive periods"), the Fund may without limitation hold cash or
invest its assets in money market instruments and repurchase agreements in
respect of those instruments. The money market instruments in which the Fund
may invest are obligations of the United States government, its agencies or
instrumentalities ("U.S. Government Securities"); commercial paper rated A-1
or higher by Standard & Poor's Corporation ("S&P") or Prime-1 by Moody's
Investors Service, Inc. ("Moody's"); and certificates of deposit and bankers'
acceptances issued by domestic branches of U.S. banks that are members of the
Federal Deposit Insurance Corporation. During temporary defensive periods, the
Fund may also invest to the extent permitted by applicable law in shares of
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 25% of its total
assets in fixed-income securities rated in the lower rating categories of
recognized statistical rating agencies, such as securities rated "CCC" or
lower by S&P or "Caa" or lower by Moody's, or non-rated securities of
comparable quality. These debt securities are predominantly speculative and
involve major risk exposure to adverse conditions. Debt securities that are
rated lower than "BBB" by S&P or "Baa" by Moody's are often referred to in the
financial press as "junk bonds."
Generally, such lower-rated securities and unrated securities of
comparable quality offer a higher current yield than is offered by
higher-rated securities, but also (i) will likely have some quality and
protective characteristics that, in the judgment of the rating organizations,
are outweighed by large uncertainties or major risk exposures to adverse
conditions and (ii) are predominantly speculative with respect to the issuer's
capacity to pay interest and repay principal in accordance with the terms of
the obligation. The market values of certain of these securities also tend to
be more sensitive to individual corporate developments and changes in economic
conditions than higher-quality bonds. In addition, such lower-rated securities
and comparable unrated securities generally present a higher degree of credit
risk. The risk of loss due to default by these issuers is significantly
greater because such lower-rated securities and unrated securities of
comparable quality generally are unsecured and frequently are subordinated to
the prior payment of senior indebtedness. In light of these risks, the
Adviser, in evaluating the creditworthiness of an issue, whether rated or
unrated, will take various factors into consideration, which may include, as
applicable, the issuer's operating history, financial resources and its
sensitivity to economic conditions and trends, the market support for the
facility financed by the issue, the perceived ability and integrity of the
issuer's management and regulatory matters.
In addition, the market value of securities in lower-rated categories
is more volatile than that of higher-quality securities, and the markets in
which such lower-rated or unrated securities are traded are more limited than
those in which higher-rated securities are traded. The existence of limited
markets may make it more difficult for the Fund to obtain accurate market
quotations for purposes of valuing its portfolio and calculating its net asset
value. Moreover, the lack of a liquid trading market may restrict the
availability of securities for the Fund to purchase and may also have the
effect of limiting the ability of the Fund to sell securities at their fair
value to respond to changes in the economy or the financial markets.
Lower-rated debt obligations also present risks based on payment
expectations. If an issuer calls the obligation for redemption (often a
feature of fixed income securities), the Fund may have to replace the security
with a lower-yielding security, resulting in a decreased return for investors.
Also, as the principal value of bonds moves inversely with movements in
interest rates, in the event of rising interest rates the value of the
securities held by the Fund may decline proportionately more than a portfolio
consisting of higher-rated securities. Investments in zero coupon bonds may be
more speculative and subject to greater fluctuations in value due to changes
in interest rates than bonds that pay interest currently. Interest rates have
recently been at the lowest levels in many years and, therefore, it is likely
that they will rise in the future.
The Fund may invest up to 10% of its total assets in securities of
issuers in default. The Fund will make an investment in securities of issuers
in default only when the Adviser believes that such issuers will honor their
obligations or emerge from bankruptcy protection and the value of these
securities will appreciate. By investing in securities of issuers in default,
the Fund bears the risk that these issuers will not continue to honor their
obligations or emerge from bankruptcy protection or that the value of the
securities will not appreciate.
In addition to using recognized rating agencies and other sources,
the Adviser also performs its own analysis of issues in seeking investments
that it believes to be underrated (and thus higher-yielding) in light of the
financial condition of the issuer. Its analysis of issuers may include, among
other things, current and anticipated cash flow and borrowing requirements,
value of assets in relation to historical cost, strength of management,
responsiveness to business conditions, credit standing and current anticipated
results of operations. In selecting investments for the Fund, the Adviser may
also consider general business conditions, anticipated changes in interest
rates and the outlook for specific industries.
Subsequent to its purchase by the Fund, an issue of securities may
cease to be rated or its rating may be reduced. In addition, it is possible
that statistical rating agencies might change their ratings of a particular
issue or reflect subsequent events on a timely basis. Moreover, such ratings
do not assess the risk of decline in market value. None of these events will
require the sale of the securities by the Fund, although the Adviser will
consider these events in determining whether the Fund should continue to hold
the securities.
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 or currency underlying the option at a specified exercise
price at any time during the term of the option. The writer of the call option
has the obligation, upon exercise of the option, to deliver the underlying
security or currency upon payment of the exercise price during the option
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
the Fund has been assigned an exercise notice, the Fund will be unable to
effect a closing purchase transaction. Similarly, if the Fund is the holder of
an option it may liquidate its position by effecting a closing sale
transaction. This is accomplished by selling an option of the same series as
the option previously purchased. There can be no assurance that either a
closing purchase or sale transaction can be effected when the Fund so desires.
The Fund will realize a profit from a closing transaction if the
price of the transaction is less than the premium received from writing the
option or is more than the premium paid to purchase the option; the Fund will
realize a loss from a closing transaction if the price of the transaction is
more than the premium received from writing the option or is less than the
premium paid to purchase the option. Since call option prices generally
reflect increases in the price of the underlying security, any loss resulting
from the repurchase of a call option may also be wholly or partially offset by
unrealized appreciation of the underlying security. Other principal factors
affecting the market value of a put or a call option include supply and
demand, interest rates, the current market price and price volatility of the
underlying security and the time remaining until the expiration date. Gains
and losses on investments in options depend, in part, on the ability of the
Adviser to predict correctly the effect of these factors. The use of options
cannot serve as a complete hedge since the price movement of securities
underlying the options will not necessarily follow the price movements of the
portfolio securities subject to the hedge.
An option position may be closed out only on an exchange which
provides a secondary market for an option of the same series or in a private
transaction. Although the Fund will generally purchase or write only those
options for which there appears to be an active secondary market, there is no
assurance that a liquid secondary market on an exchange will exist for any
particular option. In such event, it might not be possible to effect closing
transactions in particular options, so that the Fund would have to exercise
its options in order to realize any profit and would incur brokerage
commissions upon the exercise of call options and upon the subsequent
disposition of underlying securities for the exercise of put options. If the
Fund, as a covered call option writer, is unable to effect a closing purchase
transaction in a secondary market, it will not be able to sell the underlying
security until the option expires or it delivers the underlying security upon
exercise or otherwise covers the position.
In addition to options on individual securities, the Fund may also
purchase and sell call and put options on securities indices. A stock index
reflects in a single number the market value of many different stocks.
Relative values are assigned to the stocks included in an index and the index
fluctuates with changes in the market values of the stocks. The options give
the holder the right to receive a cash settlement during the term of the
option based on the difference between the exercise price and the value of the
index. By writing a put or call option on a securities index, the Fund is
obligated, in return for the premium received, to make delivery of this
amount. The Fund may offset its position in stock index options prior to
expiration by entering into a closing transaction on an exchange or it may let
the option expire unexercised.
The Fund also may buy or sell put and call options on foreign
currencies. A put option on a foreign currency gives the purchaser of the
option the right to sell a foreign currency at the exercise price until the
option expires. A call option on a foreign currency gives the purchaser of the
option the right to purchase the currency at the exercise price until the
option expires. Currency options traded on U.S. or other exchanges may be
subject to position limits which may limit the ability of the Fund to reduce
foreign currency risk using such options. Over-the-counter options differ from
exchange-traded options in that they are two-party contracts with price and
other terms negotiated between buyer and seller and generally do not have as
much market liquidity as exchange-traded options. Over-the-counter options are
illiquid securities.
Use of options on securities indices entails the risk that trading in
the options may be interrupted if trading in certain securities included in
the index is interrupted. The Fund will not purchase these options unless the
Adviser is satisfied with the development, depth and liquidity of the market
and the Adviser believes the options can be closed out.
Price movements in the portfolio of the Fund are unlikely to
correlate precisely with movements in the level of an index and, therefore,
the use of options on indices cannot serve as a complete hedge and will
depend, in part, on the ability of the Adviser to predict correctly movements
in the direction of the stock market generally or of a particular industry.
Because options on securities indices require settlement in cash, the Adviser
may be forced to liquidate portfolio securities to meet settlement
obligations. The staff of the SEC considers over-the-counter options such as
options on indices illiquid securities.
Although the Adviser will attempt to take appropriate measures to
minimize the risks relating to the Fund's writing of put and call options,
there can be no assurance that the Fund will succeed in any option-writing
program it undertakes.
Futures Contracts and Options on Futures. The Fund will not enter
into futures contracts or options on futures contracts unless (i) the
aggregate initial margins and premiums do not exceed 5% of the fair market
value of its assets and (ii) the aggregate market value of its outstanding
futures contracts and the market value of the currencies and futures contracts
subject to outstanding options written by the Fund do not exceed 50% of the
market value of its total assets. It is anticipated that these investments, if
any, will be made by the Fund solely for the purpose of hedging against
changes in the value of its portfolio securities and in the value of
securities it intends to purchase. Such investments will only be made if they
are economically appropriate to the reduction of risks involved in the
management of the Fund. In this regard, the Fund may enter into futures
contracts or options on futures for the purchase or sale of securities indices
or other financial instruments including but not limited to U.S. Government
Securities.
A "sale" of a futures contract (or a "short" futures position) means
the assumption of a contractual obligation to deliver the securities
underlying the contract at a specified price at a specified future time. A
"purchaser" of a futures contract (or a "long" futures position) means the
assumption of a contractual obligation to acquire the securities underlying
the contract at a specified future time. Certain futures contracts, including
stock and bond index futures, are settled on a net cash payment basis rather
than by the sale and delivery of the securities underlying the futures
contracts.
No consideration will be paid or received by the Fund upon the
purchase or sale of a futures contract. Initially, the Fund will be required
to deposit with the broker an amount of cash or cash equivalents equal to
approximately 1% to 10% of the contract amount (this amount is subject to
change by the exchange or board of trade on which the contract is traded and
brokers or members of such board of trade may charge a higher amount). This
amount is known as "initial margin" and is in the nature of a performance bond
or good faith deposit on the contract. Subsequent payments, known as
"variation margin," to and from the broker will be made daily as the price of
the index or security underlying the futures contract fluctuates. At any time
prior to the expiration of the futures contract, the Fund may elect to close
the position by taking an opposite position, which will operate to terminate
its existing position in the contract.
An option on a futures contract gives the purchaser the right, in
return for the premium paid, to assume a position in a futures contract at a
specified exercise price at any time to the expiration of the option. Upon
exercise of an option, the delivery of the futures position by the writer of
the option to the holder of the option will be accompanied by delivery of the
accumulated balance in the writer's futures margin account attributable to
that contract, which represents the amount by which the market price of the
futures contract exceeds, in the case of a call, or is less than, in the case
of a put, the exercise price of the option on the futures contract. The
potential loss related to the purchase of an option on futures on contracts is
limited to the premium paid for the option (plus transaction costs). Because
the value of the option purchased is fixed at the point of sale, there are no
daily cash payments by the purchaser to reflect changes in the value of the
underlying contract; however, the value of the option does change daily and
that change would be reflected in the net assets of the Fund.
Futures and options on futures entail certain risks, including but
not limited to the following: no assurance that futures contracts or options
on futures can be offset at favorable prices, possible reduction of the yield
of the Fund due to the use of hedging, possible reduction in value of both the
securities hedged and the hedging instrument, possible lack of liquidity due
to daily limits on price fluctuations, imperfect correlation between the
contracts and the securities being hedged, losses from investing in futures
transactions that are potentially unlimited and the segregation requirements
described below.
In the event the Fund sells a put option or enters into long futures
contracts, under current interpretations of the 1940 Act, an amount of cash,
obligations of the U.S. government and its agencies and instrumentalities or
other liquid securities equal to the market value of the contract must be
deposited and maintained in a segregated account with the custodian of the
Fund to collateralize the positions, in order for the Fund to avoid being
treated as having issued a senior security in the amount of its obligations.
For short positions in futures contracts and sales of call options, the Fund
may establish a segregated account (not with a futures commission merchant or
broker) with cash obligations of the U.S. government and its agencies and
instrumentalities or other high grade debt securities that, when added to
amounts deposited with a futures commission merchant or a broker as margin,
equal the market value of the instruments or currency underlying the futures
contracts or call options, respectively (but are no less than the stock price
of the call option or the market price at which the short positions were
established).
Forward Currency Transactions. The Fund may hold currencies to meet
settlement requirements for foreign securities and may engage in currency
exchange transactions to protect against uncertainty in the level of future
exchange rates between a particular foreign currency and the U.S. dollar or
between foreign currencies in which its securities are or may be denominated.
Forward currency contracts are agreements to exchange one currency for another
at a future date. The date (which may be any agreed- upon fixed number of days
in the future), the amount of currency to be exchanged and the price at which
the exchange takes place will be negotiated and fixed for the term of the
contract at the time that the Fund enters into the contract. Forward currency
contracts (1) are traded in a market conducted directly between currency
traders (typically, commercial banks or other financial institutions) and
their customers, (2) generally have no deposit requirements and (3) are
typically consummated without payment of any commissions. The Fund, however,
may enter into forward currency contracts requiring deposits or involving the
payment of commissions. To assure that its forward currency contracts are not
used to achieve investment leverage, the Fund will segregate liquid assets
consisting of cash, U.S. Government Securities or other liquid securities with
its custodian, or a designated sub-custodian, in an amount at all times equal
to or exceeding its commitment with respect to the contracts.
The dealings of the Fund in forward foreign exchange are limited to
hedging involving either specific transactions or portfolio positions.
Transaction hedging is the purchase or sale of one forward foreign currency
for another currency with respect to specific receivables or payables of the
Fund accruing in connection with the purchase and sale of its portfolio
securities or its payment of dividends and distributions. Position hedging is
the purchase or sale of one forward foreign currency for another currency with
respect to portfolio security positions denominated or quoted in the foreign
currency to offset the effect of an anticipated substantial appreciation or
depreciation, respectively, in the value of the currency relative to the U.S.
dollar. In this situation, the Fund also may, for example, enter into a
forward contract to sell or purchase a different foreign currency for a fixed
U.S. dollar amount where it is believed that the U.S. dollar value of the
currency to be sold or bought pursuant to the forward contract will fall or
rise, as the case may be, whenever there is a decline or increase,
respectively, in the U.S. dollar value of the currency in which its portfolio
securities are denominated (this practice being referred to as a
"cross-hedge").
In hedging a specific transaction, the Fund may enter into a forward
contract with respect to either the currency in which the transaction is
denominated or another currency deemed appropriate by the Adviser. The amount
the Fund may invest in forward currency contracts is limited to the amount of
its aggregate investments in foreign currencies.
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.
Short sales "against the box" may be subject to special tax rules, one of the
effects of which may be to accelerate income to the Fund.
When the Fund makes a short sale, it must borrow the security sold
short and deliver it to the broker-dealer through which it made the short sale
in order to satisfy its obligation to deliver the security upon conclusion of
the sale. The Fund may have to pay a fee to borrow particular securities and
is often obligated to pay over any payments received on such borrowed
securities.
The Fund's obligation to replace the borrowed security will be
secured by collateral deposited with the broker-dealer, usually cash, U.S.
Government Securities or other highly liquid debt securities. The Fund will
also be required to deposit similar collateral with its custodian, State
Street Bank and Trust Company ("State Street"), 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.
INVESTMENT RESTRICTIONS
The Fund operates under the following restrictions that constitute
fundamental policies that, except as otherwise noted, cannot be changed
without the affirmative vote of the holders of a majority of the outstanding
voting securities of the Fund along with the affirmative vote of a majority of
the votes entitled to be cast by holders of outstanding preferred shares
(including the Series A Preferred Shares and/or Series B Preferred Shares),
voting together as a single class. For purposes of the preferred share voting
rights described in the foregoing sentence, except as otherwise required under
the 1940 Act, the majority of the outstanding preferred shares means, in
accordance with Section 2(a)(42) of the 1940 Act, the vote of (i) of 67% or
more of the preferred shares present at the shareholders meeting called for
such vote, if the holders of more than 50% of the outstanding preferred shares
are present or represented by proxy or (ii) more than 50% of the outstanding
preferred shares, whichever is less. Except as otherwise noted, all percentage
limitations set forth below apply immediately after a purchase or initial
investment and any subsequent change in any applicable percentage resulting
from market fluctuations does not require any action. The Fund may not:
(1) invest 25% or more of its total assets, taken at market value at the
time of each investment, in the securities of issuers in any
particular industry other than the Utility Industry. This restriction
does not apply to investments in U.S. Government Securities.
(2) purchase or sell commodities or commodity contracts except that the
Fund may purchase or sell futures contracts and related options
thereon if immediately thereafter (i) no more than 5% of its total
assets are invested in margins and premiums and (ii) the aggregate
market value of its outstanding futures contracts and market value of
the currencies and futures contracts subject to outstanding options
written by the Fund do not exceed 50% of the market value of its
total assets. The Fund may not purchase or sell real estate, provided
that the Fund may invest in securities secured by real estate or
interests therein or issued by companies which invest in real estate
or interests therein.
(3) make loans of money, except by the purchase of a portion of private
or publicly distributed debt obligations or the entering into of
repurchase agreements. The Fund reserves the authority to make loans
of its portfolio securities to financial intermediaries in an
aggregate amount not exceeding 20% of its total assets. Any such
loans will only be made upon approval of, and subject to any
conditions imposed by, the Board of Trustees of the Fund. Because
these loans are required to be fully collateralized at all times, the
risk of loss in the event of default of the borrower should be
slight.
(4) borrow money except to the extent permitted by applicable law. The
1940 Act currently requires that the Fund have 300% asset coverage
with respect to all borrowings other than temporary borrowings of up
to 5% of the value of its total assets.
(5) issue senior securities, except to the extent permitted by applicable
law.
(6) underwrite securities of other issuers except insofar as the Fund may
be deemed an underwriter under the Securities Act 1933, (the "1933
Act") in selling portfolio securities; provided, however, this
restriction shall not apply to securities of any investment company
organized by the Fund that are to be distributed pro rata as a
dividend to its shareholders.
MANAGEMENT OF THE FUND
Trustees and Officers
Overall responsibility for management and supervision of the Fund
rests with its Board of Trustees. The Board of Trustees approves all
significant agreements between the Fund and the companies that furnish the
Fund with services, including agreements with the Adviser, the Fund's
custodian and the Fund's transfer agent. The day-to-day operations of the Fund
are delegated to the Adviser.
The names and business addresses of the trustees and principal
officers of the Fund are set forth in the following table, together with their
positions and their principal occupations during the past five years and, in
the case of the trustees, their positions with certain other organizations and
companies. Trustees who are "interested persons" of the Fund, as defined by
the 1940 Act, are indicated by an asterisk.
Trustees
Number of
Portfolios in
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 Address(1) Time Served(2) Past Five Years Trustee Trustee
------------------- -------------- --------------- -------- --------
INTERESTED
TRUSTEES:
*Mario J. Gabelli (61)+ Since 1999* Chairman of the Board, Chief 23 Director of
Trustee and Chief Investment Executive Officer of Gabelli Morgan Group
Officer Asset Management Inc. and Holdings, Inc.
Chief Investment Officer of (transportation
the Investment Adviser and services); Vice
GAMCO Investors, Inc. Chairman of Lynch
Corporation
(diversified
manufacturing
company) and Lynch
Interactive
Corporation
(multimedia).
*John D. Gabelli (58)+ Since 1999*** Senior Vice President of 10 ____
Trustee Gabelli & Company, Inc. and
Director of Gabelli Advisers,
Inc.
*Karl Otto Pohl (73) Since 1999*** Member of the Shareholder 32 Director of
Trustee Committee of Sal Oppenheim Gabelli Asset
Jr. & Cie, Zurich Management
(private investment bank); Inc.; Chairman,
Former President of the Incentive Capital
Deutsche Bundesbank and Incentive
and Chairman of its Central Asset Management
Bank Council from (Zurich);
1980 through 1991. Director at Sal
Oppenheim Jr. &
Cie, Zurich
DISINTERESTED
TRUSTEES:
Dr. Thomas E. Bratter (63) Since 1999* Director, President and 3 ___
Trustee Founder, The John Dewey
Academy
(residential college
preparatory therapeutic
high school).
Anthony J. Colavita (67) Since 1999** President and Attorney at law 34 ___
Trustee in the law firm of Anthony J.
Colavita, P.C. since 1961.
James P. Conn (65) 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.
Vincent D. Enright (59) Since 1999* Former Senior Vice President 12 ___
Trustee and Chief Financial Officer of
KeySpan Energy Corporation
through 1998.
Frank J. Fahrenkopf, Jr. (63) Since 1999** President and CEO of the 3 ___
Trustee American Gaming Association
since June 1995; Partner in
the law firm of Hogan &
Hartson; Chairman of
International Trade Practice
Group; Co-Chairman of the
Commission on Presidential
Debates; Former Chairman of
the Republican National
Committee.
Robert J. Morrissey (63) Since 1999** Partner in the law firm of 10 ___
Trustee Morrissey, Hawkins & Lynch.
Anthony R. Pustorino (77) Since 1999*** Certified Public Accountant; 17 ___
Trustee Professor Emeritus, Pace
University.
Salvatore J. Zizza (57) Since 1999** Chairman of Hallmark 10 Director of
Trustee Electrical Supplies Corp.; Hollis Eden
Former Executive Vice Pharmaceuticals
President of FMG Group (a
healthcare provider).
Officers
Name (And Age), Position Term of Office Principal
with the Fund and and Length of Occupation During
Business Address(1) Time Served Past Five Years
------------------ ----------- ----------------
Bruce N. Alpert (51) Since 2003 Executive Vice President and
President 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
Gus A. Coutsouros (40) Since 2003 Vice President and Chief
Vice President and Treasurer Financial Officer of the Adviser
since 1998; Officer of all other
registered investment companies
in the Gabelli fund complex.
Chief Financial Officer of
Gabelli Advisers, Inc. Prior to
1998, Treasurer of Lazard
Funds.
David I. Schachter (50) Since 1999 Vice President of the Fund since
Vice President 1999; Research Analyst of
Gabelli & Company Inc. from
October 1998 to July 1999;
Prior to October, 1998, Vice
President of Thomas J. Herzfeld
Advisers, Inc., a registered
investment adviser and noted
closed-end fund authority.
James E. McKee (40) Since 1999 Vice President, General Counsel
Secretary and Secretary of Gabelli Asset
Management, Inc. (since 1999)
and GAMCO Investors, Inc.
(since 1993); Secretary of all
other registered investment
companies in the Gabelli fund
complex.
_____________________
* "Interested person" of the Fund, as defined in the 1940 Act. Mr. Mario Gabelli is an "interested
person" of the Fund as a result of his employment as an officer of the Fund and the Adviser. Messrs.
John and Mario Gabelli are registered representatives of an affiliated broker-dealer. Mr. Pohl is a
director of the parent company of the Adviser. + Mr. Mario Gabelli and Mr. John Gabelli are brothers.
1 Address: One Corporate Center, Rye, NY 10580-1422, unless otherwise noted.
2 The Fund's Board of Trustees is divided into three classes, each class having a term of three years.
Each year the term of office of one class expires and the successor or successors elected to such
class serve for a three year term. The three year term for each class expires as follows:
*-- Term expires at the Fund's 2004 Annual Meeting of Shareholders and until their successors are duly
elected and qualified.
**-- Term expires at the Fund's 2005 Annual Meeting of Shareholders and until their successors are
duly elected and qualified.
***-- Term expires at the Fund's 2006 Annual Meeting of Shareholders and until their successors are
duly elected and qualified.
The Board of Trustees of the Fund is divided into three classes, with
each class having a term of three years. The terms of Messrs. Bratter, Enright
and Mario Gabelli as trustees of the Fund expire in 2004; the terms of Messrs.
Colavita, Fahrenkopf, Morrissey and Zizza as trustees of the Fund expire in
2005; the terms of Messrs. Conn, John Gabelli, Pohl and Pustorino as trustees
of the Fund expire in 2006.
Name of Trustee Dollar Range of Equity Aggregate Dollar Range of
Securities in the Fund Equity Securities in all
Registered Investment
Companies Overseen by Trustees
in Family of Investment
Companies
Interested Trustees
Mario J. Gabelli Over $100,000 Over $100,000
John D. Gabelli None Over $100,000
Karl Otto Pohl None None
Disinterested Trustees
Dr. Thomas E. Bratter None Over $100,000
Anthony J. Colavita $10,001-$50,000 Over $100,000
James P. Conn $10,001 - $50,000 Over $100,000
Vincent D. Enright None Over $100,000
Frank J. Fahrenkopf, Jr. None $1 - $10,000
Robert J. Morrissey None $10,001 - $50,000
Anthony R. Pustonino $10,001 - $50,000 Over $100,000
Salvatore J. Zizza $50,001 - $100,000 Over $100,000
All shares were valued as of December 31, 2002.
The Trustees serving on the Fund'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 Fund. The Nominating Committee did not meet
during the year ended December 31, 2002. The Fund does not have a standing
compensation committee.
Messrs. Pustorino (Chairman), Colavita and Enright serve on the
Fund's Audit Committee and these Trustees are not "interested persons" of the
Fund as defined in the 1940 Act. The Audit Committee generally is responsible
for reviewing and evaluating issues related to the accounting and financial
reporting policies and, as appropriate, internal controls of the Fund and the
internal controls of certain service providers, overseeing the quality and
objectivity of the Fund's financial statements and the audit thereof and to
act as a liaison between the Board of Trustees and the Fund's independent
accountants. During the year ended December 31, 2002, the Audit Committee met
twice.
As of June 30, 2003, the trustees and officers of the Fund as a group
beneficially owned approximately 1.55% of the outstanding shares of the Fund's
Common Shares.
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, 2002.
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, 2002
TOTAL COMPENSATION
FROM THE FUND AND
AGGREGATE FUND COMPLEX PAID
NAME OF PERSON AND COMPENSATION FROM TO TRUSTEES/
POSITION THE FUND OFFICERS*
MARIO J. GABELLI Chairman of the Board $0 $0 (22)
DR. THOMAS E. BRATTER Trustee $5,000 $31,000 (3)
ANTHONY J. COLAVITA Trustee $6,000 $152,286 (33)
JAMES P. CONN Trustee $5,000 $53,500 (11)
VINCENT D. ENRIGHT Trustee $6,000 $54,536 (11)
FRANK J. FAHRENKOPF, JR. Trustee $5,000 $31,000 (3)
JOHN D. GABELLI Trustee $0 $0 (9)
ROBERT J. MORRISSEY Trustee $5,000 $45,500 (9)
KARL OTTO POHL Trustee $0 $0 (31)
ANTHONY R. PUSTORINO Trustee $6,000 $132,286 (17)
SALVATORE J. ZIZZA Trustee $5,000 $73,750 (9)
* Represents the total compensation paid to such persons during the
calendar year ended December 31, 2002 by investment companies
(including the Fund) or portfolios thereof from which such person
receives compensation that are considered part of the same fund
complex as the Fund because they have common or affiliated investment
advisers. The number in parenthesis represents the number of such
investment companies and portfolios.
For his services as Vice President of the Fund, Mr. Schachter received
compensation in 2002 of $130,000.
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 June 30,
2003, the Adviser acted as registered investment adviser to 19 management
investment companies with aggregate net assets of $9.3 billion. The Adviser,
together with other affiliated investment advisers set forth below, had assets
under management totaling approximately $21.9 billion, as of June 30, 2003.
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
$10.8 billion under management as of June 30, 2003. 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 $1.2 billion under
management as of June 30, 2003. Gabelli Advisers, Inc., an affiliate of the
Adviser, acts as investment manager to the Gabelli Westwood Funds, having
aggregate assets of $493 million under management as of June 30, 2003.
The Adviser is a wholly-owned subsidiary of Gabelli Asset Management
Inc., a New York corporation, whose Class A Common Stock is traded on the New
York Stock Exchange under the symbol "GBL." Mr. Mario J. Gabelli may be deemed
a "controlling person" of the Adviser on the basis of his ownership of a
majority of the stock of Gabelli Group Capital Partners, Inc., which owns a
majority of the capital stock of Gabelli Asset Management Inc.
Under the terms of the Advisory Agreement, the Adviser manages the
portfolio of the Fund in accordance with its stated investment 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 maintaining the Fund's books and records,
preparing reports to the Fund's shareholders and supervising the calculation
of the net asset value of its shares. All expenses of computing the net asset
value of the Fund, including any equipment or services obtained solely for the
purpose of pricing shares or valuing its investment portfolio, will be an
expense of the Fund under its Advisory Agreement unless the Adviser
voluntarily assumes responsibility for such expense.
The economic terms of the Advisory Agreement between the Fund and its
Adviser were unanimously approved by the Fund's Board of Trustees at its
February 19, 2003 meeting. The Board's approval included a majority of the
Trustees who are not parties to the Advisory Agreement or interested persons
of any such party (as such term is defined in the 1940 Act). In considering
whether to approve the Advisory Agreement, the Fund's non-interested trustees
considered, among other factors, (i) the services provided to the Fund by the
Adviser and the sub-administrator, (ii) the Fund's absolute and comparative
investment performance, (iii) the Fund's fee and expense data as compared to
various benchmarks and a peer group of closed-end funds in the same asset
range as the Fund, and (iv) the Adviser's profitability with respect to its
management of the Fund. The non-interested trustees indicated that the primary
factors in their determination to approve the Advisory Agreement were the high
quality of service provided by the Adviser, including the experience of the
Fund's portfolio manager, and the Fund's comparative investment performance.
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 Adviser has voluntarily agreed
to waive the portion of its investment advisory fee attributable to an amount
of assets of the Fund equal to the aggregate stated value of the applicable
series of its preferred shares for any calendar year in which the net asset
value total return of the Fund allocable to the Common Shares, including
distributions and the advisory fee subject to potential waiver, is less than
the stated annual dividend rate of such series, prorated during the year such
series is issued and the final year such series is outstanding. This waiver
will apply separately to the portion of the Fund's assets attributable to the
Series A Preferred Shares and Series B Preferred Shares, respectively, for so
long as any shares of such series remain outstanding.
For each of the years ended December 31, 2000, December 31, 2001 and
December 31, 2002, the Adviser was paid $861,678, $855,435 and $878,549,
respectively, for advisory and administrative services rendered to 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.
Code of Ethics
The Fund and the Adviser have adopted a code of ethics (the "Code of
Ethics") under Rule 17j-1 of the 1940 Act. The Code of Ethics permits
personnel, subject to the Code of Ethics and its restrictive provisions, to
invest in securities, including securities that may be purchased or held by
the Fund. The Code of Ethics can be reviewed and copied at the United States
Securities and Exchange Commission's Public Reference Room in Washington, D.C.
Information on the operations of the Reference Room may be obtained by calling
the Securities and Exchange Commission at (202) 942-8090. The Code of Ethics
is also available on the EDGAR database on the Securities and Exchange
Commission's web site at http://www.sec.gov. Copies of the Code of Ethics may
also be obtained, after paying a duplicating fee, by electronic request at the
following e-mail address: publicinfo@sec.gov, or by writing the Securities and
Exchange Commission's Public Reference Room Section, Washington, D.C. 20549-
0102.
PORTFOLIO TRANSACTIONS
Subject to policies established by the Board of Trustees of the Fund,
the Adviser is responsible for placing purchase and sale orders and the
allocation of brokerage on behalf of the Fund. Transactions in equity
securities are in most cases effected on U.S. stock exchanges and involve the
payment of negotiated brokerage commissions. In general, there may be no
stated commission in the case of securities traded in over-the-counter
markets, but the prices of those securities may include undisclosed
commissions or mark-ups. Principal transactions are not entered into with
affiliates of the Fund. However, Gabelli & Company 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.
For the fiscal years ended December 31, 2000, December 31, 2001 and
December 31, 2002, the Fund paid a total of $125,729, $81,313, and $140,917,
respectively, in brokerage commissions, of which Gabelli & Company, Inc. and
its affiliates received $116,973, $70,203, and $123,636, respectively. The
amount received by Gabelli & Company, Inc. and its affiliates from the Fund in
respect of brokerage commissions for the fiscal year ended December 31, 2002
represented approximately 87.74% of the aggregate dollar amount of brokerage
commissions paid by the Fund for such period and approximately 75.29% of the
aggregate dollar amount of transactions by the Fund for such period. The
brokerage commissions in 2002 reflect, in part, the Fund's investment of
proceeds from its rights offering, completed in June, 2002. The variance
between the percentage of brokerage commissions received by Gabelli & Company,
Inc. and the percentage of transactions executed by Gabelli & Company, Inc.
reflects the Fund's practice of generally directing bulk trades to
unaffiliated broker-dealers.
Repurchase of Shares
The Fund is a closed-end, non-diversified, management investment
company and as such its shareholders do not, and will not, have the right to
redeem their shares. The Fund, however, may repurchase its shares from time to
time as and when it deems such a repurchase advisable. Such repurchases will
be made when the Fund's shares are trading at a discount of 10% or more (or
such other percentage as the Board of Trustees of the Fund may determine from
time to time) from the net asset value of the shares. Pursuant to the 1940
Act, the Fund may repurchase its shares on a securities exchange (provided
that the Fund has informed its shareholders within the preceding six months of
its intention to repurchase such shares) or as otherwise permitted in
accordance with Rule 23c-1 under the 1940 Act. Under that Rule, certain
conditions must be met regarding, among other things, distribution of net
income for the preceding fiscal year, status of the seller, price paid,
brokerage commissions, prior notice to shareholders of an intention to
purchase shares and purchasing in a manner and on a basis which does not
discriminate unfairly against the other shareholders through their interest in
the Fund. When the Fund repurchases its shares for a price below their net
asset value, the net asset value of those shares that remain outstanding will
be enhanced, but this does not necessarily mean that the market price of those
outstanding shares will be affected, either positively or negatively.
Portfolio Turnover
The portfolio turnover rates of the Fund for the fiscal years ending
December 31, 2002 and 2001 were 29% and 41%, 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, indirectly, by its shareholders. A higher rate of portfolio turnover may
also result in taxable gains being passed to shareholders sooner than would
otherwise be the case.
AUTOMATIC DIVIDEND REINVESTMENT
AND VOLUNTARY CASH PURCHASE PLAN
Under the Automatic Dividend Reinvestment and Voluntary Cash Purchase
Plan adopted by the Fund ( the "Plan"), a shareholder whose Common Shares are
registered in his own name, including all Shares issued pursuant to the Rights
Offering and all shares held by a shareholder participating in the Rights
Offering, will have all distributions reinvested automatically by Equiserve
Trust Company ("Equiserve"), which is agent under the Plan, unless the
shareholder elects to receive cash. Distributions with respect to shares
registered in the name of a broker-dealer or other nominee (that is, in
"street name") will be reinvested by the broker or nominee in additional
shares under the Plan, unless the service is not provided by the broker or
nominee or the shareholder elects to receive distributions in cash. Investors
who own Common Shares registered in street name should consult their
broker-dealers for details regarding reinvestment. All distributions to
investors who do not participate in the Plan will be paid by check mailed
directly to the record holder by Equiserve as dividend disbursing agent.
Under the Plan, whenever the market price of the Common Shares is
equal to or exceeds net asset value at the time shares are valued for purposes
of determining the number of shares equivalent to the cash dividend or capital
gains distribution, participants in such plan are issued Common Shares, valued
at the greater of (i) the net asset value as most recently determined or (ii)
95% of the then current market price of the Common Shares. The valuation date
is the dividend or distribution payment date or, if that date is not a New
York Stock Exchange trading day, the next preceding trading day. If the net
asset value of the Common Shares at the time of valuation exceeds the market
price of the Common Shares, participants will receive shares from the Fund, or
acquired by the Plan agent in the open market, valued at market price. If the
Fund should declare a dividend or capital gains distribution payable only in
cash, Equiserve will buy the Fund's Common Shares for the Plan in the open
market, on the New York Stock Exchange or elsewhere, for the participants'
accounts, except that Equiserve will endeavor to terminate purchases in the
open market and cause the Fund to issue shares at the greater of (i) net asset
value or (ii) 95% of the market price of the Common Shares if, following the
commencement of such purchases, the market value of its Common Shares exceeds
net asset value.
Participants in the Plan have the option of making additional cash
payments to Equiserve, twice per month for the Fund, for investment in the
shares. Such payments may be made in any amount from $250 to $10,000.
Equiserve will use all funds received from participants to purchase shares of
the Fund in the open market on the 1st and 15th of each month. It is suggested
that participants send voluntary 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. Common Shares in the account of
each Plan participant will be held by Equiserve in noncertificated form in the
name of the participant, and each shareholder's proxy will include those
shares purchased pursuant to the Plan. A Plan participant may send his share
certificates to Equiserve so that the shares represented by such certificates
will be held by Equiserve in the participant's shareholder account under the
Plan.
In the case of shareholders such as banks, brokers or nominees, which
hold shares for others who are the beneficial owners, Equiserve will
administer the Plan on the basis of the number of shares certified from time
to time by the shareholder as representing the total amount registered in the
shareholder's name and held for the account of beneficial owners who
participate in the Plan. There is no charge to participants for reinvesting
dividends or capital gains distributions payable in either stock or cash.
Equiserve's fees for handling the reinvestment of such dividends and
capital gains distributions are paid by the Fund. There are no brokerage
charges with respect to shares issued directly by the Fund as a result of
dividends or capital gains distributions payable in stock or in cash. However,
each participant bears a pro rata share of brokerage commissions incurred with
respect to Equiserve's open market purchases in connection with the
reinvestment of dividends or capital gains distributions.
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
43025, Providence, R.I. 02940-3025.
TAXATION
The following discussion is a brief summary of certain United States
federal income tax considerations affecting the Fund and its shareholders. No
attempt is made to present a detailed explanation of all federal, state, local
and foreign tax concerns affecting the Fund and its Shareholders (including
Shareholders who own large positions in the Fund), and the discussions set
forth here and in the Prospectus do not constitute tax advice. Investors are
urged to consult their own tax advisers with any specific questions relating
to federal, state, local and foreign taxes. The discussion reflects applicable
tax laws of the United States as of the date of this SAI, which tax laws may
be changed or subject to new interpretations by the courts or the Internal
Revenue Service (the "IRS") retroactively or prospectively.
Taxation of the Fund
The Fund has qualified as and intends to continue to qualify as a
regulated investment company (a "RIC") under Subchapter M of the Internal
Revenue Code of 1986, as amended (the "Code"). If it so qualifies, the Fund
will not be subject to U.S. federal income tax on the portion of its net
investment income (i.e., its investment company taxable income as defined in
the Code without regard to the deduction for dividends paid) and on its net
capital gain (i.e., the excess of its net realized long-term capital gain over
its net realized short-term capital loss), if any, which it distributes to its
shareholders in each taxable year, provided that an amount equal to at least
90% of the sum of its net investment income and any net tax-exempt income for
the taxable year is distributed to its shareholders.
Qualification as a RIC requires, among other things, that the Fund:
(i) derive at least 90% of its gross income in each taxable year from
dividends, interest, payments with respect to securities loans, gains from the
sale or other disposition of stock, securities or foreign currencies or other
income (including gains from options, futures or forward contracts) derived
with respect to its business of investing in stock, securities or currencies
and (ii) diversify its holdings so that, at the end of each quarter of each
taxable year, subject to certain exceptions, (a) at least 50% of the market
value of the Fund's assets is represented by cash, cash items, U.S. government
securities, securities of other RICs and other securities with such other
securities limited, in respect of any one issuer, to an amount not greater
than 5% of the value of the Fund's assets and 10% of the outstanding voting
securities of such issuer, and (b) not more than 25% of the value of its
assets is invested in the securities (other than U.S. government securities or
the securities of other RICs) of any one issuer or any two or more issuers
that the Fund controls and which are determined to be engaged in the same or
related trades or businesses. If the Fund were unable to satisfy the 90%
distribution requirement or otherwise were to fail to qualify as a RIC in any
year, it would be taxed in the same manner as an ordinary corporation with no
deduction for dividends paid. In addition, distributions would be taxed to its
shareholders as ordinary income.
The IRS has taken the position that if a regulated investment company
has two classes of shares, it may designate distributions made to each class
in any year as consisting of no more than such class's proportionate share of
particular types of income, such as long-term capital gain. A class's
proportionate share of a particular type of income is determined according to
the percentage of total dividends paid by the regulated investment company
during such year that was paid to such class. Consequently, the Fund will
designate distributions made to the common shareholders and preferred
shareholders as consisting of particular types of income in accordance with
the classes' proportionate shares of such income. Because of this rule, the
Fund is required to allocate a portion of its net capital gain, qualified
dividend income and dividends qualifying for the dividends received deduction
to common shareholders and preferred shareholders. The amount of net capital
gain and qualified dividend income and dividends qualifying for the dividends
received deduction allocable among common shareholders and the preferred
shareholders will depend upon the amount of such net capital gain and
qualified dividend income and dividends qualifying for the dividends received
deduction realized by the Fund and the total dividends paid by the Fund on the
Common Shares and the Preferred Shares during a taxable year.
Under the Code, amounts not distributed by a RIC on a timely basis in
accordance with a calendar year distribution requirement are subject to a 4%
excise tax. To avoid the tax, the Fund must distribute during each calendar
year, an amount at least equal to the sum of (i) 98% of its ordinary income
for the calendar year, (ii) 98% of its capital gain net income (both long-term
and short-term) for the one year period ending on October 31 of such year,
(unless an election is made to use the Fund's fiscal year), and (iii) all
ordinary income and capital gain net income for previous years that were not
previously distributed or subject to tax under Subchapter M. A distribution
will be treated as paid during the calendar year if it is paid during the
calendar year or declared by the Fund in October, November or December of the
year, payable to shareholders of record on a date during such a month and paid
by the Fund during January of the following year. Any such distributions paid
during January of the following year will be deemed to be received on December
31 of the year the distributions are declared, rather than when the
distributions are received. While the Fund intends to distribute its ordinary
income and capital gain net income in the manner necessary to minimize
imposition of the 4% excise tax, there can be no assurance that sufficient
amounts of the Fund's ordinary income and capital gain net income will be
distributed to avoid entirely the imposition of the tax. In such event, the
Fund will be liable for the tax only on the amount by which it does not meet
the foregoing distribution requirements.
Gain or loss on the sales of securities by the Fund will be long-term
capital gain or loss if the securities have been held by the Fund for more
than one year. Gain or loss on the sale of securities held for one year or
less will be short-term capital gain or loss.
Foreign currency gain or loss on non-U.S. dollar denominated bonds
and other similar debt instruments and on any non-U.S. dollar denominated
futures contracts, options and forward contracts that are not section 1256
contracts (as defined below) generally will be treated as net investment
income and loss.
Investments by the Fund in certain "passive foreign investment
companies" ("PFICs") could subject the Fund to federal income tax (including
interest charges) on certain distributions or dispositions with respect to
those investments which cannot be eliminated by making distributions to
stockholders. An election may be available to the Fund to mitigate the effect
of this provision but the election generally accelerates the recognition of
income without the receipt of cash. Dividends paid by PFICs will not qualify
for the reduced tax rates discussed below under "Taxation of Shareholders."
The Fund may invest in debt obligations purchased at a discount with
the result that the Fund may be required to accrue income for federal income
tax purposes before amounts due under the obligations are paid. The Fund may
also invest in securities rated in the medium to lower rating categories of
nationally recognized rating organizations, and in unrated securities ("high
yield securities"). A portion of the interest payments on such high yield
securities may be treated as dividends for federal income tax purposes.
As a result of investing in stock of PFICs or securities purchased at
a discount or any other investment that produces income that is not matched by
a corresponding cash distribution to the Fund, the Fund could be required to
include in current income, income it has not yet received. Any such income
would be treated as income earned by the Fund and therefore would be subject
to the distribution requirements of the Code. This might prevent the Fund from
distributing 90% of its net investment income as is required in order to avoid
Fund-level federal income taxation on all of its income, or might prevent the
Fund from distributing enough ordinary income and capital gain net income to
avoid completely the imposition of the excise tax. To avoid this result, the
Fund may be required to borrow money or dispose of other securities to be able
to make distributions to its shareholders.
If the Fund does not meet the asset coverage requirements of the 1940
Act and the Statements of Preferences, the Fund will be required to suspend
distributions to the holders of the Common Shares until the asset coverage is
restored. Such a suspension of distributions might prevent the Fund from
distributing 90% of its net investment income as is required in order to avoid
Fund-level federal income taxation on all of its income, or might prevent the
Fund from distributing enough income and capital gain net income to avoid
completely imposition of the excise tax. Upon any failure to meet the asset
coverage requirements of the 1940 Act or the Statements of Preferences, the
Fund may, and in certain circumstances will, be required to partially redeem
Preferred Shares in order to restore the requisite asset coverage and avoid
the adverse consequences to the Fund and its shareholders of failing to
qualify as a RIC. If asset coverage were restored, the Fund would again be
able to pay dividends and would generally be able to avoid Fund-level federal
income taxation on the income that it distributes.
Hedging Transactions
Certain options, futures contracts and options on futures contracts
are "section 1256 contracts." Any gains or losses on section 1256 contracts
are generally considered 60% long-term and 40% short-term capital gains or
losses ("60/40"). Also, section 1256 contracts held by the Fund at the end of
each taxable year are "marked-to-market" with the result that unrealized gains
or losses are treated as though they were realized and the resulting gain or
loss is treated as 60/40 gain or loss.
Hedging transactions undertaken by the Fund may result in "straddles"
for federal income tax purposes. The straddle rules may affect the character
of gains (or losses) realized by the Fund. In addition, losses realized by the
Fund on positions that are part of a straddle may be deferred under the
straddle rules, rather than being taken into account in calculating the
taxable income for the taxable year in which such losses are realized.
Further, the Fund may be required to capitalize, rather than deduct currently,
any interest expense on indebtedness incurred or continued to purchase or
carry any positions that are part of a straddle.
The Fund may make one or more of the elections available under the
Code which are applicable to straddles. If the Fund makes any of the
elections, the amount, character and timing of the recognition of gains or
losses from the affected straddle positions may be determined under rules that
vary according to the election(s) made. The rules applicable under certain of
the elections accelerate the recognition of gain or loss from the affected
straddle positions.
Because application of the straddle rules may affect the character
and timing of the Fund's gains, losses and deductions, the amount which must
be distributed to shareholders, and which will be taxed to shareholders as
ordinary income or long-term capital gain, may be increased or decreased
substantially as compared to a fund that did not engage in such hedging
transactions.
Foreign Taxes
Since the Fund may invest in foreign securities, its income from such
securities may be subject to non-U.S. taxes. The Fund historically has
invested less than 50% of its total assets in foreign securities. As long as
the Fund continues to invest less than 50% of its assets in foreign securities
it will not be eligible to elect to "pass-through" to shareholders of the Fund
the ability to use the foreign tax deduction or foreign tax credit for foreign
taxes paid with respect to qualifying taxes.
Taxation of Shareholders
The Fund will determine either to distribute or to retain for
reinvestment all or part of its net capital gain. If any such gains are
retained, the Fund will be subject to a tax of 35% of such amount. In that
event, the Fund expects to designate the retained amount as undistributed
capital gains in a notice to its shareholders, each of whom (i) will be
required to include in income for tax purposes as long-term capital gains its
share of such undistributed amounts, (ii) will be entitled to credit its
proportionate share of the tax paid by the Fund against its federal income tax
liability and to claim refunds to the extent that the credit exceeds such
liability and (iii) will increase its basis in its shares of the Fund by an
amount equal to 65% of the amount of undistributed capital gains included in
such shareholder's gross income.
Distributions of ordinary income are taxable to a U.S. shareholder as
ordinary income, whether paid in cash or shares. Such dividends (if designated
by the Fund) may qualify (provided holding periods and other requirements are
met) (i) for the dividends received deduction available to corporations, but
only to the extent that the Fund's income consists of qualified dividends
received from U.S. corporations and (ii) under the recently enacted Jobs and
Growth Tax Relief Reconciliation Act of 2003 (effective for taxable years
after December 31, 2002 through December 31, 2008) ("2003 Tax Act"), as
qualified dividend income eligible for the reduced maximum rate to individuals
of generally 15% (5% for individuals in lower tax brackets) to the extent that
the Fund receives qualified dividend income. Qualified dividend income is, in
general, dividend income from taxable domestic corporations and certain
foreign corporations (e.g., generally, foreign corporations incorporated in a
possession of the United States or in certain countries with a comprehensive
tax treaty with the United States, or the stock of which is readily tradable
on an established securities market in the United States). Distributions of
net capital gain designated as capital gain dividends, if any, are taxable to
shareholders at rates applicable to long-term capital gains, whether paid in
cash or in shares, regardless of how long the shareholder has held the Fund's
shares, and are not eligible fo the dividends received deduction. Under the
2003 Tax Act, the maximum tax rate on net long-term capital gain of
individuals is reduced generally from 20% to 15% (5% for individuals in lower
brackets) for such gain realized after May 6, 2003 and before January 1, 2009.
Distributions in excess of the Fund's earnings and profits will first reduce
the adjusted tax basis of a holder's shares and, after such adjusted tax basis
is reduced to zero, will constitute capital gain to such holder (assuming the
shares are held as a capital asset). For non-corporate taxpayers, under the
2003 Tax Act, net investment income (other than qualified dividend income)
will currently be taxed at a maximum rate of 35%, while net capital gain
generally will be taxed at a maximum rate of 15%. For corporate taxpayers,
both net investment income and net capital gain are taxed at a maximum rate of
35%.
Shareholders may be entitled to offset their capital gain dividends
with capital losses. There are a number of statutory provisions affecting when
capital losses may be offset against capital gains, and limiting the use of
losses from certain investments and activities. Accordingly, shareholders with
capital losses are urged to consult their tax advisers.
The price of shares purchased at any time may reflect the amount of a
forthcoming distribution. Those purchasing shares just prior to a distribution
will receive a distribution which will be taxable to them even though it
represents in part a return of invested capital.
Upon a sale or exchange of shares, a shareholder will realize a
taxable gain or loss depending upon his or her basis in the shares. Such gain
or loss will be treated as long-term capital gain or loss if the shares have
been held for more than one year. Any loss realized on a sale or exchange will
be disallowed to the extent the shares disposed of are replaced within a
61-day period beginning 30 days before and ending 30 days after the date that
the shares are disposed of. In such a case, the basis of the shares acquired
will be adjusted to reflect the disallowed loss.
Any loss realized by a shareholder on the sale of Fund shares held by
the shareholder for six months or less will be treated for tax purposes as a
long-term capital loss to the extent of any capital gain dividends received by
the shareholder (or amounts credited to the shareholder as an undistributed
capital gain) with respect to such shares.
Ordinary income dividends and capital gain dividends also may be
subject to state and local taxes. Shareholders are urged to consult their own
tax advisers regarding specific questions about the U.S. federal (including
the application of the alternative minimum tax rules), state, local or foreign
tax consequences to them of investing in the Fund.
Ordinary income dividends (but not capital gain dividends) paid to
shareholders who are non-resident aliens or foreign entities will be subject
to a 30% United States withholding tax under existing provisions of the Code
applicable to foreign individuals and entities unless a reduced rate of
withholding or a withholding exemption is provided under applicable treaty
law. Non-resident shareholders are urged to consult their own tax advisers
concerning the applicability of the United States withholding tax.
Backup Withholding
The Fund may be required to withhold federal income tax on all
taxable distributions and redemption proceeds payable to non-corporate
shareholders who fail to provide the Fund with their correct taxpayer
identification number or to make required certifications, or who have been
notified by the IRS that they are subject to backup withholding. Backup
withholding is not an additional tax. Any amounts withheld may be refunded or
credited against such shareholder's federal income tax liability, if any,
provided that the required information is furnished to the IRS.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury regulations presently in effect. For the
complete provisions, reference should be made to the pertinent Code sections
and the Treasury regulations promulgated thereunder. The Code and the Treasury
regulations are subject to change by legislative, judicial or administrative
action, either prospectively or retroactively. Persons considering an
investment in Common Shares of the Fund should consult their own tax advisers
regarding the purchase, ownership and disposition of Common Shares of the
Fund.
NET ASSET VALUE
The net asset value of the Fund's shares will be computed, based on
the market value of the securities it holds and determined daily as of the
close of regular trading on the New York Stock Exchange.
Portfolio instruments of the Fund which are traded in a market
subject to government regulation on which trades are reported
contemporaneously generally will be valued at the last sale price on the
principal market for such instruments as of the close of regular trading on
the day the instruments are being valued, or lacking any sales, at the average
of the bid and asked 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 obtained from a dealer maintaining an active
market in that security or on the basis of prices obtained from a pricing
service approved as reliable by the Board of Trustees. Short-term investments
that 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, Four 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 OWNERS
As of July 31, 2003, there are no persons known to the Fund who may
be deemed beneficial owners of 5% or more of shares of the Fund's Common
Shares because they possessed or shared voting or investment power with
respect to the Fund's Common Shares.
FINANCIAL STATEMENTS
The audited financial statements included in the Annual Report to the
Fund's Shareholders for the fiscal year ended December 31, 2002, 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 and Semi-Annual Report to Shareholders
are not incorporated herein by reference and are not part of the Registration
Statement. A copy of the Annual Report to Shareholders may be obtained without
charge by writing to the Fund at its address at One Corporate Center, Rye, New
York 10580-1422 or by calling the Fund toll-free at 800-GABELLI (422- 3554).
The unaudited financial statements for the six months ended June 30, 2003,
follow.
FINANCIAL STATEMENTS
PORTFOLIO OF INVESTMENTS
June 30, 2003 (Unaudited)
Market
Shares Cost Value
------ ---- -----
COMMON STOCKS - 87.9%
Agriculture - 0.0%
20,000 Cadiz Inc.+ .............................. $ 3,000 $ 2,700
----------- -----------
Communications Equipment - 0.2%
60,000 Furukawa Electric Co. Ltd. ............... 419,016 195,877
----------- -----------
Energy and Utilities: Electric - 21.0%
220,000 AES Corp.+ ............................... 1,072,514 1,397,000
20,000 Calpine Corp.+ ........................... 52,600 132,000
55,000 Cinergy Corp. ............................ 1,727,502 2,023,450
20,000 Cleco Corp. .............................. 364,947 346,400
80,0000 DPL Inc. ................................. 1,547,470 1,275,200
19,000 DTE Energy Co. ........................... 807,570 734,160
90,000 Edison International + ................... 1,037,120 1,478,700
160,000 El Paso Electric Co.+ .................... 1,462,191 1,972,800
22,000 FPL Group Inc. ........................... 1,192,215 1,470,700
44,000 Great Plains Energy Inc. ................. 919,607 1,270,720
55,000 Maine Public Service Co. ................. 1,750,455 1,788,050
170,000 Northeast Utilities ...................... 3,354,147 2,845,800
55,000 SCANA Corp. .............................. 1,694,645 1,885,400
118,000 TECO Energy Inc. ......................... 1,863,891 1,414,820
22,000 UIL Holdings Corp. ....................... 966,711 892,100
20,000 Unisource Energy Corp. ................... 236,625 376,00
----------- -----------
20,050,210 21,303,300
----------- -----------
Energy and Utilities: Integrated - 35.6%
162,000 Allegheny Energy Inc. .................... 1,462,197 1,368,900
13,000 ALLETE Inc. .............................. 222,463 345,150
75,000 Alliant Energy Corp. ..................... 1,256,310 1,427,250
150,000 Aquila Inc. .............................. 423,832 387,000
500 Avista Corp. ............................. 5,575 7,075
18,000 Central Vermont Public
Service Corp. .......................... 327,361 351,900
48,000 CH Energy Group Inc. ..................... 2,186,400 2,160,000
165,000 CMS Energy Corp. ......................... 1,334,352 1,336,500
75,000 Constellation Energy
Group Inc. ............................ 2,109,100 2,572,500
2,000 Dominion Resources Inc. .................. 80,310 128,540
180,000 DQE Inc. ................................. 3,128,555 2,712,600
150,000 Duke Energy Corp. ........................ 2,884,145 2,992,500
100,000 El Paso Corp. ............................ 1,049,809 808,000
13,000 Empire District Electric Co................ 259,961 282,750
32,000 Energy East Corp. ........................ 595,433 664,320
5,000 Entergy Corp. ............................ 140,415 263,900
8,979 FirstEntergy Corp. ....................... 287,099 345,243
83,666 Florida Public Utilities Co. ............. 1,051,557 1,367,939
20,000 Green Mountain Power Corp. ............... 416,731 400,000
30,000 MGE Energy Inc. .......................... 816,100 941,400
110,000 Mirant Corp.+ ............................ 900,482 319,000
5,000 NiSource Inc. ............................ 103,120 95,000
Market
Shares Cost Value
45,000 NiSource Inc. (Sails)+................ $ 90,000 $ 99,900
64,000 NSTAR ................................ 2,729,958 2,915,200
6,000 Otter Tail Corp. ..................... 167,121 161,880
50,000 PG&E Corp.+ .......................... 625,746 1,057,500
10,000 PNM Resources Inc. ................... 185,900 267,500
45,000 Progress Energy Inc. ................. 1,959,850 1,975,500
40,000 Progress Energy Inc., CVO+ .......... 20,800 4,200
12,000 Puget Energy Inc. .................... 266,242 286,440
30,000 Sierra Pacific Resources+ ............ 227,798 178,200
30,000 TXU Corp. ............................ 483,015 673,500
10,000 Unitil Corp. ......................... 271,147 241,000
10,000 Vectren Corp. ........................ 245,531 250,500
215,000 Westar Energy Inc. ................... 3,192,547 3,489,450
10,000 Wisconsin Energy Corp. ............... 257,794 290,000
7,000 WPS Resources Corp. .................. 204,319 281,400
175,000 Xcel Energy Inc. ..................... 3,004,875 2,632,000
----------- -----------
34,973,950 36,081,637
----------- -----------
Energy and Utilities: Natural Gas - 14.9%
33,000 AGL Resources Inc. ....................... 805,954 839,520
3,000 Atmos Energy Corp. ....................... 66,880 74,400
13,800 Cascade Natural Gas Corp. ................ 295,987 263,580
3,000 Chesapeake Utilities Corp. ............... 55,515 67,800
29,800 Delta Natural Gas Co. Inc. ............... 496,324 700,002
40,000 Dynegy Inc., Cl. A + ..................... 250,000 168,000
1,000 EnergySouth Inc. ......................... 26,780 32,800
38,000 National Fuel Gas Co. .................... 890,728 989,900
90,000 Nicor Inc. ............................... 1,982,877 3,339,900
15,000 NUI Corp. ................................ 174,468 232,800
65,000 ONEOK Inc. ............................... 1,121,404 1,275,950
19,000 Peoples Energy Corp. ..................... 665,481 814,910
20,000 Piedmont Natural Gas Co. Inc.............. 588,123 776,200
3,000 RGC Resources, Inc. ...................... 59,164 70,020
115,000 SEMCO Energy Inc. ........................ 1,528,444 669,300
102,566 Southern Union Co.+ ...................... 1,458,095 1,737,468
145,000 Southwest Gas Corp. ...................... 3,596,118 3,071,100
---------- ----------
14,062,342 15,123,650
---------- ----------
Energy and Utilites: Water - 5.3%
12,000 American States Water Co. ............... 266,173 327,600
11,000 Artesian Resources Corp., Cl. A ......... 257,250 395,989
20,500 BIW Ltd. ................................ 385,069 372,075
20,520 California Water
Service Group ........................ 566,928 577,022
7,500 Connecticut Water
Service Inc. ......................... 146,455 191,625
38,500 Middlesex Water Co. ..................... 801,886 948,640
20,066 Pennichuck Corp. ........................ 489,727 495,630
12,000 Philadelphia Suburban Corp. ............. 183,101 292,560
18,300 SJW Corp. ............................... 1,768,527 1,560,075
See accompanying notes to financial statements.
PORTFOLIO OF INVESTMENTS (Continued)
June 30, 2003 (Unaudited)
Market
Shares Cost Value
COMMON STOCKS (Continued)
Energy and Utilities: Water (Continued)
5,512 Southwest Water Co. ................ $ 52,058 $ 77,003
6,000 York Water Co. ..................... 108,629 98,520
----------- -----------
5,025,983 5,336,739
----------- -----------
Environmental Services - 0.1%
18,000 Catalytica Energy
Systems Inc.+ .................... 179,986 48,600
------- ------
Equipment and Supplies - 0.0%
10,000 Capstone Turbine Corp.+ ............ 13,980 10,900
------ ------
Exchange Traded Funds - 2.1%
28,000 Utilities HOLDRs Trust ............. 2,015,370 2,088,800
--------- ---------
Metals and Mining - 0.5%
6,168 Fording Canadian Coal
Trust (New York) ................. 132,561 111,764
19,532 Fording Canadian Coal
Trust (Toronto) .................. 389,730 350,750
------- -------
522,291 462,514
------- -------
Satellite - 0.6%
50,000 General Motors Corp., Cl. H+ ....... 870,553 640,500
------- -------
Telecommunications - 6.6%
45,000 BellSouth Corp. .................... 1,411,141 1,198,350
30,000 BT Group plc, ADR .................. 1,094,015 1,009,800
24,000 CenturyTel Inc. .................... 910,440 836,400
140,000 Cincinnati Bell Inc.+ .............. 953,620 938,000
18,000 Citizens Communications Co.+ ....... 132,130 232,020
2,000 Commonwealth Telephone
Enterprises Inc.+ ................ 65,002 87,940
19,788 D&E Communications Inc. ............ 231,091 226,573
9,000 Deutsche Telekom AG, ADR+ .......... 162,149 136,800
2,000 France Telecom SA, ADR ............. 22,799 49,300
40,000 Touch America Holdings Inc. + ...... 38,488 2,680
49,000 Verizon Communications Inc. ........ 1,876,164 1,933,050
2,045 WilTel Communications Inc. + ....... 53,526 30,143
--------- ---------
6,950,295 6,681,056
--------- ---------
Wireless Communications - 1.0%
39,000 mm02 plc, ADR+ ..................... 405,354 359,970
35,000 Nextel Communications Inc.,
Cl. A+ ........................... 460,343 632,800
------- -------
865,697 992,770
------- -------
TOTAL COMMON STOCKS ................ 85,952,673 88,969,043
---------- ----------
Market
Shares Cost Value
------ ---- -----
PREFERRED STOCKS - 1.2%
Telecommunications - 1.2%
23,000 Citizens Communications Co.,
5.00% Cv. Pfd. ................ $ 1,094,616 $ 1,219,000
------------- -------------
Principal
Amount
------
CORPORATE BONDS - 0.8%
Energy and Utilities: Integrated - 0.8%
$ 1,100,000 Mirant Corp., Sub. Deb. Cv.,
2.500%, 06/15/21+ ............... 833,029 825,000
------------- -------------
REPURCHASE AGREEMENT - 10.0%
10,089,000 Agreement with State Street
Bank and Trust Co.,
1.080%, dated 06/30/03,
due 07/01/03, proceeds at
maturity, $10,089,303(a) ....... 10,089,000 10,089,000
----------- -------------
TOTAL INVESTMENTS - 99.9% .................... $ 97,969,318 $ 101,102,043
============= -------------
Other Assets in Excess of Liabilities - 0.1% ....... 150,362
-------
NET ASSETS - 100.0%
(15,282,735 shares outstanding) .................... $ 101,252,405
=============
NET ASSET VALUE
($101,252,405 / 15,282,735 shares outstanding) ..... $ 6.63
=============
For Federal tax purposes:
Aggregate cost ......................... $ 97,227,406
=============
Gross unrealized appreciation .......... $ 10,072,345
Gross unrealized depreciation .......... (6,197,708)
--------------
Net unrealized appreciation ............ $ 3,874,637
=============
------------
(a) Collateralized by U.S. Treasury Note, 3.375%, due 04/30/04, market
value $10,293,821.
+ Non-income producing security.
ADR - American Depository Receipt.
CVO - Contingent Value Obligation.
See accompanying notes to financial statements.
THE GABELLI UTILITY TRUST
STATEMENT OF ASSETS AND LIABILITIES
June 30, 2003 (Unaudited)
Assets:
Investments, at value (Cost $97,969,318 .............. $ 101,102,043
Cash ................................................. 757
Dividends and interest receivable .................... 308,141
Receivable for investments sold ...................... 489,920
Other assets ......................................... 3,465
-------------
Total Assets ......................................... 101,904,326
-------------
Liabilities:
Payable for investments purchased .................... 182,918
Payable for investment advisory fees ................. 83,812
Payable for audit and legal fees ..................... 19,118
Other accrued expenses ............................... 366,073
Total Liabilities .................................... 651,921
Net Assets applicable to 15,282,735
shares outstanding ................................... $ 101,252,405
=============
Net Assets consist of:
Shares of beneficial interest, at par value .......... $ 15,283
Additional paid-in capital ........................... 103,846,628
Accumulated net investment loss ...................... (4,686,805)
Accumulated net realized loss on investments ......... (1,055,344)
Net unrealized appreciation on investments ........... 3,132,643
Total Net Assets ..................................... $ 101,252,405
=============
Net Asset Value
($101,252,405 / 15,282,735 shares
outstanding; unlimited number of shares
authorized of $0.001 par value) ................. $ 6.63
=============
STATEMENT OF OPERATIONS
For the Six Months Ended June 30, 2003 (Unaudited)
Investment Income:
Dividends (net of foreign taxes $4,647) .............. $ 1,582,099
Interest ............................................. 106,091
------------
Total Investment Income .............................. 1,688,190
------------
Expenses:
Investment advisory fees ............................. 462,568
Shareholder communications expenses .................. 146,113
Shareholder services fees ............................ 123,155
Payroll .............................................. 66,335
Trustees' fees ....................................... 22,582
Legal and audit fees ................................. 17,718
Custodian fees ....................................... 7,448
Miscellaneous expenses ............................... 48,770
------------
Total Expenses ....................................... 894,689
------------
Less: Custodian fee credit .......................... (147)
------------
Net Expenses ......................................... 894,542
------------
Net Investment Income ................................ 793,648
------------
Net Realized and Unrealized Gain (Loss) on
Investments
Net realized loss in investments ..................... (1,635,388)
Net change in unrealized appreciation on
investments ........................................ 11,593,255
------------
Net Realized and Unrealized Gain (Loss)
on Investments ..................................... 9,957,867
------------
Net Increase in Net Assets Resulting
from Operations ................................... $ 10,751,515
============
STATEMENT OF CHANGES IN NET ASSETS
Six Months Ended
June 30, 2003 Year Ended
(Unaudited) December 31, 2002
------------------ -------------------
Operations:
Net investment income ........................................................ $ 793,648 $ 1,448,624
Net realized loss on investments ............................................. (1,635,388) 3,644,126
Net change in unrealized appreciations/depreciation on investments ........... 11,593,255 (11,989,550)
------------- -------------
Net Increase (Decrease) in Net Assets resulting from operations .............. 10,751,515 (6,896,800)
------------- -------------
Distributions to Common Stock Shareholders:
Net investment income ........................................................ (793,648) (1,475,143)
Net realized gain on investments ............................................. -- (4,760,629)
Return of capital ............................................................ (4,686,805) (3,261,058)
------------- -------------
Total Distributions to Common Stock Shareholders ............................. (5,480,453) (9,496,830)
------------- -------------
Trust Share Transactions:
Net increase in net assets from common shares issued in rights offering ...... -- 27,737,238
Net increase in net assets from common shares issued upon
reinvestment of dividends and distributions ............................... 870,263 1,570,082
------------- -------------
Net Increase in Net Assets from Trust Share Transactions ..................... 870,263 29,307,320
------------- -------------
Net Increase in Net Assets ................................................... 6,141,325 12,913,690
------------- -------------
Net Assets:
Beginning of period .......................................................... 95,111,080 82,197,390
------------- -------------
End of period ................................................................ $ 101,252,405 $ 95,111,080
============= =============
See accompanying notes to financial statements.
NOTES TO FINANCIAL STATEMENTS (Unaudited)
1. Organization. The Gabelli Utility Trust (the "Utility Trust") is a
closed-end, non-diversified management investment company organized as a
Delaware business trust on February 25, 1999 and registered under the
Investment Company Act of 1940, as amended (the "1940 Act"), whose primary
objective is long-term growth of capital and income. The Utility Trust had no
operations prior to July 9, 1999, other than the sale of 10,000 shares of
beneficial interest for $100,000 to The Gabelli Equity Trust Inc. (the "Equity
Trust") at $10.00 per share. On July 9, 1999, the Utility Trust had a 4 for 3
stock split making the balance of Utility Trust shares held by the Equity
Trust as 13,333. On July 9, 1999, the Equity Trust contributed $79,487,260 in
cash and securities in exchange for shares of the Utility Trust, and on the
same date distributed such shares to Equity Trust shareholders of record on
July 1, 1999 at the rate of one share of the Utility Trust for every ten
shares of the Equity Trust. Investment operations commenced on July 9, 1999.
Effective August 1, 2002, the Fund modified its non-fundamental investment
policy (the "80% Policy") to increase, from 65% to 80%, the portion of its
assets that it will invest, under normal market conditions, in common stocks
and other securities of foreign and domestic companies involved in providing
products, services or equipment for (i) the generation or distribution of
electricity, gas and water and (ii) telecommunications services or
infrastructure operations (the "Utility Industry").
The 80% Policy may be changed without shareholder approval. However, the Fund
has adopted a policy to provide shareholders with at least 60 days' notice of
the implementation of any change in the 80% Policy.
2. Significant Accounting Policies. The preparation of financial statements in
accordance with generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amounts and
disclosures in the financial statements. Actual results could differ from
those estimates. The following is a summary of significant accounting policies
followed by the Utility Trust in the preparation of its financial statements.
Security Valuation. Portfolio securities listed or traded on a
nationally recognized securities exchange, quoted by the National Association
of Securities Dealers Automated Quotations, Inc. ("Nasdaq") or traded in the
U.S. over-the-counter market for which market quotations are readily available
are valued at the last quoted sale price on that exchange or market as of the
close of business on the day the securities are being valued. If there were no
sales that day, the security is valued at the average of the closing bid and
asked prices or, if there were no asked prices quoted on that day, then the
security is valued at the closing bid price on that day. If no bid or asked
prices are quoted on such day, the security is valued at the most recently
available price or, if the Board of Trustees so determines, by such other
method as the Board of Trustees shall determine in good faith, to reflect its
fair market value. Portfolio securities traded on more than one national
securities exchange or market are valued according to the broadest and most
representative market, as determined by Gabelli Funds, LLC (the "Adviser").
Portfolio securities primarily traded in foreign markets are generally valued
at the preceding closing values of such securities on their respective
exchanges or markets. Securities and assets for which market quotations are
not readily available are valued at their fair value as determined in good
faith under procedures established by and under the general supervision of the
Board of Trustees. Short term debt securities with remaining maturities of 60
days or less are valued at amortized cost, unless the Board of Trustees
determines such does not reflect the securities fair value, in which case
these securities will be valued at their fair value as determined by the Board
of Trustees. Debt instruments having a maturity greater than 60 days for which
market quotations are readily available are valued at the latest average of
the bid and asked prices. If there were no asked prices quoted on such day,
the security is valued using the closing bid price on that day. Options are
valued at the last sale price on the exchange on which they are listed. If no
sales of such options have taken place that day, they will be valued at the
mean between their closing bid and asked prices.
Repurchase Agreements. The Utility Trust may enter into repurchase
agreements with primary government securities dealers recognized by the
Federal Reserve Bank of New York, with member banks of the Federal Reserve
System or with other brokers or dealers that meet credit guidelines
established by the Adviser and reviewed by the Board of Trustees. Under the
terms of a typical repurchase agreement, the Utility Trust takes possession of
an underlying debt obligation subject to an obligation of the seller to
repurchase, and the Utility Trust to resell, the obligation at an agreed-upon
price and time, thereby determining the yield during the Utility Trust's
holding period. The Utility Trust will always receive and maintain securities
as collateral whose market value, including accrued interest, will be at least
equal to 102% of the dollar amount invested by the Utility Trust in each
agreement. The Utility Trust will make payment for such securities only upon
physical delivery or upon evidence of book entry transfer of the collateral to
the account of the custodian. To the extent that any repurchase transaction
exceeds one business day, the value of the collateral is marked- to-market on
a daily basis to maintain the adequacy of the collateral. If the seller
defaults and the value of the collateral declines or if bankruptcy proceedings
are commenced with respect to the seller of the security, realization of the
collateral by the Utility Trust may be delayed or limited.
Securities Sold Short. A short sale involves selling a security which
the Utility Trust does not own. The proceeds received for short sales are
recorded as liabilities and the Utility Trust records an unrealized gain or
loss to the extent of the difference between the proceeds received and the
value of the open short position on the day of determination. The Utility
Trust records a realized gain or loss when the short position is closed out.
By entering into a short sale, the Utility Trust bears the market risk of an
unfavorable change in the price of the security sold short. Dividends on short
sales are recorded as an expense by the Utility Trust on the ex- dividend date
and interest expense is recorded on the accrual basis.
Foreign Currency Translation. The books and records of the Utility
Trust are maintained in United States (U.S.) dollars. Foreign currencies,
investments and other assets and liabilities are translated into U.S. dollars
at the exchange rates prevailing at the end of the period, and purchases and
sales of investment securities, income and expenses are translated at the
exchange rate prevailing on the respective dates of such transactions.
Unrealized gains and losses, which result from changes in foreign exchange
rates and/or changes in market prices of securities, have been included in
unrealized appreciation/depreciation on investments and foreign currency
transactions. Net realized foreign currency gains and losses resulting from
changes in exchange rates include foreign currency gains and losses between
trade date and settlement date on investment securities transactions, foreign
currency transactions and the difference between the amounts of interest and
dividends recorded on the books of the Utility Trust and the amounts actually
received. The portion of foreign currency gains and losses related to
fluctuation in exchange rates between the initial trade date and subsequent
sale trade date is included in realized gain/(loss) on investments.
Securities Transactions and Investment Income. Securities
transactions are accounted for as of the trade date with realized gain or loss
on investments determined by using the identified cost method. Interest income
(including amortization of premium and accretion of discount) is recorded as
earned. Dividend income is recorded on the ex-dividend date.
Dividends and Distributions to Shareholders. Distributions to
shareholders are recorded on the ex- dividend date. Income distributions and
capital gain distributions are determined in accordance with Federal income
tax regulations, which may differ from accounting principles generally
accepted in the United States.
Provision for Income Taxes. The Utility Trust intends to continue to
qualify as a regulated investment company under Subchapter M of the Internal
Revenue Code of 1986, as amended. As a result, a Federal income tax provision
is not required.
Dividends and interest from non-U.S. sources received by the Utility
Trust are generally subject to non- U.S. withholding taxes at rates ranging up
to 30%. Such withholding taxes may be reduced or eliminated under the terms of
applicable U.S. income tax treaties, and the Utility Trust intends to
undertake any procedural steps required to claim the benefits of such
treaties.
3. Agreements and Transactions with Affiliates. The Utility Trust has entered
into an investment advisory agreement (the "Advisory Agreement") with the
Adviser which provides that the Utility Trust will pay the Adviser on the
first business day of each month a fee for the previous month equal on an
annual basis to 1.00% of the value of the Utility Trust's average daily net
assets. In accordance with the Advisory Agreement, the Adviser provides a
continuous investment program for the Utility Trust's portfolio and oversees
the administration of all aspects of the Utility Trust's business and affairs.
During the six months ended June 30, 2003, Gabelli & Company, Inc.
and its affiliates received $26,975 in brokerage commissions as a result of
executing agency transactions in portfolio securities on behalf of the Utility
Trust.
The cost of calculating the Trust's net asset value per share is a
Trust expense pursuant to the Investment Advisory Agreement between the Trust
and the Adviser. During the six months ended June 30, 2003, the Gabelli
Utility Trust reimbursed the Adviser $17,400 in connection with the cost of
computing the Trust's net asset value.
4. Portfolio Securities. Cost of purchases and proceeds from sales of
securities, other than short-term securities, for the six months ended June
30, 2003 aggregated $13,736,614 and $2,710,040, respectively.
5. Capital. The Board of Trustees of the Utility Trust has authorized the
repurchase of 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 of Trustees may
determine from time to time) from the net asset value of the shares. During
the six months ended June 30, 2003, the Utility Trust did not repurchase any
shares of beneficial interest in the open market.
On May 22, 2002, the Utility Trust distributed one transferable right
for each of the 11,294,893 common shares outstanding to shareholders of record
on that date. Three rights were required to purchase one additional common
share at the subscription price of $7.50 per share. The subscription period
expired on June 27, 2002. The rights offering was fully subscribed resulting
in the issuance of 3,764,965 common shares and proceeds of $28,237,239 to the
Utility Trust, prior to the deduction of estimated expenses of $500,000. The
net asset value per share of the Utility Trust common shareholders was
enhanced by approximately $0.15 per share as a result of the issuance of
shares above net asset value.
Transactions in shares of beneficial interest were as follows:
Six Months Ended
June 30, 2003 Year Ended
(Unaudited) December 31, 2002
--------------------------- ---------------------------
Shares Amount Shares Amount
------------ ------------ ------------ -------------
Shares issued in rights offering.......... -- -- 3,764,965 $27,737,239
Shares issued upon reinvestment
of dividends and distributions......... 102,243 $870,263 185,730 1,570,081
------------ ------------ ------------ -------------
Net increase.............................. 102,243 $870,263 3,950,695 $29,307,320
============ ============ ============ =============
6. Industry Concentration. Because the Utility Trust primarily invests in
common stocks and other securities of foreign and domestic companies in the
Utility Industry, its portfolio may be subject to greater risk and market
fluctuations than a portfolio of securities representing a broad range of
investments.
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
non-credit risks created by the terms of the obligations.
"AA" to "CCC" may be modified by the addition of a plus or minus sign
to show relative standing within the major categories.
"NR" indicates that no public rating has been requested, that there
is insufficient information on which to base a rating, or that S&P does not
rate a particular type of obligation as a matter of policy.
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