Filed pursuant to Rule 497(h)
Registration File No. 333-105500
PROSPECTUS $ 55,000,000 [GABELLI LOGO]
The Gabelli Utility Trust
_________________
1,200,000 Shares, 5.625% Series A Cumulative Preferred Shares
(Liquidation Preference $25 per Share)
1,000 Shares, Series B Auction Market Preferred Shares ("AMPS")
(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 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 debt or equity
securities of foreign and domestic companies involved to a substantial extent
(e.g., at least 50% of the assets, gross income or net profits of a company is
committed to or derived from) in providing products, services or equipment for
(i) the generation or distribution of electricity, gas and water and (ii)
telecommunications services or infrastructure operations, such as airports,
toll roads and municipal services. Gabelli Funds, LLC serves as investment
adviser to the Fund. An investment in the Fund is not appropriate for all
investors. We cannot assure you that the Fund's objective will be achieved.
This prospectus describes shares of the Fund's 5.625% Series A
Cumulative Preferred Shares (the "Series A Preferred"), liquidation preference
$25 per share. Dividends on shares of Series A Preferred are cumulative from
such original issue date at the annual rate of 5.625% of the liquidation
preference of $25 per share and are payable quarterly on March 26, June 26,
September 26 and December 26 in each year, commencing on September 26, 2003.
This prospectus also describes shares of the Fund's Series B Auction
Market Preferred Shares (the "Series B AMPS"), liquidation preference $25,000
per share. The dividend rate for the Series B AMPS will vary from dividend
period to dividend period. The annual dividend rate for the initial dividend
period for the Series B AMPS will be 1.07% of the liquidation preference of
$25,000 per share. The initial dividend period is from the date of issuance
through August 12, 2003. For subsequent dividend periods, the Series B AMPS
will pay dividends based on a rate set at auction, usually held weekly.
The Fund offers by this prospectus, in the aggregate, $55 million of
preferred shares of either Series A Preferred or Series B AMPS, or a
combination of both series.
Investing in our Series A Preferred or Series B AMPS involves risks.
See "Risk Factors and Special Considerations" beginning on page 26.
_____________________
Proceeds to the Fund
Public Offering Price(1) Underwriting Discount(2) (before expenses)(3)
------------------------ ------------------------ --------------------
Series A Preferred Per Share $25.00 $.7875 $24.2125
Total............................ $30,000,000 $945,000 $29,055,000
Series B AMPS Per Share.......... $25,000 $250 $24,750
Total............................ $25,000,000 $250,000 $24,750,000
(1) Plus accumulated dividends, if any, from July 31, 2003
(2) The Fund and Gabelli Funds, LLC have agreed to indemnify the
underwriters against certain liabilities, including liabilities under
the Securities Act of 1933, as amended.
(3) Offering expenses payable by the Fund are estimated at approximately
$455,000.
_________________
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.
_______________________
Merrill Lynch & Co. Gabelli & Company, Inc.
_______________________
The date of this prospectus is July 28, 2003.
The shares of Series A Preferred and/or Series B AMPS 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 AMPS will be made in book-entry form through
the facilities of The Depository Trust Company on or about July 31, 2003.
(continued from previous page)
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 AMPS will not be listed on an exchange. Investors may
only buy or sell Series B AMPS 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
AMPS and a secondary market may not provide you with liquidity.
The net proceeds of the offering, which are expected to be
$53,350,000 will be invested in accordance with the Fund's investment
objective and policies. See "Investment Objective and Policies" beginning on
page 19.
The Fund expects that dividends paid on the Series A Preferred and
Series B AMPS will consist of (i) long-term capital gain (gain from the sale
of a capital asset held longer than 12 months), (ii) qualified dividend income
(income from domestic and certain foreign corporations), and (iii) investment
company taxable income (other than qualified dividend income), including
interest income, short-term capital gain and income from certain hedging and
interest rate transactions. For individuals, the maximum federal income tax
rate on long-term capital gain is currently 15%, on qualified dividend income
is 15%, and on other types of income is 35%. These tax rates are scheduled to
apply through 2008. We cannot assure you, however, as to what percentage of
the dividends paid on the Series A Preferred or Series B AMPS will consist of
long-term capital gains and qualified dividend income, which are taxed at
lower rates for individuals than ordinary income. For a more detailed
discussion, see "Taxation."
Neither the Series A Preferred nor the Series B AMPS may be issued
unless each is rated "Aaa" by Moody's Investors Service, Inc. ("Moody's"). In
addition, the Series B AMPS may not be issued unless they are also rated "AAA"
by Standard and Poor's Ratings Services ("S&P"). 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 AMPS
under guidelines established by each of Moody's and S&P. See "Description of
the Series A Preferred and Series B AMPS -- Rating Agency Guidelines." The
Fund is also required to maintain a minimum asset coverage by the Investment
Company Act of 1940, as amended. 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 Investment Company Act of 1940, as
amended, that some or all of its outstanding preferred shares, including the
Series A Preferred and/or Series B AMPS, be sold back to it (redeemed).
Otherwise, prior to July 31, 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 Investment Company Act of 1940, as amended), the Fund at
its option may redeem (i) the Series A Preferred beginning on July 31, 2008,
and (ii) the Series B AMPS 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 AMPS, 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 AMPS. 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 July 28, 2003, which contains
additional information about the Fund. The Statement of Additional Information
is incorporated by reference in its entirety into this prospectus. You can
review the table of contents of the Statement of Additional Information on
page 59 of this prospectus. You may request a free copy of the Statement of
Additional Information 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 Statement of Additional Information as well
as reports, proxy and information statements and other information regarding
registrants, including the Fund, that file electronically with the Securities
and Exchange Commission 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.
(This Page Intentionally Left Blank)
TABLE OF CONTENTS
Page
----
SUMMARY.......................................................................1
FINANCIAL HIGHLIGHTS.........................................................16
USE OF PROCEEDS..............................................................17
THE FUND.....................................................................17
CAPITALIZATION...............................................................17
INVESTMENT OBJECTIVE AND POLICIES............................................19
RISK FACTORS AND SPECIAL CONSIDERATIONS......................................26
HOW THE FUND MANAGES RISK....................................................32
MANAGEMENT OF THE FUND.......................................................33
PORTFOLIO TRANSACTIONS.......................................................35
DIVIDENDS AND DISTRIBUTIONS..................................................35
DESCRIPTION OF THE SERIES A PREFERRED
AND SERIES B AMPS.......................................................37
THE AUCTION OF SERIES B AMPS.................................................47
DESCRIPTION OF CAPITAL SHARES AND OTHER SECURITIES...........................50
TAXATION.....................................................................50
ANTI-TAKEOVER PROVISIONS OF THE FUND'S GOVERNING DOCUMENTS...................53
CUSTODIAN, TRANSFER AGENT, AUCTION AGENT AND DIVIDEND-DISBURSING AGENT.......54
UNDERWRITING.................................................................55
LEGAL MATTERS................................................................58
EXPERTS......................................................................58
ADDITIONAL INFORMATION.......................................................59
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS............................59
TABLE OF CONTENTS OF SAI.....................................................60
(This Page Intentionally Left Blank)
SUMMARY
This is only a summary. You should review the more detailed information
contained in this prospectus and the Statement of Additional Information,
dated July 28, 2003 (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 June
30, 2003, the net assets of the Fund
were $101,252,405, and the Fund had
outstanding 15,282,735 common shares.
The Fund currently expects to
complete a rights offering for its
common shares on September 30, 2003.
Assuming the primary subscription of
rights offering had been completed as
of June 30, 2003, the net assets of
the Fund as of that date would have
been approximately $134,527,249.
There can be no assurance as to when,
or if, the rights offering will be
completed. Prior to the issuance of
the Series A Preferred and/or Series
B AMPS offered by this prospectus,
the Fund had no preferred shares
outstanding.
The Offering............................ The Fund offers by this prospectus,
in the aggregate, $55 million of
preferred shares of either Series A
Preferred or Series B AMPS, or a
combination of both such series. The
Series A Preferred and/or Series B
AMPS are being offered by Merrill
Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch") and
Gabelli & Company, Inc. as
underwriters. Upon issuance, the
Series A Preferred and the Series B
AMPS will have equal seniority with
respect to dividends and liquidation
preference. See "Description of the
Series A Preferred and Series B
AMPS."
Series A Preferred. The Fund is
offering 1,200,000 shares of 5.625%
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.
Application has been made to list the
Series A Preferred on the NYSE and it
is anticipated that trading of the
Series A Preferred on the NYSE will
commence within 30 days from the date
of this prospectus.
Series B AMPS. The Fund is offering
1,000 shares of Series B AMPS, 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 AMPS is issued.
The Fund may in the future offer
additional Series B AMPS. The Series
B AMPS will not be listed on an
exchange. Instead, investors may buy
or sell Series B AMPS 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 AMPS will not
receive certificates representing
ownership of their shares. The
securities depository (The Depository
Trust Company ("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 debt or equity securities of
foreign and domestic companies
involved to a substantial extent
(e.g., at least 50% of the assets,
gross income or net profits of a
company is committed to or derived
from) in providing products, services
or equipment for (i) the generation
or distribution of electricity, gas
and water and (ii) telecommunications
services or infrastructure
operations, such as airports, toll
roads and municipal services
(collectively, the "Utility
Industry"). The remaining 20% of 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 5.625% of its $25 per share
liquidation preference, are
cumulative from the 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 September 26, 2003.
Series B AMPS. The holders of Series
B AMPS 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 AMPS.
Dividend
Initial Payment Date Number of
Dividend for Initial Days of Initial
Rate Dividend Period Dividend Period
---- --------------- ---------------
Series B
AMPS........ 1.07% August 13, 2003 13
For subsequent dividend periods, the
Series B AMPS 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 Market 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 AMPS
exceed the then-maximum rate. The
maximum applicable rate for any
standard rate period will be (as set
forth in the table below) the greater
of (i) the applicable percentage of
the reference rate or (ii) the
applicable spread plus the reference
rate. The reference rate is the
applicable LIBOR Rate (for a dividend
period or a special dividend period
of fewer than 365 days), or the
applicable Treasury Index Rate (for a
special dividend period of 365 days
or more). The applicable percentage
and applicable spread will be
determined based on the lower of the
credit ratings assigned to the Series
B AMPS by Moody's and S&P. If Moody's
and S&P or both do not make such
ratings available, the rate will be
determined by reference to equivalent
ratings issued by a substitute rating
agency.
Credit Ratings for Series B AMPS
Applicable
Moody's S&P Percentage of Applicable
Credit Rating Credit Rating Reference Rate Spread
------------- ------------- -------------- ----------
Aaa AAA 125% 125 bps
Aa3 to Aa1 AA- to AA+ 150% 150 bps
A3 to A1 A- to A+ 200% 200 bps
Baa3 to Baa1 BBB- to BBB+ 250% 250 bps
Below Baa3 Below BBB- 300% 300 bps
See "Description of the Series A
Preferred and Series B AMPS --
Dividends on the Series B AMPS --
Maximum Rate." For example,
calculated as of December 31, 2002
and March 31, 2003, respectively, the
maximum rate for the Series B AMPS
(assuming a rating of "Aaa" by
Moody's and "AAA" by S&P) would have
been approximately 2.63% and 2.53%,
for dividend periods of 90 days, and
approximately 2.84% and 2.75% for
dividend periods of two years.* There
is no minimum 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 AMPS
-- Dividends on the Series B AMPS"
and "The Auction of Series B AMPS."
-------------------
* Dividend periods presented for illustrative purposes only. Actual
dividend periods may be of greater or lesser duration.
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
AMPS as to the payment of dividends,
any dividends being paid on such
preferred shares (including any
outstanding Series A Preferred and
Series B AMPS) 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. In order to
allow its holders of common shares to
realize a predictable, but not
assured, level of cash flow and some
liquidity periodically on their
investment without having to sell
shares, the Fund has adopted a
policy, which may be modified at any
time by its Board of Trustees, of
paying distributions on its common
shares of $0.06 per share per month.
For the fiscal year ending December
31, 2002, the Fund made distributions
of $0.72 per common share, of which
$0.25 constituted a return of
capital. The Fund has made monthly
distributions with respect to its
common shares since October 1999,
none of which has constituted a
return of capital, except for the
fiscal year ending December 31, 2002,
as indicated in the preceding
sentence.
Auction Procedures..................... You may buy, sell or hold Series B
AMPS 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 AMPS, except
that no dividend rate will be higher
than the then-maximum rate. See
"Description of the Series A
Preferred and Series B AMPS --
Dividends on the Series B AMPS."
If you own shares of Series B AMPS,
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 AMPS 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 AMPS 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 AMPS, 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 AMPS. You may also enter an
order to buy additional Series B
AMPS. All orders must be for whole
shares. All orders you submit are
irrevocable. There is a fixed number
of Series B AMPS 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 AMPS and
general economic conditions including
current interest rates. If you own
Series B AMPS 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 AMPS, 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 AMPS,
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 AMPS 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 AMPS. A
broker-dealer's failure to submit
orders for Series B AMPS 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 AMPS 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 360,
times (ii) 1/4 of 1%, times (iii)
$25,000, times (iv) the aggregate
number of Series B AMPS 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 AMPS placed by the
broker-dealers at the auction agreed
to by the Fund and the
broker-dealers.
If the number of Series B AMPS 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 AMPS 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 AMPS available for
purchase in the auction.
If the number of Series B AMPS 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
AMPS 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 AMPS 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 AMPS 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 AMPS 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 AMPS, 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 90% of the
then-current reference rate.
The auction procedures include a pro
rata allocation of Series B AMPS
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 AMPS
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 AMPS 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 AMPS
will be held on August 12, 2003, the
business day preceding the dividend
payment date for the initial dividend
period. Thereafter, except during
special dividend periods, auctions
for Series B AMPS 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 AMPS
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 AMPS."
Tax Treatment of Preferred
Share Dividends......................... The Fund expects that dividends paid
on the Series A Preferred and Series
B AMPS will consist of (i) long-term
capital gain (gain from the sale of a
capital asset held longer than 12
months), (ii) qualified dividend
income (income from domestic and
certain foreign corporations), and
(iii) investment company taxable
income (other than qualified dividend
income), including interest income,
short-term capital gain and income
from certain hedging and interest
rate transactions. For individuals,
the maximum federal income tax rate
on long-term capital gain is
currently 15%, on qualified dividend
income is 15%, and on other types of
income is 35%. These tax rates are
scheduled to apply through 2008. We
cannot assure you, however, as to
what percentage of the dividends paid
on the Series A Preferred or Series B
AMPS will consist of long-term
capital gains and qualified dividend
income, which are taxed at lower
rates for individuals than ordinary
income. For a more detailed
discussion, see "Taxation."
Rating and Asset
Coverage Requirements................... Series A Preferred. Before any shares
can be issued, the Series A Preferred
must receive a rating of "Aaa" from
Moody's. 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 "Aaa" from
Moody's on the Series A Preferred.
See "Description of the Series A
Preferred and Series B AMPS -- Rating
Agency Guidelines."
Series B AMPS. Before any shares can
be issued, the Series B AMPS must
receive both a rating of "Aaa" from
Moody's and a rating of "AAA" from
S&P. As with the Series A Preferred,
the Statement of Preferences setting
forth the rights and preferences of
the Series B AMPS contains certain
tests that the Fund must satisfy to
obtain and maintain a rating of "Aaa"
from Moody's and "AAA" from S&P. See
"Description of the Series A
Preferred and Series B AMPS -- Rating
Agency Guidelines."
Asset Coverage Requirements. Under
the asset coverage tests to which
each of the Series A Preferred and/or
Series B AMPS 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 AMPS
-- 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 Investment
Company Act of 1940, as amended (the
"1940 Act") with respect to all
outstanding preferred shares of the
Fund, including the Series A
Preferred and the Series B AMPS. See
"Description of the Series A
Preferred and Series B AMPS -- Asset
Maintenance Requirements."
The Fund estimates that if the shares
offered hereby had been issued and
sold as of June 30, 2003, the asset
coverage under the 1940 Act would
have been approximately 281%
immediately following such issuance
and sale and 342% assuming that the
primary subscription of 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
$1,650,000 and in the case of the
Fund's rights offering, the deduction
of additional estimated offering
expenses of $500,000). The asset
coverage would have been computed as
follows:
value of Fund assets less liabilities
not constituting senior securities
($154,602,405) / senior securities
representing indebtedness plus
liquidation preference of both
classes of preferred shares
($55,000,000), expressed as a
percentage = 281%.
value of Fund assets less liabilities
not constituting senior securities
(including assets attributable to the
rights offering) ($187,877,249) /
senior securities representing
indebtedness plus liquidation
preference of both classes of
preferred shares ($55,000,000),
expressed as a percentage = 342%.
The Statement of Preferences for each
of the Series A Preferred and the
Series B AMPS, 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 AMPS 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 the guidelines of each of
the applicable rating agencies 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 AMPS,
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 AMPS
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 AMPS
-- Redemption."
In the event of a mandatory
redemption, such redemption will be
made from the Series A Preferred, the
Series B AMPS 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 AMPS
as follows:
Series A Preferred. Commencing July
31, 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
July 31, 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 AMPS --
Redemption -- Optional Redemption of
the Series A Preferred."
Series B AMPS. The Fund at its option
generally may redeem Series B AMPS,
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
AMPS 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 AMPS
-- Redemption -- Optional Redemption
of the Series B AMPS."
The redemption price per Series B
AMPS 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 AMPS 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 AMPS --
Redemption -- Optional Redemption of
the Series B AMPS."
Voting Rights........................... At all times, holders of the Fund's
preferred shares outstanding
(including the Series A Preferred
and/or Series B AMPS), 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 trustees. 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
additional trustees that would then
constitute a simple majority of the
trustees until all cumulative
dividends on all preferred shares
have been paid or provided for.
Holders of outstanding Series A
Preferred, Series B AMPS 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 AMPS 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 AMPS --
Voting Rights."
Liquidation Preference.................. The liquidation preference of each
share of Series A Preferred is $25.
The liquidation preference of the
Series B AMPS 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
AMPS-- 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 and, consequently may be
illiquid during that period.
Limitation on Secondary
Market Trading of the
Series B AMPS........................... The Series B AMPS will not be listed
on an exchange. Broker-dealers may,
but are not obliged to, maintain a
secondary trading market in Series B
AMPS outside of auctions. There can
be no assurance that a secondary
market will provide owners with
liquidity. You may transfer Series B
AMPS 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 AMPS you
should consider the risks carefully.
Series A Preferred. Primary risks
specially 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 AMPS. Primary risks
specially associated with an
investment in Series B AMPS include:
If an auction fails, you may not be
able to sell some or all of your
Series B AMPS. The Fund is not
obliged to redeem your Series B AMPS
if an auction fails. The underwriters
are not required to make a market in
the Series B AMPS. No broker-dealer
is obligated to maintain a secondary
market for the Series B AMPS apart
from the auctions.
You may receive less than the price
you paid for your Series B AMPS if
you sell them outside of the auction,
especially when market interest rates
are rising.
Both the Series A Preferred and
Series B AMPS. An investment in
either the Series A Preferred or
Series B AMPS also includes the
following primary risks:
You will have no right to require the
Fund to repurchase or redeem your
shares of Series A Preferred or
Series B AMPS at any time.
A rating agency could downgrade or
withdraw the rating assigned to the
Series A Preferred and/or Series B
AMPS, 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.
In general, the Fund may redeem your
Series B AMPS at any time and may
redeem your Series A Preferred at any
time after July 31, 2008, and may at
any time redeem shares of either or
both series to meet regulatory or
rating agency requirements.
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
AMPS.
The Series A Preferred and/or Series
B AMPS 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 AMPS 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 AMPS.
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."
Under normal market conditions, the
Fund invests at least 80% of its
assets in foreign and domestic
companies in the Utility Industry (as
described under "Investment Objective
and Policies") and, as a result, the
net asset value of the Fund will be
more susceptible to factors affecting
those particular types of companies,
including government regulation,
inflation, cost increases in fuel and
other operating expenses,
technological innovations that may
render existing products and
equipment obsolete, and increasing
interest rates resulting in high
interest costs on borrowings needed
for capital construction programs,
including costs associated with
compliance with environmental and
other regulations. 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."
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
has voluntarily agreed to waive the
portion of its investment advisory
fee attributable to an amount of
assets of the Fund equal to the
aggregate stated value of the Fund's
outstanding Series A Preferred or
Series B AMPS, 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
AMPS, the net cost of capital to the
Fund with respect to the Series B
AMPS for such year expressed as a
percentage (including, without
duplication, dividends paid by the
Fund on the Series B AMPS and the net
cost to the Fund of any associated
swap or cap transaction if the Fund
hedges its Series B AMPS dividend
obligations). This waiver will apply
to the portion of the Fund's assets
attributable to the Series A
Preferred and Series B AMPS,
respectively, for so long as any
shares of such series remain
outstanding. See "Management of the
Fund."
Repurchase of Common
Shares and Anti-takeover
Provisions.............................. The Fund's Board of Trustees has
authorized the Fund to repurchase its
common shares in the open market when
the common shares are trading at a
discount of 10% or more from net
asset value. Such repurchases are
subject to the Fund maintaining asset
coverage on its preferred shares and
to certain notice and other
requirements under the 1940 Act. See
"Description of Capital Shares and
Other Securities -- Common Shares."
Certain provisions of the Fund's
Agreement and Declaration of Trust
and By-Laws (collectively, the
"Governing Documents") may be
regarded as "anti-takeover"
provisions. Pursuant to these
provisions, only one of three classes
of trustees is elected each year, and
the affirmative vote of the holders
of 75% 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, among other things, the
average 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 AMPS. 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 AMPS.
Interest Rate Transactions ............. The Fund may enter into interest rate
swap or cap transactions in relation
to all or a portion of the Series B
AMPS in order to manage the impact on
its portfolio of changes on the
dividend rate of the Series B AMPS.
Through these transactions, the Fund
may, for example, obtain the
equivalent of a fixed rate for the
Series B AMPS 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 AMPS. 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
AMPS. 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 AMPS.
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 AMPS). 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
AMPS in a notional amount in excess
of the outstanding amount of the
Series B AMPS. 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."
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 Fund common share
outstanding throughout each period: Six Months Ended Year Ended Year Ended Year Ended Period Ended
June 30, 2003 December 31, December 31, December 31,December 31,
(Unaudited) 2002 2001 2000 1999(a)
-------------- ----------- ---------- ---------- ----------
Operating performance:
Net asset value, beginning of period............. $ 6.27 $ 7.32 $ 8.21 $ 7.62 $ 7.50
---------- -------- -------- --------- ---------
Net investment income............................ 0.05 0.11 0.12(e) 0.15 0.08
Net realized and unrealized gain (loss) on
investments..................................... 0.67 (0.62) (0.32)(e) 1.44 0.19
---------- -------- -------- --------- ---------
Total from investment operations................. 0.72 (0.20) (0.20) 1.59 0.27
---------- -------- -------- --------- ---------
Change in net asset value from transactions in
shares of beneficial interest:
Increase in net asset value from shares issued in
rights offering ................................ -- 0.15 -- -- --
Increase in net asset value from Fund share trans-
actions......................................... -- 0.03 0.01 -- --
---------- -------- -------- --------- ---------
Distributions to shareholders:
Net investment income............................ (0.05) (0.11) (0.21) (0.06) (0.08)
Net realized gain on investments................. -- (0.36) (0.49) (0.94) (0.07)
Return of capital................................ ( 0.31) (0.25) -- -- --
---------- -------- -------- --------- ---------
Total distributions.............................. (0.36) (0.72) (0.70) (1.00) (0.15)
---------- -------- -------- --------- ---------
Net asset value, end of period................... $ 6.63 $ 6.27 $ 7.32 $ 8.21 $ 7.62
========== ======== ========= ========= =========
Net asset value total return+.................... 10.29% (6.79)% (3.15)% 22.01% 3.62%
---------- -------- -------- --------- ---------
Market value, end of period...................... $ 9.61 $ 8.72 $ 9.33 $ 8.75 $ 7.63
========== ======== ========= ========= =========
Total investment return++........................ 14.95% 1.70% 15.82% 29.95% 3.70%
========== ======== ========= ========= =========
Ratios to average net assets and supplemental
data:
Net assets, end of period (in 000's)............. $101,252 $95,111 $82,197 $90,669 $83,330
Ratio of net investment income to average net
assets(c)...................................... 1.72%(b) 1.65% 1.57% 1.88% 2.27%(b)
Ratio of operating expenses to average net
assets(c)(d)................................... 1.93%(b) 1.93% 2.00% 1.95% 1.85%(b)
Portfolio turnover rate.......................... 3% 29% 41% 92% 37%
+ Based on net asset value per share, adjusted for reinvestment of
distributions. Total return for the periods of less than one year is not
annualized.
++ Based on market value per share, adjusted for reinvestment of
distributions, including the effect of shares issued pursuant to the
rights offering, assuming full subscription by the shareholder. Total
return for the periods of less than one year is not annualized.
(a) The Gabelli Utility Trust commenced operations on July 9, 1999.
(b) Annualized.
(c) During the period ended December 31, 1999, the Fund's administrator
voluntarily reimbursed certain expenses. If such reimbursement had not
occurred, the annualized ratios of net investment and operating expenses
to average net assets would have been 1.85% and 2.17%, respectively.
(d) The ratios do not include a reduction of expenses for custodian fee
credits on cash balances maintained with the custodian. Including such
custodian fee credits for the six months ended June 30, 2003 and the year
ended December 31, 2002, 2001, and 2000, the expense ratios would be
1.93%, 1.93%, 2.00% and 1.93% , respectively.
(e) 2001's Net investment income per share and Net realized and unrealized
gain (loss) on investments were originally presented in the Financial
Highlights without regard to 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 approximately
$53,350,000, 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 common shares to The Gabelli Equity Trust Inc. in exchange for
approximately $75 million of cash and short-term fixed income instruments.
CAPITALIZATION
The following table sets forth the unaudited capitalization of
the Fund as of June 30, 2003, and its adjusted capitalization assuming (i) the
Series A Preferred and/or Series B AMPS offered in this prospectus had been
issued and (ii) such shares had been issued and the Fund's rights offering had
been completed. We cannot assure you as to when, or if, the rights offering
will be completed.
As of June 30, 2003
As Adjusted
Assuming
Actual As adjusted Rights Offering
------ ----------- ---------------
(Unaudited)
Preferred shares, $0.001 par value, unlimited shares
authorized.
(The "Actual" column reflects the Fund's outstanding
capitalization as of June 30, 2003; the "As Adjusted"
column assumes the issuance of an additional 1,200,000
shares of Series A Preferred and 1,000 shares of
Series B AMPS, $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 is fully
subscribed at its completion.......................... $0.00 $55,000,000 $55,000,000
-------------------- ----------------- --------------------
Shareholders' equity applicable to common shares:
Common shares, $.001 par value per share;
15,282,735 shares outstanding.......................... $15,283 $15,283 $20,377
Paid-in surplus*....................................... 99,159,823 97,509,823 130,779,573
Accumulated net realized loss from investment
transactions........................................... (1,055,344) (1,055,344) (1,055,344)
Net unrealized appreciation............................ 3,132,643 3,132,643 3,132,643
-------------------- ----------------- --------------------
Net assets applicable to common shares................. $101,252,405 $99,602,405 $132,877,249
-------------------- ----------------- --------------------
Net assets, plus the liquidation preference of $101,252,405 $154,602,405 $187,877,249
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 AMPS
issuance of $1,650,000. As Adjusted Assuming Rights Offering paid-in
surplus reflects a reduction for estimated rights offering expenses of
$500,000.
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 debt or equity securities of
foreign and domestic companies involved to a substantial extent (e.g., at
least 50% of the assets, gross income or net profits of a company is committed
to or derived from) in providing products, services or equipment for (i) the
generation or distribution of electricity, gas and water and (ii)
telecommunications services or infrastructure operations, such as airports,
toll roads and municipal services.
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 is 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 Defensive Investments. Although under normal market
conditions at least 80% of the Fund's assets will consist of common stock and
other debt or equity 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
U.S. government, its agencies or instrumentalities; commercial paper rated A-1
or higher by Standard & Poor's Ratings Services ("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 be 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." The Fund may find it more difficult to
achieve the long-term growth of capital component of its investment objective
during temporary defensive periods.
Lower Rated Securities. The Fund may invest up to 25% of its total
assets in fixed-income securities rated in the lower rating categories of
recognized statistical rating agencies, such as securities rated "CCC" or
lower by S&P or "Caa" or lower by Moody's, or non-rated securities of
comparable quality. These debt securities are predominantly speculative and
involve major risk exposure to adverse conditions. Debt securities that are
not rated or rated lower than "BBB" by S&P or lower than "Baa" by Moody's are
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
value to respond to changes in the economy or the financial markets.
Lower-rated debt obligations also present risks based on payment
expectations. If an issuer calls the obligation for redemption (often a
feature of fixed income securities), the Fund may have to replace the security
with a lower yielding security, resulting in a decreased return for investors.
Also, as the principal value of bonds moves inversely with movements in
interest rates, in the event of rising interest rates the value of the
securities held by the Fund may decline proportionately more than a portfolio
consisting of higher rated securities. Investments in zero coupon bonds may be
more speculative and subject to greater fluctuations in value due to changes
in interest rates than bonds that pay interest currently. Interest rates are
at historical lows and, therefore, it is likely that they will rise in the
future.
As 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 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. 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.
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. The Fund may, from time to time, subject to guidelines of
the Board of Trustees and the limitations set forth in this 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 over- the-counter ("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, 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, in return for a premium, to sell the underlying security to the writer,
at a specified price, and obligating the writer to purchase the underlying
security from the holder at that price.
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
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 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. On behalf of the Fund, the
Investment Adviser may, subject to guidelines of the Board of Trustees,
purchase and sell financial futures contracts and options thereon which are
traded on a commodities exchange or board of trade for certain hedging, yield
enhancement and risk management purposes, in accordance with regulations of
the Commodity Futures Trading Commission ("CFTC"). These futures contracts and
related options may be on debt securities, financial indices, securities
indices, U.S. Government securities and foreign currencies. A financial
futures contract is an agreement to purchase or sell an agreed amount of
securities or currencies at a set price for delivery in the future.
Under CFTC regulations, the Investment Adviser on behalf of the Fund
may purchase and sell futures contracts and options thereon for bona fide
hedging purposes, as defined under CFTC regulations, without regard to the
percentage of the Fund's assets committed to margin and option premiums. Other
than for bona fide hedging purposes, 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 total
assets and (ii) the aggregate market value of its outstanding futures
contracts and the market value of the currencies and futures contracts subject
to outstanding options written by the Fund, as the case may be, do not exceed
50% of its total assets.
Forward Currency Exchange Contracts. Subject to guidelines of the
Board of Trustees, the Fund may enter into forward foreign currency exchange
contracts to protect the value of its portfolio against uncertainty in the
level of future currency exchange rates. The Fund may enter into such
contracts on a spot, i.e., cash, basis at the rate then prevailing in the
currency exchange market or on a forward basis, by entering into a forward
contract to purchase or sell currency. A forward contract on foreign currency
is an obligation to purchase or sell a specific currency at a future date,
which may be any fixed number of days agreed upon by the parties from the date
of the contract at a price set on the date of the contract. The Fund expects
to invest in forward currency contracts for hedging or currency risk
management purposes and not in order to speculate on currency exchange rate
movements. The Fund will only enter into forward currency contracts with
parties which it believes to be creditworthy.
When Issued, Delayed Delivery Securities and Forward Commitments. The
Fund may enter into forward commitments for the purchase or sale of
securities, including on a "when issued" or "delayed delivery" basis, in
excess of customary settlement periods for the type of security involved. In
some cases, a forward commitment may be conditioned upon the occurrence of a
subsequent event, such as approval and consummation of a merger, corporate
reorganization or debt restructuring, i.e., a when, as and if issued security.
When such transactions are negotiated, the price is fixed at the time of the
commitment, with payment and delivery taking place in the future, generally a
month or more after the date of the commitment. While it will only enter into
a forward commitment with the intention of actually acquiring the security,
the Fund may sell the security before the settlement date if it is deemed
advisable.
Securities purchased under a forward commitment are subject to market
fluctuation, and no interest (or dividends) accrues to the Fund prior to the
settlement date. The Fund will segregate with its custodian cash or liquid
securities in an aggregate amount at least equal to the amount of its
outstanding forward commitments.
Short Sales. The Fund may make short sales of securities. A short
sale is a transaction in which the Fund sells a security it does not own in
anticipation that the market price of that security will decline. The market
value of the securities sold short of any one issuer will not exceed either 5%
of the Fund's total assets or 5% of such issuer's voting securities. The Fund
also will not make a short sale, if, after giving effect to such sale, the
market value of all securities sold short exceeds 25% of the value of its
assets or the Fund's aggregate short sales of a particular class of securities
exceeds 25% of the outstanding securities of that class. The Fund may also
make short sales "against the box" without respect to such limitations. In
this type of short sale, at the time of the sale, the Fund owns, or has the
immediate and unconditional right to acquire at no additional cost, the
identical security.
The Fund expects to make short sales both to obtain capital gains
from anticipated declines in securities and as a form of hedging to offset
potential declines in long positions in the same or similar securities. The
short sale of a security is considered a speculative investment technique.
Short sales "against the box" may be subject to special tax rules, one of the
effects of which may be to accelerate income to the Fund.
When the Fund makes a short sale, it must borrow the security sold
short and deliver it to the broker-dealer through which it made the short sale
in order to satisfy its obligation to deliver the security upon conclusion of
the sale. The Fund may have to pay a fee to borrow particular securities and
is often obligated to pay over any payments received on such borrowed
securities.
The Fund's obligation to replace the borrowed security will be
secured by collateral deposited with the broker-dealer, usually cash, U.S.
government securities or other highly liquid debt securities. The Fund will
also be required to deposit similar collateral with its custodian, State
Street Bank and Trust Company ("State Street"), and, to the extent, if any,
necessary so that the value of both collateral deposits in the aggregate is at
all times equal to the greater of the price at which the security is sold
short or 100% of the current market value of the security sold short.
Depending on arrangements made with the broker-dealer from which it borrowed
the security regarding payment over of any payments received by the Fund on
such security, the Fund may not receive any payments (including interest) on
its collateral deposited with such broker-dealer. If the price of the security
sold short increases between the time of the short sale and the time the Fund
replaces the borrowed security, the Fund will incur a loss; conversely, if the
price declines, the Fund will realize a capital gain. Any gain will be
decreased, 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 shares (such as the Series A
Preferred or Series B AMPS) 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 shares and debt outstanding.
Any such debt or preferred shares 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 shares 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 shares. These two risks would generally make the Fund's
total return to holders of common shares 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 shares 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
share 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 Internal Revenue Code of 1986, as amended (the
"Code"). See "Taxation." Finally, if the asset coverage for preferred shares
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 shares 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). Higher portfolio turnover may decrease the
after-tax return 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.
The portfolio turnover rates of the Fund for the fiscal years ending
December 31, 2002, December 31, 2001 and December 31, 2000 were 29%, 41% and
92%, respectively.
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 AMPS. The market value for the Series A
Preferred and/or Series B AMPS will be influenced by changes in interest
rates, the perceived credit quality of the Series A Preferred or Series B AMPS
and other factors. The Series A Preferred and/or Series B AMPS 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 AMPS.
Subject to such circumstances, the Series A Preferred and/or Series B AMPS are
perpetual.
The credit rating on the Series A Preferred or Series B AMPS 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 AMPS. 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 AMPS.
The Series A Preferred and the Series B AMPS are not obligations of
the Fund. The Series A Preferred and/or Series B AMPS 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 AMPS for the full redemption
price. In addition, the fund has adopted a policy of distributing $0.06 per
share per month to common shareholders. In the event investment returns do not
provide sufficient amounts to fund such distributions, the Fund may be
required to return capital as part of such distribution, which may have the
effect of decreasing the asset coverage per share with respect to the Fund's
Series A Preferred and Series B AMPS. The Fund has made monthly distributions
with respect to its common shares since October 1999, none of which have
constituted a return of capital, except for the fiscal year ended December 31,
2002, when $0.25 of the monthly distributions for the year constituted a
return of capital.
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 AMPS being offered in this
prospectus, the amount of leverage will represent approximately 35.6% 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 AMPS'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 Investment
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 AMPS) 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 Moody's assigns a rating of "Aaa" to the Series A
Preferred and/or Series B AMPS and that S&P assigns a rating of "AAA" to the
Series B AMPS, the ratings do not eliminate or necessarily mitigate the risks
of investing in Series A Preferred or Series B AMPS. The credit rating on the
Series A Preferred or Series B AMPS 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 AMPS. A reduction or withdrawal of
the credit ratings on the Series B AMPS may also make your Series B AMPS
shares less liquid at an auction or in the secondary market.
In addition, if a rating agency rating the Series B AMPS at the
Fund's request downgrades the Series B AMPS, the maximum rate on the Series B
AMPS will increase. See "Description of the Series A Preferred and Series B
AMPS -- 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 AMPS
Interest Rate Risk. In connection with the sale of the Series B AMPS,
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 AMPS or
obtain the equivalent of a fixed rate for the Series B AMPS 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 AMPS at an
auction if the auction fails, i.e., if there is more Series B AMPS 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 AMPS only at a specified rate
that exceeds the rate set at the auction, you will not retain your Series B
AMPS. 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 AMPS, which
could also affect the liquidity of your investment. See "Description of the
Series A Preferred and Series B AMPS" and "The Auction of Series B AMPS."
Secondary Market Risk. If you try to sell your Series B AMPS 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 AMPS are not required to maintain this market, and the Fund is not required
to redeem Series B AMPS if either an auction or an attempted secondary market
sale fails because of a lack of buyers. The Series B AMPS is not registered on
a stock exchange or the NASDAQ stock market. If you sell your Series B AMPS 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
Under normal market conditions, the Fund will invest 80% or more 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,
technological innovations that may render existing products and equipment
obsolete, and increasing interest rates resulting in high interest costs on
borrowings needed for capital construction programs, including costs
associated with compliance with environmental and other regulations.
Sector Risk. The Fund concentrates its investments in the utilities
industry. As a result, the Fund's investments may be subject to greater risk
and market fluctuation than a fund that had securities representing a broader
range of investment alternatives. The prices of securities issued by utility
companies may change in response to interest rate changes. Generally, when
interest rates go up, the value of securities issued by utility companies goes
down. Conversely, when interest rates go down, the value of securities issued
by utility companies goes up. There is no guarantee that this relationship
will hold in the future.
Government Regulation. There are substantial differences between the
regulatory practices and policies in various jurisdictions, and any given
regulatory agency may make major shifts in policy from time to time. There is
no assurance that regulatory authorities will, in the future, permit rate
increases or that such increases will be adequate to permit the payment of
dividends on common stocks. Additionally, existing and possible future
regulatory legislation may make it even more difficult for these utilities to
obtain adequate relief.
Various regulatory regimes also impose limitations on the percentage
of the shares of a public utility held by a fund as an investment for its
clients. These limitations may unfavorably restrict the ability of the Fund to
make certain investments.
Deregulation. Changing regulation constitutes one of the key
industry-specific risks for the Fund, especially with respect to its
investments in traditionally regulated public utilities and partially
regulated utility companies. Domestic and foreign regulators monitor and
control utility revenues and costs, and therefore may limit utility profits
and dividends paid to investors, which could result in reduced income to the
Fund. Regulatory authorities also may restrict a company's access to new
markets, thereby diminishing the company's long-term prospects. The
deregulation of certain utilities companies may eliminate restrictions on
profits and dividends, but may also subject these companies to greater risks
of loss. Deregulation of the utility industry could have a positive or
negative impact on the Fund. The Investment Adviser believes that certain
utility companies' fundamentals should continue to improve as the industry
undergoes deregulation. Companies may seek to strengthen their competitive
positions through mergers and takeovers. The loosening of the government
regulation of utilities should encourage convergence within the industry.
Improving earnings prospects, strong cash flows, share repurchases and
takeovers from industry consolidation may tend to boost share prices. However,
as has occurred in California and elsewhere, certain companies may be less
able to meet the challenge of deregulation as competition increases and
investments in these companies would not be likely to perform well. Individual
sectors of the utility market are subject to additional risks. These risks can
apply to all utility companies - regulated or fully or partially deregulated
and unregulated. For example, telecommunications companies have been affected
by technological developments leading to increased competition, as well as
changing regulation of local and long-distance telephone services and other
telecommunications businesses. Certain telecommunications companies have been
adversely affected by the new competitive climate.
Financing. Currently companies in the utility industry are
encountering difficulties in obtaining financing for construction programs.
Issuers experiencing such difficulties may also experience lower
profitability, which can result in reduced income to the Fund. Historically,
companies in the utility industry have also encountered such financing
difficulties during inflationary periods.
Equipment and Supplies. Utility companies face the risk of lengthy
delays and increased costs associated with the design, construction, licensing
and operation of their facilities. Moreover, technological innovations may
render existing plants, equipment or products obsolete. Increased costs and a
reduction in the availability of fuel (such as oil, coal, nuclear or natural
gas) also may adversely affect the profitability of utility companies.
Electric utilities may be burdened by unexpected increases in fuel
and other operating costs. They may also be negatively affected when long-term
interest rates rise. Long-term borrowings are used to finance most utility
investments, and rising interest rates lead to higher financing costs and
reduced earnings. There are also the considerable costs associated with
environmental compliance, nuclear waste clean-up, and safety regulation.
Increasingly, regulators are calling upon electric utilities to bear these
added costs, and there is a risk that these costs will not be fully recovered
through an increase in revenues.
Among gas companies, there has been a move to diversify into oil and
gas exploration and development, making investment returns more sensitive to
energy prices. In the case of the water utility sector, the industry is highly
fragmented, and most water supply companies find themselves in mature markets,
although upgrading of fresh water and waste water systems is an expanding
business.
Long-term Objective; Not a Complete Investment Program
The Fund is intended for investors seeking long-term capital growth
and income. The Fund is not meant to provide a vehicle for those who wish to
play short-term swings in the stock market. An investment in shares of the
Fund should not be considered a complete investment program. Each shareholder
should take into account the 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. In addition, the underlying
issuers of certain depositary receipts, particularly unsponsored or
unregistered depositary receipts, are under no obligation to distribute
shareholder communications to the holders of such receipts, or to pass through
to them any voting rights with respect to the deposited securities.
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, the war in Iraq and
its aftermath and other geopolitical events have led to, and may in the future
lead to, increased short-term market volatility and may have long-term effects
on U.S. and world economies and 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 AMPS.
Anti-takeover Provisions
The Fund's Governing Documents include provisions that could limit
the ability of other entities or persons to acquire control of the Fund or
convert the Fund to an open-end fund. See "Anti-takeover Provisions of the
Fund's Governing Documents."
HOW THE FUND MANAGES RISK
Investment Restrictions
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 in order to obtain and
maintain ratings from Moody's or S&P on its preferred shares.
Interest Rate Transactions
The Fund may enter into interest rate swap or cap transactions in
relation to all or a portion of the Series B AMPS in order to manage the
impact on its portfolio of changes in the dividend rate of the Series B AMPS.
Through these transactions the Fund may, for example, obtain the equivalent of
a fixed rate for the Series B AMPS 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 AMPS. 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 AMPS. 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 AMPS. 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 AMPS. 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 AMPS) 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 AMPS 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 AMPS in a notional
amount in excess of the outstanding amount of the Series B AMPS. 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
trustees 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 has voluntarily agreed to waive the portion of its
investment advisory fee attributable to an amount of assets of the Fund equal
to the aggregate stated value of, as the case may be, its outstanding Series A
Preferred and/or Series B AMPS 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 AMPS, the net cost of capital
to the Fund with respect to the Series B AMPS for such year expressed as a
percentage (including, without duplication, dividends paid by the Fund on the
Series B AMPS and the net cost to the Fund of any associated swap or cap
transaction if the Fund hedges its Series B AMPS dividend obligations). This
waiver will apply to the portion of the Fund's assets attributable to the
Series A Preferred and Series B AMPS, respectively, for so long as any shares
of such series remain outstanding. For purposes of the calculation of the fees
payable to the Investment Adviser by the Fund, average weekly net assets of
the Fund are determined at the end of each month on the basis of its average
net assets for each week during the month. The assets for each weekly period
are determined by averaging the net assets at the end of a week with the net
assets at the end of the prior week.
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 March 31, 2003, the
Investment Adviser acted as registered investment adviser to 19 management
investment companies with aggregate net assets of $8.4 billion. The Investment
Adviser, together with other affiliated investment advisers noted below had
assets under management totaling approximately $19.5 billion as of March 31,
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 $9.2 billion under management as of March 31, 2003.
Gabelli Fixed Income LLC, an affiliate of the Investment Adviser, acts as
investment adviser for The Treasurer's Fund and separate accounts having
aggregate assets of $1.4 billion under management as of March 31, 2003.
Gabelli Advisers, Inc., an affiliate of the Investment Adviser, acts as
investment manager to the Gabelli Westwood Funds having aggregate assets of
$441 million under management as of March 31, 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 trustees
of the Fund who are affiliated with the Investment Adviser.
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 trustees, 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 currently and has been responsible for the
day-to-day management of the Fund since its formation. 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 Vice Chairman of the Board and Chief Executive Officer of Lynch
Interactive Corporation, a multimedia and communications services company.
Non-resident Trustee
Karl Otto Pohl, a trustee of the Fund, resides outside the United
States and all or a significant portion of his assets are located outside the
United States. 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 a sub-administration
agreement with PFPC Inc. (the "Sub-Administrator") pursuant to which the
Sub-Administrator provides certain administrative services necessary for the
Fund's operations which do not include the investment 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. The Fund has a
policy, which may be modified at any time by its Board of Trustees, of paying
distributions on its common shares of $0.06 per share per month. This policy
permits holders of common shares to realize a predictable, but not assured,
level of cash flow and some liquidity periodically with respect to their
common shares without having to sell shares. To avoid paying income tax at the
corporate level, the Fund will distribute substantially all of its investment
company taxable income and realized capital gains. In the event that the
Fund's investment company taxable income and realized capital gains exceed the
total of the Fund's monthly distributions, the Fund intends to pay such excess
once a year. If, for any calendar year, the total monthly distributions exceed
investment company taxable income and net capital gain, the excess will
generally be treated as a tax-free return of capital up to the amount of a
shareholder's tax basis in the shares. The amount treated as a tax-free return
of capital will reduce a shareholder's tax basis in the shares, thereby
increasing such shareholder's potential gain or reducing his or her potential
loss on the sale of the shares. Any amounts distributed to a shareholder in
excess of the basis in the shares will generally be taxable to the shareholder
as capital gain. See "Taxation" below.
In the event the Fund distributes amounts in excess of its investment
company taxable income and net capital gain, such distributions will decrease
the Fund's total assets and, therefore, have the likely effect of increasing
the Fund's expense ratio. In addition, in order to make such distributions,
the Fund might have to sell a portion of its investment portfolio at a time
when independent investment judgment might not dictate such action.
The Fund, along with other closed-end registered investment companies
advised by the Investment Adviser, has obtained an exemption from Section
19(b) of the 1940 Act and Rule 19b-1 thereunder permitting the Fund to make
periodic distributions of long-term capital gains provided that any
distribution policy of the Fund with respect to its common shares calls for
periodic (e.g., quarterly or semi-annually, but in no event more frequently
than monthly) distributions in an amount equal to a fixed percentage of the
Fund's average net asset value over a specified period of time or market price
per common share at or about the time of distribution or pay-out of a fixed
dollar amount. The Fund's current policy is to make monthly distributions to
holders of its common shares. The exemption also permits the Fund to make
distributions with respect to its preferred shares in accordance with such
shares' terms.
DESCRIPTION OF THE SERIES A PREFERRED
AND SERIES B AMPS
The Fund offers by this prospectus, in the aggregate, $55 million of
preferred shares of either Series A Preferred or Series B AMPS, 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 AMPS. 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 AMPS.
For complete terms of the Series A Preferred or the Series B AMPS, 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 2,000,000 preferred shares as
Series A Preferred and up to 5,000 preferred shares as Series B AMPS. 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 AMPS, 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 AMPS will have a liquidation
preference of $25,000 per share. Upon a liquidation, each holder of Series A
Preferred or Series B AMPS 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 AMPS 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, excluding interest
thereon) to and including the date of distribution. The Series A Preferred and
the Series B AMPS 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 AMPS 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 AMPS will, upon issuance, be fully paid
and nonassessable, provided that the Fund may cause its capital shares,
including the Series A Preferred and the Series B AMPS, to pay directly, in
advance or arrears, for charges of distribution, of the custodian or transfer,
shareholder servicing or similar agent, a pro rata amount as the Fund may
determine, by setting off such charges due from each shareholder from declared
but unpaid dividends or distributions owed such shareholder and/or by reducing
the number of shares in the account of such shareholder by that number of full
and/or fractional shares which represents the outstanding amount of such
charges due from such shareholder. In addition, the Series A Preferred and
Series B AMPS will have no preemptive, exchange or conversion rights. The
Board of Trustees may by resolution classify or reclassify any authorized but
unissued capital shares of the Fund from time to time by setting or changing
the preferences, conversion or other rights, voting powers, restrictions,
limitations as to dividends or terms or conditions of redemption. The Fund
will not issue any class of shares senior to the Series A Preferred and/or
Series B AMPS.
Rating Agency Guidelines
Upon issuance, both the Series A Preferred and the Series B AMPS will
be rated "Aaa" by Moody's. In addition, the Series B AMPS will also be rated
"AAA" by S&P. The Fund is required under Moody's and S&P 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 AMPS, with
respect to the separate guidelines Moody's and S&P 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 Moody's and S&P 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 AMPS 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 AMPS, 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 Moody's or S&P.
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 AMPS 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 any provisions
in the Fund's Statements of Preferences for the Series A Preferred and Series
B AMPS, including provisions that have been adopted by the Fund pursuant to
the rating agency guidelines, if the Board of Trustees determines that such
amendments or modifications (i) are necessary to prevent a reduction in, or
the withdrawal of, a rating of the Series A Preferred or Series B AMPS and are
in the aggregate in the best interests of the holders of the Series A
Preferred or Series B AMPS, as the case may be, or (ii) will not in the
aggregate adversely affect the rights and preferences of the holders of Series
A Preferred or Series B AMPS, provided, that in the case of clause (ii) the
Fund has received advice from each applicable rating agency that such
amendment or modification is not expected to adversely affect such rating
agency's then-current rating of the Fund's preferred shares.
Among the modifications or amendments of the Statements of
Preferences that would not be held to adversely affect the rights and
preferences of the Series A Preferred or Series B AMPS would be the following:
o a modification of the definition of the maximum rate to
increase the percentage amount by which the applicable LIBOR
rate or treasury index rate is multiplied to determine the
maximum rate or increase the spread added to the applicable
LIBOR rate or treasury index rate; or
o a modification of the calculation of the adjusted value of the
Fund's eligible assets or the basic maintenance amount (or of
the elements and terms of each of them or the definitions of
such elements or terms).
As described by Moody's and S&P, the ratings assigned to the Series A
Preferred and the Series B AMPS 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 AMPS. The ratings on the Series A Preferred and the
Series B AMPS 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
AMPS will be able to sell such shares on an exchange, in an auction or
otherwise. The ratings are based on current information furnished to Moody's
and S&P 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 and
Series B AMPS, respectively, only so long as such rating agency is rating such
shares at the request of the Fund. The Fund will pay fees to Moody's and S&P
for rating the Series A Preferred and the Series B AMPS.
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 AMPS 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 AMPS. If
the Fund fails to maintain the asset coverage required under the 1940 Act on
such dates and such failure is not cured within 49 days, in the case of the
Series A Preferred, or 10 days, in the case of the Series B AMPS, (including
the Series A Preferred or Series B AMPS) 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 AMPS offered
hereby had been issued and sold as of June 30, 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 $1,650,000), would have been
computed as follows:
value of Fund assets less liabilities not constituting senior
securities ($154,602,405) / senior securities representing
indebtedness plus liquidation preference of both classes of
preferred shares ($55,000,000), expressed as a percentage =
281%.
Assuming in addition that the primary subscription of the Fund's rights
offering also had been completed as of June 30, 2003 (after giving effect to
the additional offering expenses for such shares estimated at $500,000), the
above computation would be as follows:
value of Fund assets less liabilities not constituting senior
securities ($187,877,249) / senior securities representing
indebtedness plus liquidation preference of both classes of
preferred shares ($55,000,000), expressed as a percentage =
342%.
We cannot assure you that the rights offering will be completed.
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 5.625% (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 each year or, if any such day is not a
business day, the immediately succeeding business day. Such dividends will
commence on September 26, 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.
Dividends on the Series B AMPS
General. Upon issuance of the Series B AMPS (if issued), the holders
of Series B AMPS 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 AMPS offered in this prospectus will
be the rate set out on the cover of this prospectus. For subsequent dividend
periods, the Series B AMPS 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 AMPS 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 AMPS. 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 AMPS 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 AMPS pay dividends based
on a rate set at auction at which Series B AMPS 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 AMPS. The auction agent then determines the lowest dividend
rate that will result in all of the Series B AMPS continuing to be held. See
"The Auction of Series B AMPS."
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 AMPS will not be greater than the applicable "maximum rate." The
maximum rate applicable for any standard rate period will be (as set forth in
the table below) the greater of (i) the applicable percentage of the reference
rate or (ii) the applicable spread plus the reference rate. The reference rate
is the applicable LIBOR Rate (for a dividend period or a special dividend
period of fewer than 365 days), or the applicable Treasury Index Rate (for a
special dividend period of 365 days or more). The applicable percentage and
applicable spread will be determined based on the lower of the credit ratings
assigned to the Series B AMPS by Moody's and S&P. If Moody's and S&P or both
do not make such ratings available, the rate will be determined by reference
to equivalent ratings issued by a substitute rating agency.
Credit Rating for Series B AMPS
Applicable
Moody's S&P Percentage of Applicable
Credit Rating Credit Rating Reference Rate Spread
------------- ------------- -------------- ----------
Aaa AAA 125% 125 bps
Aa3 to Aa1 AA- to AA+ 150% 150 bps
A3 to A1 A- to A+ 200% 200 bps
Baa3 to Baa1 BBB- to BBB+ 250% 250 bps
Below Baa3 Below BBB- 300% 300 bps
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
AMPS 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 AMPS 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 LIBOR Rate for a
dividend period of 364 days or fewer and 300% of the applicable Treasury Index
Rate for a dividend period of longer than 364 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 more or less frequently than weekly and may
designate dividend periods longer or shorter than one week. 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 less frequently than weekly or establish dividend
periods longer or shorter than one week. If the Fund designates a special
dividend period, changes in interest rates could affect the price received if
shares of Series B AMPS 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 AMPS
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 AMPS, 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 AMPS and has provided notice of such
designation and a Basic Maintenance Report to each rating agency then rating
the Series B AMPS 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 at least 91 days, dividend payment dates will
occur monthly on the first business day of each calendar month and on the
business day next succeeding the last day of 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 AMPS
So long as any Series A Preferred or Series B AMPS 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 AMPS 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 AMPS, 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 AMPS 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 AMPS 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 AMPS 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 AMPS as to the payment of dividends, any dividends being paid on the
preferred shares (including the Series A Preferred and/or Series B AMPS) 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 AMPS) 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 49 days, in the case of the Series A Preferred,
or 10 business days in the case of the Series B AMPS
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 AMPS 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 AMPS 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 asset coverage requirements of each applicable rating agency 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 AMPS 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 July 31,
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 July 31, 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 AMPS. The Fund may, at its
option, redeem the Series B AMPS, 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 AMPS 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 AMPS
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 AMPS, 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 AMPS 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 AMPS 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 AMPS 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 AMPS, 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 AMPS 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
AMPS 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 AMPS 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 AMPS 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 AMPS and other parity
preferred shares as to liquidation.
Voting Rights
Except as otherwise stated in this prospectus, specified in the
Fund's Governing Documents or resolved by the Board of Trustees or as
otherwise required by applicable law, holders of the Series A Preferred and/or
Series B AMPS shall have no power to vote on any matter except matters
submitted to a vote of the common shares. In any matter submitted to a vote of
the holders of the common shares, each holder of the Series A Preferred and/or
Series B AMPS, will be entitled to one vote per share held on each such matter
and will vote together with the holders of common shares and of any other
preferred shares then outstanding as a single class.
In connection with the election of the Fund's trustees, holders of
the outstanding Series A Preferred, Series B AMPS 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 trustees, and the remaining trustees will be
elected by holders of common shares and holders of the Series A Preferred,
Series B AMPS 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 AMPS and/or any other preferred shares are unpaid
in an amount equal to at least two full years' dividends thereon and
sufficient cash or specified securities have not been deposited with the
applicable paying agent for the payment of such accumulated dividends or (ii)
at any time holders of any other series of preferred shares are entitled to
elect a majority of the trustees of the Fund under the 1940 Act or the
Statements of Preferences creating such shares, then the number or composition
of trustees constituting the Board of Trustees will be adjusted such that,
when added to the two trustees elected exclusively by the holders of the
Series A Preferred, Series B AMPS and other series of preferred shares as
described above, would then constitute a simple majority of the Board of
Trustees as so adjusted. Such additional trustees will be elected by the
holders of the Series A Preferred, Series B AMPS 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 trustees at the time
of that election and who remain trustees following such 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 trustees, 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 trustees
elected by the holders of the preferred shares (but not of the trustees with
respect to whose election the holders of common shares were entitled to vote
or the two trustees 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 AMPS 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 AMPS, as applicable)
and present and voting on such matter, voting separately as one class, amend,
alter or repeal the provisions of the Fund's Governing Documents so as to in
the aggregate adversely affect the rights and preferences of the 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
effect any of the actions set forth in the preceding sentence which in the
aggregate adversely affect the rights and preferences of a particular series
of preferred shares (such as the Series A Preferred or Series B AMPS)
differently than such rights and preferences for any other series of preferred
shares without the affirmative vote of the holders of at least a majority of
the preferred shares outstanding and present and voting on such matter of each
series adversely affected (each such adversely affected series voting
separately as a class to the extent its rights are affected differently).
Unless a higher percentage is required under the Governing Documents or
applicable provisions of the Delaware Statutory Trust Act or the 1940 Act, 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
AMPS), 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 the foregoing sentence, 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 AMPS and any other preferred shares, voting
together as a single class, that may be necessary to authorize the action in
question. An increase in the number of authorized preferred shares pursuant to
the Governing Documents or the issuance of additional shares of any series of
preferred shares pursuant to the Governing Documents shall not in and of
itself be considered to adversely affect the rights and preferences of the
preferred shares.
The Board of Trustees, without further action by the shareholders,
may amend, alter, add to or repeal any provisions in the Fund's Statements of
Preferences for the Series A Preferred and Series B AMPS, including provisions
that have been adopted by the Fund pursuant to the rating agency guidelines,
if the Board of Trustees determines that such amendments or modifications (i)
are necessary to prevent a reduction in, or the withdrawal of, a rating of the
Series A Preferred or Series B AMPS and are in the aggregate in the best
interests of the holders of the Series A Preferred or Series B AMPS, as the
case may be, or (ii) will not in the aggregate adversely affect the rights and
preferences of the holders of Series A Preferred or Series B AMPS, provided,
that in the case of clause (ii) the Fund has received advice from each
applicable rating agency that such amendment or modification is not expected
to adversely affect such rating agency's then-current rating of the Fund's
preferred shares.
The foregoing voting provisions will not apply to any Series A
Preferred or Series B AMPS that, at or prior to the time when the act with
respect to which such vote otherwise would be required will be effected, 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 AMPS 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 AMPS is outstanding,
subject to receipt of approval from Moody's and, in the case of the Series B
AMPS, S&P, 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
AMPS, 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 to be redeemed out of such proceeds) 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
monitor market conditions, including, among other things, interest rates and
the asset levels of the Fund, and will consider from time to time whether to
offer additional preferred shares or securities representing indebtedness and
may issue such additional securities if the Board of Trustees concludes 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 AMPS
The Fund is a closed-end investment company and, as such, holders of
the Series A Preferred or Series B AMPS do not and will not have the right to
require the Fund to repurchase their shares. The Fund, however, may repurchase
Series A Preferred or, outside of an auction, Series B AMPS 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. Unlike
a redemption of the Series A Preferred and/or the Series B AMPS, where
shareholders are subject to the redemption terms, in a repurchase offer the
Fund is purchasing shares on an exchange (with respect to the Series A
Preferred only) or otherwise (through private transactions or tender offers )
soliciting repurchases, and shareholders may choose whether or not to sell.
The Fund will not repurchase Series B AMPS at Auction. See "The Auction of
Series B AMPS."
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 AMPS will initially be held by the auction agent
as custodian for Cede & Co., in whose name the shares of the Series B AMPS
shall be registered. The Fund will treat Cede & Co. as the holder of record of
the Series B AMPS for all purposes.
THE AUCTION OF SERIES B AMPS
Summary of Auction Procedures
The following is a brief summary of the auction procedures for the
Series B AMPS, 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 AMPS.
The auctions determine the dividend rate for the Series B AMPS, but
each dividend rate will not be higher than the maximum rate. See "Description
of the Series A Preferred and Series B AMPS -- Dividends on the Series B
AMPS." If you own shares of Series B AMPS, 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 AMPS 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 AMPS 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 AMPS, 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 AMPS. You may also enter an order to buy additional Series B
AMPS. All orders must be for whole shares. All orders you submit are
irrevocable. There is a fixed number of Series B AMPS 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 AMPS and general economic conditions including current interest
rates. If you own Series B AMPS 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 AMPS, 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 AMPS, 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 AMPS 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 AMPS. A broker-dealer's failure to
submit orders for Series B AMPS 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 AMPS 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 360,
times (ii) 1/4 of 1%, times (iii) $25,000, times (iv) the aggregate number of
Series B AMPS 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 AMPS placed by the
broker-dealers at the auction agreed to by the Fund and the broker-dealers.
If the number of Series B AMPS 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 AMPS 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 AMPS available for
purchase in the auction.
If the number of Series B AMPS 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 AMPS 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 AMPS 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 AMPS 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 AMPS 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 AMPS, 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 90% of the reference rate, as determined in accordance with
procedures set forth in the Statement of Preferences establishing the Series B
AMPS. See "Description of the Series A Preferred and Series B AMPS --
Dividends on the Series B AMPS -- Maximum Rate."
The auction procedures include a pro rata allocation of Series B AMPS
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 AMPS 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 AMPS 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 AMPS will be held on August 12, 2003,
the business day preceding the dividend payment date for the initial dividend
period. Thereafter, except during special dividend periods, auctions for
Series B AMPS 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 AMPS 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 AMPS 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 all Bid order at 1.6% rate for all 500
500 shares if auction rate is less shares
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 all Bid order at 1.4% rate for all 200
200 shares if auction rate is less shares
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 AMPS
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 AMPS
The underwriters are not required to make a market in the Series B
AMPS. 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
AMPS will develop or, if it does develop, that it will provide owners with
liquidity of investment. The Series B AMPS will not be registered on any stock
exchange or on the NASDAQ market. Investors who purchase Series B AMPS 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 AMPS
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 AMPS in the name of a broker-dealer, a sale or transfer of your
Series B AMPS 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.
DESCRIPTION OF CAPITAL SHARES AND OTHER SECURITIES
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 151,271 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.
Shareholders whose common shares are registered in their own name
will have all distributions reinvested pursuant to the Automatic Dividend
Reinvestment and Voluntary Cash Purchase Plan. For a more detailed discussion
of the Fund's reinvestment plan, see "Automatic Dividend Reinvestment and
Voluntary Cash Purchase Plan" in the SAI.
Preferred Shares
Currently, 2,005,000 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. For a description of these terms and limitations, with respect to
liquidation rights, dividends, the rights of holders of the Fund's common
shares to receive the monthly distributions, and selection of trustees to the
board of trustees, see "Description of the Series A Preferred and Series B
AMPS." As of June 30, 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 June 30, 2003.
Amount Held by
Company or for
Title of Class Amount Authorized its Own Account Amount Outstanding
Common Shares................ unlimited none 15,282,735
----------------------------- -------------------------- --------------------------
Preferred Shares............. unlimited** none 0*
----------------------------- -------------------------- --------------------------
* Does not include the Series A Preferred or Series B AMPS being offered
pursuant to this prospectus.
** Of these authorized shares, 2,000,000 are classified as 5.625% Series A
Cumulative Preferred Shares and 5,000 are classified as Series B AMPS.
TAXATION
The following discussion is a brief summary of certain U.S. federal
income tax considerations affecting the Fund and its shareholders. 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 (including shareholders owning large
positions in the Fund), 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.
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
generally taxable to you as ordinary income to the extent of the Fund's
earning and profits. Such distributions (if designated by the Fund) may,
however, qualify (provided holding periods and other requirements are met) (i)
for the dividends received deduction in the case of corporate shareholders to
the extent that the Fund's income consists of dividend income from U.S.
corporations, and (ii) under the recently enacted Jobs and Growth Tax Relief
Reconciliation Act of 2003 (effective for taxable years after December 31,
2002 through December 31, 2008) ("2003 Tax Act"), as qualified dividend income
eligible for the reduced maximum rate to individuals of generally 15% (5% for
individuals in lower tax brackets) to the extent that the Fund receives
qualified dividend income. Qualified dividend income is, in general, dividend
income from taxable domestic corporations and certain foreign corporations
(e.g., generally, foreign corporations incorporated in a possession of the
United States or in certain countries with a comprehensive tax treaty with the
United States, or the stock of which is readily tradable on an established
securities market in the United States). Distributions 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. Under the 2003 Tax Act, the maximum tax rate
on net long-term capital gain of individuals is reduced generally from 20% to
15% (5% for individuals in lower brackets) for such gain realized after May 6,
2003 and before January 1, 2009. Distributions in excess of the Fund's
earnings and profits will first reduce the adjusted tax basis of your shares
and, after such adjusted tax basis is reduced to zero, will constitute capital
gains to you (assuming the shares are held as a capital asset). Generally, not
later than 60 days after the close of its taxable year, the Fund will provide
you with a written notice designating the amount of any qualified dividend
income or capital gain dividends and other distributions.
The sale or other disposition of 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, under the 2003 Tax
Act, short-term capital gains will currently be taxed at the maximum rate of
35% applicable to ordinary income while long-term capital gains generally will
be taxed at a maximum rate of 15%.
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 IRS.
Based in part on a lack of present intention on the part of the Fund
to voluntarily redeem the Series B AMPS at any time in the future, the Fund
intends to take the position that under present law the Series B AMPS 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 AMPS constitutes debt of the Fund. If that position were upheld,
distributions on the Series B AMPS would be considered interest, taxable as
ordinary income regardless of the taxable income of the Fund. The Fund
believes this position, if asserted, would be unlikely to prevail.
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 Agreement and 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 two-thirds of the remaining trustees and,
without cause, by 66 2/3% of the votes entitled to be cast for the election of
such trustees. Special voting requirements of 75% of the outstanding voting
shares (together with a separate vote by the holders of any preferred shares
outstanding) 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. 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 "Additional 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, among other things, the
average 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 AMPS. The Bank of New York, located at 100 Church Street,
New York, NY 10286, will serve as the Fund's auction agent, transfer agent,
registrar, dividend paying agent and redemption agent with respect to the
Series B AMPS.
UNDERWRITING
Subject to the terms and conditions of an underwriting agreement
dated July 28, 2003, each underwriter named below has severally agreed to
purchase, and the Fund has agreed to sell to such underwriters, the number of
preferred shares set forth opposite the name of such underwriter.
Number of Series A Number of Series B
Underwriter Preferred Shares AMPS
----------- ------------------- -----------------
Merrill Lynch, Pierce, Fenner & Smith
Incorporated.... 1,080,000 1,000
Gabelli & Company, Inc........... 120,000 --
------------- ---------------
1,200,000 1,000
Total.............. ============= ===============
The underwriting agreement provides that the obligations of the
underwriters to purchase the shares included in this offering are subject to
the approval of certain legal matters by counsel and to certain other
conditions. The underwriters are obligated to purchase all of the Series A
Preferred and Series B AMPS, as applicable, if they purchase any such shares.
In the underwriting agreement, the Fund and the Investment Adviser have agreed
to indemnify the underwriters against certain liabilities, including
liabilities arising under the Securities Act of 1933, as amended, or to
contribute to payments the underwriters may be required to make for any of
those liabilities.
The expenses of the offering are estimated at approximately $455,000
and are payable by the Fund.
Offering of the Series A Preferred
The underwriters propose to initially offer some of the Series A
Preferred shares directly to the public at the public offering price set forth
on the cover page of this prospectus and some of the Series A Preferred shares
to certain dealers at the public offering price less a concession not in
excess of $.50 per Series A Preferred share. The sales load the Fund will pay
of $.7875 per Series A Preferred share is equal to 3.15% of the initial
offering price. The underwriters may allow, and the dealers may reallow, a
discount not in excess of $.45 per Series A Preferred share on sales to other
dealers. After the initial public offering, the public offering price,
concession and discount may be changed. Investors must pay for any Series A
Preferred Shares purchased in the initial public offering on or before July
31, 2003.
Prior to the offering, there has been no public market for the Series
A Preferred. Application has been made to list the Series A Preferred on the
New York Stock Exchange. However, during an initial period that is not
expected to exceed 30 days after the date of this prospectus, 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, an investment in the Series A
Preferred may be illiquid during such period.
The underwriters may purchase and sell the Series A Preferred in the
open market. These transactions may include short sales and stabilizing
transactions. Short sales involve the sale by the underwriters of a greater
number of shares than they are required to purchase in the offering.
Stabilizing transactions consist of various bids for or purchases of shares
made by the underwriters in the open market prior to the completion of the
offering.
The underwriters may also impose a penalty bid. This occurs when a
particular underwriter repays to the underwriters a portion of the
underwriting discount received by it because the underwriters have repurchased
shares sold by or for the account of such underwriter in stabilizing or short
covering transactions.
Similar to other purchase transactions, the underwriters' purchases
to cover the syndicate short sales may have the effect of raising or
maintaining the market price of the shares or preventing or retarding a
decline in the market price of the Series A Preferred. As a result, the price
of the Series A Preferred may be higher than the price that might otherwise
exist in the open market.
Neither we nor any of the underwriters make any representation or
prediction as to the direction or magnitude of any effect that the
transactions described above may have on the price of the Series A Preferred.
The underwriters do not make any representation that they will engage in these
transactions or that these transactions, once commenced, will not be
discontinued without notice.
Offering of Series B AMPS
Merrill Lynch, Pierce, Fenner & Smith Incorporated is the sole
underwriter of the Series B AMPS. The underwriter proposes to initially offer
some of the Series B AMPS directly to the public at the public offering prices
set forth on the cover page of this prospectus and some of the Series B AMPS
to certain dealers at the public offering price less a concession not in
excess of $137.50 per Series B AMPS share. The sales load the Fund will pay of
$250 per Series B AMPS share is equal to 1% of the initial offering price.
After the initial public offering, the public offering price and concession
may be changed. Investors must pay for any Series B AMPS purchased in the
initial public offering on or before July 31, 2003.
Provisions of Other Services to the Fund
The Fund anticipates that the underwriters may from time to time act
as brokers or, after they have ceased to be underwriters, dealers in executing
the Fund's portfolio transactions and that the underwriters, or their
affiliates, may act as a counterparty in connection with the interest rate
transactions described under "How the Fund Manages Risk - Interest Rate
Transaction" after they have ceased to be underwriters. The underwriters are
active underwriters of, and dealers in, securities and act as market markers
in a number of such securities, and therefore can be expected to engage in
portfolio transactions with the Fund. The Fund anticipates that the
underwriters or their respective affiliates may, from time to time, act in
auctions as broker-dealers and receive fees as set forth under "The Auction of
the Series B AMPS" and in the SAI.
The principal business address of Merrill Lynch, Pierce, Fenner &
Smith Incorporated is 4 World Financial Center, New York, New York 10080. The
principal business address of Gabelli & Company, Inc. is One Corporate Center,
Rye, New York 10580.
Gabelli & Company, Inc. is a wholly-owned subsidiary of Gabelli
Securities, Inc., which is a majority-owned subsidiary of the parent company
of the Investment Adviser which is, in turn, indirectly majority-owned by
Mario J. Gabelli. As a result of these relationships, Mr. Gabelli, the Fund's
President and Chief Investment Officer, may be deemed to be a "controlling
person" of Gabelli & Company, Inc.
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 AMPS,
and by Simpson Thacher & Bartlett LLP, New York, New York, 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 AMPS 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 July 28, 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-3
INVESTMENT OBJECTIVE AND POLICIES ....................................... B-3
INVESTMENT RESTRICTIONS..................................................B-14
MANAGEMENT OF THE FUND...................................................B-14
PORTFOLIO TRANSACTIONS ..................................................B-23
REPURCHASE OF COMMON SHARES..............................................B-27
PORTFOLIO TURNOVER ......................................................B-24
AUTOMATIC DIVIDEND REINVESTMENT AND
VOLUNTARY CASH PURCHASE PLAN...........................................B-25
TAXATION ................................................................B-26
ADDITIONAL INFORMATION CONCERNING
AUCTIONS FOR SERIES B AMPS ...........................................B-30
ADDITIONAL INFORMATION CONCERNING THE SERIES
A PREFERRED AND SERIES B AMPS ........................................B-37
MOODY'S AND S&P GUIDELINES ..............................................B-43
NET ASSET VALUE..........................................................B-52
BENEFICIAL OWNERS........................................................B-53
GENERAL INFORMATION......................................................B-54
FINANCIAL STATEMENTS.....................................................B-56
GLOSSARY................................................................. A-1
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.
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.
[Gabelli Logo]
$55,000,000
THE GABELLI UTILITY TRUST
1,200,000 Shares, 5.625% Series A Cumulative Preferred Shares
(Liquidation Preference $25 per Share)
1,000 Shares, Series B Auction Market Preferred Shares ("AMPS")
(Liquidation Preference $25,000 per Share)
------------------
PROSPECTUS
------------------
Merrill Lynch & Co.
Gabelli & Company, Inc.
July 28, 2003
Dated July 28, 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 to invest at least 80% of
its total assets in common stock and other debt or equity securities of
foreign and domestic companies involved to a substantial extent (e.g., at
least 50% of the assets, gross income or net profits of a company is committed
to or derived from) in providing products, services or equipment for (i) the
generation or distribution of electricity, gas and water and (ii)
telecommunications services or infrastructure operations, such as airports,
toll roads and municipal services.
This Statement of Additional Information ("SAI") is not a prospectus,
but should be read in conjunction with the Prospectus for the Fund dated July
28, 2003 (the "Prospectus"). 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 "SEC") upon payment of the fee
prescribed, or inspected at the SEC'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 July 28, 2003.
TABLE OF CONTENTS
Page
THE FUND ...................................................................B-3
INVESTMENT OBJECTIVE AND POLICIES...........................................B-3
INVESTMENT RESTRICTIONS....................................................B-14
MANAGEMENT OF THE FUND.....................................................B-15
PORTFOLIO TRANSACTIONS.....................................................B-23
REPURCHASE OF COMMON SHARES................................................B-24
PORTFOLIO TURNOVER.........................................................B-24
AUTOMATIC DIVIDEND REINVESTMENT
AND VOLUNTARY CASH PURCHASE PLAN..................................B-24
TAXATION ..................................................................B-25
ADDITIONAL INFORMATION CONCERNING AUCTIONS
FOR SERIES B AMPS.................................................B-30
ADDITIONAL INFORMATION CONCERNING
THE SERIES A PREFERRED AND SERIES B AMPS..........................B-37
MOODY'S AND S&P GUIDELINES.................................................B-43
NET ASSET VALUE............................................................B-52
BENEFICIAL OWNERS..........................................................B-53
GENERAL INFORMATION........................................................B-54
FINANCIAL STATEMENTS.......................................................B-56
GLOSSARY ...................................................................A-1
THE FUND
The Fund was formed in Delaware on February 25, 1999, and is a
non-diversified, closed-end management investment company registered under the
1940 Act. The Fund's investment operations commenced on July 9, 1999. The
Fund's Common Shares are traded on the New York Stock Exchange under the
symbol "GUT."
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 debt or equity securities of
foreign and domestic companies involved to a substantial extent (e.g., at
least 50% of the assets, gross income or net profits of a company is committed
to or derived from) in providing products, services or equipment for (i) the
generation or distribution of electricity, gas and water and (ii)
telecommunications services or infrastructure operations, such as airports,
toll roads and municipal services. See "Investment Objective and Policies" in
the Prospectus.
Investment Practices
Securities Subject to Reorganization. The Fund may invest without
limit in securities for which a tender or exchange offer has been made or
announced and in securities of companies for which a merger, consolidation,
liquidation or reorganization proposal has been announced if, in the judgment
of the 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 Defensive Investments. Although under normal market
conditions at least 80% of the Fund's assets will consist of common stock and
other debt or equity 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 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 are U.S. Government
Obligations; commercial paper rated A-1 or higher by S&P or Prime-1 by
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 during temporary defensive periods to
the extent permitted by applicable law in shares of money market mutual funds
that invest primarily in U.S. Government Obligations and repurchase agreements
in respect of those securities. Under current law, in the absence of an
exemptive order, such funds will not be affiliated with the Investment
Adviser. 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 25% of its total
assets in fixed-income securities rated in the lower rating categories of
recognized statistical rating agencies, such as securities rated "CCC" or
lower by S&P or "Caa" or lower by Moody's, or non-rated securities of
comparable quality. These debt securities are predominantly speculative and
involve major risk exposure to adverse conditions. Debt securities that are
not rated or are rated lower than "BBB" by S&P or lower than "Baa" by Moody's
are 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. Interest rates are
at historical lows and, therefore, it is likely that they will rise in the
future.
As 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 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 Obligations or other high-grade short-term obligations 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.
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 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.
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
over-the-counter ("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 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, as the case may be, do not
exceed 50% 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
Obligations.
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
"purchase" 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 price 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 the "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 prior 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 Obligations 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 Obligations
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).
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. Subject to guidelines of the
Board of Trustees, the Fund may enter into forward foreign currency exchange
contracts to protect the value of its portfolio against uncertainty in the
level of future currency 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. The Fund may enter into such contracts on a spot, i.e.,
cash, basis at the rate then prevailing in the currency exchange market or on
a forward basis, by entering into a forward contract to purchase or sell
currency. A forward contract on foreign currency is an obligation to purchase
or sell a specific currency at a future date, which may be any fixed number of
days agreed upon by the parties from the date of the contract at a price set
on the date of the contract. 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 Obligations 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.
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 Obligations 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 along 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 AMPS), voting together as a
single class. For purposes of the preferred share voting rights described in
the foregoing sentence, except as otherwise required under the 1940 Act, the
majority of the outstanding preferred shares means, in accordance with Section
2(a)(42) of the 1940 Act, the vote of (i) of 67% or more of the preferred
shares present at the shareholders meeting called for such vote, if the
holders of more than 50% of the outstanding preferred shares are present or
represented by proxy or (ii) more than 50% of the outstanding preferred
shares, whichever is less. Except as otherwise noted, all percentage
limitations set forth below apply immediately after a purchase or initial
investment and any subsequent change in any applicable percentage resulting
from market fluctuations does not require any action. The Fund may not:
(1) invest 25% or more of its total assets, taken at market
value at the time of each investment, in the securities of
issuers in any particular industry other than the Utility
Industry. This restriction does not apply to investments in
U.S. government securities.
(2) purchase or sell commodities or commodity contracts except
that the Fund may purchase or sell futures contracts and
related options thereon if immediately thereafter (i) no
more than 5% of its total assets are invested in margins and
premiums and (ii) the aggregate market value of its
outstanding futures contracts and market value of the
currencies and futures contracts subject to outstanding
options written by the Fund do not exceed 50% of the market
value of its total assets. The Fund may not purchase or sell
real estate, provided that the Fund may invest in securities
secured by real estate or interests therein or issued by
companies which invest in real estate or interests therein.
(3) make loans of money, except by the purchase of a portion of
private or publicly distributed debt obligations or the
entering into of repurchase agreements. The Fund reserves
the authority to make loans of its portfolio securities to
financial intermediaries in an aggregate amount not
exceeding 20% of its total assets. Any such loans will only
be made upon approval of, and subject to any conditions
imposed by, the Board of Trustees of the Fund. Because these
loans are required to be fully collateralized at all times,
the risk of loss in the event of default of the borrower
should be slight.
(4) borrow money except to the extent permitted by applicable
law. The 1940 Act currently requires that the Fund have 300%
asset coverage with respect to all borrowings other than
temporary borrowings of up to 5% of the value of its total
assets.
(5) issue senior securities, except to the extent permitted by
applicable law.
(6) underwrite securities of other issuers except insofar as the
Fund may be deemed an underwriter under the Securities Act
of 1933, as amended (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 Investment 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 Address(1) Time Served(2) Past Five Years Trustee Trustee
----------------- ------------ --------------- ------- -------
INTERESTED Since 1999* Chairman of the Board, Chief 22 Director of
TRUSTEES: Executive Officer of Gabelli Morgan Group
*+Mario J. Gabelli Asset Management Inc. and Holdings, Inc.
(61) Chief Investment Officer of (transportation
Trustee and Chief the Investment Adviser and services); Vice
Investment Officer GAMCO Investors, Inc; Chairman of
Director/Trustee and Chief Lynch
Investment Officer of other Corporation
registered investment (diversified
companies in the Gabelli fund manufacturing
complex. Vice Chairman and company).
CEO of Lynch Interactive
Corp.
*+John D. Gabelli Since 1999*** Senior Vice President of 9 --
(58) Gabelli & Company and
Trustee Director of Gabelli Advisers,
Inc.; Trustee of other
registered investment
companies in the Gabelli fund
complex.
*Karl Otto Pohl Since 1999*** Member of the Shareholder 32 Director of
(73) Committee of Sal. Oppenheim Gabelli Asset
Trustee Jr. & Cie, Zurich (private Management Inc.;
investment bank); Former Chairman,
President of the Deutsche Incentive Capital
Bundesbank and Chairman of and Incentive
its Central Bank Council from Asset
1980 through 1991; Management
Director/Trustee of other (Zurich); Director
registered investment at Sal.
companies in the Gabelli fund Oppenheim Jr. &
complex. Cie, Zurich
DISINTERESTED Since 1999* Director, President and 3 --
TRUSTEES: Founder, The John Dewey
Dr. Thomas E. Academy (residential college
Bratter (63) preparatory therapeutic high
Trustee school); Director/Trustee of
other registered investment
companies in the Gabelli fund
complex.
Anthony J. Colavita Since 1999** President and Attorney at law 34 --
(67) in 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 11 Director of
Trustee and Chief Investment Officer LaQuinta Corp.
of Financial Security (hotels) and First
Assurance Holdings Ltd., Republic Bank
1992-1998; Trustee of other
registered investment
companies in the Gabelli fund
complex.
Vincent D. Enright Since 1999* Former Senior Vice President 12 --
(59) and Chief Financial Officer of
Trustee KeySpan Energy Corporation
through 1998; Trustee of other
registered investment
companies in the Gabelli fund
complex.
Frank J. Since 1999** President and CEO of the 3 --
Fahrenkopf, Jr. (63) American Gaming Association
Trustee since June 1995; Partner in the
law firm of Hogan & Hartson;
Chairman of International
Trade Practice Group; Co-Chairman
of the Commission on Presidential
Debates; former Chairman of the
Republican National Committee;
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. Since 1999*** Certified Public Accountant; 17 --
Pustorino (77) Professor Emeritus, Pace
Trustee University; Trustee of other
registered investment
companies in the Gabelli fund
complex.
Salvatore J. Zizza Since 1999** Chairman of Hallmark 10 Director of Hollis
(57) Electrical Supply Corp.; Eden
Trustee Former Executive Vice Pharmaceuticals
President of FMG Group (a
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 Address(1) Time Served Past Five Years
----------------- ----------- ---------------
Bruce N. Alpert (51) Since 1999 Executive Vice President and Chief
President Operating Officer of the
Investment Adviser since June
1988; Director and President of
Gabelli Advisers, Inc.; Officer of
all other registered investment
companies in the Gabelli fund
complex.
Gus A. Coutsouros (40) Since 2003 Vice President and Chief 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
Vice President 1999; Financial Services Research
Analyst of Gabelli & Company
from October 1, 1998 to July 9,
1999; Prior to October, 1998, Vice
President of Thomas J. Herzfeld
Advisers, Inc., a registered
investment adviser and noted
closed-end fund authority.
James E. McKee (40) Since 1999 Vice President, General Counsel
Secretary of the Fund and Secretary of the Investment
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 Investment Adviser.
+ Mr. Mario Gabelli and Mr. John Gabelli are brothers.
1 Address: One Corporate Center, Rye, NY 10580-1422, unless otherwise
noted.
2 The Fund's Board of Trustees is divided into three classes, each
class having a term of three years. Each year the term of office of
one class expires and the successor or successors elected to such
class serve for a three year term. The three year term for each class
expires as follows:
* - Term expires at the Fund's 2004 Annual Meeting of Shareholders
and until their successors are duly elected and qualified.
** - Term expires at the Fund's 2005 Annual Meeting of Shareholders
and until their successors are duly elected and qualified.
*** - Term expires at the Fund's 2006 Annual Meeting of Shareholders
and until their successors are duly elected and qualified.
The Board of Trustees of the Fund 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 Trustee Dollar Range of Equity Aggregate Dollar Range of
Securities in the Fund Equity Securities in all
Registered Investment
Companies Overseen by Trustees
in Family of Investment
Companies
INTERESTED TRUSTEES
Mario J. Gabelli Over $100,000 Over $100,000
John D. Gabelli None Over $100,000
Karl Otto Pohl None None
DISINTERESTED TRUSTEES
Dr. Thomas E. Bratter None Over $100,000
Anthony J. Colavita $10,001 - $50,000 Over $100,000
James P. Conn $10,001 - $50,000 Over $100,000
Vincent D. Enright None Over $100,000
Frank J. Fahrenkopf, Jr. None $1 - $10,000
Robert J. Morrissey None $10,001 - $50,000
Anthony R. Pustorino $10,001 - $50,000 Over $100,000
Salvatore J. Zizza $50,001 - $100,000 Over $100,000
All shares were valued as of December 31, 2002.
The Trustees serving on the Fund's Nominating Committee are Messrs.
Zizza and Colavita (Chairman). 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, who are not
"interested persons" of the Fund as defined in the 1940 Act, serve on the
Fund's Audit Committee. The Audit Committee is generally responsible for
reviewing and evaluating issues related to the accounting and financial
reporting policies and internal controls of the Fund and, as appropriate, the
internal controls of certain service providers, overseeing the quality and
objectivity of the Fund's financial statements and the audit thereof and to
act as a liaison between the Board of Trustees and the Fund's independent
accountants. During the year ended December 31, 2002, the Audit Committee met
twice.
As of June 30, 2003, the trustees and officers of the Fund as a group
beneficially owned approximately 1.55% of the outstanding shares of the Fund's
Common Shares.
REMUNERATION OF TRUSTEES AND OFFICERS
The Fund pays each trustee who is not affiliated with the 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 (22)
the Board
DR. THOMAS E. BRATTER $5,000 $31,000 (3)
Trustee
ANTHONY J. COLAVITA $6,000 $152,286 (33)
Trustee
JAMES P. CONN Trustee $5,000 $53,500 (11)
VINCENT D. ENRIGHT Trustee $6,000 $54,536 (11)
FRANK J. FAHRENKOPF, JR. $5,000 $31,000 (3)
Trustee
JOHN D. GABELLI Trustee $0 $0 (9)
ROBERT J. MORRISSEY Trustee $5,000 $45,000 (9)
KARL OTTO POHL Trustee $0 $0 (31)
ANTHONY R. PUSTORINO $6,000 $132,286 (17)
Trustee
SALVATORE J. ZIZZA Trustee $5,000 $73,750 (9)
* Does not include $3,126 of, among other things, out of pocket trustee
expenses, which would bring total trustee compensation/expenses to
$46,126.
** 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 total does not include $46,126 of, among other things,
out of pocket Director expenses. 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 Trustees; 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 March 31, 2003 the Investment Adviser acted as registered investment
adviser to 19 management investment companies with aggregate net assets of
$8.4 billion. The Investment Adviser, together with other affiliated
investment advisers set forth below, had assets under management totaling
approximately $19.5 billion, as of March 31, 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
$9.2 billion under management as of March 31, 2003. Gabelli Fixed Income LLC,
an affiliate of the Investment Adviser, acts as investment adviser for The
Treasurer's Fund and separate accounts having aggregate assets of $1.4 billion
under management as of March 31, 2003. Gabelli Advisors, Inc., an affiliate of
the Investment Adviser, acts as investment manager to the Gabelli Westwood
Funds, having aggregate assets of $441 under management as of March 31, 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 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 has voluntarily agreed
to waive the portion of its investment advisory fee attributable to an amount
of assets of the Fund equal to the aggregate stated value of the applicable
series of its Preferred Shares for any calendar year in which the net asset
value total return of the Fund allocable to the Common Shares, including
distributions and the advisory fee subject to potential waiver, is less than
the stated annual dividend rate of such series, prorated during the year such
series is issued and the final year such series is outstanding. This waiver
will apply to the portion of the Fund's assets attributable to the Series A
Preferred and Series B AMPS, respectively, for so long as any shares of such
series remain 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 trustees who are
not "interested persons" (as defined in the 1940 Act) of any party to the
Advisory Agreement, by vote cast in person at a meeting called for the purpose
of voting on such approval. The Advisory Agreement was approved most recently
by the Board of Trustees on February 19, 2003.
In considering whether to approve the Advisory Agreement, the Fund's
non-interested trustees considered, among other factors, (i) the services
provided to the Fund by the Investment Adviser and the sub-administrator, (ii)
the Fund's absolute and comparative investment performance, (iii) the Fund's
fee and expense data as compared to various benchmarks and a peer group of
closed-end funds in the same asset range as the Fund and (iv) the Investment
Adviser's profitability with respect to its management of the Fund. The
non-interested trustees indicated that the primary factors in their
determination to approve the Advisory Agreement were the high quality of
service provided by the Investment Adviser, based in large part upon the
experience of the Fund's portfolio manager, and the Fund's comparative
investment performance.
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 $861,678, $855,435 and
$878,549, 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 $125,729, $81,313, and $140,917,
respectively, in brokerage commissions, of which Gabelli & Company, Inc. and
its affiliates received $116,973, $70,203, and $123,636, respectively. The
amount received by Gabelli & Company, Inc. and its affiliates from the Fund in
respect of brokerage commissions for the fiscal year ended December 31, 2002
represented approximately 87.74% of the aggregate dollar amount of brokerage
commissions paid by the Fund for such period and approximately 75.29% of the
aggregate dollar amount of transactions by the Fund for such period. The
increased brokerage commissions in 2002 reflect, in part, the Fund's
investment of proceeds from its rights offering, completed in June, 2002. The
variance between the percentage of brokerage commissions received by Gabelli &
Company, Inc. and the percentage of transactions executed by Gabelli &
Company, Inc. reflects the Fund's practice of generally directing bulk trades
to unaffiliated broker-dealers.
REPURCHASE OF 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
require the Fund to repurchase 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
pursuant to tenders or as otherwise permitted in accordance with Rule 23c-1
under the 1940 Act. Under that Rule, certain conditions must be met regarding,
among other things, distribution of net income for the preceding fiscal year,
status of the seller, price paid, brokerage commissions, prior notice to
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 29%, 41% and
92%, respectively. Portfolio turnover rate is calculated by dividing the
lesser of an investment company's annual sales or purchases of portfolio
securities by the monthly average value of securities in its portfolio during
the year, excluding portfolio securities the maturities of which at the time
of acquisition were one year or less. A high rate of portfolio turnover
involves correspondingly greater brokerage commission expense than a lower
rate, which expense must be borne by the Fund and indirectly by its
shareholders. A higher rate of portfolio turnover may also result in taxable
gains being passed to shareholders sooner than would otherwise be the case.
AUTOMATIC DIVIDEND REINVESTMENT
AND VOLUNTARY CASH PURCHASE PLAN
Under the 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 the greater
of net asset value or 95% of market 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 affecting the Fund and its shareholders (including
shareholders owning a large position in the Fund), and the discussions set
forth here and in the Prospectus do not constitute tax advice. Investors are
urged to consult their own tax advisers with any specific questions relating
to federal, state, local and foreign taxes. The discussion reflects applicable
tax laws of the United States as of the date of this SAI, which tax laws may
be changed or subject to new interpretations by the courts or the Internal
Revenue Service (the "IRS") retroactively or prospectively.
Taxation of the Fund
The Fund has qualified as and intends to continue to qualify as a
regulated investment company (a "RIC") under Subchapter M of the Internal
Revenue Code of 1986, as amended (the "Code"). If it so qualifies, the Fund
will not be subject to U.S. federal income tax on the portion of its
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 investment company taxable income and any net tax-exempt interest 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.
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 ordinary income and
loss.
Investments by the Fund in certain "passive foreign investment
companies" ("PFICs") could subject the Fund to federal income tax (including
interest charges) on certain distributions or dispositions with respect to
those investments which cannot be eliminated by making distributions to
shareholders. Elections may be available to the Fund to mitigate the effect of
this tax, but such elections generally accelerate the recognition of income
without the receipt of cash. Dividends paid by PFICs will not qualify for the
reduced tax rates discussed below under "Taxation of Shareholders."
The Fund may invest in debt obligations purchased at a discount with
the result that the Fund may be required to accrue income for federal income
tax purposes before amounts due under the obligations are paid. The Fund may
also invest in securities rated in the medium to lower rating categories of
nationally recognized rating organizations, and in unrated securities ("high
yield securities"). A portion of the interest payments on such high yield
securities may be treated as dividends for federal income tax purposes.
As a result of investing in stock of PFICs or securities purchased at
a discount or any other investment that produces income that is not matched by
a corresponding cash distribution to the Fund, the Fund could be required to
include, in current income, income it has not yet received. Any such income
would be treated as income earned by the Fund and therefore would be subject
to the distribution requirements of the Code. This might prevent the Fund from
distributing 90% of its net investment income as is required in order to avoid
Fund-level federal income taxation on all of its income, or might prevent the
Fund from distributing enough ordinary income and capital gain net income to
avoid completely the imposition of the excise tax. To avoid this result, the
Fund may be required to borrow money or dispose of other securities to be able
to make distributions to its shareholders.
If the Fund does not meet the asset coverage requirements of the 1940
Act and the Statements of Preferences, the Fund will be required to suspend
distributions to the holders of the Common Shares until the asset coverage is
restored. Such a suspension of distributions might prevent the Fund from
distributing 90% of its investment company taxable income as is required in
order to avoid Fund-level federal income taxation on all of its income, or
might prevent the Fund from distributing enough income and capital gain net
income to avoid completely imposition of the excise tax. Upon any failure to
meet the asset coverage requirements of the 1940 Act or the Statements of
Preferences, the Fund may, and in certain circumstances will be required to,
partially redeem Preferred Shares in order to restore the requisite asset
coverage and avoid the adverse consequences to the Fund and its shareholders
of failing to qualify as a RIC. If asset coverage were restored, the Fund
would again be able to pay dividends and would generally be able to avoid
Fund-level federal income taxation on the income that it distributes.
Hedging Transactions
Certain options, futures contracts and options on futures contracts
are "section 1256 contracts." Any gains or losses on section 1256 contracts
are generally considered 60% long-term and 40% short-term capital gains or
losses ("60/40"). Also, section 1256 contracts held by the Fund at the end of
each taxable year are "marked-to-market" with the result that unrealized gains
or losses are treated as though they were realized and the resulting gain or
loss is treated as 60/40 gain or loss.
Hedging transactions undertaken by the Fund may result in "straddles"
for federal income tax purposes. The straddle rules may affect the character
of gains (or losses) realized by the Fund. In addition, losses realized by the
Fund on positions that are part of a straddle may be deferred under the
straddle rules, rather than being taken into account in calculating the
taxable income for the taxable year in which such losses are realized.
Further, the Fund may be required to capitalize, rather than deduct currently,
any interest expense on indebtedness incurred or continued to purchase or
carry any positions that are part of a straddle.
The Fund may make one or more of the elections available under the
Code which are applicable to straddles. If the Fund makes any of the
elections, the amount, character and timing of the recognition of gains or
losses from the affected straddle positions may be determined under rules that
vary according to the election(s) made. The rules applicable under certain of
the elections accelerate the recognition of gain or loss from the affected
straddle positions.
Because application of the straddle rules may affect the character
and timing of the Fund's gains, losses and deductions, the amount which must
be distributed to shareholders, and which will be taxed to shareholders as
ordinary income or long-term capital gain, may be increased or decreased
substantially as compared to a fund that did not engage in such hedging
transactions.
Foreign Taxes
Since the Fund may invest in foreign securities, its income from such
securities may be subject to non-U.S. taxes. The Fund historically has
invested less than 50% of its total assets in foreign securities. As long as
the Fund continues to invest less than 50% of its assets in foreign securities
it will not be eligible to elect to "pass-through" to shareholders of the Fund
the ability to use the foreign tax deduction or foreign tax credit for foreign
taxes paid with respect to qualifying taxes.
Taxation of Shareholders
The Fund will determine either to distribute or to retain for
reinvestment all or part of its net capital gain. If any such gains are
retained, the Fund will be subject to a tax of 35% of such amount. In that
event, the Fund expects to designate the retained amount as undistributed
capital gains in a notice to its shareholders, each of whom (i) will be
required to include in income for tax purposes as long-term capital gains its
share of such undistributed amounts, (ii) will be entitled to credit its
proportionate share of the tax paid by the Fund against its federal income tax
liability and to claim refunds to the extent that the credit exceeds such
liability and (iii) will increase its basis in its shares of the Fund by an
amount equal to 65% of the amount of undistributed capital gains included in
such shareholder's gross income.
Distributions paid by the Fund from its net investment income or from
an excess of net short-term capital gains over net-long term capital losses
generally are taxable as ordinary income to the extent of the Fund's earnings
and profits. Such distributions (if designated by the Fund) may, however,
qualify (provided holding periods and other requirements are met) (i) for the
dividends received deduction available to corporations, but only to the extent
that the Fund's income consists of dividends received from U.S. corporations
and (ii) under the recently enacted Jobs and Growth Tax Relief Reconciliation
Act of 2003 (effective for taxable years after December 31, 2002 through
December 31, 2008) ("2003 Tax Act"), as qualified dividend income eligible for
the reduced maximum rate to individuals of generally 15% (5% for individuals
in lower tax brackets) to the extent that the Fund receives qualified dividend
income. Qualified dividend income is, in general, dividend income from taxable
domestic corporations and certain foreign corporations (e.g., generally,
foreign corporations incorporated in a possession of the United States or in
certain countries with a comprehensive tax treaty with the United States, or
the stock of which is readily tradable on an established securities market in
the United States). Distributions of net capital gain designated as capital
gain dividends, if any, are taxable to shareholders at rates applicable to
long-term capital gains, whether paid in cash or in shares, and regardless of
how long the shareholder has held the Fund's shares. Capital gain dividends
are not eligible for the dividends received deduction. Under the 2003 Tax Act,
the maximum tax rate on net long-term capital gain of individuals is reduced
generally from 20% to 15% (5% for individuals in lower brackets) for such gain
realized after May 6, 2003 and before January 1, 2009. Distributions in excess
of the Fund's earnings and profits will first reduce the adjusted tax basis of
a holder's shares and, after such adjusted tax basis is reduced to zero, will
constitute capital gain to such holder (assuming the shares are held as a
capital asset). For non-corporate taxpayers, under the 2003 Tax Act,
investment company taxable income (other than qualified dividend income) will
currently be taxed at a maximum rate of 35%, while net capital gain generally
will be taxed at a maximum rate of 15%. For corporate taxpayers, both
investment company taxable income and net capital gain are taxed at a maximum
rate of 35%.
Shareholders may be entitled to offset their capital gain dividends
with capital losses. There are a number of statutory provisions affecting when
capital losses may be offset against capital gains, and limiting the use of
losses from certain investments and activities. Accordingly, shareholders with
capital losses are urged to consult their tax advisers.
The price of shares purchased at any time may reflect the amount of a
forthcoming distribution. Those purchasing shares just prior to a distribution
will receive a distribution which will be taxable to them even though it
represents in part a return of invested capital.
Upon a sale or exchange of shares, a shareholder will realize a
taxable gain or loss depending upon his or her basis in the shares. Such gain
or loss will be treated as long-term capital gain or loss if the shares have
been held for more than one year. Any loss realized on a sale or exchange will
be disallowed to the extent the shares disposed of are replaced within a
61-day period beginning 30 days before and ending 30 days after the date that
the shares are disposed of. In such a case, the basis of the shares acquired
will be adjusted to reflect the disallowed loss.
Any loss realized by a shareholder on the sale of Fund shares held by
the shareholder for six months or less will be treated for tax purposes as a
long-term capital loss to the extent of any capital gain dividends received by
the shareholder (or amounts credited to the shareholder as an undistributed
capital gain) with respect to such shares.
Ordinary income dividends and capital gain dividends also may be
subject to state and local taxes. Shareholders are urged to consult their own
tax advisers regarding specific questions about the U.S. federal (including
the application of the alternative minimum tax rules), state, local or foreign
tax consequences to them of investing in the Fund.
Ordinary income dividends (but not capital gain dividends) paid to
shareholders who are non-resident aliens or foreign entities will be subject
to a 30% United States withholding tax under existing provisions of the Code
applicable to foreign individuals and entities, unless a reduced rate of
withholding or a withholding exemption is provided under applicable treaty
law. Non-resident shareholders are urged to consult their own tax advisers
concerning the applicability of the United States withholding tax.
Based in part on a lack of present intention on the part of the Fund
to voluntarily redeem the Series B AMPS at any time in the future, the Fund
intends to take the position that under present law the Series B AMPS 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 AMPS constitute debt of the Fund. If that position were upheld,
distributions on the Series B AMPS would be considered interest, taxable as
ordinary income regardless of the taxable income of the Fund. The Fund
believes this position, if asserted, would be unlikely to prevail.
The IRS has taken the position that if a RIC 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 RIC during such year that was paid to such class.
Consequently, the Fund will designate distributions made to the common
shareholders and preferred shareholders as consisting of particular types of
income in accordance with the classes' proportionate shares of such income.
Because of this rule, the Fund is required to allocate a portion of its net
capital gain, qualified dividend income and dividends qualifying for the
dividends received deduction to common shareholders and preferred
shareholders. The amount of net capital gain, qualified dividend income and
dividends qualifying for the dividends received deduction allocable among
common shareholders and the preferred shareholders will depend upon the amount
of such net capital gain, and qualified dividend income and dividends
qualifying for the dividends received deduction realized by the Fund and the
total dividends paid by the Fund on the Common Shares and the Preferred Shares
during a taxable year.
Backup Withholding
The Fund may be required to withhold federal income tax on all
taxable distributions and redemption proceeds payable to non-corporate
shareholders who fail to provide the Fund with their correct taxpayer
identification number or to make required certifications, or who have been
notified by the IRS that they are subject to backup withholding. Backup
withholding is not an additional tax. Any amounts withheld may be refunded or
credited against such shareholder's federal income tax liability, if any,
provided that the required information is furnished to the IRS.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury regulations presently in effect. For the
complete provisions, reference should be made to the pertinent Code sections
and the Treasury regulations promulgated thereunder. The Code and the Treasury
regulations are subject to change by legislative, judicial or administrative
action, either prospectively or retroactively. Persons considering an
investment in Series A Preferred or Series B AMPS should consult their own tax
advisers regarding the purchase, ownership and disposition of Series A
Preferred or Series B AMPS.
ADDITIONAL INFORMATION CONCERNING AUCTIONS
FOR SERIES B AMPS
General
The Statement of Preferences provides that the Applicable Rate for
each Dividend Period of the Series B AMPS 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 AMPS 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 AMPS. See "Broker-Dealers"
below.
Securities Depository. DTC will act as the Securities Depository for
the Agent Members with respect to the Series B AMPS. One certificate for all
of the Series B AMPS 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 AMPS contained in the Statement of Preferences. The Fund will also
issue stop-transfer instructions to the transfer agent for the Series B AMPS.
Prior to the commencement of the right of Holders of the Preferred Shares to
elect a majority of the Fund's trustees, as described under "Description of
the Series A Preferred and Series B AMPS -- Voting Rights" in the Prospectus,
Cede & Co. will be the Holder of all the Series B AMPS 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 AMPS, 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 AMPS:
(i) each Beneficial Owner of Series B AMPS may submit to its
Broker-Dealer by telephone or otherwise a:
(a) "Hold Order" - indicating the number of Outstanding
Series B AMPS 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
AMPS shares, if any, that such Beneficial Owner offers
to sell if the Applicable Rate for such Series B AMPS
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 AMPS shares, if any, that such Beneficial Owner
offers to sell without regard to the Applicable Rate for
such Series B AMPS 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 AMPS shares that
they offer to purchase if the Applicable Rate for Series B
AMPS 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 AMPS 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 AMPS an Order or Orders covering all
the Outstanding Series B AMPS 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 AMPS 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 AMPS an Order or Orders covering all of the
Outstanding Series B AMPS 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 AMPS
shares held by such Beneficial Owner and not subject to Orders submitted to
its Broker-Dealer.
A Potential Beneficial Owner of Series B AMPS may submit to its
Broker-Dealer Bids in which it offers to purchase Series B AMPS 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 AMPS 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 AMPS that offers to become the
Beneficial Owner of additional Series B AMPS 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 AMPS subject
to Orders submitted or deemed submitted to them by Beneficial Owners and as
Potential Holders in respect of Series B AMPS 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 AMPS 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 AMPS 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 AMPS shares
that is fewer than the number of Series B AMPS 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 resulting from the use or reliance on a source of information used
in good faith unless the Auction Agent will have been grossly negligent in the
determination, calculation or declaration thereunder.
The Auction Agent may rely upon, as evidence of the identities of the
Existing Holders of Series B AMPS, 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 AMPS -- Secondary Market Trading and Transfer of
Series B AMPS" 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 or for any reason
its appointment is terminated during any period when the Series B AMPS are
outstanding, the Fund will use its best efforts promptly thereafter 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 in substantially the form of the Auction Agency
Agreement with a successor Auction Agent.
Broker-Dealers
The Auction Agent after each Auction for Series B AMPS 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 360,
times (ii) 1/4 of 1%, times (iii) $25,000, times (iv) the aggregate number of
Series B AMPS 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 AMPS 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 AMPS 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 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. 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 1:30 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 AMPS 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 AMPS 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 AMPS will be considered
valid, but only up to and including in the aggregate the
number of Outstanding shares of Series B AMPS held by
such Existing Holder, and, if the number of Series B
AMPS shares subject to such Hold Orders exceeds the
number of shares of Outstanding Series B AMPS 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 AMPS will be considered valid
up to and including the excess of the number of
Outstanding shares of Series B AMPS held by such
Existing Holder over the number of Series B AMPS 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 AMPS is submitted to the
Auction Agent with the same rate and the number of
Outstanding shares of Series B AMPS 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 AMPS
subject to each Bid with the same rate will be reduced
pro rata to cover the number of shares of Series B AMPS
equal to such excess;
(c) subject to subclauses (a) and (b), if more than one Bid
of an Existing Holder for Series B AMPS 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 AMPS 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 AMPS by or on behalf of a Potential
Holder at the rate specified therein; and
(iii) all Sell Orders for Series B AMPS will be considered valid up
to and including the excess of the number of Outstanding
shares of Series B AMPS 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 AMPS 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 AMPS
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 AMPS, 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 AMPS over the number of Outstanding
shares of Series B AMPS subject to Submitted Hold Orders (such excess being
herein referred to as the "Available Series B AMPS") 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 AMPS 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 AMPS that are the subject of Submitted Sell Orders (including the
number of Series B AMPS shares subject to Bids of Existing Holders specifying
rates higher than the Maximum Rate).
If Sufficient Clearing Bids for Series B AMPS 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 AMPS
shares which, when added to the number of Outstanding Series B AMPS shares to
be purchased by Potential Holders, based on the rates in their Submitted Bids,
would equal not less than the Available Series B AMPS. 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 AMPS is subject to Submitted Hold Orders), the
Applicable Rate for the next Dividend Period for all Series B AMPS 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 AMPS subject to such Sell Orders but will
continue to own Series B AMPS 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 AMPS is subject to Submitted Hold
Orders, the Applicable Rate for all Series B AMPS 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 AMPS 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 AMPS subject to such Hold
Orders.
If Sufficient Clearing Bids for Series B AMPS 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 AMPS 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 AMPS
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 AMPS 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 AMPS subject to such
Submitted Bid, unless the number of Outstanding Series B AMPS
shares subject to all such Submitted Bids is greater than the
number of Series B AMPS shares ("remaining shares") in excess
of the Available Series B AMPS over the number of Series B
AMPS 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 AMPS subject to such Submitted
Bid determined on a pro rata basis based on the number of
Outstanding Series B AMPS 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 AMPS will purchase any Available Series
B AMPS not accounted for in clauses (ii) through (iv) above on
a pro rata basis based on the Outstanding Series B AMPS shares
subject to all such Submitted Bids.
If Sufficient Clearing Bids for Series B AMPS shares have not been
made (unless this results because all Outstanding Series B AMPS 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 AMPS 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
AMPS 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 AMPS
shares subject to such Submitted Bid or Submitted Sell Order
determined on a pro rata basis based on the number of
Outstanding Series B AMPS 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 AMPS 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 AMPS shares being sold or purchased on such Auction Date so
that the number of Series B AMPS 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 AMPS share, the Auction Agent will, in such manner as,
in its sole discretion, it will determine, allocate Series B AMPS for purchase
among Potential Holders so that only whole Series B AMPS 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 AMPS as a result of
the Auction and will be required to advise each customer purchasing or selling
Series B AMPS 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 AMPS 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 AMPS 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 AMPS 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 AMPS shares that is less than the number of Series B AMPS
shares that otherwise was to be purchased by such person. In such event, the
number of Series B AMPS shares to be so delivered will be determined by the
Broker-Dealer. Delivery of such lesser number of Series B AMPS shares will
constitute good delivery.
ADDITIONAL INFORMATION CONCERNING
THE SERIES A PREFERRED AND SERIES B AMPS
The additional information concerning the Series A Preferred and
Series B AMPS 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 AMPS contained in the
Prospectus under "Description of the Series A Preferred and Series B AMPS."
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 AMPS. 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 AMPS
Holders of Series B AMPS 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 AMPS 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 AMPS 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 AMPS 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 AMPS is set forth in the Prospectus. See "The Auction of
Series B AMPS -- 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 AMPS 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 AMPS Basic
Maintenance Amount.
The Maximum Rate will apply automatically following an Auction for
Series B AMPS in which Sufficient Clearing Bids have not been made (other than
because all Series B AMPS 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 AMPS 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 AMPS; 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 AMPS 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 AMPS Basic Maintenance Amount and has consulted with the
Broker-Dealers and has provided notice and a Series B AMPS Basic Maintenance
Report to each Rating Agency which is then rating the Series B AMPS 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 ten 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 the Outstanding
Series B AMPS 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 (or such later date as the Paying
Agent may authorize), as the case may be, (i) the full amount of any declared
dividend on the Outstanding Series B AMPS 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 AMPS 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 AMPS, 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 AMPS, 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 shares), or (ii) declare any dividend (except a dividend payable
in shares of the issuer) or other distributions upon any of its outstanding
capital shares, including the Series A Preferred or Series B AMPS, or purchase
any such capital shares 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 AMPS, 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 AMPS is prohibited, unless there is no event of default
under indebtedness senior to the Series A Preferred and/or Series B AMPS 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 AMPS).
For so long as the Series A Preferred or Series B AMPS 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 AMPS 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 AMPS 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 AMPS (except by conversion into or exchange for
shares of the Fund ranking junior to the Series A Preferred and/or Series B
AMPS 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 AMPS and
the 1940 Act Asset Coverage with respect to the Fund's Outstanding Preferred
Shares, including the Series A Preferred and/or Series B AMPS, 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 AMPS (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 AMPS 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 AMPS 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
AMPS) 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 AMPS) 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 AMPS: (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
AMPS, 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 AMPS, 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 Moody's (if Moody's is then rating the Series A Preferred or Series B AMPS
at the request of the Fund) and S&P (if S&P is then rating the Series A
Preferred or Series B AMPS 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
AMPS.
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 31 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 the Discounted
Value of the Fund's portfolio holdings for purposes of determining compliance
with the Basic Maintenance Amount - are based on the criteria established by
each Rating Agency in connection with rating, as the case may be, the Series A
Preferred or Series B AMPS. 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. Upon any failure to maintain the
required Discounted Value of the Fund's Eligible Assets, the Fund may 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.
The Fund may, but is not required to, adopt any modifications to the
rating agency guidelines that may hereafter be established by Moody's or S&P.
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 AMPS 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 any provisions
in the Fund's Statements of Preferences for the Series A Preferred and Series
B AMPS, including provisions that have been adopted by the Fund pursuant to
the rating agency guidelines, if the Board of Trustees determines that such
amendments or modifications (i) are necessary to prevent a reduction in, or
the withdrawal of, a rating of the Series A Preferred or Series B AMPS and are
in the aggregate in the best interests of the holders of the Series A
Preferred or Series B AMPS, as the case may be, or (ii) will not in the
aggregate adversely affect the rights and preferences of the holders of Series
A Preferred or Series B AMPS, provided, that in the case of clause (ii) the
Fund has received advice from each applicable rating agency that such
amendment or modification is not expected to adversely affect such rating
agency's then-current rating of the Fund's preferred shares.
Among the modifications or amendments of the Statements of
Preferences that would not be held to adversely affect the rights and
preferences of the Series A Preferred or Series B AMPS would be the following:
o a modification of the definition of the maximum rate to
increase the percentage amount by which the applicable LIBOR
rate or treasury index rate is multiplied to determine the
maximum rate or increase the spread added to the applicable
LIBOR rate or treasury index rate; or
o a modification of the calculation of the adjusted value of the
Fund's eligible assets or the basic maintenance amount (or of
the elements and terms of each of them or the definitions of
such elements or terms).
1940 Act 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 Monthly 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 fifth Business Day after the relevant
Monthly Valuation Date or Cure Date.
As for any Valuation Date for which the Fund's ratio of the
Discounted Value of Eligible Assets in respect of any Rating Agency to the
Basic Maintenance Amount is less than or equal to 110%, the Fund shall
deliver, by fax or email before 5:00 p.m. New York City time on the first
Business Day following such Valuation Date, notice of such ratio to each
Rating Agency.
Deposit Assets Requirements Relating to the Series B AMPS
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 AMPS. 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 AMPS
Series B AMPS 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 AMPS through different Broker-Dealers,
advises the Auction Agent of such transfer. Any certificates representing the
Series B AMPS 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.
MOODY'S AND S&P GUIDELINES
The descriptions of the Moody's and S&P 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 Moody's and S&P,
each a Rating Agency, in connection with the Fund's receipt of a rating of
"Aaa" from Moody's and "AAA" from S&P, respectively, for the Series B AMPS and
a rating of "Aaa" from Moody's 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 such
guidelines, greater than the aggregate liquidation preference of the
Outstanding Series A Preferred, Series B AMPS 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 AMPS
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 AMPS --
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 will apply to the Series A Preferred or Series B
AMPS only so long as the relevant Rating Agency is rating such shares at the
request of the Fund. If in the future the Fund elected to issue senior
securities rated by a rating agency other than Moody's or S&P, other similar
arrangements might apply with respect to those securities.
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
AMPS -- Asset Maintenance." Moody's and S&P 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.
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 "Aaa" (as described by Moody's) or
"AAA" (as described by S&P) indicates strong asset protection, conservative
balance sheet ratios and positive indications of continued protection of
preferred dividend requirements. A Moody's or S&P 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 Moody's and S&P, an
issue of preferred shares which is rated "Aaa" or "AAA" 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.
The Fund will pay certain fees to Moody's and S&P for rating, as the
case may be, the Series A Preferred and/or Series B AMPS. 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 AMPS should be evaluated
independently of any other rating. Ratings are not recommendations to
purchase, hold or sell Series A Preferred or Series B AMPS, 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 Moody's and
S&P by the Fund and obtained by Moody's and S&P from other sources. The rating
may be changed, suspended or withdrawn as a result of changes in, or
unavailability of, such information. The Fund has no current intention to file
a voluntary application for relief under federal bankruptcy law or any similar
application under state law for so long as the Fund is solvent and does not
foresee becoming insolvent.
MOODY'S GUIDELINES
Under the Moody's guidelines, the Fund is required to maintain specified
discounted asset values for its portfolio representing the Preferred Basic
Maintenance Amount. To the extent any particular portfolio holding does not
meet the applicable guidelines, it is not included for purposes of calculating
the Discounted Value of the Fund's portfolio.
The following Discount Factors apply to portfolio holdings as
described below, subject to diversification, issuer size and other
requirements, in order to constitute Moody's Eligible Assets includable within
the calculation of Discounted Value:
Moody's
Type of Moody's Eligible Asset: Discount Factor:
------------------------------ ---------------
Short Term Money Market Instruments (other than U.S. Government Obligations set forth
below) and other commercial paper:
U.S. Treasury Securities with final maturities that are less than or equal to 60 days..... 1.00
Demand or time deposits, certificates of deposit and bankers' acceptances includable in
Moody's Short Term Money Market Instruments............................................. 1.00
Commercial paper rated P-1 by Moody's maturing in 30 days or less......................... 1.00
Commercial paper rated P-1 by Moody's maturing in more than 30 days but in 270 days
or less................................................................................. 1.15
Commercial paper rated A-1+ by S&P maturing in 270 days or less........................... 1.25
Repurchase obligations includable in Moody's Short Term Money Market Instruments if
term is less than 30 days and counterparty is rated at least A2......................... 1.00
Other repurchase obligations.............................................................. **
U.S. Common Stock and Common Stock of foreign issuers for which ADRs are traded
Utility................................................................................... 1.70
Industrial................................................................................ 2.64
Financial................................................................................. 2.41
Common Stock of foreign issuers (in existence for at least five years) for which no ADRs are
traded......................................................................................... 4.00
Convertible preferred stocks................................................................... 3.00
Preferred stocks:
Auction rate preferred stocks............................................................. 3.50
Other preferred stocks issued by issuers in the financial and industrial industries....... 2.09
-------------------
** Discount factor applicable to the underlying assets.
Moody's
Type of Moody's Eligible Asset: Discount Factor:
------------------------------ ---------------
Other preferred stocks issued by issuers in the utilities industry........................ 1.55
U.S. Government Obligations (other than U.S. Treasury Securities set forth above or U.S.
Treasury Securities Strips set forth below)................................................. 1.04-1.26
U.S. Treasury Securities Strips................................................................ 1.04-1.66
Corporate Debt:
Non-convertible corporate debt rated Aaa.................................................... 1.09-1.50
Non-convertible corporate debt rated at least Aa3........................................... 1.12-1.55
Non-convertible corporate debt rated at least A3............................................ 1.15-1.60
Non-convertible corporate debt rated at least Baa3.......................................... 1.18-1.65
Non-convertible corporate debt rated at least Ba3........................................... 1.37-1.96
Non-convertible corporate debt rated at least B1and B2...................................... 1.50-2.29
Non-convertible unrated corporate debt...................................................... 2.50
Convertible corporate debt rated at least Aa3 issued by the following type of issuers:
Utility................................................................................... 1.62-1.67
Industrial................................................................................ 2.56-2.61
Financial................................................................................. 2.33-2.38
Transportation............................................................................ 2.50-2.65
Convertible corporate debt rated at least A3 issued by the following type
of issuers:
Utility................................................................................... 1.72
Industrial................................................................................ 2.66
Financial................................................................................. 2.43
Transportation............................................................................ 2.75
Convertible corporate debt rated at least Baa3 issued by the following type
of issuers:
Utility................................................................................... 1.88
Industrial................................................................................ 2.82
Financial................................................................................. 2.59
Transportation............................................................................ 2.85
Convertible corporate debt rated at least Ba3 issued by the following type
of issuers:
Utility................................................................................... 1.95
Industrial................................................................................ 2.90
Financial................................................................................. 2.65
Transportation............................................................................ 2.90
Convertible corporate debt rated at least B2 issued by the following type
of issuers:
Utility................................................................................... 1.99
Industrial................................................................................ 2.93
Financial................................................................................. 2.70
Transportation............................................................................ 2.95
"Moody's Eligible Assets" means:
(a) cash (including, for this purpose, receivables for
investments sold to a counterparty whose senior debt securities are rated at
least "Baa3" by Moody's or a counterparty approved by Moody's and payable
within five Business Days following such Valuation Date and dividends and
interest receivable within 49 days on investments);
(b) Short-Term Money Market Instruments;
(c) commercial paper that is not includable as a Short-Term
Money Market Instrument having on the Valuation Date a rating from Moody's of
at least "P-1" and maturing within 270 days;
(d) preferred stocks (i) which either (A) are issued by
issuers whose senior debt securities are rated at least "Baa1" by Moody's or
(B) are rated at least "Baa3" by Moody's or (C) in the event an issuer's
senior debt securities or preferred stock is not rated by Moody's, which
either (1) are issued by an issuer whose senior debt securities are rated at
least "A-" by S&P or (2) are rated at least "A-" by S&P and for this purpose
have been assigned a Moody's equivalent rating of at least "Baa3", (ii) of
issuers which have (or, in the case of issuers which are special purpose
corporations, whose parent companies have) common stock listed on the New York
Stock Exchange, the American Stock Exchange or the Nasdaq National Market
System, (iii) which have a minimum issue size (when taken together with other
of the issuer's issues of similar tenor) of $50,000,000, (iv) which have paid
cash dividends consistently during the preceding three-year period (or, in the
case of new issues without a dividend history, are rated at least "A1" by
Moody's or, if not rated by Moody's, are rated at least "AA-" by S&P), (v)
which pay cumulative cash dividends in U.S. dollars, (vi) which are not
convertible into any other class of stock and do not have warrants attached,
(vii) which are not issued by issuers in the transportation industry and
(viii) in the case of auction rate preferred stocks, which are rated at least
"Aa3" by Moody's, or if not rated by Moody's, "AAA" by S&P, AAA by Fitch or
are otherwise approved in writing by Moody's and have never had a failed
auction; provided, however, that for this purpose the aggregate Market Value
of the Fund's holdings of any single issue of auction rate preferred stock
shall not be more than 1% of the Fund's total assets;
(e) common stocks (i) (A) which are traded on a nationally
recognized stock exchange or in the over-the-counter market, (B) if cash
dividend paying, pay cash dividends in U.S. dollars and (C) which may be sold
without restriction by the Fund; provided, however, that (y) common stock
which, while a Moody's Eligible Asset owned by the Fund, ceases paying any
regular cash dividend will no longer be considered a Moody's Eligible Asset
until 71 days after the date of the announcement of such cessation, unless the
issuer of the common stock has senior debt securities rated at least A3 by
Moody's and (z) the aggregate Market Value of the Fund's holdings of the
common stock of any issuer in excess of 4% in the case of utility common stock
and 6% in the case of non-utility common stock of the aggregate Market Value
of the Fund's holdings shall not be Moody's Eligible Assets, (ii) which are
securities denominated in any currency other than the U.S. dollar or
securities of issuers formed under the laws of jurisdictions other than the
United States, its states and the District of Columbia for which there are
dollar- denominated American Depository Receipts ("ADRs") or their equivalents
which are traded in the United States on exchanges or over-the-counter and are
issued by banks formed under the laws of the United States, its states or the
District of Columbia or (iii) which are securities of issuers formed under the
laws of jurisdictions other than the United States (and in existence for at
least five years) for which no ADRs are traded; provided, however, that the
aggregate Market Value of the Fund's holdings of securities denominated in
currencies other than the U.S. dollar and ADRs in excess of (A) 6% of the
aggregate Market Value of the outstanding shares of common stock of such
issuer thereof or (B) 10% of the Market Value of the Fund's Moody's Eligible
Assets with respect to issuers formed under the laws of any single such
non-U.S. jurisdiction other than Australia, Belgium, Canada, Denmark, Finland,
France, Germany, Ireland, Italy, Japan, the Netherlands, New Zealand, Norway,
Spain, Sweden, Switzerland and the United Kingdom, shall not be a Moody's
Eligible Asset;
(f) ADR securities, based on the following guidelines: (i)
Sponsored ADR program or (ii) Level II or Level III ADRs. Private placement
Rule 144A ADRs are not eligible for collateral consideration. Global GDR
programs will be evaluated on a case by case basis;
(g) U.S. Government Obligations;
(h) corporate evidences of indebtedness (i) which may be
sold without restriction by the Fund which are rated at least "B3" ("Caa"
subordinate) by Moody's (or, in the event the security is not rated by
Moody's, the security is rated at least "BB-" by S&P and which for this
purpose is assigned a Moody's equivalent rating of one full rating category
lower), with such rating confirmed on each Valuation Date, (ii) which have a
minimum issue size of at least (A) $100,000,000 if rated at least "Baa3" or
(B) $50,000,000 if rated "B" or "Ba3", (iii) which are not convertible or
exchangeable into equity of the issuing corporation and have a maturity of not
more than 30 years and (iv) for which, if rated below "Baa3" or not rated, the
aggregate Market Value of the Fund's holdings do not exceed 10% of the
aggregate Market Value of any individual issue of corporate evidences of
indebtedness calculated at the time of original issuance;
(i) convertible corporate evidences of indebtedness (i)
which are issued by issuers whose senior debt securities are rated at least
"B2" by Moody's (or, in the event an issuer's senior debt securities are not
rated by Moody's, which are issued by issuers whose senior debt securities are
rated at least "BB" by S&P and which for this purpose is assigned a Moody's
equivalent rating of one full rating category lower), (ii) which are
convertible into common stocks which are traded on the New York Stock Exchange
or the American Stock Exchange or are quoted on the Nasdaq National Market
System and (iii) which, if cash dividend paying, pay cash dividends in U.S.
dollars; provided, however, that once convertible corporate evidences of
indebtedness have been converted into common stock, the common stock issued
upon conversion must satisfy the criteria set forth in clause (e) above and
other relevant criteria set forth in this definition in order to be a Moody's
Eligible Asset; provided, however, that the Fund's investments in auction rate
preferred stocks described in clause (d) above shall be included in Moody's
Eligible Assets only to the extent that the aggregate Market Value of such
stocks does not exceed 10% of the aggregate Market Value of all of the Fund's
investments meeting the criteria set forth in clauses (a) through (g) above
less the aggregate Market Value of those investments excluded from Moody's
Eligible Assets pursuant to the proviso appearing after clause (j) below; and
(j) no assets which are subject to any lien or irrevocably
deposited by the Fund for the payment of amounts needed to meet the following
obligations may be includable in Moody's Eligible Assets.
Notwithstanding anything to the contrary in the preceding clauses
(a)-(j), the Fund's investment in preferred stock, common stock, corporate
evidences of indebtedness and convertible corporate evidences of indebtedness
shall not be treated as Moody's Eligible Assets except to the extent they
satisfy the following diversification requirements (utilizing Moody's Industry
and Sub-industry Categories) with respect to the Market Value of the Fund's
holdings: Issuer:
Non-Utility Utility
Maximum Single Maximum Single
Moody's Rating(1)(2) Issuer(3)(4) Issuer(3)(4)
-------------------- -------------- ------------
Aaa 100% 100%
Aa 20% 20%
A 10% 10%
CS/CB, "Baa", Baa(5) 6% 4%
Ba 4% 4%
B1/B2 3% 3%
B3 or below 2% 2%
Industry and State:
Utility Utility
Non-Utility Maximum Maximum
Maximum Single Single Sub- Single
Moody's Rating(1) Industry(3) Industry(3)(6) State(3)
----------------- ----------- ------------- --------
Aaa 100% 100% 100%
Aa 60% 60% 20%
A 40% 50% 10%(7)
CS/CB, "Baa", Baa(5) 20% 50% 7%(7)
Ba 12% 12% 0%
B1/B2 8% 8% 0%
B3 or below 5% 5% 0%
___________________
(1) Unless conclusions regarding liquidity risk as well as
estimates of both the probability and severity of default
for the Fund's assets can be derived from other sources,
securities rated below B by Moody's and unrated securities,
which are securities rated by neither Moody's, S&P nor
Fitch, are limited to 10% of Moody's Eligible Assets. If a
corporate, municipal or other debt security is unrated by
Moody's, S&P or Fitch, the Fund will use the percentage set
forth under "Below B and Unrated" in this table. Ratings
assigned by S&P or Fitch are generally accepted by Moody's
at face value. However, adjustments to face value may be
made to particular categories of credits for which the S&P
and/or Fitch rating does not seem to approximate a Moody's
rating equivalent.
(2) Corporate evidences of indebtedness from issues ranging from
$50,000,000 to $100,000,000 are limited to 20% of Moody's
Eligible Assets.
(3) The referenced percentages represent maximum cumulative
totals only for the related Moody's rating category and each
lower Moody's rating category.
(4) Issuers subject to common ownership of 25% or more are
considered as one name.
(5) CS/CB refers to common stock and convertible corporate
evidences of indebtedness, which are diversified
independently from the rating level.
(6) In the case of utility common stock, utility preferred
stock, utility evidences of indebtedness and utility
convertible evidences of indebtedness, the definition of
industry refers to sub-industries (electric, water, hydro
power, gas, diversified). Investments in other
sub-industries are eligible only to the extent that the
combined sum represents a percentage position of the Moody's
Eligible Assets less than or equal to the percentage limits
in the diversification tables above.
(7) Such percentage shall be 15% in the case of utilities
regulated by California, New York and Texas.
S&P GUIDELINES
Under the S&P guidelines, the Fund is required to maintain specified
discounted asset values for its portfolio representing the Series B Preferred
Basic Maintenance Amount (as defined below). To the extent any particular
portfolio holding does not meet the applicable guidelines, it is not included
for purposes of calculating the Discounted Value of the Fund's portfolio.
The following Discount Factors apply to portfolio holdings as
described below in order to constitute S&P Eligible Assets includable within
the calculation of Discounted Value:
Asset Class Obligor Discount Factors (1)
(Collateral) --------------------
-----------
Common Stock 230.4%
30-yr treasury notes 126.7%
10-yr treasury notes 121.6%
5-yr treasury notes 115.1%
2-yr treasury notes 109.4%
52 week treasury bills 105.8%
STMMI with maturities 112.7%
from 181 to 360 days
STMMI with maturities 104%
from 1 to 180
Non-rated 2a-7 eligible 111%
money market funds used
as sweep accounts
Cash, receivables due 100%
within 5 business days of
a Valuation Date, demand
deposits and STMMI with
next day maturities held
in 'A-1+' rated
institutions, 'AAAm' rated
money market funds & 'A-1+'
commercial paper with
maturities of 30 days or
less
___________________
(1) For an S&P rating of "AAA".
"S&P Eligible Assets" means:
(a) Deposit Securities; and
(b) common stocks that satisfy all of the following
conditions:
(i) such common stock (including the common
stock of any predecessor or constituent
issuer) has been traded on a recognized
national securities exchange or quoted on
the National Market System (or any
equivalent or successor thereto) of Nasdaq
for at least 450 days,
(ii) the Market Capitalization of such issuer of
common stock exceeds $100 million,
(iii) the issuer of such common stock is not an
entity that is treated as a partnership
for federal income tax purposes,
(iv) if such issuer is organized under the laws
of any jurisdiction other than the United
States, any state thereof, any possession
or territory thereof or the District of
Columbia, the common stock of such issuer
held by the Fund is traded on a recognized
national securities exchange or quoted on
the National Market System of Nasdaq
either directly or in the form of
depository receipts, and
(v) if such issuer is registered as an
investment company under the 1940 Act,
such issuer does not invest more than 25%
of the value of its gross assets in
securities that are not S&P Eligible
Assets by reason of clause (iv) above;
provided, however, that the Fund's holdings of the common
stock of any single issuer that satisfies the conditions set
forth in clauses (i) through (v) above shall be included in
S&P Eligible Assets only to the extent that:
(1) restricted stocks (144a securities) or any
pink sheet stocks (generally, stock that
are not carried in daily over-the-counter
newspaper listings) are ineligible; and
(2) the aggregate Market Value of the Fund's
holdings of any single issuer is not in
excess of 4% of the aggregate Market Value
of the Fund's S&P Eligible Assets.
(c) Preferred stocks on such basis as S&P may determine in
response to a request from the Fund.
Notwithstanding the foregoing, an asset will not be considered an S&P
Eligible Asset if it is held in a margin account, is subject to any material
lien, mortgage, pledge, security interest or security agreement of any kind or
has been deposited irrevocably for the payment of dividends, redemption
payments or any other payment or obligation under the Fund's Statement of
Preferences.
In addition, so long as any Series B AMPS are Outstanding and S&P is
rating such Series B AMPS at the Fund's request, the Fund will not, unless it
has received written confirmation that any such transaction would not impair
the rating then assigned by S&P to the Series B AMPS, engage in any one or
more of the following transactions:
(a) purchase or sell futures contracts; write,
purchase or sell options on futures contracts; or write put options (except
covered put options) or call options (except covered call options) on
securities owned by the Fund (collectively, "S&P Hedging Transactions"),
except subject to the following limitations:
(i) for each net long or short position in S&P
Hedging Transactions, the Fund will maintain in a segregated
account with the Fund's custodian an amount of cash or
readily marketable securities having a value, when added to
any amounts on deposit with the Fund's futures commission
merchants or brokers as margin or premium for such position,
at least equal to the market value of the Fund's potential
obligations on such position, marked-to-market on a daily
basis, in each case as and to the extent required by the
applicable rules or orders of the SEC or by interpretations
of the SEC's staff;
(ii) the Fund will not engage in any S&P Hedging
Transaction which would cause the Fund at the time of such
transaction to own or have sold the lesser of (A)
outstanding futures contracts, in aggregate, based on the
Standard & Poor's 500 Index, the Dow Jones Industrial
Average, the Russell 2000 Index, the Wilshire 5000 Index,
the Nasdaq Composite Index and the New York Stock Exchange
Composite Index (or any component of any of the forgoing)
exceeding in number 50% of the market value of the Fund's
total assets or (B) outstanding futures contracts
based on any of the aforementioned indices exceeding in
number 10% of the average number of daily traded futures
contracts based on such index in the 30 days preceding the
time of effecting such transaction as reported by The Wall
Street Journal;
(iii) the Fund will engage in closing transactions
to close out any outstanding futures contract which the Fund
owns or has sold or any outstanding option thereon owned by
the Fund in the event (A) the Fund does not have S&P
Eligible Assets with an aggregate Discounted Value equal to
or greater than the Series B AMPS Basic Maintenance Amount
on two consecutive Valuation Dates and (B) the Fund is
required to pay variation margin on the second such
Valuation Date;
(iv) the Fund will engage in a closing transaction
to close out any outstanding futures contract or option
thereon at least one week prior to the delivery date under
the terms of the futures contract or option thereon unless
the corporation holds the securities deliverable under such
terms; and
(v) when the Fund writes a futures contract or
option thereon, either the amount of margin posted by the
Fund (in the case of a futures contract) or the
marked-to-market value of the Fund's obligation (in the case
of a put option written by the Fund) shall be treated as a
liability of the Fund for purposes of calculating the Series
B AMPS Basic Maintenance Amount, or, in the event the Fund
writes a futures contract or option thereon which requires
delivery of an underlying security and the Fund does not
wish to treat its obligations with respect thereto as a
liability for purposes of calculating the Series B AMPS
Basic Maintenance Amount, it shall hold such underlying
security in its portfolio and shall not include such
security to the extent of such contract or option as an S&P
Eligible Asset.
(b) borrow money, except for the purpose of
clearing securities transactions if (i) the Series B AMPS Basic Maintenance
Amount would continue to be satisfied after giving effect to such borrowing
and (ii) such borrowing (A) is privately arranged with a bank or other person
and is not intended to be publicly distributed or (B) is for "temporary
purposes," and is in an amount not exceeding 5 percent of the market value of
the total assets of the Fund at the time of the borrowing; for purposes of the
foregoing, "temporary purposes" means that the borrowing is to be repaid
within sixty days and is not to be extended or renewed;
(c) engage in any short sales of equity securities
(other than short sales against the box) unless the Fund maintains in a
segregated account with the Fund's custodian an amount of cash or other
readily marketable securities having a market value, when added to any amounts
on deposit with the Fund's broker as collateral for its obligation to replace
the securities borrowed and sold short, at least equal to the current market
value of securities sold short, marked-to-market on a daily basis;
(d) utilize any pricing service other than FT
Interactive Data, Reuters, Telekurs, Bloomberg Financial Markets, J.J. Kenney
Pricing Service, Merrill Lynch Securities Pricing Service or Bridge Data
Corp., and any pricing service then permitted by S&P; or
(e) enter into any reverse repurchase agreement,
other than with a counterparty that is rated at least "A-1+" by S&P.
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
As of June 30, 2003, there were no persons known to the Fund to be
beneficial owners of more than 5% of the Fund's outstanding Common Shares.
As of June 30, 2003, the trustees and officers of the Fund as a group
beneficially owned approximately 1.55% 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 AMPS 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 AMPS.
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). The unaudited financial statements
for the six months ended June 30, 2003, follow.
PORTFOLIO OF INVESTMENTS
June 30, 2003 (Unaudited)
Market
Shares Cost Value
------ ---- -------
COMMON STOCKS - 87.9%
Agriculture - 0.0%
20,000 Cadiz Inc.+............. $ 3,000 $ 2,700
------------ ----------
Communications Equipment - 0.2%
60,000 Furukawa Electric Co. Ltd. 419,016 195,877
------------ ----------
Energy and Utilities: Electric - 21.0%
220,000 AES Corp.+.............. 1,072,514 1,397,000
20,000 Calpine Corp.+ 52,600 132,000
55,000 Cinergy Corp............ 1,727,502 2,023,450
20,000 Cleco Corp.............. 364,947 346,400
80,0000 DPL Inc. 1,547,470 1,275,200
19,000 DTE Energy Co........... 807,570 734,160
90,000 Edison International +.. 1,037,120 1,478,700
160,000 El Paso Electric Co.+... 1,462,191 1,972,800
22,000 FPL Group Inc........... 1,192,215 1,470,700
44,000 Great Plains Energy Inc. 919,607 1,270,720
55,000 Maine Public Service Co. 1,750,455 1,788,050
170,000 Northeast Utilites...... 3,354,147 2,845,800
55,000 SCANA Corp.............. 1,694,645 1,885,400
118,000 TECO Energy Inc......... 1,863,891 1,414,820
22,000 UIL Holdings Corp....... 966,711 892,100
20,000 Unisource Energy Corp... 236,625 376,00
--------- ----------
20,050,210 21,303,300
--------- ----------
Energy and Utilities: Integrated - 35.6%
162,000 Allegheny Energy Inc.... 1,462,197 1,368,900
13,000 ALLETE Inc.............. 222,463 345,150
75,000 Alliant Energy Corp..... 1,256,310 1,427,250
150,000 Aquila Inc.............. 423,832 387,000
500 Avista Corp............. 5,575 7,075
18,000 Central Vermont Public
Service Corp........ 327,361 351,900
48,000 CH Energy Group Inc..... 2,186,400 2,160,000
165,000 CMS Energy Corp......... 1,334,352 1,336,500
75,000 Constellation Energy
Group Inc........... 2,109,100 2,572,500
2,000 Dominion Resources Inc.. 80,310 128,540
180,000 DQE Inc................. 3,128,555 2,712,600
150,000 Duke Energy Corp........ 2,884,145 2,992,500
100,000 El Paso Corp............ 1,049,809 808,000
13,000 Empire District Electric Co. 259,961 282,750
32,000 Energy East Corp........ 595,433 664,320
5,000 Entergy Corp............ 140,415 263,900
8,979 FirstEntergy Corp....... 287,099 345,243
83,666 Florida Public Utilities Co. 1,051,557 1,367,939
20,000 Green Mountain Power Corp. 416,731 400,000
30,000 MGE Energy Inc.......... 816,100 941,400
110,000 Mirant Corp.+........... 900,482 319,000
5,000 NiSource Inc............ 103,120 95,000
Market
Shares Cost Value
------ ---- -------
45,000 NiSource Inc. (Sails)+..... $ 90,000 $ 99,900
64,000 NSTAR...................... 2,729,958 2,915,200
6,000 Otter Tail Corp............ 167,121 161,880
50,000 PG&E Corp.+................ 625,746 1,057,500
10,000 PNM Resources Inc.......... 185,900 267,500
45,000 Progress Energy Inc. 1,959,850 1,975,500
40,000 Progress Energy Inc., CVO+. 20,800 4,200
12,000 Puget Energy Inc........... 266,242 286,440
30,000 Sierra Pacific Resources+.. 227,798 178,200
30,000 TXU Corp................... 483,015 673,500
10,000 Unitil Corp................ 271,147 241,000
10,000 Vectren Corp............... 245,531 250,500
215,000 Westar Energy Inc.......... 3,192,547 3,489,450
10,000 Wisconsin Energy Corp...... 257,794 290,000
7,000 WPS Resources Corp......... 204,319 281,400
175,000 Xcel Energy Inc............ 3,004,875 2,632,000
---------- ----------
34,973,950 36,081,637
---------- ----------
Energy and Utilities: Natural Gas - 14.9%
33,000 AGL Resources Inc.......... 805,954 839,520
3,000 Atmos Energy Corp.......... 66,880 74,400
13,800 Cascade Natural Gas Corp... 295,987 263,580
3,000 Chesapeake Utilities Corp.. 55,515 67,800
29,800 Delta Natural Gas Co. Inc. 496,324 700,002
40,000 Dynegy Inc., Cl. A +....... 250,000 168,000
1,000 EnergySouth Inc............ 26,780 32,800
38,000 National Fuel Gas Co....... 890,728 989,900
90,000 Nicor Inc.................. 1,982,877 3,339,900
15,000 NUI Corp................... 174,468 232,800
65,000 ONEOK Inc.................. 1,121,404 1,275,950
19,000 Peoples Energy Corp........ 665,481 814,910
20,000 Piedmont Natural Gas Co. Inc. 588,123 776,200
3,000 RGC Resources, Inc......... 59,164 70,020
115,000 SEMCO Energy Inc........... 1,528,444 669,300
102,566 Southern Union Co.+........ 1,458,095 1,737,468
145,000 Southwest Gas Corp......... 3,596,118 3,071,100
---------- ----------
14,062,342 15,123,650
---------- ----------
Energy and Utilites: Water - 5.3%
12,000 American States Water Co... 266,173 327,600
11,000 Artesian Resources Corp., Cl. 257,250 395,989
20,500 BIW Ltd.................... 385,069 372,075
20,520 California Water
Service Group.......... 566,928 577,022
7,500 Connecticut Water
Service Inc............ 146,455 191,625
38,500 Middlesex Water Co......... 801,886 948,640
20,066 Pennichuck Corp............ 489,727 495,630
12,000 Philadelphia Suburban Corp. 183,101 292,560
18,300 SJW Corp................... 1,768,527 1,560,075
See accompanying notes to financial statements.
PORTFOLIO OF INVESTMENTS (Continued)
June 30, 2003 (Unaudited)
Market
Shares Cost Value
------ ---- -------
COMMON STOCKS (Continued)
Energy and Utilities: Water (Continued)
5,512 Southwest Water Co.......... $ 52,058 $ 77,003
6,000 York Water Co............... 108,629 98,520
----------- ------------
5,025,983 5,336,739
----------- ------------
Environmental Services - 0.1%
18,000 Catalytica Energy
Systems Inc.+........ 179,986 48,600
----------- ------------
Equipment and Supplies - 0.0%
10,000 Capstone Turbine Corp.+..... 13,980 10,900
----------- ------------
Exchange Traded Funds - 2.1%
28,000 Utilities HOLDRs Trust...... 2,015,370 2,088,800
----------- ------------
Metals and Mining - 0.5%
6,168 Fording Canadian Coal
Trust (New York)..... 132,561 111,764
19,532 Fording Canadian Coal
Trust (Toronto)...... 389,730 350,750
----------- ------------
522,291 462,514
----------- ------------
Satellite - 0.6%
50,000 General Motors Corp., Cl H+ 870,553 640,500
----------- ------------
Telecommunications - 6.6%
45,000 BellSouth Corp.............. 1,411,141 1,198,350
30,000 BT Group plc, ADR........... 1,094,015 1,009,800
24,000 CenturyTel Inc.............. 910,440 836,400
140,000 Cincinnati Bell Inc.+....... 953,620 938,000
18,000 Citizens Communications
Co.+................. 132,130 232,020
2,000 Commonwealth Telephone
Enterprises Inc.+.... 65,002 87,940
19,788 D&E Communications Inc...... 231,091 226,573
9,000 Deutsche Telekom AG, ADR.... 162,149 136,800
2,000 France Telecom SA, ADR...... 22,799 49,300
40,000 Touch America Holdings Inc.+ 38,488 2,680
49,000 Verizon Communications Inc.. 1,876,164 1,933,050
2,045 WilTel Communications Inc... 53,526 30,143
----------- ------------
6,950,295 6,681,056
----------- ------------
Wireless Communications - 1.0%
39,000 mm02 plc, ADR+.............. 405,354 359,970
35,000 Nextel Communications Inc.,
Cl. A+............... 460,343 632,800
----------- ------------
865,697 992,770
----------- ------------
TOTAL COMMON
STOCKS.................... 85,952,673 88,969,043
----------- ------------
See accompanying notes to financial statements.
Market
Shares Cost Value
------ ---- -------
PREFERRED STOCKS - 1.2%
Telecommunications - 1.2%
23,000 Citizens Communications Co.
5.00% Cv. Pfd....... $ 1,094,61 1,219,000
---------- ----------
Principal
Amount
------
CORPORATE BONDS - 0.8%
Energy and Utilities: Integrated - 0.8%
$ 1,100,000 Mirant Corp., Sub. Deb. CV.,
2.500%, 06/15/21+... 833,029 825,000
---------- ----------
REPURCHASE AGREEMENT - 10.0%
10,089,000 Agreement with State Street
Bank and Trust Co.,
1.080%, dated 06/30/03,
due 07/01/03, proceeds at
maturity, $10,089,303(a) 10,089,000 10,089,00
---------- ----------
TOTAL INVESTMENTS - 99.9%........... $ 97,969,318 $ 101,102,043
============== --------------
Other Assets in Excess of Liabilities - 0.1%..... 150,362
--------------
NET ASSETS - 100.0%
(15,282,735 shares outstanding).................. $ 101,252,405
==============
NET ASSET VALUE
($101,252,405 / 15,282,735 shares outstanding)... $6.63
==============
------------
For Federal tax purposes:
Aggregate cost....................... $ 97,227,406
==============
Gross unrealized appreciation........ $ 10,072,345
Gross unrealized depreciation........ (6,197,708)
--------------
Net unrealized appreciation.......... $ 3,874,637
==============
------------
(a) Collateralized by U.S. Treasury Note, 3.375%,
due 04/30/04, market value $10,293,821.
+ Non-income producing security.
ADR - American Depository Receipt.
CVO - Contingent Value Obligation.
STATEMENT OF ASSETS AND LIABILITIES
June 30, 2003 (Unaudited)
Assets:
Investments, at value (Cost $97,969,318) $101,102,043
Cash................................. 757
Dividends and interest receivable.... 308,141
Receivable for investments sold...... 489,920
Other assets......................... 3,465
-------------
Total Assets......................... 101,904,326
-------------
Liabilities:
Payable for investments purchased.... 182,918
Payable for investment advisory fees. 83,812
Payable for audit and legal fees..... 19,118
Other accrued expenses............... 366,073
-------------
Total Liabilities.................... 651,921
Net Assets applicable to 15,282,735 shares
outstanding.......................... $101,252,405
=============
Net Assets consist of:
Shares of beneficial interest, at par value $ 15,283
Additional paid-in capital........... 99,159,823
Accumulated net realized loss on investment (1,055,344)
Net unrealized appreciation on investments 3,132,643
-------------
Total Net Assets..................... $101,252,405
=============
Net Asset Value
($101,252,405 / 15,282,735 shares $6.63
outstanding; unlimited number of shares
authorized of $0.001 par value).
=============
STATEMENT OF OPERATIONS
For the Six Months Ended June 30, 2003 (Unaudited)
Investment Income:
Dividends (net of foreign taxes $4,647). $1,582,099
Interest................................ 106,091
-----------
Total Investment Income................. 1,688,190
-----------
Expenses:
Investment advisory fees................ 462,568
Shareholder communications expenses..... 146,113
Shareholder services fees............... 123,155
Payroll................................. 66,335
Trustees' fees.......................... 22,582
Legal and audit fees.................... 17,718
Custodian fees.......................... 7,448
Miscellaneous expenses.................. 48,770
-----------
Total Expenses.......................... 894,689
-----------
Less: Custodian fee credit............. (147)
-----------
Net Expenses............................ 894,542
-----------
Net Investment Income................... 793,648
-----------
Net Realized and Unrealized Gain (Loss) on
Investments
Net realized loss in investments........ (1,635,388)
Net change in unrealized appreciation on
investments........................... 11,593,255
-----------
Net Realized and Unrealized Gain (Loss) on
Investments........................... 9,957,867
-----------
Net Increase in Net Assets Resulting
from Operations...................... $10,751,515
===========
STATEMENT OF CHANGES IN NET ASSETS
Six Months Ended
June 30, 2003 Year Ended
(Unaudited) December 31, 2002
------------------ -------------------
Operations:
Net investment income............................................... $ 793,648 $ 1,448,624
Net realized loss on investments.................................... (1,635,388) 3,644,126
Net change in unrealized appreciations/depreciation on investments.. 11,593,255 (11,989,550)
---------- -----------
Net Increase (Decrease) in Net Assets resulting from operations..... 10,751,515 (6,896,800)
---------- ----------
Distributions to Common Stock Shareholders:
Net investment income............................................... (793,648) (1,475,143)
Net realized gain on investments.................................... -- (4,760,629)
Return of capital................................................... (4,686,805) (3,261,058)
---------- ----------
Total Distributions to Common Stock Shareholders.................... (5,480,453) (9,496,830)
---------- ----------
Trust Share Transactions:
Net increase in net assets from common shares issued in rights offering -- 27,737,238
Net increase in net assets from common shares issued upon
reinvestment of dividends and distributions...................... 870,263 1,570,082
---------- ----------
Net Increase in Net Assets from Trust Share Transactions............ 870,263 29,307,320
---------- ----------
Net Increase in Net Assets.......................................... 6,141,325 12,913,690
---------- ----------
Net Assets:
Beginning of period................................................. 95,111,080 82,197,390
---------- ----------
End of period....................................................... $101,252,405 $ 95,111,080
============ ============
See accompanying notes to financial statements.
NOTES TO FINANCIAL STATEMENTS (Unaudited)
1. Organization. The Gabelli Utility Trust (the "Utility Trust") is a
closed-end, non-diversified management investment company organized as a
Delaware business trust on February 25, 1999 and registered under the
Investment Company Act of 1940, as amended (the "1940 Act"), whose primary
objective is long-term growth of capital and income. The Utility Trust had no
operations prior to July 9, 1999, other than the sale of 10,000 shares of
beneficial interest for $100,000 to The Gabelli Equity Trust Inc. (the "Equity
Trust") at $10.00 per share. On July 9, 1999, the Utility Trust had a 4 for 3
stock split making the balance of Utility Trust shares held by the Equity
Trust as 13,333. On July 9, 1999, the Equity Trust contributed $79,487,260 in
cash and securities in exchange for shares of the Utility Trust, and on the
same date distributed such shares to Equity Trust shareholders of record on
July 1, 1999 at the rate of one share of the Utility Trust for every ten
shares of the Equity Trust. Investment operations commenced on July 9, 1999.
Effective August 1, 2002, the Fund modified its non-fundamental investment
policy to increase, from 65% to 80%, the portion of its assets that it will
invest, under normal market conditions, in common stocks and other securities
of foreign and domestic companies involved in providing products, services or
equipment for (i) the generation or distribution of electricity, gas and water
and (ii) telecommunications services or infrastructure operations (the "80%
Policy").
The 80% Policy may be changed without shareholder approval. However, the Fund
has adopted a policy to provide shareholders with at least 60 days' notice of
the implementation of any change in the 80% Policy.
2. Significant Accounting Policies. The preparation of financial statements in
accordance with generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amounts and
disclosures in the financial statements. Actual results could differ from
those estimates. The following is a summary of significant accounting policies
followed by the Utility Trust in the preparation of its financial statements.
Security Valuation. Portfolio securities listed or traded on a nationally
recognized securities exchange, quoted by the National Association of
Securities Dealers Automated Quotations, Inc. ("Nasdaq") or traded in the U.S.
over-the-counter market for which market quotations are readily available are
valued at the last quoted sale price on that exchange or market as of the
close of business on the day the securities are being valued. If there were no
sales that day, the security is valued at the average of the closing bid and
asked prices or, if there were no asked prices quoted on that day, then the
security is valued at the closing bid price on that day. If no bid or asked
prices are quoted on such day, the security is valued at the most recently
available price or, if the Board of Trustees so determines, by such other
method as the Board of Trustees shall determine in good faith, to reflect its
fair market value. Portfolio securities traded on more than one national
securities exchange or market are valued according to the broadest and most
representative market, as determined by Gabelli Funds, LLC (the "Adviser").
Portfolio securities primarily traded in foreign markets are generally valued
at the preceding closing values of such securities on their respective
exchanges or markets. Securities and assets for which market quotations are
not readily available are valued at their fair value as determined in good
faith under procedures established by and under the general supervision of the
Board of Trustees. Short term debt securities with remaining maturities of 60
days or less are valued at amortized cost, unless the Board of Trustees
determines such does not reflect the securities fair value, in which case
these securities will be valued at their fair value as determined by the Board
of Trustees. Debt instruments having a maturity greater than 60 days for which
market quotations are readily available are valued at the latest average of
the bid and asked prices. If there were no asked prices quoted on such day,
the security is valued using the closing bid price on that day. Options are
valued at the last sale price on the exchange on which they are listed. If no
sales of such options have taken place that day, they will be valued at the
mean between their closing bid and asked prices.
Repurchase Agreements. The Utility Trust may enter into repurchase
agreements with primary government securities dealers recognized by the
Federal Reserve Bank of New York, with member banks of the Federal Reserve
System or with other brokers or dealers that meet credit guidelines
established by the Adviser and reviewed by the Board of Trustees. Under the
terms of a typical repurchase agreement, the Utility Trust takes possession of
an underlying debt obligation subject to an obligation of the seller to
repurchase, and the Utility Trust to resell, the obligation at an agreed-upon
price and time, thereby determining the yield during the Utility Trust's
holding period. The Utility Trust will always receive and maintain securities
as collateral whose market value, including accrued interest, will be at least
equal to 102% of the dollar amount invested by the Utility Trust in each
agreement. The Utility Trust will make payment for such securities only upon
physical delivery or upon evidence of book entry transfer of the collateral to
the account of the custodian. To the extent that any repurchase transaction
exceeds one business day, the value of the collateral is marked- to-market on
a daily basis to maintain the adequacy of the collateral. If the seller
defaults and the value of the collateral declines or if bankruptcy proceedings
are commenced with respect to the seller of the security, realization of the
collateral by the Utility Trust may be delayed or limited.
Securities Sold Short. A short sale involves selling a security which the
Utility Trust does not own. The proceeds received for short sales are recorded
as liabilities and the Utility Trust records an unrealized gain or loss to the
extent of the difference between the proceeds received and the value of the
open short position on the day of determination. The Utility Trust records a
realized gain or loss when the short position is closed out. By entering into
a short sale, the Utility Trust bears the market risk of an unfavorable change
in the price of the security sold short. Dividends on short sales are recorded
as an expense by the Utility Trust on the ex- dividend date and interest
expense is recorded on the accrual basis.
Foreign Currency Translation. The books and records of the Utility Trust
are maintained in United States (U.S.) dollars. Foreign currencies,
investments and other assets and liabilities are translated into U.S. dollars
at the exchange rates prevailing at the end of the period, and purchases and
sales of investment securities, income and expenses are translated at the
exchange rate prevailing on the respective dates of such transactions.
Unrealized gains and losses, which result from changes in foreign exchange
rates and/or changes in market prices of securities, have been included in
unrealized appreciation/depreciation on investments and foreign currency
transactions. Net realized foreign currency gains and losses resulting from
changes in exchange rates include foreign currency gains and losses between
trade date and settlement date on investment securities transactions, foreign
currency transactions and the difference between the amounts of interest and
dividends recorded on the books of the Utility Trust and the amounts actually
received. The portion of foreign currency gains and losses related to
fluctuation in exchange rates between the initial trade date and subsequent
sale trade date is included in realized gain/(loss) on investments.
Securities Transactions and Investment Income. Securities transactions are
accounted for as of the trade date with realized gain or loss on investments
determined by using the identified cost method. Interest income (including
amortization of premium and accretion of discount) is recorded as earned.
Dividend income is recorded on the ex-dividend date.
Dividends and Distributions to Shareholders. Distributions to shareholders
are recorded on the ex-dividend date. Income distributions and capital gain
distributions are determined in accordance with Federal income tax
regulations, which may differ from accounting principles generally accepted in
the United States.
Provision for Income Taxes. The Utility Trust intends to continue to
qualify as a regulated investment company under Subchapter M of the Internal
Revenue Code of 1986, as amended. As a result, a Federal income tax provision
is not required.
Dividends and interest from non-U.S. sources received by the Utility Trust
are generally subject to non-U.S. withholding taxes at rates ranging up to
30%. Such withholding taxes may be reduced or eliminated under the terms of
applicable U.S. income tax treaties, and the Utility Trust intends to
undertake any procedural steps required to claim the benefits of such
treaties.
3. Agreements and Transactions with Affiliates. The Utility Trust has entered
into an investment advisory agreement (the "Advisory Agreement") with the
Adviser which provides that the Utility Trust will pay the Adviser on the
first business day of each month a fee for the previous month equal on an
annual basis to 1.00% of the value of the Utility Trust's average daily net
assets. In accordance with the Advisory Agreement, the Adviser provides a
continuous investment program for the Utility Trust's portfolio and oversees
the administration of all aspects of the Utility Trust's business and affairs.
During the six months ended June 30, 2003, Gabelli & Company, Inc. and its
affiliates received $26,975 in brokerage commissions as a result of executing
agency transactions in portfolio securities on behalf of the Utility Trust.
The cost of calculating the Trust's net asset value per share is a Trust
expense pursuant to the Investment Advisory Agreement between the Trust and
the Adviser. During the six months ended June 30, 2003, the Gabelli Utility
Trust reimbursed the Adviser $17,400 in connection with the cost of computing
the Trust's net asset value.
4. Portfolio Securities. Cost of purchases and proceeds from sales of
securities, other than short-term securities, for the six months ended June
30, 2003 aggregated $13,736,614 and $2,710,040, respectively.
5. Capital. The Board of Trustees of the Utility Trust has authorized the
repurchase of its shares on the open market when the shares are trading at a
discount of 10% or more (or such other percentage as the Board of Trustees may
determine from time to time) from the net asset value of the shares. During
the six months ended June 30, 2003, the Utility Trust did not repurchase any
shares of beneficial interest in the open market.
On May 22, 2002, the Utility Trust distributed one transferable right for
each of the 11,294,893 common shares outstanding to shareholders of record on
that date. Three rights were required to purchase one additional common share
at the subscription price of $7.50 per share. The subscription period expired
on June 27, 2002. The rights offering was fully subscribed resulting in the
issuance of 3,764,965 common shares and proceeds of $28,237,239 to the Utility
Trust, prior to the deduction of estimated expenses of $500,000. The net asset
value per share of the Utility Trust common shareholders was enhanced by
approximately $0.15 per share as a result of the issuance of shares above net
asset value.
Transactions in shares of beneficial interest were as follows:
Six Months Ended
June 30, 2003 Year Ended
(Unaudited) December 31, 2002
--------------------------- ---------------------------
Shares Amount Shares Amount
------------- ------------ ------------ ------------
Shares issued in rights offering..................... -- -- 3,764,965 $27,737,239
Shares issued upon reinvestment
of dividends and distributions.................... 102,243 $870,263 185,730 1,570,081
------------- ------------ ------------ ------------
Net increase......................................... 102,243 $870,263 3,950,695 $29,307,320
============= ============ ============ ============
6. Industry Concentration. Because the Utility Trust primarily invests in
common stocks and other securities of foreign and domestic companies in the
utility industry, its portfolio may be subject to greater risk and market
fluctuations than a portfolio of securities representing a broad range of
investments.
FINANCIAL HIGHLIGHTS
The Financial Highlights are included in their entirety on page 18 of the
Prospectus.
CODE OF ETHICS
The Fund and the Investment Adviser have adopted a code of ethics.
This code of ethics sets forth restrictions on the trading activities of
trustees/directors, officers and employees of the Fund, the Investment Adviser
and their affiliates. For example, such persons may not purchase any security
for which the Fund has a purchase or sale order pending, or for which such
trade is under consideration. In addition, those trustees/directors, officers
and employees that are principally involved in investment decisions for client
accounts are prohibited from purchasing or selling for their own account for a
period of seven days a security that has been traded for a client's account,
unless such trade is executed on more favorable terms for the client's account
and it is determined that such trade will not adversely affect the client's
account. Short-term trading by such trustee/directors, officers and employees
for their own accounts in securities held by a Fund client's account is also
restricted. The above examples are subject to certain exceptions and they do
not represent all of the trading restrictions and policies set forth by the
code of ethics. The code of ethics is on file with the SEC and can be reviewed
and copied at the SEC's Public Reference Room in Washington, D.C., that
information on the operation of the Public Reference Room may be obtained by
calling the SEC at 1-202-942-8090. The code of ethics is also available on the
EDGAR Database on the SEC's Internet site at http:// www.sec.gov, and copies
of the code of ethics may be obtained, after paying a duplicating fee, by
electronic request at the following E-mail address: publicinfo@sec.gov, or by
writing the SEC's Public Reference Section, Washington, D.C. 20549-0102. The
code of ethics was filed with the SEC as Exhibit 99-Q to the Fund's
registration statement on Form N-2, filed on May 10, 2002.
GLOSSARY
"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, a New York limited liability
company, and will include, as appropriate, any sub-administrator appointed by
the Administrator.
"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 a trustee of the Fund be deemed to be an Affiliate solely
because such director or executive officer is also a trustee 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 90% of the Reference Rate.
"Applicable Rate" means, with respect to the Series B AMPS, 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 AMPS are 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; provided, further, however, that the Auction Date following a
Default Period shall be the last Business Day in the Standard Dividend Period
that commenced during such Default Period. Notwithstanding 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 AMPS."
"Available Series B AMPS" has the meaning set forth in "Additional Information
Concerning the Auction for Series B AMPS -- 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 AMPS -- Asset
Maintenance."
"Basic Maintenance Report" means a report prepared by the Administrator which
sets forth, as of the related Monthly Valuation Date, (i) Moody's Eligible
Assets and S&P Eligible Assets sufficient to meet or exceed the Basic
Maintenance Amount, (ii) the Market Value and Discounted Value thereof
(seriatim and in the aggregate), (iii) the Basic Maintenance Amount, and (iv)
the net asset value of the Fund. Such report will also include (A) the
month-end closing price for the Common Shares of the Trust (B) the monthly
total-return per Common Shares, which will be determined based upon month-end
closing share prices, assuming reinvestment of all dividends paid during such
month and (C) the total leverage positions of the Trust. For the purposes of
this Statement of Preferences, "Basic Maintenance Report" or "Report" shall
have a correlative meaning with respect to any other class or series of
Preferred Shares.
"Beneficial Owner" with respect to Series B AMPS, 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 AMPS -- Orders by Existing Holders and Potential
Holders."
"Bidder" has the meaning set forth in "Additional Information Concerning the
Auction for Series B AMPS -- Orders by Existing Holders and Potential
Holders."
"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.
"By-Laws" means the By-Laws of the Fund, as amended from time to time.
"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 paragraph 3(a) of Part II of the
Statement of Preferences for the Series A Preferred and paragraph 3(a)(ii) of
Part I of the Statement of Preferences for the Series B AMPS.
"Date of Original Issue" means the date on which the Series A Preferred or
Series B AMPS, as the case may be, is originally issued by the Fund.
"Declaration" means the Agreement and Declaration of Trust of the Fund, dated
as of February 25, 1999, as amended, supplemented or restated from time to
time (including by the Statements of Preferences or by way of any other
supplement or Statement of Preferences authorizing or creating a class of
shares of beneficial interest in the Fund).
"Default Period" has the meaning set forth in "Additional Information
Concerning the Series A Preferred and Series B AMPS -- Dividends and Dividend
Periods for the Series B AMPS."
"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 Moody's is rating the Series A
Preferred or Series B AMPS at the Fund's request, the Moody's Discount Factor,
(ii) so long as S&P is rating the Series B AMPS, the S&P 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, or (ii) such
other formula for determining the discounted value of an Eligible Asset as may
be established by an applicable Rating Agency, 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 AMPS -- 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 paragraph 1(a) of Part II of the Statement of
Preferences of the Series A Preferred, and, with respect to the Series B AMPS,
any date on which dividends declared by the Board of Trustees thereon are
payable pursuant to the provisions of paragraph 2(b) of Part I of the
Statement of Preferences, for the Series B AMPS, and shall have a correlative
meaning with respect to any other class or series of Preferred Shares.
"Dividend Period" means, with respect to the Series A Preferred, the quarterly
dividend specified in paragraph 1(a) of Part II of the Statement of
Preferences for the Series A Preferred and, with respect to Series B AMPS, the
initial period determined in the manner set forth under "Designation" in the
Statement of Preferences of the Series B AMPS, 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 Moody's Eligible Assets (if Moody's is then rating the
Series A Preferred or Series B AMPS at the request of the Fund), S&P Eligible
Assets (if S&P is then rating the Series B AMPS 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 AMPS, whichever is applicable.
"Existing Holder" means (i) a person who beneficially owns those shares of
Series B AMPS 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 AMPS
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 Declaration, and the By-Laws.
"Hold Order" has the meaning set forth in "Additional Information Concerning
the Auction for Series B AMPS -- Orders By Existing Holders and Potential
Holders."
"Holder" means, with respect to the Series B AMPS, the registered holder of
Series B AMPS 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.
"LIBOR Dealers" means Merrill Lynch, Pierce, Fenner & Smith Incorporated and
such other dealer or dealers as the Fund may from time to time appoint, or, in
lieu of any thereof, their respective affiliates or successors.
"LIBOR Rate" on any Auction Date, means (i) the rate for deposits in U.S.
dollars for the designated Dividend Period, which appears on display page 3750
of Moneyline's Telerate Service ("Telerate Page 3750") (or such other page as
may replace that page on that service, or such other service as may be
selected by the LIBOR Dealer or its successors that are LIBOR Dealers) as of
11:00 a.m., London time, on the day that is the London Business Day preceding
the Auction Date (the "LIBOR Determination Date"), or (ii) if such rate does
not appear on Telerate Page 3750 or such other page as may replace such
Telerate Page 3750, (A) the LIBOR Dealer shall determine the arithmetic mean
of the offered quotations of the Reference Banks to leading banks in the
London interbank market for deposits in U.S. dollars for the designated
Dividend Period in an amount determined by such LIBOR Dealer by reference to
requests for quotations as of approximately 11:00 a.m. (London time) on such
date made by such LIBOR Dealer to the Reference Banks, (B) if at least two of
the Reference Banks provide such quotations, LIBOR Rate shall equal such
arithmetic mean of such quotations, (C) if only one or none of the Reference
Banks provide such quotations, LIBOR Rate shall be deemed to be the arithmetic
mean of the offered quotations that leading banks in The City of New York
selected by the LIBOR Dealer (after obtaining the Fund's approval) are quoting
on the relevant LIBOR Determination Date for deposits in U.S. dollars for the
designated Dividend Period in an amount determined by the LIBOR Dealer (after
obtaining the Fund's approval) that is representative of a single transaction
in such market at such time by reference to the principal London offices of
leading banks in the London interbank market; provided, however, that if one
of the LIBOR Dealers does not quote a rate required to determine the LIBOR
Rate, the LIBOR Rate will be determined on the basis of the quotation or
quotations furnished by any Substitute LIBOR Dealer or Substitute LIBOR
Dealers selected by the Fund to provide such rate or rates not being supplied
by the LIBOR Dealer; provided further, that if the LIBOR Dealer and Substitute
LIBOR Dealers are required but unable to determine a rate in accordance with
at least one of the procedures provided above, LIBOR Rate shall be LIBOR Rate
as determined on the previous Auction Date. If the number of Dividend Period
days shall be (1) 7 or more but fewer than 21 days, such rate shall be the
seven-day LIBOR rate; (2) more than 21 but fewer than 49 days, such rate shall
be the one-month LIBOR rate; (3) 49 or more but fewer than 77 days, such rate
shall be the two-month LIBOR rate; (4) 77 or more but fewer than 112 days,
such rate shall be the three-month LIBOR rate; (5) 112 or more but fewer than
140 days, such rate shall be the four-month LIBOR rate; (6) 140 or more but
fewer than 168 days, such rate shall be the five-month LIBOR rate; (7) 168 or
more but fewer than 189 days, such rate shall be the six-month LIBOR rate; (8)
189 or more but fewer than 217 days, such rate shall be the seven-month LIBOR
rate; (9) 217 or more but fewer than 252 days, such rate shall be the
eight-month LIBOR rate; (10) 252 or more but fewer than 287 days, such rate
shall be the nine-month LIBOR rate; (11) 287 or more but fewer than 315 days,
such rate shall be the ten-month LIBOR rate; (12) 315 or more but fewer than
343 days, such rate shall be the eleven-month LIBOR rate; and (13) 343 or more
but fewer than 365 days, such rate shall be the twelve-month LIBOR rate.
"Liquidation Preference" means $25 per share of Series A Preferred and $25,000
per share of Series B AMPS and will have a correlative meaning with respect to
shares of any other class or series of Preferred Shares.
"London Business Day" means any day on which commercial banks are generally
open for business in London.
"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 price
obtained from a Pricing Service as of the Valuation Date, or
(c) if there was no reported sales price on the Valuation
Date or price available from a Pricing Service, 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 Moody's and S&P) 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 price provided by a
Pricing Service or, if not obtainable through a Pricing
Service, 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
Moody's and S&P) 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 and timed 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 and if
such indebtedness is not traded on a national securities
exchange or quoted on the Nasdaq System, the price obtained
from a Pricing Service as of the Valuation Date or (C) 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, and a price was not
obtainable from a Pricing Service as of the Valuation Date,
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
Moody's and S&P) 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.
Notwithstanding the foregoing, in the case of Preferred Shares that
are rated by a single Rating Agency, "Market Value" shall have the meaning set
forth in the Statement of Preferences of such Preferred Shares.
"Maximum Rate" means, on any day on which the Applicable Rate is determined,
the greater of (as set forth in the table below) (i) the applicable percentage
of the Reference Rate or (ii) the applicable spread plus the Reference Rate.
The reference rate is the applicable LIBOR Rate (for a dividend period or a
special dividend period of fewer than 365 days), or the applicable Treasury
Index Rate (for a special dividend period of 365 days or more). The applicable
percentage and applicable spread will be determined based on the lower of the
credit ratings assigned to the Series B AMPS by Moody's and S&P. If Moody's
and S&P or both do not make such ratings available, the rate will be
determined by reference to equivalent ratings issued by a substitute rating
agency.
Credit Ratings for Series B AMPS
--------------------------------
Applicable
Moody's S&P Percentage of Applicable
Credit Rating Credit Rating Reference Rate Spread
------------- ------------- -------------- ------
Aaa AAA 125% 125 bps
Aa3 to Aa1 AA- to AA+ 150% 150 bps
A3 to A1 A- to A+ 200% 200 bps
Baa3 to Baa1 BBB- to BBB+ 250% 250 bps
Below Baa3 Below BBB- 300% 300 bps
"Monthly Valuation Date" means the last Valuation Date of any calendar month.
"Moody's" means Moody's Investors Service, Inc. and its successors at law.
"Moody's Discount Factor" has the meaning ascribed to it in "Moody's and S&P
Guidelines -- Moody's Guidelines."
"Moody's Eligible Assets" has the meaning ascribed to it in "Moody's and S&P
Guidelines -- Moody's 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 AMPS (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 paragraph 9(a)(i)(B) of the Statement of
Preferences of the Series B AMPS.
"Non-Call Period" means a period determined by the Board of Trustees after
consultation with the Broker-Dealers, during which the Series B AMPS 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 AMPS -- Orders By Existing Holders and Potential
Holders."
"Other Rating Agency" means any rating agency other than Moody's or S&P then
providing a rating for the Series B AMPS 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 AMPS.
"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 an auction market
Preferred Share 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
in trust for, or have been irrevocably deposited with the
relevant disbursing agent for payment to the holder of such
share pursuant to the Statement of Preferences with respect
thereto;
(iii) in the case of an auction market Preferred Share, 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 Preferred 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 AMPS 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 AMPS held by the Fund will be disregarded and deemed not Outstanding.
"Paying Agent" means with respect to Series B AMPS, 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 AMPS or (ii) any
other person who may be interested in acquiring shares of Series B AMPS 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 AMPS.
"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 Moody's and S&P as long as such rating agency is then
rating the Series A Preferred or the Series B AMPS at the request of the Fund,
or any other rating agency then rating the Series A Preferred or the Series B
Preferred at the request of the Fund.
"Rating Agency Guidelines" has the meaning set forth in set forth in "Moody's
and S&P 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 AMPS -- Dividends and Dividend
Period."
"Redemption Price" means, with respect to the Series A Preferred, the price
set forth in paragraph 3(a) of Part II of the Statement of Preferences for the
Series A Preferred and, with respect to the Series B AMPS, as defined in
paragraph 13 of Part I of the Statement of Preferences for the Series B
Preferred.
"Reference Banks" means four major banks in the London interbank market
selected by Merrill Lynch, Pierce, Fenner & Smith Incorporated or its
affiliates or successors or such other party as the Fund may from time to time
appoint.
"Reference Rate" means, with respect to the determination of the Default Rate,
the applicable LIBOR Rate for a Dividend Period of 364 days or fewer or the
applicable Treasury Index Rate for a Dividend Period of longer than 364 days
and, with respect to the determination of the Maximum Rate, the LIBOR Rate or
the Treasury Index Rate, as appropriate.
"S&P" means Standard & Poor's Ratings Services, or its successors at law.
"S&P Discount Factor" has the meaning set forth in "Moody's and S&P Guidelines
- S&P Guidelines."
"S&P Eligible Assets" has the meaning set forth in "Moody's and S&P Guidelines
- S&P Guidelines."
"S&P Hedging Transactions" has the meaning set forth in "Moody's and S&P
Guidelines - S&P Guidelines."
"SEC" means the Securities and Exchange Commission.
"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
AMPS.
"Sell Order" has the meaning set forth in "Additional Information Concerning
the Auction for Series B AMPS -- Orders by Existing Holders and Potential
Holders."
"Series A Preferred" means the Fund's 5.625% 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 Moody's Eligible Assets
or the S&P Eligible Assets if both Moody's and S&P are then rating the Series
A Preferred at the request of the Fund, or the Eligible Assets of whichever of
Moody's or S&P is then doing so if only one of Moody's or S&P 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 AMPS" means the Fund's Series B Auction Market Preferred Shares,
$.001 par value per share and liquidation preference $25,000 per share.
"Series B AMPS Basic Maintenance Amount Test" means a test which is met if the
lower of the aggregate Discounted Values of the Moody's Eligible Assets or the
S&P Eligible Assets if both Moody's and S&P are then rating the Series B AMPS
at the request of the Fund, or the Eligible Assets of whichever of Moody's or
S&P is then doing so if only one of Moody's or S&P is then rating the Series B
AMPS at the request of the Fund, meets or exceeds the Basic Maintenance Amount
with respect to the Series B AMPS.
"Short-Term Money Market Instruments" 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) AAAm rated money market funds;
(iii) 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 (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), or (C) A-1+ rated institutions;
(iv) overnight funds; and
(v) U.S. Government Obligations.
Notwithstanding the foregoing, in the case of Preferred Shares that
are rated by a single Rating Agency, "Short-Term Money Market Instruments"
shall have the meaning set forth in the Statement of Preferences of such
Preferred Shares.
"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.
"Statement of Preferences" means the Statement of Preferences of the Fund
establishing, as the case may be, the Series A Preferred or the Series B AMPS.
"Submission Deadline" means 1:30 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 AMPS -- 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 AMPS -- 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 AMPS -- 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 AMPS -- 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 AMPS -- Determination of
Sufficient Clearing Bids, Winning Bids, Winning Bid Rate and Applicable Rate."
"Sufficient Clearing Orders" means that all shares of Series B AMPS are the
subject of Submitted Hold Orders or that the number of shares of Series B AMPS
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 AMPS 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 AMPS 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 week, or such other date
as the Fund and Rating Agencies may agree to for purposes of determining the
Basic Maintenance Amount. Notwithstanding the foregoing, in the case of
Preferred Shares that are rated by a single Rating Agency, "Valuation Date"
shall have the meaning set forth in the Statement of Preferences of such
Preferred Shares.
"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 AMPS shares which, when added
to the number of Outstanding Series B AMPS shares
to be purchased by such Potential Holders described
in subclause (ii) above, would equal not less than
the Available Series B AMPS shares.