As filed with the Securities and Exchange Commission on May 23, 2003
Securities Act File No. 333-[__]
Investment Company Act File No. 811-09243
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM N-2
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[X] Registration Statement under the Securities Act of 1933
[ ] Pre-Effective Amendment No.
[ ] Post-Effective Amendment No.
and/or
[X] Registration Statement under the Investment
Company Act of 1940
[X] Amendment No. 6
(Check Appropriate Box or Boxes)
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THE GABELLI UTILITY TRUST
(Exact Name of Registrant as Specified in Charter)
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One Corporate Center
Rye, New York 10580-1422
(Address of Principal Executive Offices)
Registrant's Telephone Number, Including Area Code: (800) 422-3554
Bruce N. Alpert
The Gabelli Utility Trust
One Corporate Center
Rye, New York 10580-1422
(914) 921-5100
(Name and Address of Agent for Service)
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Copies to:
Richard T. Prins, Esq. James McKee, Esq.
Skadden, Arps, Slate, The Gabelli Utility Trust
Meagher & Flom LLP One Corporate Center
Four Times Square Rye, New York 10580-1422
New York, New York 10036 (914) 921-5100
(212) 735-3000
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Approximate date of proposed public offering: As soon as practicable
after the effective date of this Registration Statement.
If any securities being registered on this form will be offered on a
delayed or continuous basis in reliance on Rule 415 under the Securities Act of
1933, as amended, other than securities offered in connection with a dividend
reinvestment plan, check the following box. [ ]
It is proposed that this filing will become effective (check
appropriate box)
[X] When declared effective pursuant to section 8(c).
If appropriate, check the following box:
[ ] This [post-effective] amendment designates a new effective date
for a previously filed [post-effective amendment] [registration
statement].
[ ] This form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act and the
Securities Act registration statement number of the earlier effective
registration statement for the same offering is [ ].
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CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
Proposed
Proposed Maximum
Maximum Aggregate
Amount Being Offering Price Offering Amount of
Title of Securities Registered Per Share Price (1) Registration Fee
------------------- ---------- --------- --------- ----------------
___% Series A 40,000 Shares $25 $1,000,000 $92
Cumulative
Preferred Shares
Series B Auction 100 Shares $25,000 $2,500,000 $230
Rate Cumulative
Preferred Shares
(1) Estimated solely for the purpose of calculating the registration fee.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
CROSS-REFERENCE SHEET
N-2 Item Number Location in Part A (Caption)
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PART A
1. Outside Front Cover................................ Outside Front Cover Page
2. Inside Front and Outside Back Cover
Page............................................. Outside Front Cover Page; Inside Front Cover
Page
3. Fee Table and Synopsis............................. Not Applicable
4. Financial Highlights............................... Financial Highlights
5. Plan of Distribution............................... Outside Front Cover Page; Summary;
Underwriting
6. Selling Shareholders............................... Not Applicable
7. Use of Proceeds.................................... Use of Proceeds; Investment Objective and
Policies
8. General Description of the
Registrant....................................... Outside Front Cover Page; Summary; The Fund;
Investment Objective and Policies; Risk Factors &
Special Considerations; How the Fund Manages
Risk; Description of Series A Preferred and
Series B Auction Rate Preferred; Anti-takeover
Provisions of the Fund's Governing Documents
9. Management......................................... Outside Front Cover Page; Summary;
Management of the Fund; Custodian, Transfer
Agent, Auction Agent and Dividend-Disbursing
Agent
10. Capital Stock, Long-Term Debt,
and Other Securities............................. Outside Front Cover Page; Summary; Investment
Objective and Policies; Description of Series A
Preferred and Series B Auction Rate Preferred;
Description of Capitalization; Taxation
11. Defaults and Arrears on Senior
Securities....................................... Not Applicable
12. Legal Proceedings.................................. Not Applicable
13. Table of Contents of the Statement
of Additional Information........................ Table of Contents of the Statement of Additional
Information
PART B Location in Statement of
Additional Information
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14. Cover Page......................................... Outside Front Cover Page
15. Table of Contents.................................. Outside Front Cover Page
16. General Information and History.................... The Fund
17. Investment Objective and
Policies......................................... Investment Objective and Policies; Investment
Restrictions
18. Management......................................... Management of the Fund
19. Control Persons and Principal
Holders of Securities............................ Management of the Fund; Beneficial Owners
20. Investment Advisory and Other
Services......................................... Management of the Fund
21. Brokerage Allocation and Other
Practices........................................ Portfolio Transactions
22. Tax Status......................................... Taxation
23. Financial Statements............................... Financial Statements
PART C
Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C to this Registration Statement.
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an
offer to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED MAY 23, 2003
PROSPECTUS $[__] [GABELLI LOGO]
THE GABELLI
UTILITY TRUST
[__] SHARES, % SERIES A CUMULATIVE PREFERRED SHARES
(LIQUIDATION PREFERENCE $25 PER SHARE)
[__] SHARES, SERIES B AUCTION RATE CUMULATIVE PREFERRED SHARES
(LIQUIDATION PREFERENCE $25,000 PER SHARE)
The Gabelli Utility Trust, or 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 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 products, services or equipment for (i) the generation or
distribution of electricity, gas and water and (ii) telecommunications services
or infrastructure operations, such as airports, toll roads and municipal
services. Gabelli Funds, LLC (the "Investment Adviser") serves as investment
adviser to the Fund. An investment in the Fund is not appropriate for all
investors. No assurances can be given that the Fund's objectives will be
achieved.
This prospectus describes shares of the Fund's [__]% Series A
Cumulative Preferred Shares (the "Series A Preferred"), liquidation preference
$25 per share. Dividends on shares of Series A Preferred issued within 30 days
of the original Series A Preferred issue date are cumulative from such original
issue date at the annual rate of [__]% of the liquidation preference of $25 per
share and are payable on March 26, June 26, September 26 and December 26 in
each year, commencing on [__], 2003.
This prospectus also describes shares of the Fund's Series B Auction
Rate Cumulative Preferred Shares (the "Series B Auction Rate Preferred"),
liquidation preference $25,000 per share. The dividend rate for the Series B
Auction Rate Preferred will vary from dividend period to dividend period. The
annual dividend rate for the initial dividend period for the Series B Auction
Rate Preferred will be [__]% of the liquidation preference of $25,000 per
share. The initial dividend period is from the date of issuance through [__],
2003. For subsequent dividend periods, the Series B Auction Rate Preferred will
pay dividends based on a rate set at auction, usually held weekly.
The Fund offers by this prospectus, in the aggregate, $[__] million of
preferred shares of either Series A Preferred or Series B Auction Rate
Preferred, or a combination of both series.
INVESTING IN OUR SERIES A PREFERRED OR SERIES B AUCTION RATE PREFERRED
INVOLVES RISKS. SEE "RISK FACTORS AND SPECIAL CONSIDERATIONS" BEGINNING ON PAGE
[__] .
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved these securities or
determined if this prospectus is truthful or complete. Any representation to
the contrary is a criminal offense.
Series A Preferred Series B Auction Rate
Per Share Total Preferred Per Share Total
Public Offering Price(1) $ $ $ $
Underwriting Discount(2) $ $ $ $
Proceeds to the Fund
(before expenses)(3) $ $ $ $
(1) Plus accumulated dividends, if any, from [__], 2003.
(b) The Fund and the Investment Adviser have agreed to indemnify the underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as amended.
(c) Offering expenses payable by the Fund are estimated at $[__].
-----------------
[--]
GABELLI & COMPANY, INC.
[__], 2003
(continued from previous page)
The shares of Series A Preferred and/or Series B Auction Rate
Preferred being offered by this prospectus are being offered by the
underwriters listed in this prospectus, subject to prior sale, when, as and if
accepted by them and subject to certain conditions. The Fund expects that
delivery of any shares of Series A Preferred or Series B Auction Rate Preferred
will be made in book-entry form through the facilities of The Depository Trust
Company ("DTC") on or about [__], 2003.
Application has been made to list the Series A Preferred on the New
York Stock Exchange. If offered, trading of the Series A Preferred on the New
York Stock Exchange is expected to commence within 30 days of the date of this
prospectus. Prior to this offering, there has been no public market for the
Series A Preferred. See "Underwriting."
The Series B Auction Rate Preferred will not be listed on an exchange.
Investors may only buy or sell Series B Auction Rate Preferred through an order
placed at an auction with or through a broker-dealer in accordance with the
procedures specified in this prospectus or in a secondary market maintained by
certain broker-dealers should those broker-dealers decide to maintain a
secondary market. Broker-dealers are not required to maintain a secondary
market in the Series B Auction Rate Preferred and a secondary market may not
provide you with liquidity.
The net proceeds of the offering, which are expected to be [__], will
be invested in accordance with the Fund's investment objective and policies.
See "Investment Objective and Policies" beginning on page [__].
The Fund expects that dividends paid on the Series A Preferred and
Series B Auction Rate Preferred will consist of long-term capital gains
(consisting of 20% federal tax rate capital gains from the sale of assets held
longer than 12 months), ordinary income (including net investment income and
short-term capital gains), and, in certain circumstances, a return of capital.
Over the past one, three and five fiscal years ending December 31, 2002, the
distributions of taxable income by the Fund consisted of [__]%, [__]% and [__]%
long-term capital gains. No assurance can be given, however, as to what
percentage of the dividends paid on the Series A Preferred or Series B Auction
Rate Preferred will consist of long-term capital gains, which are taxed at
lower rates for individuals than ordinary income.
Neither the Series A Preferred nor the Series B Auction Rate Preferred
may be issued unless it is rated [__] by [__]. In addition, the Series B
Auction Rate Preferred may not be issued unless it is also rated [__] by [__].
In order to keep these ratings, the Fund will be required to maintain a minimum
discounted asset coverage with respect to its outstanding Series A Preferred
and Series B Auction Rate Preferred under guidelines established by each of
[__] and [__]. See "Description of the Series A Preferred and Series B Auction
Rate Preferred -- Rating Agency Guidelines." The Fund is also required to
maintain a minimum asset coverage by the 1940 Act. If the Fund fails to
maintain any of these minimum asset coverage requirements, the Fund can at its
option (and in certain circumstances must) require, in accordance with its
governing documents and the requirements of the 1940 Act, that some or all of
its outstanding preferred shares, including the Series A Preferred and/or
Series B Auction Rate Preferred, be sold back to it (redeemed). Otherwise,
prior to [__], 2008 the Series A Preferred will be redeemable at the option of
the Fund only to the extent necessary for the Fund to continue to qualify for
tax treatment as a regulated investment company. Subject to certain notice and
other requirements (including those set forth in Section 23(c) of the 1940
Act), the Fund at its option may redeem (i) the Series A Preferred beginning on
[__], 2008 and (ii) the Series B Auction Rate Preferred following the initial
dividend period (so long as the Fund has not designated a non-call period). In
the event the Fund redeems Series A Preferred such redemption will be for cash
at a redemption price equal to $25 per share plus accumulated but unpaid
dividends (whether or not earned or declared). In the event the Fund redeems
Series B Auction Rate Preferred, such redemptions will be for cash, generally
at a redemption price equal to $25,000 per share plus accumulated but unpaid
dividends (whether or not earned or declared), though in limited circumstances
the Fund's Board of Trustees may also declare a redemption premium.
This prospectus concisely sets forth important information about the
Fund that you should know before deciding whether to invest in Series A
Preferred or Series B Auction Rate Preferred. You should read this prospectus
and retain it for future reference.
The Fund has also filed with the Securities Exchange Commission a
Statement of Additional Information, dated [__], 2003 (the "SAI"), which
contains additional information about the Fund. The SAI is incorporated by
reference in its entirety into this prospectus. You can review the table of
contents of the SAI on page [__] of this prospectus. You may request a free
copy of the SAI by writing to the Fund at its address at One Corporate Center,
Rye, New York 10580-1422 or calling the Fund toll-free at (800) 422-3554. You
may also obtain the SAI on the Securities and Exchange Commission's web site
(http://www.sec.gov).
CERTAIN PERSONS PARTICIPATING IN THE OFFERING OF SERIES A PREFERRED,
IN THE EVENT THEY ARE OFFERED, MAY ENGAGE IN TRANSACTIONS THAT STABILIZE,
MAINTAIN OR OTHERWISE AFFECT THE MARKET PRICE OF THE SERIES A PREFERRED,
INCLUDING THE ENTRY OF STABILIZING BIDS, SYNDICATE COVERING TRANSACTIONS OR THE
IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING."
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN OR INCORPORATED BY
REFERENCE INTO THIS PROSPECTUS. NEITHER THE FUND NOR THE UNDERWRITERS HAVE
AUTHORIZED ANY OTHER PERSON TO PROVIDE YOU WITH DIFFERENT INFORMATION. IF
ANYONE PROVIDES YOU WITH DIFFERENT OR INCONSISTENT INFORMATION, YOU SHOULD NOT
RELY ON IT. NEITHER THE FUND NOR THE UNDERWRITERS ARE MAKING AN OFFER TO SELL
THESE SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED.
TABLE OF CONTENTS
Page
Summary...........................................................................................................1
Tax Attributes of Preferred Share Dividends......................................................................19
Financial Highlights.............................................................................................22
Use of Proceeds..................................................................................................24
the Fund.........................................................................................................24
Capitalization...................................................................................................25
Investment Objective and Policies................................................................................26
Risk Factors and Special Considerations..........................................................................36
How the Fund Manages Risk........................................................................................42
Management of the Fund...........................................................................................43
Portfolio Transactions...........................................................................................46
Dividends and Distributions......................................................................................46
Description of the Series a Preferred and Series B Auction Rate Preferred........................................48
the Auction of Series B Auction Rate Preferred...................................................................60
Capitalization...................................................................................................64
Taxation.........................................................................................................65
Anti-takeover Provisions of the Fund's Governing Documents.......................................................68
Custodian, Transfer Agent, Auction Agent and Dividend-Disbursing Agent...........................................69
Underwriting.....................................................................................................70
Legal Matters....................................................................................................71
Experts..........................................................................................................71
Additional Information...........................................................................................72
Special Note Regarding Forward-looking Statements................................................................72
Table of Contents of SAI.........................................................................................73
Appendix A................................................................................................... A-1
SUMMARY
This is only a summary. You should review the more detailed information contained in this prospectus
and the SAI.
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 outstanding common shares, par value
$.001 per share, are listed and traded on the New York Stock
Exchange ("NYSE"). As of March 31, 2003, the net assets of the
Fund were approximately $[__] million. The Fund currently expects
to complete a rights offering for its common shares on [__], 2003.
Assuming the rights offering had been completed as of March 31,
2003, the net assets of the Fund as of that date would have been
approximately [__]. Prior to the issuance of the Series A Preferred
and/or Series B Auction Rate Preferred offered by this prospectus, the
Fund had no preferred shares outstanding.
The Offering............................ The Fund offers by this prospectus, in the aggregate, $[__] million of
preferred shares of either Series A Preferred or Series B Auction Rate
Preferred, or a combination of both such series. The Series A
Preferred and/or Series B Auction Rate Preferred are being offered by
[__] and Gabelli & Company, Inc. as underwriters. Upon issuance,
the Series A Preferred and the Series B Auction Rate Preferred will
have equal seniority with respect to dividends and liquidation
preference. See "Description of the Series A Preferred and Series B
Auction Rate Preferred."
Series A Preferred. The Fund is offering [__] shares of [__]% Series
A Cumulative Preferred, par value $.001 per share, liquidation
preference $25 per share, at a purchase price of $25 per share.
Dividends on the shares of Series A Preferred will accumulate from
the date on which such shares are issued; provided, however, that any
shares of Series A Preferred issued within 30 days of the original issue
date of the series will accumulate dividends from the series' original
date of issue. Application has been made to list the Series A Preferred
on the NYSE.
Series B Auction Rate Preferred. The Fund is offering [__] shares of
Series B Auction Rate Preferred, par value $.001 per share,
liquidation preference $25,000 per share at a purchase price of
$25,000 per share, plus dividends, if any, that have accumulated from
the commencement date of the dividend period during which such
Series B Auction Rate Preferred is issued. The Series B Auction Rate
Preferred will not be listed on an exchange. Instead, investors may
buy or sell Series B Auction Rate Preferred in an auction by
submitting orders to broker-dealers that have entered into an
agreement with the auction agent and the Fund.
Generally, investors in Series A Preferred or Series B Auction Rate
Preferred will not receive certificates representing ownership of their
shares. The securities depository (DTC or any successor) or its
nominee for the account of the investor's broker-dealer will maintain
record ownership of the preferred shares in book-entry form. An
investor's broker-dealer, in turn, will maintain records of that
investor's beneficial ownership of preferred shares.
Investment Objective.................... The 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 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 the Fund's assets may be invested
in other securities including stocks, debt obligations and money
market instruments, as well as certain derivative instruments in the
utility industry or other industries. No assurance can be given that the
Fund will achieve its investment objective. See "Investment Objective
and Policies."
Dividends and Distributions............. Series A Preferred. Dividends on the Series A Preferred, at the annual
rate of [__]% of its $25 per share liquidation preference, are
cumulative from the Series A Preferred's original issue date for any
shares issued within 30 days of such original issue date and are
payable, when, as and if declared by the Board of Trustees of the
Fund, out of funds legally available therefor, quarterly on March 26,
June 26, September 26 and December 26 in each year, commencing
on [__], 2003. Any Series A Preferred issued later than 30 days
following the original issue date will accumulate dividends from the
date such shares are issued.
Series B Auction Rate Preferred. The holders of Series B Auction
Rate Preferred are entitled to receive cash dividends stated at annual
rates of its $25,000 per share liquidation preference, that will vary
from dividend period to dividend period. The table below shows the
dividend rate, the dividend payment date and the number of days for
the initial dividend period on the Series B Auction Rate Preferred.
Dividend
Initial Payment Date Number of
Dividend for Initial Days of Initial
Rate Dividend Period Dividend Period
Series B [___]% [__], 2003 [___]
Auction Rate
Preferred.........
For subsequent dividend periods, the Series B Auction Rate Preferred
will pay dividends based on a rate set at auctions, normally held
weekly. In most instances, dividends are payable weekly, on the first
business day following the end of the dividend period. If the day on
which dividends otherwise would be paid is not a business day, then
dividends will be paid on the first business day that falls after the end
of the dividend period. The Fund may, subject to certain conditions,
designate special dividend periods of more (or less) than seven days.
The dividend payment date for any such special dividend period will
be set out in the notice designating the special dividend period.
Dividends on shares of Series B Auction Rate Preferred will be
cumulative from the date such shares are issued and will be paid out
of legally available funds.
In no event will the dividend rate set at auction for the Series B
Auction Rate Preferred exceed the then-maximum rate. The maximum
rate means (i) in the case of a dividend period of 184 days or less, the
applicable percentage of the "AA" Financial Composite Commercial
Paper Rate on the date of such auction determined as set forth in the
following chart based on the lower of the credit ratings assigned to the
Series B Auction Rate Preferred by [__] and [__] or (ii) in the case of
a dividend period of longer than 184 days, the applicable percentage of
the Treasury Index Rate.
Applicable
[__] Credit Rating [__] Credit Rating Percentage
[__] or higher [__] or higher 150%
[__] to [__] [__] to [__] 175%
[__] to [__] [__] to [__] 250%
Below [__] Below [__] 275%
See "Description of the Series A Preferred and Series B Auction Rate
Preferred -- Dividends on the Series B Auction Rate Preferred --
Maximum Rate." For example, calculated as of December 31, 2002
and March 31, 2003, respectively, the maximum rate for the Series B
Auction Rate Preferred (assuming a rating of [__] or above by [__]
and [__] or above by [__]) would have been approximately [__]% and
[__]%, for dividend periods of 90 days, and approximately [__]% and
[__]% for dividend periods of two years.* There is no minimum
applicable rate with respect to any dividend period.
Any designation of a special dividend period will be effective only if,
among other things, proper notice has been given, the auction
immediately preceding the special dividend period was not a failed
auction and the Fund has confirmed that it has assets with an
aggregate discounted value at least equal to the Basic Maintenance
Amount (as described under "Description of the Series A Preferred
and Series B Action Rate Preferred -- Rating Agency Guidelines).
See "Description of the Series A Preferred and Series B Auction Rate
Preferred -- Dividends on the Series B Auction Rate Preferred" and
"The Auction of Series B Auction Rate Preferred."
Preferred Share Dividends. Under current law, all preferred shares of
the Fund must have the same seniority as to the payment of dividends.
Accordingly, no full dividend will be declared or paid on any series
of preferred shares of the Fund for any dividend period, or part
thereof, unless full cumulative dividends due through the most recent
dividend payment dates therefor for all series of outstanding preferred
shares of the Fund are declared and paid. If full cumulative dividends
due have not been declared and paid on all outstanding preferred
shares of the Fund ranking on a parity with the Series A Preferred
and/or Series B Auction Rate Preferred as to the payment of
dividends, any dividends being paid on such preferred shares
(including any outstanding Series A Preferred and Series B Auction
Rate Preferred) will be paid as nearly pro rata as possible in
proportion to the respective amounts of dividends accumulated but
unpaid on each such series of preferred shares on the relevant
dividend payment date.
In the event that for any calendar year the total distributions on the
Fund's preferred shares exceed the Fund's ordinary income and net
capital gain allocable to those shares, the excess distributions will
generally be treated as a tax-free return of capital (to the extent of the
shareholder's tax basis in his or her shares). The amount treated as a
tax-free return of capital will reduce a shareholder's adjusted basis in
his or her preferred shares, thereby increasing the shareholder's
potential gain or reducing his or her potential loss on the sale of the
shares.
Common Share Dividends. The Fund's policy is to make monthly
distributions to holders of its common shares. For the fiscal year
ending December 31, 2002, the Fund made distributions of [__] per
common share, of which [__] constituted a return of capital. The
--------
* Dividend periods presented for illustrative purposes only. Actual dividend periods may be of greater or
lesser duration.
Fund has made monthly distributions with respect to its common
shares since October of 1999.
Auction Procedures..................... You may buy, sell or hold Series B Auction Rate Preferred in the
auction. The following is a brief summary of the auction procedures,
which are described in more detail elsewhere in this prospectus and
in the SAI. These auction procedures are complicated, and there are
exceptions to these procedures. Many of the terms in this section have
a special meaning as set forth in this prospectus or the SAI.
The auctions determine the dividend rate for the Series B Auction
Rate Preferred, except that no dividend rate will be higher than the
then-maximum rate. See "Description of the Series A Preferred and
Series B Auction Rate Preferred -- Dividends on the Series B Auction
Rate Preferred."
If you own shares of Series B Auction Rate Preferred, you may
instruct your broker-dealer to enter one of three kinds of order in the
auction with respect to your shares: sell, bid and hold.
If you enter a sell order, you indicate that you want to sell Series B
Auction Rate Preferred at $25,000 per share, no matter what the next
dividend period's rate will be.
If you enter a bid (or "hold at a rate") order, which must specify a
dividend rate, you indicate that you want to sell Series B Auction Rate
Preferred only if the next dividend period's rate is less than the rate
you specify.
If you enter a hold order you indicate that you want to continue to own
Series B Auction Rate Preferred, no matter what the next dividend
period's rate will be.
You may enter different types of orders for different portions of your
Series B Auction Rate Preferred. You may also enter an order to buy
additional Series B Auction Rate Preferred. All orders must be for
whole shares. All orders you submit are irrevocable. There is a fixed
number of Series B Auction Rate Preferred shares, and the dividend
rate likely will vary from auction to auction depending on the number
of bidders, the number of shares the bidders seek to buy, the rating of
the Series B Auction Rate Preferred and general economic conditions
including current interest rates. If you own Series B Auction Rate
Preferred and submit a bid order specifying a rate that is higher than
the then-maximum rate, your bid order will be treated as a sell order.
If you do not enter an order, the broker-dealer will assume that you
want to continue to hold your Series B Auction Rate Preferred, but if
you fail to submit an order and the dividend period is longer than 28
days, the broker-dealer will treat your failure to submit an order as a
sell order.
If you do not then own Series B Auction Rate Preferred, or want to
buy more shares, you may instruct a broker-dealer to enter a bid order
to buy shares in an auction at $25,000 per share at or above the
dividend rate you specify. If you bid for shares you do not already
own at a rate higher than the then-maximum rate, your bid will not be
considered.
Broker-dealers will submit orders from existing and potential holders
of Series B Auction Rate Preferred to the auction agent. Neither the
Fund nor the auction agent will be responsible for a broker-dealer's
failure to submit orders from existing or potential holders of Series B
Auction Rate Preferred. A broker-dealer's failure to submit orders for
Series B Auction Rate Preferred held by it or its customers will be
treated in the same manner as a holder's failure to submit an order to
the broker-dealer. A broker-dealer may submit orders to the auction
agent for its own account. The Fund may not submit an order in any
auction.
The auction agent after each auction for the Series B Auction Rate
Preferred will pay to each broker-dealer, from funds provided by the
Fund, a service charge equal to, in the case of any auction
immediately preceding a dividend period of less than one year, the
product of (i) a fraction, the numerator of which is the number of days
in such dividend period and the denominator of which is 365, times
(ii) 1/4 of 1%, times (iii) $25,000, times (iv) the aggregate number of
Series B Auction Rate Preferred shares placed by such broker-dealer
at such auction or, in the case of any auction immediately preceding
a dividend period of one year or longer, a percentage of the purchase
price of the Series B Auction Rate Preferred placed by the
broker-dealers at the auction agreed to by the Fund and the
broker-dealers.
If the number of Series B Auction Rate Preferred shares subject to bid
orders by potential holders with a dividend rate equal to or lower than
the then-maximum rate is at least equal to the number of Series B
Auction Rate Preferred shares subject to sell orders, then the dividend
rate for the next dividend period will be the lowest rate submitted
which, taking into account that rate and all lower rate bids submitted
from existing and potential holders, would result in existing and
potential holders owning all the Series B Auction Rate Preferred
available for purchase in the auction.
If the number of Series B Auction Rate Preferred shares subject to bid
orders by potential holders with a dividend rate equal to or lower than
the then-maximum rate is less than the number of Series B Auction
Rate Preferred shares subject to sell orders, then the auction is
considered to be a failed auction, and the dividend rate will be the
maximum rate. In that event, existing holders that have submitted sell
orders (or are treated as having submitted sell orders) may not be able
to sell any or all of the Series B Auction Rate Preferred for which they
submitted sell orders.
The auction agent will not consider a bid above the then-maximum
rate. The purpose of the maximum rate is to place an upper limit on
dividends with respect to the Series B Auction Rate Preferred and in
so doing to help protect the earnings available to pay dividends on the
Fund's common shares, and to serve as the dividend rate in the event
of a failed auction (that is, an auction where there are more shares of
Series B Auction Rate Preferred offered for sale than there are buyers
for those shares).
If broker-dealers submit or are deemed to submit hold orders for all
outstanding Series B Auction Rate Preferred, the auction is considered
an "all hold" auction and the dividend rate for the next dividend
period will be the "all hold rate," which is 80% of the then-current
"AA" Financial Composite Commercial Paper Rate.
The auction procedures include a pro rata allocation of Series B
Auction Rate Preferred shares for purchase and sale. This allocation
process may result in an existing holder selling, or a potential holder
buying, fewer shares than the number of Series B Auction Rate
Preferred shares in its order. If this happens, broker-dealers that have
designated themselves as existing holders or potential holders in
respect of customer orders will be required to make appropriate pro
rata allocations among their respective customers.
Settlement of purchases and sales will be made through DTC on the
next business day after the auction date (which also is a dividend
payment date). Purchasers will pay for their Series B Auction Rate
Preferred through broker-dealers in same-day funds to DTC against
delivery to the broker-dealers. DTC will make payment to the sellers'
broker-dealers in accordance with its normal procedures, which
require broker-dealers to make payment against delivery in same-day
funds. As used in this prospectus, a business day is a day on which
the NYSE is open for trading, and which is not a Saturday, Sunday or
any other day on which banks in New York City are authorized or
obligated by law to close.
The first auction for Series B Auction Rate Preferred will be held on
[__], 2003, the business day preceding the dividend payment date for
the initial dividend period. Thereafter, except during special dividend
periods, auctions for Series B Auction Rate Preferred normally will
be held every Tuesday (or the next preceding business day if Tuesday
is a holiday), and each subsequent dividend period for the Series B
Auction Rate Preferred normally will begin on the following
Wednesday.
If an auction is not held because an unforeseen event or unforeseen
events cause a day that otherwise would have been an auction date not
to be a business day, then the length of the then-current dividend
period will be extended by seven days (or a multiple thereof if
necessary because of such unforeseen event or events), the applicable
rate for such period will be the applicable rate for the then-current
dividend period so extended and the dividend payment date for such
dividend period will be the first business day immediately succeeding
the end of such period. See "The Auction of Series B Auction Rate
Preferred."
Potential Tax Benefit
to Certain Investors.................... Most individuals pay federal income tax at a lower rate on long term
capital gains than on ordinary income and short-term capital gains.
For individuals in the highest tax brackets this differential currently
can be as great as 18.6%, the difference between 38.6% on ordinary
income and short-term capital gains and 20.0% on long-term capital
gains. In accordance with the current view of the Internal Revenue
Service, the Fund intends to allocate its net long-term capital gain and
ordinary income (including net short-term capital gain and investment
income) proportionately between its common shares and preferred
shares based on dividends paid during the year. Over the past one,
three and five fiscal years ending December 31, 2002, the
distributions of taxable income by the Fund consisted of [__]%, [__]%
and [__]% long-term capital gains. If the Fund is able in future years
to continue to pay a portion of its distributions in the form of
long-term capital gain distributions, most individual investors will
accordingly realize a tax benefit and pay a lower rate of federal
income tax on their Series A Preferred and/or Series B Auction Rate
Preferred dividends than if the Fund did not distribute long-term
capital gains. No assurance can be given as to what, if any, portion of
the Fund's dividends in future years will consist of long-term capital
gains. See "Tax Attributes of Preferred Share Dividends." For the
fiscal year ending December 31, 2002, [__]% of the Fund's
distributions to common shareholders constituted a return of capital.
Pending legislation may eliminate or reduce federal income taxation of
dividends previously taxed at the corporate level and thereby reduce,
eliminate or reverse the preferential taxation to individuals of capital
gain versus dividend income. While it is unclear whether and in what
form such legislation may be enacted, or its applicability to regulated
investment company dividends, such a change in law could be given
retroactive effect.
Rating and Asset
Coverage Requirements................... Series A Preferred. Before it can be issued, the Series A Preferred
must receive a rating of [__] from [__]. The Fund's Statement of
Preferences setting forth the rights and preferences of the Series A
Preferred contains certain tests that the Fund must satisfy to obtain
and maintain a rating of [__] from [__] on the Series A Preferred.
See "Description of the Series A Preferred and Series B Auction
Rate Preferred-- Rating Agency Guidelines."
Series B Auction Rate Preferred. Before it can be issued, the Series
B Auction Rate Preferred must receive both a rating of [__] from
[__] and a rating of [__] from [__]. As with the Series A Preferred,
the Statement of Preferences setting forth the rights and preferences
of the Series B Auction Rate Preferred contains certain tests that
the Fund must satisfy to obtain and maintain a rating of [__] from
[__] and [__] from [__]. See "Description of the Series A Preferred
and Series B Auction Rate Preferred -- Rating Agency
Guidelines."
Asset Coverage Requirements. Under the asset coverage tests to
which each of the Series A Preferred and/or Series B Auction Rate
Preferred is subject, the Fund is required to maintain (i) assets
having in the aggregate a discounted value greater than or equal to a
Basic Maintenance Amount (as described under "Description of the
Series A Preferred and Series B Auction Rate Preferred -- Rating
Agency Guidelines") for each such series calculated pursuant to the
applicable rating agency guidelines and (ii) an asset coverage of at
least 200% (or such higher or lower percentage as may be required
at the time under the 1940 Act) with respect to all outstanding
preferred shares of the Fund, including the Series A Preferred and
the Series B Auction Rate Preferred. See "Description of the Series
A Preferred and Series B Auction Rate Preferred -- Asset
Maintenance Requirements."
The Fund estimates that if the shares offered hereby had been
issued and sold as of [__], 2003, the asset coverage under the 1940
Act would have been approximately [__]% immediately following
such issuance and sale and [__]% assuming that the Fund's rights
offering had been completed as of that date (in each case after
giving effect to the deduction of the underwriting discounts and
estimated offering expenses for such shares of $[__]). The asset
coverage would have been computed as follows:
value of Fund assets less liabilities not constituting senior securities
($[__]) / senior securities representing indebtedness plus
liquidation preference of each class of preferred shares ($[__]),
expressed as a percentage = [__]%.
value of Fund assets less liabilities not constituting senior securities
(including assets attributable to the rights offering) ($[__]) / senior
securities representing indebtedness plus liquidation preference of
each class of preferred shares ($[__]), expressed as a percentage =
[__]%.
The Statement of Preferences for each of the Series A Preferred and
the Series B Auction Rate Preferred, which contain the technical
provisions of the various components of the asset coverage tests,
will be filed as exhibits to this registration statement and may be
obtained through the web site of the SEC (http://www.sec.gov).
Mandatory Redemption.................... The Series A Preferred and the Series B Auction Rate Preferred
may be subject to mandatory redemption by the Fund to the extent
the Fund fails to maintain the asset coverage requirements in
accordance with the rating agency guidelines or the 1940 Act
described above and does not cure such failure by the applicable
cure date. If the Fund redeems preferred shares mandatorily, it
may, but is not required to, redeem a sufficient number of such
shares so that after the redemption the Fund exceeds the asset
coverage required by each of the applicable rating agency
guidelines and the 1940 Act by 10%.
With respect to the Series A Preferred, any such redemption will be
made for cash at a redemption price equal to $25 per share, plus an
amount equal to accumulated and unpaid dividends (whether or not
earned or declared) to the redemption date.
With respect to the Series B Auction Rate Preferred, any such
redemption will be made for cash at a redemption price equal to
$25,000 per share, plus an amount equal to accumulated but unpaid
dividends (whether or not earned or declared) to the redemption
date, plus, in the case of Series B Auction Rate Preferred having a
dividend period of more than one year, any applicable redemption
premium determined by the Board of Trustees. See "Description of
the Series A Preferred and Series B Auction Rate Preferred --
Mandatory Redemption."
In the event of a mandatory redemption, such redemption will be
made from the Series A Preferred, the Series B Auction Rate
Preferred or other preferred shares of the Fund in such proportions
as the Fund may determine, subject to the limitations of the 1940
Act and Delaware law.
Optional Redemption..................... Subject to the limitations of the 1940 Act and Delaware law, the
Fund may, at its option, redeem the Series A Preferred and/or the
Series B Auction Rate Preferred as follows:
Series A Preferred. Commencing [__], 2008 and at any time
thereafter, the Fund at its option may redeem the Series A
Preferred, in whole or in part, for cash at a redemption price per
share equal to $25, plus an amount equal to accumulated and
unpaid dividends (whether or not earned or declared) to the
redemption date. If fewer than all of the shares of the Series A
Preferred are to be redeemed, such redemption will be made pro
rata in accordance with the number of such shares held. Prior to
[__], 2008 the Series A Preferred will be subject to optional
redemption by the Fund at the redemption price only to the extent
necessary for the Fund to continue to qualify for tax treatment as a
regulated investment company. See "Description of the Series A
Preferred and Series B Auction Rate Preferred -- Redemption --
Optional Redemption of the Series A Preferred."
Series B Auction Rate Preferred. The Fund generally may redeem
Series B Auction Rate Preferred, in whole or in part, at any time
other than during a non-call period. The Fund may declare a
non-call period during a dividend period of more than seven days.
If fewer than all of the shares of the Series B Auction Rate
Preferred are to be redeemed, such redemption will be made pro
rata in accordance with the number of such shares held. See
"Description of the Series A Preferred and Series B Auction Rate
Preferred -- Redemption -- Optional Redemption of the Series B
Auction Rate Preferred."
The redemption price per Series B Auction Rate Preferred share
will equal $25,000, plus an amount equal to any accumulated but
unpaid dividends thereon (whether or not earned or declared) to the
redemption date, plus, in the case of Series B Auction Rate
Preferred having a dividend period of more than one year, any
redemption premium applicable during such dividend period. See
"Description of the Series A Preferred and Series B Auction Rate
Preferred -- Redemption -- Optional Redemption of the Series B
Auction Rate Preferred."
Voting Rights........................... At all times, holders of the Fund's preferred shares outstanding
(including the Series A Preferred and/or Series B Auction Rate
Preferred), voting as a single class, will be entitled to elect two
members of the Fund's Board of Trustees, and holders of the
preferred shares and common shares, voting as a single class, will
elect the remaining directors. However, upon a failure by the Fund
to pay dividends on any of its preferred shares in an amount equal
to two full years' dividends, holders of the preferred shares, voting
as a single class, will have the right to elect the smallest number of
directors that would then constitute a majority of the directors until
all cumulative dividends on all preferred shares have been paid or
provided for. Holders of outstanding Series A Preferred, Series B
Auction Rate Preferred and any other preferred shares will vote
separately as a class on certain other matters as required under the
applicable Statement of Preferences, the 1940 Act and Delaware
law. Except as otherwise indicated in this prospectus and as
otherwise required by applicable law, holders of Series A Preferred
and/or Series B Auction Rate Preferred will be entitled to one vote
per share on each matter submitted to a vote of shareholders and
will vote together with holders of common shares and any other
preferred shares as a single class. See "Description of the Series A
Preferred and Series B Auction Rate Preferred -- Voting Rights."
Liquidation Preference.................. The liquidation preference of each share of Series A Preferred is
$25. The liquidation preference of the Series B Auction Rate
Preferred is $25,000 per share. Upon liquidation, preferred
shareholders will be entitled to receive the liquidation preference
with respect to their preferred shares plus an amount equal to
accumulated but unpaid dividends with respect to such shares
(whether or not earned or declared) to the date of distribution. See
"Description of the Series A Preferred and Series B Auction Rate
Preferred -- Liquidation Rights."
Use of Proceeds......................... The Fund will use the net proceeds from the offering to purchase
additional portfolio securities in accordance with its investment
objective and policies. See "Use of Proceeds."
Listing of the Series A
Preferred............................... Prior to this offering there has been no public market for the Series
A Preferred. Following its issuance (if issued), the Series A
Preferred is expected to be listed on the NYSE. However, during
an initial period which is not expected to exceed 30 days after the
date of its initial issuance, the Series A Preferred will not be listed
on any securities exchange.
Limitation on Secondary
Market Trading of the
Series B Auction Rate
Preferred............................... The Series B Auction Rate Preferred will not be listed on an
exchange. Broker-dealers may, but are not obliged to, maintain a
secondary trading market in Series B Auction Rate Preferred
outside of auctions. There can be no assurance that a secondary
market will provide owners with liquidity. You may transfer Series
B Auction Rate Preferred outside of auctions only to or through a
broker-dealer that has entered into an agreement with the auction
agent and the Fund, or other persons as the Fund permits.
Special Characteristics
and Risks............................... Risk is inherent in all investing. Therefore, before investing in
Series A Preferred or Series B Auction Rate Preferred you should
consider the risks carefully.
Series A Preferred. Primary risks associated with an investment in
the Series A Preferred include:
The market price for the Series A Preferred will be influenced by
changes in interest rates, the perceived credit quality of the Series A
Preferred and other factors.
During an initial period which is not expected to exceed 30 days
after the date of its issuance, the Series A Preferred will not be
listed on any securities exchange. During such period, the
underwriters intend to make a market in the Series A Preferred,
however, they have no obligation to do so. Consequently, the
Series A Preferred may be illiquid during such period. No
assurances can be provided that listing on any securities exchange
or market making by the underwriters will result in the market for
Series A Preferred being liquid at any time.
Series B Auction Rate Preferred. Primary risks associated with an
investment in Series B Auction Rate Preferred include:
If an auction fails, you may not be able to sell some or all of your
Series B Auction Rate Preferred. The Fund is not obliged to
redeem your Series B Auction Rate Preferred if an auction fails.
The underwriters are not required to make a market in the Series B
Auction Rate Preferred. No broker-dealer is obligated to maintain a
secondary market for the Series B Auction Rate Preferred apart
from the auctions.
You may receive less than the price you paid for your Series B
Auction Rate Preferred if you sell them outside of the auction,
especially when market interest rates are rising.
In connection with the sale of the Series B Auction Rate Preferred,
the Fund may enter into interest rate swap or cap transactions in
order to reduce the impact of changes in the dividend rate of the
Series B Auction Rate Preferred or obtain the equivalent of a fixed
rate for the Series B Auction Rate Preferred that is lower than the
Fund would have to pay if it issued fixed rate preferred shares. The
use of interest rate swaps and caps is a highly specialized activity
that involves investment techniques and risks different from those
associated with ordinary portfolio security transactions. See "How
the Fund Manages Risk -- Interest Rate Transactions."
Both the Series A Preferred and Series B Auction Rate Preferred.
An investment in either the Series A Preferred or Series B Auction
Rate Preferred also includes the following primary risks:
A rating agency could downgrade or withdraw the rating assigned
to the Series A Preferred and/or Series B Auction Rate Preferred,
which would likely have an adverse effect on the liquidity and
market value of such preferred shares. The present credit rating
does not eliminate or mitigate the risks of investing in these
preferred shares.
The Fund may mandatorily redeem your Series A Preferred and/or
Series B Auction Rate Preferred to meet regulatory or rating agency
requirements or may voluntarily redeem your Series A Preferred
and/or Series B Auction Rate Preferred. Subject to such
redemptions, these preferred shares are perpetual.
The Fund may not meet the asset coverage requirements or earn
sufficient income from its investments to pay dividends on the
Series A Preferred and/or Series B Auction Rate Preferred.
The Series A Preferred and/or Series B Auction Rate Preferred are
not obligations of the Fund. Although unlikely, precipitous
declines in the value of the Fund's assets could result in the Fund
having insufficient assets to redeem all of the Series A Preferred
and/or Series B Auction Rate Preferred for the full redemption
price plus accumulated dividends.
The value of the Fund's investment portfolio may decline, reducing
the asset coverage for the Series A Preferred and/or Series B
Auction Rate Preferred. Further, if an issuer of a common stock in
which the Fund invests experiences financial difficulties or if an
issuer's preferred stock or debt security is downgraded or defaults
or if an issuer in which the Fund invests is affected by other
adverse market factors, there may be a negative impact on the
income and/or asset value of the Fund's investment portfolio.
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, and accordingly, an
investment in the Fund may, under certain circumstances, present
greater risk to an investor than an investment in a diversified
company. See "Risk Factors and Special Considerations --
Non-Diversified Status."
The Fund invests a significant portion of its assets in companies in
the utility industry (as described under "Investment Objective and
Policies") and, as a result, the value of the Fund's shares will be
more susceptible to the factors affecting those particular types of
companies, including government regulation, inflation, cost
increases in fuel and other operating expenses, obsolescence of
products and services, and increasing interest rates resulting in high
interest costs on borrowings needed for capital construction
programs, including compliance with environmental regulations.
See "Risk Factors and Special Considerations -- Industry Risks."
There is no limitation on the amount of foreign securities in which
the Fund may invest. Investing in securities of foreign companies
(or foreign governments), which are generally denominated in
foreign currencies, may involve certain risks and opportunities 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 revaluation of currencies.
See "Risk Factors and Special Considerations -- Foreign
Securities."
The Investment Adviser (as hereinafter defined) 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. See "Risk Factors and Special Considerations
-- Dependence on Key Personnel."
Federal Income Tax
Considerations.......................... The Fund has qualified, and intends to remain qualified, for federal
income tax purposes as a regulated investment company.
Qualification requires, among other things, compliance by the Fund
with certain distribution requirements. Statutory limitations on
distributions on the common shares if the Fund fails to satisfy the
1940 Act's asset coverage requirements could jeopardize the Fund's
ability to meet such distribution requirements. The Fund presently
intends, however, to purchase or redeem preferred shares to the
extent necessary in order to maintain compliance with such asset
coverage requirements. See "Taxation" for a more complete
discussion of these and other federal income tax considerations.
Management and Fees..................... Gabelli Funds, LLC serves as the Fund's investment adviser and is
compensated for its services and its related expenses at an annual
rate of 1.00% of the Fund's average weekly net assets. The
Investment Adviser is responsible for administration of the Fund
and currently utilizes and pays the fees of a third party
sub-administrator. Notwithstanding the foregoing, the Investment
Adviser will 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 Fund's outstanding Series A Preferred
or Series B Auction Rate Preferred, as the case may be, 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, the stated annual dividend rate of such
series and (ii) in the case of the Series B Auction Rate Preferred,
the net cost of capital to the Fund with respect to the Series B
Auction Rate Preferred for such year expressed as a percentage
(including, without duplication, dividends paid by the Fund on the
Series B Auction Rate Preferred and the net cost to the Fund of any
associated swap or cap transaction if the Fund hedges its Series B
Auction Rate Preferred dividend obligations). See "Management of
the Fund."
Repurchase of Common
Shares and Anti-takeover
Provisions.............................. The Fund is authorized, subject to maintaining required asset
coverage on its preferred shares, to repurchase its common shares
in the open market when the common shares are trading at a
discount of 10% or more (or such other percentage as the Fund's
Board of Trustees may determine from time to time) from net asset
value. Such repurchases are subject to certain notice and other
requirements, including those set forth in Rule 23c-1 under the
1940 Act. See "Capitalization -- Common Shares." Through
December 31, 2002, the Fund has repurchased in the open market
[__] shares of its common shares under this authorization. See
"Capitalization -- Common Shares."
Certain provisions of the Fund's Declaration of Trust, Statements of
Preferences and by-laws (collectively, the "Governing Documents")
may be regarded as "anti-takeover" provisions. Pursuant to these
provisions, only one of three classes of directors is elected each
year, and the affirmative vote of the holders of 66 2/3% of the
outstanding shares of the Fund and the vote of a majority (as
defined in the 1940 Act) of the holders of preferred shares, voting
as a single class, are necessary to authorize the conversion of the
Fund from a closed-end to an open-end investment company. 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. These provisions may have the effect of
depriving Fund shareholders of an opportunity to sell their shares at
a premium to the prevailing market price. See "Anti-takeover
Provisions of the Fund's Governing Documents."
Custodian, Transfer Agent,
Auction Agent and
Dividend Disbursing Agent............... State Street Bank and Trust Company (the "Custodian"), located at
150 Royall Street, Canton, MA 02021, 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, RI 02940-3025, serves as the Fund's dividend
disbursing agent, as agent under the Fund's automatic dividend
reinvestment and voluntary cash purchase plan, and as transfer
agent and registrar with respect to the common shares of the Fund.
Series A Preferred. EquiServe will also serve as the transfer agent,
registrar, dividend paying agent and redemption agent with respect
to the Series A Preferred.
Series B Auction Rate Preferred. The Bank of New York will serve
as the auction agent, transfer agent, registrar, dividend paying agent
and redemption agent with respect to the Series B Auction Rate
Preferred.
Interest Rate Transactions ............. In connection with the sale of the Series B Auction Rate Preferred,
the Fund may enter into interest rate swap or cap transactions in
order to reduce the impact of changes in the dividend rate of the
Series B Auction Rate Preferred or obtain the equivalent of a fixed
rate for the Series B Auction Rate Preferred that is lower than the
Fund would have to pay if it issued fixed rate preferred shares. The
use of interest rate swaps and caps is a highly specialized activity
that involves investment techniques and risks different from those
associated with ordinary portfolio security transactions.
In an interest rate swap, the Fund would agree to pay to the other
party to the interest rate swap (which is known as the
"counterparty") periodically a fixed rate payment in exchange for
the counterparty agreeing to pay to the Fund periodically a variable
rate payment that is intended to approximate the Fund's variable
rate payment obligation on the Series B Auction Rate Preferred. In
an interest rate cap, the Fund would pay a premium to the
counterparty to the interest rate cap and, to the extent that a
specified variable rate index exceeds a predetermined fixed rate, the
Fund would receive from the counterparty payments of the
difference based on the notional amount of such cap. Interest rate
swap and cap transactions introduce additional risk because the
Fund would remain obligated to pay preferred share dividends
when due in accordance with the Statement of Preferences even if
the counterparty defaulted. Depending on the general state of
short-term interest rates and the returns on the Fund's portfolio
securities at that point in time, such a default could negatively
affect the Fund's ability to make dividend payments on the Series B
Auction Rate Preferred. In addition, at the time an interest rate
swap or cap transaction reaches its scheduled termination date,
there is a risk that the Fund will not be able to obtain a replacement
transaction or that the terms of the replacement will not be as
favorable as on the expiring transaction. If this occurs, it could
have a negative impact on the Fund's ability to make dividend
payments on the Series B Auction Rate Preferred.
A sudden and dramatic decline in interest rates may result in a
significant decline in the asset coverage. If the Fund fails to
maintain the required asset coverage on its outstanding preferred
shares or fails to comply with other covenants, the Fund may, at its
option (and in certain circumstances mandatorily) consistent with
its Governing Documents and the requirements of the 1940 Act,
redeem some or all of its preferred shares (including the Series A
Preferred or the Series B Auction Rate Preferred). Such
redemption likely would result in the Fund seeking to terminate
early all or a portion of any swap or cap transaction. Early
termination of a swap could require the Fund to make a termination
payment to the counterparty.
The Fund intends to segregate cash or liquid securities having a
value at least equal to the value of the Fund's net payment
obligations under any swap transaction, marked to market daily.
The Fund does not presently intend to enter into interest rate swap
or cap transactions relating to the Series B Auction Rate Preferred
in a notional amount in excess of the outstanding amount of the
Series B Auction Rate Preferred. The Fund will monitor any such
swap with a view to ensuring that the Fund remains in compliance
with all applicable regulatory investment policy and tax
requirements. See "How the Fund Manages Risk -- Interest Rate
Transactions."
TAX ATTRIBUTES OF PREFERRED SHARE DIVIDENDS
The Fund intends to distribute to its shareholders substantially all
of its net capital gains and ordinary income (including net investment income
and short-term capital gains). The Fund operates as a regulated investment
company under the Internal Revenue Code of 1986, as amended, (the "Code") and
distributions by a regulated investment company generally retain their
character as capital gain or ordinary income when received by individual
investors who hold its preferred or common shares. Thus, dividends paid by the
Fund to holders of the Series A Preferred or Series B Auction Rate Preferred
may, for federal income tax purposes, consist of varying proportions of
long-term capital gain, ordinary income and/or returns of capital.
Capital gain on assets held longer than 12 months generally is
currently taxable to individuals at a maximum rate of 20.0%. The 20.0% capital
gains rate will be reduced to 18.0% for capital assets held for more than five
years, if the holding period begins after December 31, 2000. Ordinary income,
which includes short-term capital gain of the Fund, is currently taxable to
individuals at a maximum rate of 38.6% (which rate is scheduled to be reduced
periodically though 2006). Pending legislation would accelerate future
reductions in individual tax rates (applicable to ordinary income and
short-term capital gain) and apply a maximum 35% rate for 2003 and thereafter.
Although the Fund is not managed using a tax-focused investment
strategy and does not seek to achieve any particular distribution composition,
individual investors in the Series A Preferred or Series B Auction Rate
Preferred would, under current federal income tax law, realize a tax advantage
on their investment to the extent that distributions by the Fund to its
shareholders are composed of long-term capital gain which is taxed at a lower
rate than ordinary income. In contrast, preferred share dividends distributed
by corporations that are not regulated investment companies are generally
taxed, for federal income tax purposes, as ordinary income.
Over the past one, three and five fiscal years ending December 31,
2002, the distributions of taxable income by the Fund consisted of [__]%,
[__]%, and [__]% long-term capital gains. Given current market conditions,
there is no assurance that over the next several years the percentage of its
taxable distributions that consist of long-term capital gain will remain at
such levels. For the fiscal year ending December 31, 2002, [__]% of the Fund's
per share distributions to common shareholders constituted a return of capital.
Corporate taxpayers are subject to a 35% tax on capital gain and
ordinary income dividends. In addition, corporate taxpayers that are eligible
for the dividends received deduction on dividends that constitute ordinary
income will not be able to utilize that deduction with respect to Fund
distributions that constitute long-term capital gain, and so may incur a tax
disadvantage by holding shares in the Fund.
Pending legislation may eliminate or reduce federal income taxation of
dividends previously taxed at the corporate level and thereby reduce, eliminate
or reverse the preferential taxation to individuals of capital gain versus
dividend income. While it is unclear whether and in what form such legislation
may be enacted, or its applicability to regulated investment company dividends,
such a change in law could be given retroactive effect.
The federal income tax characteristics of the Fund and the taxation of
its shareholders are described more fully under "Taxation."
The following tables show examples of the pure ordinary income
equivalent yield that would be generated by the illustrated dividend rates on
the Series A Preferred and Series B Auction Rate Preferred, respectively,
assuming distributions for federal income tax purposes consisting of different
proportions of long-term capital gain and ordinary income (including short-term
capital gain) for an individual in the 38.6% and 30.0% federal marginal income
tax brackets. In reading these tables, you should understand that a number of
factors could affect the actual composition for federal income tax purposes of
the Fund's distributions each year. Such factors include (i) the Fund's
investment performance for any particular year, which may result in
distributions of varying proportions of long-term capital gain, ordinary income
and/or return of capital, (ii) revocation or revision of the Internal Revenue
Service revenue ruling requiring the proportionate allocation of types of
income among the holders of various classes of a regulated investment company's
capital stock and (iii) the proposals pending before Congress to eliminate or
reduce the rates of federal income tax on dividends.
THESE TABLES ARE FOR ILLUSTRATIVE PURPOSES ONLY AND CANNOT BE TAKEN AS AN
INDICATION OF THE ACTUAL COMPOSITION FOR FEDERAL INCOME TAX PURPOSES OF THE
FUND'S FUTURE DISTRIBUTIONS.
SERIES A PREFERRED
SERIES A PREFERRED SERIES A PREFERRED
ILLUSTRATIVE ANNUAL ILLUSTRATIVE ANNUAL
DIVIDEND RATE DIVIDEND RATE
% % % %
PERCENTAGE OF SERIES A PREFERRED ILLUSTRATIVE TAX EQUIVALENT YIELD FOR AN TAX EQUIVALENT YIELD FOR AN
ANNUAL DIVIDEND COMPRISED OF INDIVIDUAL IN THE 38.6% INDIVIDUAL IN THE 30.0%
FEDERAL INCOME TAX BRACKET1 FEDERAL INCOME TAX BRACKET1
LONG-TERM ORDINARY
CAPITAL GAINS INCOME
80.0% 20.0% % % % %
66.7% 33.3% % % % %
50.0% 50.0% % % % %
33.3% 66.7% % % % %
20.0% 80.0% % % % %
12.5% 87.5% % % % %
0.0% 100.0% % % % %
SERIES B AUCTION RATE PREFERRED
SERIES B AUCTION RATE SERIES B AUCTION RATE
PREFERRED ILLUSTRATIVE ANNUAL PREFERRED ILLUSTRATIVE
DIVIDEND RATE* ANNUAL DIVIDEND RATE*
------------------------------------ --------------------------------
% % % %
PERCENTAGE OF SERIES B AUCTION RATE
PREFERRED SHARE ILLUSTRATIVE ANNUAL
DIVIDEND COMPRISED OF
------------------------------------------------
TAX EQUIVALENT YIELD FOR AN TAX EQUIVALENT YIELD FOR AN
LONG-TERM ORDINARY INDIVIDUAL IN THE 38.6% INDIVIDUAL IN THE 30.0%
---------- ---------
CAPITAL GAINS INCOME FEDERAL INCOME TAX BRACKET1 FEDERAL INCOME TAX BRACKET1
------------- ------
------------------------------------ --------------------------------
80.0% 20.0% % % % %
66.7% 33.3% % % % %
50.0% 50.0% % % % %
33.3% 66.7% % % % %
20.0% 80.0% % % % %
12.5% 87.5% % % % %
0.0% 100.0% % % % %
---------------------------
* Actual dividend rates for the Series B Auction Rate Preferred will be determined based upon the results of
periodic auctions. See "Description of the Series A Preferred and Series B Auction Rate Preferred --
Dividends on the Series B Auction Rate Preferred."
(1) Annual taxable income levels for individuals corresponding to the 2003 federal marginal tax brackets are as follows:
2003 Federal
Income Tax
Bracket Single Joint
-------- ------ -----
38.6% over $311,950 over $311,950
35.0% over $143,500 - $311,950 over $174,700 - $311,950
30.0% over $68,800 - $143,500 over $114,650 - $174,700
27.0% over $28,400 - $68,800 over $47,450 - $114,650
15.0% over $6,000 - $28,400 over $12,000 - $47,450
10.0% up to and including $6,000 up to and including $6,000
Your federal marginal income tax rates may exceed the rates shown in the above tables due to the reduction,
or possible elimination, of the personal exemption deduction for high-income taxpayers and an overall limit
on itemized deductions. Income may be subject to certain state, local and foreign taxes. IF YOU PAY
ALTERNATIVE MINIMUM TAX, OR AMT, EQUIVALENT YIELDS MAY BE LOWER THAN THOSE SHOWN ABOVE. The tax
rates shown above do not apply to corporate taxpayers.
The Economic Growth and Tax Relief Reconciliation Act of 2001 creates a new 10 percent income tax
bracket and reduces the tax rate applicable to ordinary income over a six year phase-in period. Beginning in
the taxable year 2006, ordinary income will be subject to a 35% maximum rate, with approximately
proportionate reductions in the other ordinary rates. Legislation pending before Congress would accelerate
future reductions in individual tax rates (applicable to ordinary income and short-term capital gain) and apply
a maximum 35% rate for 2003 and thereafter.
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.
Selected Data for a Common Share Outstanding Throughout Each Period
Year Ended Year Ended Year Ended Period Ended
December 31, December 31, December 31, December 31,
2002 2001 2000 1999 (a)
------------- -------------- -------------- -------------
OPERATING PERFORMANCE:
Net asset value, beginning of period............ $ 7.32 $ 8.21 $ 7.62 $ 7.50
------ ------ ------ ------
Net investment income........................... 0.11 0.12(e) 0.15 0.08
Net realized and unrealized gain(loss) on
investments..................................... (0.62) (0.32)(e) 1.44 0.19
------ ------ ------ ------
Total from investment operations................ (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 i
rights offering.................................n 0.15 -- -- --
Increase in net asset value from Trust share
transactions.................................... 0.03 0.01 -- --
------ ------ ------ ------
DISTRIBUTIONS TO
SHAREHOLDERS:
Net investment income........................... (0.11) (0.21) (0.06) (0.08)
Net realized gain on investments................ (0.36) (0.49) (0.94) (0.07)
Return of Capital............................... (0.25) -- -- --
------ ------ ------ ------
Total distributions............................. (0.72) (0.70) (1.00) (0.15)
------ ------ ------ ------
NET ASSET VALUE, END OF PERIOD: $ 6.27 $7.32 $8.21 $ 7.62
====== ===== ===== =======
Market value, end of period..................... $ 8.72 $9.33 $8.75 $ 7.63
====== ===== ===== =======
Net asset value total return + ................. (6.79%) (3.15%) 22.01% 3.62%
===== ====== ====== =======
Total Investment Return ++ ....................... 1.70% 15.82% 29.95% 3.70%
===== ===== ====== ======
RATIOS TO AVERAGE NET ASSETS AND
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)........ $ 95,111 $ 82,197 $ 90,669 $ 83,330
Ratio of net investment income to average net as
(c).............................................sets 1.65% 1.57% 1.88% 2.27%(b)
Ratio of operating expenses to average net asset
(c)(d)..........................................s 1.93% 2.00% 1.95% 1.85%(b)
Portfolio turnover rate......................... 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 shareholder. Total return for the period of less than one year
is not annualized.
(a) The Gabelli Utility Trust commenced investment operations on July 9, 1999.
(b) Annualized.
(c) During the period ended December 31, 1999, the Utility Trust's administrator voluntarily reimbursed certain expenses.
If such reimbursement had not occurred, the annualized ratios of net investment income and operating expenses to
average net assets would have been 1.85% and 2.17%, respectively.
(d) The ratios do not include a reduction of expenses for custodian fee credits on cash balances maintained with the
custodian. Including such custodian fee credits for the year ended December 31, 2002, December 31, 2001 and the
year ended December 31, 2000, the expense ratios would be 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 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.
USE OF PROCEEDS
The net proceeds of the offering are estimated at $ , after
deduction of the underwriting discounts and estimated offering expenses payable
by the Fund. The Investment Adviser expects that it will initially invest the
proceeds of the offering in high quality short-term debt securities and
instruments. The Investment Adviser anticipates that the investment of the
proceeds will be made in accordance with the Fund's investment objective and
policies, as appropriate investment opportunities are identified. Investment of
the proceeds will not take more than six months.
THE FUND
The Fund, formed in Delaware on February 25, 1999, is a
non-diversified, closed-end management investment company registered under the
1940 Act. The Fund's common shares are traded on the NYSE under the symbol
"GUT." The Fund had no operations prior to July 9, 1999, other than the sale
of 7,579,739 shares to The Gabelli Equity Trust in exchange for approximately
$75 million of cash and short-term fixed income securities.
CAPITALIZATION
The following table sets forth the unaudited capitalization of the
Fund as of [__], 2003, and its adjusted capitalization assuming (i) the Series
A Preferred and/or Series B Auction Rate Preferred offered in this prospectus
had been issued and (ii) such shares had been issued and the Fund's rights
offering had been completed.
AS OF [__], 2003
AS ADJUSTED
ASSUMING
ACTUAL AS ADJUSTED RIGHTS OFFERING
(Unaudited)
Preferred shares, $0.001 par value, [__] shares authorized.
(The "Actual" column reflects Fund's outstanding
capitalization as of [__], 2003; the "As Adjusted"
column assumes the issuance of an additional [__]
shares of Series A Preferred and [__] shares of Series
B Auction Rate Preferred, $25 and $25,000 $
liquidation preference, respectively); the "As
Adjusted Assuming Rights Offering" column assumes
the issuance of such shares and that the rights
offering had been completed....................... es $ $
-------------------- ----------------- -------------------
Shareholders' equity applicable to common shares.......
Common shares, $.001 par value per share; [__] shares
outstanding............................................ $ $ $
Paid-in surplus*.......................................
Undistributed net investment loss......................
Accumulated net realized loss from investment
transactions...........................................
Net unrealized depreciation............................
-------------------- ----------------- -------------------
Net assets applicable to common shares................. $ $ $
-------------------- ----------------- -------------------
Net assets, plus liquidation preference of preferred shares $ $ $
==================== ================= ===================
* As adjusted paid-in surplus reflects a reduction for the sales load and estimated offering cost
of the Series A Preferred and/or Series B Auction Rate Preferred issuance of $[__].
As used in this prospectus, unless otherwise noted, the Fund's
"managed assets" include the aggregate net asset value of the common shares
plus assets attributable to outstanding preferred shares, with no deduction for
the liquidation preference of such preferred shares. For financial reporting
purposes, however, the Fund is required to deduct the liquidation preference of
its outstanding preferred shares from "managed assets," so long as the
preferred shares have redemption features that are not solely within the
control of the Fund. For all regulatory purposes, the Fund's preferred shares
will be treated as stock (rather than as indebtedness).
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is long-term growth of capital and
income. Under normal market conditions, the Fund will invest at least 80% of
its total assets in common stock and other securities of foreign and domestic
companies involved to a substantial extent (e.g., at least 50% of the assets,
gross income or net 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.
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 diversification of the portfolio of the Fund as to
issuers.
The Investment Adviser's investment philosophy with respect to equity
securities seeks to identify assets that are selling in the public market at a
discount to their private market value. The Investment Adviser defines private
market value as the value informed purchasers are willing to pay to acquire
assets with similar characteristics. The Investment Adviser also normally
evaluates an issuer's free cash flow and long-term earnings trends. Finally,
the Investment Adviser looks for a catalyst, something indigenous to the
company, its industry or country that will surface additional value.
CERTAIN 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 Investment 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 Investment 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 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 Investment 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; 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,
which, under current law, in the absence of an exemptive order will not
affiliated with the Investment Adviser. Money market mutual funds are
investment companies and the investments in those companies by the Fund are in
some cases 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
Investment Adviser, with respect to assets so invested. See "Management of the
Fund -- General."
Lower Rated Securities. The Fund may invest up to 10% of its total
assets in fixed-income securities rated in the lower rating categories of
recognized statistical rating agencies, such as securities rated "CCC" or lower
by S&P or "Caa" or lower by Moody's, or non-rated securities of comparable
quality. These debt securities are predominantly speculative and involve major
risk exposure to adverse conditions and are often referred to in the financial
press as "junk bonds."
Generally, such lower rated securities and unrated securities of
comparable quality offer a higher current yield than is offered by higher rated
securities, but also (i) will likely have some quality and protective
characteristics that, in the judgment of the rating organizations, are
outweighed by large uncertainties or major risk exposures to adverse conditions
and (ii) are predominantly speculative with respect to the issuer's capacity to
pay interest and repay principal in accordance with the terms of the
obligation. The market values of certain of these securities also tend to be
more sensitive to individual corporate developments and changes in economic
conditions than higher quality bonds. In addition, such lower rated securities
and comparable unrated securities generally present a higher degree of credit
risk. The risk of loss due to default by these issuers is significantly greater
because such lower rated securities and unrated securities of comparable
quality generally are unsecured and frequently are subordinated to the prior
payment of senior indebtedness. In light of these risks, the Investment
Adviser, in evaluating the creditworthiness of an issue, whether rated or
unrated, will take various factors into consideration, which may include, as
applicable, the issuer's financial resources, its sensitivity to economic
conditions and trends, the operating history of and the community support for
the facility financed by the issue, the ability of the issuer's management and
regulatory matters.
In addition, the market value of securities in lower rated categories
is more volatile than that of higher quality securities, and the markets in
which such lower rated or unrated securities are traded are more limited than
those in which higher rated securities are traded. The existence of limited
markets may make it more difficult for the Fund to obtain accurate market
quotations for purposes of valuing its portfolio and calculating its net asset
value. Moreover, the lack of a liquid trading market may restrict the
availability of securities for the Fund to purchase and may also have the
effect of limiting the ability of the Fund to sell securities at their fair
value to respond to changes in the economy or the financial markets.
Lower-rated debt obligations also present risks based on payment
expectations. If an issuer calls the obligation for redemption, the Fund may
have to replace the security with a lower yielding security, resulting in a
decreased return for investors. Also, as the principal value of bonds moves
inversely with movements in interest rates, in the event of rising interest
rates the value of the securities held by the Fund may decline proportionately
more than a portfolio consisting of higher rated securities. Investments in
zero coupon bonds may be more speculative and subject to greater fluctuations
in value due to changes in interest rates than bonds that pay interest
currently.
The Fund may invest in securities of issuers in default. The Fund will
make an investment in securities of issuers in default only when the Investment
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
Investment 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
Investment 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 to reflect subsequent events on a timely basis. None of these events will
require the sale of the securities by the Fund, although the Investment 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 (i) equal to or less than the exercise
price of the call written or (ii) greater than the exercise price of the call
written if the difference is maintained by the Fund in cash, U.S. government
securities or other high grade short-term obligations in a segregated account
held with its custodian. A written put option is "covered" if the Fund
maintains cash or other high grade short-term obligations with a value equal to
the exercise price in a segregated account held with its custodian, or else
holds a put on the same security as the put written where the exercise price of
the put held is equal to or greater than the exercise price of the put written.
If the Fund has written an option, it may terminate its obligation by
effecting a closing purchase transaction. This is accomplished by purchasing an
option of the same series as the option previously written. However, once it
has been assigned an exercise notice, the Fund will be unable to effect a
closing purchase transaction. Similarly, if the Fund is the holder of an option
it may liquidate its position by effecting a closing sale transaction. This is
accomplished by selling an option of the same series as the option previously
purchased. There can be no assurance that either a closing purchase or sale
transaction can be effected when the Fund so desires.
The Fund will realize a profit from a closing transaction if the price
of the transaction is less than the premium received from writing the option or
is more than the premium paid to purchase the option; the Fund will realize a
loss from a closing transaction if the price of the transaction is more than
the premium received from writing the option or is less than the premium paid
to purchase the option. Since call option prices generally reflect increases in
the price of the underlying security, any loss resulting from the repurchase of
a call option may also be wholly or partially offset by unrealized appreciation
of the underlying security. Other principal factors affecting the market value
of a put or a call option include supply and demand, interest rates, the
current market price and price volatility of the underlying security and the
time remaining until the expiration date. Gains and losses on investments in
options depend, in part, on the ability of the Adviser to predict correctly the
effect of these factors. The use of options cannot serve as a complete hedge
since the price movement of securities underlying the options will not
necessarily follow the price movements of the portfolio securities subject to
the hedge.
An option position may be closed out only on an exchange which
provides a secondary market for an option of the same series or in a private
transaction. Although the Fund will generally purchase or write only those
options for which there appears to be an active secondary market, there is no
assurance that a liquid secondary market on an exchange will exist for any
particular option. In such event, it might not be possible to effect closing
transactions in particular options, so that the Fund would have to exercise its
options in order to realize any profit and would incur brokerage commissions
upon the exercise of call options and upon the subsequent disposition of
underlying securities for the exercise of put options. If the Fund, as a
covered call option writer, is unable to effect a closing purchase transaction
in a secondary market, it will not be able to sell the underlying security
until the option expires or it delivers the underlying security upon exercise
or otherwise covers the position.
In addition to options on individual securities, the Fund may also
purchase and sell call and put options on securities indices. A stock index
reflects in a single number the market value of many different stocks. Relative
values are assigned to the stocks included in an index and the index fluctuates
with changes in the market values of the stocks. The options give the holder
the right to receive a cash settlement during the term of the option based on
the difference between the exercise price and the value of the index. By
writing a put or call option on a securities index, the Fund is obligated, in
return for the premium received, to make delivery of this amount. The Fund may
offset its position in stock index options prior to expiration by entering into
a closing transaction on an exchange or it may let the option expire
unexercised.
The Fund also may buy or sell put and call options on foreign
currencies. A put option on a foreign currency gives the purchaser of the
option the right to sell a foreign currency at the exercise price until the
option expires. A call option on a foreign currency gives the purchaser of the
option the right to purchase the currency at the exercise price until the
option expires. Currency options traded on U.S. or other exchanges may be
subject to position limits which may limit the ability of the Fund to reduce
foreign currency risk using such options. Over-the-counter options differ from
exchange-traded options in that they are two-party contracts with price and
other terms negotiated between buyer and seller and generally do not have as
much market liquidity as exchange-traded options. Over-the-counter options are
illiquid securities.
Use of options on securities indices entails the risk that trading in
the options may be interrupted if trading in certain securities included in the
index is interrupted. The Fund will not purchase these options unless the
Investment Adviser is satisfied with the development, depth and liquidity of
the market and the Investment 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 Investment 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 Investment
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 Investment 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 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,
U.S. government securities 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, U.S. government securities 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 the Fund enters into the contract. Forward currency
contracts (i) are traded in a market conducted directly between currency
traders (typically, commercial banks or other financial institutions) and their
customers, (ii) generally have no deposit requirements and (iii) 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 Investment Adviser.
The amount the Fund may invest in forward currency contracts is limited to the
amount of its aggregate investments in foreign currencies.
The use of forward currency contracts may involve certain risks,
including the failure of the counterparty to perform its obligations under the
contract, and such use may not serve as a complete hedge because of an
imperfect correlation between movements in the prices of the contracts and the
prices of the currencies hedged or used for cover. The Fund will only enter
into forward currency contracts with parties which it believes to be
creditworthy institutions.
When Issued, Delayed Delivery Securities and Forward Commitments. The
Fund may enter into forward commitments for the purchase or sale of securities,
including on a "when issued" or "delayed delivery" basis, in excess of
customary settlement periods for the type of security involved. In some cases,
a forward commitment may be conditioned upon the occurrence of a subsequent
event, such as approval and consummation of a merger, corporate reorganization
or debt restructuring, i.e., a when, as and if issued security. When such
transactions are negotiated, the price is fixed at the time of the commitment,
with payment and delivery taking place in the future, generally a month or more
after the date of the commitment. While it will only enter into a forward
commitment with the intention of actually acquiring the security, the Fund may
sell the security before the settlement date if it is deemed advisable.
Securities purchased under a forward commitment are subject to market
fluctuation, and no interest (or dividends) accrues to the Fund prior to the
settlement date. The Fund will segregate with its custodian cash or liquid
securities in an aggregate amount at least equal to the amount of its
outstanding forward commitments.
Short Sales. The Fund may make short sales of securities. A short sale
is a transaction in which the Fund sells a security it does not own in
anticipation that the market price of that security will decline. The market
value of the securities sold short of any one issuer will not exceed either 5%
of the Fund's total assets or 5% of such issuer's voting securities. The Fund
also will not make a short sale, if, after giving effect to such sale, the
market value of all securities sold short exceeds 25% of the value of its
assets or the Fund's aggregate short sales of a particular class of securities
exceeds 25% of the outstanding securities of that class. The Fund may also make
short sales "against the box" without respect to such limitations. In this type
of short sale, at the time of the sale, the Fund owns, or has the immediate and
unconditional right to acquire at no additional cost, the identical security.
The Fund expects to make short sales both to obtain capital gains from
anticipated declines in securities and as a form of hedging to offset potential
declines in long positions in the same or similar securities. The short sale of
a security is considered a speculative investment technique.
When the Fund makes a short sale, it must borrow the security sold
short and deliver it to the broker-dealer through which it made the short sale
in order to satisfy its obligation to deliver the security upon conclusion of
the sale. The Fund may have to pay a fee to borrow particular securities and is
often obligated to pay over any payments received on such borrowed securities.
The Fund's obligation to replace the borrowed security will be secured
by collateral deposited with the broker-dealer, usually cash, U.S. government
securities or other highly liquid debt securities. The Fund will also be
required to deposit similar collateral with its custodian, Boston Safe Deposit
and Trust Company ("Boston Safe"), and, to the extent, if any, necessary so
that the value of both collateral deposits in the aggregate is at all times
equal to the greater of the price at which the security is sold short or 100%
of the current market value of the security sold short. Depending on
arrangements made with the broker-dealer from which it borrowed the security
regarding payment over of any payments received by the Fund on such security,
the Fund may not receive any payments (including interest) on its collateral
deposited with such broker-dealer. If the price of the security sold short
increases between the time of the short sale and the time the Fund replaces the
borrowed security, the Fund will incur a loss; conversely, if the price
declines, the Fund will realize a capital gain. Any gain will be decreased, and
any loss will be 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 Investment
Adviser. The Fund will not enter into repurchase agreements with the Investment
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
Investment 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.
Leveraging. As provided in the 1940 Act and subject to certain
exceptions, the Fund may issue debt or preferred stock (such as the Series A
Preferred or Series B Auction Rate Preferred) so long as its total assets, less
certain ordinary course liabilities, exceed 300% of the amount of the debt
outstanding and exceed 200% of the sum of the amount of preferred stock and
debt outstanding. Any such debt or preferred stock may be convertible in
accordance with SEC staff guidelines which may permit each fund to obtain
leverage at attractive rates. Leverage entails two primary risks. The first
risk is that the use of leverage magnifies the impact on the holders of common
stock of changes in net asset value. For example, if the Fund were to use 33%
leverage, it would 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 holders of common stock. These two risks would generally make the
Fund's total return to holders of common stock more volatile were it to use
leverage.
So long as the Fund uses leverage it may be required to sell
investments in order to meet dividend or interest payments on the debt or
preferred stock when it may be disadvantageous to do so. In addition, a decline
in net asset value could affect the ability of the Fund to make common stock
dividend payments and such a failure to pay dividends or make distributions
could result in the Fund ceasing to qualify as a regulated investment company
under the Code. See "Taxation." Finally, if the asset coverage for preferred
stock or debt securities declines to less than 200% or 300%, respectively (as a
result of market fluctuations or otherwise), the Fund may be required to sell a
portion of its investments to redeem the preferred stock or repay the debt when
it may be disadvantageous to do so.
PORTFOLIO TURNOVER
The Fund will buy and sell 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. The portfolio
turnover rate is computed by dividing the lesser of the amount of the
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). To the extent the Fund experiences high
portfolio turnover, such turnover is likely to decrease tax advantages to
individual investors in the Fund to the extent it results in a decrease of the
long term capital gains portion of distributions to shareholders.
RISK FACTORS AND SPECIAL CONSIDERATIONS
Investors should consider the following risk factors and special
considerations associated with investing in the Fund.
PREFERRED SHARES
General. There are a number of risks associated with an investment in
the Series A Preferred or Series B Auction Rate Preferred. The market value for
the Series A Preferred and/or Series B Auction Rate Preferred will be
influenced by changes in interest rates, the perceived credit quality of the
Series A Preferred or Series B Auction Rate Preferred and other factors. The
Series A Preferred and/or Series B Auction Rate Preferred are subject to
redemption under specified circumstances and investors may not be able to
reinvest the proceeds of any such redemption in an investment providing the
same or a better rate than that of the Series A Preferred or Series B Auction
Rate Preferred. Subject to such circumstances, the Series A Preferred and/or
Series B Auction Rate Preferred are perpetual.
The credit rating on the Series A Preferred or Series B Auction Rate
Preferred could be reduced or withdrawn while an investor holds shares, and the
credit rating does not eliminate or mitigate the risks of investing in the
Series A Preferred or Series B Auction Rate Preferred. A reduction or
withdrawal of the credit rating would likely have an adverse effect on the
market value of the Series A Preferred or Series B Auction Rate Preferred.
The Series A Preferred and the Series B Auction Rate Preferred are not
obligations of the Fund. The Series A Preferred and/or Series B Auction Rate
Preferred would be junior in respect of dividends and liquidation preference to
any indebtedness incurred by the Fund. Although unlikely, precipitous declines
in the value of the Fund's assets could result in the Fund having insufficient
assets to redeem all of the Series A Preferred and/or Series B Auction Rate
Preferred for the full redemption price. The Fund has made monthly
distributions with respect to its shares of common stock since October of 1999.
Leverage Risk. The Fund uses financial leverage for investment
purposes by issuing preferred shares. It is currently anticipated that, taking
into account the Series A Preferred and/or Series B Auction Rate Preferred
being offered in this prospectus, the amount of leverage will represent
approximately [__]% of the Fund's managed assets (as defined below). The Fund's
leveraged capital structure creates special risks not associated with
unleveraged funds having a similar investment objective and policies. These
include the possibility of greater loss and the likelihood of higher volatility
of the net asset value of the Fund and the Series A Preferred and/or Series B
Auction Rate Preferred's asset coverage.
Because the fee paid to the Investment Adviser will be calculated on
the basis of the Fund's managed assets, which equal the aggregate net asset
value of the common shares plus assets attributable to outstanding preferred
shares, with no deduction for the liquidation preference of such preferred
shares (rather than only on the basis of net assets attributable to the common
shares), the fee may be higher when leverage is utilized, giving the Investment
Adviser an incentive to utilize leverage. However, the Adviser has agreed not
to accept an incremental fee unless the Fund's total return at least equals the
dividend rate on each series of the preferred shares.
Restrictions on Dividends and Other Distributions. Restrictions
imposed on the declaration and payment of dividends or other distributions to
the holders of the Fund's common shares and preferred shares, both by the 1940
Act and by requirements imposed by rating agencies, might impair the Fund's
ability to maintain its qualification as a regulated investment company for
federal income tax purposes. While the Fund intends to redeem its preferred
shares (including the Series A Preferred and/or Series B Auction Rate
Preferred) to the extent necessary to enable the Fund to distribute its income
as required to maintain its qualification as a regulated investment company
under the Code, there can be no assurance that such actions can be effected in
time to meet the Code requirements. See "Taxation" in the SAI.
Ratings and Asset Coverage Risk. While it is a condition to the
closing of the offering that [__] assigns a rating of [__] to the Series A
Preferred and/or Series B Auction Rate Preferred and that [__] assigns a rating
of [__] to the Series B Auction Rate Preferred, the ratings do not eliminate or
necessarily mitigate the risks of investing in Series A Preferred or Series B
Auction Rate Preferred. The credit rating on the Series A Preferred or Series B
Auction Rate Preferred could be reduced or withdrawn while an investor holds
shares, which would likely have an adverse effect on the market value of the
Series A Preferred or Series B Auction Rate Preferred. A reduction or
withdrawal of the credit ratings on the Series B Auction Rate Preferred may
also make your Series B Auction Rate Preferred shares less liquid at an auction
or in the secondary market.
In addition, if a rating agency rating the Series B Auction Rate
Preferred at the Fund's request downgrades the Series B Auction Rate Preferred,
the maximum rate on the Series B Auction Rate Preferred will increase. See
"Description of the Series A Preferred and Series B Auction Rate Preferred --
Rating Agency Guidelines" for a description of the asset maintenance tests the
Fund must meet. In addition, should the rating on the Fund's preferred shares
be lowered or withdrawn by the relevant rating agency, the Fund may also be
required to redeem all or part of its outstanding preferred shares.
SPECIAL RISKS OF THE SERIES A PREFERRED
Illiquidity Prior to Exchange Listing. Prior to the offering, there
has been no public market for the Series A Preferred. In the event the Series A
Preferred are issued, prior application will have been made to list the Series
A Preferred on the NYSE. However, during an initial period, which is not
expected to exceed 30 days after the date of its initial issuance, the Series A
Preferred will not be listed on any securities exchange. During such period,
the underwriters intend to make a market in the Series A Preferred, though,
they have no obligation to do so. Consequently, an investment in the Series A
Preferred may be illiquid during such period.
SPECIAL RISKS OF THE SERIES B AUCTION RATE PREFERRED
Interest Rate Risk. In connection with the sale of the Series B
Auction Rate Preferred, the Fund may enter into interest rate swap or cap
transactions in order to reduce the impact of changes in the dividend rate of
the Series B Auction Rate Preferred or obtain the equivalent of a fixed rate
for the Series B Auction Rate Preferred that is lower than the Fund would have
to pay if it issued fixed rate preferred shares. The use of interest rate swaps
and caps is a highly specialized activity that involves investment techniques
and risks different from those associated with ordinary portfolio security
transactions. See "How the Fund Manages Risk -- Interest Rate Transactions."
Auction Risk. You may not be able to sell your Series B Auction Rate
Preferred at an auction if the auction fails, i.e., if there is more Series B
Auction Rate Preferred offered for sale than there are buyers for those shares.
Also, if you place orders (place a hold order) at an auction to retain Series B
Auction Rate Preferred only at a specified rate that exceeds the rate set at
the auction, you will not retain your Series B Auction Rate Preferred.
Additionally, if you place a hold order without specifying a rate below which
you would not wish to continue to hold your shares and the auction sets a
below-market rate, you will receive a lower rate of return on your shares than
the market rate. Finally, the dividend period may be changed, subject to
certain conditions and with notice to the holders of the Series B Auction Rate
Preferred, which could also affect the liquidity of your investment. See
"Description of the Series A Preferred and Series B Auction Rate Preferred" and
"The Auction of Series B Auction Rate Preferred."
Secondary Market Risk. If you try to sell your Series B Auction Rate
Preferred between auctions, you may not be able to sell them for $25,000 per
share or $25,000 per share plus accumulated dividends. If the Fund has
designated a special dividend period of more than seven days, changes in
interest rates could affect the price you would receive if you sold your shares
in the secondary market. Broker-dealers that maintain a secondary trading
market for the Series B Auction Rate Preferred are not required to maintain
this market, and the Fund is not required to redeem Series B Auction Rate
Preferred if either an auction or an attempted secondary market sale fails
because of a lack of buyers. The Series B Auction Rate Preferred is not
registered on a stock exchange or the NASDAQ stock market. If you sell your
Series B Auction Rate Preferred to a broker-dealer between auctions, you may
receive less than the price you paid for them, especially when market interest
rates have risen since the last auction or during a special dividend period.
INDUSTRY RISKS
The Fund will invest a significant portion of its assets in foreign
and domestic companies involved in the Utility Industry and, as a result, the
net asset value of the Fund will be more susceptible to factors affecting those
particular types of companies, including governmental regulation, inflation,
cost increases in fuel and other operating expenses, obsolescence of products
and services, and increasing interest rates resulting in high interest costs on
borrowings needed for capital construction programs, including compliance with
environmental regulations.
Various regulatory regimes impose limitations on the percentage of the
shares of a public utility held by an investment for its clients. These
limitations may unfavorably restrict the ability of the Fund to make certain
investments.
In addition, deregulation of the utility industry could have a
positive or negative impact on the Fund. 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.
LONG-TERM OBJECTIVE; NOT A COMPLETE INVESTMENT PROGRAM
The Fund is intended for investors seeking long-term capital growth.
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 Fund's investment objective as well as the shareholder's
other investments when considering an investment in the Fund.
NON-DIVERSIFIED STATUS
The Fund is classified as a "non-diversified" investment company under
the 1940 Act, which means 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 has in the past conducted and intends to conduct its
operations so as to qualify as a "regulated investment company," or RIC, for
purposes of the Code, which will relieve it of any liability for federal income
tax to the extent its earnings are distributed to shareholders. To qualify as a
"regulated investment company," among other requirements, the Fund will limit
its investments so that, with certain exceptions, at the close of each quarter
of the taxable year:
o not more than 25% of the market value of its total assets
will be invested in the securities (other than U.S.
government securities or the securities of other RICs) of a
single issuer or any two or more issuers that the Fund
controls and which are determined to be engaged in the same,
similar or related trades or businesses; and
o at least 50% of the market value of the Fund's assets will be
represented by cash, securities of other regulated investment
companies, U.S. government securities and other securities,
with such other securities limited in respect of any one
issuer to an amount not greater than 5% of the value of the
Fund's assets and not more than 10% of the outstanding voting
securities of such issuer.
As a non-diversified investment company, the Fund may invest in the
securities of individual issuers to a greater degree than a diversified
investment company. As a result, 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 present greater risk to an investor than an investment in a diversified
company.
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. These high yield securities, also sometimes referred to as
"junk bonds," generally pay a premium above the yields of U.S. government
securities or debt securities of investment grade issuers because they are
subject to greater risks than these securities. These risks, which reflect
their speculative character, include the following:
o greater volatility;
o greater credit risk;
o potentially greater sensitivity to general economic or
industry conditions;
o potential lack of attractive resale opportunities
(illiquidity); and
o additional expenses to seek recovery from issuers who
default.
The market value of lower-rated securities may be more volatile than
the market value of higher-rated securities and generally tends to reflect the
market's perception of the creditworthiness of the issuer and short-term market
developments to a greater extent than more highly rated securities, which
primarily reflect fluctuations in general levels of interest rates.
Ratings are relative and subjective and not absolute standards of
quality. Securities ratings are based largely on the issuer's historical
financial condition and the rating agencies' analysis at the time of rating.
Consequently, the rating assigned to any particular security is not necessarily
a reflection of the issuer's current financial condition.
As a part of its investments in lower rated securities, the Fund may
invest up to 10% of its total assets in securities of issuers in default. The
Fund will invest in securities of issuers in default only when the Investment
Adviser believes that such issuers will honor their obligations, emerge from
bankruptcy protection and the value of these securities will appreciate. By
investing in the 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 these securities will not
appreciate.
For a further description of lower rated securities and the risks
associated therewith, see "Investment Objective and Policies -- Investment
Practices" in the SAI. For a description of the ratings categories of certain
recognized statistical ratings agencies, see Appendix A to this prospectus.
FOREIGN SECURITIES
Investments in the securities of foreign issuers involve certain
considerations and risks not ordinarily associated with investments in
securities of domestic issuers. Foreign companies are not generally subject to
uniform accounting, auditing and financial standards and requirements
comparable to those applicable to U.S. companies. Foreign securities exchanges,
brokers and listed companies may be subject to less government supervision and
regulation than exists in the United States. Dividend and interest income may
be subject to withholding and other foreign taxes, which may adversely affect
the net return on such investments. There may be difficulty in obtaining or
enforcing a court judgment abroad. In addition, it may be difficult to effect
repatriation of capital invested in certain countries. In addition, with
respect to certain countries, there are risks of expropriation, confiscatory
taxation, political or social instability or diplomatic developments that could
affect assets of the Fund held in foreign countries.
There may be less publicly available information about a foreign
company than a U.S. company. Foreign securities markets may have substantially
less volume than U.S. securities markets and some foreign company securities
are less liquid than securities of otherwise comparable U.S. companies. A
portfolio of foreign securities may also be adversely affected by fluctuations
in the rates of exchange between the currencies of different nations and by
exchange control regulations. Foreign markets also have different clearance and
settlement procedures that could cause the Fund to encounter difficulties in
purchasing and selling securities on such markets and may result in the Fund
missing attractive investment opportunities or experiencing loss. In addition,
a portfolio that includes foreign securities can expect to have a higher
expense ratio because of the increased transaction costs on non-U.S. securities
markets and the increased costs of maintaining the custody of foreign
securities. The Fund does not have an independent limit on the amount of its
assets that it may invest in the securities of foreign issuers.
The Fund also may purchase sponsored American Depository Receipts
("ADRs") or U.S. denominated securities of foreign issuers. ADRs are receipts
issued by United States banks or trust companies in respect of securities of
foreign issuers held on deposit for use in the United States securities
markets. While ADRs may not necessarily be denominated in the same currency as
the securities into which they may be converted, many of the risks associated
with foreign securities may also apply to ADRs.
FUTURES TRANSACTIONS
Futures and options on futures entail certain risks, including but not
limited to the following:
o no assurance that futures contracts or options on futures can
be offset at favorable prices;
o possible reduction of the yield of the Fund due to the use of
hedging;
o possible reduction in value of both the securities hedged and
the hedging instrument;
o possible lack of liquidity due to daily limits or price
fluctuations;
o imperfect correlation between the contracts and the
securities being hedged; and
o losses from investing in futures transactions that are
potentially unlimited and the segregation requirements for
such transactions.
For a further description of the Fund's investments in futures, see "Investment
Objective 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 Objective 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.
CURRENT MARKET UNCERTAINTIES
As a result of the terrorist attacks on the World Trade Center and the
Pentagon on September 11, 2001, some of the U.S. Securities Markets were closed
for a four-day period. These terrorists attacks and related events have led to
increased short-term market volatility and may have long-term effects on U.S.
and world markets. Similar events in the future or other disruptions of
financial markets could affect interest rates, securities exchanges, auctions,
secondary trading, rating, credit risk, inflation and other factors relating to
the Series A Preferred and/or Series B Auction Rate Preferred.
HOW THE FUND MANAGES RISK
INVESTMENT LIMITATIONS
The Fund has adopted certain investment limitations designed to limit
investment risk and maintain portfolio diversification. These limitations are
fundamental and may not be changed without the approval of the holders of a
majority, as defined in the 1940 Act, of the outstanding common shares and
preferred shares voting together as a single class. See "Investment
Restrictions" in the SAI for a complete list of the fundamental investment
policies of the Fund. The Fund may become subject to guidelines that are more
limiting than its fundamental investment restrictions set forth above in order
to obtain and maintain ratings from [__] or [__] on its preferred shares.
INTEREST RATE TRANSACTIONS
In order to reduce the impact of changes in the dividend rate of the
Series B Auction Rate Preferred or obtain the equivalent of a fixed rate for
the Series B Auction Rate Preferred that is lower than the Fund would have to
pay if it issued fixed rate preferred shares, the Fund may enter into interest
rate swap or cap transactions.
The use of interest rate swaps and caps is a highly specialized
activity that involves investment techniques and risks different from those
associated with ordinary portfolio security transactions. In an interest rate
swap, the Fund would agree to pay to the other party to the interest rate swap
(which is known as the "counterparty") periodically a fixed rate payment in
exchange for the counterparty agreeing to pay to the Fund periodically a
variable rate payment that is intended to approximate the Fund's variable rate
payment obligation on the Series B Auction Rate Preferred. In an interest rate
cap, the Fund would pay a premium to the counterparty to the interest rate cap
and, to the extent that a specified variable rate index exceeds a predetermined
fixed rate, would receive from the counterparty payments of the difference
based on the notional amount of such cap. Interest rate swap and cap
transactions introduce additional risk because the Fund would remain obligated
to pay preferred share dividends when due in accordance with the Statement of
Preferences even if the counterparty defaulted. Depending on the general state
of short-term interest rates and the returns on the Fund's portfolio securities
at that point in time, such a default could negatively affect the Fund's
ability to make dividend payments on the Series B Auction Rate Preferred. In
addition, at the time an interest rate swap or cap transaction reaches its
scheduled termination date, there is a risk that the Fund will not be able to
obtain a replacement transaction or that the terms of the replacement will not
be as favorable as on the expiring transaction. If this occurs, it could have a
negative impact on the Fund's ability to make dividend payments on the Series B
Auction Rate Preferred. To the extent there is a decline in interest rates, the
value of the interest rate swap or cap could decline, resulting in a decline in
the asset coverage for the Series B Auction Rate Preferred. A sudden and
dramatic decline in interest rates may result in a significant decline in the
asset coverage. Under the Statement of Preferences, if the Fund fails to
maintain the required asset coverage on the outstanding preferred shares
(including the Series B Auction Rate Preferred) or fails to comply with other
covenants, the Fund may be required to redeem some or all of these shares. The
Fund may also choose to redeem some or all of the Series B Auction Rate
Preferred at any time. Such redemption would likely result in the Fund seeking
to terminate early all or a portion of any swap or cap transaction. Early
termination of a swap could result in a termination payment by the Fund to the
counterparty, while early termination of a cap could result in a termination
payment to the Fund.
The Fund will usually enter into swaps or caps on a net basis; that
is, the two payment streams will be netted out in a cash settlement on the
payment date or dates specified in the instrument, with the Fund receiving or
paying, as the case may be, only the net amount of the two payments. The Fund
intends to segregate cash or liquid securities having a value at least equal to
the value of the Fund's net payment obligations under any swap transaction,
marked to market daily. The Fund does not presently intend to enter into
interest rate swap or cap transactions relating to Series B Auction Rate
Preferred in a notional amount in excess of the outstanding amount of the
Series B Auction Rate Preferred. The Fund will monitor any such swap with a
view to ensuring that the Fund remains in compliance with all applicable
regulatory investment policy and tax requirements.
MANAGEMENT OF THE FUND
GENERAL
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
decides upon matters of general policy and reviews the actions of the
Investment Adviser, Gabelli Funds, LLC, located at One Corporate Center, Rye,
New York 10580-1422, and the Sub-Administrator (as defined below). Pursuant to
an Investment Advisory Contract with the Fund, the Investment Adviser, under
the supervision of the Fund's Board of Trustees, provides a continuous
investment program for the Fund's portfolio; provides investment research and
makes and executes recommendations for the purchase and sale of securities; and
provides all facilities and personnel, including officers required for its
administrative management and pays the compensation of all officers and
directors of the Fund who are its affiliates. As compensation for its services
and the related expenses borne by the Investment Adviser, the Fund pays the
Investment Adviser a fee, computed daily and payable monthly, equal, on an
annual basis, to 1.00% of the Fund's average weekly net assets. However, the
Investment Adviser will 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 and/or Series
B Auction Rate Preferred 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, the stated annual dividend rate of
such series and (ii) in the case of the Series B Auction Rate Preferred, the
net cost of capital to the Fund with respect to the Series B Auction Rate
Preferred for such year expressed as a percentage (including, without
duplication, dividends paid by the Fund on the Series B Auction Rate Preferred
and the net cost to the Fund of any associated swap or cap transaction if the
Fund hedges its Series B Auction Rate Preferred dividend obligations). For
purposes of the calculation of the fees payable to the Investment Adviser by
the Fund, average weekly net assets of the Fund are determined at the end of
each month on the basis of its average net assets for each week during the
month. The assets for each weekly period are determined by averaging the net
assets at the end of a week with the net assets at the end of the prior week.
THE INVESTMENT ADVISER
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. The Investment Adviser was organized in 1999 and is the successor
to Gabelli Funds, Inc., which was organized in 1980. As of [__], 2003, the
Investment Adviser acted as registered investment adviser to [__] management
investment companies with aggregate net assets of $[__] billion. The Investment
Adviser, together with other affiliated investment advisers noted below had
assets under management totaling approximately $[__] billion as of [__], 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 $[__] billion under management as of [__], 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 $[__] billion under management as of [__], 2003. Gabelli Advisers, Inc., an
affiliate of the Investment Adviser, acts as investment manager to the Gabelli
Westwood Funds having aggregate assets of $[__] million under management as of
[__], 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 the Gabelli Group Capital Partners, Inc., which owns
a majority of the capital stock of Gabelli Asset Management Inc.
PAYMENT OF EXPENSES
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 directors
of the Fund who are affiliated with the Investment Adviser. The Fund pays all
other expenses incurred in its operation including, among other things,
expenses for legal and independent accountants' services, costs of printing
proxies, share certificates and shareholder reports, charges of the custodian,
any subcustodian and transfer and dividend paying agent, expenses in connection
with its respective automatic dividend reinvestment and voluntary cash purchase
plan, SEC fees, fees and expenses of unaffiliated directors, accounting and
pricing costs, including costs of calculating the net asset value of the Fund,
membership fees in trade associations, fidelity bond coverage for its officers
and employees, directors' and officers' errors and omission insurance coverage,
interest, brokerage costs, taxes, stock exchange listing fees and expenses,
expenses of qualifying its shares for sale in various states, litigation and
other extraordinary or non-recurring expenses, and other expenses properly
payable by the Fund.
In addition to the fees of the Investment Adviser, the Fund is
responsible for the payment of all its other expenses incurred in the operation
of the Fund, which include, among other things, expenses for legal and
independent accountant's services, stock exchange listing fees, expenses
relating to the offering of preferred shares, rating agency fees, costs of
printing proxies, share certificates and shareholder reports, charges of State
Street Bank and Trust Company ("State Street" or the "Custodian"), charges of
EquiServe and The Bank of New York, SEC fees, fees and expenses of unaffiliated
directors, accounting and printing costs, the Fund's pro rata portion of
membership fees in trade organizations, fidelity bond coverage for the Fund's
officers and employees, interest, brokerage costs, taxes, expenses of
qualifying the Fund for sale in various states, expenses of personnel
performing shareholder servicing functions, litigation and other extraordinary
or non-recurring expenses and other expenses properly payable by the Fund.
SELECTION OF SECURITIES BROKERS
The Investment Advisory Contract contains provisions relating to the
selection of securities brokers to effect the portfolio transactions of the
Fund. Under those provisions, the Investment Adviser may (i) direct Fund
portfolio brokerage to Gabelli & Company, Inc. or other broker-dealer
affiliates of the Investment Adviser and (ii) pay commissions to brokers other
than Gabelli & Company, Inc. that are higher than might be charged by another
qualified broker to obtain brokerage and/or research services considered by the
Investment Adviser to be useful or desirable for its investment management of
the Fund and/or its other advisory accounts or those of any investment adviser
affiliated with it. The SAI contains further information about the Investment
Advisory Contract including a more complete description of the advisory and
expense arrangements, exculpatory and brokerage provisions, as well as
information on the brokerage practices of the Fund.
PORTFOLIO MANAGER
Mario J. Gabelli is 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.; and Vice Chairman of the Board of Lynch Corporation, a
diversified manufacturing company, and Chairman of the Board and Chief
Executive Officer of Lynch Interactive Corporation, a multimedia and
communications services company.
NON-RESIDENT DIRECTOR
Karl Otto Pohl, a director of the Fund, resides outside the United
States and all or a significant portion of his assets are located outside the
United States. Mr. Pohl does not have an authorized agent in the United States
to receive service of process. As a result, it may not be possible for
investors to effect service of process within the United States or to enforce
against Mr. Pohl in United States courts judgments predicated upon civil
liability provisions of United States securities laws. It may also not be
possible to enforce against Mr. Pohl in foreign courts judgments of United
States courts or liabilities in original actions predicated upon civil
liability provisions of the United States securities laws.
SUB-ADMINISTRATOR
The Investment Adviser has entered into sub-administration agreement
with PFPC Inc. (the "Sub-Administrator") pursuant to which the
Sub-Administrator provides certain administrative services necessary for the
Fund's operations which do not include the investment advisory and portfolio
management services provided by the 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 $10.0
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, Inc., an affiliate of the Investment Adviser,
may execute portfolio transactions on stock exchanges and in the
over-the-counter markets on an agency basis and receive a stated commission
therefor. For a more detailed discussion of the Fund's brokerage allocation
practices, see "Portfolio Transactions" in the SAI.
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. If, for any calendar
year, the total distributions exceed net investment 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 be taxable to the
shareholder as capital gain. See "Taxation" below.
In the event the Fund distributes amounts in excess of its net
investment 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 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.
DESCRIPTION OF THE SERIES A PREFERRED
AND SERIES B AUCTION RATE PREFERRED
The Fund offers by this prospectus, in the aggregate, $[__]million of
preferred shares of either Series A Preferred or Series B Auction Rate
Preferred, or a combination of both such series. The following is a brief
description of the terms of each of the Series A Preferred and the Series B
Auction Rate Preferred. This description does not purport to be complete and is
qualified by reference to the Fund's Governing Documents, including the
provisions of the Statement of Preferences establishing each of the Series A
Preferred and the Series B Auction Rate Preferred. For complete terms of the
Series A Preferred or the Series B Auction Rate Preferred, including
definitions of terms used in this prospectus, please refer to the actual terms
of such series, which are set forth in the applicable Statement of Preferences.
GENERAL
The Fund is authorized to issue up to [__] preferred shares as Series
A Preferred and up to [__] preferred shares as Series B Auction Rate Preferred.
No fractional shares of either series will be issued. The Board of Trustees
reserves the right to issue additional preferred shares, including Series A
Preferred or Series B Auction Rate Preferred, from time to time, subject to the
restrictions in the Fund's Governing Documents and the 1940 Act.
If and when issued, the Series A Preferred will have a liquidation
preference of $25 per share and the Series B Auction Rate Preferred will have a
liquidation preference of $25,000 per share. Upon a liquidation, each holder of
Series A Preferred or Series B Auction Rate Preferred 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 and Series B Auction Rate
Preferred 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 and
the Series B Auction Rate Preferred 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 and Series B
Auction Rate Preferred each carry one vote per share on all matters on which
such shares are entitled to vote. The Series A Preferred and the Series B
Auction Rate Preferred will, upon issuance, be fully paid and nonassessable and
will have no preemptive, exchange or conversion rights. [Any Series A Preferred
or Series B Auction Rate Preferred repurchased or redeemed by the Fund will be
classified as authorized but unissued preferred shares.] 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 and/or Series B Auction Rate
Preferred.
RATING AGENCY GUIDELINES
Upon issuance, both the Series A Preferred and the Series B Auction
Rate Preferred will be rated [__] by [__]. In addition, the Series B Auction
Rate Preferred will also be rated [__] by [__]. The Fund is required under [__]
and [__] guidelines to maintain assets having in the aggregate a discounted
value at least equal to the Basic Maintenance Amount (as defined below) for its
outstanding preferred shares, including any outstanding Series A Preferred or
Series B Auction Rate Preferred, with respect to the separate guidelines [__]
and [__] has each established for determining discounted value. To the extent
any particular portfolio holding does not satisfy the applicable rating
agency's guidelines, all or a portion of such holding's value will not be
included in the calculation of discounted value (as defined by such rating
agency). The [__] and [__] guidelines also impose certain diversification
requirements and industry concentration limitations on the Fund's overall
portfolio, and apply specified discounts to securities held by the Fund (except
certain money market securities). The "Basic Maintenance Amount" is equal to
(i) the sum of (a) the aggregate liquidation preference of the preferred shares
then outstanding plus (to the extent not included in the liquidation preference
of such preferred shares) an amount equal to the aggregate accumulated but
unpaid dividends (whether or not earned or declared) in respect of such
preferred shares, (b) the total principal of any debt (plus accrued and
projected interest), (c) certain Fund expenses and (d) certain other current
liabilities (excluding any unpaid dividends on the Fund's common shares) less
(ii) the Fund's (a) cash and (b) assets consisting of indebtedness which (x) is
to mature prior to or on the date of redemption or repurchase of the preferred
shares, (y) are U.S. government obligations or evidences of indebtedness rated
at least Aaa, P-1, VMIG-1 or MIG-1 by Moody's or AAA, SP-1+ or A-1+ by Standard
and Poor's, and (z) is held by the Fund for the payment of dividends or
distributions, the amounts needed to redeem or repurchase preferred shares, or
the Fund's liabilities.
If the Fund does not timely cure a failure to maintain a discounted
value of its portfolio equal to the Basic Maintenance Amount in accordance with
the requirements of the applicable rating agency or agencies then rating the
Series A Preferred or the Series B Auction Rate Preferred at the request of the
Fund, the Fund may, and in certain circumstances will be required to,
mandatorily redeem preferred shares, including the Series A Preferred or the
Series B Auction Rate Preferred, as described below under " -- Redemption."
The Fund may, but is not required to, adopt any modifications to the
rating agency guidelines that may hereafter be established by [__] or [__].
Failure to adopt any such modifications, however, may result in a change in the
relevant rating agency's ratings or a withdrawal of such ratings altogether. In
addition, any rating agency providing a rating for the Series A Preferred or
the Series B Auction Rate Preferred at the request of the Fund may, at any
time, change or withdraw any such rating. The Board of Trustees, without
further action by the shareholders, may amend, alter, add to or repeal certain
of the definitions and related provisions that have been adopted by the Fund
pursuant to the rating agency guidelines if the Board of Trustees determines
that such modification is necessary to prevent a reduction in rating of the
preferred shares by [__] and/or [__], as the case may be, or is in the best
interests of the holders of common shares and is not adverse to the holders of
preferred shares in view of advice to the Fund by [__] and [__] (or such other
rating agency then rating the Series A Preferred or Series B Auction Rate
Preferred at the request of the Fund) that such modification would not
adversely affect its then-current rating of the Series A Preferred or Series B
Auction Rate Preferred, as the case may be.
In addition, with respect to the Series B Auction Rate Preferred, the
Board of Trustees may amend the Statement of Preferences definition of "Maximum
Rate" (the "maximum rate" as defined below under " -- Dividends on the Series B
Auction Rate Preferred -- Maximum Rate") to increase the percentage amount by
which the "AA" Financial Composite Commercial Paper Rate or the Treasury Index
Rate, whichever is applicable, is multiplied to determine the maximum rate
without the vote or consent of the holders of Series B Auction Rate Preferred
or any other shareholder of the Fund, but only after consultation with the
broker-dealers for the Series B Auction Rate Preferred, and with confirmation
from each applicable rating agency that the Fund could meet the Basic
Maintenance Amount Test applicable to the Series B Auction Rate Preferred
immediately following any such increase. See "-- Dividends on the Series B
Auction Rate Preferred -- Maximum Rate."
As described by [__] and [__], the ratings assigned to the Series A
Preferred and the Series B Auction Rate Preferred are assessments of the
capacity and willingness of the Fund to pay the obligations of each of the
Series A Preferred and the Series B Auction Rate Preferred. The ratings on the
Series A Preferred and the Series B Auction Rate Preferred are not
recommendations to purchase, hold or sell shares of either series, inasmuch as
the ratings do not comment as to market price or suitability for a particular
investor. The rating agency guidelines also do not address the likelihood that
an owner of Series A Preferred or Series B Auction Rate Preferred will be able
to sell such shares on an exchange, in an auction or otherwise. The ratings are
based on current information furnished to [__] and [__] by the Fund and the
Investment Adviser and information obtained from other sources. The ratings may
be changed, suspended or withdrawn as a result of changes in, or the
unavailability of, such information.
The rating agency guidelines will apply to the Series A Preferred or
Series B Auction Rate Preferred, as the case may be, only so long as such
rating agency is rating such shares at the request of the Fund. The Fund will
pay fees to [__] and [__] for rating the Series A Preferred and the Series B
Auction Rate Preferred.
ASSET MAINTENANCE REQUIREMENTS
In addition to the requirements summarized under " -- Rating Agency
Guidelines" above, the Fund must also satisfy asset maintenance requirements
under the 1940 Act with respect to its preferred shares. The 1940 Act
requirements are summarized below.
The Fund will be required under the Statement of Preferences for each
of the Series A Preferred and/or Series B Auction Rate Preferred to determine
whether it has as of the last business day of each March, June, September and
December of each year, an "asset coverage" (as defined in the 1940 Act) of at
least 200% (or such higher or lower percentage as may be required at the time
under the 1940 Act) with respect to all outstanding senior securities of the
Fund that are stock, including any outstanding Series A Preferred and the
Series B Auction Rate Preferred. If the Fund fails to maintain the asset
coverage required under the 1940 Act on such dates and such failure is not
cured within 60 days, in the case of the Series A Preferred, or 10 days, in the
case of the Series B Auction Rate Preferred, (including the Series A Preferred
or Series B Auction Rate Preferred) the Fund may, and in certain circumstances
will be required to, mandatorily redeem preferred shares sufficient to satisfy
such asset coverage. See " -- Redemption" below.
If the shares of Series A Preferred and/or Series B Auction Rate
Preferred offered hereby had been issued and sold as of [__], 2003, the asset
coverage required under the 1940 Act immediately following such issuance and
sale (after giving effect to the deduction of the underwriting discounts and
estimated offering expenses for such shares of $[__]), would have been computed
as follows:
value of Fund assets less liabilities not constituting senior
securities ($[__]) / senior securities representing
indebtedness plus liquidation preference of each class of
preferred shares ($[__]), expressed as a percentage = [__]%.
Assuming in addition that the Fund's rights offering also had been completed as
of March [__], 2003, the
above computation would be as follows:
value of Fund assets less liabilities not constituting senior
securities ($[__]) / senior securities representing
indebtedness plus liquidation preference of each class of
preferred shares ($[__]), expressed as a percentage = [__]%.
DIVIDENDS ON THE SERIES A PREFERRED
Upon issuance of the Series A Preferred (if issued), holders of shares
of Series A Preferred will be entitled to receive, when, as and if declared by
the Board of Trustees of the Fund out of funds legally available therefor,
cumulative cash dividends, at the annual rate of [__] % (computed on the basis
of a 360-day year consisting of twelve 30-day months) of the liquidation
preference of $25 per share, payable quarterly on March 26, June 26, September
26 and December 26 in each year or, if any such day is not a business day, the
immediately succeeding business day. Such dividends will commence on [__] ,
2003, and will be payable to the persons in whose names the shares of Series A
Preferred are registered at the close of business on the fifth preceding
business day.
Dividends on the shares of Series A Preferred will accumulate from the
date on which such shares are issued; provided, however, that any shares of
Series A Preferred issued within 30 days of the original issue date of the
series will accumulate dividends from the series' original date of issue.
DIVIDENDS ON THE SERIES B AUCTION RATE PREFERRED
General. Upon issuance of the Series B Auction Rate Preferred (if
issued), the holders of Series B Auction Rate Preferred will be entitled to
receive cash dividends stated at annual rates as a percentage of its $25,000
per share liquidation preference, that will vary from dividend period to
dividend period. The dividend rate for the initial dividend period for any
Series B Auction Rate Preferred offered in this prospectus will be the rate set
out on the cover of this prospectus. For subsequent dividend periods, the
Series B Auction Rate Preferred will pay dividends based on a rate set at the
auction, normally held weekly, but the rates set at the auction will not exceed
the maximum rate. Dividend periods generally will be seven days, and the
dividend periods generally will begin on the first business day after an
auction. In most instances, dividends are also paid weekly, on the business day
following the end of the dividend period. The Fund, subject to some
limitations, may change the length of the dividend periods, designating them as
"special dividend periods," as described below.
Dividend Payments. Except as described below, the dividend payment
date will be the first business day after the dividend period ends. The
dividend payment dates for special dividend periods of more (or less) than
seven days will be set out in the notice designating a special dividend period.
See " -- Designation of Special Dividend Periods" for a discussion of payment
dates for a special dividend period.
Dividends on Series B Auction Rate Preferred will be paid on the
dividend payment date to holders of record as their names appear on the Fund's
share ledger or share records on the business day next preceding the dividend
payment date. If dividends are in arrears, they may be declared and paid at any
time to holders of record as their names appear on the Fund's share ledger or
share records on a date not more than 15 days before the payment date, as the
Fund's Board of Trustees may fix.
The dividend paying agent, in accordance with its current procedures,
is expected to credit in same-day funds on each dividend payment date dividends
received from the Fund to the accounts of broker-dealers who act on behalf of
holders of the Series B Auction Rate Preferred. Such broker-dealers, in turn,
are expected to distribute dividend payments to the person for whom they are
acting as agents. If a broker-dealer does not make dividends available to
Series B Auction Rate Preferred holders in same-day funds, these shareholders
will not have funds available until the next business day.
Dividend Rate Set at Auction. The Series B Auction Rate Preferred pays
dividends based on a rate set at auction at which Series B Auction Rate
Preferred may be bought and sold. The auction usually is held weekly, but may
be held more or less frequently. The Bank of New York, the auction agent,
reviews orders from broker-dealers on behalf of existing holders who wish to
sell, hold at the auction rate, or hold only at a specified dividend rate , and
on behalf of potential holders who wish to buy Series B Auction Rate Preferred.
The auction agent then determines the lowest dividend rate that will result in
all of the Series B Auction Rate Preferred continuing to be held. See "The
Auction of Series B Auction Rate Preferred."
If an auction is not held because an unforeseen event, or unforeseen
events cause a day that otherwise would have been an auction date not to be a
business day, then the length of the then-current dividend period will be
extended by seven days (or a multiple thereof if necessary because of such
unforeseen event or events), the applicable rate for such period will be the
applicable rate for the then-current dividend period so extended and the
dividend payment date for such dividend period will be the first business day
immediately succeeding the end of such period.
Determination of Dividend Rates. The Fund computes the dividends per
share by multiplying the applicable rate determined at the auction by a
fraction, the numerator of which normally is the number of days in such
dividend period and the denominator of which is 360. This applicable rate is
then multiplied by $25,000 to arrive at the dividend per share.
Maximum Rate. The dividend rate that results from an auction for the
Series B Auction Rate Preferred will not be greater than the applicable
"maximum rate." The maximum rate means (i) in the case of a dividend period of
184 days or less, the applicable percentage of the "AA" Financial Composite
Commercial Paper Rate on the date of such auction determined as set forth in
the following chart based on the lower of the credit ratings assigned to the
Series B Auction Rate Preferred by [__] and [__] or (ii) in the case of a
dividend period of longer than 184 days, the applicable percentage of the
Treasury Index Rate.
[ ] Credit Rating [ ] Credit Rating Applicable Percentage
------------------- -------------------- ---------------------
[__] or higher [__] or higher 150%
[__] to [__] [__] to [__] 175%
[__] to [__] [__] to [__] 250%
Below [__] Below [__]-- 275%
The "Treasury Index Rate" means the average yield to maturity for
actively traded marketable U.S. Treasury fixed interest rate securities having
the same number of 30-day periods to maturity as the length of the applicable
dividend period, determined, to the extent necessary, by linear interpolation
based upon the yield for such securities having the next shorter and next
longer number of 30-day periods to maturity treating all dividend periods with
a length greater than the longest maturity for such securities as having a
length equal to such longest maturity, in all cases based upon data set forth
in the most recent weekly statistical release published by the Board of
Governors of the Federal Reserve System (currently in H.15 (519)); provided,
however, that if the most recent such statistical release will not have been
published during the 15 days preceding the date of computation, the foregoing
computations will be based upon the average of comparable data as quoted to the
Fund by at least three recognized dealers in U.S. government securities
selected by the Fund.
There is no minimum dividend rate in respect of any dividend period.
Effect of Failure to Pay Dividends in a Timely Manner. If the Fund
fails to pay the paying agent the full amount of any dividend for the Series B
Auction Rate Preferred in a timely manner, but the Fund cures the failure and
pays any late charge before 12:00 noon, New York City time on the third
business day following the date the failure occurred, no default will be deemed
to have occurred and the dividend rate for the dividend period immediately
following the dividend with respect to which the dividend payment default would
otherwise have occurred will be the applicable rate set at the auction for such
dividend period.
However, if the Fund does not effect a timely cure, the dividend rate
for the Series B Auction Rate Preferred for such default period, and any
subsequent dividend period for which such default is continuing, will be the
default rate. In the event the Fund fully pays all default amounts due during a
dividend period, the dividend rate for the remainder of that dividend period
will be, as the case may be, the applicable rate (for the first dividend period
following a dividend default) or the then-maximum rate (for any subsequent
dividend period for which such default is continuing).
The default rate means 300% of the applicable "AA" Financial Composite
Commercial Paper Rate for a dividend period of 184 days or fewer and 300% of
the applicable Treasury Index Rate for a dividend period of longer than 184
days. Late charges are also calculated at the applicable default rate.
Designation of Special Dividend Periods. The Fund may instruct the
auction agent to hold auctions and pay dividends more or less frequently than
weekly. The Fund may do this if, for example, the Fund expects that short-term
rates might increase or market conditions otherwise change, in an effort to
optimize the effect of the Fund's leverage on holders of its common shares. The
Fund does not currently expect to hold auctions and pay dividends less
frequently than weekly in the near future. If the Fund designates a special
dividend period, changes in interest rates could affect the price received if
shares of Series B Auction Rate Preferred are sold in the secondary market.
Any designation of a special dividend period will be effective only if
(i) notice thereof will have been given as provided for in the Governing
Documents, (ii) any failure to pay in a timely matter to the auction agent the
full amount of any dividend on, or the redemption price of, the Series B
Auction Rate Preferred will have been cured as provided for in the Governing
Documents, (iii) the auction immediately preceding the special dividend period
was not a failed auction, (iv) if the Fund will have mailed a notice of
redemption with respect to Series B Auction Rate Preferred, the Fund will have
deposited with the paying agent all funds necessary for such redemption, and
(v) the Fund has confirmed that as of the auction date next preceding the first
day of such special dividend period, it has assets with an aggregate discounted
value at least equal to the Basic Maintenance Amount (as defined below), and
the Fund has consulted with the broker-dealers for the Series B Auction Rate
Preferred and has provided notice of such designation and a Basic Maintenance
Report to each rating agency then rating the Series B Auction Rate Preferred at
the request of the Fund.
The dividend payment date for any special dividend period will be the
first business day after the end of the special dividend period. In addition,
for special dividend periods of (x) at least 91 days but not more than one
year, dividend payment dates will occur on the 91st, 181st and 271st days
within such dividend period, if applicable, and (y) more than one year,
dividend payment dates will occur on each March 26, June 26, September 26 and
December 26 during the special dividend period.
Before the Fund designates a special dividend period: (i) at least
seven business days (or two business days in the event the duration of the
dividend period prior to such special dividend period is less than eight days)
and not more than 30 business days before the first day of the proposed special
dividend period, the Fund will issue a press release stating its intention to
designate a special dividend period and inform the auction agent of the
proposed special dividend period by telephonic or other means and confirm it in
writing promptly thereafter and (ii) the Fund must inform the auction agent of
the proposed special dividend period by 3:00 p.m., New York City time on the
second business day before the first day of the proposed special dividend
period.
See the SAI for more information.
RESTRICTIONS ON DIVIDENDS AND OTHER DISTRIBUTIONS FOR THE SERIES A PREFERRED
AND THE SERIES B AUCTION RATE PREFERRED
So long as any Series A Preferred or Series B Auction Rate Preferred
is outstanding, the Fund may not pay any dividend or distribution (other than a
dividend or distribution paid in common shares or in options, warrants or
rights to subscribe for or purchase common shares) in respect of the common
shares or call for redemption, redeem, purchase or otherwise acquire for
consideration any common shares (except by conversion into or exchange for
shares of the Fund ranking junior to the Series A Preferred and/or Series B
Auction Rate Preferred as to the payment of dividends and the distribution of
assets upon liquidation), unless:
o the Fund has declared and paid (or provided to the relevant
dividend paying agent) all cumulative dividends on the Fund's
preferred shares, including the Series A Preferred and/or
Series B Auction Rate Preferred, due on or prior to the date
of such common share dividend or distribution;
o the Fund has redeemed the full number of shares of Series A
Preferred and/or Series B Auction Rate Preferred to be
redeemed pursuant to any mandatory redemption provision in
the Fund's Governing Documents; and
o after paying the dividend, the Fund meets applicable asset
coverage requirements described under " -- Rating Agency
Guidelines" and " -- Asset Maintenance Requirements."
No full dividend will be declared or paid on the Series A Preferred or
Series B Auction Rate Preferred for any dividend period, or part thereof,
unless full cumulative dividends due through the most recent dividend payment
dates therefor for all outstanding series of preferred shares of the Fund
ranking on a parity with the Series A Preferred and Series B Auction Rate
Preferred as to the payment of dividends have been or contemporaneously are
declared and paid. If full cumulative dividends due have not been paid on all
outstanding preferred shares of the Fund ranking on a parity with the Series A
Preferred and/or Series B Auction Rate Preferred as to the payment of
dividends, any dividends being paid on the preferred shares (including the
Series A Preferred and/or Series B Auction Rate Preferred) will be paid as
nearly pro rata as possible in proportion to the respective amounts of
dividends accumulated but unpaid on each such series of preferred shares on the
relevant dividend payment date.
REDEMPTION
Mandatory Redemption Relating to Asset Coverage Requirements. The Fund
may, at its option, consistent with its Governing Documents and the 1940 Act,
and in certain circumstances will be required to, mandatorily redeem preferred
shares (including, at its discretion, the Series A Preferred or Series B
Auction Rate Preferred) in the event that:
o the Fund fails to maintain the asset coverage requirements
specified under the 1940 Act and such failure is not cured on
or before 60 days, in the case of the Series A Preferred, or
10 business days in the case of the Series B Auction Rate
Preferred following such failure; or
o the Fund fails to maintain the asset coverage requirements as
calculated in accordance with the applicable rating agency
guidelines as of any monthly valuation date, and such failure
is not cured on or before 10 business days after such
valuation date.
The redemption price for shares of each of the Series A Preferred and
Series B Auction Rate Preferred subject to mandatory redemption will be,
respectively, $25 per share and $25,000 per share, in each case plus an amount
equal to any accumulated but unpaid dividends (whether or not earned or
declared) to the date fixed for redemption, plus (in the case of Series B
Auction Rate Preferred having a dividend period of more than one year) any
applicable redemption premium determined by the Board of Trustees.
The number of preferred shares that will be redeemed in the case of a
mandatory redemption will equal the minimum number of outstanding preferred
shares, the redemption of which, if such redemption had occurred immediately
prior to the opening of business on the applicable cure date, would have
resulted in the relevant asset coverage requirement having been met or, if the
required asset coverage cannot be so restored, all of the preferred shares. In
the event that preferred shares are redeemed due to a failure to satisfy the
1940 Act asset coverage requirements, the Fund may, but is not required to,
redeem a sufficient number of preferred shares so that the Fund's assets exceed
the asset coverage requirements under the 1940 Act after the redemption by 10%
(that is, 220% asset coverage). In the event that preferred shares are redeemed
due to a failure to satisfy applicable rating agency guidelines, the Fund may,
but is not required to, redeem a sufficient number of preferred shares so that
the Fund's discounted portfolio value (as determined in accordance with the
applicable rating agency guidelines) after redemption exceeds the rating agency
guidelines asset coverage requirements by up to 10% (that is, 110% rating
agency asset coverage). In addition, as discussed under " -- Optional
Redemption" below, the Fund generally may exercise its optional redemption
rights with respect to the Series B Auction Rate Preferred at any time.
If the Fund does not have funds legally available for the redemption
of, or is otherwise unable to redeem, all the preferred shares to be redeemed
on any redemption date, the Fund will redeem on such redemption date that
number of shares for which it has legally available funds, or is otherwise able
to redeem, from the holders whose shares are to be redeemed ratably on the
basis of the redemption price of such shares, and the remainder of those shares
to be redeemed will be redeemed on the earliest practicable date on which the
Fund will have funds legally available for the redemption of, or is otherwise
able to redeem, such shares upon written notice of redemption.
If fewer than all of the Fund's outstanding preferred shares are to be
redeemed, the Fund, at its discretion and subject to the limitations of the
1940 Act and Delaware law, will select the one or more series of preferred
shares from which shares will be redeemed and the amount of preferred shares to
be redeemed from each such series. If less than all preferred shares of a
series are to be redeemed, such redemption will be made as among the holders of
that series pro rata in accordance with the respective number of shares of such
series held by each such holder on the record date for such redemption (or by
such other equitable method as the Fund may determine). If fewer than all the
preferred shares held by any holder are to be redeemed, the notice of
redemption mailed to such holder will specify the number of shares to be
redeemed from such holder, which may be expressed as a percentage of shares
held on the applicable record date.
Optional Redemption of the Series A Preferred. Prior to [__], 2008,
the shares of Series A Preferred are not subject to optional redemption by the
Fund unless such redemption is necessary, in the judgment of the Fund, to
maintain the Fund's status as a regulated investment company under the Code.
Commencing on [__], 2008 and thereafter, the Fund may at any time redeem shares
of Series A Preferred in whole or in part for cash at a redemption price per
share equal to $25 per share plus accumulated and unpaid dividends (whether or
not earned or declared) to the redemption date. Such redemptions are subject to
the notice requirements set forth under " -- Redemption Procedures" and the
limitations of the 1940 Act and Delaware law.
Optional Redemption of the Series B Auction Rate Preferred. The Fund
may, at its option, redeem the Series B Auction Rate Preferred, in whole or in
part, at any time following the initial dividend period so long as the Fund has
not designated a non-call period. The Fund may designate a non-call period
during a dividend period of more than seven days. In the case of Series B
Auction Rate Preferred having a dividend period of one year or less, the
redemption price per share will equal $25,000 plus an amount equal to any
accumulated but unpaid dividends thereon (whether or not earned or declared) to
the redemption date, and in the case of Series B Auction Rate Preferred having
a dividend period of more than one year, for the redemption price plus any
redemption premium applicable during such dividend period. Such redemptions are
subject to the notice requirements set forth under " -- Redemption Procedures"
and the limitations of the 1940 Act and Delaware law.
Redemption Procedures. A notice of redemption with respect to an
optional redemption will be given to the holders of record of preferred shares
selected for redemption not less than 15 days (subject to NYSE requirements),
in the case of the Series A Preferred, and not less than 7 days in the case of
the Series B Auction Rate Preferred, nor, in both cases, more than 40 days
prior to the date fixed for redemption. Preferred shareholders may receive
shorter notice in the event of a mandatory redemption. Each notice of
redemption will state (i) the redemption date, (ii) the number or percentage of
preferred shares to be redeemed (which may be expressed as a percentage of such
shares outstanding), (iii) the CUSIP number(s) of such shares, (iv) the
redemption price (specifying the amount of accumulated dividends to be included
therein), (v) the place or places where such shares are to be redeemed, (vi)
that dividends on the shares to be redeemed will cease to accrue on such
redemption date, (vii) the provision of the Statement of Preferences under
which the redemption is being made and (viii) any conditions precedent to such
redemption. No defect in the notice of redemption or in the mailing thereof
will affect the validity of the redemption proceedings, except as required by
applicable law.
The holders of Series A Preferred or Series B Auction Rate Preferred
will not have the right to redeem their shares of the Fund at their option.
LIQUIDATION RIGHTS
Upon a liquidation, dissolution or winding up of the affairs of the
Fund (whether voluntary or involuntary), holders of Series A Preferred or
Series B Auction Rate Preferred then outstanding will be entitled to receive
out of the assets of the Fund available for distribution to shareholders, after
satisfying claims of creditors but before any distribution or payment of assets
is made to holders of the common shares or any other class of shares of the
Fund ranking junior to the Series A Preferred or Series B Auction Rate
Preferred as to liquidation payments, a liquidation distribution in the amount
of $25 per share, in the case of the Series A Preferred, or $25,000 per share,
in the case of the Series B Auction Rate Preferred, in either case plus an
amount equal to all unpaid dividends accrued to and including the date fixed
for such distribution or payment (whether or not earned or declared by the Fund
but excluding interest thereon), and such holders will be entitled to no
further participation in any distribution or payment in connection with any
such liquidation, dissolution or winding up. If, upon any liquidation,
dissolution or winding up of the affairs of the Fund, whether voluntary or
involuntary, the assets of the Fund available for distribution among the
holders of all outstanding preferred shares of the Fund ranking on a parity
with the Series A Preferred and/or Series B Auction Rate Preferred as to
payment upon liquidation will be insufficient to permit the payment in full to
such holders of the Series A Preferred and/or Series B Auction Rate Preferred
and other parity preferred shares of the amounts due upon liquidation with
respect to such shares, then such available assets will be distributed among
the holders of the Series A Preferred, the Series B Auction Rate Preferred and
such other parity preferred shares ratably in proportion to the respective
preferential amounts to which they are entitled. Unless and until the
liquidation payments due to holders of the Series A Preferred and/or Series B
Auction Rate Preferred and such other parity preferred shares have been paid in
full, no dividends or distributions will be made to holders of the common
shares or any other shares of the Fund ranking junior to the Series A Preferred
and/or Series B Auction Rate Preferred and other parity preferred stock as to
liquidation.
VOTING RIGHTS
Except as otherwise stated in this prospectus, specified in the Fund's
Governing Documents or as otherwise required by applicable law, holders of the
Series A Preferred and/or Series B Auction Rate Preferred along with holders of
other outstanding shares of series of preferred stock, will be entitled to one
vote per share held on each matter submitted to a vote of shareholders and will
vote together with holders of shares of common stock and of any other preferred
shares then outstanding as a single class.
In connection with the election of the Fund's directors, holders of
the outstanding Series A Preferred, Series B Auction Rate Preferred and the
other series of preferred shares, voting together as a single class, will be
entitled at all times to elect two of the Fund's directors, and the remaining
directors will be elected by holders of common shares and holders of the Series
A Preferred, Series B Auction Rate Preferred and other series 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 Auction Rate
Preferred 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 directors of
the Fund under the 1940 Act or the Statements of Preferences creating such
shares, then the number of directors constituting the Board of Trustees
automatically will be increased by the smallest number that, when added to the
two directors elected exclusively by the holders of the Series A Preferred,
Series B Auction Rate Preferred and other series of preferred shares as
described above, would then constitute a majority of the Board of Trustees as
so increased by such smallest number. Such additional directors will be elected
by the holders of the Series A Preferred, Series B Auction Rate Preferred 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. If the Fund fails to send such meeting notice or to call
such a special meeting, the meeting may be called by any preferred shareholder
on like notice. The terms of office of the persons who are directors at the
time of that election will continue. If the Fund thereafter pays or declares
and sets apart for payment in full, all dividends payable on all outstanding
preferred shares for all past dividend periods or the holders of other series
of preferred shares are no longer entitled to elect such additional directors,
the additional voting rights of the holders of the preferred shares as
described above will cease, and the terms of office of all of the additional or
replacement directors elected by the holders of the preferred shares (but not
of the directors with respect to whose election the holders of common shares
were entitled to vote or the two directors the holders of preferred shares have
the right to elect as a separate class in any event) will terminate at the
earliest time permitted by law.
So long as shares of Series A Preferred or Series B Auction Rate
Preferred are outstanding, the Fund will not, without the affirmative vote of
the holders of a majority (as defined in the 1940 Act) of the preferred shares
outstanding at the time (including the Series A Preferred or Series B Auction
Rate Preferred, as applicable), voting separately as one class, amend, alter or
repeal the provisions of the Fund's Governing Documents, whether by merger,
consolidation or otherwise, so as to materially adversely affect any of the
contract rights expressly set forth in the Governing Documents with respect to
such preferred shares. Also, to the extent permitted under the 1940 Act, in the
event preferred shares of more than one series 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
Governing Documents with respect to such series of preferred shares (such as
the Series A Preferred or Series B Auction Rate Preferred) differently than
those of a holder of any other series of preferred shares without the
affirmative vote of the holders of at least a majority 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 to the
extent its rights are affected differently). Unless a higher percentage is
provided for under the Governing Documents or applicable provisions of Delaware
law, the affirmative vote of a majority of the votes entitled to be cast by
holders of outstanding preferred shares (including the Series A Preferred
and/or Series B Auction Rate Preferred), voting together as a single class,
will be required to approve any plan of reorganization adversely affecting the
preferred shares or any action requiring a vote of security holders under
Section 13(a) of the 1940 Act, including, among other things, changes in the
Fund's investment objective or changes in the investment restrictions described
as fundamental policies under "Investment Objective and Policies" and
"Investment Restrictions" in this prospectus and the SAI. For purposes of the
preferred share voting rights described in this section, except as otherwise
required under the 1940 Act, the phrase "vote of the holders of a majority of
the outstanding preferred shares" (or any like phrase) means, in accordance
with Section 2(a)(42) of the 1940 Act, the vote, at the annual or a special
meeting of the shareholders of the Fund duly called (i) of 67% or more of the
preferred shares present at such meeting, 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. The class
vote of holders of preferred shares described above in each case will be in
addition to a separate vote of the requisite percentage of common shares,
Series A Preferred, Series B Auction Rate Preferred and any other preferred
shares, voting together as a single class, that may be necessary to authorize
the action in question.
The calculation of the elements and definitions of certain terms of
the rating agency guidelines may be modified by action of the Board of Trustees
without further action by the shareholders if the Board of Trustees determines
that such modification is necessary to prevent a reduction in rating of the
preferred shares by [__] and/or [__] (or any other rating agency then rating
the Series A Preferred or Series B Auction Rate Preferred at the request of the
Fund), as the case may be, or is in the best interests of the holders of common
shares and is not adverse to the holders of preferred shares in view of advice
to the Fund by the relevant rating agencies that such modification would not
adversely affect its then-current rating of the preferred shares.
The foregoing voting provisions will not apply to any Series A
Preferred or Series B Auction Rate Preferred if, at or prior to the time when
the act with respect to which such vote otherwise would be required will be
effected, such shares will have been redeemed or called for redemption and
sufficient cash or cash equivalents provided to the applicable paying agent to
effect such redemption. The holders of Series A Preferred and/or Series B
Auction Rate Preferred will have no preemptive rights or rights to cumulative
voting.
LIMITATION ON ISSUANCE OF PREFERRED SHARES
So long as any Series A Preferred or Series B Auction Rate Preferred
is outstanding, subject to receipt of approval from [__] and, in the case of
the Series B Auction Rate Preferred, [__], and subject to compliance with the
Fund's investment objective, policies and restrictions, the Fund may issue and
sell one of more other series of preferred shares in addition to the Series A
Preferred or Series B Auction Rate Preferred, provided that the Fund will,
immediately after giving effect to the issuance of such additional preferred
shares and to its receipt and application of the proceeds thereof (including,
without limitation, to the redemption of preferred shares for which notice of
redemption has been given prior to such issuance) have an "asset coverage" for
all senior securities of the Fund which are stock, as defined in the 1940 Act,
of at least 200% of the sum of the liquidation preference of the preferred
shares of the Fund then outstanding and all indebtedness of the Fund
constituting senior securities and no such additional preferred shares will
have any preference or priority over any other preferred shares of the Fund
upon the distribution of the assets of the Fund or in respect of the payment of
dividends.
The Fund does not currently intend to offer additional preferred
shares or senior securities representing indebtedness. However, the Fund will
consider from time to time whether to do so and may issue additional such
securities were the Board of Trustees to conclude that such an offering would
be consistent with the Fund's Governing Documents and applicable law, and in
the best interest of existing common shareholders.
REPURCHASE OF SERIES A PREFERRED AND SERIES B AUCTION RATE PREFERRED SHARES
The Fund is a closed-end investment company and, as such, holders of
the Series A Preferred or Series B Auction Rate Preferred do not and will not
have the right to redeem their shares of the Fund. The Fund, however, may
repurchase Series A Preferred or, outside of an auction, Series B Auction Rate
Preferred when it is deemed advisable by the Board of Trustees in compliance
with the requirements of the 1940 Act and regulations thereunder and other
applicable requirements.
BOOK-ENTRY
Shares of Series A Preferred will initially be held in the name of
Cede & Co. as nominee for DTC. The Fund will treat Cede & Co. as the holder of
record of the Series A Preferred for all purposes. In accordance with the
procedures of DTC, however, purchasers of Series A Preferred will be deemed the
beneficial owners of shares purchased for purposes of dividends, voting and
liquidation rights. Purchasers of Series A Preferred may obtain registered
certificates by contacting the Transfer Agent.
Shares of Series B Auction Rate Preferred will initially be held by
the auction agent as custodian for Cede & Co., in whose name the shares of the
Series B Auction Rate Preferred shall be registered. The Fund will treat Cede &
Co. as the holder of record of the Series B Auction Rate Preferred for all
purposes.
THE AUCTION OF SERIES B AUCTION RATE PREFERRED
SUMMARY OF AUCTION PROCEDURES
The following is a brief summary of the auction procedures for the
Series B Auction Rate Preferred, which are described in more detail in the SAI.
These auction procedures are complicated, and there are exceptions to these
procedures. Many of the terms in this section have a special meaning.
Accordingly, this description does not purport to be complete and is qualified,
in its entirety, by reference to the Fund's Governing Documents, including the
provisions of the Statement of Preferences establishing the Series B Auction
Rate Preferred.
The auctions determine the dividend rate for the Series B Auction Rate
Preferred, but each dividend rate will not be higher than the maximum rate. See
"Description of the Series A Preferred and Series B Auction Rate Preferred --
Dividends on the Series B Auction Rate Preferred." If you own shares of Series
B Auction Rate Preferred, you may instruct your broker-dealer to enter one of
three kinds of order in the auction with respect to your shares: sell, bid and
hold.
o If you enter a sell order, you indicate that you want to sell
Series B Auction Rate Preferred at $25,000 per share, no
matter what the next dividend period's rate will be.
o If you enter a bid (or "hold at a rate") order, which must
specify a dividends rate, you indicate that you want to sell
Series B Auction Rate Preferred only if the next dividend
period's rate is less than the rate you specify.
o If you enter a hold order you indicate that you want to
continue to own Series B Auction Rate Preferred, no matter
what the next dividend period's rate will be.
You may enter different types of orders for different portions of your
Series B Auction Rate Preferred. You may also enter an order to buy additional
Series B Auction Rate Preferred. All orders must be for whole shares. All
orders you submit are irrevocable. There is a fixed number of Series B Auction
Rate Preferred shares, and the dividend rate likely will vary from auction to
auction depending on the number of bidders, the number of shares the bidders
seek to buy, the rating of the Series B Auction Rate Preferred and general
economic conditions including current interest rates. If you own Series B
Auction Rate Preferred and submit a bid for them higher than the then-maximum
rate, your bid will be treated as a sell order. If you do not enter an order,
the broker-dealer will assume that you want to continue to hold Series B
Auction Rate Preferred, but if you fail to submit an order and the dividend
period is longer than 28 days, the broker-dealer will treat your failure to
submit a bid as a sell order.
If you do not then own Series B Auction Rate Preferred, or want to buy
more shares, you may instruct a broker-dealer to enter a bid order to buy
shares in an auction at $25,000 per share at or above the dividend rate you
specify. If your bid for shares you do not own specifies a rate higher than the
then-maximum rate, your bid will not be considered.
Broker-dealers will submit orders from existing and potential holders
of Series B Auction Rate Preferred to the auction agent. Neither the Fund nor
the auction agent will be responsible for a broker-dealer's failure to submit
orders from existing or potential holders of Series B Auction Rate Preferred. A
broker-dealer's failure to submit orders for Series B Auction Rate Preferred
held by it or its customers will be treated in the same manner as a holder's
failure to submit an order to the broker-dealer. A broker-dealer may submit
orders to the auction agent for its own account. The Fund may not submit an
order in any auction.
The auction agent after each auction for the Series B Auction Rate
Preferred will pay to each broker-dealer, from funds provided by the Fund, a
service charge equal to, in the case of any auction immediately preceding a
dividend period of less than 365 days, the product of (i) a fraction, the
numerator of which is the number of days in such dividend period and the
denominator of which is 365, times (ii) 1/4 of 1%, times (iii) $25,000, times
(iv) the aggregate number of Series B Auction Rate Preferred shares placed by
such broker-dealer at such auction or, in the case of any auction immediately
preceding a dividend period of one year or longer, a percentage of the purchase
price of the Series B Auction Rate Preferred placed by the broker-dealers at
the auction agreed to by the Fund and the broker-dealers.
If the number of Series B Auction Rate Preferred shares subject to bid
orders by potential holders with a dividend rate equal to or lower than the
then-maximum rate is at least equal to the number of Series B Auction Rate
Preferred shares subject to sell orders, then the dividend rate for the next
dividend period will be the lowest rate submitted which, taking into account
that rate and all lower rates submitted in order from existing and potential
holders, would result in existing and potential holders owning all the Series B
Auction Rate Preferred available for purchase in the auction.
If the number of Series B Auction Rate Preferred shares subject to bid
orders by potential holders with a dividend rate equal to or lower than the
then-maximum rate is less than the number of Series B Auction Rate Preferred
shares subject to sell orders, then the auction is considered to be a failed
auction, and the dividend rate will be the maximum rate. In that event,
existing holders that have submitted sell orders (or are treated as having
submitted sell orders) may not be able to sell any or all of the Series B
Auction Rate Preferred for which they submitted sell orders.
The auction agent will not consider a bid above the then-maximum rate.
The purpose of the maximum rate is to place an upper limit on dividends with
respect to the Series B Auction Rate Preferred and in so doing to help protect
the earnings available to pay dividends on common shares, and to serve as the
dividend rate in the event of a failed auction (that is, an auction where there
are more Series B Auction Rate Preferred offered for sale than there are buyers
for those shares).
If broker-dealers submit or are deemed to submit hold orders for all
outstanding Series B Auction Rate Preferred, the auction is considered an "all
hold" auction and the dividend rate for the next dividend period will be the
"all hold rate," which is 80% of the "AA" Financial Composite Commercial Paper
Rate, as determined in accordance with procedures set forth in the Statement of
Preferences establishing the Series B Auction Rate Preferred.
The auction procedures include a pro rata allocation of Series B
Auction Rate Preferred shares for purchase and sale. This allocation process
may result in an existing holder continuing to hold or selling, or a potential
holder buying, fewer shares than the number of Series B Auction Rate Preferred
shares in its order. If this happens, broker-dealers will be required to make
appropriate pro rata allocations among their respective customers.
Settlement of purchases and sales will be made on the next business
day (which also is a dividend payment date) after the auction date through DTC.
Purchasers will pay for their Series B Auction Rate Preferred through
broker-dealers in same-day funds to DTC against delivery to the broker-dealers.
DTC will make payment to the sellers' broker-dealers in accordance with its
normal procedures, which require broker-dealers to make payment against
delivery in same-day funds. As used in this prospectus, a business day is a day
on which the NYSE is open for trading, and which is not a Saturday, Sunday or
any other day on which banks in New York City are authorized or obligated by
law to close.
The first auction for Series B Auction Rate Preferred will be held on
[__], 2003, the business day preceding the dividend payment date for the
initial dividend period. Thereafter, except during special dividend periods,
auctions for Series B Auction Rate Preferred normally will be held every
Tuesday (or the next preceding business day if Tuesday is a holiday), and each
subsequent dividend period for the Series B Auction Rate Preferred normally
will begin on the following Wednesday.
If an auction is not held because an unforeseen event or unforeseen
events cause a day that otherwise would have been an auction date not to be a
business day, then the length of the then-current dividend period will be
extended by seven days (or a multiple thereof if necessary because of such
unforeseen event or events), the applicable rate for such period will be the
applicable rate for the then-current dividend period so extended and the
dividend payment date for such dividend period will be the first business day
immediately succeeding the end of such period.
The following is a simplified example of how a typical auction works.
Assume that the Fund has 1,000 outstanding Series B Auction Rate Preferred
shares and three current holders. The three current holders and three potential
holders submit orders through broker-dealers at the auction:
Current Holder A Owns 500 shares, wants to sell Bid order at 1.6% rate for all
all 500 shares if auction rate is 500 shares
less than 1.6%
Current Holder B Owns 300 shares, wants to hold Hold order - will take the
auction rate
Current Holder C Owns 200 shares, wants to sell Bid order at 1.4% rate for all
all 200 shares if auction rate is 200 shares
less than 1.4%
Potential Holder D Wants to buy 200 shares Places order to buy at or above
1.5%
Potential Holder E Wants to buy 300 shares Places order to buy at or above
1.4%
Potential Holder F Wants to buy 200 shares Places order to buy at or above
1.6%
The lowest dividend rate that will result in all 1,000 Series B
Auction Rate Preferred shares continuing to be held is 1.5% (the offer by D).
Therefore, the dividend rate will be 1.5%. Current holders B and C will
continue to own their shares. Current holder A will sell its shares because A's
dividend rate bid was higher than the dividend rate. Potential holder D will
buy 200 shares and potential holder E will buy 300 shares because their bid
rates were at or below the dividend rate. Potential holder F will not buy any
shares because its bid rate was above the dividend rate.
SECONDARY MARKET TRADING AND TRANSFER OF SERIES B AUCTION RATE PREFERRED
The underwriters are not required to make a market in the Series B
Auction Rate Preferred. The broker-dealers (including the underwriters) may
maintain a secondary trading market for outside of auctions, but they are not
required to do so. There can be no assurance that a secondary trading market
for the Series B Auction Rate Preferred will develop or, if it does develop,
that it will provide owners with liquidity of investment. The Series B Auction
Rate Preferred will not be registered on any stock exchange or on the NASDAQ
market. Investors who purchase Series B Auction Rate Preferred in an auction
for a special dividend period should note that because the dividend rate on
such shares will be fixed for the length of that dividend period, the value of
such shares may fluctuate in response to the changes in interest rates, and may
be more or less than their original cost if sold on the open market in advance
of the next auction thereof, depending on market conditions.
You may sell, transfer, or otherwise dispose of the Series B Auction
Rate Preferred only in whole shares and only pursuant to a bid or sell order
placed with the auction agent in accordance with the auction procedures, to the
Fund or its affiliates or to or through a broker-dealer that has been selected
by the Fund or to such other persons as may be permitted by the Fund. However,
if you hold your Series B Auction Rate Preferred in the name of a
broker-dealer, a sale or transfer of your Series B Auction Rate Preferred to
that broker-dealer, or to another customer of that broker-dealer, will not be
considered a sale or transfer for purposes of the foregoing if the shares
remain in the name of the broker-dealer immediately after your transaction. In
addition, in the case of all transfers other than through an auction, the
broker-dealer (or other person, if the Fund permits) receiving the transfer
must advise the auction agent of the transfer.
Further description of the auction procedures can be found in the SAI.
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. Common shares are not redeemable and have no preemptive,
conversion or cumulative voting rights.
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 [__] shares. The Fund's common shares
have traded in the market at both a premium to and a discount from net asset
value. Since the beginning of 2001, the Fund's common shares have traded at a
premium to net asset value. There can be no assurance, however, that the Fund's
common shares will continue to do so in the future.
The Fund is authorized, subject to maintaining required asset
coverage on its preferred shares, to repurchase its common shares in the open
market when the common shares are trading at a discount of 10% or more (or
such other percentage as the Fund's Board of Trustees may determine from time
to time) from net asset value. Such repurchases are subject to certain notice
and other requirements, including those set forth in Rule 23c-1 under the 1940
Act.
Currently, [__] of the Fund's shares have been classified by the Board
of Trustees as preferred shares, par value $.001 per share. The terms of such
preferred shares may be fixed by the Board of Trustees and would materially
limit and/or qualify the rights of the holders of the Fund's common shares. As
of [__], 2003, the Fund had no preferred shares outstanding.
The following table shows the number of shares authorized, their
classification and the shares outstanding for each class of authorized shares
of the Fund as of [__], 2003.
Amount Held by
Company or for
Title of Class Amount Authorized its Own Account Amount Outstanding
Common Shares................ unlimited none
----------------------------- -------------------------- --------------------------
Preferred Shares............. unlimited none 0
----------------------------- -------------------------- --------------------------
* Does not include the Series A Preferred or Series B Auction Rate Preferred being offered pursuant to this prospectus.
TAXATION
The following is a description of certain U.S. federal income tax
consequences to a shareholder of acquiring, holding and disposing of preferred
shares of the Fund. The discussion reflects applicable tax laws of the United
States as of the date of this prospectus, which tax laws may be changed or
subject to new interpretations by the courts or the Internal Revenue Service
(the "IRS") retroactively or prospectively.
No attempt is made to present a detailed explanation of all U.S.
federal, state, local and foreign tax concerns affecting the Fund and its
shareholders, and the discussion set forth herein does not constitute tax
advice. Investors are urged to consult their own tax advisers to determine the
tax consequences to them of investing in the Fund.
TAXATION OF THE FUND
The Fund has elected to be treated and has qualified as, and intends
to continue to qualify as, a regulated investment company under Subchapter M of
the Code. Accordingly, the Fund must, among other things, (i) derive in each
taxable year at least 90% of its gross income (including tax-exempt interest)
from dividends, interest, payments with respect to certain securities loans,
and gains from the sale or other disposition of stock, securities or foreign
currencies, or other income (including but not limited to gain from options,
futures and forward contracts) derived with respect to its business of
investing in such stock, securities or currencies; and (ii) diversify its
holdings so that, at the end of each quarter of each taxable year (a) at least
50% of the market value of 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 (b) 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 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 at least equal to the sum of (i) 98% of its ordinary
income (not taking into account any capital gains or losses) for the calendar
year, (ii) 98% of its capital gains in excess of its capital losses (adjusted
for certain ordinary losses) for a one-year period generally ending on October
31 of the calendar year (unless an election is made to use the Fund's fiscal
year), and (iii) 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 gain)
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.
Based in part on a lack of present intention on the part of the Fund
to voluntarily redeem the Series B Auction Rate Cumulative Preferred at any
time in the future, the Fund intends to take the position that under present
law the Series B Auction Rate Cumulative Preferred will constitute stock,
rather than debt of the Fund. It is possible, however, that the IRS could take
a contrary position asserting for example that the Series B Auction Rate
Cumulative Preferred constitutes debt of the Fund. If that position were
upheld, distributions on the Series B Auction Rate Cumulative Preferred would
be considered interest, taxable as ordinary income regardless of the taxable
income of the Fund.
TAXATION OF SHAREHOLDERS
Distributions paid to you by the Fund from its net investment income
or from an excess of net short-term capital gains over net long-term capital
losses (together referred to hereinafter as "ordinary income dividends") are
taxable to you as ordinary income to the extent of the Fund's earning and
profits. Distributions made to you from an excess of net long-term capital
gains over net short-term capital losses ("capital gain dividends"), including
capital gain dividends credited to you but retained by the Fund, are taxable to
you as long-term capital gains if they have been properly designated by the
Fund, regardless of the length of time you have owned Fund shares.
Distributions in excess of the Fund's earnings and profits will first reduce
the adjusted tax basis of your shares and, after such adjusted tax basis is
reduced to zero, will constitute capital gains to you (assuming the shares are
held as a capital asset). Generally, not later than 60 days after the close of
its taxable year, the Fund will provide you with a written notice designating
the amount of any ordinary income dividends or capital gain dividends and other
distributions.
The sale or other disposition of 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 substantially identical Fund shares are acquired
(whether through the automatic reinvestment of dividends or otherwise) within a
61-day period beginning 30 days before and ending 30 days after the date that
the shares are disposed of. In such case, the basis of the shares acquired will
be adjusted to reflect the disallowed loss. Present law taxes both long-term
and short-term capital gains of corporations at the rates applicable to
ordinary income. For non-corporate taxpayers, however, short-term capital gains
and net investment income will currently be taxed at a maximum rate of 38.6%
(which rate is scheduled to be reduced periodically through 2006) while
long-term capital gains generally will be taxed at a maximum rate of 20%. The
20% capital gains rate will be reduced to 18% for capital assets held for more
than five years if the holding period begins after December 31, 2000.
Legislation pending before Congress would accelerate future reductions in
individual tax rates (applicable to ordinary income and short-term capital
gain) and apply a maximum 35% rate for 2003 and thereafter.
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 that was declared in the previous October, November
or December to shareholders of record on a specified date in one of such
months, then such dividend will be treated for tax purposes as being paid by
the Fund and received by you on December 31 of the year in which the dividend
was declared.
The Fund is required in certain circumstances to backup withhold on
taxable dividends and certain other payments paid to non-corporate holders of
the Fund's shares who do not furnish the Fund with their correct taxpayer
identification number (in the case of individuals, their social security
number) and certain certifications, or who are otherwise subject to backup
withholding. Backup withholding is not an additional tax. Any amounts withheld
from payments made to you may be refunded or credited against your U.S. federal
income tax liability, if any, provided that the required information is
furnished to the Internal Revenue Service.
Pending legislation may eliminate or reduce federal income taxation of
dividends previously taxed at the corporate level and thereby reduce, eliminate
or reverse the preferential taxation to individuals of capital gain versus
dividend income. While it is unclear whether and in what form such legislation
may be enacted, or its applicability to regulated investment company dividends,
such a change in law could be given retroactive effect. Accordingly, it is not
possible to evaluate how such legislation might affect the taxation of the
Fund's shareholders.
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
AND ITS SHAREHOLDERS CAN BE FOUND IN THE STATEMENT OF ADDITIONAL INFORMATION
THAT 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.
ANTI-TAKEOVER PROVISIONS OF THE FUND'S GOVERNING DOCUMENTS
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.
The Governing Documents of the Fund are on file with the SEC. For the
full text of these provisions see "Further Information."
CUSTODIAN, TRANSFER AGENT,
AUCTION AGENT AND DIVIDEND-DISBURSING AGENT
State Street Bank and Trust Company (the "Custodian"), located at 150
Royall Street, Canton, MA 02021, 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,
RI 02940-3025, serves as the Fund's dividend disbursing agent, as agent under
the Fund's automatic dividend reinvestment and voluntary cash purchase plan and
as transfer agent and registrar for the common shares of the Fund.
Series A Preferred. EquiServe will also serve as the Fund's transfer
agent, registrar, dividend paying agent and redemption agent with respect to
the Series A Preferred.
Series B Auction Rate Preferred. The Bank of New York, located at 5
Penn Plaza, 13th Floor, New York, NY 10001, will serve as the Fund's auction
agent, transfer agent, registrar, dividend paying agent and redemption agent
with respect to the Series B Auction Rate Preferred.
UNDERWRITING
LEGAL MATTERS
Certain legal matters will be passed on by Skadden, Arps, Slate,
Meagher & Flom LLP, New York, New York, special counsel to the Fund in
connection with the offering of the Series A Preferred and/or Series B Auction
Rate Preferred, and by [__], counsel to the underwriters.
EXPERTS
The audited 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. The report of
PricewaterhouseCoopers LLP is included in the SAI. PricewaterhouseCoopers LLP
is located at 1177 Avenue of the Americas, New York, New York 10036.
ADDITIONAL INFORMATION
The Fund is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended, and the 1940 Act and in accordance
therewith files reports and other information with the SEC. Reports, proxy
statements and other information filed by the Fund with the SEC pursuant to the
informational requirements of such Acts can be inspected and copied at the
public reference facilities maintained by the SEC, 450 Fifth Street, N.W.,
Washington, D.C. 20549. The SEC maintains a web site at http://www.sec.gov
containing reports, proxy and information statements and other information
regarding registrants, including the Fund, that file electronically with the
SEC.
The Fund's common shares are listed on the NYSE, and reports, proxy
statements and other information concerning the Fund and filed with the SEC by
the Fund can be inspected at the offices of the New York Stock Exchange, Inc.,
20 Broad Street, New York, New York 10005.
This prospectus constitutes part of a Registration Statement filed by
the Fund with the SEC under the Securities Act of 1933, as amended, and the
1940 Act. This prospectus omits certain of the information contained in the
Registration Statement, and reference is hereby made to the Registration
Statement and related exhibits for further information with respect to the Fund
and the Series A Preferred and Series B Auction Rate Preferred offered hereby.
Any statements contained herein concerning the provisions of any document are
not necessarily complete, and, in each instance, reference is made to the copy
of such document filed as an exhibit to the Registration Statement or otherwise
filed with the SEC. Each such statement is qualified in its entirety by such
reference. The complete Registration Statement may be obtained from the SEC
upon payment of the fee prescribed by its rules and regulations or free of
charge through the SEC's web site (http://www.sec.gov).
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 Special Considerations" 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.
TABLE OF CONTENTS OF SAI
An SAI dated as of [__], 2003, has been filed with the Securities and
Exchange Commission and is incorporated by reference in this prospectus. An SAI
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 Table of Contents of the SAI is as follows:
PAGE
THE FUND ............................................................................. B-
INVESTMENT OBJECTIVE AND POLICIES .................................................... B-
INVESTMENT RESTRICTIONS............................................................... B-
MANAGEMENT OF THE FUND................................................................ B-
PORTFOLIO TRANSACTIONS ............................................................... B-
REPURCHASE OF COMMON SHARES........................................................... B-
PORTFOLIO TURNOVER ................................................................... B-
AUTOMATIC DIVIDEND REINVESTMENT AND
VOLUNTARY CASH PURCHASE PLAN........................................................ B-
TAXATION ............................................................................. B-
ADDITIONAL INFORMATION CONCERNING
AUCTIONS FOR Series B AUCTION RATE PREFERRED ...................................... B-
ADDITIONAL INFORMATION CONCERNING THE SERIES
A PREFERRED AND SERIES B AUCTION RATE PREFERRED ................................... B-
[__] AND [__] GUIDELINES ............................................................. B-
NET ASSET VALUE....................................................................... B-
BENEFICIAL OWNERS..................................................................... B-
GENERAL INFORMATION................................................................... B-
FINANCIAL STATEMENTS.................................................................. B-
GLOSSARY. . . . . . . . .. . . . . . . . . . . . . . .. . . . . . . . . . .. . . . . . . .. . . . A-
No person has been authorized to give any information or to make any
representations in connection with this offering other than those contained in
this prospectus in connection with the offer contained herein, and, if given or
made, such other information or representations must not be relied upon as
having been authorized by the Fund, the Investment Adviser or the underwriters.
Neither the delivery of this prospectus nor any sale made hereunder will, under
any circumstances, create any implication that there has been no change in the
affairs of the Fund since the date hereof or that the information contained
herein is correct as of any time subsequent to its date. This prospectus does
not constitute an offer to sell or a solicitation of an offer to buy any
securities other than the securities to which it relates. This prospectus does
not constitute an offer to sell or the solicitation of an offer to buy such
securities in any circumstance in which such an offer or solicitation is
unlawful.
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 that 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 that 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 that 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.
---------- --------------------------------------------------------------------------------------------------------
FITCH, INC.
AAA This is the highest rating assigned by Fitch 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.
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 Fitch does not rate a particular type of obligation as a matter of policy.
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.
A Principal and interest payments on bonds in this category are regarded as safe. 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 C 1 is reserved for income bonds on which no interest
is being paid and debt rated D is in payment default.
In July 1994, S&P initiated an "r" symbol to its ratings. The "r" symbol is attached to
derivatives, hybrids and certain other obligations that S&P believes may experience high variability in
expected returns due to noncredit risks created by the terms of the obligations.
AA to CCC may be modified by the addition of a plus or minus sign to show relative standing
within the major categories.
"NR" indicates that no public rating has been requested, that there is insufficient information on
which to base a rating, or that S&P does not rate a particular type of obligation as a matter of policy.
$[__]
THE GABELLI UTILITY TRUST
[__] Shares, [__]% Series A Cumulative Preferred Shares
(Liquidation Preference $25 per Share)
[__] Shares, Series B Auction Rate Cumulative Preferred Shares
(Liquidation Preference $25,000 per Share)
[Gabelli Logo]
------------------
PROSPECTUS
[__], 2003
------------------
[__]
Gabelli & Company, Inc.
SUBJECT TO COMPLETION, DATED MAY 23, 2003
THE GABELLI UTILITY TRUST
--------------------------
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 "Investment 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 other securities of foreign and domestic
companies involved to a substantial extent (e.g., at least 50% of the assets,
gross income or net profits of a company is committed to or derived from) in
providing products, services or equipment for (i) the generation or distribution
of electricity, gas and water and (ii) telecommunications services or
infrastructure operations, such as airports, toll roads and municipal services.
This Statement of Additional Information ("SAI") is not a prospectus,
but should be read in conjunction with the Prospectus for the Fund dated June
__, 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
1-800-GABELLI (1-800-422-3554) or (914) 921-5070. This SAI incorporates by
reference the entire Prospectus.
The Prospectus and this SAI omit certain of the information contained
in the 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.
Each capitalized term used but not defined in this SAI has the meaning
ascribed to it, as the case may be, in the Prospectus or in the glossary of this
SAI.
This Statement of Additional Information is dated [__], 2003.
TABLE OF CONTENTS
Page
The Fund .........................................................................................................
Investment Objective and Policies.................................................................................
Investment Restrictions...........................................................................................
Management of the Fund............................................................................................
Portfolio Transactions............................................................................................
Repurchase of Common Stock........................................................................................
Portfolio Turnover................................................................................................
Automatic Dividend Reinvestment and Voluntary Cash Purchase Plan..................................................
Taxation .........................................................................................................
Additional Information Concerning Auctions for the Series B Auction Rate Preferred................................
Additional Information Concerning the Series A Preferred and Series B Auction Rate Preferred......................
[__] and [__] Guidelines..........................................................................................
Net AssetValue....................................................................................................
Beneficial Owners.................................................................................................
General Information...............................................................................................
Financial Statements..............................................................................................
Glossary..........................................................................................................
Appendix A........................................................................................................
THE FUND
The Fund was[__] in Delaware on [__], [__], and is a non-diversified,
closed-end management investment company registered under the 1940 Act. The
Fund's investment operations commenced on [__], [__]. The Fund's Common Shares
are traded on the New York Stock Exchange under the symbol "[__]."
INVESTMENT OBJECTIVE AND POLICIES
INVESTMENT OBJECTIVE
The Fund's investment objective is long-term growth of capital and
income. Under normal market conditions, the Fund will invest at least 80% of its
total assets in common stock and other securities of foreign and domestic
companies involved to a substantial extent (e.g., at least 50% of the assets,
gross income or net 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 Objective and Policies" in the Prospectus.
INVESTMENT PRACTICES
Special Situations. Subject to the Fund's policy of investing at least
80% of the value of its total assets in companies involved in the
telecommunications, media, publishing and entertainment industries, the Fund
from time to time may invest in companies that are determined by the Investment
Adviser to possess "special situation" characteristics. In general, a special
situation company is a company whose securities are expected to increase in
value solely by reason of a development particularly or uniquely applicable to
the company. Developments that may create special situations include, among
others, a liquidation, reorganization, recapitalization or merger, material
litigation, technological breakthrough or new management or management policies.
The principal risk associated with investments in special situation companies is
that the anticipated development thought to create the special situation may not
occur and the investment therefore may not appreciate in value or may decline in
value.
Temporary Defensive Investments. Although under normal market
conditions at least 80% of the Fund's assets will consist of common stock and
other securities of foreign and domestic companies involved in the
telecommunications, media, publishing and entertainment industries, when a
temporary defensive posture is believed by the Investment Adviser to be
warranted ("temporary defensive periods"), the Fund may hold without limitation
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, which in the absence of an appropriate exemptive order will not be
affiliates of the Fund, are 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. For a description of such ratings, see
Appendix A to the Prospectus. The Fund may also invest up to 10% of the market
value of its total assets during temporary defensive periods in shares of money
market mutual funds that invest primarily in U.S. government securities and
repurchase agreements in respect of those securities. Money market mutual funds
are investment companies and the investments by the Fund in those companies are
subject to certain other limitations. See "Investment
Restrictions." As a shareholder in a mutual fund, the Fund will bear its ratable
share of the fund's expenses, including management fees, and will remain subject
to payment of the fees to the Investment Adviser with respect to assets so
invested.
Lower Rated Securities. The Fund may invest up to 10% of its total
assets in fixed-income securities rated in the lower rating categories of
recognized statistical rating agencies, such as securities rated "CCC" or lower
by S&P or "Caa" or lower by Moody's, or non-rated securities of comparable
quality. These debt securities are predominantly speculative and involve major
risk exposure to adverse conditions and are often referred to in the financial
press as "junk bonds."
Generally, such lower rated securities and unrated securities of
comparable quality offer a higher current yield than is offered by higher rated
securities, but also (i) will likely have some quality and protective
characteristics that, in the judgment of the rating organizations, are
outweighed by large uncertainties or major risk exposures to adverse conditions
and (ii) are predominantly speculative with respect to the issuer's capacity to
pay interest and repay principal in accordance with the terms of the obligation.
The market values of certain of these securities also tend to be more sensitive
to individual corporate developments and changes in economic conditions than
higher quality bonds. In addition, such lower rated securities and comparable
unrated securities generally present a higher degree of credit risk. The risk of
loss due to default by these issuers is significantly greater because such lower
rated securities and unrated securities of comparable quality generally are
unsecured and frequently are subordinated to the prior payment of senior
indebtedness. In light of these risks, the Investment 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 market
value to respond to changes in the economy or the financial markets.
Lower rated debt obligations also present risks based on payment
expectations. If an issuer calls the obligation for redemption (often a feature
of fixed income securities), the Fund may have to replace the security with a
lower yielding security, resulting in a decreased return for investors. Also, as
the principal value of bonds moves inversely with movements in interest rates,
in the event of rising interest rates the value of the securities held by the
Fund may decline proportionately more than a portfolio consisting of higher
rated securities. Investments in zero coupon bonds may be more speculative and
subject to greater fluctuations in value due to changes in interest rates than
bonds that pay interest currently.
The Fund may invest in securities of issuers in default. The Fund will
invest in securities of issuers in default only when the Investment 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
Investment Adviser also
performs its own analysis 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 Investment 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 not change their ratings of a particular issue
or reflect subsequent events on a timely basis. Moreover, such ratings do not
assess the risk of a decline in market value. None of these events will require
the sale of the securities by the Fund, although the Investment Adviser will
consider these events in determining whether the Fund should continue to hold
the securities.
The market for certain lower rated and comparable unrated securities
has in the past experienced a major economic recession. The recession 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.
Derivative Instruments.
Options. The Fund may, from time to time, subject to guidelines of the
Board of Trustees and the limitations set forth in the Prospectus and applicable
rating agency guidelines, 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 OTC market, as a means of achieving additional
return or of hedging the value of the Fund's portfolio.
A call option is a contract that gives the holder of the option the
right to buy from the writer of the call option, in return for a premium, 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 a contract that gives the holder of the option the
right, in return for a premium, to sell to the seller the underlying security at
a specified price. The seller of the put option has the obligation to buy the
underlying security upon exercise at the exercise price.
A call option is "covered" if the Fund owns the underlying instrument
covered by the call or has an absolute and immediate right to acquire that
instrument without additional cash consideration (or for additional cash
consideration held in a segregated account by its custodian) upon conversion or
exchange of other instruments held in its portfolio. A call option is also
covered if the Fund holds a call on the same instrument as the call written
where the exercise price of the call held is (i) equal to or less than the
exercise price of the call written or (ii) 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 liquid securities in a segregated account with
its custodian. A 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 with its custodian, or else holds a put on the same
instrument 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. The Investment
Adviser, on behalf of the Fund, has no present intention to engage in uncovered
option transactions. 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 Investment 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. 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.
Options on Securities Indices. The Fund may purchase and sell
securities index options. One effect of such transactions may be to hedge all or
part of the Fund's securities holdings against a general decline in the
securities market or a segment of the securities market. Options on securities
indices are similar to options on stocks except that, rather than the right to
take or make delivery of stock at a specified price, an option on a securities
index gives the holder the right to receive, upon exercise of the option, an
amount of cash if the closing level of the securities index upon which the
option is based is greater than, in the case of a call, or less than, in the
case of a put, the exercise price of the option.
The Fund's successful use of options on indices depends upon its
ability to predict the direction of the market and is subject to various
additional risks. The correlation between movements in the index and the price
of the securities being hedged against is imperfect and the risk from imperfect
correlation increases as the composition of the Fund diverges from the
composition of the relevant index. Accordingly, a decrease in the value of the
securities being hedged against may not be wholly offset by a gain on the
exercise or sale of a securities index put option held by the Fund.
Options on Foreign Currencies. Instead of purchasing or selling
currency futures (as described below), the Fund may attempt to accomplish
similar objectives by purchasing put or call options on currencies or by writing
put options or call options on currencies either on exchanges or in OTC markets.
A put option gives the Fund the right to sell a currency at the exercise price
until the option expires. A
call option gives the Fund the right to purchase a currency at the exercise
price until the option expires. Both types of options serve to insure against
adverse currency price movements in the underlying portfolio assets designated
in a given currency. The Fund's use of options on currencies will be subject to
the same limitations as its use of options on securities, described above and in
the Prospectus. Currency options may be subject to position limits which may
limit the ability of the Fund to fully hedge its positions by purchasing the
options.
As in the case of interest rate futures contracts and options thereon,
described below, the Fund may hedge against the risk of a decrease or increase
in the U.S. dollar value of a foreign currency denominated debt security which
the Fund owns or intends to acquire by purchasing or selling options contracts,
futures contracts or options thereon with respect to a foreign currency other
than the foreign currency in which such debt security is denominated, where the
values of such different currencies (vis-a-vis the U.S. dollar) historically
have a high degree of positive correlation.
Futures Contracts. The Fund will enter into futures contracts only for
certain bona fide hedging, yield enhancement and risk management purposes. The
Fund may enter into futures contracts for the purchase or sale of debt
securities, financial indices, and U.S. government securities (collectively,
"interest rate futures contracts"). It may also enter into futures contracts for
the purchase or sale of foreign currencies in which securities held or to be
acquired by the Fund are denominated, or the value of which have a high degree
of positive correlation to the value of such currencies as to constitute an
appropriate vehicle for hedging. In addition, the Fund may enter into futures
contracts on stock and bond indices (collectively, "securities indices"). The
Fund may enter into such futures contracts both on U.S. and foreign exchanges.
A "sale" of a futures contract (or a "short" futures position) means
the assumption of a contractual obligation to deliver the assets underlying the
contract at a specified price at a specified future time. A "purchase" of a
futures contract (or a "long" futures position) means the assumption of a
contractual obligation to acquire the assets underlying the contract at a
specified price at a specified future time. Certain futures contracts are
settled on a net cash payment basis rather than by the sale and delivery of the
assets underlying the futures contracts. U.S. futures contracts have been
designed by exchanges that have been designated as "contract markets" by the
Commodity Futures Trading Commission (the "CFTC"), an agency of the U.S.
government, and must be executed through a futures commission merchant, i.e., a
brokerage firm, which is a member of the relevant contract market. Futures
contracts trade on these contract markets and their affiliated clearing
organizations guarantee performance of the contracts as between the clearing
members of the exchange.
At the time a futures contract is purchased or sold, the Fund must
allocate cash or securities as a deposit payment (initial margin). It is
expected that the initial margin on U.S. exchanges will vary from 0.5% to 4% of
the face value of the contract. Under certain circumstances, however, such as
during periods of high volatility, the Fund may be required by an exchange to
increase the level of its initial margin payment. Thereafter, the futures
contract is valued daily and the payment in cash of "variation margin" may be
required, a process known as "mark-to-the-market." Each day the Fund is required
to provide or is entitled to receive variation margin in an amount equal to any
change in the value of the contract since the preceding day.
Although futures contracts by their terms may call for the actual
delivery or acquisition of underlying assets, in most cases the contractual
obligation is extinguished by offset before the expiration of the contract.
The offsetting of a contractual obligation is accomplished by buying
(to offset an earlier sale) or selling (to offset an earlier purchase) an
identical futures contract calling for delivery in the same month.
Such a transaction cancels the obligation to make or take delivery of the
underlying commodity. When the Fund purchases or sells futures contracts, the
Fund will incur brokerage fees and related transactions costs.
In addition, futures contracts entail risks. The ordinary spreads
between values in the cash and futures markets, due to differences in the
characters of those markets, are subject to distortions. First, all participants
in the futures market are subject to initial and variation margin requirements.
Rather than meeting additional variation margin requirements, investors may
close futures contracts through offsetting transactions which could distort the
normal relationship between the cash and futures markets. Second, the liquidity
of the futures market depends on participants entering into offsetting
transactions rather than making or taking delivery. To the extent participants
decide to make or take delivery, liquidity in the futures market could be
reduced, thus producing price distortions. Third, from the point of view of
speculators, the margin deposit requirements in the futures market are less
onerous than margin requirements in the securities market. Increased
participation by speculators in the futures market may cause temporary price
distortions. Thus, a correct forecast of interest rate trends by the Investment
Adviser may still not result in a successful transaction.
If the Fund seeks to hedge against a decline in the value of its
portfolio securities and sells futures contracts on other securities that
historically have had a high degree of positive correlation to the value of the
portfolio securities, the value of its portfolio securities might decline more
rapidly than the value of a poorly correlated futures contract rises. In that
case, the hedge will be less effective than if the correlation had been greater.
In a similar but more extreme situation, the value of the futures position might
in fact decline while the value of the portfolio securities holds steady or
rises. This would result in a loss that would not have occurred but for the
attempt to hedge.
Options on Futures Contracts. The Fund may also enter into options on
futures contracts for certain bona fide hedging, yield enhancement and risk
management purposes. The Fund may purchase put and call options and write put
and call options on futures contracts that are traded on U.S. and foreign
exchanges. The Investment Adviser, on behalf of the Fund, has no present
intention to engage in uncovered option transactions. 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 (a long position if the option is a call
and a short position if the option is a put) at a specified exercise price at
any time during the option exercise period. The writer of the option is required
upon exercise to assume a short futures position (if the option is a call) or a
long futures position (if the option is a put). Upon exercise of the option, the
assumption of offsetting futures positions by the writer and holder of the
option will be accompanied by delivery of the accumulated cash balance in the
writer's futures margin account which represents the amount by which the market
price of the futures contract at exercise, exceeds, in the case of a call, or is
less than, in the case of a put, the exercise of the option on the futures
contract.
The Fund will be considered "covered" with respect to a call option it
writes on a futures contract if the Fund owns the asset which is deliverable
under the futures contract or an option to purchase that futures contract having
a strike price equal to or less than the strike price of the "covered" option
and having an expiration date not earlier than the expiration date of the
"covered" option, or if it segregates and maintains with its custodian for the
term of the option, cash or liquid securities equal to the fluctuating value of
the optioned futures. The Fund will be considered "covered" with respect to a
put option it writes on a futures contract if it owns an option to sell that
futures contract having a strike price equal to or greater than the strike price
of the "covered" option and having an expiration date not earlier than the
expiration date of the "covered" option, or if it segregates and maintains with
its custodian for the term of the option, cash or liquid securities at all times
equal in value to the exercise price of the put (less any initial margin
deposited by the Fund with its custodian with respect to such put option). There
is no limitation on the amount of the Fund's assets which can be placed in the
segregated account.
Writing a put option on a futures contract serves as a partial hedge
against an increase in the value of debt securities the Fund intends to acquire.
If the futures price at expiration of the option is above the exercise price,
the Fund will retain the full amount of the option premium which provides a
partial hedge against any increase that may have occurred in the price of the
debt securities the Fund intends to acquire. If the market price of the
underlying futures contract is below the exercise price when the option is
exercised, the Fund will incur a loss, which may be wholly or partially offset
by the decrease in the value of the securities the Fund intends to acquire.
Writing a call option on a futures contract serves as a partial hedge
against a decrease in the value of the Fund's portfolio securities. If the
market price of the underlying futures contract at expiration of a written call
option is below the exercise price, the Fund will retain the full amount of the
option premium, thereby partially hedging against any decline that may have
occurred in the Fund's holding of debt securities. If the futures price when the
option is exercised is above the exercise price, however, the Fund will incur a
loss, which may be wholly or partially offset by the increase in the value of
the securities in the Fund's portfolio which were being hedged.
The Fund may purchase put options on futures contracts to hedge its
portfolio against the risk of a decline in the value of the debt securities it
owns as a result of rising interest rates or fluctuating currency exchange
rates. The Fund may also purchase call options on futures contracts as a hedge
against an increase in the value of securities the Fund intends to acquire as a
result of declining interest rates or fluctuating currency exchange rates.
Interest Rate Futures Contracts and Options Thereon. The Fund may
purchase or sell interest rate futures contracts to take advantage of or to
protect the Fund against fluctuations in interest rates affecting the value of
debt securities which the Fund holds or intends to acquire. For example, if
interest rates are expected to increase, the Fund might sell futures contracts
on debt securities, the values of which historically have a high degree of
positive correlation to the values of the Fund's portfolio securities. Such a
sale would have an effect similar to selling an equivalent value of the Fund's
portfolio securities. If interest rates increase, the value of the Fund's
portfolio securities will decline, but the value of the futures contracts to the
Fund will increase at approximately an equivalent rate thereby keeping the net
asset value of the Fund from declining as much as it otherwise would have. The
Fund could accomplish similar results by selling debt securities with longer
maturities and investing in debt securities with shorter maturities when
interest rates are expected to increase. However, since the futures market may
be more liquid than the cash market, the use of futures contracts as a risk
management technique allows the Fund to maintain a defensive position without
having to sell its portfolio securities.
Similarly, the Fund may purchase interest rate futures contracts when
it is expected that interest rates may decline. The purchase of futures
contracts for this purpose constitutes a hedge against increases in the price of
debt securities (caused by declining interest rates) which the Fund intends to
acquire. Since fluctuations in the value of appropriately selected futures
contracts should approximate that of the debt securities that will be purchased,
the Fund can take advantage of the anticipated rise in the cost of the debt
securities without actually buying them. Subsequently, the Fund can make its
intended purchase of the debt securities in the cash market and currently
liquidate its futures position. To the extent the Fund enters into futures
contracts for this purpose, it will maintain in a segregated asset account with
the Fund's custodian, assets sufficient to cover the Fund's obligations with
respect to such futures contracts, which will consist of cash or other liquid
securities from its portfolio in an amount equal to the difference between the
fluctuating market value of such futures contracts and the aggregate value of
the initial margin deposited by the Fund with its custodian with respect to such
futures contracts.
The purchase of a call option on a futures contract is similar in some
respects to the purchase of a call option on an individual security. Depending
on the pricing of the option compared to either the price
of the futures contract upon which it is based or the price of the underlying
debt securities, it may or may not be less risky than ownership of the futures
contract or underlying debt securities. As with the purchase of futures
contracts, when the Fund is not fully invested it may purchase a call option on
a futures contract to hedge against a market advance due to declining interest
rates.
The purchase of a put option on a futures contract is similar to the
purchase of protective put options on portfolio securities. The Fund will
purchase a put option on a futures contract to hedge the Fund's portfolio
against the risk of rising interest rates and consequent reduction in the value
of portfolio securities.
The writing of a call option on a futures contract constitutes a
partial hedge against declining prices of the securities which are deliverable
upon exercise of the futures contract. If the futures price at expiration of the
option is below the exercise price, the Fund will retain the full amount of the
option premium which provides a partial hedge against any decline that may have
occurred in the Fund's portfolio holdings. The writing of a put option on a
futures contract constitutes a partial hedge against increasing prices of the
securities that are deliverable upon exercise of the futures contract. If the
futures price at expiration of the option is higher than the exercise price, the
Fund will retain the full amount of the option premium, which provides a partial
hedge against any increase in the price of debt securities that the Fund intends
to purchase. If a put or call option the Fund has written is exercised, the Fund
will incur a loss which will be reduced by the amount of the premium it
received. Depending on the degree of correlation between changes in the value of
its portfolio securities and changes in the value of its futures positions, the
Fund's losses from options on futures it has written may to some extent be
reduced or increased by changes in the value of its portfolio securities.
Currency Futures and Options Thereon. Generally, foreign currency
futures contracts and options thereon are similar to the interest rate futures
contracts and options thereon discussed previously. By entering into currency
futures and options thereon, the Fund will seek to establish the rate at which
it will be entitled to exchange U.S. dollars for another currency at a future
time. By selling currency futures, the Fund will seek to establish the number of
dollars it will receive at delivery for a certain amount of a foreign currency.
In this way, whenever the Fund anticipates a decline in the value of a foreign
currency against the U.S. dollar, the Fund can attempt to "lock in" the U.S.
dollar value of some or all of the securities held in its portfolio that are
denominated in that currency. By purchasing currency futures, the Fund can
establish the number of dollars it will be required to pay for a specified
amount of a foreign currency in a future month. Thus, if the Fund intends to buy
securities in the future and expects the U.S. dollar to decline against the
relevant foreign currency during the period before the purchase is effected, the
Fund can attempt to "lock in" the price in U.S. dollars of the securities it
intends to acquire.
The purchase of options on currency futures will allow the Fund, for
the price of the premium and related transaction costs it must pay for the
option, to decide whether or not to buy (in the case of a call option) or to
sell (in the case of a put option) a futures contract at a specified price at
any time during the period before the option expires. If the Investment Adviser,
in purchasing an option, has been correct in its judgment concerning the
direction in which the price of a foreign currency would move as against the
U.S. dollar, the Fund may exercise the option and thereby take a futures
position to hedge against the risk it had correctly anticipated or close out the
option position at a gain that will offset, to some extent, currency exchange
losses otherwise suffered by the Fund. If exchange rates move in a way the Fund
did not anticipate, however, the Fund will have incurred the expense of the
option without obtaining the expected benefit; any such movement in exchange
rates may also thereby reduce rather than enhance the Fund's profits on its
underlying securities transactions.
Securities Index Futures Contracts and Options Thereon. Purchases or
sales of securities index futures contracts are used for hedging purposes to
attempt to protect the Fund's current or intended
investments from broad fluctuations in stock or bond prices. For example, the
Fund may sell securities index futures contracts in anticipation of or during a
market decline to attempt to offset the decrease in market value of the Fund's
securities portfolio that might otherwise result. If such decline occurs, the
loss in value of portfolio securities may be offset, in whole or part, by gains
on the futures position. When the Fund is not fully invested in the securities
market and anticipates a significant market advance, it may purchase securities
index futures contracts in order to gain rapid market exposure that may, in part
or entirely, offset increases in the cost of securities that the Fund intends to
purchase. As such purchases are made, the corresponding positions in securities
index futures contracts will be closed out. The Fund may write put and call
options on securities index futures contracts for hedging purposes.
Limitations on the Purchase and Sale of Futures Contracts and Options
on Futures Contracts. Subject to the guidelines of the Board of Trustees, the
Fund may engage in transactions in futures contracts and options hereon only for
bona fide hedging, yield enhancement and risk management purposes, in each case
in accordance with the rules and regulations of the CFTC.
Regulations of the CFTC currently applicable to the Fund permit the
Fund's futures and options on futures transactions to include (i) bona fide
hedging transactions without regard to the percentage of the Fund's assets
committed to margin and option premiums and (ii) non-hedging transactions,
provided that the Fund not enter into such non-hedging transactions if,
immediately thereafter, the sum of the amount of initial margin deposits on the
Fund's existing futures positions and option premiums would exceed 5% of the
market value of the Fund's liquidating value, after taking into account
unrealized profits and unrealized losses on any such transactions.
In addition, investment in future contracts and related options
generally will be limited by the rating agency guidelines applicable to any of
the Fund's outstanding Preferred Shares.
Forward Currency Exchange Contracts. The Fund may engage in currency
transactions other than on futures exchanges to protect against future changes
in the level of future currency exchange rates. The Fund will conduct such
currency exchange transactions either 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 forward contracts to purchase or sell currency. A forward contract
on foreign currency involves 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 risk of shifting of a forward currency contract will be
substantially the same as a futures contract having similar terms. The Fund's
dealing in forward currency exchange will be limited to hedging involving either
specific transactions or portfolio positions. Transaction hedging is the
purchase or sale of forward currency with respect to specific receivables or
payables of the Fund generally arising in connection with the purchase or sale
of its portfolio securities and accruals of interest receivable and Fund
expenses. Position hedging is the forward sale of currency with respect to
portfolio security positions denominated or quoted in that currency or in a
currency bearing a high degree of positive correlation to the value of that
currency.
The Fund may not position hedge with respect to a particular currency
for an amount greater than the aggregate market value (determined at the time of
making any sale of forward currency) of the securities held in its portfolio
denominated or quoted in, or currently convertible into, such currency. If the
Fund enters into a position hedging transaction, the Fund's custodian or
subcustodian will place cash or other liquid securities in a segregated account
of the Fund in an amount equal to the value of the Fund's total assets committed
to the consummation of the given forward contract. If the value of the
securities placed in the segregated account declines, additional cash or
securities will be placed in the account so that the value of the account will,
at all times, equal the amount of the Fund's commitment with respect to the
forward contract.
At or before the maturity of a forward sale contract, the Fund may
either sell a portfolio security and make delivery of the currency, or retain
the security and offset its contractual obligations to deliver the currency by
purchasing a second contract pursuant to which the Fund will obtain, on the same
maturity date, the same amount of the currency which it is obligated to
delivery. If the Fund retains the portfolio security and engages in an
offsetting transaction, the Fund, at the time of execution of the offsetting
transaction, will incur a gain or a loss to the extent that movement has
occurred in forward contract prices. Should forward prices decline during the
period between the Fund's entering into a forward contract for the sale of a
currency and the date it enters into an offsetting contract for the purchase of
the currency, the Fund will realize a gain to the extent the price of the
currency it has agreed to purchase is less than the price of the currency it has
agreed to sell. Should forward prices increase, the Fund will suffer a loss to
the extent the price of the currency it has agreed to purchase exceeds the price
of the currency it has agreed to sell. Closing out forward purchase contracts
involves similar offsetting transactions.
The cost to the Fund of engaging in currency transactions varies with
factors such as the currency involved, the length of the contract period and the
market conditions then prevailing. Because forward transactions in currency
exchange are usually conducted on a principal basis, no fees or commissions are
involved. The use of foreign currency contracts does not eliminate fluctuations
in the underlying prices of the securities, but it does establish a rate of
exchange that can be achieved in the future. In addition, although forward
currency contracts limit the risk of loss due to a decline in the value of the
hedged currency, they also limit any potential gain that might result if the
value of the currency increases.
If a decline in any currency is generally anticipated by the Investment
Adviser, the Fund may not be able to contract to sell the currency at a price
above the level to which the currency is anticipated to decline.
Special Risk Considerations Relating to Futures and Options Thereon.
The Fund's ability to establish and close out positions in futures contracts and
options thereon will be subject to the development and maintenance of liquid
markets. Although the Fund generally will purchase or sell only those futures
contracts and options thereon for which there appears to be a liquid market,
there is no assurance that a liquid market on an exchange will exist for any
particular futures contract or option thereon at any particular time. In the
event no liquid market exists for a particular futures contract or option
thereon in which the Fund maintains a position, it will not be possible to
effect a closing transaction in that contract or to do so at a satisfactory
price and the Fund would have to either make or take delivery under the futures
contract or, in the case of a written option, wait to sell the underlying
securities until the option expires or is exercised or, in the case of a
purchased option, exercise the option. In the case of a futures contract or an
option thereon which the Fund has written and which the Fund is unable to close,
the Fund would be required to maintain margin deposits on the futures contract
or option thereon and to make variation margin payments until the contract is
closed.
Successful use of futures contracts and options thereon and forward
contracts by the Fund is subject to the ability of the Investment Adviser to
predict correctly movements in the direction of interest and foreign currency
rates. If the Investment Adviser's expectations are not met, the Fund will be in
a worse position than if a hedging strategy had not been pursued. For example,
if the Fund has hedged against the possibility of an increase in interest rates
that would adversely affect the price of securities in its portfolio and the
price of such securities increases instead, the Fund will lose part or all of
the benefit of the increased value of its securities because it will have
offsetting losses in its futures positions. In addition, in such situations, if
the Fund has insufficient cash to meet daily variation margin requirements, it
may have to sell securities to meet the requirements. These sales may be, but
will not necessarily be, at increased prices which reflect the rising market.
The Fund may have to sell securities at a time when it is disadvantageous to do
so.
Additional Risks of Foreign Options, Futures Contracts, Options on
Futures Contracts and Forward Contracts. Options, futures contracts and options
thereon and forward contracts on securities and currencies may be traded on
foreign exchanges. Such transactions may not be regulated as effectively as
similar transactions in the U.S., may not involve a clearing mechanism and
related guarantees, and are subject to the risk of governmental actions
affecting trading in, or the prices of, foreign securities. The value of such
positions also could be adversely affected by (i) other complex foreign
political, legal and economic factors, (ii) lesser availability than in the U.S.
of data on which to make trading decisions, (iii) delays in the Fund's ability
to act upon economic events occurring in the foreign markets during non-business
hours in the U.S., (iv) the imposition of different exercise and settlement
terms and procedures and margin requirements than in the U.S. and (v) lesser
trading volume.
Exchanges on which options, futures and options on futures are traded
may impose limits on the positions that the Fund may take in certain
circumstances.
Risks of Currency Transactions. Currency transactions are also subject
to risks different from those of other portfolio transactions. Because currency
control is of great importance to the issuing governments and influences
economic planning and policy, purchases and sales of currency and related
instruments can be adversely affected by government exchange controls,
limitations or restrictions on repatriation of currency, and manipulation, or
exchange restrictions imposed by governments. These forms of governmental action
can result in losses to the Fund if it is unable to deliver or receive currency
or monies in settlement of obligations and could also cause hedges it has
entered into to be rendered useless, resulting in full currency exposure as well
as incurring transaction costs.
Repurchase Agreements. The Fund may engage in repurchase agreements as
set forth in the Prospectus. A repurchase agreement is an instrument under which
the purchaser, i.e., the Fund, acquires a debt security and the seller agrees,
at the time of the sale, to repurchase the obligation at a mutually agreed upon
time and price, thereby determining the yield during the purchaser's holding
period. This results in a fixed rate of return insulated from market
fluctuations during such period. The underlying securities are ordinarily U.S.
Treasury or other government obligations or high quality money market
instruments. The Fund will require that the value of such underlying securities,
together with any other collateral held by the Fund, always equals or exceeds
the amount of the repurchase obligations of the counter party. The Fund's risk
is primarily that, if the seller defaults, the proceeds from the disposition of
the underlying securities and other collateral for the seller's obligation are
less than the repurchase price. If the seller becomes insolvent, the Fund might
be delayed in or prevented from selling the collateral. In the event of a
default or bankruptcy by a seller, the Fund will promptly seek to liquidate the
collateral. To the extent that the proceeds from any sale of such collateral
upon a default in the obligation to repurchase are less than the repurchase
price, the Fund will experience a loss.
If the financial institution which is a party to the repurchase
agreement petitions for bankruptcy or becomes subject to the United States
Bankruptcy Code, the law regarding the rights of the Fund is unsettled. As a
result, under extreme circumstances, there may be a restriction on the Fund's
ability to sell the collateral and the Fund would suffer a loss.
Loans of Portfolio Securities. Consistent with applicable regulatory
requirements and the Fund's investment restrictions, the Fund may lend its
portfolio securities to securities broker-dealers or financial institutions,
provided that such loans are callable at any time by the Fund (subject to notice
provisions described below), and are at all times secured by cash or cash
equivalents, which are maintained in a segregated account pursuant to applicable
regulations and that are at least equal to the market value, determined daily,
of the loaned securities. The advantage of such loans is that the Fund continues
to receive the income on the loaned securities while at the same time earns
interest on the cash amounts deposited as collateral, which will be invested in
short-term obligations. The Fund will not lend its
portfolio securities if such loans are not permitted by the laws or regulations
of any state in which its shares are qualified for sale. The Fund's loans of
portfolio securities will be collateralized in accordance with applicable
regulatory requirements and no loan will cause the value of all loaned
securities to exceed 20% of the value of the Fund's total assets. The Fund's
ability to lend portfolio securities will be limited by the rating agency
guidelines applicable to any of the Fund's outstanding Preferred Shares.
A loan may generally be terminated by the borrower on one business day
notice, or by the Fund on five business days notice. If the borrower fails to
deliver the loaned securities within five days after receipt of notice, the Fund
could use the collateral to replace the securities while holding the borrower
liable for any excess of replacement cost over collateral. As with any
extensions of credit, there are risks of delay in recovery and in some cases
even loss of rights in the collateral should the borrower of the securities fail
financially. However, these loans of portfolio securities will only be made to
firms deemed by the Fund's management to be creditworthy and when the income
which can be earned from such loans justifies the attendant risks. The Board of
Trustees will oversee the creditworthiness of the contracting parties on an
ongoing basis. Upon termination of the loan, the borrower is required to return
the securities to the Fund. Any gain or loss in the market price during the loan
period would inure to the Fund. The risks associated with loans of portfolio
securities are substantially similar to those associated with repurchase
agreements. Thus, if the counter party to the loan petitions for bankruptcy or
becomes subject to the United States Bankruptcy Code, the law regarding the
rights of the Fund is unsettled. As a result, under extreme circumstances, there
may be a restriction on the Fund's ability to sell the collateral and the Fund
would suffer a loss. When voting or consent rights which accompany loaned
securities pass to the borrower, the Fund will follow the policy of calling the
loaned securities, to be delivered within one day after notice, to permit the
exercise of such rights if the matters involved would have a material effect on
the Fund's investment in such loaned securities. The Fund will pay reasonable
finder's, administrative and custodial fees in connection with a loan of its
securities.
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
high-grade debt 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
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 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 its custodian, State
Street Bank and Trust Company ("State Street"), 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.
INVESTMENT RESTRICTIONS
The Fund operates under the following restrictions that constitute
fundamental policies that, except as otherwise noted, cannot be changed without
the affirmative vote of the holders of a majority of the outstanding voting
securities of the Fund. Except as otherwise noted, all percentage limitations
set forth below apply immediately after a purchase or initial investment and any
subsequent change in any applicable percentage resulting from market
fluctuations does not require any action. The Fund may not:
(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 Investment 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
NAME (AND AGE), PORTFOLIOS IN OTHER
POSITION WITH THE TERM OF OFFICE PRINCIPAL FUND COMPLEX DIRECTORSHIPS
FUND AND AND LENGTH OF OCCUPATION DURING OVERSEEN BY HELD BY
BUSINESS ADDRESS1 TIME SERVED2 PAST FIVE YEARS TRUSTEE TRUSTEE
---------------- ----------- --------------- ------- -------
INTERESTED Since 1999* Chairman of the Board, Chief 22 Director of Morgan
TRUSTEES: Executive Officer of Gabelli Group Holdings,
*Mario J. Gabelli (60) Asset Management Inc. and Chief Inc. (transportation
Trustee and Chief Investment Officer of the services); Vice
Investment Officer Investment Adviser and GAMCO Chairman of Lynch
Investors, Inc; Director/Trustee Corporation
and Chief Investment Officer of (diversified
other registered investment manufacturing
companies in the Gabelli fund company).
complex.
*John D. Gabelli (58) Since 1999*** Senior Vice President of Gabelli 9 --
Trustee & Company and Director of
Gabelli Advisers, Inc.; Trustee of
other registered investment
companies in the Gabelli fund
complex.
*Karl Otto Pohl (73) Since 1999*** Member of the Shareholder 31 Director of Gabelli
Trustee Committee of Sal. Oppenheim Jr. Asset Management
& Cie, Zurich (private investment Inc.; Chairman,
bank); Former President of the Incentive Capital
Deutsche Bundesbank and and Incentive Asset
Chairman of its Central Bank Management
Council from 1980 through 1991; (Zurich); Director
Director/Trustee of other at Sal. Oppenheim
registered investment companies Jr. & Cie, Zurich
in the Gabelli fund complex.
Dr. Thomas E. Bratter Since 1999* Director, President and Founder, 3 --
(63) The John Dewey Academy
(residential college preparatory
therapeutic high school);
Trustee Director/Trustee of other
registered investment companies in
the Gabelli fund complex.
Anthony J. Colavita Since 1999** President and Attorney at law in 33 --
(67) the law firm of Anthony J.
Trustee Colavita, P.C. since 1961;
Director/Trustee of other
registered investment companies in
the Gabelli fund complex.
James P. Conn (65) Since 1999*** Former Managing Director and 11 Director of
Trustee Chief Investment Officer of LaQuinta Corp.
Financial Security Assurance (hotels) and First
Holdings Ltd., 1992-1998; Republic Bank
Trustee of other registered
investment companies in the Gabelli
fund complex.
Vincent D. Enright Since 1999* Former Senior Vice President and 11 --
(59) Chief Financial Officer of
Trustee KeySpan Energy Corporation
through 1998; Trustee of other
registered investment companies in
the Gabelli fund complex.
Frank J. Fahrenkopf, Since 1999** President and CEO of the 3 --
Jr. (63) American Gaming Association
Trustee since June 1995; Partner of
Hogan & Hartson; Chairman of
International Trade Practice Group;
Co-Chairman of the Commission on
Presidential Debates; former
Chairman of the Republican National
Committee; Trustee of other
registered investment companies in
the Gabelli fund complex.
Robert J. Morrissey Since 1999** Partner in the law firm of 9 --
(63) Morrissey, Hawkins & Lynch;
Trustee Trustee of other registered
investment companies in the
Gabelli fund complex.
Anthony R. Pustorino Since 1999*** Certified Public Accountant; 17 --
(77) Professor Emeritus, Pace
Trustee University; Trustee of other
registered investment companies
in the Gabelli fund complex.
Salvatore J. Zizza (67) Since 1999** Chairman of Hallmark Electrical 9 Director of Hollis
Trustee Supply Corp.; Former Executive Eden
Vice President of FMG Group (a
Pharmaceuticals healthcare
provider); Trustee of other
registered investment companies in
the Gabelli fund complex.
OFFICERS
NAME (AND AGE), POSITION TERM OF OFFICE PRINCIPAL
WITH THE FUND AND AND LENGTH OF OCCUPATION DURING
BUSINESS ADDRESS1 TIME SERVED PAST FIVE YEARS
Bruce N. Alpert (51) Since 1999 Executive Vice President and Chief
President Operating Officer of the
Adviser since June 1988; Director and
President of Gabelli Advisers, Inc.;
Officer of all other registered
investment companies in the Gabelli fund
complex; Vice President of The
Treasurer's Fund Inc.;
Gus A. Coursouros (40) Since 2003 Vice President and Chief Financial
Vice President and Treasurer Officer of Gabelli Funds, LLC since
1998 and an officer of all mutual funds
advised by Gabelli Funds, LLC and its
affiliates. Chief Financial Officer of
Gabelli Advisers, Inc. Prior to 1998,
Treasurer of Lazard Funds.
David Schachter (49) Since 1999 Vice President of the Fund since 1999;
Vice President Financial Services Research Analyst of
Gabelli & Company from October 1,
1998 to July 9, 1999; Prior to October,
1998, Vice President of Thomas J.
Herzfeld Advisers, Inc., a registered
investment adviser and noted
closed-end fund authority.
James E. McKee (39) Since 1999 Vice President, General Counsel and
Secretary of the Fund Secretary of the Adviser (since 1999)
and Vice President of GAMCO
Investors, Inc. (since 1993); Secretary
of the 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 Investment Adviser.
Messrs. John and Mario Gabelli are registered representatives of an
affiliated broker-dealer. Mr. Pohl is a director of the parent company
of the Adviser.
1 Address: One Corporate Center, Rye, NY 10580-1422, unless otherwise
noted.
2 The 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 are divided into three classes, with
a class having a term of three years except as described below. Each year the
term of office of one class of trustees of the Fund will expire. However, to
ensure that the term of a class of the Fund's trustees expires each year, one
class of the Fund's trustees will serve three-year terms. The terms of Messrs.
Bratter, Enright and Mario Gabelli as trustees of the Fund expire in 2004; and
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 DIRECTOR DOLLAR RANGE OF EQUITY AGGREGATE DOLLAR RANGE OF
SECURITIES IN THE FUND EQUITY SECURITIES IN ALL
REGISTERED INVESTMENT
COMPANIES OVERSEEN BY
DIRECTORS IN FAMILY OF INVESTMENT
COMPANIES
INTERESTED TRUSTEES
Mario J. Gabelli B E
John D. Gabelli A E
Karl Otto Pohl A A
DISINTERESTED TRUSTEES
Dr. Thomas E. Bratter A E
James P. Conn C E
Vincent D. Enright A E
Frank J. Fahrenkopf, Jr. A B
Robert J. Morrissey A C
Anthony J. Pustonino C
Salvatore J. Zizza D E
------------------------------------------
* KEY TO DOLLAR RANGES
A. None
B. $1 - $10,000
C. $10,001 - $50,000
D. $50,001 - $100,000
E. Over $100,000
All shares were valued as of December 31, 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 is responsible for reviewing and
evaluating issues related to the accounting and financial reporting policies and
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 April 30, 2003, the Directors and Officers of the Fund as a group
beneficially owned approximately less than [__]% 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 Investment
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 Investment
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 FUND
COMPLEX PAID
NAME OF PERSON AND AGGREGATE COMPENSATION TO TRUSTEES/
POSITION FROM THE FUND OFFICERS*
MARIO J. GABELLI Chairman of $0 $0
the Board
DR. THOMAS E. BRATTER $5,000 $31,000
Trustee
ANTHONY J. COLAVITA $6,000 $152,286
Trustee
JAMES P. CONN Trustee $5,000 $53,500
VINCENT D. ENRIGHT Trustee $6,000 $54,536
FRANK J. FAHRENKOPF, JR. $5,000 $31,000
Trustee
JOHN D. GABELLI Trustee $0 $0
ROBERT J. MORRISSEY Trustee $6,000 $45,000
KARL OTTO POHL Trustee $0 $0
ANTHONY R. PUSTORINO $6,000 $132,286
Trustee
SALVATORE J. ZIZZA Trustee $5,000 $73,750
* 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.
For his services as Vice President of the Fund, Mr. Schachter received
compensation in 2002 of $130,000.
INDEMNIFICATION OF OFFICERS AND DIRECTORS; LIMITATIONS ON 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 Investment
Adviser is a New York corporation with principal offices located at One
Corporate Center, Rye, New York 10580. The Investment Adviser was organized in
1999 and is the successor to Gabelli Funds, Inc., which was organized in 1980.
As of December 31, 2002, the Investment Adviser acted as registered investment
advisers to [__] management investment companies with aggregate net assets of
$[__] billion. The Investment Adviser, together with other affiliated investment
advisers set forth below, had assets under management totaling approximately
$[__] billion, as of December 31, 2002. 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 $[__] billion under management
as of December 31, 2002. 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 $[__] billion under management as
of December 31, 2002. Gabelli Advisors, Inc., an affiliate of the Investment
Adviser, acts as investment manager to the Gabelli Westwood Funds, having
aggregate assets of $[__] million under management as of December 31, 2002.
The Investment Adviser is a wholly-owned subsidiary of Gabelli Asset
Management Inc., a New York corporation, whose Class A Common Stock is traded on
the New York Stock Exchange under the symbol "GBL." Mr. Mario J. Gabelli may be
deemed a "controlling person" of the Investment Adviser on the basis of his
ownership of a majority of the stock of the Gabelli Group Capital Partners,
Inc., which owns a majority of the capital stock of Gabelli Asset Management
Inc.
Under the terms of the Advisory Agreement, the Investment 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 Investment
Adviser oversees the administration of all aspects of the Fund's business and
affairs and provides, or arranges for others to provide, at the Investment
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
Investment Adviser voluntarily assumes responsibility for such expense.
The Advisory Agreement combines investment advisory and administrative
responsibilities in one agreement. For services rendered by the Investment
Adviser on behalf of the Fund under the Advisory Agreement, the Fund pays the
Investment Adviser a fee computed daily and paid monthly at the annual rate of
1.00% of the average weekly net assets of the Fund. Notwithstanding the
foregoing, the Investment Adviser will 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.
The Advisory Agreement provides that in the absence of willful
misfeasance, bad faith, gross negligence or reckless disregard for its
obligations and duties thereunder, the Investment Adviser is not liable for any
error or judgment or mistake of law or for any loss suffered by the Fund. As
part of the Advisory Agreement, the Fund has agreed that the name "Gabelli" is
the Investment Adviser's property, and that in the event the Investment 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 directors who are not
"interested persons" (as defined in the 1940 Act) of any party to the Advisory
Agreement, by vote cast in person at a meeting called for the purpose of voting
on such approval. The Advisory Agreement was initially approved by the Board of
Trustees at a meeting held on [__] and was approved most recently by the Board
of Trustees on [__]. 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.
For each of the years ended December 31, 2000, December 31, 2001 and
December 31, 2002, the Investment Adviser was paid $[__], $[__] and $[__],
respectively, for advisory and administrative services rendered to the Fund.
PORTFOLIO TRANSACTIONS
Subject to policies established by the Board of Trustees of the Fund,
the Investment Adviser is responsible for placing purchase and sale orders and
the allocation of brokerage on behalf of the Fund. Transactions in equity
securities are in most cases effected on U.S. stock exchanges and involve the
payment of negotiated brokerage commissions. In general, there may be no stated
commission in the case of securities traded in over-the-counter markets, but the
prices of those securities may include undisclosed commissions or mark-ups.
Principal transactions are not entered into with affiliates of the Fund.
However, Gabelli & Company, Inc. may execute transactions in the
over-the-counter markets on an agency basis and receive a stated commission
therefrom. To the extent consistent with applicable provisions of the 1940 Act
and the rules and exemptions adopted by the SEC thereunder, as well as other
regulatory requirements, the Fund's Board of Trustees have determined that
portfolio transactions may be executed through Gabelli & Company, Inc. and its
broker-dealer affiliates if, in the judgment of the Investment 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 Investment
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 Investment 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 Investment
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 Investment Adviser under the
Advisory Agreement and the expenses of the Investment Adviser will not
necessarily be reduced as a result of the receipt of such supplemental
information. Such information may be useful to the Investment Adviser and its
affiliates in providing services to clients other than the Fund, and not all
such information is used by the Investment Adviser in connection with the Fund.
Conversely, such information provided to the Investment Adviser and its
affiliates by brokers and dealers through whom other clients of the Investment
Adviser and its affiliates effect securities transactions may be useful to the
Investment 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 Investment 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 Investment 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 $[__], $[__], and $[__],
respectively, in brokerage commissions, of which Gabelli & Company, Inc. and its
affiliates received $[__], $[__], and $[__], 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 [__]% of the aggregate dollar amount of brokerage commissions paid
by the Fund for such period and approximately [__]% of the aggregate dollar
amount of transactions by the Fund for such period.
REPURCHASE OF COMMON 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 Common Shares from
time to time as and when it deems such a repurchase advisable. Such repurchases
will be made when the Fund's Common 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 net asset value. Pursuant to the 1940 Act, the
Fund may repurchase its Common 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 that does not discriminate unfairly against the other
shareholders through their interest in the Fund.
When the Fund repurchases its Common Shares for a price below net asset
value, the net asset value of the Common Shares that remain outstanding will be
enhanced, but this does not necessarily mean that the market price of the
outstanding Common 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, December 31, 2001 and December 31, 2000 were [__]%, [__] %
and [__]%, respectively. Portfolio turnover rate is calculated by dividing the
lesser of an investment company's annual sales or purchases of portfolio
securities by the monthly average value of securities in its portfolio during
the year, excluding portfolio securities the maturities of which at the time of
acquisition were one year or less. A high rate of portfolio turnover involves
correspondingly greater brokerage commission expense than a lower rate, which
expense must be borne by the Fund and its shareholders, as applicable. A higher
rate of portfolio turnover may also result in taxable gains being passed to
shareholders.
AUTOMATIC DIVIDEND REINVESTMENT
AND VOLUNTARY CASH PURCHASE PLAN
Under the Fund's Automatic Dividend Reinvestment and Voluntary Cash
Purchase Plan (the "Plan"), a shareholder whose Common Shares are registered in
his or her own name will have all distributions reinvested automatically by
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 the 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, valued at market
price. If the Fund should declare a dividend or capital gains distribution
payable only in cash, EquiServe will buy the Common Shares for such Plan in the
open market, on the New York Stock Exchange or elsewhere, for the participants'
accounts, except that EquiServe will endeavor to terminate purchases in the open
market and cause the Fund to issue shares at net asset value if, following the
commencement of such purchases, the market value of the Common Shares exceeds
net asset value.
Participants in the Plan have the option of making additional cash
payments to EquiServe, monthly, for investment in the shares as applicable. Such
payments may be made in any amount from $250 to $10,000. EquiServe will use all
funds received from participants to purchase shares of the Fund
in the open market on or about the 15th of each month. EquiServe will charge
each shareholder who participates $0.75, plus a pro rata share of the brokerage
commissions. Brokerage charges for such purchases are expected to be less than
the usual brokerage charge for such transactions. It is suggested that
participants send voluntary cash payments to EquiServe in a manner that ensures
that EquiServe will receive these payments approximately 10 days before the 15th
of the month. A participant may without charge withdraw a voluntary cash payment
by written notice, if the notice is received by EquiServe at least 48 hours
before such payment is to be invested.
EquiServe maintains all shareholder accounts in the Plan and furnishes
written confirmations of all transactions in the account, including information
needed by shareholders for personal and tax records. Shares in the account of
each Plan participant will be held by EquiServe in noncertificated form in the
name of the participant. A Plan participant may send its share certificates to
EquiServe so that the shares represented by such certificates will be held by
EquiServe in the participant's 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.
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, RI 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, 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 similar trades or businesses
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 and distributions to the Fund's
shareholders would not be deductible by the Fund in computing its taxable
income. To qualify again to be taxed as a RIC in a subsequent year, the Fund
would be required to distribute to preferred shareholders and common
shareholders its earnings and profits attributable to non-RIC years reduced by
an interest charge on 50% of such earnings and profits payable by the Fund to
the IRS. In addition, if the Fund failed to qualify as a RIC for a period
greater than one taxable year, then the Fund would be required to recognize and
pay tax on any net built-in gains (the excess of aggregate gains, including
items of income, over aggregate losses that would have been realized if the Fund
had been liquidated) or, alternatively, to elect to be subject to taxation on
such built-in gains recognized for a period of ten years, in order to qualify as
a RIC in a subsequent year.
Based in part on a lack of present intention on the part of the Fund to
voluntarily redeem the Series B Auction Rate Cumulative Preferred at any time in
the future, the Fund intends to take the position that under present law the
Series B Auction Rate Cumulative Preferred will constitute stock, rather than
debt of the Fund. It is possible, however, that the IRS could take a contrary
position asserting for example that the Series B Auction Rate Cumulative
Preferred constitutes debt of the Fund. If that position were upheld,
distributions on the Series B Auction Rate Cumulative Preferred would be
considered interest, taxable as ordinary income regardless of the taxable income
of the Fund.
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, ordinary investment
income and dividends qualifying for the dividends received deduction to common
shareholders and preferred shareholders. The amount of net capital gain and
ordinary investment 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 ordinary investment
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.
If the Fund invests in stock of a passive foreign investment company (a
"PFIC"), the Fund may be subject to federal income tax on a portion of any
"excess distribution" with respect to, or gain from the disposition of, such
stock even if such income is distributed as a taxable dividend by the Fund to
its shareholders. The tax would be determined by allocating such distribution or
gain ratably to each day of the Fund's holding period for the stock. The amount
so allocated to any taxable year of the Fund prior to the taxable year in which
the excess distribution or disposition occurs would be taxed to the Fund at the
highest marginal federal corporate income tax rate in effect for the year to
which it was allocated, and the tax would be further increased by an interest
charge. The amount allocated to the taxable year of the distribution or
disposition would be included in the Fund's net investment income and,
accordingly, would not be taxable to the Fund to the extent distributed by the
Fund as a taxable dividend to shareholders.
If the Fund invests in stock of a PFIC, the Fund may be able to elect
to treat the PFIC as a "qualified electing fund," in lieu of being taxable in
the manner described in the above paragraph, and to include annually in income
its pro rata share of the ordinary earnings and net capital gain (whether or not
distributed) of the PFIC. In order to make this election, the Fund would be
required to obtain annual information from the PFICs in which it invests, which
may be difficult to obtain. Alternatively, the Fund may elect to mark-to-market
at the end of each taxable year all shares that it hold in PFICs. If it makes
this election, the Fund would recognize as ordinary income any increase in the
value of such shares over their adjusted basis and as ordinary loss any decrease
in such value to the extent it does not exceed prior increases.
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 that 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. Ordinary income dividends paid
by the Fund may qualify 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. 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. 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, net investment income will
currently be taxed at a maximum rate of 38.6% (which rate is scheduled to be
reduced periodically through 2006) while net capital gain generally will be
taxed at a maximum rate of 20%. For corporate taxpayers, both net investment
income and net capital gain are taxed at a maximum rate of 35%. Legislation
pending before Congress would accelerate future reductions in individual tax
rates (applicable to ordinary income and short-term capital gain) and apply a
maximum 35% rate for 2003 and thereafter.
Shareholders may be entitled to offset their capital gain dividends
with capital losses. There are a number of statutory provisions affecting when
capital loses 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.
Shareholders receiving distributions in the form of newly issued shares
will have a basis in such shares of the Fund equal to the fair market value of
such shares on the distribution date. If the net asset value of shares is
reduced below a shareholder's cost as a result of a distribution by the Fund,
such distribution will be taxable even though it represents a return of invested
capital. 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.
Pending legislation may eliminate or reduce federal income taxation of
dividends previously taxed at the corporate level and thereby reduce, eliminate
or reverse the preferential taxation to individuals of capital gain versus
dividend income. While it is unclear whether and in what form such legislation
may be enacted, or its applicability to regulated investment company dividends,
such a change in law could be given retroactive effect. Accordingly, it is not
possible to evaluate how such legislation might affect the taxation of the
Fund's shareholders.
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 Internal Revenue Service.
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 SERIES A PREFERRED OR SERIES B AUCTION RATE PREFERRED SHOULD CONSULT THEIR
OWN TAX ADVISERS REGARDING THE PURCHASE, OWNERSHIP AND DISPOSITION OF SERIES A
PREFERRED OR SERIES B AUCTION RATE PREFERRED.
ADDITIONAL INFORMATION CONCERNING AUCTIONS
FOR SERIES B AUCTION RATE PREFERRED
GENERAL
The Statement of Preferences provide that the Applicable Rate for each
Dividend Period of the Series B Auction Rate Preferred will be equal to the rate
per annum that the Auction Agent advises has resulted on the Business Day
preceding the first day of a Dividend Period (an "Auction Date") from
implementation of the Auction Procedures set forth in the Statement of
Preferences, and summarized below, in which persons determine to hold or offer
to sell or, based on dividend rates bid by them, offer to purchase or sell
shares of such Series. Each periodic implementation of the Auction Procedures is
referred to herein as an "Auction." The following summary is qualified by
reference to the Auction Procedures set forth in the Statements of Preferences.
Auction Agency Agreement. The Fund has entered into an Auction Agency
Agreement (the "Auction Agency Agreement") with the Auction Agent (currently,
The Bank of New York), which provides, among other things, that the Auction
Agent will follow the Auction Procedures for purposes of determining the
Applicable Rate for Series B Auction Rate Preferred so long as the Applicable
Rate is to be based on the results of the Auction.
Broker-Dealer Agreements. Each Auction requires the participation of
one or more Broker-Dealers. The Auction Agent has entered into agreements
(collectively, the "Broker-Dealer Agreements") with several Broker-Dealers
selected by the Fund, which provide for the participation of those
Broker-Dealers in Auctions for Series B Auction Rate Preferred. See
"Broker-Dealers" below.
Securities Depository. DTC will act as the Securities Depository for
the Agent Members with respect to the Series B Auction Rate Preferred. One
certificate for all of the Series B Auction Rate Preferred shares will be
registered in the name of Cede & Co., as nominee of the Securities Depository.
Such certificate will bear a legend to the effect that such certificate
is issued subject to the provisions restricting transfers of Series B Auction
Rate Preferred contained in the Statement of Preferences. The Fund will also
issue stop-transfer instructions to the transfer agent for the Series B Auction
Rate Preferred. Prior to the commencement of the right of Holders of the
Preferred Shares to elect a majority of the Fund's directors, as described under
"Description of the Series A Preferred and Series B Auction Rate Preferred --
Voting Rights" in the Prospectus, Cede & Co. will be the Holder of all the
Series B Auction Rate Preferred and owners of such shares will not be entitled
to receive certificates representing their ownership interest in such shares.
DTC, a New York chartered limited purpose trust company, performs
services for its participants (including Agent Members), some of whom (and/or
their representatives) own DTC. DTC maintains lists of its participants and will
maintain the positions (ownership interests) held by each such Agent Member in
Series B Auction Rate Preferred, whether for its own account or as a nominee for
another person.
ORDERS BY EXISTING HOLDERS AND POTENTIAL HOLDERS
On or prior to the Submission Deadline on each Auction Date for the
Series B Auction Rate Preferred:
(i) each Beneficial Owner of Series B Auction Rate Preferred may
submit to its Broker-Dealer by telephone or otherwise a:
(a) "Hold Order" - indicating the number of Outstanding Series
B Auction Rate Preferred shares, if any, that such
Beneficial Owner desires to continue to hold without
regard to the Applicable Rate for such shares for the next
succeeding Dividend Period of such shares;
(b) "Bid" - indicating the number of Outstanding Series B
Auction Rate Preferred shares, if any, that such
Beneficial Owner offers to sell if the Applicable Rate for
such Series B Auction Rate Preferred for the next
succeeding Dividend Period is less than the rate per annum
specified by such Beneficial Owner in such Bid; and/or
(c) "Sell Order" - indicating the number of Outstanding Series
B Auction Rate Preferred shares, if any, that such
Beneficial Owner offers to sell without regard to the
Applicable Rate for such Series B Auction Rate Preferred
for the next succeeding Dividend Period; and
(ii) Broker-Dealers will contact customers who are Potential
Beneficial Owners by telephone or otherwise to determine whether
such customers desire to submit Bids, in which case they will
indicate the number of Series B Auction Rate Preferred shares
that they offer to purchase if the Applicable Rate for Series B
Auction Rate Preferred for the next succeeding Dividend Period
is not less than the rate per annum specified in such Bids.
The communication to a Broker-Dealer of the foregoing information is
herein referred to as an "Order" and collectively as "Orders." A Beneficial
Owner or a Potential Beneficial Owner placing an Order with its Broker-Dealer is
herein referred to as a "Bidder" and collectively as "Bidders." The submission
by a Broker-Dealer of an Order to the Auction Agent is referred to herein as an
"Order" and collectively as "Orders," and an Existing Holder or Potential Holder
who places an Order with the Auction Agent or on whose behalf an Order is placed
with the Auction Agent is referred to herein as a "Bidder" and collectively as
"Bidders."
A Bid placed by a Beneficial Owner specifying a rate higher than the
Applicable Rate determined in the Auction will constitute an irrevocable offer
to sell the shares subject thereto. A Beneficial Owner that submits a Bid to its
Broker-Dealer having a rate higher than the Maximum Rate on the Auction Date
thereof will be treated as having submitted a Sell Order to its Broker-Dealer. A
Sell Order will constitute an irrevocable offer to sell Series B Auction Rate
Preferred subject thereto at a price per share equal to $25,000.
A Beneficial Owner that fails to submit to its Broker-Dealer prior to
the Submission Deadline for the Series B Auction Rate Preferred an Order or
Orders covering all the Outstanding Series B Auction Rate Preferred held by such
Beneficial Owner will be deemed to have submitted a Hold Order to its
Broker-Dealer covering the number of Outstanding Series B Auction Rate Preferred
shares held by such Beneficial Owner and not subject to Orders submitted to its
Broker-Dealer; provided, however, that if a Beneficial Owner fails to submit to
its Broker-Dealer prior to the Submission Deadline for the Series B Auction Rate
Preferred an Order or Orders covering all of the Outstanding Series B Auction
Rate Preferred held by such Beneficial Owner for an Auction relating to a
Special Dividend Period consisting of more than 28 Dividend Period days, such
Beneficial Owner will be deemed to have submitted a Sell Order to its
Broker-Dealer covering the number of Outstanding Series B Auction Rate Preferred
shares held by such Beneficial Owner and not subject to Orders submitted to its
Broker-Dealer.
A Potential Beneficial Owner of Series B Auction Rate Preferred may
submit to its Broker-Dealer Bids in which it offers to purchase Series B Auction
Rate Preferred if the Applicable Rate
for the next Dividend Period is not less than the rate specified in such Bid. A
Bid placed by a Potential Beneficial Owner specifying a rate not higher than the
Maximum Rate will constitute an irrevocable offer to purchase the number of
Series B Auction Rate Preferred shares specified in such Bid if the rate
determined in the Auction is equal to or greater than the rate specified in such
Bid. A Beneficial Owner of Series B Auction Rate Preferred that offers to become
the Beneficial Owner of additional Series B Auction Rate Preferred is, for
purposes of such offer, a Potential Beneficial Owner.
As described more fully below under "-- Submission of Orders by
Broker-Dealers to Auction Agent," the Broker-Dealers will submit the Orders of
their respective customers who are Beneficial Owners and Potential Beneficial
Owners to the Auction Agent, designating themselves (unless otherwise permitted
by the Fund) as Existing Holders in respect of Series B Auction Rate Preferred
subject to Orders submitted or deemed submitted to them by Beneficial Owners and
as Potential Holders in respect of Series B Auction Rate Preferred subject to
Orders submitted to them by Potential Beneficial Owners. However, neither the
Fund nor the Auction Agent will be responsible for a Broker-Dealer's failure to
comply with the foregoing. Any Order placed with the Auction Agent by a
Broker-Dealer as or on behalf of an Existing Holder or a Potential Holder will
be treated in the same manner as an Order placed with a Broker-Dealer by a
Beneficial Owner or a Potential Beneficial Owner, as described above. Similarly,
any failure by a Broker-Dealer to submit to the Auction Agent an Order in
respect of any Series B Auction Rate Preferred held by it or its customers who
are Beneficial Owners will be treated in the same manner as a Beneficial Owner's
failure to submit to its Broker-Dealer an Order in respect of Series B Auction
Rate Preferred held by it, as described in the second preceding paragraph. For
information concerning the priority given to different types of Orders placed by
Existing Holders, see "-- Submission of Orders by Broker-Dealers to Auction
Agent" below.
The Fund may not submit an Order in any Auction.
The Auction Procedures include a pro rata allocation of shares for
purchase and sale, which may result in an Existing Holder continuing to hold or
selling, or a Potential Holder purchasing, a number of Series B Auction Rate
Preferred shares that is fewer than the number of Series B Auction Rate
Preferred shares specified in its Order. See "-- Acceptance and Rejection of
Submitted Bids and Submitted Sell Orders and Allocation of Shares" below. To the
extent the allocation procedures have that result, Broker-Dealers that have
designated themselves as Existing Holders or Potential Holders in respect of
customer Orders will be required to make appropriate pro rata allocations among
their respective customers. Each purchase or sale will be made for settlement on
the Business Day next succeeding the Auction Date at a price per share equal to
$25,000. See "-- Notification of Results; Settlement" below.
As described above, any Bid specifying a rate higher than the Maximum
Rate will (i) be treated as a Sell Order if submitted by a Beneficial Owner or
an Existing Holder and (ii) not be accepted if submitted by a Potential
Beneficial Owner or a Potential Holder. Accordingly, the Auction Procedures
establish the Maximum Rate as a maximum rate per annum that can result from an
Auction up to the Maximum Rate. See "Determination of Sufficient Clearing Bids,
Winning Bid Rate and Applicable Rate" and "Acceptance and Rejection of Submitted
Bids and Submitted Sell Orders and Allocation of Shares" below.
CONCERNING THE AUCTION AGENT
The Auction Agent is acting as agent for the Fund in connection with
Auctions. In the absence of willful misconduct or gross negligence on its part,
the Auction Agent will not be liable for any action taken, suffered, or omitted
or for any error of judgment made by it in the performance of its duties under
the Auction Agency Agreement and will not be liable for any error of judgment
made in good faith unless the Auction Agent will have been grossly negligent in
ascertaining the pertinent facts.
The Auction Agent may rely upon, as evidence of the identities of the
Existing Holders of Series B Auction Rate Preferred, the Auction Agent's
registry of Existing Holders, the results of Auctions and notices from any
Broker-Dealer (or other person, if permitted by the Fund) with respect to
transfers described under "The Auction of Series B Auction Rate Preferred --
Secondary Market Trading and Transfer of Series B Auction Rate Preferred" in the
Prospectus and notices from the Fund. The Auction Agent is not required to
accept any such notice for an Auction unless it is received by the Auction Agent
by 3:00 p.m., New York City time, on the Business Day preceding such Auction.
The Auction Agent may terminate the Auction Agency Agreement upon
written notice to the Fund on a date no earlier than 30 days after the date of
delivery of such notice. If the Auction Agent should resign, the Fund will use
its best efforts to enter into an agreement with a successor Auction Agent
containing substantially the same terms and conditions as the Auction Agency
Agreement. The Fund may remove the Auction Agent, provided that prior to such
removal, the Fund has entered into such an agreement with a successor Auction
Agent.
BROKER-DEALERS
The Auction Agent after each Auction for Series B Auction Rate
Preferred will pay to each Broker-Dealer, from funds provided by the Fund, a
service charge equal to, in the case of any auction immediately preceding a
dividend period of less than 365 days the product of (i) a fraction, the
numerator of which is the number of days in such dividend period and the
denominator of which is 365, times (ii) 1/4 of 1%, times (iii) $25,000, times
(iv) the aggregate number of Series B Auction Rate Preferred shares placed by
such broker-dealer at such auction or, in the case of any auction immediately
preceding a dividend period of one year or longer, a percentage of the purchase
price of the Series B Auction Rate Preferred placed by the broker-dealers at the
auction agreed to by the Fund and the broker-dealers. For the purposes of the
preceding sentence, Series B Auction Rate Preferred will be placed by a
Broker-Dealer if such shares were (i) the subject of Hold Orders deemed to have
been submitted to the Auction Agent by the Broker-Dealer and were acquired by
such Broker-Dealer for its customers who are Beneficial Owners or (ii) the
subject of an Order submitted by such Broker-Dealer that is (a) a Submitted Bid
of an Existing Holder that resulted in such Existing Holder continuing to hold
such shares as a result of the Auction, (b) a Submitted Bid of a Potential
Holder that resulted in such Potential Holder purchasing such shares as a result
of the Auction or (c) a valid Hold Order.
The Fund may request the Auction Agent to terminate one or more
Broker-Dealer Agreements at any time, provided that at least one Broker-Dealer
Agreement is in effect after such termination.
The Broker-Dealer Agreement provides that a Broker-Dealer (other than
an affiliate of the Fund) may submit Orders in Auctions for its own account,
unless the Fund notifies all Broker-Dealers that they may no longer do so, in
which case Broker-Dealers may continue to submit Hold Orders and Sell Orders for
their own accounts. Any Broker-Dealer that is an affiliate of the Fund may
submit Orders in Auctions, but only if such Orders are not for its own account.
If a Broker-Dealer submits an Order for its own account in any Auction, it might
have an advantage over other Bidders because it would have knowledge of all
Orders submitted by it in that Auction. Such Broker-Dealer, however, would not
have knowledge of Orders submitted by other Broker-Dealers in that Auction.
SUBMISSION OF ORDERS BY BROKER-DEALERS TO AUCTION AGENT
Prior to 1:00 p.m., New York City time, on each Auction Date, or such
other time on the Auction Date specified by the Auction Agent (i.e., the
Submission Deadline), each Broker-Dealer will submit to the Auction Agent in
writing all Orders obtained by it for the Auction to be conducted on such
Auction Date, designating itself (unless otherwise permitted by the Fund) as the
Existing Holder or Potential Holder, as the case may be, in respect of Series B
Auction Rate Preferred subject to such Orders. Any Order submitted by a
Beneficial Owner or a Potential Beneficial Owner to its Broker-Dealer, or by a
Broker-Dealer to the Auction Agent, prior to the Submission Deadline on any
Auction Date, will be irrevocable.
If any rate specified in any Bid contains more than three figures to
the right of the decimal point, the Auction Agent will round such rate to the
next highest one-thousandth (0.001) of 1%.
If one or more Orders of an Existing Holder is submitted to the Auction
Agent covering in the aggregate more than the number of Outstanding Series B
Auction Rate Preferred shares subject to an Auction held by such Existing
Holder, such Orders will be considered valid in the following order of priority:
(i) all Hold Orders for Series B Auction Rate Preferred will be
considered valid, but only up to and including in the aggregate
the number of Outstanding shares of Series B Auction Rate
Preferred held by such Existing Holder, and, if the number of
Series B Auction Rate Preferred shares subject to such Hold
Orders exceeds the number of shares of Outstanding Series B
Auction Rate Preferred held by such Existing Holder, the number
of shares subject to each such Hold Order will be reduced pro
rata to cover the number of Outstanding shares held by such
Existing Holder;
(ii) (a) any Bid for Series B Auction Rate Preferred will be
considered valid up to and including the excess of the
number of Outstanding shares of Series B Auction Rate
Preferred held by such Existing Holder over the number of
Series B Auction Rate Preferred shares subject to any Hold
Orders referred to in clause (i) above;
(b) subject to subclause (a), if more than one Bid of an
Existing Holder for Series B Auction Rate Preferred is
submitted to the Auction Agent with the same rate and the
number of Outstanding shares of Series B Auction Rate
Preferred subject to such Bids is greater than such
excess, such Bids will be considered valid up to and
including the amount of such excess, and the number of
shares of Series B Auction Rate Preferred subject to each
Bid with the same rate will be reduced pro rata to cover
the number of shares of Series B Auction Rate Preferred
equal to such excess;
(c) subject to subclauses (a) and (b), if more than one Bid of
an Existing Holder for Series B Auction Rate Preferred is
submitted to the Auction Agent with different rates, such
Bids will be considered valid in the ascending order of
their respective rates up to and including the amount of
such excess; and
(d) in any such event, the number, if any, of such Outstanding
shares of Series B Auction Rate Preferred subject to any
portion of Bids considered not valid in whole or in part
under this clause (ii) will be treated as the subject of a
Bid for Series B Auction Rate Preferred by or on behalf of
a Potential Holder at the rate specified therein; and
(iii) all Sell Orders for Series B Auction Rate Preferred will be
considered valid up to and including the excess of the number of
Outstanding shares of Series B Auction Rate Preferred held by
such Existing Holder over the sum of shares subject to valid
Hold Orders referred to in clause (i) above and valid Bids
referred to in clause (ii) above.
If more than one Bid of a Potential Holder for Series B Auction Rate Preferred
is submitted to the Auction Agent by or on behalf of any Potential Holder, each
such Bid submitted will be a separate Bid with the rate and number of Series B
Auction Rate Preferred shares specified therein.
DETERMINATION OF SUFFICIENT CLEARING BIDS, WINNING BID RATE AND APPLICABLE RATE
Not earlier than the Submission Deadline on each Auction Date for
Series B Auction Rate Preferred, the Auction Agent will assemble all valid
Orders submitted or deemed submitted to it by the Broker-Dealers (each such Hold
Order, Bid or Sell Order as submitted or deemed submitted by a Broker-Dealer
being herein referred to as a "Submitted Hold Order," a "Submitted Bid" or a
"Submitted Sell Order," as the case may be, or as a "Submitted Order" and
collectively as "Submitted Hold Orders," "Submitted Bids" or "Submitted Sell
Orders," as the case may be, or as "Submitted Orders") and will determine the
excess of the number of Outstanding shares of Series B Auction Rate Preferred
over the number of Outstanding shares of Series B Auction Rate Preferred subject
to Submitted Hold Orders (such excess being herein referred to as the "Available
Series B Auction Rate Preferred") and whether Sufficient Clearing Bids have been
made in the Auction. "Sufficient Clearing Bids" will have been made if the
number of Outstanding shares of Series B Auction Rate Preferred that are the
subject of Submitted Bids of Potential Holders specifying rates not higher than
the Maximum Rate equals or exceeds the number of Outstanding shares of Series B
Auction Rate Preferred that are the subject of Submitted Sell Orders (including
the number of Series B Auction Rate Preferred shares subject to Bids of Existing
Holders specifying rates higher than the Maximum Rate).
If Sufficient Clearing Bids for Series B Auction Rate Preferred have
been made, the Auction Agent will determine the lowest rate specified in such
Submitted Bids (the Winning Bid Rate for shares of such Series) which, taking
into account the rates in the Submitted Bids of Existing Holders, would result
in Existing Holders continuing to hold an aggregate number of Outstanding Series
B Auction Rate Preferred shares which, when added to the number of Outstanding
Series B Auction Rate Preferred shares to be purchased by Potential Holders,
based on the rates in their Submitted Bids, would equal not less than the
Available Series B Auction Rate Preferred. In such event, the Winning Bid Rate
will be the Applicable Rate for the next Dividend Period for all shares of such
Series.
If Sufficient Clearing Bids have not been made (other than because all
of the Outstanding Series B Auction Rate Preferred is subject to Submitted Hold
Orders), the Applicable Rate for the next Dividend Period for all Series B
Auction Rate Preferred will be equal to the Maximum Rate. In such a case,
Beneficial Owners that have submitted or that are deemed to have submitted Sell
Orders may not be able to sell in the Auction all Series B Auction Rate
Preferred subject to such Sell Orders but will continue to own Series B Auction
Rate Preferred for the next Dividend Period. See " - Acceptance and Rejection of
Submitted Bids and Submitted Sell Orders and Allocation of Shares" below.
If all of the Outstanding Series B Auction Rate Preferred is subject to
Submitted Hold Orders, the Applicable Rate for all Series B Auction Rate
Preferred for the next succeeding Dividend Period will be the All Hold Rate.
ACCEPTANCE AND REJECTION OF SUBMITTED BIDS AND SUBMITTED SELL ORDERS AND
ALLOCATION OF SHARES
Based on the determinations made under " - Determination of Sufficient
Clearing Bids, Winning Bid Rate and Applicable Rate" above and, subject to the
discretion of the Auction Agent to round and allocate certain shares as
described below, Submitted Bids and Submitted Sell Orders will be accepted or
rejected in the order of priority set forth in the Auction Procedures, with the
result that Existing Holders and Potential Holders of Series B Auction Rate
Preferred will sell, continue to hold and/or purchase such shares as set forth
below. Existing Holders that submitted or were deemed to have submitted Hold
Orders (or on whose behalf Hold Orders were submitted or deemed to have been
submitted) will continue to hold the Series B Auction Rate Preferred subject to
such Hold Orders.
If Sufficient Clearing Bids for Series B Auction Rate Preferred shares
have been made:
(i) Each Existing Holder that placed or on whose behalf was placed a
Submitted Sell Order or Submitted Bid specifying any rate higher
than the Winning Bid Rate will sell the Outstanding Series B
Auction Rate Preferred subject to such Submitted Sell Order or
Submitted Bid;
(ii) Each Existing Holder that placed or on whose behalf was placed a
Submitted Bid specifying a rate lower than the Winning Bid Rate
will continue to hold the Outstanding Series B Auction Rate
Preferred subject to such Submitted Bid;
(iii) Each Potential Holder that placed or on whose behalf was placed
a Submitted Bid specifying a rate lower than the Winning Bid
Rate will purchase the number of Outstanding Series B Auction
Rate Preferred shares subject to such Submitted Bid;
(iv) Each Existing Holder that placed or on whose behalf was placed a
Submitted Bid specifying a rate equal to the Winning Bid Rate
will continue to hold Series B Auction Rate Preferred subject to
such Submitted Bid, unless the number of Outstanding Series B
Auction Rate Preferred shares subject to all such Submitted Bids
is greater than the number of Series B Auction Rate Preferred
shares ("remaining shares") in excess of the Available Series B
Auction Rate Preferred over the number of Series B Auction Rate
Preferred shares accounted for in clauses (ii) and (iii) above,
in which event each Existing Holder with such a Submitted Bid
will continue to hold Series B Auction Rate Preferred subject to
such Submitted Bid determined on a pro rata basis based on the
number of Outstanding Series B Auction Rate Preferred shares
subject to all such Submitted Bids of such Existing Holders; and
(v) Each Potential Holder that placed or on whose behalf was placed
a Submitted Bid specifying a rate equal to the Winning Bid Rate
for Series B Auction Rate Preferred will purchase any Available
Series B Auction Rate Preferred not accounted for in clauses
(ii) through (iv) above on a pro rata basis based on the
Outstanding Series B Auction Rate Preferred shares subject to
all such Submitted Bids.
If Sufficient Clearing Bids for Series B Auction Rate Preferred shares
have not been made (unless this results because all Outstanding Series B Auction
Rate Preferred shares are subject to Submitted Hold Orders):
(i) Each Existing Holder that placed or on whose behalf was placed a
Submitted Bid specifying a rate equal to or lower than the
Maximum Rate will continue to hold the Series B Auction Rate
Preferred subject to such Submitted Bid;
(ii) Each Potential Holder that placed or on whose behalf was placed
a Submitted Bid specifying a rate equal to or lower than the
Maximum Rate will purchase the number of Series B Auction Rate
Preferred shares subject to such Submitted Bid; and
(iii) Each Existing Holder that placed or on whose behalf was placed a
Submitted Bid specifying a rate higher than the Maximum Rate or
a Submitted Sell Order will sell a number of Series B Auction
Rate Preferred shares subject to such Submitted Bid or
Submitted Sell Order determined on a pro rata basis based on the
number of Outstanding Series B Auction Rate Preferred shares
subject to all such Submitted Bids and Submitted Sell Orders.
If, as a result of the pro rata allocation described in clauses (iv) or
(v) of the second preceding paragraph or clause (iii) of the next preceding
paragraph, any Existing Holder would be entitled or required to sell, or any
Potential Holder would be entitled or required to purchase, a fraction of a
Series B Auction Rate Preferred share, the Auction Agent will, in such manner
as, in its sole discretion, it determines, round up or down to the nearest whole
share the number of Series B Auction Rate Preferred shares being sold or
purchased on such Auction Date so that the number of Series B Auction Rate
Preferred shares sold or purchased by each Existing Holder or Potential Holder
will be whole shares of such Series. If as a result of the pro rata allocation
described in clause (v) of the second preceding paragraph, any Potential Holder
would be entitled or required to purchase less than a whole Series B Auction
Rate Preferred share, the Auction Agent will, in such manner as, in its sole
discretion, it will determine, allocate Series B Auction Rate Preferred for
purchase among Potential Holders so that only whole Series B Auction Rate
Preferred shares are purchased by any such Potential Holder, even if such
allocation results in one or more of such Potential Holders not purchasing
shares of such Series.
NOTIFICATION OF RESULTS; SETTLEMENT
The Auction Agent will be required to advise each Broker-Dealer that
submitted an Order of the Applicable Rate for the next Dividend Period and, if
the Order was a Bid or Sell Order, whether such Bid or Sell Order was accepted
or rejected, in whole or in part, by telephone by approximately 3:00 p.m., New
York City time, on each Auction Date. Each Broker-Dealer that submitted an Order
for the account of a customer will then be required to advise such customer of
the Applicable Rate for the next Dividend Period and, if such Order was a Bid or
a Sell Order, whether such Bid or Sell Order was accepted or rejected, in whole
or in part, will be required to confirm purchases and sales with each customer
purchasing or selling Series B Auction Rate Preferred as a result of the Auction
and will be required to advise each customer purchasing or selling Series B
Auction Rate Preferred as a result of the Auction to give instructions to its
Agent Member of the Securities Depository to pay the purchase price against
delivery of such shares or to deliver such shares against payment therefor, as
appropriate. The Auction Agent will be required to record each transfer of
Series B Auction Rate Preferred shares on the registry of Existing Holders to be
maintained by the Auction Agent.
In accordance with the Securities Depository's normal procedures, on
the Business Day after the Auction Date, the transactions described above will
be executed through the Securities Depository and the accounts of the respective
Agent Members at the Securities Depository will be debited and credited and
shares delivered as necessary to effect the purchases and sales of Series B
Auction Rate Preferred as determined in the Auction. Purchasers will make
payment through their Agent Members in same-day funds to the Securities
Depository against delivery through their Agent Members; the Securities
Depository will make payment in accordance with its normal procedures, which now
provide for payment against delivery by their Agent Members in same-day funds.
If any Existing Holder selling Series B Auction Rate Preferred in an
Auction fails to deliver such shares, the Broker-Dealer of any person that was
to have purchased such shares in such Auction may deliver to such person a
number of whole Series B Auction Rate Preferred shares that is less than the
number of Series B Auction Rate Preferred shares that otherwise was to be
purchased by such person. In such event, the number of Series B Auction Rate
Preferred shares to be so delivered will be determined by the Broker-Dealer.
Delivery of such lesser number of Series B Auction Rate Preferred shares will
constitute good delivery.
ADDITIONAL INFORMATION CONCERNING
THE SERIES A PREFERRED AND SERIES B AUCTION RATE PREFERRED
The additional information concerning the Series A Preferred and Series
B Auction Rate Preferred contained in this SAI does not purport to be complete a
complete description of those Series and should be read in conjunction with the
description of the Series A Preferred and Series B Auction Rate Preferred
contained in the Prospectus under "Description of the Series A Preferred and
Series B Auction Rate Preferred." This description is subject to and qualified
in its entirety by reference to the Fund's Governing Documents, including the
provisions of the Statements of Preferences establishing, respectively, the
Series A Preferred and the Series B Auction Rate Preferred. Copies of these
Statements of Preferences are filed as exhibits to the registration statement of
which the Prospectus and this SAI are a part and may be inspected, and a copy
thereof may be obtained, as described under "Additional Information" in the
Prospectus.
DIVIDENDS AND DIVIDEND PERIODS FOR THE SERIES B AUCTION RATE PREFERRED
Holders of Series B Auction Rate Preferred will be entitled to receive,
when, as and if declared by the Board of Trustees, out of funds legally
available therefor, cumulative cash dividends on their shares, at the Applicable
Rate determined as described under " -- Determination of Dividend Rate," payable
as and when set forth below. Dividends so declared and payable will be paid to
the extent permitted under the Code, and to the extent available and in
preference to and priority over any dividend declared and payable on the Fund's
Common Shares.
By 12:00 noon, New York City time, on the Business Day immediately
preceding each Dividend Payment Date, the Fund is required to deposit with the
Paying Agent sufficient same-day funds for the payment of declared dividends.
The Fund does not intend to establish any reserves for the payment of dividends.
Each dividend will be paid by the Paying Agent to the Holder, which
Holder is expected to be the nominee of the Securities Depository. The
Securities Depository will credit the accounts of the Agent Members of the
beneficial owners in accordance with the Securities Depository's normal
procedures. The Securities Depository's current procedures provide for it to
distribute dividends in same-day funds to Agent Members who are in turn expected
to distribute such dividends to the persons for whom they are acting as agents.
The Agent Member of a beneficial owner will be responsible for holding or
disbursing such payments on the applicable Dividend Payment Date to such
beneficial owner in accordance with the instructions of such beneficial owner.
Holders of Series B Auction Rate Preferred will not be entitled to any
dividends, whether payable in cash, property or shares, in excess of full
cumulative dividends. No interest will be payable in respect of any dividend
payment or payments that may be in arrears. See " - Default Period."
The amount of dividends per Outstanding Series B Auction Rate Preferred
share payable (if declared) on each Dividend Payment Date of each Dividend
Period of less than one year (or in respect of dividends on another date in
connection with a redemption during such Dividend Period) will be computed by
multiplying the Applicable Rate (or the Default Rate) for such Dividend Period
(or a portion thereof) by a fraction, the numerator of which will be the number
of days in such Dividend Period (or portion thereof) such share was Outstanding
and for which the Applicable Rate or the Default Rate was applicable (but in no
event will the numerator exceed 360) and the denominator of which will be 360,
multiplying the amount so obtained by the $25,000, and rounding the amount so
obtained to the nearest cent. During any Dividend Period of one year or more,
the amount of dividends per Series B Auction Rate Preferred share payable on any
Dividend Payment Date (or in respect of dividends on
another date in connection with a redemption during such Dividend Period) will
be computed as described in the preceding sentence except that the numerator,
with respect to any full twelve month period, will be 360.
Determination of Dividend Rate. The dividend rate for the initial
Dividend Period (i.e., the period from and including the Date of Original Issue
to and including the initial Auction Date) and the initial Auction Date for the
Series B Auction Rate Preferred is set forth in the Prospectus. See "The Auction
of Series B Auction Rate Preferred -- Summary of Auction Procedures" in the
Prospectus. For each subsequent Dividend Period, subject to certain exceptions,
the dividend rate will be the Applicable Rate that the Auction Agent advises the
Fund has resulted from an Auction.
Dividend Periods after the initial Dividend Period will either be
Standard Dividend Periods (generally seven days) or, subject to certain
conditions and with notice to Holders, Special Dividend Periods.
A Special Dividend Period will not be effective unless Sufficient
Clearing Bids exist at the Auction in respect of such Special Dividend Period
(that is, in general, the number of shares subject to Bids by Potential
Beneficial Owners is at least equal to the number of shares subject to Sell
Orders by Existing Holders). If Sufficient Clearing Bids do not exist at any
Auction in respect of a Special Dividend Period, the Dividend Period commencing
on the Business Day succeeding such Auction will be the Standard Dividend
Period, and the Holders of the Series B Auction Rate Preferred will be required
to continue to hold such shares for such Standard Dividend Period. The
designation of a Special Dividend Period is also subject to additional
conditions. See "-- Notification of Dividend Period" below.
Dividends will accumulate at the Applicable Rate from the Date of
Original Issue and will be payable on each Dividend Payment Date thereafter.
Dividends will be paid through the Securities Depository on each Dividend
Payment Date. The Applicable Rate resulting from an Auction will not be greater
than the Maximum Rate. The Maximum Rate is subject to upward, but not downward,
adjustment in the discretion of the Board of Trustees after consultation with
the Broker-Dealers, provided that immediately following any such increase the
Fund would be in compliance with the Series B Auction Rate Preferred Basic
Maintenance Amount.
The Maximum Rate will apply automatically following an Auction for
Series B Auction Rate Preferred in which Sufficient Clearing Bids have not been
made (other than because all Series B Auction Rate Preferred were subject to
Submitted Hold Orders) or following the failure to hold an Auction for any
reason on the Auction Date scheduled to occur (except for (i) circumstances in
which the Dividend Rate is the Default Rate, as described below or (ii) in the
event an auction is not held because an unforeseen event or unforeseen events
cause a day that otherwise would have been an Auction Date not to be a Business
Day, in which case the length of the then-current dividend period will be
extended by seven days, or a multiple thereof if necessary because of such
unforeseen event or events, the applicable rate for such period will be the
applicable rate for the then-current dividend period so extended and the
dividend payment date for such dividend period will be the first business day
next succeeding the end of such period). The All Hold Rate will apply
automatically following an Auction in which all of the Outstanding Series B
Auction Rate Preferred shares are subject (or are deemed to be subject) to Hold
Orders.
Prior to each Auction, Broker-Dealers will notify Holders of the term
of the next succeeding Dividend Period as soon as practicable after the
Broker-Dealers have been so advised by the Fund. After each Auction, on the
Auction Date, Broker-Dealers will notify Holders of the Applicable Rate for the
next succeeding Dividend Period and of the Auction Date of the next succeeding
Auction.
Notification of Dividend Period. The Fund will designate the duration
of Dividend Periods of the Series B Auction Rate Preferred; provided, however,
that no such designation is necessary for a Standard Dividend Period and that
any designation of a Special Dividend Period will be effective only if (i)
notice thereof has been given as provided herein, (ii) any failure to pay in the
timely manner to the Auction Agent the full amount of any dividend on, or the
redemption price of, the Series B Auction Rate Preferred has been cured as set
forth under " - Default Period," (iii) Sufficient Clearing Orders existed in an
Auction held on the Auction Date immediately preceding the first day of such
proposed Special Dividend Period, (iv) if the Fund mailed a notice of redemption
with respect to any shares, the Redemption Price with respect to such shares has
been deposited with the Paying Agent, and (v) the Fund has confirmed that, as of
the Auction Date next preceding the first day of such Special Dividend Period,
it has Eligible Assets with an aggregate Discounted Value at least equal to the
Series B Auction Rate Preferred Basic Maintenance Amount and has consulted with
the Broker-Dealers and has provided notice and a Series B Auction Rate Preferred
Basic Maintenance Report to each Rating Agency which is then rating the Series B
Auction Rate Preferred and so requires.
If the Fund proposes to designate any Special Dividend Period, not
fewer than seven Business Days (or two Business Days in the event the duration
of the Special Dividend Period is fewer than eight days) nor more than 30
Business Days prior to the first day of such Special Dividend Period, notice
will be made by press release and communicated by the Fund by telephonic or
other means to the Auction Agent and confirmed in writing promptly thereafter.
Each such notice will state (x) that the Fund proposes to exercise its option to
designate a succeeding Special Dividend Period, specifying the first and last
days thereof and (y) that the Fund will, by 3:00 p.m., New York City time, on
the second Business Day next preceding the first day of such Special Dividend
Period, notify the Auction Agent, who will promptly notify the Broker-Dealers,
of either its determination, subject to certain conditions, to proceed with such
Special Dividend Period, in which case the Fund may specify the terms of any
Specific Redemption Provisions, or its determination not to proceed with such
Special Dividend Period, in which case the succeeding Dividend Period will be a
Standard Dividend Period.
No later than 3:00 p.m., New York City time, on the second Business Day
next preceding the first day of any proposed Special Dividend Period, the Fund
will deliver to the Auction Agent, who will promptly deliver to the
Broker-Dealers and Existing Holders, either:
(a) a notice stating (i) that the Fund has determined to designate
the immediately succeeding Dividend Period as a Special Dividend
Period, specifying the first and last days thereof and (ii) the
terms of the Specific Redemption Provisions, if any; or
(b) a notice stating that the Fund has determined not to exercise
its option to designate a Special Dividend Period.
If the Fund fails to deliver either such notice with respect to any designation
of any proposed Special Dividend Period to the Auction Agent or is unable to
make the confirmation described above by 3:00 p.m., New York City time, on the
second Business Day next preceding the first day of such proposed Special
Dividend Period, the Fund will be deemed to have delivered a notice to the
Auction Agent with respect to such Dividend Period to the effect set forth in
clause (b) above, thereby resulting in a Standard Dividend Period.
Default Period. A "Default Period" with respect to Series B Auction
Rate Preferred will commence on any date upon which the Fund fails to deposit
irrevocably in trust in same-day funds with the Paying Agent by 12:00 noon, New
York City time, on the Business Day immediately preceding the relevant Dividend
Payment Date or Redemption Date, as the case may be, (i) the full amount of any
declared dividend on the Series B Auction Rate Preferred payable on such
Dividend Payment Date (a
"Dividend Default") or (ii) the full amount of any redemption price (the
"Redemption Price") payable on the Series B Auction Rate Preferred being
redeemed on such Redemption Date (a "Redemption Default" and, together with a
Dividend Default, a "Default").
A Default Period with respect to a Dividend Default or a Redemption
Default will end by 12:00 noon, New York City time, on the Business Day on which
all unpaid dividends and any unpaid Redemption Price will have been deposited
irrevocably in trust in same-day funds with the Paying Agent.
In the case of a Dividend Default, no Auction will be held during a
Default Period applicable to the Series B Auction Rate Preferred, and the
dividend rate for each Dividend Period commencing during a Default Period will
be equal to the Default Rate; provided, however, that if a Default Period is
deemed not to have occurred because the Default has been cured, then the
dividend rate for the period shall be the Applicable Rate set at the auction for
such period.
Each subsequent Dividend Period commencing after the beginning of a
Default Period will be a Standard Dividend Period; provided, however, that the
commencement of a Default Period will not by itself cause the commencement of a
new Dividend Period. No Auction will be held during a Default Period applicable
to such Series; provided, however, that if a Default Period shall end prior to
the end of Standard Dividend Period that had commenced during the Default
Period, an Auction shall be held on the last day of such Standard Dividend
Period.
In the event the Fund fully pays all default amounts due during a
Dividend Period, the dividend rate for the remainder of that Dividend Period
will be, as the case may be, the Applicable Rate (for the first Dividend Period
following a Dividend Default) or the Maximum Rate (for any subsequent Dividend
Period for which such Default is continuing).
No Default Period with respect to a Dividend Default or Redemption
Default will be deemed to commence if the amount of any dividend or any
Redemption Price due (if such Default is not solely due to the willful failure
of the Fund) is deposited irrevocably in trust, in same-day funds with the
Paying Agent by 12:00 noon, New York City time, within three Business Days after
the applicable Dividend Payment Date or Redemption Date, together with an amount
equal to the Default Rate applied to the amount of such non-payment based on the
actual number of days comprising such period divided by 360. The Default Rate
will be equal to the Reference Rate multiplied by three.
RESTRICTIONS ON DIVIDENDS, REDEMPTION AND OTHER PAYMENTS
Under the 1940 Act, the Fund may not (i) declare any dividend (except a
dividend payable in shares of the issuer) or other distributions upon any of its
outstanding Common Shares, or purchase any such Common Shares, if at the time of
the declaration, distribution or purchase, as applicable (and after giving
effect thereto), asset coverage with respect to the Fund's outstanding senior
securities representing stock, including the Series A Preferred or Series B
Auction Rate Preferred, would be less than 200% (or such higher percentage as
may in the future be specified in or under the 1940 Act as the minimum asset
coverage for senior securities representing indebtedness of a closed-end
investment company as a condition of declaring distributions, purchases or
redemptions of its capital stock), or (ii) declare any dividend (except a
dividend payable in shares of the issuer) or other distributions upon any of its
outstanding capital stock, including the Series A Preferred or Series B Auction
Rate Preferred, or purchase any such capital stock if, at the time of such
declaration, distribution or purchase, as applicable (and after giving effect
thereto), asset coverage with respect to the senior securities representing
indebtedness would be less than 300% (or such other percentage as may in the
future be specified in or under the 1940 Act as the minimum asset coverage for
senior securities representing stock of a closed-end investment company as a
condition of declaring dividends on its Preferred Shares), except
that dividends may be declared upon any Preferred Shares, including the Series A
Preferred or Series B Auction Rate Preferred, if, at the time of such
declaration (and after giving effect thereto), asset coverage with respect to
the senior securities representing indebtedness would be equal to or greater
than 200% (or such other percentage as may in the future be specified in or
under the 1940 Act as the minimum asset coverage for senior securities
representing stock of a closed-end investment company as a condition of
declaring dividends on its Preferred Shares). A declaration of a dividend or
other distribution on or purchase or redemption of Series A Preferred or Series
B Auction Rate Preferred is prohibited, unless there is no event of default
under indebtedness senior to the Series A Preferred and/or Series B Auction Rate
Preferred and, immediately after such transaction, the Fund would have Eligible
Assets with an aggregated Discounted Value at least equal to the asset coverage
requirements under indebtedness senior to its Preferred Shares (including the
Series A Preferred and/or Series B Auction Rate Preferred).
For so long as the Series A Preferred or Series B Auction Rate
Preferred is Outstanding, except as otherwise provided in the Statement of
Preferences, the Fund will not pay any dividend or other distribution (other
than a dividend or distribution paid in shares of, or options, warrants or
rights to subscribe for or purchase, Common Shares or other shares, if any,
ranking junior to the Series A Preferred and/or Series B Auction Rate Preferred
as to dividends or upon liquidation) with respect to Common Shares or any other
shares of the Fund ranking junior to the Series A Preferred and/or Series B
Auction Rate Preferred as to dividends or upon liquidation, or call for
redemption, redeem, purchase or otherwise acquire for consideration any Common
Shares or other shares ranking junior to the Series A Preferred and/or Series B
Auction Rate Preferred (except by conversion into or exchange for shares of the
Fund ranking junior to the Series A Preferred and/or Series B Auction Rate
Preferred as to dividends and upon liquidation), unless, in each case, (x)
immediately after such transaction, the Fund would have Eligible Assets with an
aggregate Discounted Value at least equal to the Basic Maintenance Amount
applicable to, as the case may be, the Series A Preferred or Series B Auction
Rate Preferred and the 1940 Act Asset Coverage with respect to the Fund's
Outstanding Preferred Shares, including the Series A Preferred and/or Series B
Auction Rate Preferred, would be achieved, (y) all cumulative and unpaid
dividends due on or prior to the date of the transaction have been declared and
paid in full with respect to the Preferred Shares, including the Series A
Preferred and/or Series B Auction Rate Preferred (or will have been declared and
sufficient funds for the full payment thereof will have been deposited with the
Paying Agent or the dividend-disbursement agent, as applicable) and (z) the Fund
has redeemed the full number of Preferred Shares to be redeemed pursuant to any
provision for mandatory redemption contained in the Statements of Preferences,
including any Series A Preferred and/or Series B Auction Rate Preferred required
or determined to be redeemed pursuant to any such provision.
No full dividend will be declared or paid on the Series A Preferred or
Series B Auction Rate Preferred for any Dividend Period or part thereof, unless
full cumulative dividends due through the most recent Dividend Payment Dates of
the Outstanding Preferred Shares (including the Series A Preferred and/or Series
B Auction Rate Preferred) have been or contemporaneously are declared and paid.
If full cumulative dividends due have not been paid on all such Preferred
Shares, any dividends being paid on such Preferred Shares (including the Series
A Preferred and/or Series B Auction Rate Preferred) will be paid as nearly pro
rata as possible in proportion to the respective amounts of dividends
accumulated but unpaid on each such series of Preferred Shares on the relevant
Dividend Payment Date.
ASSET MAINTENANCE
The Fund is required to satisfy two separate asset maintenance
requirements in respect of its Preferred Shares, including the Series A
Preferred and/or Series B Auction Rate Preferred: (i) the Fund must maintain
assets in its portfolio that have a value, discounted in accordance with the
Rating Agency Guidelines, at least equal to the aggregate liquidation preference
of each of the series of Preferred Shares, including Series A Preferred and/or
Series B Auction Rate Preferred, plus specified liabilities, payment obligations
and other amounts; and (ii) the Fund must maintain asset coverage for its
Outstanding Preferred Shares, including for the Series A Preferred and/or Series
B Auction Rate Preferred, of at least 200%.
Basic Maintenance Amount. The Fund is required to maintain, as of each
Valuation Date, Eligible Assets having in the aggregate a Discounted Value at
least equal to the Basic Maintenance Amount, calculated separately for [__] (if
[__] is then rating the Series A Preferred or Series B Auction Rate Preferred at
the request of the Fund) and [__] (if [__] is then rating the Series A Preferred
or Series B Auction Rate Preferred at the request of the Fund). For this
purpose, the value of the Fund's portfolio securities will be the Market Value.
If the Fund fails to meet such requirement on any Valuation Date and such
failure is not cured by the related Cure Date, the Fund will be required under
certain circumstances to redeem some or all of the Series A Preferred or Series
B Auction Rate Preferred.
The "Basic Maintenance Amount" means, as of any Valuation Date, the
dollar amount equal to (i) the sum of (a) the product of the number of shares of
each class or series of Preferred Shares Outstanding on such Valuation Date
multiplied by the Liquidation Preference per share; (b) to the extent not
included in (a) the aggregate amount of cash dividends (whether or not earned or
declared) that will have accumulated for each Outstanding Preferred Share from
the most recent Dividend Payment Date to which dividends have been paid or duly
provided for (or, in the event the Basic Maintenance Amount is calculated on a
date prior to the initial Dividend Payment Date with respect to a class or
series of the Preferred Shares, then from the date of original issue) through
the Valuation Date plus all dividends to accumulate on the Preferred Shares then
Outstanding during the 70 days following such Valuation Date or, if less, during
the number of days following such Valuation Date that Preferred Shares called
for redemption are scheduled to remain Outstanding; (c) the Fund's other
liabilities due and payable as of such Valuation Date (except that dividends and
other distributions payable by the Fund on Common Shares will not be included as
a liability) and such liabilities projected to become due and payable by the
Fund during the 90 days following such Valuation Date (excluding liabilities for
investments to be purchased and for dividends and other distributions not
declared as of such Valuation Date); and (d) any current liabilities of the Fund
as of such Valuation Date to the extent not reflected in (or specifically
excluded by) any of (i)(a) through (i)(c) (including, without limitation, and
immediately upon determination, any amounts due and payable by the Fund pursuant
to reverse repurchase agreements and any payables for assets purchased as of
such Valuation Date) less (ii) (a) the adjusted value of any of the Fund's
assets or (b) the face value of any of the Fund's assets if, in the case of both
(ii)(a) and (ii)(b), such assets are either cash or evidences of indebtedness
which mature prior to or on the date of redemption or repurchase of Preferred
Shares or payment of another liability and are either U.S. Government
Obligations or evidences of indebtedness which have a rating assigned by Moody's
of at least Aaa, P-1, VMIG-1 or MIG-1 or by S&P of at least AAA, SP-1+ or A-1+,
and are irrevocably held by the Fund's custodian bank in a segregated account or
deposited by the Fund with the dividend-disbursing agent or Paying Agent, as the
case may be, for the payment of the amounts needed to redeem or repurchase
Preferred Shares subject to redemption or repurchase or any of (i)(b) through
(i)(d); and provided that in the event the Fund has repurchased Preferred Shares
and irrevocably segregated or deposited assets as described above with its
custodian bank or the dividend-disbursing agent or Paying Agent for the payment
of the repurchase price the Fund may deduct 100% of the Liquidation Preference
of such Preferred Shares to be repurchased from (i) above.
The Discount Factors, the criteria used to determine whether the assets
held in the Fund's portfolio are Eligible Assets, and guidelines for determining
the market value of the Fund's portfolio holdings for purposes of determining
compliance with the Basic Maintenance Amount are based on the criteria
established in connection with rating the Series A Preferred or Series B Auction
Rate Preferred, as the case may be. These factors include, but are not limited
to, the sensitivity of the market value of the
relevant asset to changes in interest rates, the liquidity and depth of the
market for the relevant asset, the credit quality of the relevant asset (for
example, the lower the rating of a debt obligation, the higher the related
discount factor) and the frequency with which the relevant asset is marked to
market. In no event will the Discounted Value of any asset of the Fund exceed
its unpaid principal balance or face amount as of the date of calculation.
The Discount Factor relating to any asset of the Fund, the Basic
Maintenance Amount, the assets eligible for inclusion in the calculation of the
Discounted Value of the Fund's portfolio and certain definitions and methods of
calculation relating thereto may be changed from time to time by the Fund,
without shareholder approval, but only in the event that the Fund receives
written confirmation from each Rating Agency which is then rating the Series A
Preferred or Series B Auction Rate Preferred, as the case may be, and which so
requires that any such changes would not impair an applicable [__] credit rating
from [__] or [__] rating from [__].
A Rating Agency's Guidelines will apply to the Series A Preferred or
Series B Auction Rate Preferred only so long as such Rating Agency is rating
such shares at the request of the Fund. The Fund will pay certain fees to [__]
and [__] for rating, as the case may be, the Series A Preferred and/or Series B
Auction Rate Preferred. The ratings assigned to the Series A Preferred or Series
B Auction Rate Preferred are not recommendations to buy, sell or hold Series A
Preferred or Series B Auction Rate Preferred. Such ratings may be subject to
revision or withdrawal by the assigning Rating Agency at any time. Any rating of
the Series A Preferred or Series B Auction Rate Preferred should be evaluated
independently of any other rating.
Upon any failure to maintain the required Discounted Value of the
Fund's Eligible Assets, the Fund will seek to alter the composition of its
portfolio to re-attain the Basic Maintenance Amount on or prior to the
applicable Cure Date, thereby incurring additional transaction costs and
possible losses and/or gains on dispositions of portfolio securities.
Under certain circumstances, as described in the Statements of
Preferences, the Board of Trustees without further action by the shareholders
may modify the calculation of Adjusted Value (as defined in the Statements of
Preferences), Basic Maintenance Amount and the elements of each of them and the
definitions of such terms and elements if the Board of Trustees determines that
such modification is necessary to prevent a reduction in rating of the Preferred
Shares by a rating agency rating such shares at the request of the Fund or is in
the best interests of the holders of Common Shares and is not adverse to the
holders of Preferred Shares in view of advice to the Fund by the relevant rating
agency that such modification would not adversely affect the then-current rating
of the affected Preferred Shares. In addition, subject to compliance with
applicable law, the Board of Trustees may amend the definition of Maximum Rate
to increase the percentage amount by which the Reference Rate is multiplied to
determine the Maximum Rate shown therein without the vote or consent of the
Holders of Preferred Shares, including the Series B Auction Rate Preferred
Shares, or any other shareholder of the Fund, after consultation with the
Broker-Dealers, and with confirmation from each Rating Agency that immediately
following any such increase the Fund would meet the Series B Auction Rate
Preferred Basic Maintenance Amount Test.
1940 Act Series B Auction Rate Preferred Asset Coverage. As of each
Valuation Date, the Fund will determine whether the 1940 Act Asset Coverage is
met as of that date. The Fund will deliver to the Auction Agent and each Rating
Agency a 1940 Act Asset Coverage Certificate which sets forth the determination
of the preceding sentence (i) as of the Date of Original Issue and, thereafter,
(ii) as of (x) the last Business Day of each March, June, September and December
and (y) a Business Day on or before any 1940 Act Asset Coverage Cure Date
following a failure to meet 1940 Act Asset Coverage. Such 1940 Act Asset
Coverage Certificate will be delivered in the case of clause (i) on the Date of
Original Issue and in the case of clause (ii) on or before the seventh Business
Day after the last Business Day of such March, June, September and December, as
the case may be, or the relevant Cure Date.
Notices. The Fund must deliver a Basic Maintenance Report to each
applicable Rating Agency and the Auction Agent, if any, which sets forth, as of
the related Valuation Date, Eligible Assets sufficient to meet or exceed the
applicable Basic Maintenance Amount, the Market Value and Discounted Value
thereof (in a series and in the aggregate) and the applicable Basic Maintenance
Amount. Such Basic Maintenance Reports must be delivered as of the applicable
Date of Original Issue and thereafter upon the occurrence of specified events on
or before the seventh Business Day after the relevant Valuation Date or Cure
Date.
DEPOSIT ASSETS REQUIREMENTS RELATING TO THE SERIES B AUCTION RATE PREFERRED
The Fund is obligated to deposit in a segregated custodial account a
specified amount of Deposit Assets not later than 12:00 noon, New York City
time, on each Dividend Payment Date and each Redemption Date relating to the
Series B Auction Rate Preferred. These Deposit Assets, in all cases, will have
an initial combined value greater than or equal to the cash amounts payable on
the applicable Dividend Payment Date or Redemption Date, and will mature prior
to such date.
RESTRICTIONS ON TRANSFER RELATING TO THE SERIES B AUCTION RATE PREFERRED
Series B Auction Rate Preferred may be transferred only (i) pursuant to
an Order placed in an Auction, (ii) to or through a Broker-Dealer, or (iii) to
the Fund or any Affiliate. Notwithstanding the foregoing, a transfer other than
pursuant to an Auction will not be effective unless the selling Existing Holder
or the Agent Member of such Existing Holder, in the case of an Existing Holder
whose shares are listed in its own name on the books of the Auction Agent, or
the Broker-Dealer or Agent Member of such Broker-Dealer, in the case of a
transfer between persons holding Series B Auction Rate Preferred through
different Broker-Dealers, advises the Auction Agent of such transfer. Any
certificates representing the Series B Auction Rate Preferred shares issued to
the Securities Depository will bear legends with respect to the restrictions
described above and stop-transfer instructions will be issued to the Transfer
Agent and/or Registrar.
[__] AND [__] GUIDELINES
The descriptions of the [__] and [__] Guidelines contained in this SAI
do not purport to be complete and are subject to and qualified in their
entireties by reference to the applicable Statement of Preferences. Copies of
the Statements of Preferences are filed as an exhibit to the registration
statement of which the Prospectus and this SAI are a part and may be inspected,
and copies thereof may be obtained, as described under "Additional Information"
in the Prospectus.
The composition of the Fund's portfolio reflects guidelines (referred
to herein as the "Rating Agency Guidelines") established by [__] and [__], each
a Rating Agency, in connection with the Fund's receipt of a rating of [__] from
[__] and [__] from [__], respectively, for the Series B Auction Rate Preferred
and a rating of [__] from [__] for the Series A Preferred. These Rating Agency
Guidelines relate, among other things, to industry and credit quality
characteristics of issuers and diversification requirements and specify various
Discount Factors for different types of securities (with the level of discount
greater as the rating of a security becomes lower). Under the Rating Agency
Guidelines, certain types of securities in which the Fund may otherwise invest
consistent with its investment strategy are not eligible for inclusion in the
calculation of the Discounted Value of the Fund's portfolio. Such instruments
include, for example, private placements (other than Rule 144A Securities) and
other
securities not within the Rating Agency Guidelines. Accordingly, although the
Fund reserves the right to invest in such securities to the extent set forth
herein, such securities have not and it is anticipated that they will not
constitute a significant portion of the Fund's portfolio.
The Rating Agency Guidelines require that the Fund maintain assets
having an aggregate Discounted Value, determined on the basis of the Guidelines,
greater than the aggregate liquidation preference of the Outstanding Series A
Preferred, Series B Auction Rate Preferred and other Preferred Shares plus
specified liabilities, payment obligations and other amounts, as of periodic
Valuation Dates. The Rating Agency Guidelines also require the Fund to maintain
asset coverage for the Outstanding Series A Preferred, Series B Auction Rate
Preferred and other Preferred Shares on a non-discounted basis of at least 200%
as of the end of each month, and the 1940 Act requires this asset coverage as a
condition to paying dividends or other distributions on its Common Shares. See
"Additional Information Concerning The Series A Preferred and Series B Auction
Rate Preferred -- Asset Maintenance." The effect of compliance with the Rating
Agency Guidelines may be to cause the Fund to invest in higher quality assets
and/or to maintain relatively substantial balances of highly liquid assets or to
restrict the Fund's ability to make certain investments that would otherwise be
deemed potentially desirable by the Investment Adviser, including private
placements of other than Rule 144A Securities (as defined herein). The Rating
Agency Guidelines are subject to change from time to time with the consent of
the relevant Rating Agency and would not apply if the Fund in the future elected
not to use investment leverage consisting of senior securities rated by either
[__] or [__], although other similar arrangements might apply with respect to
other rated senior securities that the Fund may issue.
The Fund intends to maintain, at specified times, a Discounted Value
for its portfolio at least equal to the amount specified by each Rating Agency
(the "Basic Maintenance Amount"), the determination of which is as set forth
under "Additional Information Concerning The Series A Preferred and Series B
Auction Rate Preferred -- Asset Maintenance." [__] and [__] have each
established separate guidelines for determining Discounted Value. To the extent
any particular portfolio holding does not satisfy the applicable Rating Agency's
Guidelines, all or a portion of such holding's value will not be included in the
calculation of Discounted Value (as defined by such Rating Agency).
Upon any failure to maintain the required Discounted Value, the Fund
may seek to alter the composition of its portfolio to reestablish required asset
coverage within the specified ten Business Day cure period, thereby incurring
additional transaction costs and possible losses and/or gains on dispositions of
portfolio securities. To the extent any such failure is not cured in a timely
manner, the holders of the Series A Preferred and Series B Auction Rate
Preferred will acquire certain rights. See "Additional Information Concerning
The Series A Preferred and Series B Auction Rate Preferred -- Asset
Maintenance."
The Rating Agency Guidelines do not impose any limitations on the
percentage of Fund assets that may be invested in holdings not eligible for
inclusion in the calculation of the Discounted Value of the Fund's portfolio.
The amount of such assets included in the portfolio at any time may vary
depending upon the rating, diversification and other characteristics of the
assets included in the portfolio which are eligible for inclusion in the
Discounted Value of the portfolio under the Rating Agency Guidelines.
A rating of preferred shares as [__] (as described by [__]) or [__] (as
described by [__]) indicates strong asset protection, conservative balance sheet
ratios and positive indications of continued protection of preferred dividend
requirements. A [__] or [__] credit rating of preferred shares does not address
the likelihood that a resale mechanism (such as the Auction) will be successful.
As described respectively by [__] and [__], an issue of preferred shares which
is rated [__] or [__] is considered to be top-quality preferred shares with good
asset protection and the least risk of dividend impairment within the universe
of preferred shares.
Ratings are not recommendations to purchase, hold or sell Series A
Preferred or Series B Auction Rate Preferred, inasmuch as the rating does not
comment as to market price or suitability for a particular investor. The rating
is based on current information furnished to [__] and [__] by the Fund and
obtained by [__] and [__] from other sources. The rating may be changed,
suspended or withdrawn as a result of changes in, or unavailability of, such
information.
[__] GUIDELINES
[__] GUIDELINES
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 will generally be 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. Initial public offering securities are initially
valued at cost, and thereafter as any other equity security. Other readily
marketable assets will be valued at the average of quotations provided by
dealers maintaining an active market in such instruments. Short-term debt
instruments that are credit impaired or mature in more than 60 days for which
market quotations are available are valued at the latest average of the bid and
asked prices obtained from a dealer maintaining an active market in that
security. Short-term investments that are not credit impaired and mature in 60
days or fewer are valued at amortized cost from purchase price or value on the
61st day prior to maturity. 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 Investment Adviser in accordance
with guidelines adopted by the Fund. The Fund may employ recognized pricing
services from time to time for the purpose of pricing portfolio instruments
(including non-U.S. dollar denominated assets and futures and options).
Trading takes place in various foreign markets on days which are not
Business Days and on which therefore the Fund's net asset value per share is not
calculated. The calculation of the Fund's net asset value may not take place
contemporaneously with the determination of the prices of portfolio securities
held by the Fund. Events affecting the values of portfolio securities that occur
between the time their prices are determined and the close of the NYSE will not
be reflected in the Fund's calculation of net asset value unless the Board of
Trustees deems that the particular event would materially affect the net asset
value, in which case the fair value of those securities will be determined by
consideration of other factors by or under the direction of the Board of
Trustees.
Net asset value per 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.
BENEFICIAL OWNERS
NAME AND ADDRESS OF
BENEFICIAL/RECORD AMOUNT OF SHARES
OWNER AS OF [ ], AND NATURE OF
2003 TITLE OF CLASS OWNERSHIP PERCENT OF CLASS
------------------- -------------- ---------------- ----------------
* A nominee partnership of DTC.
** Shares held at DTC
As of May [__], 2003, the Directors and Officers of the Fund as a group
beneficially owned approximately [__]% of the Fund's outstanding Common Shares.
GENERAL INFORMATION
BOOK-ENTRY-ONLY ISSUANCE
DTC will act as securities depository for the shares of Series A
Preferred and/or Series B Auction Rate Preferred offered pursuant to the
Prospectus. The information in this section concerning DTC and DTC's book-entry
system is based upon information obtained from DTC. The securities offered
hereby initially will be issued only as fully-registered securities registered
in the name of Cede & Co. (as nominee for DTC). One or more fully-registered
global security certificates initially will be issued, representing in the
aggregate the total number of securities, and deposited with DTC.
DTC is a limited-purpose trust company organized under the New York
Banking Law, a "banking organization" within the meaning of the New York Banking
Law, a member of the Federal Reserve System, a "clearing corporation" within the
meaning of the New York Uniform Commercial Code and a "clearing agency"
registered pursuant to the provisions of Section 17A of the Securities Exchange
Act of 1934, as amended. DTC holds securities that its participants deposit with
DTC. DTC also facilities the settlement among participants of securities
transactions, such as transfers and pledges, in deposited securities through
electronic computerized book-entry changes in participants' accounts, thereby
eliminating the need for physical movement of securities certificates. Direct
DTC participants include securities brokers and dealers, banks, trust companies,
clearing corporations and certain other organizations. Access to the DTC system
is also available to others such as securities brokers and dealers, banks and
trust companies that clear through or maintain a custodial relationship with a
direct participant, either directly or indirectly through other entities.
Purchases of securities within the DTC system must be made by or
through direct participants, which will receive a credit for the securities on
DTC's records. The ownership interest of each actual purchaser of a security, a
beneficial owner, is in turn to be recorded on the direct or indirect
participants' records. Beneficial owners will not receive written confirmation
from DTC of their purchases, but beneficial owners are expected to receive
written confirmations providing details of the transactions, as well as periodic
statements of their holdings, from the direct or indirect participants through
which the beneficial owners purchased securities. Transfers of ownership
interests in securities are to be accomplished by entries made on the books of
participants acting on behalf of beneficial owners. Beneficial owners will not
receive certificates representing their ownership interests in securities,
except as provided herein.
DTC has no knowledge of the actual beneficial owners of the securities
being offered pursuant to this Prospectus; DTC's records reflect only the
identity of the direct participants to whose accounts such securities are
credited, which may or may not be the beneficial owners. The participants will
remain responsible for keeping account of their holdings on behalf of their
customers.
Conveyance of notices and other communications by DTC to direct
participants, by direct participants to indirect participants, and by direct
participants and indirect participants to beneficial owners will be governed by
arrangements among them, subject to any statutory or regulatory requirements as
may be in effect from time to time.
Payments on the securities will be made to DTC. DTC's practice is to
credit direct participants' accounts on the relevant payment date in accordance
with their respective holdings shown on DTC's records unless DTC has reason to
believe that it will not receive payments on such payment date. Payments by
participants to beneficial owners will be governed by standing instructions and
customary practices and will be the responsibility of such participant and not
of DTC or the Fund, subject to any statutory or regulatory requirements as may
be in effect from time to time. Payment of dividends to DTC
is the responsibility of the Fund, disbursement of such payments to direct
participants is the responsibility of DTC, and disbursement of such payments to
the beneficial owners is the responsibility of direct and indirect participants.
Furthermore each beneficial owner must rely on the procedures of DTC to exercise
any rights under the Securities.
DTC may discontinue providing its services as securities depository
with respect to the securities at any time by giving reasonable notice to the
Fund. Under such circumstances, in the event that a successor securities
depository is not obtained, certificates representing the Securities will be
printed and delivered.
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
issuance of Series A Preferred and/or Series B Auction Rate Preferred.
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.
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 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).
GLOSSARY
"AA FINANCIAL COMPOSITE COMMERCIAL PAPER RATE" on any date means (i) the
interest equivalent of the 7-day rate, in the case of a Dividend Period of 7
days or shorter; for Dividend Periods greater than 7 days but fewer than or
equal to 31 days, the 30-day rate; for Dividend Periods greater than 31 days
but fewer than or equal to 61 days, the 60-day rate; for Dividend Periods
greater than 61 days but fewer than or equal to 91 days, the 90 day rate; for
Dividend Periods greater than 91 days but fewer than or equal to 270 days, the
rate described in (ii) below; for Dividend Periods greater than 270 days, the
Treasury Index Rate; on commercial paper on behalf of issuers whose corporate
bonds are rated "AA" by S&P, or the equivalent of such rating by another
nationally recognized rating agency, as announced by the Federal Reserve Bank
of New York for the close of business on the Business Day immediately
preceding such date; or (ii) if the Federal Reserve Bank of New York does not
make available such a rate, then the arithmetic average of the interest
equivalent of such rates on commercial paper placed on behalf of such issuers,
as quoted on a discount basis or otherwise by the Commercial Paper Dealers to
the Auction Agent for the close of business on the Business Day immediately
preceding such date (rounded to the next highest .001 of 1%). If any
Commercial Paper Dealer does not quote a rate required to determine the "AA"
Financial Composite Commercial Paper Rate, such rate will be determined on the
basis of the quotations (or quotation) furnished by the remaining Commercial
Paper Dealers (or Dealer), if any, or, if there are no such Commercial Paper
Dealers, by the Auction Agent pursuant to instructions from the Fund. For
purposes of this definition, (A) "Commercial Paper Dealers" will mean (i)
Salomon Smith Barney Inc., Lehman Brothers Inc., Merrill Lynch, Pierce, Fenner
& Smith Incorporated and Goldman Sachs & Co.; (ii) in lieu of any thereof, its
respective affiliate or successor; and (iii) in the event that any of the
foregoing will cease to quote rates for commercial paper of issuers of the
sort described above, in substitution therefor, a nationally recognized dealer
in commercial paper of such issuers then making such quotations selected by
the Fund, and (B) "interest equivalent" of a rate stated on a discount basis
for commercial paper of a given number of days maturity will mean a number
equal to the quotient (rounded upward to the next higher one-thousandth of 1%)
of (1) such rate expressed as a decimal, divided by (2) the difference between
(x) 1.00 and (y) a fraction, the numerator of which will be the product of
such rate expressed as a decimal, multiplied by the number of days in which
such commercial paper will mature and the denominator of which will be 360.
"ADJUSTED VALUE" of each Eligible Asset shall be computed as follows:
(i) cash shall be valued at 100% of the face value thereof; and
(ii) all other Eligible Assets shall be valued at the applicable
Discounted Value thereof; and
(iii) each asset that is not an Eligible Asset shall be valued at
zero.
"ADMINISTRATOR" means the other party to the Administration Agreement with the
Fund which shall initially be Gabelli Funds, LLC.
"AFFILIATE" means, with respect to the Auction Agent, any person known to the
Auction Agent to be controlled by, in control of or under common control with
the Fund; provided, however, that no Broker-Dealer controlled by, in control
of or under common control with the Fund will be deemed to be an Affiliate nor
will any corporation or any Person controlled by, in control of or under
common control with such corporation one of the directors or executive
officers of which is director of the Fund be deemed to be an Affiliate solely
because such director or executive officer is also a director of the Fund.
"AGENT MEMBER" means a member of or a participant in the Securities Depository
that will act on behalf of a Bidder.
"ALL HOLD RATE" means 80% of the "AA" Financial Composite Commercial Paper
Rate.
"APPLICABLE RATE" means, with respect to the Series B Auction Rate Preferred,
for each Dividend Period (i) if Sufficient Clearing Bids exist for the Auction
in respect thereof, the Winning Bid Rate, (ii) if Sufficient Clearing Orders
do not exist for the Auction in respect thereof or an Auction does not take
place with respect to such Dividend Period because of the commencement of a
Default Period that ends prior to an Auction Date, the Maximum Rate and (iii)
if all Series B Auction Rate Preferred is the subject of Submitted Hold Orders
for the Auction in respect thereof, the All Hold Rate.
"AUCTION" means each periodic operation of the Auction Procedures.
"AUCTION AGENT" means The Bank of New York unless and until another commercial
bank, trust company, or other financial institution appointed by a resolution
of the Board of Trustees enters into an agreement with the Fund to follow the
Auction Procedures for the purpose of determining the Applicable Rate.
"AUCTION DATE" means the last day of the initial Dividend Period and each
seventh day after the immediately preceding Auction Date; provided, however,
that if any such seventh day is not a Business Day, such Auction Date shall be
the first preceding day that is a Business Day and the next Auction Date, if
for a Standard Dividend Period, shall (subject to the same advancement
procedure) be the seventh day after the date that the preceding Auction Date
would have been if not for the advancement procedure; provided further,
however, that the Auction Date for the Auction at the conclusion of any
Special Dividend Period shall be the last Business Day in such Special
Dividend Period and that no more than one Auction shall be held during any
Dividend Period. Notwithstanidng the foregoing, in the event an auction is not
held because an unforeseen event or unforeseen events cause a day that
otherwise would have been an Auction Date not to be a Business Day, then the
length of the then-current dividend period will be extended by seven days (or
a multiple thereof if necessary because of such unforeseen event or events).
"AUCTION PROCEDURES" means the procedures for conducting Auctions described in
"Additional Information Concerning the Auction for Series B Auction Rate
Preferred."
"AVAILABLE SERIES B AUCTION RATE PREFERRED" has the meaning set forth in
"Additional Information Concerning the Auction for Series B Auction Rate
Preferred -- Determination of Sufficient Clearing Bids, Winning Bid Rate and
Applicable Rate."
"BASIC MAINTENANCE AMOUNT" has the meaning set forth in "Additional
Information Concerning The Series A Preferred and Series B Auction Rate
Preferred -- Asset Maintenance."
"BASIC MAINTENANCE REPORT" means, with respect to the Series B Auction Rate
Preferred, a report prepared by the Administrator which sets forth, as of the
related Valuation Date, [__] Eligible Assets and [__] Eligible Assets
sufficient to meet or exceed the Basic Maintenance Amount, the Market Value
and Discounted Value thereof (seriatim and in the aggregate), and the Basic
Maintenance Amount, and shall have a correlative meaning with respect to any
other class or series of Preferred Shares.
"BENEFICIAL OWNER" with respect to Series B Auction Rate Preferred, means a
customer of a Broker-Dealer who is listed on the records of that Broker-Dealer
(or, if applicable, the Auction Agent) as a holder of such shares of such
series.
"BID" has the meaning set forth in "Additional Information Concerning the
Auction for the Series B Auction Rate Preferred -- Submission of Orders by
Broker-Dealers to Auction Agent."
"BIDDER" has the meaning set forth in "Additional Information Concerning the
Auction for Series B Auction Rate Preferred -- Submission of Orders by
Broker-Dealers to Auction Agent."
"BOARD OF TRUSTEES" or "BOARD" means the Board of Trustees of the Fund or any
duly authorized committee thereof as permitted by applicable law.
"BROKER-DEALER" means any broker-dealer or broker-dealers, or other entity
permitted by law to perform the functions required of a Broker-Dealer by the
Auction Procedures, that has been selected by the Fund and has entered into a
Broker-Dealer Agreement that remains effective.
"BROKER-DEALER AGREEMENT" means an agreement between the Auction Agent and a
Broker-Dealer, pursuant to which such Broker-Dealer agrees to follow the
Auction Procedures.
"BUSINESS DAY" means a day on which the New York Stock Exchange is open for
trading and which is not a Saturday, Sunday or other day on which banks in The
City of New York, New York are authorized or obligated by law to close.
"CODE" means the Internal Revenue Code of 1986, as amended.
"COMMISSION" means the Securities and Exchange Commission.
"COMMON SHARES" means the shares of the Fund's common beneficial interest, par
value $.001 per share.
"CURE DATE" has the meaning set forth in [__] of the Statement of Preferences
for the Series A Preferred and [__] of the Statement of Preferences for the
Series B Auction Rate Preferred.
"DATE OF ORIGINAL ISSUE" means the date on which the Series A Preferred or
Series B Auction Rate Preferred, as the case may be, is originally issued by
the Fund.
"DEFAULT PERIOD" has the meaning set forth in "Additional Information
Concerning the Series A Preferred and Series B Auction Rate Preferred --
Dividends and Dividend Period."
"DEFAULT RATE" means the Reference Rate multiplied by three (3).
"DEPOSIT ASSETS" means cash, Short-Term Money Market Instruments and U.S.
Government Obligations. Except for determining whether the Fund has Eligible
Assets with an Adjusted Value equal to or greater than the Basic Maintenance
Amount, each Deposit Asset shall be deemed to have a value equal to its
principal or face amount payable at maturity plus any interest payable thereon
after delivery of such Deposit Asset but only if payable on or prior to the
applicable payment date in advance of which the relevant deposit is made.
"DISCOUNT FACTOR" means (i) so long as [__] is rating the Series A Preferred
or Series B Auction Rate Preferred at the Fund's request, the [__] Discount
Factor, (ii) so long as [__] is rating the Series B Auction Rate Preferred,
the [__] Discount Factor, and/or (iii) any applicable discount factor
established by any Other Rating Agency, whichever is applicable.
"DISCOUNTED VALUE" means, as applicable, (i) the quotient of the Market Value
of an Eligible Asset divided by the applicable Discount Factor, provided that
with respect to an Eligible Asset that is currently callable, Discounted Value
will be equal to the applicable quotient or product as calculated above or the
call price, whichever is lower, and that with respect to an Eligible Asset
that is prepayable, Discounted Value will be equal to the applicable quotient
or product as calculated above or the par value, whichever is lower.
"DIVIDEND DEFAULT" has the meaning set forth in "Additional Information
Concerning the Series A Preferred and Series B Auction Rate Preferred --
Dividends and Dividend Period."
"DIVIDEND PAYMENT DATE" means, with respect to the Series A Preferred, any
date on which dividends declared by the Board of Trustees thereon are payable
pursuant to the provisions of [__] of the Statement of Preferences of the
Series A Preferred, and, with respect to the Series B Auction Rate Preferred,
any date on which dividends declared by the Board of Trustees thereon are
payable pursuant to the provisions of [__] of the Statement of Preferences,
for the Series B Auction Rate Preferred, and shall have a correlative meaning
with respect to any other class or series of Preferred Shares.
"DIVIDEND PERIOD" means, with respect to Series A Preferred, the quarterly
dividend specified in paragraph [__] of the Statement of Preferences for the
Series A Preferred and, with respect to Series B Auction Rate Preferred, the
initial period determined in the manner set forth under ["__"] in the
Statement of Preferences of the Series B Auction Rate Preferred, and
thereafter, the period commencing on the Business Day following each Auction
Date and ending on the next Auction Date or, if such next Auction Date is not
immediately followed by a Business Day, on the latest day prior to the next
succeeding Business Day.
"ELIGIBLE ASSETS" means [__] Eligible Assets (if [__] is then rating the
Series A Preferred or Series B Auction Rate Preferred at the request of the
Fund), [__] Eligible Assets (if [__] is then rating the Series B Auction Rate
Preferred at the request of the Fund), and/or Other Rating Agency Eligible
Assets if any Other Rating Agency is then rating the Series A Preferred or
Series B Auction Rate Preferred, whichever is applicable.
"EXISTING HOLDER" means (i) a person who beneficially owns those shares of
Series B Auction Rate Preferred listed in that person's name in the records of
the Fund or the Auction Agent or (ii) the beneficial owner of those shares of
Series B Auction Rate Preferred which are listed under such person's
Broker-Dealer's name in the records of the Auction Agent, which Broker-Dealer
will have signed a master purchaser's letter.
"GOVERNING DOCUMENTS" means the [__].
"HOLD ORDER" has the meaning set forth in "Additional Information Concerning
the Auction for Series B Auction Rate Preferred -- Orders By Existing Holders
and Potential Holders."
"HOLDER" means, with respect to the Series B Auction Rate Preferred, the
registered holder of Series B Auction Rate Preferred shares as the same
appears on the share ledger or share records of the Fund or records of the
Auction Agent, as the case may be.
"INDUSTRY CLASSIFICATION" means a six-digit industry classification in the
Standard Industry Classification system published by the United States.
"LIQUIDATION PREFERENCE" means $25 per share of Series A Preferred and $25,000
per share of Series B Auction Rate Preferred and will have a correlative
meaning with respect to shares of any other class or series of Preferred
Shares.
"MARKET CAPITALIZATION" means, with respect to any issue of common stock, as
of any date, the product of (i) the number of shares of such common stock
issued and outstanding as of the close of business on the date of
determination thereof and (ii) the Market Value per share of such common stock
as of the close of business on the date of determination thereof.
"MARKET VALUE" means the amount determined by the Fund with respect to
specific Eligible Assets in accordance with valuation policies adopted from
time to time by the Board of Trustees as being in compliance with the
requirements of the 1940 Act.
Notwithstanding the foregoing, "Market Value" may, at the option of
the Fund with respect to any of its assets, mean the amount determined with
respect to specific Eligible Assets of the Fund in the manner set forth below:
(i) as to any common or preferred stock which is an Eligible Asset,
(a) if the stock is traded on a national securities exchange or
quoted on the Nasdaq System, the last sales price reported on
the Valuation Date or (b) if there was no reported sales price
on the Valuation Date, the lower of two bid prices for such
stock provided to the Administrator by two recognized
securities dealers with a minimum capitalization of $25,000,000
(or otherwise approved for such purpose by [__] and [__]) or by
one such securities dealer and any other source (provided that
the utilization of such source would not adversely affect [__]
and [__] then-current rating of the Series B Auction Rate
Preferred), at least one of which will be provided in writing
or by telecopy, telex, other electronic transcription, computer
obtained quotation reducible to written form or similar means,
and in turn provided to the Fund by any such means by such
administrator, or, if two bid prices cannot be obtained, such
Eligible Asset will have a Market Value of zero;
(ii) as to any U.S. Government Obligation, Short-Term Money Market
Instrument (other than demand deposits, federal funds, bankers'
acceptances and next Business Day repurchase agreements) and
commercial paper, with a maturity of greater than 60 days, the
product of (a) the principal amount (accreted principal to the
extent such instrument accretes interest) of such instrument
and (b) the lower of the bid prices for the same kind of
instruments having, as nearly as practicable, comparable
interest rates and maturities provided by two recognized
securities dealers having minimum capitalization of $25,000,000
(or otherwise approved for such purpose by [__] and [__]) or by
one such dealer and any other source (provided that the
utilization of such source would not adversely affect [__] and
[__] then-current rating of the Series A Preferred or Series B
Auction Rate Preferred, as the case may be,) to the
administrator, at least one of which will be provided in
writing or by telecopy, telex, other electronic transcription,
computer obtained quotation reducible to written form or
similar means, and in turn provided to the Fund by any such
means by such administrator, or, if two bid prices cannot be
obtained, such Eligible Asset will have a Market Value of zero;
(iii) as to cash, demand deposits, federal funds, bankers'
acceptances and next Business Day repurchase agreements
included in Short-Term Money Market Instruments, the face value
thereof;
(iv) as to any U.S. Government Obligation, Short-Term Money Market
Instrument or commercial paper with a maturity of 60 days or
fewer, amortized cost unless the Board of Trustees determines
that such value does not constitute fair value; or
(v) as to any other evidence of indebtedness which is an Eligible
Asset, (a) the product of (1) the unpaid principal balance of
such indebtedness as of the Valuation Date and (2)(A) if such
indebtedness is traded on a national securities exchange or
quoted on the Nasdaq System, the last sales price reported on
the Valuation Date or (B) if there was no reported sales price
on the Valuation Date or if such indebtedness is not traded on
a national securities exchange or quoted on the Nasdaq System,
the lower of two bid prices for such indebtedness provided by
two recognized dealers with a minimum capitalization of
$25,000,000 (or otherwise approved for such purpose by [__] and
[__]) or by one such dealer and any other source (provided that
the utilization of such source would not adversely affect [__]
and [__] then-current rating of the Series A Preferred or
Series B Auction Rate Preferred , as the case may be,) to the
administrator of the Fund's assets, at least one of which will
be provided in writing or by telecopy, telex, other electronic
transcription, computer obtained quotation reducible to written
form or similar means, and in turn provided to the Fund by any
such means by such administrator, plus (b) accrued interest on
such indebtedness.
"MAXIMUM RATE" means, on any date on which the Applicable Rate is determined,
the applicable percentage of (i) in the case of dividend period of 184 days or
less, the "AA" Financial Composite Commercial Paper Rate on the date of such
Auction determined as set forth below based on the lower of the credit ratings
assigned to the Series B Auction Rate Preferred by [__] and [__] subject to
upward but not downward adjustment in the discretion of the Board of Trustees
after consultation with the Broker-Dealers; provided that immediately
following any such increase the Fund would be in compliance with the Series B
Auction Rate Preferred Basic Maintenance Amount or (ii) in the case of a
dividend period of longer than 184 days, the Treasury Index Rate.
[ ] Credit Rating [ ] Credit Rating Applicable Percentage
------------------- -------------------- ---------------------
[__] or higher [__] or higher 150%
[__] to [__] [__] to [__] 175%
[__] to [__] [__] to [__] 250%
Below [__] Below [__] 275%
"MOODY'S" means Moody's Investors Service, Inc. and its successors at law.
"[__] DISCOUNT FACTOR" has the meaning ascribed to it in "[__] and [__]
Guidelines -- [__] Guidelines."
"[__] ELIGIBLE ASSETS" has the meaning ascribed to it in "[__] and [__]
Guidelines -- [__] Guidelines."
"1940 ACT" means the Investment Company Act of 1940, as amended, or any
successor statute.
"1940 ACT ASSET COVERAGE" means asset coverage, as determined in accordance
with Section 18(h) of the 1940 Act, of at least 200% with respect to all
outstanding senior securities of the Fund which are stock, including all
Outstanding shares of Series A Preferred and Series B Auction Rate Preferred
(or such other asset coverage as may in the future be specified in or under
the 1940 Act as the minimum asset coverage for senior securities which are
stock of a closed-end investment company as a condition of declaring dividends
on its common stock), determined on the basis of values calculated as of a
time within 48 hours (not including Saturdays, Sundays or holidays) next
preceding the time of such determination.
"1940 ACT ASSET COVERAGE CERTIFICATE" means the certificate required to be
delivered by the Fund pursuant to [__] of the Statement of Preferences of the
Series B Auction Rate Preferred.
"NON-CALL PERIOD" means a period determined by the Board of Trustees after
consultation with the Broker-Dealers, during which the Series B Auction Rate
Preferred subject to such Special Dividend Period is not subject to redemption
at the option of the Fund but only to mandatory redemption.
"NRSRO" means a Nationally Recognized Statistical Ratings Organization.
"ORDER" has the meaning set forth in "Additional Information Concerning the
Auction for Series B Auction Rate Preferred -- Orders By Existing Holders and
Potential Holders."
"OTHER RATING AGENCY" means any rating agency other than [__] or [__] then
providing a rating for the Series B Auction Rate Preferred pursuant to the
request of the Fund.
"OTHER RATING AGENCY ELIGIBLE ASSETS" means assets of the Fund designated by
any Other Rating Agency as eligible for inclusion in calculating the
discounted value of the Fund's assets in connection with such Other Rating
Agency's rating of the Series B Auction Rate Preferred.
"OUTSTANDING" means, as of any date, Preferred Shares theretofore issued by
the Fund except:
(i) any such Preferred Share theretofore cancelled by the Fund or
delivered to the Fund for cancellation;
(ii) any such Preferred Share other than the Series B Auction Rate
Preferred (or other auction market preferred stock) as to which
a notice of redemption will have been given and for whose
payment at the redemption thereof Deposit Assets in the
necessary amount are held by the Fund on in trust for or were
paid by the Fund to the holder of such share pursuant to the
Statement of Preferences with respect thereto;
(iii) in the case of shares of the Series B Auction Rate Preferred or
other auction market preferred shares, any such shares
theretofore delivered to the applicable auction agent for
cancellation or with respect to which the Fund has given notice
of redemption and irrevocably deposited with the applicable
paying agent sufficient funds to redeem such shares; and
(iv) any such share in exchange for or in lieu of which other shares
have been issued and delivered.
Notwithstanding the foregoing, (x) for purposes of voting rights (including
the determination of the number of shares required to constitute a quorum),
any Preferred Shares as to which the Fund or any subsidiary is the holder or
Existing Holder, as applicable, will be disregarded and deemed not
Outstanding; (y) in connection with any auction, any auction rate Preferred
Shares as to which the Fund or any Person known to the auction agent to be an
subsidiary is the holder or Existing Holder, as applicable, will be
disregarded and not deemed Outstanding; and (z) for purposes of determining
the Basic Maintenance Amount, Series B Auction Rate Preferred held by the
Fund will be disregarded and deemed not Outstanding.
"PAYING AGENT" means with respect to Series B Auction Rate Preferred, The Bank
of New York unless and until another entity appointed by a resolution of the
Board of Trustees enters into an agreement with the Fund to serve as paying
agent, which paying agent may be the same as the Auction Agent and, with
respect to any other class or series of Preferred Shares, the Person appointed
by the Fund as dividend disbursing or paying agent with respect to such class
or series.
"PERSON" means and includes an individual, a partnership, the Fund, a trust, a
corporation, a limited liability company, an unincorporated association, a
joint venture or other entity or a government or any agency or political
subdivision thereof.
"POTENTIAL BENEFICIAL OWNER OR HOLDER" means (i) any Existing Holder who may
be interested in acquiring additional shares of Series B Auction Rate
Preferred or (ii) any other person who may be interested in acquiring shares
of Series B Auction Rate Preferred and who has signed a master purchaser's
letter or whose shares will be listed under such person's Broker-Dealer's name
on the records of the Auction Agent which Broker-Dealer will have executed a
master purchaser's letter.
"PREFERRED SHARES" means the preferred shares, par value $.001 per share, of
the Fund, and includes the Series A Preferred and Series B Auction Rate
Preferred.
"PREMIUM CALL PERIOD" means a period consisting of a number of whole years as
determined by the Board of Trustees after consultation with the
Broker-Dealers, during each year of which the shares subject to such Special
Dividend Period will be redeemable at the Fund's option at a price per share
equal to the Liquidation Preference plus accumulated but unpaid dividends
(whether or not earned or declared) plus a premium expressed as a percentage
or percentages of the Liquidation Preference or expressed as a formula using
specified variables as determined by the Board of Trustees after consultation
with the Broker-Dealers.
"PRICING SERVICE" means any of the following: Bloomberg Financial Service,
Bridge Information Services, Data Resources Inc., FT Interactive,
International Securities Market Association, Merrill Lynch Securities Pricing
Service, Muller Data Corp., Reuters, S&P/J.J. Kenny, Telerate, Trepp Pricing
and Wood Gundy.
"RATING AGENCY" means [__] and [__] as long as such rating agency is then
rating the Series A Preferred or Series B Auction Rate Preferred at the
request of the Fund.
"RATING AGENCY GUIDELINES" has the meaning set forth in set forth in "[__] and
[__] Guidelines."
"REDEMPTION DATE" means, with respect to the Fund's Outstanding Preferred
Shares, the date fixed by the Fund for the redemption of such shares.
"REDEMPTION DEFAULT" has the meaning set forth in "Additional Information
Concerning the Series A Preferred and Series B Auction Rate Preferred --
Dividends and Dividend Period."
"REDEMPTION PRICE" means, with respect to the Series A Preferred, the price
set forth in [__] of the Statement of Preferences for the Series A Preferred
and, with respect to the Series B Auction Rate Preferred, the price set forth
in [__] of the Statement of Preferences for the Series B Auction Rate
Preferred.
"REFERENCE RATE" means, with respect to the determination of the Default Rate,
the applicable "AA" Financial Composite Commercial Paper Rate for a Dividend
Period of 184 days or fewer or the applicable Treasury Index Rate for a
Dividend Period of longer than 184 days and, with respect to the determination
of the Maximum Rate, the "AA" Financial Composite Commercial Paper Rate or the
Treasury Index Rate, as appropriate.
"S&P" means Standard & Poor's Ratings Services, or its successors at law.
"SECURITIES ACT" means The Securities Act of 1933, as amended, or any
successor statute.
"SECURITIES DEPOSITORY" means The Depository Trust Company and its successors
and assigns or any successor securities depository selected by the Fund that
agrees to follow the procedures required to be followed by such securities
depository in connection with the shares of Series A Preferred or Series B
Auction Rate Preferred.
"SELL ORDER" has the meaning set forth in "Additional Information Concerning
the Auction for Series B Auction Rate Preferred -- Submission of Orders by
Broker-Dealers to Auction Agent."
"SERIES A PREFERRED" means the Fund's [__]% Series A Cumulative Preferred
Shares, $.001 par value per share and liquidation preference $25 per share.
"SERIES A PREFERRED BASIC MAINTENANCE AMOUNT TEST" means a test which is met
if the lower of the aggregate Discounted Values of the [__] Eligible Assets or
the [__] Eligible Assets if both [__] and [__] are then rating the Series A
Preferred at the request of the Fund, or the Eligible Assets of whichever of
[__] or [__] is then doing so if only one of [__] or [__] is then rating the
Series A Preferred at the request of the Fund, meets or exceeds the Basic
Maintenance Amount with respect to the Series A Preferred.
"SERIES B AUCTION RATE PREFERRED" means the Fund's Series B Auction Rate
Cumulative Preferred Shares, $.001 par value per share and liquidation
preference $25,000 per share.
"SERIES B AUCTION RATE PREFERRED BASIC MAINTENANCE AMOUNT TEST" means a test
which is met if the lower of the aggregate Discounted Values of the [__]
Eligible Assets or the [__] Eligible Assets if both [__] and [__] are then
rating the Series B Auction Rate Preferred at the request of the Fund, or the
Eligible Assets of whichever of [__] or [__] is then doing so if only one of
[__] or [__] is then rating the Series B Auction Rate Preferred at the request
of the Fund, meets or exceeds the Basic Maintenance Amount with respect to the
Series B Auction Rate Preferred.
"SHORT-TERM MONEY MARKET INSTRUMENT" means the following types of instruments
if, on the date of purchase or other acquisition thereof by the Fund, the
remaining term to maturity thereof is not in excess of 180 days:
(i) commercial paper rated A-1 if such commercial paper matures in
30 days or A-1+ if such commercial paper matures in over 30
days;
(ii) demand or time deposits in, and banker's acceptances and
certificates of deposit of (a) a depository institution or
trust company incorporated under the laws of the United States
of America or any state thereof or the District of Columbia or
(b) a United States branch office or agency of a foreign
depository institution (provided that such branch office or
agency is subject to banking regulation under the laws of the
United States, any state thereof or the District of Columbia);
(iii) overnight funds; and
(iv) U.S. Government Obligations.
"SPECIAL DIVIDEND PERIOD" means a Dividend Period that is not a Standard
Dividend Period.
"SPECIFIC REDEMPTION PROVISIONS" means, with respect to any Special Dividend
Period of more than one year, either, or any combination of (i) a Non-Call
Period and (ii) a Premium Call Period.
"STANDARD DIVIDEND PERIOD" means a Dividend Period of seven days, subject to
increase or decrease to the extent necessary for the next Auction Date and
Dividend Payment Date to each be Business Days.
"SUBMISSION DEADLINE" means 1:00 p.m., New York City time, on any Auction Date
or such other time on any Auction Date by which Broker-Dealers are required to
submit Orders to the Auction Agent as specified by the Auction Agent from time
to time.
"SUBMITTED BID" has the meaning set forth in "Additional Information
Concerning the Auction for Series B Auction Rate Preferred -- Determination of
Sufficient Clearing Bids, Winning Bids, Winning Bid Rate and Applicable Rate."
"SUBMITTED BID ORDER" has the meaning set forth in "Additional Information
Concerning the Auction for Series B Auction Rate Preferred -- Determination of
Sufficient Clearing Bids, Winning Bids, Winning Bid Rate and Applicable Rate."
"SUBMITTED HOLD ORDER" has the meaning set forth in "Additional Information
Concerning the Auction for Series B Auction Rate Preferred -- Determination of
Sufficient Clearing Bids, Winning Bids, Winning Bid Rate and Applicable Rate."
"SUBMITTED ORDER" has the meaning set forth in "Additional Information
Concerning the Auction for Series B Auction Rate Preferred -- Determination of
Sufficient Clearing Bids, Winning Bids, Winning Bid Rate and Applicable Rate."
"SUBMITTED SELL ORDER" has the meaning set forth in "Additional Information
Concerning the Auction for Series B Auction Rate Preferred -- Determination of
Sufficient Clearing Bids, Winning Bids, Winning Bid Rate and Applicable Rate."
"SUFFICIENT CLEARING BIDS" has the meaning set forth in "Additional
Information Concerning the Auction for Series B Auction Rate Preferred --
Determination of Sufficient Clearing Bids, Winning Bids, Winning Bid Rate and
Applicable Rate."
"SUFFICIENT CLEARING ORDERS" means that all shares of Series B Auction Rate
Preferred are the subject of Submitted Hold Orders or that the number of
shares of Series B Auction Rate Preferred that are the subject of Submitted
Bids by Potential Holders specifying one or more rates equal to or less than
the Maximum Rate exceeds or equals the sum of (i) the number of shares of
Series B Auction Rate Preferred that are subject of Submitted Bids by Existing
Holders specifying one or more rates higher than the Maximum Rate and (ii) the
number of shares of Series B Auction Rate Preferred that are subject to
Submitted Sell Orders.
"TREASURY INDEX RATE" means the average yield to maturity for actively traded
marketable U.S. Treasury fixed interest rate securities having the same number
of 30-day periods to maturity as the length of the applicable Dividend Period,
determined, to the extent necessary, by linear interpolation based upon the
yield for such securities having the next shorter and next longer number of
30-day periods to maturity treating all Dividend Periods with a length greater
than the longest maturity for such securities as having a length equal to such
longest maturity, in all cases based upon data set forth in the most recent
weekly statistical release published by the Board of Governors of the Federal
Reserve System (currently in H.15 (519)); provided, however, if the most
recent such statistical release will not have been published during the 15
days preceding the date of computation, the foregoing computations will be
based upon the average of comparable data as quoted to the Fund by at least
three recognized dealers in U.S. Government Obligations selected by the Fund.
"U.S. GOVERNMENT OBLIGATIONS" means direct obligations of the United States or
by its agencies or instrumentalities that are entitled to the full faith and
credit of the United States and that, other than United States Treasury Bills,
provide for the periodic payment of interest and the full payment of principal
at maturity or call for redemption.
"UTILITY INDUSTRY" means 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.
"VALUATION DATE" means the last Business Day of each month, or such other date
as the Fund and Rating Agencies may agree to for purposes of determining the
Basic Maintenance Amount.
"WINNING BID RATE" means the lowest rate specified in the Submitted Bids which
if:
(i) (a) each such Submitted Bid of Existing Holders specifying
such lowest rate and
(b) all other such Submitted Bids of Existing Holders
specifying lower rates were rejected, thus entitling
such Existing Holders to continue to hold the shares of
such series that are subject to such Submitted Bids; and
(ii) (a) each such Submitted Bid of Potential Holders specifying
such lowest rate and
(b) all other such Submitted Bids of Potential Holders
specifying lower rates were accepted;
would result in such Existing Holders described in subclause (i) above
continuing to hold an aggregate number of Outstanding Series B Auction Rate
Preferred shares which, when added to the number of Outstanding Series B
Auction Rate Preferred shares to be purchased by such Potential Holders
described in subclause (ii) above, would equal not less than the Available
Series B Auction Rate Preferred shares.
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(1) Financial Statements
Part A
Financial highlights (audited) for a share outstanding throughout the
periods ended December 31, 2002, 2001, 2000 and 1999.
Part B
Financial Statements (audited) for the fiscal year 2002(1)
(i) Portfolio of Investments as of December 31, 2002
(ii) Statement of Assets and Liabilities as of December 31, 2002
(iii) Statement of Operations for the year ended December 31, 2002
(iv) Statement of Changes in Net Assets for the year ended December
31, 2002
(v) Financial highlights for a share outstanding throughout the
periods 2002, 2001, 2000 and 1999.
(vi) Notes to Financial Statements
(vii) Report of Independent Accountants
(2) Exhibits
(a) (i) Amended and Restated Agreement and Declaration of Trust
of Registrant(3)
(ii) Form of Statement of Preferences for the __% Series A
Cumulative Preferred Shares(2)
(iii) Form of Statement of Preferences for the Series B
Auction Rate Cumulative Preferred Shares(2)
(b) Amended and Restated By-Laws of Registrant(3)
(c) Not applicable
(d) (i) Specimen Share Certificate for the ___% Series A
Cumulative Preferred Shares(3)
(ii) Specimen Share Certificate for the Series B Auction Rate
Cumulative Preferred Shares(3)
(e) Automatic Dividend Reinvestment and Voluntary Cash Purchase
Plan of Registrant(2)
(f) Not applicable
(g) Form of Investment Advisory Agreement between Registrant and
Gabelli Funds, LLC(2)
(h) Form of Underwriting Agreement(2)
(i) Not applicable
(j) (i) Form of Custodian Contract between Registrant and Boston
Safe Deposit and Trust Company(3)
(ii) Form of Custodian Fee Schedule between Registrant and
Boston Safe Deposit and Trust Company(3)
(k) (i) Registrar, Transfer Agency and Service Agreement between
Registrant and EquiServe Trust Company relating to the
common shares(3)
(ii) Form of Auction Agency Agreement(2)
(iii) Form of Broker-Dealer Agreement(2)
(iv) Form of DTC Agreement(2)
(l) Opinion and Consent of Skadden, Arps, Slate, Meagher & Flom LLP
with respect to legality(2)
(m) Not applicable
(n) (i) Consent of PricewaterhouseCoopers LLP(4)
(ii) Powers of Attorney(3)
(o) Not applicable
(p) Not applicable
(q) Codes of Ethics of the Trust and the Advisor(3)
-------------------
(1) Incorporated by reference to the Fund's annual report filed on
March 10, 2003.
(2) To be filed by Amendment.
(3) Filed Previously.
(4) Filed Herewith.
Item 25. Marketing Arrangements
See Exhibit 2(h) to this Registration Statement.
Item 26. Other Expenses of Issuance and Distribution
The following table sets forth the estimated expenses to be incurred
in connection with the offering described in this Registration
Statement:
SEC registration fees .......................................... $
New York Stock Exchange listing fee .............................
Rating Agency Fees...............................................
Printing and engraving expenses .................................
Auditing fees and expenses ......................................
Legal fees and expenses .........................................
Blue Sky fees and expenses ......................................
Miscellaneous....................................................
Total....................................................... $
------------
Item 27. Persons Controlled by or Under Common Control with Registrant
NONE
Item 28. Number of Holders of Securities as of May [__], 2003
Number of Record
Title of Class Holders
-------------- ----------------
Common Shares, par value $.001 per share
Item 29. Indemnification
The response of this Item is incorporated by reference to the caption
"Limitation of Officers' and Directors Liability" in the Part B of this
Registration Statement.
Insofar as indemnification for liability arising under the Securities
Act may be permitted to trustees, officers and controlling persons of
Registrant pursuant to the foregoing provisions, or otherwise, Registrant has
been advised that, in the opinion of the Commission, such indemnification is
against public policy as expressed in the Securities Act, and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by Registrant of expenses incurred or paid
by a director, officer or controlling person of Registrant in the successful
defense of any action, suit or proceeding) is asserted by such director,
officer or controlling person in connection with the securities being
registered. Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
Item 30. Business and Other Connections of Investment Adviser
The Investment Adviser, a limited liability company organized under
the laws of the State of New York, acts as investment adviser to the
Registrant. The Registrant is fulfilling the requirement of this Item 30 to
provide a list of the officers and directors of the Investment Adviser,
together with information as to any other business, profession, vocation or
employment of a substantial nature engaged in by the Investment Adviser or
those officers and directors during the past two years, by incorporating by
reference the information contained in the Form ADV of the Investment Adviser
filed with the commission pursuant to the Investment Advisers Act of 1940
(Commission File No. 801-26202).
Item 31. Location of Accounts and Records
The accounts and records of the Registrant are maintained in part at
the office of the Investment Adviser at One Corporate Center, Rye, New York
10580-1422, in part at the offices of the Custodian, Boston Safe Deposit and
Trust Company, One Boston Place, Boston, Massachusetts 02108, at the offices
of the Fund's Administrator, PFPC, Inc, 3200 Horizon Drive, King of Prussia,
Pennsylvania 19406, and in part at the offices of EquiServe Trust Company,
N.A., PO Box 43025, Providence, RI 02940-3025.
Item 32. Management Services
Not applicable.
Item 33. Undertakings
1. Registrant undertakes to suspend the offering of shares until the
prospectus is amended, if subsequent to the effective date of this
registration statement, its net asset value declines more than ten
percent from its net asset value, as of the effective date of the
registration statement or its net asset value increases to an amount
greater than its net proceeds as stated in the prospectus.
2. Not applicable.
3. Not applicable.
4. The undersigned registrant hereby undertakes:
1. To file, during any period in which offers or sales are
being made, a post-effective amendment to this registration
statement:
(i) To include any prospectus required by section
10(a)(3) of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events
arising after the effective date of the
registration statement (or the most recent
post-effective amendment thereof) which,
individually or in the aggregate, represent a
fundamental change in the information set forth in
the registration statement. Notwithstanding the
foregoing, any increase or decrease in volume of
securities offered (if the total dollar value of
securities offered would not exceed that which was
registered) and any deviation from the low or high
end of the estimated maximum offering range may be
reflected in the form of prospectus filed with the
Commission pursuant to Rule 424 (b) if, in the
aggregate, the changes in volume and price
represent no more than 20% change in the maximum
aggregate offering price set forth in the
"Calculation of Registration Fee" table in the
effective registration statement;
(iii) To include any material information with respect to
the plan of distribution not previously disclosed
in the registration statement or any material
change to such information in the registration
statement;
2. To remove from registration by means of a post-effective
amendment any of the securities being registered which
remain unsold at the termination of the offering.
3. The undersigned registrant hereby undertakes to supplement
the prospectus, after expiration of the subscription period,
to set forth the results of the subscription offer, and the
terms of any subsequent raftering thereof.
5. 1. Registrant undertakes that, for the purpose of
determining any liability under the Securities Act the
information omitted from the form of prospectus filed as
part of the Registration Statement in reliance upon Rule
430A and contained in the form of prospectus filed by the
Registrant pursuant to Rule 497 (h) will be deemed to be a
part of the Registration Statement as of the time it was
declared effective.
2. Registrant undertakes that, for the purpose of determining
any liability under the Securities Act, each post-effective
amendment that contains a form of prospectus will be deemed
to be a new Registration Statement relating to the
securities offered therein, and the offering of such
securities at that time will be deemed to be the initial
bona fide offering thereof.
6. Registrant undertakes to send by first class mail or other means
designed to ensure equally prompt delivery, within two business days
of receipt of a written or oral request, any Statement of Additional
Information constituting Part B of this Registration Statement.
SIGNATURES
As required by the Securities Act of 1933, this Registrant's
Registration Statement has been signed on behalf of the Registrant, in the
City of Rye, State of New York, on the 22rd day of May, 2003.
THE GABELLI UTILITY TRUST
By: /s/ Bruce N. Alpert
----------------------------
Bruce N. Alpert
Vice President and Treasurer
As required by the Securities Act of 1933, this Registration
Statement has been signed below by the following persons in the capacities and
on the dates indicated.
Signature Title Date
* Chairman of the Board, President May 22, 2003
---------------------------- Chief Investment Officer
Mario J. Gabelli and Trustee
/s/ Bruce N. Alpert Chief Financial Officer May 22, 2003
---------------------------
Bruce N. Alpert
* Trustee May 22, 2003
---------------------------
Thomas E. Bratter
* Trustee May 22, 2003
---------------------------
Felix J. Christiana
* Trustee May 22, 2003
---------------------------
Anthony J. Colavita
* Trustee May 22, 2003
---------------------------
James P. Conn
* Trustee May 22, 2003
---------------------------
Vincent D. Enright
* Trustee May 22, 2003
---------------------------
Frank J. Fahrenkopf, Jr.
* Trustee May 22, 2003
---------------------------
John D. Gabelli
* Trustee May 22, 2003
---------------------------
Karl Otto Pohl
* Trustee May 22, 2003
---------------------------
Anthony R. Pustorino
* Trustee May 22, 2003
---------------------------
Salvatore J. Zizza
* /s/ Bruce Alpert May 22, 2003
------------------
Bruce N. Alpert,
Attorney-in-Fact
EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION
EX-99(n)(1) Consent of PricewaterHouseCoopers LLP