As filed with the Securities and Exchange Commission on March 18, 2008
Securities Act File No. 333-147575
Investment Company Act File No. 811-21529
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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Form N-2
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(Check Appropriate Box or Boxes)
|X| REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
|X| Pre-Effective Amendment No. 3
|_| Post-Effective Amendment No.
and/or
|X| REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
|X| Amendment No. 6
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THE GABELLI GLOBAL UTILITY & INCOME TRUST
(Exact name of Registrant as specified in Charter)
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One Corporate Center, Rye, New York 10580-1422
(Address of Principal Executive Offices)
Registrant's Telephone Number, including Area Code: (800) 422-3554
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Bruce N. Alpert
The Gabelli Global Utility & Income Trust
One Corporate Center
Rye, New York 10580-1422
(914) 921-5100
(Name and Address of Agent for Service)
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Copies to:
Michael Rosella, Esq. James E. McKee, Esq.
Paul, Hastings, Janofsky The Gabelli Global Utility
& Walker LLP & Income Trust
75 East 55th Street One Corporate Center
New York, New York 10022 Rye, New York 10580-1422
(212) 318-6800 (914) 921-5100
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Approximate date of proposed public offering: From time to time after
the effective date of this Registration Statement.
If any securities being registered on this form will be offered on a
delayed or continuous basis in reliance on Rule 415 under the Securities Act of
1933, as amended, other than securities offered in connection with a dividend
reinvestment plan, check the following box. |X|
It is proposed that this filing will become effective (check
appropriate box)
|X| When declared effective pursuant to section 8(c)
If appropriate, check the following box:
|__| This [post-effective] amendment designates a new effective date for
a previously foiled [post-effective amendment] [registration statement].
This form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act and the Securities Act
registration number of the earlier effective registration statement for the same
offering is __________.
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
====================================================================================================================================
Title of Securities Amount Being Proposed Maximum Proposed Maximum Amount of
Being Registered Registered Offering Price Per Aggregate Offering Registration
Share Price(1) Fee(2)
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Preferred Shares of Beneficial Interest [ ] Shares $[ ] $100 million $3,070
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(1) Estimated solely for the purpose of calculating the registration fee. In
no event will the aggregate initial offering price of all shares offered
from time to time pursuant to the prospectus included as a part of this
Registration Statement exceed $100 million.
(2) The fee has been previously paid pursuant to the filing of the
Registration Statement on Form N-2 on November 21, 2007.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
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THE GABELLI GLOBAL UTILITY & INCOME TRUST
CROSS-REFERENCE SHEET
PART A-THE PROSPECTUS
Items in Part A of Form N-2 Location in Prospectus
Item 1. Outside Front Cover Front Cover Page
Item 2. Inside Front and Outside Back Cover Pages Front Cover Page; Inside Front Cover Page
Item 3. Fee Table and Synopsis Not Applicable
Item 4. Financial Highlights Financial Highlights
Item 5. Plan of Distribution Prospectus Summary; Plan of Distribution
Item 6. Selling Shareholders Not Applicable
Item 7. Use of Proceeds Use of Proceeds
Item 8. General Description of the Registrant Outside Front Cover; Risk Factors and Special
Considerations; Investment Objectives and
Policies; Net Asset Value; Custodian, Transfer
Agent and Dividend Disbursing Agent;
Independent Registered Public Accounting Firm;
Additional Information
Item 9. Management Management of the Fund
Item 10. Capital Stock, Long-Term Debt and Other Prospectus Summary; Dividends and
Securities Distributions; Taxation; Risk Factors and
Special Considerations; Description of Capital
Shares; Anti-Takeover Provisions of the Fund's
Governing Documents; Closed-End Fund
Structure; Automatic Dividend Reinvestment and
Voluntary Cash Purchase Plan; Custodian,
Transfer Agent and Dividend Disbursing Agent;
Independent Registered Public Accounting Firm;
Additional Information
Item 11. Defaults and Arrears on Senior Securities Not Applicable
Item 12. Legal Proceedings Management of the Fund
Item 13. Table of Contents of the Statement of Table of Contents of the Statement of
Additional Information Additional Information
PART B -- STATEMENT OF ADDITIONAL INFORMATION
Items in Part B of Form N-2 Location in Prospectus
Item 14. Cover Page Cover Page
Item 15. Table of Contents Table of Contents
Item 16. General Information and History Not Applicable
Item 17. Investment Objective and Policies Investment Objectives and Policies
Item 18. Management Management of the Fund
Item 19. Control Persons and Principal Holders of Management of the Fund
Securities
Item 20. Investment Advisory and Other Services Management of the Fund
Item 21. Portfolio Managers Management of the Fund
Item 22. Brokerage, Allocation and Other Practices Portfolio Transactions
Item 23. Tax Status Taxation
Item 24. Financial Statements Incorporation by Reference
PART C-OTHER INFORMATION
Items 25-34 have been answered in Part C of this Registration Statement.
Subject to Completion,
Preliminary Base Prospectus dated _________, 2008
PROSPECTUS
[GRAPHIC OMITTED]
$100,000,000
The Gabelli Global Utility & Income Trust
Preferred Shares
Investment Objectives. The Gabelli Global Utility & Income Trust (the
"Fund") is a non-diversified, closed-end management investment company
registered under the Investment Company Act of 1940, as amended (the "1940
Act"). The Fund's investment objective is to seek a consistent level of
after-tax total return for its investors with an emphasis currently on
tax-advantaged dividend income under current tax law. We cannot assure you that
the Fund's objective will be achieved. Gabelli Funds, LLC (the "Investment
Adviser") serves as investment adviser to the Fund. Under normal market
conditions, the Fund invests at least 80% of its assets in equity securities of
domestic and foreign companies involved in the "utilities industry" and other
industries that are expected to periodically pay dividends. The Fund's 80%
policy is not fundamental and shareholders will be notified if it is changed.
Under current tax law, dividends on most stocks issued by publicly traded
companies may qualify through 2010 for U.S. federal income taxation at rates
applicable to long-term capital gains, which currently are taxed at a maximum
rate of 15%. Such dividends are referred to in this prospectus as
"tax-advantaged qualified dividend income" or "qualifying dividends." Companies
in the "utilities industry" are those companies involved to a substantial extent
(i.e., at least 50% of the assets, gross income or net profits of a company is
committed to or derived from) in providing (i) products, services or equipment
for the generation or distribution of electricity, gas or water, (ii)
infrastructure operations such as airports, toll roads and municipal services
and (iii) telecommunications services such as telephone, telegraph, satellite,
cable, microwave, radiotelephone, mobile communication and cellular, paging,
electronic mail, videotext, voice communications, data communications and
internet. Under normal market conditions, at least 50% of the Fund's assets will
consist of equity securities of domestic and foreign companies involved to a
substantial extent in the "utilities industry." In making stock selections, the
Fund's Investment Adviser looks for companies that have proven dividend records
and sound financial structures. The Fund was organized as a Delaware statutory
trust on March 8, 2004 and commenced its investment operations on May 28, 2004.
An investment in the Fund is not appropriate for all investors.
We may offer, from time to time, in one or more offerings, our
preferred shares, par value $0.001 per share. Shares may be offered at prices
and on terms to be set forth in one or more supplements to this Prospectus (each
a "Prospectus Supplement"). You should read this Prospectus and the applicable
Prospectus Supplement carefully before you invest in our shares.
Our shares may be offered directly to one or more purchasers, through
agents designated from time to time by us, or to or through underwriters or
dealers. The Prospectus Supplement relating to the offering will identify any
agents or underwriters involved in the sale of our shares, and will set forth
any applicable purchase price, fee, commission or discount arrangement between
us and our agents or underwriters, or among our underwriters, or the basis upon
which such amount may be calculated. The Prospectus Supplement relating to any
sale of preferred shares will set forth the liquidation preference and
information about the dividend period, dividend rate, any call protection or
non-call period and other matters. We may not sell any of our shares through
agents, underwriters or dealers without delivery of a Prospectus Supplement
describing the method and terms of the particular offering of our shares.
Shares of closed-end funds often trade at a discount from net asset
value. This creates a risk of loss for an investor purchasing shares in a public
offering.
Investing in the Fund's shares involves risks. See "Risk Factors and
Special Considerations" on page 24 for factors that should be considered before
investing in shares of the Fund.
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.
This Prospectus may not be used to consummate sales of shares by us
through agents, underwriters or dealers unless accompanied by a Prospectus
Supplement.
This Prospectus is part of a registration statement that we have filed
with the Securities and Exchange Commission (the "SEC") using the "shelf"
registration process. Under the shelf registration process, we may offer, from
time to time, separately or together in one or more offerings, up to
$100,000,000 of our preferred shares on the terms to be determined at the time
of the offering. The securities may be offered at prices and on terms described
in one or more supplements to this Prospectus. This Prospectus provides you with
a general description of the securities that we may offer. Each time we use this
Prospectus to offer securities, we will provide a Prospectus Supplement that
will contain specific information about the terms of that offering. The
Prospectus Supplement may also add, update or change information contained in
this Prospectus. This Prospectus, together with any Prospectus Supplement, sets
forth concisely the information about us that a prospective investor ought to
know before investing. You should read this Prospectus and the related
Prospectus Supplement before deciding whether to invest and retain them for
future reference. A Statement of Additional Information, dated March 18, 2008
("SAI"), containing additional information about us, has been filed with the SEC
and is incorporated by reference in its entirety into this Prospectus. You may
request a free copy of our shareholder reports and our SAI, the table of
contents of which is on page 61 of this Prospectus, by calling (800) GABELLI
(422-3554) or by writing to us. You may also obtain copies of these documents
(and other information regarding us) from the SEC's web site
(http://www.sec.gov).
Our shares do not represent a deposit or obligation of, and are not
guaranteed or endorsed by, any bank or other insured depository institution, and
are not federally insured by the Federal Deposit Insurance Corporation (the
"FDIC"), the Federal Reserve Board or any other government agency.
You should rely only on the information contained or incorporated by
reference in this Prospectus and any related Prospectus Supplement. We have not
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. We are not making an offer to sell these securities in any jurisdiction
where the offer or sale is not permitted. You should assume that the information
appearing in this Prospectus and any Prospectus Supplement is accurate only as
of the respective dates on their front covers. Our business, financial
condition, results of operations and prospects may have changed since that date.
TABLE OF CONTENTS
Page
PROSPECTUS SUMMARY..........................................................1
USE OF PROCEEDS............................................................14
FINANCIAL HIGHLIGHTS.......................................................15
THE FUND...................................................................16
INVESTMENT OBJECTIVES AND POLICIES.........................................16
RISK FACTORS AND SPECIAL CONSIDERATIONS....................................24
HOW THE FUND MANAGES RISK..................................................38
MANAGEMENT OF THE FUND.....................................................39
PORTFOLIO TRANSACTIONS.....................................................42
DIVIDENDS AND DISTRIBUTIONS................................................42
AUTOMATIC DIVIDEND REINVESTMENT AND VOLUNTARY CASH PURCHASE PLAN...........43
DESCRIPTION OF CAPITAL SHARES..............................................44
ANTI-TAKEOVER PROVISIONS OF THE FUND'S GOVERNING DOCUMENTS.................54
CLOSED-END FUND STRUCTURE..................................................55
REPURCHASE OF COMMON SHARES................................................55
TAXATION...................................................................55
CUSTODIAN, TRANSFER AGENT AND DIVIDEND DISBURSING AGENT....................58
PLAN OF DISTRIBUTION.......................................................58
LEGAL MATTERS..............................................................59
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM..............................59
ADDITIONAL INFORMATION.....................................................59
PRIVACY PRINCIPLES OF THE FUND.............................................60
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS..........................60
TABLE OF CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION...................61
CORPORATE BOND RATINGS.....................................................62
PROSPECTUS SUMMARY
This is only a summary. This summary may not contain all of the
information that you should consider before investing in our shares. You should
review the more detailed information contained in this Prospectus and the
Statement of Additional Information, dated March 18, 2008 (the "SAI").
The Fund The Gabelli Global Utility & Income Trust is a
closed-end, non-diversified management investment
company organized as a Delaware statutory trust on March
8, 2004. Throughout this Prospectus, we refer to The
Gabelli Global Utility & Income Trust as the "Fund" or
as "we." See "The Fund."
The Fund's outstanding common shares, par value $0.001
per share, are listed on the American Stock Exchange
("Amex") under the symbol "GLU." On March 17, 2008, the
last reported sale price of our common shares was
$20.61. As of December 31, 2007, the net assets of the
Fund attributable to its common shares was $77,778,350.
As of December 31, 2007, the Fund had outstanding
3,050,236 common shares.
The Offering We may offer, from time to time, in one or more
offerings, our preferred shares, $0.001 par value per
share. The shares may be offered at prices and on terms
to be set forth in one or more supplements to this
Prospectus (each a "Prospectus Supplement"). You should
read this Prospectus and the applicable Prospectus
Supplement carefully before you invest in our shares.
Our shares may be offered directly to one or more
purchasers, through agents designated from time to time
by us, or through underwriters or dealers. The
Prospectus Supplement relating to the offering will
identify any agents, underwriters or dealers involved in
the sale of our shares, and will set forth any
applicable purchase price, fee, commission or discount
arrangement between us and our agents or underwriters,
or among our underwriters, or the basis upon which such
amount may be calculated. The Prospectus Supplement
relating to any sale of preferred shares will set forth
the liquidation preference and information about the
dividend period, dividend rate, any call protection or
non-call period and other matters.
While the aggregate number and amount of securities we
may issue pursuant to this registration statement is
limited to $100,000,000 of securities, our Board of
Trustees (the "Board") may, without any action by the
shareholders, amend our Agreement and Declaration of
Trust from time to time to increase or decrease the
aggregate number of shares or the number of shares of
any class or series that we have authority to issue. We
may not sell any of our shares through agents,
underwriters or dealers without delivery of a Prospectus
Supplement describing the method and terms of the
particular offering of our shares.
Investment Objectives The Fund's investment objective is to seek a consistent
and Policies level of after-tax total return with an emphasis
currently on tax-advantaged qualified dividend income.
No assurance can be given that the Fund will achieve its
investment objective. The Fund will attempt to achieve
its investment objective under current tax law by
investing, under normal market conditions, at least 80%
of its assets in (i) equity securities (including common
stock, preferred stock, convertible stock and options on
these securities) of domestic and foreign companies
involved to a substantial extent (i.e., at least 50% of
the assets, gross income or net profits of a company is
committed to or derived from) in providing (a) products,
services or equipment for the generation or distribution
of electricity, gas or water, (b) infrastructure
operations such as airports, toll roads and
1
municipal services and (c) telecommunications services
such as telephone, telegraph, satellite, cable,
microwave, radiotelephone, mobile communication and
cellular, paging, electronic mail, videotext, voice
communications, data communications and internet
(collectively, the "Utilities Industry") and (ii) equity
securities (including preferred securities) of companies
in other industries, in each case in such securities
that are expected to periodically pay dividends. The
Fund's 80% policy is not fundamental and shareholders
will be notified if it is changed. In addition, under
normal market conditions, at least 50% of the Fund's
assets will consist of equity securities (including
preferred securities) of domestic and foreign companies
involved to a substantial extent in the Utilities
Industry. The remaining Fund assets will generally be
invested in other securities that the Investment Adviser
views as not being correlated with the Fund's Utilities
Industry investments. Such investments may include
convertible securities, securities of issuers subject to
reorganization or other risk arbitrage investments,
certain derivative instruments, debt (including
obligations of the U.S. Government) and money market
instruments. See "Investment Objectives and Policies."
The Fund is intended for investors seeking a consistent
level of after-tax total return consisting of income
(with a current emphasis on qualifying dividends) and
long-term capital gain. It is not intended for those who
wish to play short-term swings in the stock market.
The Investment Adviser's investment philosophy with
respect to selecting investments in the Utilities
Industry is to emphasize quality. The Investment Adviser
will seek companies that have proven dividend records
and sound financial structures. In addition, in making
stock selections, the Fund's Investment Adviser looks
for securities that have a superior yield, as well as
capital gains potential. The Investment Adviser seeks to
identify assets that are selling in the public market at
a discount to their private market value. The Investment
Adviser defines private market value as the value
informed purchasers are willing to pay to acquire assets
with similar characteristics. The Investment Adviser
also normally evaluates an issuer's free cash flow and
long-term earnings trends. Finally, the Investment
Adviser looks for a catalyst, something indigenous to
the company, its industry or country that will surface
additional value.
Preferred Shares The terms of each series of preferred shares may be
fixed by the Board and may materially limit and/or
qualify the rights of holders of the Fund's common
shares. If the Fund's Board determines that it may be
advantageous to the holders of the Fund's common shares
for the Fund to utilize additional leverage, the Fund
may issue series of fixed rate preferred shares ("Fixed
Rate Preferred Shares") or series of variable rate
preferred shares ("Variable Rate Preferred Shares"). Any
Fixed Rate Preferred Shares or Variable Rate Preferred
Shares issued by the Fund will pay, as applicable,
distributions at a fixed rate or at rates that will be
reset frequently based on short-term interest rates.
Leverage creates a greater risk of loss as well as a
potential for more gains for the common shares than if
leverage were not used. See "Risk Factors and Special
Considerations--Leverage Risk." The Fund may also
determine in the future to issue other forms of senior
securities, such as securities representing debt,
subject to the limitations of the 1940 Act. The Fund may
also engage in investment management techniques which
will not be considered senior securities if the Fund
establishes in a segregated account cash or other liquid
securities equal to the Fund's obligations in respect of
such techniques. The Fund may
2
also borrow money, to the extent permitted by the 1940
Act.
Dividends and Preferred Shares Distributions. In accordance with the
Distributions Fund's Agreement and Declaration of Trust and By-laws
(together with any amendments or supplements thereto,
including any Statement of Preferences of the Fund
establishing a series of preferred shares (the
"Statement of Preferences" and together with the
Agreement and Declaration of Trust, the "Governing
Documents"), all preferred shares of the Fund must have
the same seniority with respect to distributions.
Accordingly, no full distribution 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 and distributions due through the
most recent dividend payment dates for all series of
outstanding preferred shares of the Fund are declared
and paid. If full cumulative distributions due have not
been declared and made on all outstanding preferred
shares of the Fund, any distributions on such preferred
shares will be made as nearly pro rata as possible in
proportion to the respective amounts of distributions
accumulated but unmade 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
such 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 the shares) or capital
gains. The amount treated as a tax-free return of
capital will reduce a shareholder's adjusted tax basis
in the preferred shares, thereby increasing the
shareholder's potential gain or reducing the potential
loss on the sale of the shares.
Common Shares Distributions. In order to allow its
common shareholders 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 managed distribution
policy, which may be changed at any time by the Board,
of paying a minimum annual distribution of 6% of the
average net asset value of the Fund to common
shareholders. In the event the Fund does not generate a
total return from dividends and interest received and
net realized capital gains in an amount equal to or in
excess of its stated distribution in a given year, the
Fund may 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 preferred
shares. Any return of capital should not be considered
by investors as yield or total return on their
investment in the Fund. For the fiscal years ended
December 31, 2006 and December 31, 2007, the Fund made
distributions of $1.20 and $1.53, respectively per
common share, none of which constituted a return of
capital. The Fund has made monthly distributions with
respect to its common shares since September 2004. The
composition of each distribution is estimated based on
the earnings of the Fund as of the record date for each
distribution. The actual composition of each of the
current year's distributions will be based on the Fund's
investment activity through December 31, 2007.
Use of Proceeds The Fund will use the net proceeds from the offering to
purchase portfolio securities in accordance with its
Investment Objectives and Policies. See "Use of
Proceeds."
Exchange Listing The Fund's outstanding common shares are listed on the
Amex, under the trading or "ticker" symbol "GLU." See
"Description of Capital Shares."
3
Any series of Fixed Rate Preferred Shares issued by the
Fund would also likely be listed on the Amex. Any series
of Variable Rate Preferred Shares would likely not be
listed on an exchange.
Risk Factors and Risk is inherent in all investing. Therefore, before
Special Considerations investing in the Fund's preferred shares, you should
consider the risks carefully.
Industry Concentration Risk. Under normal market
conditions, the Fund invests at least 50% of its assets
in foreign and domestic companies in the Utilities
Industry (as described under "Investment Objective and
Policies"). As a result of this policy of concentrating
its investments in a particular industry, the net asset
value of the Fund will be more susceptible to factors
affecting those particular types of companies, such as
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 product
development, capital investment and construction
programs, including costs associated with compliance
with environmental and other regulations. In addition,
the Fund's concentration policy may subject it to
greater risk of market fluctuation than a fund that had
securities representing a broader range of investment
alternatives. See "Risk Factors and Special
Considerations -- Industry Risk."
Leverage Risk. The Fund intends to use financial
leverage for investment purposes by issuing preferred
shares. The Fund's leveraged capital structure creates
special risks not associated with unleveraged funds
having similar investment objectives 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 asset coverage for preferred shares.
Such volatility may increase the likelihood of the Fund
having to sell investments in order to meet its
obligations to make distributions on the preferred
shares, or to redeem preferred shares when it may be
disadvantageous to do so. Also, if the Fund is utilizing
leverage, a decline in net asset value could affect the
ability of the Fund to make common share distributions
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."
Leveraging through the issuance of preferred shares
requires that the holders of the preferred shares have
class voting rights on various matters that could make
it more difficult for the holders of the common shares
to change the investment objective or fundamental
policies of the Fund, to convert the Fund to an open-end
fund or to make certain other changes. Finally, if the
asset coverage for preferred shares or senior debt
securities declines to less than 200% or 300% as
determined in accordance with the 1940 Act, 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
senior debt securities when it may be disadvantageous to
do so.
Leverage entails two primary risks. The first risk is
that the use of leverage magnifies the impact on the
holders of common shares from changes in net asset value
by creating greater volatility in the net asset value
and market price of the shares than a comparable
portfolio without leverage. For example, if the Fund
were to use leverage equal to 50% of its common shares,
it would show a 1.5% increase or decline in net asset
value for each
4
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. In a rising
interest rate environment, this second risk is more
prevalent in the case of variable rate securities. These
two risks would generally make the Fund's total return
to holders of common shares more volatile were it to use
leverage. See "Risk Factors and Specific Considerations
-- Leverage Risk."
Special Risks to Holders of Fixed Rate Preferred Shares.
Prior to any offering, there will be no public market
for Fixed Rate Preferred Shares. In the event any series
of Fixed Rate Preferred Shares are issued, prior
application will have been made to list such shares on a
national securities exchange, which will likely be the
Amex. However, during an initial period, which is not
expected to exceed 30 days after the date of its initial
issuance, such shares may not be listed on any
securities exchange. During such period, the
underwriters may make a market in such shares, although
they will have no obligation to do so. Consequently, an
investment in such shares may be illiquid during such
period. Shares of Fixed Rate Preferred may trade at a
premium to or discount from liquidation value for
various reasons, including changes in interest rates.
Special Risks for Holders of Variable Rate Preferred
Shares.
o Auction Risk. You may not be able to sell your
auction Variable Rate Preferred Shares at an auction
if the auction fails, i.e., if more Variable Rate
Preferred Shares are offered for sale than there are
buyers for those shares. Also, if you place an order
(a hold order) at an auction to retain Variable Rate
Preferred Shares only at a specified rate that
exceeds the rate set at the auction, you will not
retain your Variable Rate Preferred Shares.
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 Variable Rate Preferred Shares, which could also
affect the liquidity of your investment.
o Secondary Market Risk. If you try to sell your
Variable Rate Preferred Shares between auctions, you
may not be able to sell them for their liquidation
preference per share or such amount 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 Variable Rate
Preferred Shares are not required to maintain this
market, and the Fund is not required to redeem
Variable Rate Preferred Shares if either an auction
or an attempted secondary market sale fails because
of a lack of buyers. The Variable Rate Preferred
Shares will not be registered on a stock exchange.
If you sell your Variable Rate Preferred Shares 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.
Tax Risk. The Fund has qualified, and intends to remain
qualified, for federal income tax purposes as a
regulated investment company.
5
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. We cannot assure you what percentage of
the distributions paid on the common shares, if any,
will consist of tax-advantaged qualified dividend income
or long-term capital gains or what the tax rates on
various types of income will be in future years. The
favorable rates on qualifying dividends and capital
gains are currently scheduled to increase for income
received or gains realized after December 31, 2010. See
"Risk Factors and Special Considerations -- Tax Risk."
Foreign Securities. Subject to the Fund's other policies
including investing at least 50% of its assets in the
Utilities Industry, the Fund may invest without
limitation in securities of foreign issuers and will
generally be invested in securities of issuers located
in at least three countries, including the United
States. 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. Foreign companies generally are not
subject to the same accounting, auditing and financial
standards and requirements as those applicable to U.S.
companies. See "Risk Factors and Special Considerations
-- Foreign Securities Risk."
Foreign Currency Risk. The Fund expects to invest in
companies whose securities are denominated in currencies
other than U.S. dollars or have operations outside of
the U.S. In such instances, the Fund will be exposed to
currency risk, including the risk of fluctuations in the
exchange rate between U.S. dollars (in which the Fund's
shares are denominated) and such foreign currencies and
the risk of currency devaluations. Certain non- U.S.
currencies, primarily in developing countries, have been
devalued in the past and might face devaluation in the
future. Currency devaluations generally have a
significant and adverse impact on the devaluing
country's economy in the short and intermediate term and
on the financial condition and results of companies'
operations in that country. Currency devaluations may
also be accompanied by significant declines in the
values and liquidity of equity and debt securities of
affected governmental and private sector entities
generally. To the extent that affected companies have
obligations denominated in currencies other than the
devalued currency, those companies may also have
difficulty in meeting those obligations under such
circumstances, which in turn could have an adverse
effect upon the value of the Fund's investments in such
companies. There can be no assurance that current or
future developments with respect to foreign currency
devaluations will not impair the Fund's investment
flexibility, its ability to achieve its investment
objective or the value of certain of its foreign
currency denominated investments. See "Risk Factors and
Special Considerations -- Foreign Currency Risk."
Equity Risk. A principal risk of investing in the Fund
is equity risk, which is the risk that the securities
held by the Fund will fall in market value due to
adverse market and economic conditions, perceptions
regarding the industries in which the issuers of
securities held by the Fund participate and
6
the particular circumstances and performance of
particular companies whose securities the Fund holds. An
investment in the Fund represents an indirect investment
in the securities owned by the Fund, which are for the
most part traded on securities exchanges or in the
over-the-counter markets. The market value of these
securities, like other market investments, may move up
or down, sometimes rapidly and unpredictably. The net
asset value of the Fund may at any point in time be
worth less than the amount at the time the shareholder
invested in the Fund, even after taking into account any
reinvestment of distributions. See "Risk Factors and
Special Considerations -- Equity Risk."
Dependence on Key Personnel. The Investment Adviser is
dependent upon the expertise of Mr. Mario J. Gabelli in
providing investment 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."
Market Discount Risk. The Fund is a non-diversified,
closed-end management investment company. Shares of
closed-end funds are bought and sold in the securities
markets and may trade at either a premium to or discount
from net asset value. Listed shares of closed-end
investment companies often trade at discounts from net
asset value. This characteristic of shares of a
closed-end fund is a risk separate and distinct from the
risk that its net asset value may decrease. The Fund
cannot predict whether its listed shares will trade at,
below or above net asset value. See "Risk Factors and
Special Considerations -- Market Discount Risk."
Common Stock Risk. Common stock of an issuer in the
Fund's portfolio may decline in price for a variety of
reasons including if the issuer fails to make
anticipated dividend payments because, among other
reasons, the issuer of the security experiences a
decline in its financial condition. Common stock in
which the Fund will invest is structurally subordinated
to preferred stock, bonds and other debt instruments in
a company's capital structure, in terms of priority to
corporate income, and therefore will be subject to
greater dividend risk than preferred stock or debt
instruments of such issuers. In addition, while common
stock has historically generated higher average returns
than fixed income securities, common stock has also
experienced significantly more volatility in those
returns. An adverse event, such as an unfavorable
earnings report, may depress the value of common stock
of an issuer held by the Fund. Also, the price of common
stock of an issuer is sensitive to general movements in
the overall stock market. A drop in stock market indices
may depress the price of many or all of the common
stocks held by the Fund. See "Risk Factors and Special
Considerations -- Common Stock Risk."
Long-Term Objective; Not a Complete Investment Program.
The Fund is intended for investors seeking a consistent
level of after-tax total return consisting of income
(with a current emphasis on qualifying dividends) and
long-term capital gains. 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
7
considering an investment in the Fund. See "Risk Factors
and Special Considerations -- Long-term Objective; Not a
Complete Investment Program."
Common Shares Distribution Policy Risk. The Board has
adopted a distribution policy, which may be changed at
any time, to pay monthly distributions on the Fund's
common shares equal to an annual rate of 6% of the
offering price per share. To the extent its total
distributions for a year exceed its net investment
company taxable income and net realized capital gain for
that year, the excess would generally constitute a
return of capital which may have the effect of
decreasing the asset coverage per share with respect to
the preferred shares. Return of capital distributions
are generally tax-free up to the amount of a
shareholder's tax basis in the shares and thereafter are
treated as capital gains and should not be considered by
investors as an element of yield or total return on
their investment in the Fund. See "Taxation." In
addition, such excess distributions will decrease the
Fund's total assets and may increase the Fund's expense
ratio. In order to make such distributions, the Fund may
have to sell a portion of its investment portfolio at a
time when independent investment judgment may not
dictate such action. See "Risk Factors and Special
Considerations -- Common Shares Distribution Policy
Risk."
Management Risk. The Fund is subject to management risk
because it is an actively managed portfolio. The
Investment Adviser will apply investment techniques and
risk analyses in making investment decisions for the
Fund, but there can be no guarantee that these will
produce the desired results. See "Risk Factors and
Special Considerations -- Management Risk."
Distribution Risk for Equity Income Portfolio
Securities. The Fund will invest a portion of its assets
in the shares of issuers that pay dividends. Such
dividends are not guaranteed and in the event an issuer
does not realize sufficient income in a particular
period to both service its liabilities and to pay
dividends, it may forgo paying dividends. See "Risk
Factors and Special Considerations -- Distribution Risk
for Equity Income Portfolio Securities."
Special Risks Related to Investing in Preferred
Securities. Special risks associated with investing in
preferred securities include deferral of distributions
or dividend payments, in some cases the right of an
issuer never to pay missed dividends, subordination,
illiquidity, limited voting rights and redemption by the
issuer. Because the Fund has no limit on its investment
in non-cumulative preferred securities, the amount of
dividends the Fund pays may be adversely affected if an
issuer of a non-cumulative preferred stock held by the
Fund determines not to pay dividends on such stock.
There is no assurance that dividends or distributions on
preferred stock in which the Fund invests will be
declared or otherwise made payable. See "Risk Factors
and Special Considerations -- Special Risks Related to
Preferred Securities."
Income Risk. The income shareholders receive from the
Fund is expected to be based primarily on dividends and
interest the Fund earns from its investments, which can
vary widely over the short and long-term. If prevailing
market interest rates drop, distribution rates of the
Fund's holdings in preferred stock and any bond holdings
could decline and shareholders' income from the Fund
could drop as well. The Fund's income also would likely
be affected adversely when prevailing short-term
8
interest rates increase and the Fund is utilizing
leverage. See "Risk Factors and Special Considerations
-- Income Risk."
Interest Rate Risk. Interest rate risk is the risk that
fixed-income securities and to a lesser extent common
stocks issued by some companies in the Utilities
Industry will decline in value because of changes in
market interest rates. When market interest rates rise,
the market value of such securities generally will fall.
The Fund's investment in such securities means that the
net asset value and market price of common stock will
tend to decline if market interest rates rise.
During periods of declining interest rates, the issuer
of a security may exercise an option to prepay principal
earlier than scheduled, forcing the Fund to reinvest in
lower yielding securities. This is known as call or
prepayment risk. Preferred stock and debt securities
frequently have call features that allow the issuer to
redeem the securities prior to their stated maturities.
An issuer may redeem such a security if the issuer can
refinance it at a lower cost due to declining interest
rates or an improvement in the credit standing of the
issuer. During periods of rising interest rates, the
average life of certain types of securities may be
extended because of slower than expected principal
payments. This may lock in a below market interest rate,
increase the security's duration and reduce the value of
the security. This is known as extension risk.
Market interest rates for investment grade fixed-income
securities of the type in which the Fund will invest
have recently declined significantly below the
historical average rates for such securities. This
decline may have increased the risk that these rates
will rise in the future (which would cause the value of
the Fund's assets invested in fixed income securities to
decline) and the degree to which asset values may
decline in such event; however, historical interest rate
levels are not necessarily predictive of future interest
rate levels. See "Risk Factors and Special
Considerations -- Interest Rate Risk."
Inflation Risk. Inflation risk is the risk that the
value of assets or income from investments will be worth
less in the future as inflation decreases the value of
money. As inflation increases, the real value of the
Fund's shares and distributions thereon can decline. In
addition, during any periods of rising inflation,
dividend rates of any variable rate preferred shares or
debt securities issued by the Fund would likely
increase, which would tend to further reduce returns to
common shareholders. See "Risk Factors and Special
Considerations -- Inflation Risk."
Dilution Risk for Convertible Securities. In the absence
of adequate anti-dilution provisions in a convertible
security, dilution in the value of the Fund's holding
may occur in the event the underlying shares are
subdivided, additional equity securities are issued for
below market value, a stock dividend is declared, or the
issuer enters into another type of corporate transaction
that has a similar effect. See "Risk Factors and Special
Considerations -- Dilution Risk for Convertible
Securities."
Value Investing Risk. The Fund invests in
dividend-paying common and preferred stocks in the
Utilities Industry that the Investment Adviser believes
are undervalued or inexpensive relative to other
investments. These types of securities may present risks
in addition to the general risks associated with
9
investing in common and preferred stocks. See "Risk
Factors and Special Considerations -- Value Investing
Risk."
Non-Diversified Status. As a non-diversified investment
company under the 1940 Act, the Fund is not limited in
the proportion of its assets that may be invested in
securities of a single issuer, 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." See also
"Taxation."
Illiquid Securities. The Fund has no limit on the amount
of its net assets it may invest in unregistered or
otherwise illiquid investments. Unregistered securities
are securities that cannot be sold publicly in the
United States without registration under the Securities
Act of 1933 (the "Securities Act"). Unregistered
securities generally can be resold only in privately
negotiated transactions with a limited number of
purchasers or in a public offering registered under the
Securities Act. Considerable delay could be encountered
in either event and, unless otherwise contractually
provided for, the Fund's proceeds upon sale may be
reduced by the costs of registration or underwriting
discounts. The difficulties and delays associated with
such transactions could result in the Fund's inability
to realize a favorable price upon disposition of
unregistered securities, and at times might make
disposition of such securities impossible. See "Risk
Factors and Special Considerations -- Illiquid
Securities."
Risk Arbitrage. To the extent consistent with the Fund's
investment objective and policies, the Fund may invest
in securities pursuant to "risk arbitrage" strategies or
in other investment funds managed pursuant to such
strategies. Risk arbitrage strategies attempt to exploit
merger activity to capture the spread between current
market values of securities and their values after
successful completion of a merger, restructuring or
similar corporate transaction. A merger or other
restructuring or tender or exchange offer anticipated by
the Fund and in which it holds an arbitrage position may
not be completed on the terms contemplated or within the
time frame anticipated, resulting in losses to the Fund.
Such losses would be magnified to the extent that the
Fund uses leverage to increase its stake in an arbitrage
position. See "Risk Factors and Special Considerations
-- Risk Arbitrage."
Investment Companies. The Fund may invest in the
securities of other investment companies to the extent
permitted by law. To the extent the Fund invests in the
common equity of investment companies, the Fund will
bear its ratable share of any such investment company's
expenses, including management fees. The Fund will also
remain obligated to pay management fees to the
Investment Adviser with respect to the assets invested
in the securities of other investment companies. In
these circumstances, holders of the Fund's common shares
will be subject to duplicative investment expenses. See
"Risk Factors and Special Considerations -- Investment
Companies."
10
Lower Rated Securities. The Fund may invest up to 10% of
its total assets in fixed income securities rated below
investment grade by recognized statistical rating
agencies or unrated securities of comparable quality.
The prices of these lower grade securities are more
sensitive to negative developments, such as a decline in
the issuer's revenues or a general economic downturn,
than are the prices of higher grade securities.
Securities of below investment grade quality - those
securities rated below Baa by Moody's or below BBB by
S&P - are predominantly speculative with respect to the
issuer's capacity to pay interest and repay principal
when due and therefore involve a greater risk of default
and are commonly referred to as "junk bonds." See "Risk
Factors and Special Considerations -- Lower Rated
Securities."
Special Risks of Derivative Transactions. The Fund may
participate in certain derivative transactions. Such
transactions entail certain execution, market,
liquidity, hedging and tax risks. Participation in the
options or futures markets and in currency exchange
transactions involves investment risks and transaction
costs to which the Fund would not be subject absent the
use of these strategies. If the Investment Adviser's
prediction of movements in the direction of the
securities, foreign currency and interest rate markets
is inaccurate, the consequences to the Fund may leave
the Fund in a worse position than if it had not used
such strategies. See "Risk Factors and Special
Considerations -- Special Risks of Derivative
Transactions."
Loans of Portfolio Securities. The Fund may seek to earn
income by lending portfolio securities to broker-dealers
or other institutional borrowers. As with other
extensions of credit, there are risks of delay in
recovery or even loss of rights in the securities loaned
if the borrower of the securities violates the terms of
the loan or fails financially. See "Risk Factors and
Special Considerations -- Loans of Portfolio
Securities."
Current Developments. 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. The nature, scope and duration of the war and
occupation cannot be predicted with any certainty.
Similar events in the future or other disruptions of
financial markets could affect interest rates,
securities exchanges, auctions, secondary trading,
ratings, credit risk, inflation, energy prices and other
factors relating to the common shares. See "Risk Factors
and Special Considerations -- Current Developments."
Interest Rate Transactions. The Fund may enter into swap
transactions in connection with Variable Rate Preferred
Shares. The use of interest rate swaps and caps is a
highly specialized activity that involves certain risks
to the Fund including, among others, counterparty risk
and early termination risk. See "How the Fund Manages
Risk--Interest Rate Transactions."
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."
11
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 total assets. This fee will be
reduced each year following the fifth anniversary of the
investment advisory agreement by 10 basis points until
the eighth anniversary, after which time the Investment
Adviser will be compensated at an annual rate of .50% of
the Fund's average weekly total assets. The Fund's total
assets for purposes of calculating the level of the
management fee will typically include assets
attributable to any outstanding senior securities, such
as preferred shares. However, the Investment Adviser has
voluntarily agreed that in the event the Fund issues
senior securities, it will waive investment management
fees on assets attributable to such senior securities
for any calendar year except to the extent the Fund's
rate of total return allocable to common shareholders,
including distributions and the management fee subject
to potential waiver, is equal to or exceeds the cost of
such leverage for that year. In other words, if the
effective cost of the leverage for any series of
preferred shares exceeds the total return (based on net
asset value) on the Fund's common shares, the Investment
Adviser will waive that portion of its management fee on
the incremental assets attributable to the leverage for
that series of preferred shares to mitigate the negative
impact of the leverage on the common shareholder's total
return. The Fund's total return on the net asset value
of the common shares will be monitored on a monthly
basis to assess whether the total return on the net
asset value of the common shares exceeds the stated
dividend rate or corresponding swap rate of each
particular series of preferred shares for the period.
The corresponding swap rate will be determined based
upon the stated dividend rate for Fixed Rate Preferred
Shares or the average weekly auction rates for the
Variable Rate Preferred Shares. The test to confirm the
accrual of the management fee on the assets attributable
to each particular series of preferred shares is annual.
The Fund will accrue for the management fee on these
assets during the fiscal year if it appears probable
that the Fund will incur the management fee on those
additional assets. The Investment Adviser is responsible
for administration of the Fund and currently utilizes
and pays the fees of a third party sub-administrator.
See "Management of the Fund."
During periods when the Fund has outstanding senior
securities (such as our preferred shares), the fees paid
to the Investment Adviser for its services to the Fund
may be higher than if the Fund did not issue senior
securities because such fees will be calculated on the
basis of the Fund's average weekly total assets (subject
to the fee waiver described above). Consequently, the
Fund and the Investment Adviser may have differing
interests in determining whether to leverage the Fund's
assets by issuing senior securities. The Board will
monitor this potential conflict.
A discussion regarding the basis for the Board's
approval of the continuation of the investment advisory
contract of the Fund is available in the Fund's
semi-annual report to shareholders dated June 30, 2007.
The Securities and Exchange Commission (the "SEC"), the
New York Attorney General and officials of other states
have been conducting inquiries into, and bringing
enforcement and other proceedings regarding, trading
abuses involving open-end investment companies. The
Investment Adviser has received information requests and
subpoenas from the SEC and the New York Attorney General
in connection with these inquiries. The Investment
Adviser and its affiliates have been complying with
these
12
requests and have implemented additional compliance
policies and procedures in response to recent industry
initiatives and their internal reviews of their mutual
fund practices in a variety of areas. In February 2007,
the Investment Adviser made an offer of settlement to
the SEC staff for communication to the SEC for
consideration to resolve this matter. This offer of
settlement is subject to final agreement regarding the
specific language of the SEC's administrative order and
other settlement documents. For further details, see
"Management of the Fund--Regulatory Matters."
Repurchase of Common The Fund's Board has authorized the Fund to repurchase
Shares its common shares in the open market when the common
shares are trading at a discount of 10% or more from net
asset value (or such other percentage as the Board may
determine from time to time). The Fund Manager has
discretion as to whether or not he wants to repurchase
common shares if they are trading at the required
discount. Such repurchases are subject to certain notice
and other requirements under the 1940 Act. See
"Repurchase of Common Shares.
Anti-Takeover Certain provisions of the Fund's Governing Documents may
Provisions 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 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 common
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 State Street Bank and Trust Company, located at One
Agent, Auction Agent Heritage Drive, Palmer 2N, North Quincy, Massachusetts
and Dividend 02171, serves as the custodian of the Fund's assets
Disbursing Agent 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 receives a monthly fee based upon the month
end value of the total assets of the Fund, plus certain
charges for securities transactions.
Computershare Trust Company, N.A. ("Computershare"),
located at P.O. Box 43010, Providence, Rhode Island
02940, serves as the Fund's dividend disbursing agent,
as agent under the Fund's automatic dividend
reinvestment and voluntary cash purchase plan (the
"Plan") and as transfer agent and registrar with respect
to the common shares and preferred shares of the Fund.
13
USE OF PROCEEDS
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 objectives and
policies as appropriate investment opportunities are identified, which is
expected to substantially be completed within three months; however, changes in
market conditions could result in the Fund's anticipated investment period
extending to as long as six months.
14
FINANCIAL HIGHLIGHTS
The selected data below sets forth the per share operating performance
and ratios for the period presented. The financial information was derived from
and should be read in conjunction with the Financial Statements of the Fund and
Notes thereto, which are incorporated by reference into this Prospectus and the
SAI. The financial information for the fiscal year ended December 31, 2007, 2006
and 2005, and the fiscal period from inception through December 31, 2004 has
been audited by PricewaterhouseCoopers LLP, the Fund's independent registered
public accounting firm, whose unqualified report on such Financial Statements is
incorporated by reference into the SAI.
Selected data for a common share of beneficial interest outstanding
throughout each period.
Year Ended Year Ended Year Ended Period Ended
December 31, December 31, December 31, December 31,
2007 2006 2005 2004(b)
-----------------------------------------------------------------------
Operating Performance:
Net asset value, beginning of period.... $ 24.52 $ 20.45 $ 21.03 $ 19.06(c)
-----------------------------------------------------------------------
Net investment income................... 0.45 0.64 0.64 0.28
Net realized and unrealized gain on
investments, swap contracts, and
foreign currency transactions........ 2.06 4.63 0.23 2.29
-----------------------------------------------------------------------
Total from investment operations........ 2.51 5.27 0.87 2.57
-----------------------------------------------------------------------
Distributions to Common Shareholders:
Net investment income................... (0.30) (0.65) (0.63) (0.28)
Net realized gain on investments........ (1.23) (0.55) (0.82) (0.06)
Return of capital....................... -- -- -- (0.26)
-----------------------------------------------------------------------
Total distributions to common shareholders (1.53) (1.20) (1.45) (0.60)
-----------------------------------------------------------------------
Net Asset Value, End of Period.......... $ 25.50 $ 24.52 $ 20.45 $ 21.03
=======================================================================
NAV Total Return (*).................... 10.46% 26.66% 4.2% 13.9%(***)
=======================================================================
Market Value, End of Period............. $ 23.05 $ 22.17 $ 17.76 $ 19.63
=======================================================================
Total investment return (**)............ 11.29% 32.83% (2.3)% 1.3%(****)
=======================================================================
Ratios and Supplemental Data:
Net assets, end of period (in 000's).... $ 77,727 $ 74,807 $ 62,381 $ 64,160
Ratio of net investment income to average
net assets........................... 1.82% 2.92% 2.99% 2.23%(d)
Ratio of operating expenses to average
net assets........................... 1.55%(a) 1.66%(a) 1.56%(a 1.49%(d)
Portfolio turnover rate.................... 16.7% 21.8% 21.0% 16.9%
---------------------------
(*) Based on net asset value per share, adjusted for reinvestment of
distributions at the net asset value per share on the ex-dividend
dates. Total return for periods of less than one year are not
annualized.
(**) Based on market value per share, adjusted for reinvestment of
distributions. Total return for periods of less than one year are not
annualized.
(***) Based on net asset value per share at commencement of operations of
$19.06 per share.
(****) Based on market value per share at initial public offering of
$20.00 per share.
(a) For the fiscal years ended December 31, 2007, 2006 and 2005, the effect
of the custodian fee credits was minimal.
(b) The Gabelli Global Utility & Income Trust commenced investment
operations on May 28, 2004.
(c) The beginning of period NAV reflects a $0.04 reduction for costs
associated with the initial public offering.
(d) Annualized.
15
THE FUND
The Fund is a non-diversified, closed-end management investment company
registered under the 1940 Act. The Fund was organized as a Delaware statutory
trust on March 8, 2004. The Fund commenced its investment operations on May 28,
2004. The Fund's principal office is located at One Corporate Center, Rye, New
York 10580-1422.
INVESTMENT OBJECTIVES AND POLICIES
Investment Objectives
The Fund's investment objective is to seek a consistent level of
after-tax total return over the long-term with an emphasis currently on
qualifying dividends. The Fund will attempt to achieve its investment objective
by investing, under normal market conditions, at least 80% of its assets in (i)
equity securities (including common stock, preferred stock, convertible stock
and options on these securities) of domestic and foreign companies involved to a
substantial extent (i.e., at least 50% of the assets, gross income or net
profits of a company is committed to or derived from) in providing (a) products,
services or equipment for the generation or distribution of electricity, gas or
water and (b) infrastructure operations such as airports, toll roads and
municipal services and telecommunications services such as telephone, telegraph,
satellite, cable, microwave, radiotelephone, mobile communication and cellular,
paging, electronic mail, videotext, voice communications, data communications
and internet (collectively, the "Utilities Industry") and (ii) in equity
securities (including preferred securities) of companies in other industries, in
each case in such securities that are expected to periodically pay dividends.
The Fund's 80% policy is not fundamental and shareholders will be notified if it
is changed. In addition, under normal market conditions, at least 50% of the
Fund's assets will consist of equity securities (including preferred securities)
of domestic and foreign companies involved to a substantial extent (i.e., at
least 50% of the assets, gross income or net profits of a company is committed
to or derived from) in the Utilities Industry. The remaining Fund assets will
generally be invested in other securities that the Investment Adviser views as
not being correlated with the Fund's Utilities Industry investments. Such
investments may include convertible securities, securities of issuers subject to
reorganization or other risk arbitrage investments, certain derivative
instruments, debt (including obligations of the U.S. Government) and money
market instruments.
No assurance can be given that the Fund's investment objective will be
achieved.
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
(which is defined below), cash flow, earnings per share and other
fundamental aspects of the underlying assets and business of the
company;
o the potential for capital appreciation of the securities;
o the interest or dividend income generated by the securities;
o the prices of the securities relative to other comparable securities;
o whether the securities are entitled to the benefits of call protection
or other protective covenants;
o the existence of any anti-dilution protections or guarantees of the
security; and
o the number and size of investments of the portfolio.
16
The Investment Adviser's investment philosophy with respect to debt and
equity securities is to identify assets that are selling in the public market at
a discount to their private market value. 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
Utilities Industry Concentration. Under normal conditions, the Fund
will invest at least 50% of its assets in foreign and domestic companies
involved to a substantial extent in the Utilities Industry. See "Risk Factors
and Special Considerations -- Industry Risks."
Tax-Advantaged Qualified Dividends. The Fund's investments will
emphasize securities that will pay what under current law through 2010 are
tax-advantaged qualified dividends. For the Fund to receive tax-advantaged
qualified dividends, the Fund must, in addition to other requirements, hold the
otherwise qualified stock for more than 61 days during the 121-day period
beginning 60 days before the ex-dividend date (or, in the case of preferred
stock, more than 91 days during the 181-day period beginning 90 days before the
ex-dividend date). Although current law only provides a 60-day, 90-day, 120-day
and 180-day period for holding such stock, a proposed technical correction to
the law would extend such periods to 61 days, 91 days, 121 days and 181 days,
respectively. The Treasury Department and the Internal Revenue Services (the
"IRS") have announced that taxpayers may apply the extended periods as if the
legislation were already enacted in filing their federal income tax returns. The
"ex-dividend date" is the date which is established by a stock exchange (usually
two business days before the record date) whereby the owner of a security at the
commencement of such date is entitled to receive the next issued dividend
payment for such security, even if the security is sold by such owner on the
ex-dividend date or thereafter. In addition, the Fund cannot be obligated to
make payments (pursuant to a short sale or otherwise) with respect to
substantially similar or related property. For an individual shareholder to be
taxed at the rates applicable to tax-advantaged qualified dividends on dividends
received from the Fund that are attributable to tax-advantaged qualified
dividends received by the Fund, the shareholder must hold its common shares for
more than 61 days during the 121-day period beginning 60 days before the
ex-dividend date for the Fund's common shares. Consequently, short-term
investors in the Fund may not realize the benefits of tax-advantaged qualified
dividends. There can be no assurance as to the portion of the Fund's dividends
that will be tax-advantaged. The provisions of the Code applicable to
tax-advantaged qualified dividends are currently effective through December 31,
2010 but may be changed at any time, possibly with retroactive effect.
Thereafter, higher tax rates will apply unless further legislative action is
taken.
Foreign Securities. Subject to the Fund's other policies including
investing at least 50% of its assets in the Utilities Industry, the Fund may
invest without limit in securities of foreign issuers, which are generally
denominated in foreign currencies. The Fund expects to generally be invested in
securities of issuers located in at least three countries including the U.S and
possibly including developing countries. The Fund currently anticipates that its
investment strategy will cause it to invest approximately 30% of its assets in
approximately 11 countries, not including the U.S., throughout the world, but
the actual number of such countries and amount of such assets in the Fund's
portfolio will vary over time. See "Risk Factors and Special Considerations --
Foreign Securities."
The Fund may also purchase sponsored American Depository Receipts
("ADRs") or U.S. dollar-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.
Income Securities. Although it is the Fund's policy to invest in
securities of companies in the Utilities Industry to the extent attractive
opportunities are available, the Fund may also invest in income securities other
than Utilities Industry securities that are expected to periodically accrue or
generate income for their holders. Such income securities include (i) fixed
income securities such as bonds, debentures, notes, stock, short-term discounted
Treasury Bills or certain securities of the U.S. government sponsored
instrumentalities, as well as money market mutual funds that invest in those
securities, which, in the absence of an applicable exemptive order, will not be
affiliated with the Investment Adviser, and (ii) common and preferred stocks of
issuers that have historically paid periodic dividends. Fixed income securities
obligate the issuer to pay to the holder of the security a specified return,
17
which may be either fixed or reset periodically in accordance with the terms of
the security. Fixed income securities generally are senior to an issuer's common
stock and their holders generally are entitled to receive amounts due before any
distributions are made to common stockholders. Common stocks, on the other hand,
generally do not obligate an issuer to make periodic distributions to holders.
The market value of fixed income securities, especially those that
provide a fixed rate of return, may be expected to rise and fall inversely with
interest rates and in general is affected by the credit rating of the issuer,
the issuer's performance and perceptions of the issuer in the market place. The
market value of callable or redeemable fixed income securities may also be
affected by the issuer's call and redemption rights. In addition, it is possible
that the issuer of fixed income securities may not be able to meet its interest
or principal obligations to holders. Further, holders of non-convertible fixed
income securities do not participate in any capital appreciation of the issuer.
The Fund may also invest in obligations of government sponsored
instrumentalities. Unlike non-U.S. government securities, obligations of certain
agencies and instrumentalities of the U.S. government, such as the Government
National Mortgage Association, are supported by the "full faith and credit" of
the U.S. government; others, such as those of the Export-Import Bank of the
U.S., are supported by the right of the issuer to borrow from the U.S. Treasury;
others, such as those of the Federal National Mortgage Association, are
supported by the discretionary authority of the U.S. government to purchase the
agency's obligations; and still others, such as those of the Student Loan
Marketing Association, are supported only by the credit of the instrumentality.
No assurance can be given that the U.S. government would provide financial
support to U.S. government sponsored instrumentalities if it is not obligated to
do so by law. Although the Fund may invest in all types of obligations of
agencies and instrumentalities of the U.S. government, the Fund currently
intends to invest only in obligations that are supported by the "full faith and
credit" of the U.S. government.
The Fund also may invest in common stock of issuers that have
historically paid periodic dividends or otherwise made distributions to common
stockholders. Unlike fixed income securities, dividend payments generally are
not guaranteed and so may be discontinued by the issuer at its discretion or
because of the issuer's inability to satisfy its liabilities. Further, an
issuer's history of paying dividends does not guarantee that it will continue to
pay dividends in the future. In addition to dividends, under certain
circumstances the holders of common stock may benefit from the capital
appreciation of the issuer.
Risk Arbitrage. Subject to the Fund's other policies including
investing at least 50% of its assets in the Utilities Industry, the Fund may
invest without limit in securities pursuant to "risk arbitrage" strategies or in
other investment funds managed pursuant to such strategies. Risk arbitrage
investments are made 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
total return significantly greater than the brokerage and other transaction
expenses involved. Risk arbitrage strategies attempt to exploit merger activity
to capture the spread between current market values of securities and their
values after successful completion of a merger, restructuring or similar
corporate transaction. Transactions associated with risk arbitrage strategies
typically involve the purchases or sales of securities in connection with
announced corporate actions which may include, but are not limited to, mergers,
consolidations, acquisitions, transfers of assets, tender offers, exchange
offers, re-capitalizations, liquidations, divestitures, spin-offs and similar
transactions.
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 trade at a discount or premium to 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 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 behind the
offer and/or the
18
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. Risk arbitrage strategies may also involve short selling,
options hedging and other arbitrage techniques to capture price differentials.
See "Risk Factors and Special Considerations -- Risk Arbitrage."
Foreign Currency Exchange Contracts. Subject to guidelines of the
Board, the Fund may enter into 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.
Restricted and Illiquid Securities. Subject to the Fund's other
policies including investing at least 50% of its assets in the Utilities
Industry, the Fund may invest without limit in securities for which there is no
readily available trading market or are otherwise illiquid. Illiquid securities
may include securities legally restricted as to resale, such as commercial paper
issued pursuant to Section 4(2) of the Securities Act, and securities eligible
for resale pursuant to Rule 144A thereunder. Section 4(2) and Rule 144A
securities may, however, be treated as liquid by the Investment Adviser pursuant
to procedures adopted by the Board, which require consideration of factors such
as trading activity, availability of market quotations and number of dealers
willing to purchase the security. If the Fund invests in Rule 144A securities,
the level of portfolio illiquidity may be increased to the extent that eligible
buyers become uninterested in purchasing such securities.
It may be more difficult to sell such securities at an attractive price
until such time as such securities may be sold publicly. Where registration is
desired, a considerable period may elapse between a decision to sell the
securities and the time when registration is complete. Thus, the Fund may not be
able to obtain as favorable a price as that prevailing at the time of the
decision to sell. The Fund may also acquire securities with contractual
restrictions on the resale of such securities. Such restrictions might prevent
their sale at a time when such sale would otherwise be desirable.
Leverage. As provided in the 1940 Act and subject to certain
exceptions, the Fund may issue senior securities (which may be stock, such as
preferred shares, or securities representing debt) so long as its total assets
(including such senior security), less certain ordinary course liabilities,
exceed 200% of the sum of any preferred shares and debt outstanding and 300% of
the amount of any debt outstanding. Any such senior securities may be
convertible in accordance with SEC staff guidelines, which may permit the Fund
to obtain leverage at more attractive rates.
The issuance of senior securities would leverage the common shares.
Although the timing and other terms of the offering of senior securities and the
terms of the senior securities would be determined by the Fund's Board, the Fund
expects to primarily invest the proceeds of any senior securities offering in
dividend paying or income producing equity or debt securities. See "Use of
Proceeds."
The use of leverage magnifies the impact in changes in net asset value.
For example, a fund that uses 33% leverage will show a 1.5% increase or decrease
in net asset value for each 1% increase or decrease in the value of its total
assets other than leverage. The concept of leveraging is based on the premise
that so long as the cost of the leverage on the assets to be obtained by the
leverage is lower than the return earned by the Fund on such leveraged assets,
the common shareholders will benefit from the incremental return. Should the
differential between the return produced by the underlying assets and the cost
of leverage narrow, the incremental return will be reduced. Furthermore, if the
cost of the leverage on the leveraged assets exceeds the return earned by the
Fund on such leveraged assets, the net asset value of the Fund will be
diminished. The use of leverage generally increases the volatility of returns to
the Fund. See "Risk Factors and Special Considerations -- Leverage Risk."
Lower Rated Securities. The Fund may invest up to 10% of its total
assets in fixed-income securities rated in the lower rating categories of
recognized statistical rating agencies, such as securities rated "CCC" or lower
by
19
Standard & Poor's Rating Services ("S&P") or "Caa" by Moody's Investors Service,
Inc. ("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 (or unrated securities of comparable
quality) 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 (i.e., subject to
the 10% cap), the Fund may invest without limit 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
20
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 lower rated and comparable unrated securities has at
various times, particularly during times of economic recession, experienced
substantial reductions in market value and liquidity. Past recessions have
adversely affected 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 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. The Fund may purchase call or put options as long as the
aggregate initial margins and premiums, measured at the time of such investment,
do not exceed 5% of the fair market value of the Fund's total assets.
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.
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.
21
Futures Contracts and Options on Futures. The Fund may purchase and
sell financial futures contracts and options thereon which are traded on a
commodities exchange or board of trade for certain hedging, yield enhancement
and risk management purposes. 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. These futures contracts and related options may be on
debt securities, financial indices, securities indices, U.S. government
securities and foreign currencies. The Investment Adviser has claimed an
exclusion from the definition of the term "commodity pool operator" under the
Commodity Exchange Act and therefore is not subject to registration under the
Commodity Exchange Act. Accordingly, the Fund's investments in derivative
instruments described in this Prospectus and the SAI are not limited by or
subject to regulation under the Commodity Exchange Act or otherwise regulated by
the Commodity Futures Trading Commission ("CFTC"). Nonetheless, the Fund's
aggregate initial margins and premiums with respect to futures contracts,
measured at the time of such investment, will not exceed 5% of the fair market
value of the Fund's total assets.
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 10%
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.
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 incurred by the Fund, including the costs associated with
providing collateral to the broker-dealer (usually cash, U.S. government
securities or other highly liquid debt securities) and the maintenance of
collateral with its custodian. Although the Fund's gain is limited to the price
at which it sold the security short, its potential loss is theoretically
unlimited.
Repurchase Agreements. Repurchase agreements may be seen as loans by
the Fund collateralized by underlying debt securities. 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
22
repurchase, and the Fund to resell, the obligation at an agreed price and time.
This arrangement results in a fixed rate of return to the Fund that is not
subject to market fluctuations during the holding period. 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 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. The Fund will not enter into repurchase
agreements with the Investment Adviser or any of its affiliates.
Swaps. The Fund may enter into total rate of return, credit default or
other types of swaps and related derivatives for various purposes, including to
gain economic exposure to an asset or group of assets that may be difficult or
impractical to acquire or for hedging and risk management. These transactions
generally provide for the transfer from one counterparty to another of certain
risks inherent in the ownership of a financial asset such as a common stock or
debt instrument. Such risks include, among other things, the risk of default and
insolvency of the obligor of such asset, the risk that the credit of the obligor
or the underlying collateral will decline or the risk that the common stock of
the underlying issuer will decline in value. The transfer of risk pursuant to a
derivative of this type may be complete or partial, and may be for the life of
the related asset or for a shorter period. These derivatives may be used as a
risk management tool for a pool of financial assets, providing the Fund with the
opportunity to gain or reduce exposure to one or more reference securities or
other financial assets (each, a "Reference Asset") without actually owning or
selling such assets in order, for example, to increase or reduce a concentration
risk or to diversify a portfolio. Conversely, these derivatives may be used by
the Fund to reduce exposure to an owned asset without selling it.
Because the Fund would not own the Reference Assets, the Fund may not
have any voting rights with respect to the Reference Assets, and in such cases
all decisions related to the obligors or issuers of the Reference Assets,
including whether to exercise certain remedies, will be controlled by the swap
counterparties.
Total rate of return swaps and similar derivatives are subject to many
risks, including the possibility that the market will move in a manner or
direction that would have resulted in gain for the Fund had the swap or other
derivative not been utilized (in which case it would have been had the Fund not
engaged in the transactions), nearly unlimited exposure to changes in the value
of the Reference Assets, total loss to the Fund of the entire notional amount of
the swap, the risk of imperfect correlation between the risk sought to be hedged
and the derivative transactions utilized, the possible inability of the
counterparty to fulfill its obligations under the swap and potential illiquidity
of the instrument utilized, which may make it difficult for the Fund to close
out or unwind one or more transactions.
Total rate of return swaps and related derivatives are a relatively
recent development in the fillancia1 markets. Consequently, there are certain
legal, tax and market uncertainties that present risks in entering into such
arrangements. There is currently little or no case law or litigation
characterizing total rate of return swaps or related derivatives, interpreting
their provisions, or characterizing their tax treatment. In addition, additional
regulations and laws may apply to these types of derivatives that have not
previously been applied. There can be no assurance that future decisions
construing similar provisions to those in any swap agreement or other related
documents or additional regulations and laws will not have an adverse effect on
the Fund that utilizes these instruments. The Fund will monitor these risks and
seek to utilize these instruments in a manner that does not lead to undue risk
regarding the tax or other structural elements of the Fund. The Fund will not
invest in these types of instruments if the Reference Assets are commodities
except for bona fide hedging or risk management purposes.
Convertible Securities. A convertible security is a bond, debenture,
note, stock or other similar security that may be converted into or exchanged
for a prescribed amount of common stock or other equity security of the same or
a different issuer within a particular period of time at a specified price or
formula. Before conversion, convertible securities have characteristics similar
to nonconvertible debt securities in that they ordinarily provide a stream of
income with generally higher yields than those of common stock of the same or
similar issuers. Convertible securities are senior in rank to common stock in a
corporation's capital structure and, therefore, generally entail less risk than
the corporation's common stock, although the extent to which such risk is
reduced depends in large
23
measure upon the degree to which the convertible security sells above its value
as a fixed income security. See "Risk Factors and Special Considerations --
Dilution Risk for Convertible Securities."
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 Utilities Industry and securities of companies in other industries that are
expected to periodically generate or accrue income, 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 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 FDIC. 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.
Loans of Portfolio Securities. To increase income, the Fund may lend
its portfolio securities to securities broker-dealers or financial institutions
if the loan is collateralized in accordance with applicable regulatory
requirements.
If the borrower fails to maintain the requisite amount of collateral,
the loan automatically terminates and the Fund could use the collateral to
replace the securities while holding the borrower liable for any excess of
replacement cost over the value of the collateral. As with any extension of
credit, there are risks of delay in recovery and in some cases even loss of
rights in collateral should the borrower of the securities violate the terms of
the loan or fail financially. There can be no assurance that borrowers will not
fail financially. On termination of the loan, the borrower is required to return
the securities to the Fund, and any gain or loss in the market price during the
loan would inure to the Fund. If the other 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. See "Investment Objective and
Policies -- Loans of Portfolio Securities" in the SAI.
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, but is not expected to be higher than 100%.
Portfolio turnover generally involves 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 Fund's portfolio
turnover rates for the fiscal years ended December 31, 2006 and 2007 were 21.8%
and 16.7%, respectively. For purposes of this calculation, portfolio securities
exclude purchases and sales of debt securities having a maturity at the date of
purchase of one year or less.
RISK FACTORS AND SPECIAL CONSIDERATIONS
Investors should consider the following risk factors and special
considerations associated with investing in the Fund:
24
Industry Risks
Under normal market conditions, the Fund will invest 80% or more of its
assets in foreign and domestic companies involved in the Utilities Industry, and
in debt or equity securities of companies in other industries that are expected
to periodically accrue or generate income for their holders. In addition under
normal market conditions, at least 50% of the Fund's assets will consist of debt
or equity of securities of domestic and foreign companies involved to a
substantial extent (i.e. at least 50% of the assets, gross income or net profits
of a company is committed to or derived from) in the Utilities Industry. As a
result of this policy of concentrating its investments in a particular industry,
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 product development, infrastructure and 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 equity securities issued by certain
types of utility companies may change more in response to interest rate changes
than the equity securities of other companies. Generally, when interest rates go
up, the value of securities issued by these companies goes down. Conversely,
when interest rates go down, the value of securities issued by these companies
goes up. There is no guarantee that this relationship will hold in the future.
Government Regulation. Companies in certain sectors of the Utilities
Industry (such as power generation and distribution) are subject to extensive
governmental regulatory requirements. Certain of these regulations that are
intended to limit the concentration of ownership and control of companies in
these industries may prevent companies in which the Fund invests from making
certain investments that they would otherwise make. Other regulations may cause
Utilities Industry companies to incur substantial additional costs or lengthy
delays in connection with the completion of capital investments or the
introduction of new products or services to market. 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 companies to implement rate increases or that such increases
will be adequate to permit the payment of dividends on such issuer's common
stocks. Additionally, existing and possible future regulatory legislation may
make it even more difficult for companies in the Utilities Industry to obtain
adequate relief from rate regulation.
Regulatory considerations limit the percentage of the shares of a
public utility held by a fund or by an adviser and its affiliates on behalf of
all their clients. Specifically, to avoid regulation under the Public Utility
Holding Company Act of 1935, the Fund along with other funds advised by the
Investment Adviser will not, in the aggregate, own more than 10% of the voting
securities of a public utility company. Also, various types of ownership
restrictions are imposed by the Federal Communications Commission ("FCC"), on
investment in media companies and cellular licensees. These rules limit the
number of broadcast stations both locally and nationally that a single entity is
permitted to own, operate, or control and prohibit ownership of certain
competitive communications providers in the same location. The FCC also applies
limited ownership restrictions on cellular licensees serving rural areas.
Attributable interests that may result from the role of the Investment Adviser
and its principals in connection with other funds, managed accounts and
companies may limit the Fund's ability to invest in certain mass media and
cellular companies. 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 or
telecommunications companies. Domestic and foreign regulators may monitor and
control such companies' 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. In some
jurisdictions certain portions of various utilities functions have been
deregulated. Deregulation may eliminate restrictions on profits and dividends of
companies, but may also subject these companies to greater risks of loss. Thus,
deregulation could have a positive or negative impact on the
25
Fund. The Investment Adviser believes that certain Utilities Industry companies'
fundamentals should continue to improve as the industry undergoes deregulation.
In recent years, changes in regulation in the United States increasingly have
allowed companies in the Utilities Industry to provide services and products
outside their traditional geographic areas and lines of business, creating new
areas of competition within these industries. However, a number of companies
have failed in their efforts to take advantage of the deregulated environment
and are seeking to refocus in their primary business. Nonetheless, because of
trends toward deregulation and the evolution of independent producers as well as
new entrants to the field of telecommunications, non-regulated providers of
utility and telecommunications services have become a significant part of their
respective industries. The emergence of competition and deregulation may result
in certain companies in the Utilities Industry being able to earn more than
their traditional regulated rates of return, while others may be forced to
defend their core business from increased competition and may be less
profitable. Reduced profitability, as well as new uses of funds (such as for
expansion, operations or stock buybacks) could result in cuts in dividend payout
rates.
Environmental and Other Regulatory Matters. Companies in the Utilities
Industry in which the Fund will invest may be subject to a number of host
country statutory and regulatory standards and required approvals relating to
energy, labor and environmental laws. Certain permits and regulatory approvals
may be required to be obtained for certain investments by companies in which the
Fund will invest and failure by such companies to obtain such permits and
regulatory approvals could adversely affect the Fund's investment. Companies
also face 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.
The adoption by a host country of new laws, policies or regulations or
changes in the interpretation or application of existing laws, policies and
regulations that modify the present regulatory environment could also have an
adverse effect on the Fund's investments. Regulatory risk affects companies in
the Utilities Industry in part because governments may be party to private
Utilities Industry investments as lessors, customers, regulators or partners.
Moreover, for political reasons, governments may control the prices at which
companies in the Utilities Industry can sell their products, which can adversely
affect the Fund's investment in such a company.
Under the laws of certain countries that are host to Utilities Industry
companies in which the Fund may invest, such companies may be required to comply
with a number of statutes and regulations during their operation pertaining to
environmental controls or restrictions, and the storage, handling,
transportation and disposal of hazardous and toxic material, waste or other
substances. Compliance with such requirements may be costly and may materially
affect the profitability of such companies. Further, failure by such a company
to comply with any such statutes or regulations could have adverse effects on
its business results and prospects, which could have negative consequences for
investors such as the Fund.
Foreign Utility Companies. Foreign companies in the Utilities Industry
are also subject to regulation, although such regulation may or may not be
comparable to regulation in the United States. Foreign companies in the
Utilities Industry may be more heavily regulated by their respective governments
than companies in the United States and, as in the United States, generally are
required to seek government approval for rate increases. In addition, many
foreign utilities use fuels that may cause more pollution than those used in the
United States, which may require such utilities to invest in pollution control
equipment to meet any proposed pollution restrictions. Foreign regulatory
systems vary from country to country and may evolve in ways different from
regulation in the United States. Additionally, because the effectiveness of the
judicial systems in non-U.S. countries varies, the Fund or companies in which it
may invest may have difficulty in successfully pursuing claims in the courts of
such countries.
Financing. At certain times, companies in the Utilities Industry
encounter difficulties in obtaining financing for product development,
infrastructure and construction programs. Issuers experiencing such difficulties
may also experience lower profitability, which can result in reduced income to
the Fund. Historically, companies in the Utilities Industry have also
encountered such financing difficulties during inflationary periods, although we
cannot assure you that such a relationship will continue and that companies in
the Utilities Industry will not encounter financing difficulties during
non-inflationary periods.
26
Equipment and Supplies. Companies in the Utilities Industry may face
the risk of lengthy delays and increased costs associated with the design,
development, construction, licensing and operation of their facilities or sale
of their products. 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. Investments in certain kinds of utility companies are also
subject to certain additional risks.
Electric. Certain of the issuers of securities held in the Fund's
portfolio may own or operate nuclear generating facilities. Governmental
authorities may from time to time review existing policies and impose additional
requirements governing the licensing, construction and operation of nuclear
power plants. Prolonged changes in climatic conditions can also have a
significant impact on both the revenues of an electric and gas utility as well
as its expenses.
The construction and operation of nuclear power facilities are subject
to increased scrutiny by, and evolving regulations of, the Nuclear Regulatory
Commission and state agencies having comparable jurisdiction. Increased scrutiny
might result in higher operating costs and higher capital expenditures, with the
risk that the regulators may disallow inclusion of these costs in rate
authorizations or the risk that a company may not be permitted to operate or
complete construction of a facility. In addition, operators of nuclear power
plants may be subject to significant costs for disposal of nuclear fuel and for
decommissioning such plants.
The rating agencies are taking a closer look at the business profile of
utilities. Ratings for companies are expected to be affected to a greater extent
in the future by how their asset base is utilized. Electric utility companies
that focus more on the generation of electricity may be assigned less favorable
ratings as this business is expected to be competitive and the least regulated.
On the other hand, companies that focus on transmission and distribution, which
is expected to be the least competitive and the more regulated part of the
business, may see higher ratings given the greater predictability of cash flow.
Several states have enacted enabling deregulation legislation. The
introduction of competition into the industry as a result of deregulation may
result in lower revenue, lower credit ratings, increased default risk and lower
electric utility security prices. Such increased competition may also cause
long-term contracts, which electric utilities previously entered into to buy
power, to become "stranded assets," which have no economic value. Any loss
associated with such contracts must be absorbed by ratepayers and investors. In
addition, in anticipation of increasing competition, some electric utilities
have acquired electric utilities overseas to diversify, enhance earnings and
gain experience in operating in a deregulated environment. In some instances,
such acquisitions have involved significant borrowings, which have burdened the
acquirer's balance sheet. There is no assurance that current deregulation
proposals will be adopted. However, deregulation in any form could significantly
impact the electric utilities industry.
Following deregulation of the energy markets in certain states, a
number of companies have engaged in energy trading and incurred substantial
losses. Certain of these energy trading businesses have been accused of
employing improper accounting practices and have been required to make
significant restatements of their financial results. In addition, several energy
companies have been accused of attempting to manipulate the price and
availability of energy in certain states.
Telecommunications. The telecommunications industry today includes both
traditional telephone companies with a history of broad market coverage and
highly regulated businesses and cable companies, which began as small, lightly
regulated businesses focused on limited markets. Today these two historically
different businesses are converging in an industry which is trending toward
larger, competitive, national and international markets with an emphasis on
deregulation. Companies that distribute telephone services and provide access to
the telephone networks still comprise the greatest portion of this segment, but
non-regulated activities such as cellular telephone services, paging, data
processing, equipment retailing, computer software and hardware services are
becoming increasingly significant components as well. The presence of
unregulated companies in this industry and
27
the entry of traditional telephone companies into unregulated or less regulated
businesses provide significant investment opportunities with companies which may
increase their earnings at faster rates than had been allowed in traditional
regulated businesses. Still, increasing competition, technological innovations
and other structural changes could adversely affect the profitability of such
utilities and the growth rate of their dividends. Given mergers, certain
marketing tests currently underway and proposed legislation and enforcement
changes, it is likely that both traditional telephone companies and cable
companies will soon provide a greatly expanded range of utility services,
including two-way video and informational services to residential, corporate and
governmental customers.
In February 1996, the Telecommunications Act of 1996 (the "Act") became
law. The Act removed regulatory restrictions on entry that prevented local and
long-distance telephone companies and cable television companies from competing
against one another. The Act also removed most cable rate controls and allows
broadcasters to own more radio and television stations. Litigation concerning
the constitutionality of certain major provisions of the Act has slowed the
implementation of such provisions.
Gas. Gas transmission companies and gas distribution companies are also
undergoing significant changes. In the United States, interstate transmission
companies are regulated by the Federal Energy Regulatory Commission, which is
reducing its regulation of the industry. Many companies have diversified into
oil and gas exploration and development, making returns more sensitive to energy
prices. In the recent decade, gas utility companies have been adversely affected
by disruptions in the oil industry and have also been affected by increased
concentration and competition. Prolonged changes in climatic conditions can also
have a significant impact on both the revenues and expenses of a gas utility.
Water. 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.
There can be no assurance that the positive developments noted above,
including those relating to privatization and changing regulation, will occur or
that risk factors other than those noted above will not develop in the future.
Leveraged Capital Structures. It is expected that Utilities Industry
companies in which the Fund will invest may employ considerable leverage, a
significant portion of which may be at floating interest rates. As a result, a
Utilities Industry company may be subject to increased exposure to adverse
economic factors such as a significant rise in interest rates, a severe downturn
in the economy or deterioration in the condition of such company or its
industry.
Leverage Risk
The Fund uses financial leverage for investment purposes by issuing
preferred shares. Preferred shares have seniority over common shares.
The Fund's use of leverage, which can be described as exposure to
changes in price at a ratio greater than the amount of equity invested, either
through the issuance of preferred shares or other forms of market exposure,
magnifies both the favorable and unfavorable effects of price movements in the
investments made by the Fund. The Fund's leveraged capital structure creates
special risks not associated with unleveraged funds having similar investment
objectives and policies. The Fund cannot assure that the issuance of preferred
shares will result in a higher yield or return to the holders of the common
shares.
o Preferred Shares Risk. The issuance of preferred shares causes the
net asset value and market value of the common shares to become
more volatile. If the dividend rate on the preferred shares
approaches the net rate of return on the Fund's investment
portfolio, the benefit of leverage to the holders of the common
shares would be reduced. If the dividend rate on the preferred
shares exceeds the net rate of return on the Fund's portfolio, the
leverage will result in a lower rate of return to the holders of
common shares than if the Fund had not issued preferred shares.
28
Any decline in the net asset value of the Fund's investments would
be borne entirely by the holders of common shares. Therefore, if
the market value of the Fund's portfolio declines, the leverage
will result in a greater decrease in net asset value to the
holders of common shares than if the Fund were not leveraged. This
greater net asset value decrease will also tend to cause a greater
decline in the market price for the common shares. The Fund might
be in danger of failing to maintain the required asset coverage of
the preferred shares or of losing its ratings on the preferred
shares or, in an extreme case, the Fund's current investment
income might not be sufficient to meet the dividend requirements
on the preferred shares. In order to counteract such an event, the
Fund might need to liquidate investments in order to fund a
redemption of some or all of the preferred shares.
In addition, the Fund would pay (and the holders of common shares
will bear) all costs and expenses relating to the issuance and
ongoing maintenance of the preferred shares, including any
advisory fees payable in connection with the incremental assets
attributable to such shares.
Holders of preferred shares may have different interests than
holders of common shares and may at times have disproportionate
influence over the Fund's affairs. Holders of preferred shares,
voting separately as a single class, would have the right to elect
two members of the Board at all times and in the event dividends
become two full years in arrears would have the right to elect a
majority of the Trustees until such arrearage is completely
eliminated. In addition, preferred shareholders have class voting
rights on certain matters, including changes in fundamental
investment restrictions and conversion of the fund to open-end
status, and accordingly can veto any such changes.
Restrictions imposed on the declarations 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 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.
o Portfolio Guidelines of Rating Agencies for Preferred Shares
and/or Credit Facility. In order to obtain and maintain attractive
credit quality ratings for preferred shares, the Fund must comply
with investment quality, diversification and other guidelines
established by the relevant rating agencies. These guidelines
could affect portfolio decisions and may be more stringent than
those imposed by the 1940 Act.
Special Risks to Holders of Fixed Rate Preferred Shares
Illiquidity Prior to Exchange Listing. Prior to the offering, there
will be no public market for any series of Fixed Rate Preferred Shares. In the
event any series of Fixed Rate Preferred Shares are issued, prior application
will have been made to list such shares on a national securities exchange, which
will likely be the Amex. However, during an initial period, which is not
expected to exceed 30 days after the date of its initial issuance, such shares
may not be listed on any securities exchange. During such period, the
underwriters may make a market in such shares, though they will have no
obligation to do so. Consequently, an investment in such shares may be illiquid
during such period.
Market Price Fluctuation. Shares of Fixed Rate Preferred may trade at a
premium to or discount from liquidation value for various reasons, including
changes in interest rates.
Special Risks for Holders of Variable Rate Preferred Shares
Auction Risk. In the event any Variable Rate Preferred Shares are
issued, you may not be able to sell your Variable Rate Preferred Shares at an
auction if the auction fails, i.e., if more Variable Rate Preferred Shares are
offered for sale than there are buyers for those shares. Also, if you place an
order (a hold order) at an auction to retain Variable Rate Preferred Shares only
at a specified rate that exceeds the rate set at the auction, you will not
retain your Variable Rate Preferred Shares. Additionally, if you place a hold
order without specifying a rate below
29
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 Variable Rate Preferred Shares,
which could also affect the liquidity of your investment.
Secondary Market Risk. In the event any Variable Rate Preferred Shares
are issued, if you try to sell your Variable Rate Preferred Shares between
auctions, you may not be able to sell them for their liquidation preference per
share or such amount 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 Variable Rate Preferred Shares are not required to maintain this market,
and the Fund is not required to redeem Variable Rate Preferred Shares if either
an auction or an attempted secondary market sale fails because of a lack of
buyers. The Variable Rate Preferred Shares will not be registered on a stock
exchange. If you sell your Variable Rate Preferred Shares 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.
Tax Risk
We cannot assure you what percentage of the distributions paid on the
common shares, if any, will consist of tax-advantaged qualified dividend income
or long-term capital gains or what the tax rates on various types of income will
be in future years. The favorable rates on qualifying dividends and capital
gains are currently scheduled to expire for income received or gains realized
after December 31, 2010. See "Taxation."
Foreign Securities Risk
The Fund may invest without limitation in securities of foreign issuers
and will generally be invested in securities of issuers located in at least
three countries including the U.S. 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 the same accounting, auditing and financial standards and
requirements as 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.
Investments in foreign securities, especially in emerging market
countries, will expose the Fund to the direct or indirect consequences of
political, social or economic changes in the countries that issue the securities
or in which the issuers are located. Certain countries in which the Fund may
invest, especially emerging market countries, have historically experienced, and
may continue to experience, high rates of inflation, high interest rates,
exchange rate fluctuations, large amounts of external debt, balance of payments
and trade difficulties and extreme poverty and unemployment. Many of these
countries are also characterized by political uncertainty and instability. The
cost of servicing external debt will generally be adversely affected by rising
international interest rates because many external debt obligations bear
interest at rates which are adjusted based upon international interest rates.
30
Investing in securities of companies in emerging markets may entail
special risks relating to potential political and economic instability and the
risks of expropriation, nationalization, confiscation or the imposition of
restrictions on foreign investment, the lack of hedging instruments and
restrictions on repatriation of capital invested. Emerging securities markets
are substantially smaller, less developed, less liquid and more volatile than
the major securities markets. The limited size of emerging securities markets
and limited trading value compared to the volume of trading in U.S. securities
could cause prices to be erratic for reasons apart from factors that affect the
quality of the securities. For example, limited market size may cause prices to
be unduly influenced by traders who control large positions. Adverse publicity
and investors' perceptions, whether or not based on fundamental analysis, may
decrease the value and liquidity of portfolio securities, especially in these
markets. Many emerging market countries have experienced substantial, and in
some periods extremely high, rates of inflation for many years. Inflation and
rapid fluctuations in inflation rates and corresponding currency devaluations
have had and may continue to have negative effects on the economies and
securities markets of certain emerging market countries. Typically, the Fund
will not hold any foreign securities of emerging market issuers and, if it does,
such securities will not comprise more than 10% of the Fund's managed assets.
The Fund also may purchase sponsored ADRs or U.S. dollar-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.
Foreign Currency Risk
The Fund expects to invest in companies whose securities are
denominated in currencies other than U.S. dollars or have operations outside of
the U.S. In such instances, the Fund will be exposed to currency risk, including
the risk of fluctuations in the exchange rate between U.S. dollars (in which the
Fund's shares are denominated) and such foreign currencies, the risk of currency
devaluations and the risks of non-exchangeability and blockage.
As non-U.S. securities may be purchased with and payable in currencies
of countries other than the U.S. dollar, the value of these assets measured in
U.S. dollars may be affected favorably or unfavorably by changes in currency
rates and exchange control regulations. Fluctuations in currency rates may
adversely affect the ability of the Investment Adviser to acquire such
securities at advantageous prices and may also adversely affect the performance
of such assets.
Certain non-U.S. currencies, primarily in developing countries, have
been devalued in the past and might face devaluation in the future. Currency
devaluations generally have a significant and adverse impact on the devaluing
country's economy in the short and intermediate term and on the financial
condition and results of companies' operations in that country. Currency
devaluations may also be accompanied by significant declines in the values and
liquidity of equity and debt securities of affected governmental and private
sector entities generally. To the extent that affected companies have
obligations denominated in currencies other than the devalued currency, those
companies may also have difficulty in meeting those obligations under such
circumstances, which in turn could have an adverse effect upon the value of the
Fund's investments in such companies. There can be no assurance that current or
future developments with respect to foreign currency devaluations will not
impair the Fund's investment flexibility, its ability to achieve its investment
objective or the value of certain of its foreign currency denominated
investments.
Equity Risk
A principal risk of investing in the Fund is equity risk, which is the
risk that the securities held by the Fund will fall in market value due to
adverse market and economic conditions, perceptions regarding the industries in
which the issuers of securities held by the Fund participate, and the particular
circumstances and performance of particular companies whose securities the Fund
holds. An investment in the Fund represents an indirect investment in the
securities owned by the Fund, which are for the most part traded on securities
exchanges or in the over-the-counter markets. The market value of these
securities, like other market investments, may move up or down,
31
sometimes rapidly and unpredictably. The net asset value of the Fund may at any
point in time be worth less than the amount at the time the shareholder invested
in the Fund, even after taking into account any reinvestment of distributions.
Dependence on Key Personnel
Mario J. Gabelli serves as the Fund's portfolio manager. 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.
Market Discount Risk
The Fund is a non-diversified, closed-end management investment
company. Shares of closed-end funds are bought and sold in the securities
markets and may trade at either a premium to or discount from net asset value.
Listed shares of closed-end investment companies often trade at discounts from
net asset value. This characteristic of shares of a closed-end fund is a risk
separate and distinct from the risk that its net asset value may decrease. The
Fund cannot predict whether its listed shares will trade at, below or above net
asset value. As of December 31, 2007, the shares traded at a discount of 9.54%.
Shareholders desiring liquidity may, subject to applicable securities laws,
trade their Fund shares on the Amex or other markets on which such shares may
trade at the then-current market value which may differ from the then current
net asset value. Shareholders will incur brokerage or other transaction costs to
sell shares.
Common Stock Risk
Common stock of an issuer in the Fund's portfolio may decline in price
for a variety of reasons, including if the issuer fails to make anticipated
dividend payments because, among other reasons, the issuer of the security
experiences a decline in its financial condition. Common stock in which the Fund
will invest is structurally subordinated to preferred stock, bonds and other
debt instruments in a company's capital structure, in terms of priority to
corporate income, and therefore will be subject to greater dividend risk than
preferred stock or debt instruments of such issuers. In addition, while common
stock has historically generated higher average returns than fixed income
securities, common stock has also experienced significantly more volatility in
those returns. An adverse event, such as an unfavorable earnings report, may
depress the value of common stock of an issuer held by the Fund. Also, the price
of common stock of an issuer is sensitive to general movements in the overall
stock market. A drop in stock market indices may depress the price of many or
all of the common stocks held by the Fund.
Long-term Objective; Not a Complete Investment Program
The Fund is intended for investors seeking a consistent level of
after-tax total return consisting of income (with a current emphasis on
qualifying dividends) and long-term capital gains. 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.
Common Shares Distribution Policy Risk
Pursuant to its adopted distribution policy, the Fund intends to make
monthly distributions on its common shares. To the extent its total monthly
distributions for a year exceed its net investment company taxable income and
net realized capital gain for that year, the excess would generally constitute a
return of capital. Return of capital distributions are generally tax-free up to
the amount of a shareholder's tax basis in the shares after which they are
treated as capital gains. See "Taxation." In addition, such excess distributions
may have the effect of decreasing the Fund's total assets and may increase the
Fund's expense ratio as the Fund's fixed expenses may become a larger percentage
of the Fund's average net assets. 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 may not dictate such action.
32
Management Risk
The Fund is subject to management risk because it is an actively
managed portfolio. The Investment Adviser will apply investment techniques and
risk analyses in making investment decisions for the Fund, but there can be no
guarantee that these will produce the desired results.
Distribution Risk for Equity Income Portfolio Securities
In selecting equity income securities in which the Fund will invest,
the Investment Adviser will consider the issuer's history of making regular
periodic distributions (i.e., dividends) to its equity holders. An issuer's
history of paying dividends, however, does not guarantee that the issuer will
continue to pay dividends in the future. The dividend income stream associated
with equity income securities generally is not guaranteed and will be
subordinate to payment obligations of the issuer on its debt and other
liabilities. Accordingly, in the event the issuer does not realize sufficient
income in a particular period both to service its liabilities and to pay
dividends on its equity securities, it may forgo paying dividends on its equity
securities. In addition, because in most instances issuers are not obligated to
make periodic distributions to the holders of their equity securities, such
distributions or dividends generally may be discontinued at the issuer's
discretion.
Special Risks Related to Investments in Preferred Securities
There are special risks associated with the Fund's investing in
preferred securities, including:
o Deferral. Preferred securities may include provisions that permit
the issuer, at its discretion, to defer dividends or distributions
for a stated period without any adverse consequences to the
issuer. If the Fund owns a preferred security that is deferring
its dividends or distributions, the Fund may be required to report
income for tax purposes although it has not yet received such
income.
o Non-Cumulative Dividends. Some preferred securities are
non-cumulative, meaning that the dividends do not accumulate and
need not ever be paid. A portion of the portfolio may include
investments in non-cumulative preferred securities, whereby the
issuer does not have an obligation to make up any arrearages to
its shareholders. Should an issuer of a non-cumulative preferred
security held by the Fund determine not to pay dividends or
distributions on such security, the Fund's return from that
security may be adversely affected. There is no assurance that
dividends or distributions on non-cumulative preferred securities
in which the Fund invests will be declared or otherwise made
payable.
o Subordination. Preferred securities are subordinated to bonds and
other debt instruments in an issuer's capital structure in terms
of priority to corporate income and liquidation payments, and
therefore will be subject to greater credit risk than more senior
debt security instruments.
o Liquidity. Preferred securities may be substantially less liquid
than many other securities, such as common stocks or U.S.
government securities.
o Limited Voting Rights. Generally, preferred security holders (such
as the Fund) have no voting rights with respect to the issuing
company unless preferred dividends have been in arrears for a
specified number of periods, at which time the preferred security
holders may be entitled to elect a number of trustees to the
issuer's board. Generally, once all the arrearages have been paid,
the preferred security holders no longer have voting rights.
o Special Redemption Rights. In certain varying circumstances, an
issuer of preferred securities may redeem the securities prior to
a specified date. For instance, for certain types of preferred
securities, a redemption may be triggered by a change in federal
income tax or securities laws. A redemption by the issuer may
negatively impact the return of the security held by the Fund.
33
Income Risk
The income investors in the Fund receive is based primarily on
dividends and interest the Fund earns from its investments, which can vary
widely over the short and long-term. If prevailing market interest rates drop,
distribution rates of the Fund's preferred shares and any bond holdings could
drop as well. The Fund's income also would likely be affected adversely when
prevailing short-term interest rates increase while the Fund is utilizing
leverage.
Interest Rate Risk
Interest rate risk is the risk that fixed-income securities, and to a
lesser extent common stocks issued by some companies in the Utilities Industry,
will decline in value because of changes in market interest rates. When market
interest rates rise, the market value of such securities generally will fall.
The value of the Fund's investment in such securities will tend to decline if
market interest rates rise. Further, while longer term fixed rate securities may
pay higher interest rates than shorter term securities, longer term fixed rate
securities also tend to be more sensitive to interest rate changes and,
accordingly, tend to experience larger changes in value as a result of interest
rate changes.
During periods of declining interest rates, the issuer of a security
may exercise an option to prepay principal earlier than scheduled, forcing the
Fund to reinvest in lower yielding securities. This is known as call or
prepayment risk. Fixed income securities frequently have call features that
allow the issuer to redeem the securities prior to their stated maturities. An
issuer may seek to redeem an obligation if the issuer can refinance the debt at
a lower cost due to declining interest rates or an improvement in the credit
standing of the issuer. During periods of rising interest rates, the average
life of certain types of securities may be extended because of slower than
expected principal payments. This may lock in a below market interest rate,
increase the security's duration and reduce the value of the security. This is
known as extension risk.
Market interest rates for investment grade fixed-income securities of
the type in which the Fund will invest have recently declined significantly
below the historical average rates for such securities. This decline has
increased the risk that these rates will rise in the future (which would cause
the value of the Fund's assets invested in fixed income securities to decline)
and the degree to which net asset values may decline in such event; however,
historical interest rate levels are not necessarily predictive of future
interest rate levels.
Inflation Risk
Inflation risk is the risk that the value of assets or income from
investments will be worth less in the future as inflation decreases the value of
money. As inflation increases, the real value of the Fund's shares and
distributions thereon can decline. In addition, during any periods of rising
inflation, dividend or interest rates of any variable rate preferred shares or
debt securities issued by the Fund would likely increase, which would tend to
further reduce returns to common shareholders.
Dilution Risk for Convertible Securities
In the absence of adequate anti-dilution provisions in a convertible
security, dilution in the value of the Fund's holding may occur in the event the
underlying stock is subdivided, additional equity securities are issued for
below market value, a stock dividend is declared or the issuer enters into
another type of corporate transaction that has a similar effect.
Value Investing Risk
The Fund invests in dividend-paying common and preferred stocks in the
Utilities Industry that the Investment Adviser believes are undervalued or
inexpensive relative to other investments. These types of securities may present
risks in addition to the general risks associated with investing in common and
preferred stocks. These securities generally are selected on the basis of an
issuer's fundamentals relative to current market price. Such securities are
subject to the risk of mis-estimation of certain fundamental factors. In
addition, during certain time
34
periods market dynamics may strongly favor "growth" stocks of issuers that do
not display strong fundamentals relative to market price based upon positive
price momentum and other factors. Disciplined adherence to a "value" investment
mandate during such periods can result in significant underperformance relative
to overall market indices and other managed investment vehicles that pursue
growth style investments and/or flexible equity style mandates.
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. 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. See "Taxation."
Illiquid Securities
The Fund has no limit on the amount of its net assets it may invest in
unregistered or otherwise illiquid investments. Unregistered securities are
securities that cannot be sold publicly in the United States without
registration under the Securities Act. Unregistered securities generally can be
resold only in privately negotiated transactions with a limited number of
purchasers or in a public offering registered under the Securities Act.
Considerable delay could be encountered in either event and, unless otherwise
contractually provided for, the Fund's proceeds upon sale may be reduced by the
costs of registration or underwriting discounts. The difficulties and delays
associated with such transactions could result in the Fund's inability to
realize a favorable price upon disposition of unregistered securities, and at
times might make disposition of such securities impossible.
Risk Arbitrage
The Fund may invest in securities pursuant to "risk arbitrage"
strategies or in other investment funds managed pursuant to such strategies.
Risk arbitrage strategies attempt to exploit merger activity to capture the
spread between current market values of securities and their values after
successful completion of a merger, restructuring or similar corporate
transaction. A merger or other restructuring or tender or exchange offer
anticipated by the Fund and in which it holds an arbitrage position may not be
completed on the terms contemplated or within the time frame anticipated,
resulting in losses to the Fund. Such losses would be magnified to the extent
that the Fund uses leverage to increase its stake in an arbitrage position.
Investment Companies
The Fund may invest in the securities of other investment companies to
the extent permitted by law. To the extent the Fund invests in the common equity
of investment companies, the Fund will bear its ratable share of any such
investment company's expenses, including management fees. The Fund will also
remain obligated to pay management fees to the Investment Adviser with respect
to the assets invested in the securities of other investment companies. In these
circumstances holders of the Fund's common shares will be subject to duplicative
investment expenses.
Lower Rated Securities
The Fund may invest up to 10% of its total assets in nonconvertible
fixed-income securities rated in the lower rating categories of recognized
statistical rating agencies or unrated securities of comparable quality, and an
unlimited percentage of it assets in convertible bonds of such quality. 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;
35
o greater credit risk and risk of default;
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.
In addition, the prices of these lower grade securities are more
sensitive to negative developments, such as a decline in the issuer's revenues
or a general economic downturn, than are the prices of higher grade securities.
Lower grade securities tend to be less liquid than investment grade securities.
The market value of lower grade securities may be more volatile than the market
value of investment grade 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 investment grade 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 grade securities, the Fund may
invest in securities of issuers in default. The Fund will invest in securities
of issuers in default only when the Investment Adviser believes that such
issuers will honor their obligations, 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 otherwise appreciate.
For a further description of lower grade securities and the risks
associated therewith, see "Investment Objectives and Policies -- Certain
Investment Practices -- Lower Rated Securities." For a description of the
ratings categories of certain recognized statistical ratings agencies, see
Appendix A to this prospectus.
Special Risks of Derivative Transactions
Participation in the options or futures markets and in currency
exchange transactions involves investment risks and transaction costs to which
the Fund would not be subject absent the use of these strategies. If the
Investment Adviser's prediction of movements in the direction of the securities,
foreign currency and interest rate markets are inaccurate, the consequences to
the Fund may leave it in a worse position than if such strategies were not used.
Risks inherent in the use of options, foreign currency, futures contracts and
options on futures contracts, securities indices and foreign currencies include:
o dependence on the Investment Adviser's ability to predict
correctly movements in the direction of interest rates, securities
prices and currency markets;
o imperfect correlation between the price of options and futures
contracts and options thereon and movements in the prices of the
securities or currencies being hedged;
o the fact that skills needed to use these strategies are different
from those needed to select portfolio securities;
o the possible absence of a liquid secondary market for any
particular instrument at any time;
o the possible need to defer closing out certain hedged positions to
avoid adverse tax consequences;
o the possible inability of the Fund to purchase or sell a security
at a time that otherwise would be favorable for it to do so, or
the possible need for the Fund to sell a security at a
disadvantageous time
36
due to a need for the Fund to maintain "cover" or to segregate
securities in connection with the hedging techniques; and
o the creditworthiness of counterparties.
Forward Currency Exchange Contracts. There is no independent limit on
the Fund's ability to invest in foreign currency exchange contracts. The use of
forward currency contracts may involve certain risks, including the failure of
the counterparty 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, see
"Investment Objectives and Policies -- Additional Investment Policies" in the
SAI.
Counterparty Risk. The Fund will be subject to credit risk with respect
to the counterparties to the derivative contracts purchased by the Fund. If a
counterparty becomes bankrupt or otherwise fails to perform its obligations
under a derivative contract due to financial difficulties, the Fund may
experience significant delays in obtaining any recovery under the derivative
contract in bankruptcy or other reorganization proceeding. The Fund may obtain
only a limited recovery or may obtain no recovery in such circumstances. For a
further description, see "Investment Objectives and Policies -- Additional
Investment Policies" in the SAI.
Futures Transactions. The Fund may invest in futures contracts as long
as the aggregate initial margins and premiums do not exceed 5% of the fair
market value of the Fund's assets. 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 return 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, see "Investment Objectives and Policies --
Additional Investment Policies" in the SAI.
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 in
the SAI), 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. As with
other extensions of credit, there are risks of delay in recovery or even loss of
rights in the securities loaned if the borrower of the securities violates the
terms of the loan or fails financially.
For a further description of such loans of portfolio securities, see
"Investment Objective and Policies -- Additional Investment Policies -- Loans of
Portfolio Securities" in the SAI.
37
Current Developments
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 terrorist 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. The nature, scope and duration of the war
and occupation cannot be predicted with any certainty. Similar events in the
future or other disruptions of financial markets could affect interest rates,
securities exchanges, auctions, secondary trading, ratings, credit risk,
inflation, energy prices and other factors relating to the common shares.
Interest Rate Transactions
The Fund may enter into interest rate swap or cap transactions in
relation to all or a portion of its Variable Rate Preferred Shares in order to
manage the impact on its portfolio of changes in the dividend rate of such
shares. Through these transactions the Fund may, for example, obtain the
equivalent of a fixed rate for such Variable Rate Preferred Shares 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 certain risks to the Fund including, among others, counterparty risk
and early termination risk. See "How the Fund Manages Risk--Interest Rate
Transactions."
Anti-Takeover Provisions of the Fund's Governing Documents
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."
Status as a Regulated Investment Company
The Fund has qualified, and intends to remain qualified, for federal
income tax purposes as a regulated investment company under Subchapter M of the
Code. 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.
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 rating agency guidelines
that are more limiting than its current investment restrictions in order to
obtain and maintain a desired rating 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 its Variable Rate Preferred Shares in order to
manage the impact on its portfolio of changes in the dividend rate of such
shares. Through these transactions, the Fund may, for example, obtain the
equivalent of a fixed rate for such Variable Rate Preferred Shares 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
38
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 its Variable Rate Preferred Shares. 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 or distributions when due in accordance with the
Statement of Preferences of the relevant series of the Variable Rate Preferred
Shares 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 or distribution payments on the Variable Rate Preferred Shares. 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 or distribution payments
on the Variable Rate Preferred Shares. 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 Variable Rate Preferred
Shares. A sudden and dramatic decline in interest rates may result in a
significant decline in the asset coverage. Under the Statement of Preferences
for each series of the preferred shares, if the Fund fails to maintain the
required asset coverage on the outstanding preferred shares or fails to comply
with other covenants, the Fund may be required to redeem some or all of these
shares. The Fund generally may redeem any series of Variable Rate Preferred
Shares, in whole or in part, at its option at any time (usually on a dividend or
distribution payment date), other than during a non-call period. Such redemption
would likely result in the Fund seeking to terminate early all or a portion of
any swap or cap transactions. 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 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 (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
agreement with the Fund, the Investment Adviser, under the supervision of the
Fund's Board, 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 total
assets. This fee will be reduced each year following the fifth anniversary of
the investment advisory agreement by 10 basis points until the eighth
anniversary, after which time the Investment Adviser will be compensated at an
annual rate of .50% of the Fund's average weekly total assets. The Fund's total
assets for purposes of calculating the level of the management fee will
typically include assets attributable to any outstanding senior securities, such
as preferred shares. However, the Investment Adviser has voluntarily agreed that
in the event the Fund issues senior securities, it will waive investment
management fees on assets attributable to such senior securities for any
calendar year except to the extent the Fund's rate of total return allocable to
common shareholders, including distributions and the management fee subject to
potential waiver, is equal to or exceeds the cost of the leverage for that year.
This waiver will apply as long as any such senior securities are outstanding.
39
The Investment Adviser
Gabelli Funds, LLC, located at One Corporate Center, Rye, New York
10580-1422, serves as the investment adviser to the Fund pursuant to an
investment advisory agreement. The Investment Adviser was organized in 1999 and
is the successor to Gabelli Funds, Inc., which was organized in 1980. As of
September 30, 2007, the Investment Adviser acted as registered investment
adviser to 24 management investment companies with aggregate net assets of $16.9
billion. The Investment Adviser, together with other affiliated investment
advisers, had assets under management totaling approximately $31.6 billion as of
September 30, 2007. GAMCO Asset Management Inc., an affiliate of the Investment
Adviser, acts as investment adviser for individuals, pension trusts, profit
sharing trusts and endowments, and as a sub-adviser to management investment
companies having aggregate assets of $13.8 billion under management as of
September, 2007. Gabelli Securities, Inc., an affiliate of the Investment
Adviser, acts as investment adviser for investment partnerships and entities
having aggregate assets of approximately $491 million under management as of
September 30, 2007. Gabelli Fixed Income LLC, an affiliate of the Investment
Adviser, acts as investment adviser for separate accounts having aggregate
assets of approximately $27 million under management as of September 30, 2007.
Gabelli Advisers, Inc., an affiliate of the Investment Adviser, acts as
investment manager to the GAMCO Westwood Funds having aggregate assets of
approximately $443 million under management as of September 30, 2007.
The Investment Adviser is a wholly-owned subsidiary of GAMCO Investors,
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 GGCP, Inc., which owns a majority of the capital stock of GAMCO
Investors, Inc.
Payment of Expenses
The Investment Adviser is obligated to pay expenses associated with
providing the services contemplated by the Investment 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 (but excluding costs associated with
the calculation of the net asset value and allocated costs of the chief
compliance officer function and officers of the Fund that are employed by the
Fund and are not employed by the Investment Adviser although such officers may
receive incentive-based variable compensation from affiliates of the Investment
Adviser), as well as the fees of all Trustees of the Fund who are officers or
employees of the Investment Adviser or its affiliates.
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 thing, expenses for legal and the
Independent Registered Public Accounting Firm's services, stock exchange listing
fees, costs of printing proxies, share certificates and shareholder reports,
charges to the Fund's custodian, charges of the transfer agent and distribution
disbursing agent, SEC fees and expenses of Trustees who are not officers or
employees of the Investment Adviser or its affiliates, accounting and printing
costs, the Fund's pro rata portion of membership fees in trade organizations,
the Fund's pro rata portion of the Chief Compliance Officer's compensation,
fidelity bond coverage for the Fund's officers and employees, Trustees and
officers liability policy, 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.
The Investment Adviser is responsible for administration of the Fund
and currently utilizes and pays the fees of a third party sub-administrator. See
"Management of the Fund - General."
Selection of Securities Brokers
The Advisory Agreement contains provisions relating to the selection of
securities brokers to effect the portfolio transactions of the Fund. Under those
provisions, the Investment Adviser may (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
40
desirable for its investment management of the Fund and/or its other investment
advisory accounts or those of any investment adviser affiliated with it. The SAI
contains further information about the Advisory Agreement, including a more
complete description of the investment 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 inception. Mr. Gabelli has served as
Chairman and Chief Executive Officer of GAMCO Investors, Inc. and its
predecessors since 1976. Mr. Gabelli is the Chief Investment Officer -- Value
Portfolios for the Investment Adviser and GAMCO Asset Management Inc. Mr.
Gabelli serves as portfolio manager for several funds in the Gabelli fund family
and is a director of several 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 of the Fund. Mr. Gabelli is also
Chairman and Chief Executive Officer of GGCP, Inc., a private company owning the
majority of the shares of GAMCO Investors, Inc.
The SAI provides additional information about the Portfolio Manager's
compensation, other accounts managed by the Portfolio Manager and the Portfolio
Manager's ownership of securities in the Fund.
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
that 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 0.0275% of the first $10 billion of the aggregate average net
assets of the Fund and all other funds advised by the Investment Adviser and
Gabelli Advisers, Inc. and administered by the Sub-Administrator, 0.0125% of the
aggregate average net assets exceeding $10 billion and 0.01% 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.
Regulatory Matters
The Fund has received the following information from the Investment
Adviser:
Over the past several years, the staff of the SEC (the "Staff"), the
staff of the New York Attorney General's office (the "NYAG"), and officials of
other states have been conducting industry-wide inquiries into, and bringing
enforcement and other proceedings regarding, trading abuses involving open-end
investment companies. The Investment Adviser and its affiliates have received
information requests and subpoenas for documents and testimony from the Staff
and the NYAG in connection with these inquiries and have responded to these
requests. The Investment Adviser has implemented additional compliance policies
and procedures in response to recent industry initiatives and its internal
reviews of its mutual fund practices in a variety of areas. The Investment
Adviser has not found any information that it believes would be material to the
ability of the Investment Adviser to fulfill its obligations under the Advisory
Agreement. More specifically, the Investment Adviser has found no evidence of
arrangements for trading in the Gabelli mutual funds after the 4:00 p.m. pricing
time and no evidence of improper short-term trading in these funds by its
investment professionals or senior executives. The Investment Adviser did find
that one investor, who had been engaged in short-term trading in one of the
Gabelli mutual funds (the prospectus of which did not at that time impose limits
on short-term trading) and who had subsequently made an investment in a hedge
fund managed by an affiliate of the Investment Adviser, was banned from the
mutual fund only after certain other investors were banned. The Investment
Adviser believes that this relationship was not material to the Investment
Adviser. The Investment Adviser also found that certain discussions took place
in 2002 and 2003 between the Investment Adviser's staff and personnel of an
investment advisor regarding possible frequent trading in certain Gabelli
domestic equity funds. In June 2006, the Investment Adviser began discussions
with the Staff regarding a possible resolution of their inquiry. In February
2007, the Investment Adviser made an offer of settlement to the Staff for
communication to the SEC for its consideration to resolve this matter. This
offer of settlement is subject to final agreement regarding the specific
language of the SEC's administrative order and other
41
settlement documents. Since these discussions are ongoing, the Investment
Adviser cannot determine whether they will ultimately result in a settlement of
this matter and, if so, what the terms of the settlement might be. There can be
no assurance that any resolution of this matter will not have a material adverse
impact on the Investment Adviser or on its ability to fulfill its obligations
under the Advisory Agreement.
The Investment Adviser was informed by the Staff that they may
recommend to the SEC that the Investment Adviser be held accountable for the
actions of two of the closed-end funds managed by the Investment Adviser
relating to Section 19(a) and Rule 19a-1 of the 1940 Act. These provisions
require registered investment companies to provide written statements to
shareholders when a distribution is made from a source other than net investment
income. While the two funds sent annual statements containing the required
information and Form 1099-DIV statements as required by the IRS, the funds did
not send written statements to shareholders with each distribution in 2002 and
2003. The then existing closed-end funds managed by the Investment Adviser
changed their notification procedures in 2004 and the Investment Adviser
believes that all of the funds have been in compliance with Section 19(a) and
Rule 19a-1 of the 1940 Act since that time. The Staff's notice to the Investment
Adviser did not relate to the Fund. The Staff indicated that they may recommend
to the SEC that administrative remedies be sought, including a monetary penalty.
The Investment Adviser cannot predict whether an administrative proceeding will
be instituted and, if so, what the ultimate resolution might be. The Investment
Adviser currently expects that any resolution of this matter will not have a
material effect on the Investment Adviser's ability to fulfill its obligations
under the Advisory Agreement. If the SEC were to revoke the exemptive order that
the Fund relies upon to make distributions of capital gains more frequently than
annually, the Board may consider whether to modify or possibly eliminate the
Fund's current distribution policy.
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
therefore. For a more detailed discussion of the Fund's brokerage allocation
practices, see "Portfolio Transactions" in the SAI.
DIVIDENDS AND DISTRIBUTIONS
The Board has adopted a dividend policy, which may be changed at any
time, to pay monthly distributions on its common shares equal to an annual rate
of 6% of the offering price per share. The Board has also determined to pay
distributions on an annual basis equal to any realized income in excess of the
monthly distributions as may be necessary to distribute substantially all of the
Fund's taxable income for that year. The Fund's distribution 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 expects to distribute substantially all of its net investment
company taxable income and net capital gain, although the Fund may retain for
reinvestment, and pay the resulting federal income taxes on its net capital
gain, if any, each year. To the extent the Fund's total monthly distributions
for a year distributions to common shareholders and the amount of distributions
on any preferred shares issued by the Fund exceed its net investment company
taxable income (interest, dividends and net short-term capital gains in excess
of expenses) and net realized long-term capital gain for that year, the excess
would generally constitute a tax-free return of capital up to the amount of a
shareholder's tax basis in the common shares. Any distributions to the holders
of common or preferred shares which (based upon the Fund's full year
performance) constitute a tax-free return of capital will reduce a shareholder's
tax basis in the common shares, thereby increasing such shareholder's potential
gain or reducing his or her potential loss on the sale of the common shares. Any
amounts distributed to a shareholder in excess of the basis in the common shares
will generally be taxable to the shareholder as capital gain. See "Taxation."
Quarterly distribution notices provided by the Fund to its shareholders will
describe the portion of the monthly distributions which, in the Fund's current
good faith judgment, constitutes capital gain, investment company taxable income
or a return of capital. The final determination of the source of such
distributions for federal income tax purposes will be made shortly after year
end based on the Fund's actual net investment company taxable income and net
capital gain for the year and will be communicated to shareholders promptly.
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
42
Fund's expense ratio as the Fund's fixed expenses will become a larger
percentage of the Fund's average net assets. In addition, in order to make such
distributions, the Fund may have to sell a portion of its investment portfolio
at a time when independent investment judgment may 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 it 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 payment of a fixed dollar amount. The
exemption also permits the Fund to make distributions with respect to its
preferred shares in accordance with such share's terms. See "Automatic Dividend
Reinvestment and Voluntary Cash Purchase Plan."
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 the
transfer agent, 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 the transfer agent 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 distribution,
participants in the Plan will receive newly issued common shares. The number of
shares to be issued will be computed at a per share rate equal to 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
distribution payment date or, if that date is not an Amex trading day, the next
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 purchased by the Plan agent in the open market. If the Fund
should declare a distribution payable only in cash, the Plan agent will buy the
common shares for such Plan in the open market, on the Amex or elsewhere, for
the participants' accounts, except that the Plan agent will terminate purchases
in the open market and instead the Fund will distribute newly issued shares at a
per share rate equal to 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 plus estimated brokerage commissions exceeds net asset value.
Participants in the Plan have the option of making additional cash
payments to the Plan agent, semi-monthly, for investment in the shares as
applicable. Such payments may be made in any amount from $250 to $10,000. The
Plan agent will use all funds received from participants to purchase shares of
the Fund in the open market on or about the 1st or 15th of each month. The Plan
agent will charge each shareholder who participates $1.00, 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 the Plan agent in a
manner that ensures that the Plan agent will receive these payments
approximately ten days before the investment date. A participant may without
charge withdraw a voluntary cash payment by written notice, if the notice is
received by the Plan agent at least 48 hours before such payment is to be
invested.
The Plan agent 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 the Plan agent in
noncertificated form in the name of the participant. A Plan participant may send
its share certificates to the Plan agent so that the shares represented by such
certificates will be held by the Plan agent in the participant's shareholder
account under the Plan.
43
In the case of shareholders such as banks, brokers or nominees, which
hold shares for others who are the beneficial owners, the Plan agent 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.
The automatic reinvestment of dividends and other distributions will
not relieve participants of any U.S. federal, state or local income tax that may
be payable (or required to be withheld) on such dividends or other
distributions.
The Fund reserves the right to amend or terminate its Plan as applied
to any voluntary cash payments made and any distribution paid with at least 90
days written notice to the participants in such Plan. The Plan also may be
amended or terminated by the Plan agent, with the Fund's prior written consent,
on at least 90 days written notice to the participants in such Plan. All
correspondence concerning the Plan should be directed to the transfer agent.
DESCRIPTION OF CAPITAL SHARES
The following is a brief description of the terms of the common and
preferred shares. This description does not purport to be complete and is
qualified by reference to the Fund's Agreement and Declaration of Trust and its
By-Laws. For complete terms of the common and preferred shares, please refer to
the actual terms of such series, which are set forth in the Governing Documents.
Common Shares
The Fund is an unincorporated statutory trust organized under the laws
of Delaware pursuant to a Certificate of Trust dated as of March 8, 2004. The
Fund is authorized to issue an unlimited number of common shares of beneficial
interest, par value $.001 per share. Each common share has one vote and, when
issued and paid for in accordance with the terms of this offering, will be fully
paid and non-assessable. Though the Fund expects to pay distributions monthly on
the common shares, it is not obligated to do so. All common shares are equal as
to distributions, assets and voting privileges and have no conversion,
preemptive or other subscription rights. The Fund will send annual and
semi-annual reports, including financial statements, to all holders of its
shares. In the event of liquidation, each of the Fund's common shares is
entitled to its proportion of the Fund's assets after payment of debts and
expenses and the amounts payable to holders of the Fund's preferred shares
ranking senior to the Fund's common shares as described below.
Any additional offerings of shares will require approval by the Fund's
Board. Any additional offering of common shares will be subject to the
requirements of the 1940 Act, which provides that common shares may not be
issued at a price below the then current net asset value, exclusive of sales
load, except in connection with an offering to existing holders of common shares
or with the consent of a majority of the Fund's outstanding voting securities.
The Fund's outstanding common shares are listed and traded on the Amex
under the symbol "GLU." The average weekly trading volume of the common shares
on the Amex during the period from January 1, 2007 through December 31, 2007 was
46,360 shares.
Unlike open-end funds, closed-end funds like the Fund do not
continuously offer shares and do not provide daily redemptions. Rather, if a
shareholder determines to buy additional common shares or sell shares already
held, the shareholder may do so by trading through a broker on the Amex or
otherwise.
Shares of closed-end investment companies often trade on an exchange at
prices lower than net asset value. The Fund's common shares have traded in the
market at a discount from net asset value. As of December 31, 2007, the closing
market price of the Fund represented a 9.54% discount to net asset value.
Because the market value of the common shares may be influenced by such factors
as dividend and distribution levels (which are in turn affected by expenses),
dividend and distribution stability, net asset value, market liquidity, relative
demand for and supply of such shares in the market, unrealized gains, general
market and economic conditions and other factors beyond the control of the Fund,
the Fund cannot assure you that common shares will trade at a price equal to or
higher than net
44
asset value in the future. The common shares are designed primarily for
long-term investors and you should not purchase the common shares if you intend
to sell them soon after purchase.
The Fund's common shareholders vote as a single class to elect the
Fund's Board and on additional matters with respect to which the 1940 Act, the
Governing Documents or resolutions adopted by the Trustees provide for a vote of
the Fund's common shareholders. See "Anti-Takeover Provisions of the Fund's
Governing Documents."
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, subject to maintaining required asset coverage for each series of
outstanding preferred shares. The Board has authorized such repurchases to be
made when the Fund's common shares are trading at a discount from net asset
value of 10% or more (or such other percentage as the Board of the Fund may
determine from time to time). 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 and may also repurchase shares privately if
the Fund meets certain conditions 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. The
repurchase of common shares will reduce the total assets of the Fund available
for investment and may increase the Fund's expense ratio. Through December 31,
2007, the Fund has not repurchased its common shares under this authorization.
Book-Entry. The common shares will initially be held in the name of
Cede & Co. as nominee for the Depository Trust Company ("DTC"). The Fund will
treat Cede & Co. as the holder of record of the common shares for all purposes.
In accordance with the procedures of DTC, however, purchasers of common shares
will be deemed the beneficial owners of shares purchased for purposes of
distributions, voting and liquidation rights. Purchasers of common shares may
obtain registered certificates by contacting the Transfer Agent.
Preferred Shares
The Agreement and Declaration of Trust provides that the Fund's Board
may authorize and issue senior securities with rights as determined by the
Board, by action of the Board without the approval of the holders of the common
shares. Holders of common shares have no preemptive right to purchase any senior
securities that might be issued.
Currently an unlimited number of the Fund's shares have been classified
by the Board as preferred shares, par value $0.001 per share. The terms of such
preferred shares may be fixed by the Board and would materially limit and/or
qualify the rights of holders of the Fund's common shares.
If the Fund issues preferred shares, it will pay dividends to the
holders of the preferred shares at either a fixed rate or a rate that will be
reset frequently based on short-term interest rates, as described in a
Prospectus Supplement accompanying each preferred share offering.
Redemption, Purchase and Sale of Preferred Shares By the Trust. The
terms of any preferred shares are expected to provide that (i) they are
redeemable by the Fund at any time in whole or in part at the original purchase
price per share plus accumulated dividends per share, (ii) the Fund may tender
for or purchase preferred shares and (iii) the Fund may subsequently resell any
shares so tendered for or purchased. Any redemption or purchase of preferred
shares by the Fund will reduce the leverage applicable to the common shares,
while any resale of preferred shares by the Fund will increase that leverage.
45
Rating Agency Guidelines. Upon issuance, it is expected that the
preferred shares will be rated "Aaa" by Moody's and/or "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 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
any 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 distributions (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 unmade distributions on the
Fund's common shares) less (ii) the Fund's (a) cash and (b) assets consisting of
indebtedness which (y) mature prior to or on the date of redemption or
repurchase of the preferred shares and are U.S. government securities 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 S&P, and (z) is held by the Fund for
distributions, the redemption or repurchase of preferred shares or the Fund's
liabilities.
If the Fund does not cure in a timely manner 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 preferred shares at the request of the Fund, the Fund may, and
in certain circumstances will be required to, mandatorily redeem preferred
shares, 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 and 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 preferred shares at the
request of the Fund may, at any time, change or withdraw any such rating. The
Board, without further action by the shareholders, may amend, alter, add to or
repeal certain of the definitions and related provisions that have been adopted
by the Fund pursuant to the rating agency guidelines if the Board determines
that such modification is necessary to prevent a reduction in rating of the
preferred shares by Moody's and S&P, as the case may be, is in the best
interests of the holders of common shares and is not adverse to the holders of
preferred shares in view of advice to the Fund by Moody's and S&P (or such other
rating agency then rating the preferred shares at the request of the Fund) that
such modification would not adversely affect, as the case may be, its then
current rating of the preferred shares.
The Board may amend the Statement of Preferences definition of "Maximum
Rate" (the "maximum rate" as defined below under "--Maximum Rate") to increase
the percentage amount by which the applicable reference rate is multiplied or to
increase the applicable spread to which the reference rate is added to determine
the maximum rate without the vote or consent of the holders of the preferred
shares or any other shareholder of the Fund, but only after consultation with
the broker-dealers and with confirmation from each applicable rating agency that
the Fund could meet applicable rating agency asset coverage tests immediately
following any such increase.
As described by Moody's and S&P, the ratings assigned to each series of
preferred shares are assessments of the capacity and willingness of the Fund to
pay the obligations of each such series. The ratings on these series of
preferred shares are not recommendations to purchase, hold or sell shares of any
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 preferred shares 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 apply to each series of preferred shares
only so long as such rating agency is rating such series at the request of the
Fund. The Fund pays fees to Moody's and S&P for rating the preferred shares.
46
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. Under the 1940 Act, debt or additional preferred shares may be issued
only if immediately after such issuance the value of the Fund's total assets
(less ordinary course liabilities) is at least 300% of the amount of any debt
outstanding and at least 200% of the amount of any preferred shares and debt
outstanding.
The Fund will be required under the Statement of Preferences of each
series of preferred shares 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 debt or stock, including
any outstanding preferred shares. If the Fund fails to maintain the asset
coverage required under the 1940 Act on such dates and such failure is not cured
within 60 calendar days, the Fund may, and in certain circumstances will be
required to, mandatorily redeem shares of preferred sufficient to satisfy such
asset coverage. See "Redemption" below.
Distributions. In connection with the offering of one or more series of
preferred shares, an accompanying Prospectus Supplement will specify whether
dividends on such preferred shares will be based on a fixed or variable rate. If
such Prospectus Supplement specifies that dividends will be paid at a fixed
rate, holders of such Fixed Rate Preferred Shares will be entitled to receive,
out of funds legally available therefore, cumulative cash distributions, at an
annual rate set forth in the applicable Prospectus Supplement, payable with such
frequency as set forth in the applicable Prospectus Supplement. Such
distributions will accumulate from the date on which such shares are issued.
In the alternative, the Prospectus Supplement may state that the
holders of one or more series of Variable Rate Preferred Shares are entitled to
receive cash distributions at annual rates stated as a percentage of liquidation
preference, that will vary from dividend period to dividend period. The
liquidation preference per share and the dividend rate for the initial dividend
period for any such series of preferred shares will be the rate set forth in the
Prospectus Supplement for such series. For subsequent dividend periods, each
such series of preferred shares will pay distributions based on a rate set at an
auction, normally held weekly, but not in excess of a 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,
distributions 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 under "--Designation of Special Dividend Periods."
Distribution Payments. Except as described below, the dividend payment
date for a series of Variable Rate Preferred Shares 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.
If a dividend payment date for a series of Variable Rate Preferred
Shares is not a business day because the Amex is closed for business for more
than three consecutive business days due to an act of God, natural disaster, act
of war, civil or military disturbance, act of terrorism, sabotage, riots or a
loss or malfunction of utilities or communications services, or the dividend
payable on such date can not be paid for any such reason, then:
o the dividend payment date for the affected dividend period will be
the next business day on which the Fund and its paying agent, if
any, are able to cause the distributions to be paid using their
reasonable best efforts;
o the affected dividend period will end on the day it would have
ended had such event not occurred and the dividend payment date
had remained the scheduled date; and
o the next dividend period will begin and end on the dates on which
it would have begun and ended had such event not occurred and the
dividend payment date remained the scheduled date.
47
Determination of Dividend Rates. The Fund computes the distributions
per share for a series of Variable Rate Preferred Shares 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 the liquidation
preference per share of such series to arrive at the distribution per share.
Maximum Rate. The dividend rate for a series of Variable Rate Preferred
Shares that results from an auction for such shares will not be greater than the
applicable "maximum rate." The maximum rate for any standard dividend period
will be the greater of the applicable percentage of the reference rate or the
reference rate plus the applicable spread. The reference rate will be the
applicable LIBOR Rate (as defined below) for a dividend period of fewer than 365
days or the Treasury Index Rate (as defined below) for a dividend period of 365
days or more. The applicable percentage and the applicable spread will be
determined based on the lower of the credit ratings assigned to such series of
preferred shares by Moody's and S&P on the auction date for such period (as set
forth in the table below). If Moody's and/or S&P do not make such rating
available, the rate will be determined by reference to equivalent ratings issued
by a substitute rating agency. In the case of a special dividend period, (1) the
Fund will communicate the maximum applicable rate in a notice of special rate
period for such dividend payment period, (2) the applicable percentage and
applicable spread will be determined on the date two business days before the
first day of such special dividend period and (3) the reference rate will be the
applicable LIBOR Rate for a dividend period of fewer than 365 days or the
Treasury Index Rate for a dividend period of 365 days or more.
The "LIBOR Rate," as described in greater detail in the Statement of
Preferences, is the applicable London Inter-Bank Offered Rate for deposits in
U.S. dollars for the period most closely approximating the applicable dividend
period for the preferred shares.
The "Treasury Index Rate," as described in greater detail in the
Statement of Preferences, is the average yield to maturity for certain U.S.
Treasury securities having substantially the same length to maturity as the
applicable dividend period for the preferred shares.
Credit Ratings
--------------------------------- Applicable Applicable
Moody's S&P Percentage Spread
------- --- ---------- ----------
Aaa AAA 150% 1.50%
Aa3 to Aa1 AA- to AA+ 250% 2.50%
A3 to A1 A- to A+ 350% 3.50%
Baa1 or lower BBB+ or lower 550% 5.50%
Assuming the Fund maintains an "AAA" and/or "Aaa" rating on the
preferred shares, the practical effect of the different methods used to
determine the maximum rate is shown in the table below:
Maximum
Applicable Method Used to
Rate Using the Maximum Applicable Determine the
Reference Applicable Rate Using the Maximum Applicable
Rate Percentage Applicable Spread Rate
--------- -------------- ------------------ ------------------
1% 1.50% 2.50% Spread
2% 3.00% 3.50% Spread
3% 4.50% 4.50% Either
4% 6.00% 5.50% Percentage
5% 7.50% 6.50% Percentage
6% 9.00% 7.50% Percentage
There is no minimum dividend rate in respect of any dividend period.
Effect of Failure to Pay Distributions in a Timely Manner. If the Fund
fails to pay the paying agent the full amount of any distribution or redemption
price, as applicable, for a series of Variable Rate Preferred Shares in a timely
manner, the dividend rate for the dividend period following such a failure to
pay (such period referred to as the default period) and any subsequent dividend
period for which such default is continuing will be the default rate.
48
In the event that 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 is 550% of the applicable LIBOR Rate for a dividend
period of 364 days or fewer and 550% of the applicable Treasury Index Rate for a
dividend period of longer than 364 days.
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 potential benefit of
the Fund's leverage for holders of its common shares. The Fund does not
currently expect to hold auctions and pay distributions 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 preferred shares are sold in the secondary market.
Any designation of a special dividend period for a series of Variable
Rate Preferred Shares will be effective only if (i) notice thereof has been
given as provided for in the Governing Documents, (ii) any failure to pay in a
timely manner to the auction agent the full amount of any distribution on, or
the redemption price of, any preferred shares has 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 has mailed a notice
of redemption with respect to any preferred shares, the Fund has 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, and the Fund has provided notice of
such designation and a Basic Maintenance Report to each rating agency then
rating the preferred shares at the request of the Fund.
The dividend payment date for any such special dividend period will be
set out in the notice designating the special dividend period. In addition, for
special dividend periods of at least 91 days, dividend payment dates will occur
on the first business day of each calendar month within such dividend period and
on the business day following the last day of such 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.
Book Entry. Shares of Fixed Rate Preferred sold through this offering
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 such shares for all purposes.
In accordance with the procedures of DTC, however, purchasers of Fixed Rate
Preferred Shares will be deemed the beneficial owners of shares purchased for
purposes of dividends, voting and liquidation rights.
Shares of Variable Rate Preferred will initially be held by the auction
agent as custodian for Cede & Co., in whose name the shares of Variable Rate
Preferred Shares will be registered. The Fund will treat Cede & Co. as the
holder of record of the shares for all purposes.
Restrictions on Dividends and Other Distributions for the Preferred Shares
So long as any preferred shares are 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
49
the preferred shares as to the payment of dividends or distributions 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 distributions on the Fund's
outstanding preferred shares due on or prior to the date of such
common shares dividend or distribution;
o the Fund has redeemed the full number of shares of preferred to be
redeemed pursuant to any mandatory redemption provision in the
Fund's Governing Documents; and
o after making the distribution, the Fund meets applicable asset
coverage requirements described under "Preferred Shares--Rating
Agency Guidelines" and "Preferred Shares--Asset Maintenance
Requirements."
No full distribution will be declared or made on any series of
preferred shares for any dividend period, or part thereof, unless full
cumulative distributions due through the most recent dividend payment dates
therefore for all outstanding series of preferred shares of the Fund ranking on
a parity with such series as to distributions have been or contemporaneously are
declared and made. If full cumulative distributions due have not been made on
all outstanding preferred shares of the Fund ranking on a parity with such
series of preferred shares as to the payment of distributions, any distributions
being paid on the preferred shares will be paid as nearly pro rata as possible
in proportion to the respective amounts of distributions accumulated but unmade
on each such series of preferred shares on the relevant dividend payment date.
The Fund's obligation to make distributions on the preferred shares will be
subordinate to its obligations to pay interest and principal, when due, on any
senior securities representing debt.
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 in the event that:
o the Fund fails to maintain the asset coverage requirements
specified under the 1940 Act on a quarterly valuation date and
such failure is not cured on or before 60 days, in the case of the
Fixed Rate Preferred Shares, or 10 business days, in the case of
the Variable Rate Preferred Shares, 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 preferred shares subject to mandatory
redemption will be the liquidation preference, as stated in the Statement of
Preferences of each existing series of preferred shares or the Prospectus
Supplement accompanying the issuance of any series of preferred shares, plus an
amount equal to any accumulated but unpaid distributions (whether or not earned
or declared) to the date fixed for redemption, plus (in the case of preferred
shares having a dividend period of more than one year) any applicable redemption
premium determined by the Board and included in the Statement of Preferences.
The number of shares of preferred shares that will be redeemed in the
case of a mandatory redemption will equal the minimum number of outstanding
shares of 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 shares
of preferred shares. In the event that shares of preferred shares are redeemed
due to a
50
failure to satisfy the 1940 Act asset coverage requirements, the Fund may, but
is not required to, redeem a sufficient number of shares 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
shares of 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 shares 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).
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
Governing Documents, the 1940 Act, and applicable law, will select the one or
more series of preferred from which shares will be redeemed and the amount of
preferred to be redeemed from each such series. If fewer than all shares of a
series of preferred 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 shares of preferred 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 Fixed Rate Preferred Shares. Shares of Fixed
Rate Preferred are not subject to optional redemption by the Fund until the
date, if any, specified in the applicable Prospectus or Prospectus Supplement,
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 such date and thereafter, the Fund may at any time redeem such Fixed Rate
Preferred Shares in whole or in part for cash at a redemption price per share
equal to the liquidation preference per share plus accumulated and unpaid
distributions (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 Governing Documents, the 1940 Act and
applicable law.
Optional Redemption of Variable Rate Preferred Shares. The Fund
generally may redeem Variable Rate Preferred Shares, in whole or in part, at its
option at any time (usually on a dividend or distribution payment date), other
than during 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 such preferred shares
having a dividend period of one year or less, the redemption price per share
will equal the liquidation preference plus an amount equal to any accumulated
but unpaid distributions thereon (whether or not earned or declared) to the
redemption date, and in the case of such preferred shares having a dividend
period of more than one year, the redemption price per share will equal the
liquidation preference 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 limitations of
the Governing Documents, the 1940 Act and applicable 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 Amex requirements), in
the case of Fixed Rate Preferred Shares, and not less than seven days, in the
case of Variable Rate Preferred Shares, 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 shares 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 distributions to be
included therein), (v) the place or places where such shares are to be redeemed,
(vi) that distributions on the shares to be redeemed will cease to accumulate 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.
51
The holders of preferred shares, whether subject to a variable or fixed
rate, will not have the right to redeem any of their shares at their option.
Liquidation Rights
In the event of any voluntary or involuntary liquidation, dissolution
or winding up of the Fund, the holders of preferred shares then outstanding will
be entitled to receive a preferential liquidating distribution, which is
expected to equal the original purchase price per preferred share plus
accumulated and unpaid dividends, whether or not declared, before any
distribution of assets is made to holders of common shares. After payment of the
full amount of the liquidating distribution to which they are entitled, the
holders of preferred shares will not be entitled to any further participation in
any distribution of assets by the Fund.
Voting Rights
Except as otherwise stated in this Prospectus, specified in the Fund's
Governing Documents or resolved by the Board or as otherwise required by
applicable law, holders of preferred shares shall be entitled to one vote per
share held on each matter submitted to a vote of the shareholders of the Fund
and will vote together with 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 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 preferred
shares, voting together as a single class. In addition, if (i) at any time
dividends and distributions on outstanding shares of preferred shares are unpaid
in an amount equal to at least two full years' dividends and distributions
thereon and sufficient cash or specified securities have not been deposited with
the applicable paying agent for the payment of such accumulated dividends and
distributions 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 applicable Statement of Preferences creating such shares, then
the number of Trustees constituting the Board automatically will be increased by
the smallest number that, when added to the two Trustees elected exclusively by
the holders of preferred shares as described above, would then constitute a
simple majority of the Board as so increased by such smallest number. Such
additional Trustees will be elected by the holders of the outstanding 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 ten
nor more than twenty 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 will
continue. If the Fund thereafter pays, or declares and sets apart for payment in
full, all dividends and distributions 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 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 automatically.
So long as shares of preferred are outstanding, the Fund will not,
without the affirmative vote of the holders of a majority (as defined in the
1940 Act) of the shares of preferred outstanding at the time, and present and
voting on such matter, voting separately as one class, amend, alter or repeal
the provisions of the Fund's Governing Documents whether by merger,
consolidation or otherwise, so as to materially adversely affect any of the
rights, preferences or powers expressly set forth in the Governing Documents
with respect to such shares of preferred, unless the Fund obtains written
confirmation from Moody's, S&P or any such other rating agency then rating the
preferred shares that such amendment, alteration or repeal would not impair the
rating then assigned by such rating agency to the preferred shares, in which
case the vote or consent of the holders of the preferred shares is not required.
Also, to the extent permitted under the 1940 Act, in the event shares of more
than one series of preferred shares are outstanding, the Fund will not approve
any of the actions set forth in the preceding sentence which materially
adversely affect the rights, preferences or powers expressly set forth in the
Governing Documents with respect to such shares of a series of preferred shares
differently than those of a holder of shares of any other series of preferred
without the affirmative vote of the holders of at least a majority of the shares
of preferred of each series materially adversely affected and outstanding at
such time (each such materially adversely affected series voting
52
separately as a class to the extent its rights are affected differently). For
purposes of this paragraph, no matter shall be deemed to adversely affect any
right, preference or power unless such matter (i) adversely alters or abolishes
any preferential right of such series; (ii) creates, adversely alters or
abolishes any right in respect of redemption of such series; or (iii) creates or
adversely alters (other than to abolish) any restriction on transfer applicable
to such series.
Under the Governing Documents and applicable provisions of the 1940
Act, the affirmative vote of a majority of the votes entitled to be cast by
holders of outstanding shares of the preferred, voting together as a single
class, will be required to approve any plan of reorganization adversely
affecting the preferred shares. The approval of 66?% of each class, voting
separately, of the Fund's outstanding voting shares is required to authorize the
conversion of the Fund from a closed-end to an open-end investment company. The
approval of a majority (as that term is defined in the 1940 Act) of the Fund's
outstanding preferred shares and a majority (as that term is defined in the 1940
Act) of the Fund's outstanding voting securities are required to approve any
action requiring a vote of security holders under Section 13(a) of the 1940 Act
(other than a conversion of the Fund from a closed-end to an open-end investment
company), including, among other things, changes in the Fund's investment
objectives or changes in the investment restrictions described as fundamental
policies under "Investment Objectives and Policies" in this Prospectus and the
SAI, "How the Fund Manages Risk--Investment Restrictions" in this Prospectus and
"Investment Restrictions" in the SAI. For purposes of this paragraph, 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, at
the annual or a special meeting of the shareholders of the Fund duly called (i)
of 66?% or more of the shares of preferred shares present at such meeting, if
the holders of more than 50% of the outstanding shares of preferred shares are
present or represented by proxy, or (ii) more than 50% of the outstanding shares
of 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, and any other preferred shares,
voting together as a single class, that may be necessary to authorize the action
in question.
The calculation of the elements and definitions of certain terms of the
rating agency guidelines may be modified by action of the Board without further
action by the shareholders if the Board determines that such modification is
necessary to prevent a reduction in rating of the shares of preferred shares by
Moody's and/or S&P (or such other rating agency then rating the preferred shares
at the request of the Fund), as the case may be, or is in the best interests of
the holders of common shares and is not adverse to the holders of preferred
shares in view of advice to the Fund by the relevant rating agencies that such
modification would not adversely affect its then current rating of the preferred
shares.
The foregoing voting provisions will not apply to any series of
preferred shares if, at or prior to the time when the act with respect to which
such vote otherwise would be required will be effected, such shares will have
been redeemed or called for redemption and sufficient cash or cash equivalents
provided to the applicable paying agent to effect such redemption. The holders
of preferred shares will have no preemptive rights or rights to cumulative
voting.
Limitation on Issuance of Preferred Shares
So long as the Fund has preferred shares outstanding, subject to
receipt of approval from the rating agencies of each series of preferred shares
outstanding, and subject to compliance with the Fund's investment objectives,
policies and restrictions, the Fund may issue and sell shares of one or more
other series of additional preferred shares 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 or distributions.
The Fund 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 concludes that such an offering
53
would be consistent with the Fund's Governing Documents and applicable law, and
in the best interest of existing common shareholders.
ANTI-TAKEOVER PROVISIONS OF THE FUND'S GOVERNING DOCUMENTS
The Fund presently has provisions in 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 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. 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 "Management of
the Fund - Trustees and Officers" in the SAI. A Trustee of the Fund may be
removed with or without cause by two-thirds of the remaining trustees and, with
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
(in addition to any required class votes) apply to certain mergers or a sale of
all or substantially all of the Fund's assets, liquidation, conversion of the
Fund into an open-end fund or interval fund and amendments to several provisions
of the Declaration of Trust, including the foregoing provisions. In addition,
after completion of the offering, 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 entity;
o issuance of any securities of the Fund to any person or entity for
cash, other than pursuant to the Dividend and Reinvestment Plan or
any offering if such person or entity acquires no greater
percentage of the securities offered than the percentage
beneficially owned by such person or entity immediately prior to
such offering or, in the case of a class or series not then
beneficially owned by such person or entity, the percentage of
common shares beneficially owned by such person or entity
immediately prior to such offering;
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 $5,000,000);
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 $5,000,000); or
o the purchase of the Fund's common shares by the Fund from any
person or entity other than pursuant to a tender offer equally
available to other shareholders in which such person or entity
tenders no greater percentage of common shares than are tendered
by all other shareholders;
if such 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
approves the transaction. In addition, shareholders have no authority to adopt,
amend or repeal By-Laws. The Trustees have authority to adopt, amend and. repeal
By-Laws consistent with the Declaration of Trust (including to require approval
by the holders of a majority of the outstanding shares for the election of
Trustees). Reference is made to the Governing Documents of the Fund, on file
with the Securities and Exchange Commission, 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
54
overall effect of the provisions is to render more difficult the accomplishment
of a merger or the assumption of control by a principal shareholder. For the
full text of these provisions see "Additional Information."
CLOSED-END FUND STRUCTURE
The Fund is a non-diversified, closed-end management investment company
(commonly referred to as a closed-end fund). Closed-end funds differ from
open-end funds (which are generally referred to as mutual funds) in that
closed-end funds generally list their shares for trading on a stock exchange and
do not redeem their shares at the request of the shareholder. This means that if
you wish to sell your shares of a closed-end fund you must trade them on the
market like any other stock at the prevailing market price at that time. In a
mutual fund, if the shareholder wishes to sell shares of the fund, the mutual
fund will redeem or buy back the shares at "net asset value." Also, mutual funds
generally offer new shares on a continuous basis to new investors, and
closed-end funds generally do not. The continuous inflows and outflows of assets
in a mutual fund can make it difficult to manage the fund's investments. By
comparison, closed-end funds are generally able to stay more fully invested in
securities that are consistent with their investment objective, and also have
greater flexibility to make certain types of investments, and to use certain
investment strategies, such as financial leverage and investments in illiquid
securities.
Shares of closed-end funds often trade at a discount to their net asset
value. Because of this possibility and the recognition that any such discount
may not be in the interest of shareholders, the Fund's Board might consider from
time to time engaging in open-market repurchases, tender offers for shares or
other programs intended to reduce the discount. We cannot guarantee or assure,
however, that the Fund's Board will decide to engage in any of these actions.
Nor is there any guarantee or assurance that such actions, if undertaken, would
result in the shares trading at a price equal or close to net asset value per
share. The Board might also consider converting the Fund to an open-end mutual
fund, which would also require a supermajority vote of the shareholders of the
Fund. We cannot assure you that the Fund will not trade at a discount.
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. The Board has authorized such repurchase to be made when the Fund's
common shares are trading at a discount from net asset value of 10% or more (or
such other percentage as the Board of the Fund may determine from time to time).
The Fund Manager has discretion as to whether or not he wants to repurchase
common shares if they are trading at the required discount. 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 and
may also repurchase shares privately if the Fund meets certain conditions
regarding, among other things, distribution of net income for the preceding
fiscal year, status of the seller, price paid, brokerage commission, 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 repurchase its common shares for a price below net asset
value, the net asset value of the common shares that remain outstanding shares
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.
The repurchase of common shares will reduce the total assets of the Fund
available for investment and may increase the Fund's expense ratio.
TAXATION
The following discussion is a brief summary of certain U.S. federal
income tax considerations affecting the Fund and its shareholders. This
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 a large position in the Fund), and
the discussions set forth herein do 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.
55
Taxation of the Fund
The Fund has elected to be treated and has qualified, and intends to
continue to qualify, as a regulated investment company under Subchapter M of the
Code. Accordingly, the Fund must, among other things, meet the following
requirements regarding the source of its income and the diversification of its
assets:
(i) The Fund must derive in each taxable year at least 90% of its
gross income from the following sources, which are referred to
herein as "Qualifying Income": (a) dividends, interest (including
tax-exempt 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 foreign currencies; and (b) interests in publicly
traded partnerships that are treated as partnerships for U.S.
federal income tax purposes and that derive less than 90% of their
gross income from the items described in (a) above (each a
"Qualified Publicly Traded Partnership").
(ii) The Fund must 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 (other than U.S. government
securities and the securities of other regulated investment
companies) of (I) any one issuer, (II) 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 or
(III) any one or more Qualified Publicly Traded Partnerships.
As a regulated investment company, the Fund generally will not be
subject to U.S. federal income tax on income and gains that the Fund distributes
to its shareholders, provided that it distributes each taxable year at least the
sum of (i) 90% of the Fund's investment company taxable income (which includes,
among other items, dividends, interest and the excess of any net short-term
capital gain over net long-term capital loss and other taxable income, other
than any net long-term capital gain, reduced by deductible expenses) determined
without regard to the deduction for dividends paid and (ii) 90% of the Fund's
net tax-exempt interest (the excess of its gross tax-exempt interest over
certain disallowed deductions). The Fund intends to distribute substantially all
of such income at least annually. The Fund will be subject to income tax at
regular corporation rates on any taxable income or gains that it does not
distribute to its shareholders.
The Code imposes a 4% nondeductible excise tax on the Fund to the
extent the Fund does not distribute by the end of any calendar year an amount at
least equal to the sum of (i) 98% of its ordinary income (not taking into
account any capital gain or loss) for the calendar year and (ii) 98% of its
capital gain in excess of its capital loss (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). In addition,
the minimum amounts that must be distributed in any year to avoid the excise tax
will be increased or decreased to reflect any under-distribution or
over-distribution, as the case may be, from the previous year. While the Fund
intends to distribute any income and capital gain 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 gain will be
distributed to entirely avoid the imposition of the excise tax. In that event,
the Fund will be liable for the excise 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.
56
Taxation of Shareholders
Distributions paid to you by the Fund from its net realized long-term
capital gains, if any, that the Fund designates as capital gains dividends
("capital gain dividends") are taxable as long-term capital gains, regardless of
how long you have held your shares. All other dividends paid to you by the Fund
(including dividends from short-term capital gains) from its current or
accumulated earnings and profits ("ordinary income dividends") are generally
subject to tax as ordinary income.
Special rules apply, however, to ordinary income dividends paid to
individuals with respect to taxable years beginning on or before December 31,
2010. If you are an individual, any such ordinary income dividend that you
receive from the Fund generally will be eligible for taxation at the Federal
rates applicable to long-term capital gains (currently at a maximum rate of 15%)
to the extent that (i) the ordinary income dividend is attributable to
"qualified dividend income" (i.e., generally dividends paid by U.S. corporations
and certain foreign corporations) received by the Fund, (ii) the Fund satisfies
certain holding period and other requirements with respect to the stock on which
such qualified dividend income was paid and (iii) you satisfy certain holding
period and other requirements with respect to your shares. There can be no
assurance as to what portion of the Fund's ordinary income dividends will
constitute qualified dividend income.
Any distributions you receive that are in excess of the Fund's current
or accumulated earnings and profits will be treated as a tax-free return of
capital to the extent of your adjusted tax basis in your shares, and thereafter
as capital gain from the sale of shares. The amount of any Fund distribution
that is treated as a tax-free return of capital will reduce your adjusted tax
basis in your shares, thereby increasing your potential gain or reducing your
potential loss on any subsequent sale or other disposition of your shares.
Dividends and other taxable distributions are taxable to you even if
they are reinvested in additional common shares of the Fund. Dividends and other
distributions paid by the Fund are generally treated under the Code as received
by you at the time the dividend or distribution is made. If, however, the Fund
pays you a dividend in January that was declared in the previous October,
November or December and you were the shareholder 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 will send you information within 60 days after the end of each
year setting forth the amount and tax status of any distributions paid to you by
the Fund.
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 you have held such shares for more than one year at the time of sale.
Any loss upon the sale or exchange of 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 with respect to such shares. Any loss you realize on a sale or exchange
of shares will be disallowed if you acquire other shares (whether through the
automatic reinvestment of dividends or otherwise) within a 61-day period
beginning 30 days before and ending 30 days after your sale or exchange of the
shares. In such case, your tax basis in the shares acquired will be adjusted to
reflect the disallowed loss.
The Fund may be required to withhold as backup withholding, currently
at a rate of 28%, a portion of the dividends, distributions and redemption
proceeds payable to shareholders who fail to provide the Fund (or its agent)
with their correct taxpayer identification number (in the case of individuals,
generally, their social security number) or to make required certifications, or
who have been notified by the IRS that they are subject to backup withholding.
Certain shareholders are exempt from backup withholding. Backup withholding is
not an additional tax and any amount withheld may be refunded or credited
against your U.S. federal income tax liability, if any, provided that you
furnish the required information to the IRS.
57
CUSTODIAN, TRANSFER AGENT
AND DIVIDEND DISBURSING AGENT
State Street Bank and Trust (the "Custodian"), located at One Heritage
Drive, Palmer 2N, North Quincy, Massachusetts 02171, 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.
Computershare, located at P.O. Box 43010, Providence, Rhode Island
02940, serves as the Fund's dividend disbursing agent, as agent under the Fund's
Plan and as transfer agent and registrar with respect to the common shares of
the Fund.
Computershare also serves as the Fund's transfer agent, registrar,
dividend disbursing agent and redemption agent with respect to the preferred
shares.
PLAN OF DISTRIBUTION
We may sell shares through underwriters or dealers, directly to one or
more purchasers, through agents, to or through underwriters or dealers, or
through a combination of any such methods of sale. The applicable Prospectus
Supplement will identify any underwriter or agent involved in the offer and sale
of our shares, any sales loads, discounts, commissions, fees or other
compensation paid to any underwriter, dealer or agent, the offering price, net
proceeds and use of proceeds and the terms of any sale.
The distribution of our shares may be effected from time to time in one
or more transactions at a fixed price or prices, which may be changed, at
prevailing market prices at the time of sale, at prices related to such
prevailing market prices, or at negotiated prices, provided, however, that the
offering price per share in the case of common shares, must equal or exceed the
net asset value per share, exclusive of any underwriting commissions or
discounts, of our common shares.
We may sell our shares directly to, and solicit offers from,
institutional investors or others who may be deemed to be underwriters as
defined in the Securities Act for any resales of the securities. In this case,
no underwriters or agents would be involved. We may use electronic media,
including the Internet, to sell offered securities directly.
In connection with the sale of our shares, underwriters or agents may
receive compensation from us in the form of discounts, concessions or
commissions. Underwriters may sell our shares to or through dealers, and such
dealers may receive compensation in the form of discounts, concessions or
commissions from the underwriters and/or commissions from the purchasers for
whom they may act as agents. Underwriters, dealers and agents that participate
in the distribution of our shares may be deemed to be underwriters under the
Securities Act, and any discounts and commissions they receive from us and any
profit realized by them on the resale of our shares may be deemed to be
underwriting discounts and commissions under the Securities Act. Any such
underwriter or agent will be identified and any such compensation received from
us will be described in the applicable Prospectus Supplement. The maximum
commission or discount to be received by any NASD member or independent
broker-dealer will not exceed eight percent. We will not pay any compensation to
any underwriter or agent in the form of warrants, options, consulting or
structuring fees or similar arrangements.
If a Prospectus Supplement so indicates, we may grant the underwriters
an option to purchase additional shares at the public offering price, less the
underwriting discounts and commissions, within 45 days from the date of the
Prospectus Supplement, to cover any overallotments.
Under agreements into which we may enter, underwriters, dealers and
agents who participate in the distribution of our shares may be entitled to
indemnification by us against certain liabilities, including liabilities under
the Securities Act. Underwriters, dealers and agents may engage in transactions
with us, or perform services for us, in the ordinary course of business.
58
If so indicated in the applicable Prospectus Supplement, we will
ourselves, or will authorize underwriters or other persons acting as our agents
to solicit offers by certain institutions to purchase our shares from us
pursuant to contracts providing for payment and delivery on a future date.
Institutions with which such contacts may be made include commercial and savings
banks, insurance companies, pension funds, investment companies, educational and
charitable institutions and others, but in all cases such institutions must be
approved by us. The obligation of any purchaser under any such contract will be
subject to the condition that the purchase of the shares shall not at the time
of delivery be prohibited under the laws of the jurisdiction to which such
purchaser is subject. The underwriters and such other agents will not have any
responsibility in respect of the validity or performance of such contracts. Such
contracts will be subject only to those conditions set forth in the Prospectus
Supplement, and the Prospectus Supplement will set forth the commission payable
for solicitation of such contracts.
To the extent permitted under the 1940 Act and the rules and
regulations promulgated thereunder, the underwriters may from time to time act
as brokers or dealers and receive fees in connection with the execution of our
portfolio transactions after the underwriters have ceased to be underwriters
and, subject to certain restrictions, each may act as a broker while it is an
underwriter.
A Prospectus and accompanying Prospectus Supplement in electronic form
may be made available on the websites maintained by underwriters. The
underwriters may agree to allocate a number of securities for sale to their
online brokerage account holders. Such allocations of securities for Internet
distributions will be made on the same basis as other allocations. In addition,
securities may be sold by the underwriters to securities dealers who resell
securities to online brokerage account holders.
In order to comply with the securities laws of certain states, if
applicable, our shares offered hereby will be sold in such jurisdictions only
through registered or licensed brokers or dealers.
LEGAL MATTERS
Certain legal matters will be passed on by Paul, Hastings, Janofsky &
Walker LLP, 75 E. 55th Street, New York, New York 10022 in connection with the
offering of the preferred shares.
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
PricewaterhouseCoopers LLP serves as the Independent Registered Public
Accounting Firm of the Fund and audits the financial statements of the Fund.
PricewaterhouseCoopers LLP is located at 300 Madison Avenue, New York, New York
10017.
ADDITIONAL INFORMATION
The Fund is subject to the informational requirements of the Securities
Exchange Act of 1934 Act and the 1940 Act and in accordance therewith files, or
will file, 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 the 1934 Act and the 1940 Act can be inspected and
copied at the public reference facilities maintained by the SEC, 100 F Street,
N.E., 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 Amex. Reports, proxy
statements and other information concerning the Fund and filed with the SEC by
the Fund will be available for inspection at the Amex, 86 Trinity Place, New
York, New York, 10006.
This Prospectus constitutes part of a Registration Statement filed by
the Fund with the SEC under the Securities Act 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 shares 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
59
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).
PRIVACY PRINCIPLES OF THE FUND
The Fund is committed to maintaining the privacy of its shareholders
and to safeguarding their non-public personal information. The following
information is provided to help you understand what personal information the
Fund collects, how the Fund protects that information and why, in certain cases,
the Fund may share information with select other parties.
Generally, the Fund does not receive any non-public personal
information relating to its shareholders, although certain non-public personal
information of its shareholders may become available to the Fund. The Fund does
not disclose any non-public personal information about its shareholders or
former shareholders to anyone, except as permitted by law or as is necessary in
order to service shareholder accounts (for example, to a transfer agent or third
party administrator).
The Fund restricts access to non-public personal information about its
shareholders to employees of the Fund's Investment Adviser and its affiliates
with a legitimate business need for the information. The Fund maintains
physical, electronic and procedural safeguards designed to protect the
non-public personal information of its shareholders.
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.
60
TABLE OF CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION
An SAI dated as of March 18, 2008, has been filed with the SEC 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............................................................... A-1
INVESTMENT OBJECTIVES AND POLICIES..................................... A-1
INVESTMENT RESTRICTIONS................................................ A- 8
MANAGEMENT OF THE FUND................................................. A-10
PORTFOLIO TRANSACTIONS................................................. A-18
PORTFOLIO TURNOVER..................................................... A-19
AUCTIONS FOR AUCTION RATE PREFERRED SHARES............................. A-20
TAXATION............................................................... A-22
NET ASSET VALUE........................................................ A-26
GENERAL INFORMATION.................................................... A-27
APPENDIX A -- PROXY VOTING POLICIES AND PROCEDURES..................... A-30
61
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.
62
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 I 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.
63
$100,000,000
[GRAPHIC OMITTED]
The Gabelli Global Utility & Income Trust
Preferred Shares
PROSPECTUS
__________, 2008
Filed Pursuant to Rule 497
Registration Statement No. 333-147575
PROSPECTUS SUPPLEMENT
(To Prospectus dated , 2008)
-------------------
____ Shares
-----------
[GRAPHIC OMITTED]
Series ____ Preferred Shares
-----------
We are offering for sale __ shares of our Series __ Preferred Shares,
par value $0.001 per share. Our common shares are traded on the American Stock
Exchange under the symbol "GLU." The last reported sale price for our common
shares on __ , __ was $__ per share.
You should review the information set forth under "Risk Factors and
Special Considerations" on page ___ of the accompanying Prospectus before
investing in our preferred shares.
Per Share Total
--------- -----
Public offering price $ $
Underwriting discounts and $ $
commissions
Proceeds, before expenses, to the $ $
Fund (1)
--------------
(1) The aggregate expenses of the offering (excluding underwriting discount)
are estimated to be $________________.
The Underwriters are expected to deliver the Series __ Preferred in
book-entry form through the Depository Trust Company on or about _____________.
You should rely only on the information contained or incorporated by
reference in this Prospectus Supplement and the accompanying Prospectus. The
Fund has not authorized anyone to provide you with different information. The
Fund is not making an offer to sell these securities in any state where the
offer or sale is not permitted. You should not assume that the information
contained in this Prospectus Supplement and the accompanying Prospectus is
accurate as of any date other than the date of this Prospectus Supplement and
the accompanying Prospectus, respectively.
__________________,______________
_
P-1
TABLE OF CONTENTS
Prospectus Supplement
Page
TERMS OF THE SERIES ____ PREFERRED SHARES....................................P-3
USE OF PROCEEDS..............................................................P-4
CAPITALIZATION...............................................................P-4
ASSET COVERAGE RATIO.........................................................P-4
SPECIAL CHARACTERISTICS AND RISKS OF THE SERIES ___ PREFERRED................P-4
TAXATION.....................................................................P-4
UNDERWRITING.................................................................P-4
LEGAL MATTERS................................................................P-4
P-2
TERMS OF THE SERIES ____ PREFERRED SHARES
Dividend Rate The dividend rate [for the initial dividend
period](1) will be __________ %.
Dividend Payment Rate [Dividends will be paid when, as and if declared on
__________, __________, __________, and __________,
commencing __________.(2) The payment date for the
initial dividend period will be __________.(1)]
[Regular Dividend Period Regular dividend periods will be __________ days.(1)]
[Regular Auction Date Auctions will be held on __________.(1)]
Liquidation Preference $__________ per share
[Non-Call Period The shares may not be called for redemption at the
option of the Fund prior to __________.(2)]
[Stock Exchange
Listing](2)
Rating It is a condition of issuance that the preferred
shares be rated "AAA" by S&P and(1)"Aaa" by Moody's.
-------------------------------
(1) Applicable only if the preferred shares being offered is Auction Rate
Preferred.
(2) Applicable only if the preferred shares being offered is Fixed
Rate Preferred.
P-3
USE OF PROCEEDS
We estimate the total net proceeds of the offering to be $__________,
based on the public offering price of $__________ per share and after deducting
underwriting discounts and commissions and estimated offering expenses payable
by us.
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 objectives and
policies as appropriate investment opportunities are identified, which is
expected to be substantially completed within three months; however, changes in
market conditions could result in the Fund's anticipated investment period
extending to as long as six months.
CAPITALIZATION
[To Come]
ASSET COVERAGE RATIO
[To Come]
SPECIAL CHARACTERISTICS AND RISKS OF THE SERIES ___ PREFERRED
[To Come]
TAXATION
[To Come]
UNDERWRITING
[To Come]
LEGAL MATTERS
Certain legal matters will be passed on by Paul, Hastings, Janofsky &
Walker LLP, 75 E. 55th Street, New York, New York 10022, counsel to the Fund in
connection with the offering of the preferred shares. Certain legal matters in
connection with this offering will be passed upon for the underwriters by
____________________.
P-4
Dated March 18, 2008
THE GABELLI GLOBAL UTILITY & INCOME TRUST
STATEMENT OF ADDITIONAL INFORMATION
THE INFORMATION IN THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT
COMPLETE AND MAY BE CHANGED. THE FUND MAY NOT SELL THESE SECURITIES UNTIL THE
REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS
EFFECTIVE. THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT AN OFFER TO SELL
THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN
ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
The Gabelli Global Utility & Income Trust (the "Fund") is a
non-diversified, closed-end management investment company registered under the
Investment Company Act of 1940, as amended (the "1940 Act"). The Fund's
investment objective is to achieve a consistent level of after-tax total return
with an emphasis currently on tax-advantaged qualified dividend income. The Fund
will attempt to achieve its investment objective under current tax law by
investing, under normal market conditions, at least 80% of its assets in (i)
equity securities (including preferred securities) of domestic and foreign
companies involved to a substantial extent (i.e., at least 50% of the assets,
gross income or net profits of a company is committed to or derived from) in
providing (a) products, services or equipment for the generation or distribution
of electricity, gas or water and (b) infrastructure operations such as airports,
toll roads and municipal services and telecommunications services such as
telephone, telegraph, satellite, cable, microwave, radiotelephone, mobile
communication and cellular, paging, electronic mail, videotext, voice
communications, data communications and internet (collectively, the "Utilities
Industry") and (ii) in equity securities (including preferred securities) of
companies in other industries, in each case in such securities that are expected
to periodically pay dividends. The Fund's 80% policy is not fundamental and
shareholders will be notified if it is changed. In addition, under normal market
conditions, at least 50% of the Fund's assets will consist of debt or equity of
securities of domestic and foreign companies involved to a substantial extent
(i.e., at least 50% of the assets, gross income or net profits of a company is
committed to or derived from) in the Utilities Industry. The Fund commenced
investment operations on May 28, 2004. Gabelli Funds, LLC (the "Investment
Adviser") serves as investment adviser to the Fund.
This Statement of Additional Information (the "SAI") does not
constitute a prospectus, but should be read in conjunction with the Fund's
prospectus relating thereto dated ________, ____, and as it may be supplemented.
This SAI does not include all information that a prospective investor should
consider before investing in the Fund's shares, and investors should obtain and
read the Fund's prospectus prior to purchasing such shares. A copy of the Fund's
Registration Statement, including the prospectus and any supplement, 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.
This Statement of Additional Information is dated March 18, 2008.
TABLE OF CONTENTS
Page
THE FUND.................................................................... A-1
INVESTMENT OBJECTIVES AND POLICIES...........................................A-1
INVESTMENT RESTRICTIONS......................................................A-8
MANAGEMENT OF THE FUND......................................................A-10
PORTFOLIO TRANSACTIONS......................................................A-18
PORTFOLIO TURNOVER..........................................................A-19
AUCTIONS FOR AUCTION RATE PREFERRED SHARES..................................A-20
TAXATION....................................................................A-22
NET ASSET VALUE.............................................................A-26
GENERAL INFORMATION.........................................................A-27
APPENDIX A - PROXY VOTING POLICIES AND PROCEDURES...........................A-30
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.
The Prospectus and this SAI omit certain information contained in the
registration statement filed with the SEC, Washington D.C. The registration
statement may be obtained from the SEC upon payment of the fee prescribed, or
inspected at the SEC's office at no charge. This Statement of Additional
Information is dated March 18, 2008.
THE FUND
The Fund was organized as a statutory trust in Delaware on March 8,
2004 and is a non-diversified, closed-end management investment company
registered under the 1940 Act. The common shares of the Fund are listed on the
American Stock Exchange (the "Amex") under the symbol "GLU."
INVESTMENT OBJECTIVES AND POLICIES
Investment Objectives
The objective of the Fund is to provide a consistent level of after-tax
total return with an emphasis currently on tax-advantaged qualified dividend
income. No assurance can be given that the Fund will achieve its investment
objective. The Fund will attempt to achieve its investment objective by
investing, under normal market conditions, at least 80% of its assets in (i)
equity securities (including preferred securities) of domestic and foreign
companies involved to a substantial extent (i.e., at least 50% of the assets,
gross income or net profits of a company is committed to or derived from) in
providing (a) products, services or equipment for the generation or distribution
of electricity, gas or water and (b) infrastructure operations such as airports,
toll roads and municipal services and telecommunications services such as
telephone, telegraph, satellite, cable, microwave, radiotelephone, mobile
communication and cellular, paging, electronic mail, videotext, voice
communications, data communications and internet (collectively, the "Utilities
Industry") and (ii) in equity securities (including preferred securities) of
companies in other industries, in each case in such securities that are expected
to periodically pay dividends, which will in large part qualify under current
tax law for U.S. federal income taxation at rates applicable to long-term
capital gains, which currently are taxed at a maximum rate of 15%. (Such
dividends are referred to in this SAI as "tax-advantaged qualified dividend
income" or "qualifying dividends.") The Fund's 80% policy is not fundamental and
shareholders will be notified if it is changed. In addition, under normal market
conditions, at least 50% of the Fund's assets will consist of debt or equity of
securities of domestic and foreign companies involved to a substantial extent in
the Utilities Industry. In making stock selections, the Fund's Investment
Adviser (as hereinafter defined) looks for companies that have proven dividend
records and sound financial structures.
Additional Investment Policies
Derivative Instruments.
Options. The Fund may, from time to time, subject to guidelines of the Board of
Trustees (the "Board") 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
A-1
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.
A-2
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,
A-3
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.
A-4
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, 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.
A-5
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 senior securities.
Forward Currency Exchange Contracts. Subject to guidelines of the Board, 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
A-6
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 United States, 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 United States, (iv) the imposition of different exercise and
settlement terms and procedures and margin requirements than in the United
States 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 enter into 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.
A-7
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 senior securities.
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 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.
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 voting together as a single class. In the event the Fund
were to issue any preferred shares, the approval of a majority of such shares
voting as a separate class would also be required. Such majority vote requires
the lesser of (i) 67% of the Fund's applicable shares represented at a meeting
at which more than 50% of the applicable shares outstanding are represented,
whether in person or by proxy, or (ii) more than 50% of the Fund's applicable
shares outstanding. Except as otherwise noted, all percentage limitations set
forth below apply 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:
A-8
(1) invest more than 25% of its total assets, taken at market value at
the time of each investment, in the securities of issuers in any particular
industry. This restriction does not apply to investments in U.S. government
securities and investments in the Utilities Industry;
(2) purchase commodities or commodity contracts if such purchase would
result in regulation of the Fund as a commodity pool operator;
(3) purchase or sell real estate, provided the Fund may invest in
securities and other instruments secured by real estate or interests therein or
issued by companies that invest in real estate or interests therein;
(4) make loans of money or other property, except that (i) the Fund may
acquire debt obligations of any type (including through extensions of credit),
enter into repurchase agreements and lend portfolio assets and (ii) the Fund may
lend money or other property to other investment companies advised by the
Investment Adviser pursuant to a common lending program to the extent permitted
by applicable law;
(5) borrow money, except to the extent permitted by applicable law;
(6) issue senior securities, except to the extent permitted by
applicable law; or
(7) underwrite securities of other issuers, except insofar as the Fund
may be deemed an underwriter under applicable law 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.
In addition, it is a fundamental policy of the Fund to invest 25% or
more of its assets in the Utilities Industry.
Unless specifically stated as such, no policy of the Fund is
fundamental and may be changed by the Board without shareholder approval.
A-9
MANAGEMENT OF THE FUND
Trustees and Officers
The business and affairs of the Fund are managed under the direction of
its Board, and the day-to-day operations are conducted through or under the
direction of its officers.
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 listed under the caption "Interested Trustee."
Trustees
Name, Position with Term of Principal Occupation(s) During Other Directorships Number of
the Fund, Age and Office and Past Five Years Held by Portfolios in
Business Address(1) Length of Director Fund Complex
Time Overseen by
Served(2) Director
Interested
Trustee(3)
Salvatore M. Salibello Since Certified Public Accountant and None 3
Trustee 2004(**) Managing Partner of the public
Age: 62 accounting firm Salibello & Broder
LLP since 1978.
Independent
Trustees
Anthony J. Colavita Since 2004(*) Partner in the law firm of Anthony None 35
Trustee J. Colavita, P.C.
Age: 72
James P. Conn Since Former Managing Director and Chief None 16
Trustee 2004(**) Investment Officer of Financial
Age: 69 Security Assurance Holdings Ltd.
(insurance holding company)
(1992-1998).
Mario D'Urso Since Chairman of Mittel Capital Markets None 4
Trustee 2004(***) S.p.A., since 2001; Senator in the
Age: 67 Italian Parliament (1996-2001)
Vincent D. Enright Since Former Senior Vice President and None 15
Trustee 2004(***) Chief Financial Officer of KeySpan
Age: 64 Energy Corporation (public
utility) (1994-1998)
A-10
Michael J. Melarkey Since Partner in the law firm of Director of Southwest Gas 4
Trustee 2004(***) Avansino, Melarkey, Knobel & Corporation (natural gas
Age: 58 Mulligan utility)
Salvatore J. Zizza Since 2004(*) Chairman of Zizza & Co., Ltd. Director of Hollis-Eden 26
Director (consulting). Pharmaceuticals
Age: 62 (biotechnology) and Earl
Scheib, Inc. (automotive
services)
Officers
Name, Position with the Length of Time Principal Occupation(s) During Past Five Years
Fund, Age, and Business Served
Address(1)
Bruce N. Alpert Since 2004 Executive Vice President and Chief Operating Officer of Gabelli
President Funds, LLC since 1988; Director and President of Gabelli Advisers,
Age: 56 Inc. since 1998; Officer of most of the registered investment
companies in the Gabelli/GAMCO Funds complex.
David I. Schachter Since 2004 Vice President of the Fund since 2004; Vice President of The Gabelli
Vice President Utility Trust since 1999, The Gabelli Global Deal Fund since 2006 and
Age: 54 The Gabelli Healthcare & Wellness(Rx) Trust since 2007; Vice President
of Gabelli & Company, Inc. since 1996.
Peter D. Goldstein Since 2004 Director of Regulatory Affairs for GAMCO Investors, Inc. since 2004;
Chief Compliance Officer Chief Compliance Officer of all registered investment companies in
Age: 54 the Gabelli/GAMCO Funds complex; Vice President of Goldman Sachs
Asset Management from 2000 through 2004.
James E. McKee Since 2004 Vice President, General Counsel and Secretary of GAMCO Investors,
Secretary Inc. since 1999 and of GAMCO Asset Management, Inc. since 1993;
Age: 44 Secretary of all registered investment companies advised by Gabelli
Funds, LLC and Gabelli Advisers, Inc.
Agnes Mullady Since 2006 President and Chief Operating Officer of Closed-End Funds for Gabelli
Treasurer Funds, LLC since April 2007; Officer of all registered investment
Age: 49 companies in the Gabelli/GAMCO Funds complex; Senior Vice President
of U.S. Trust Company, N.A. and Treasurer and Chief Financial Office
of Excelsior Funds from 2004 through 2005; Chief Financial Officer of
AMIC Distribution Partners from 2002 through 2004; Controller of
Reserve Management, Inc. and Reserve Partners, Inc. and Treasurer of
Reserve Funds from 2000 through 2002.
-------------------------
(1) Address: One Corporate Center, Rye, NY 10580-1422, unless otherwise
noted.
(2) The Board of the Fund 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 is as
follows:
(*) Term continues until the Fund's 2008 Annual Meeting of Shareholders or
until their successors are duly elected and qualified.
(**) Term continues until the Fund's 2009 Annual Meeting of Shareholders or
until their successors are duly elected and qualified.
(***) Term continues until the Fund's 2010 Annual Meeting of Shareholders or
until their successors are duly elected and qualified.
(3) "Interested person" of the Fund is defined in the 1940 Act. Mr.
Salibello is considered an "interested person" of the Fund as a result
of being a partner in an accounting firm that provides professional
services to affiliates of the investment adviser.
A-11
Beneficial Ownership of Shares Held in the Fund and the Fund Complex for Each
Trustee
Set forth in the table below is the dollar range of equity securities
in the Fund beneficially owned by each Trustee and the aggregate dollar range of
equity securities in the Fund complex beneficially owned by each Trustee.
Aggregate Dollar
Dollar Range of Range of Equity
Equity Securities Held Securities Held in
Name of Trustee in the Fund (*)(1) Fund Complex(*)(1)(2)
INTERESTED TRUSTEE:
-----------------
Salvatore M. Salibello A E
INDEPENDENT TRUSTEES:
---------------------
Anthony J. Colavita(**) C E
James P. Conn E E
Mario d'Urso E E
Vincent D. Enright B E
Michael J. Melarkey A E
Salvatore J. Zizza A E
-------------------------
(*) Key to Dollar Ranges
A. None
B. $1 - $10,000
C. $10,001 - $50,000
D. $50,001 - $100,000
E. Over $100,000
All shares were valued as of December 31, 2007
(**) Mr. Colavita beneficially owns less than 1% of the common stock of The LGL
Group, Inc., having a value of $9,071 as of December 31, 2007. The LGL
Group, Inc. may be deemed to be controlled by Mario J. Gabelli and in that
event would be deemed to be under common control with the Fund's Adviser.
(1) This information has been furnished by each Trustee as of December 31,
2007. "Beneficial Ownership" is determined in accordance with Section
16a-1(a)(2) of the Securities Exchange Act of 1934, as amended (the "1934
Act").
(2) The "Fund Complex" includes all the funds that are considered part of the
same fund complex as the Fund because they have common or affiliated
investment advisers.
The Trustees serving on the Fund's Nominating Committee are Messrs.
Colavita, Enright and Zizza. 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 Fund does not have a standing
compensation committee. The Nominating Committee met once during the year ended
December 31, 2007.
Anthony J. Colavita, Vincent D. Enright and Salvatore J. Zizza, 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 and the Fund's independent registered public
accounting firm. The Audit Committee met twice during the year ended December
31, 2007.
A-12
Remuneration of Trustees and Officers
The Fund pays each Trustee that is not considered to be an affiliated
person an annual retainer of $3,000 plus $1,000 for each Board meeting attended
and they are reimbursed for any out of pocket expenses incurred in attending
meetings. All Board committee members receive $500 per meeting attended.
Trustees who are directors or employees of the Adviser or an affiliated company
receive no compensation or expense reimbursement from the Fund.
The following table shows the compensation that the Trustees earned in
their capacity as Trustees during the year ended December 31, 2007. The table
also shows, for the year ended December 31, 2007, the compensation Trustees
earned in their capacity as Directors/Trustees for other funds in the Gabelli
Fund Complex.
COMPENSATION TABLE
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2007
Aggregate Compensation from the
Aggregate Compensation Fund and Fund Complex Paid to
Name of Person and Position from the Fund Trustees and Officers(*)
--------------------------- ------------- -------------------------------
INTERESTED TRUSTEES:
--------------------
Salvatore M. Salibello $7,000 $32,500 (3)
TRUSTEES:
---------
Anthony J. Colavita $8,500 $225,000 (35)
James P. Conn $7,000 $104,750 (16)
Mario d'Urso $7,000 $40,250 (4)
Vincent D. Enright $13,542 $96,997 (15)
Michael J. Melarkey $6,000 $37,250 (4)
Salvatore J. Zizza $8,531 $166,250 (26)
OFFICER:
--------
David I. Schachter $75,000 $255,000 (2)
Vice President
-------------------------
(*) Represents the total compensation paid to such persons during the calendar
year ended December 31, 2007 by investment companies (including the Fund) or
portfolios thereof from which such person receives compensation that are
considered part of the same fund complex as the Fund because they have common or
affiliated investment advisers. The number in parenthesis represents the number
of such investment companies and portfolios.
Limitation of Trustees' and Officers' 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 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.
A-13
Investment Advisory and Administrative Arrangements
Gabelli Funds, LLC, located at One Corporate Center, Rye, New York
10580-1422, serves as the investment adviser to the Fund pursuant to an
investment advisory agreement. The Investment Adviser was organized in 1999 and
is the successor to Gabelli Funds, Inc., which was organized in 1980. As of
September 30, 2007, the Investment Adviser acted as registered investment
adviser to 24 management investment companies with aggregate net assets of $16.9
billion. The Investment Adviser, together with other affiliated investment
advisers, had assets under management totaling approximately $31.6 billion as of
September 30, 2007. GAMCO Asset Management Inc., an affiliate of the Investment
Adviser, acts as investment adviser for individuals, pension trusts, profit
sharing trusts and endowments, and as a sub-adviser to management investment
companies having aggregate assets of $13.8 billion under management as of
September, 2007. Gabelli Securities, Inc., an affiliate of the Investment
Adviser, acts as investment adviser for investment partnerships and entities
having aggregate assets of approximately $491 million under management as of
September 30, 2007. Gabelli Fixed Income LLC, an affiliate of the Investment
Adviser, acts as investment adviser for separate accounts having aggregate
assets of approximately $27 million under management as of September 30, 2007.
Gabelli Advisers, Inc., an affiliate of the Investment Adviser, acts as
investment manager to the GAMCO Westwood Funds having aggregate assets of
approximately $443 million under management as of September 30, 2007.
Affiliates of the Investment Adviser may, in the ordinary course of
their business, acquire for their own account or for the accounts of their
investment advisory clients, significant (and possibly controlling) positions in
the securities of companies that may also be suitable for investment by the
Fund. The securities in which the Fund might invest may thereby be limited to
some extent. For instance, many companies in the past several years have adopted
so-called "poison pill" or other defensive measures designed to discourage or
prevent the completion of non-negotiated offers for control of the company. Such
defensive measures may have the effect of limiting the shares of the company
which might otherwise be acquired by the Fund if the affiliates of the
Investment Adviser or their investment advisory accounts have or acquire a
significant position in the same securities. However, the Investment Adviser
does not believe that the investment activities of its affiliates will have a
material adverse effect upon the Fund in seeking to achieve its investment
objective. Securities purchased or sold pursuant to contemporaneous orders
entered on behalf of the investment company accounts of the Investment Adviser
or the investment advisory accounts managed by its affiliates for their
unaffiliated clients are allocated pursuant to principles believed to be fair
and not disadvantageous to any such accounts. In addition, all such orders are
accorded priority of execution over orders entered on behalf of accounts in
which the Investment Adviser or its affiliates have a substantial pecuniary
interest. The Investment Adviser may on occasion give advice or take action with
respect to other clients that differs from the actions taken with respect to the
Fund. The Fund may invest in the securities of companies which are investment
management clients of GAMCO Investors Inc. In addition, portfolio companies or
their officers or directors may be minority shareholders of the Investment
Adviser or its affiliates.
The Investment Adviser is a wholly-owned subsidiary of GAMCO Investors,
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 and voting power of GGCP, Inc., which owns a majority of
the capital stock and voting power of GAMCO Investors, Inc.
Under the terms of the Investment 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. In addition, under the Investment 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 Investment
Advisory Agreement.
The Investment 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 Investment 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 total assets of the
Fund (which includes for this purpose assets attributable to outstanding senior
securities, if any, with no deduction for the liquidation preference or
principal amount, as applicable). This fee will be reduced each year following
the fifth anniversary of the Investment Advisory Agreement by 10 basis points
until the
A-14
eighth anniversary, after which time the Investment Adviser will be compensated
at an annual rate of .50% of the Fund's average weekly total assets.
The Investment 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 Investment 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 Investment Advisory Agreement will remain in
effect with respect to the Fund until the second anniversary of sole shareholder
approval of such Agreement, and from year to year thereafter if approved
annually (i) by the Fund's Board 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 Investment
Advisory Agreement, by vote cast in person at a meeting called for the purpose
of voting on such approval.
The Investment Advisory Agreement was approved by the Fund's Board at a
meeting in person of the Board held on May 16, 2007, including a majority of the
Trustees who are not parties to the agreement or interested persons of any such
party (as such term is defined in the 1940 Act).
In the course of agreeing in principle to the Investment Advisory
Agreement, the Fund's non-interested Trustees focused primarily on (i) the
services provided to the Fund by the Investment Adviser and the
sub-administrator, (ii) the Fund's fee and expense data as compared to various
benchmarks, a peer group of closed-end funds and the other registered investment
companies managed by the Investment Adviser and (iii) the experience and breadth
of the investment advisory team expected to be utilized by the Investment
Adviser.
The Investment Advisory Agreement terminates automatically on its
assignment and may be terminated without penalty on 60 days written notice at
the option of either party thereto or by a vote of a majority (as defined in the
1940 Act) of the Fund's outstanding shares.
Portfolio Manager Information
Other Accounts Managed
The information below lists other accounts for which each portfolio
manager was primarily responsible for the day-to-day management during the year
ended December 31, 2007.
# of Accounts
Managed with Total Assets
Name of Portfolio Total # of Advisory Fee with Advisory
Manager or Accounts Total Based on Fee Based on
Team Member Type of Accounts Managed Assets Performance Performance
----------- ---------------- ------- ------ ----------- -----------
Mario J. Gabelli Registered Investment 23 $15.8B 7 $5.6B
Companies:
Other Pooled Investment 12 $269.6M 11 $188.6M
Vehicles:
Other Accounts: 1991 $10.6B 6 $1.6B
A-15
Ownership of Shares in the Fund
As of December 31, 2007, the portfolio manager of the Fund owns the
following amounts of equity securities of the Fund.
Name Dollar Range of Equity Securities Held in Fund
Mario J. Gabelli $3,951,600
Potential Conflicts of Interest
Actual or apparent conflicts of interest may arise when the portfolio
manager also has day-to-day management responsibilities with respect to one or
more other accounts. These potential conflicts include:
Allocation of Limited Time and Attention. Because the portfolio manager
manages many accounts, he may not be able to formulate as complete a strategy or
identify equally attractive investment opportunities for each of those accounts
as if he were to devote substantially more attention to the management of only a
few accounts.
Allocation of Limited Investment Opportunities. If the portfolio
manager identifies an investment opportunity that may be suitable for multiple
accounts, the Fund may not be able to take full advantage of that opportunity
because the opportunity may need to be allocated among all or many of these
accounts or other accounts primarily managed by other portfolio managers of the
Investment Adviser and its affiliates.
Pursuit of Differing Strategies. At times, the portfolio manager may
determine that an investment opportunity may be appropriate for only some of the
accounts for which he exercises investment responsibility, or may decide that
certain of the accounts should take differing positions with respect to a
particular security. In these cases, the portfolio manager may execute differing
or opposite transactions for one or more accounts which may affect the market
price of the security or the execution of the transactions, or both, to the
detriment of one or more of his accounts.
Selection of Broker/Dealers. Portfolio managers may be able to select
or influence the selection of the brokers and dealers that are used to execute
securities transactions for the funds or accounts that they supervise. In
addition to providing execution of trades, some brokers and dealers provide
portfolio managers with brokerage and research services which may result in the
payment of higher brokerage fees than might otherwise be available. These
services may be more beneficial to certain funds or accounts than to others.
Although the payment of brokerage commissions is subject to the requirement that
the portfolio manager determine in good faith that the commissions are
reasonable in relation to the value of the brokerage and research services
provided to the fund, a portfolio manager's decision as to the selection of
brokers and dealers could yield disproportionate costs and benefits among the
funds or other accounts that he or she manages. In addition, with respect to
certain types of accounts (such as pooled investment vehicles and other accounts
managed for organizations and individuals) the Investment Adviser may be limited
by the client concerning the selection of brokers or may be instructed to direct
trades to particular brokers. In these cases, the Investment Adviser or its
affiliates may place separate, non-simultaneous transactions in the same
security for a fund and another account that may temporarily affect the market
price of the security or the execution of the transaction, or both, to the
detriment of the fund or the other accounts. Because of Mr. Gabelli's position
with, and his indirect majority ownership interest in, an affiliated broker
dealer, Gabelli & Company, he may have an incentive to use Gabelli & Company to
execute portfolio transactions for the Fund even if using Gabelli & Company is
not in the best interest of the Fund.
Variation in Compensation. A conflict of interest may arise where the
financial or other benefits available to the portfolio manager differ among the
accounts that he manages. If the structure of the Investment Adviser's
management fee or the portfolio manager's compensation differs among accounts
(such as where certain accounts pay higher management fees or performance-based
management fees), the portfolio manager may be motivated to favor certain
accounts over others. The portfolio manager also may be motivated to favor
accounts in which he has an investment interest, or in which the Investment
Adviser or its affiliates have investment interests. In Mr. Gabelli's case, the
Investment Adviser's compensation (and expenses) for the Fund is marginally
greater as a percentage of
A-16
assets than for certain other accounts and is less than for certain other
accounts managed by Mr. Gabelli, while his personal compensation structure
varies with near-term performance to a greater degree in certain performance
fee-based accounts than with non-performance-based accounts. In addition, he has
investment interests in several of the funds managed by the Investment Adviser
and its affiliates.
The Investment Adviser and the Fund have adopted compliance policies
and procedures that are designed to address the various conflicts of interest
that may arise for the Investment Adviser and its staff members. However, there
is no guarantee that such policies and procedures will be able to detect and
address every situation in which an actual or potential conflict may arise.
Compensation Structure
Mr. Gabelli receives incentive-based variable compensation based on a
percentage of net revenues received by the Investment Adviser for managing the
fund. Net revenues are determined by deducting from gross investment management
fees the firm's expenses (other than Mr. Gabelli's compensation) allocable to
the Fund. Additionally, he receives similar incentive-based variable
compensation for managing other accounts within the firm. This method of
compensation is based on the premise that superior long-term performance in
managing a portfolio should be rewarded with higher compensation as a result of
growth of assets through appreciation and net investment activity. One of the
other registered investment companies managed by Mr. Gabelli has a performance
(fulcrum) fee arrangement for which his compensation is adjusted up or down
based on the performance of the investment company relative to an index. Five
closed-end registered investment companies managed by Mr. Gabelli have
arrangements whereby the Adviser will only receive its investment advisory fee
attributable to the liquidation value of outstanding preferred shares (and Mr.
Gabelli would only receive his percentage of such advisory fee) if certain
performance levels are met. Mr. Gabelli manages other accounts with performance
fees. Compensation for managing these accounts has two components. One component
of his compensation is based on a percentage of net revenues received by the
Adviser for managing the account. The second component is based on absolute
performance of the account, with respect to which a percentage of such
performance fee is paid to Mr. Gabelli. As an executive officer of the Adviser's
parent company, GAMCO Investors, Inc., Mr. Gabelli also receives ten percent of
the net operating profits of the parent company. Mr. Gabelli receives no base
salary, no annual bonus and no stock options.
Portfolio Holdings Information
Employees of the Investment Adviser and its affiliates will often have
access to information concerning the portfolio holdings of the Fund. The Fund
and the Investment Adviser have adopted policies and procedures that require all
employees to safeguard proprietary information of the Fund, which includes
information relating to the Fund's portfolio holdings as well as portfolio
trading activity of the Investment Adviser with respect to the Fund
(collectively, "Portfolio Holdings Information"). In addition, the Fund and the
Investment Adviser have adopted policies and procedures providing that Portfolio
Holdings Information may not be disclosed except to the extent that it is (a)
made available to the general public by posting on the Fund's website or filed
as a part of a required filing on Form N-Q or N-CSR or (b) provided to a third
party for legitimate business purposes or regulatory purposes, that has agreed
to keep such data confidential under forms approved by the Investment Adviser's
legal department or outside counsel, as described below. The Investment Adviser
will examine each situation under (b) with a view to determine that release of
the information is in the best interest of the Fund and its shareholders and, if
a potential conflict between the Investment Adviser's interests and the Fund's
interests arises, to have such conflict resolved by the Chief Compliance Officer
or the independent Board. These policies further provide that no officer of the
Fund or employee of the Investment Adviser shall communicate with the media
about the Fund without obtaining the advance consent of the Chief Executive
Officer, Chief Operating Officer, or General Counsel of the Investment Adviser.
Under the foregoing policies, the Fund currently may disclose Portfolio
Holdings Information in the circumstances outlined below. Disclosure generally
may be either on a monthly or quarterly basis with no time lag in some cases and
with a time lag of up to 60 days in other cases (with the exception of proxy
voting services which require a regular download of data):
A-17
(1) To regulatory authorities in response to requests for such
information and with the approval of the Chief Compliance Officer of the Fund;
(2) To mutual fund rating and statistical agencies and to persons
performing similar functions where there is a legitimate business purpose for
such disclosure and such entity has agreed to keep such data confidential at
least until it has been made public by the Investment Adviser;
(3) To service providers of the Fund, as necessary for the performance
of their services to the Fund and to the Board; the Fund's anticipated service
providers are its administrator, transfer agent, custodian, independent
registered public accounting firm, and legal counsel;
(4) To firms providing proxy voting and other proxy services, provided
such entity has agreed to keep such data confidential until at least it has been
made public by the Investment Adviser;
(5) To certain broker dealers, investment advisers, and other financial
intermediaries for purposes of their performing due diligence on the Fund and
not for dissemination of this information to their clients or use of this
information to conduct trading for their clients. Disclosure of Portfolio
Holdings Information in these circumstances requires the broker, dealer,
investment adviser, or financial intermediary to agree to keep such information
confidential and is further subject to prior approval of the Chief Compliance
Officer of the Fund and to reporting to the Board at the next quarterly meeting;
and
(6) To consultants for purposes of performing analysis of the Fund,
which analysis (but not the Portfolio Holdings Information) may be used by the
consultant with its clients or disseminated to the public, provided that such
entity shall have agreed to keep such information confidential until at least it
has been made public by the Investment Adviser.
Disclosures made pursuant to a confidentiality agreement are subject to
periodic confirmation by the Chief Compliance Officer of the Fund that the
recipient has utilized such information solely in accordance with the terms of
the agreement. Neither the Fund nor the Investment Adviser, nor any of the
Investment Adviser's affiliates will accept on behalf of itself, its affiliates,
or the Fund any compensation or other consideration in connection with the
disclosure of portfolio holdings of the Fund. The Board will review such
arrangements annually with the Fund's Chief Compliance Officer.
PORTFOLIO TRANSACTIONS
Subject to policies established by the Board 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 markups. 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 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, the affiliated
broker-dealers charge the Fund a rate consistent with that charged to comparable
unaffiliated customers in similar transactions and comparable to rates charged
by other broker-dealers for 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.
A-18
Subject to obtaining the best price and execution, brokers who provide
supplemental research, market and statistical information, or other services
(e.g., wire services) 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 Investment 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 for the other accounts managed by the Investment Adviser and its
affiliates, investments of the kind made by the Fund may also be made for 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 a manner deemed fair and
equitable to all of the accounts, including the Fund.
For the fiscal period ending December 31, 2004 and the fiscal years
ending December 31, 2005, December 31, 2006 and December 31, 2007, the Fund paid
a total of $121,218, $42,112, $18,727 and $33,557, respectively, in brokerage
commissions, of which Gabelli & Company and its affiliates received, $99,079,
$19,698, $12,777 and $26,415, respectively. The amount received by Gabelli &
Company and its affiliates from the Fund in respect of brokerage commissions for
the fiscal year ended December 31, 2007 represented approximately 78.72% of the
aggregate dollar amount of brokerage commissions paid by the Fund for such
period and approximately 64.11% of the aggregate dollar amount of transactions
by the Fund for such period.
PORTFOLIO TURNOVER
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. The portfolio turnover rate may
vary from year to year and will not be a factor when the Investment Adviser
determines that portfolio changes are appropriate.
For example, an increase in the Fund's participation in risk arbitrage
situations would increase the Fund's portfolio turnover rate. A higher rate of
portfolio turnover may also result in taxable gains being passed to shareholders
sooner than would otherwise be the case. The Fund anticipates that its annual
portfolio turnover rate will not exceed 100%. The Fund's portfolio turnover
rates for the years ended December 31, 2005, December 31, 2006 and December 31,
2007 were 21.0%, 21.8% and 16.7%, respectively.
A-19
AUCTIONS FOR AUCTION RATE PREFERRED SHARES
Summary of Auction Procedures
The following is a brief summary of the auction procedures for
preferred shares that are auction rate preferred shares. 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 any series of auction rate preferred
shares.
The auctions determine the dividend rate for auction rate preferred
shares, but each dividend rate will not be higher than the maximum rate. If you
own auction rate preferred shares, you may instruct your broker-dealer to enter
one of three kinds of orders 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
auction rate preferred shares at their liquidation preference 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 dividend rate, you indicate that you want to sell auction rate
preferred shares 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 auction rate preferred shares, no matter what the next
dividend period's rate will be.
You may enter different types of orders for different portions of your
auction rate preferred shares. You may also enter an order to buy additional
auction rate preferred shares. All orders must be for whole shares. All orders
you submit are irrevocable. There is a fixed number of auction rate preferred
shares, and the dividend rate likely will vary from auction to auction depending
on the number of bidders, the number of shares the bidders seek to buy, the
rating of the auction rate preferred shares and general economic conditions
including current interest rates. If you own auction rate preferred shares 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 auction rate preferred shares, 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 auction rate preferred shares, or want to buy
more shares, you may instruct a broker-dealer to enter a bid order to buy shares
in an auction at the liquidation preference 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 auction rate preferred shares 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 auction rate preferred shares. A
broker-dealer's failure to submit orders for auction rate preferred shares 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 auction rate preferred
shares will pay to each broker-dealer, from funds provided by the Fund, a
service charge equal to, in the case shares of any auction immediately preceding
a dividend period of less than 365 days, the product of (i) a fraction, the
numerator of which is the number of days in such dividend period and the
denominator of which is 365, times (ii) 1/4 of 1%, times (iii) the liquidation
preference per share, times (iv) the aggregate number of auction rate preferred
shares placed by such broker-dealer at such auction or, in the case of any
auction immediately preceding a dividend period of one year or longer, a
percentage of the purchase price of the auction rate preferred shares placed by
the broker-dealer at the auction agreed to by the Fund and the broker-dealers.
A-20
If the number of auction rate preferred shares subject to bid orders by
potential holders with a dividend rate equal to or lower than the then-maximum
rate is at least equal to the number of auction rate preferred shares subject to
sell orders, then the dividend rate for the next dividend period will be the
lowest rate submitted which, taking into account that rate and all lower rates
submitted in order from existing and potential holders, would result in existing
and potential holders owning all the auction rate preferred shares available for
purchase in the auction.
If the number of auction rate preferred shares subject to bid orders by
potential holders with a dividend rate equal to or lower than the then-maximum
rate is less than the number of auction rate preferred shares subject to sell
orders, then the auction is considered to be a failed auction, and the dividend
rate will be the maximum rate. In that event, existing holders that have
submitted sell orders (or are treated as having submitted sell orders) may not
be able to sell any or all of the auction rate preferred shares offered for sale
than there are buyers for those shares.
If broker-dealers submit or are deemed to submit hold orders for all
outstanding auction rate preferred shares, the auction is considered an "all
hold" auction and the dividend rate for the next dividend period will be the
"all hold rate," which is 80% of the "AA" Financial Composite Commercial Paper
Rate, as determined in accordance with procedures set forth in the Statement of
Preferences establishing the auction rate preferred shares.
The auction procedures include a pro rata allocation of auction rate
preferred shares for purchase and sale. This allocation process may result in an
existing holder continuing to hold or selling, or a potential holder buying,
fewer shares than the number of shares of auction rate preferred shares in its
order. If this happens, broker-dealers will be required to make appropriate pro
rata allocations among their respective customers.
Settlement of purchases and sales will be made on the next business day
(which also is a dividend payment date) after the auction date through DTC.
Purchasers will pay for their auction rate preferred shares 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 SAI, 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 a series of auction rate preferred shares will be
held on the date specified in the Prospectus Supplement for such series, which
will be the business day preceding the dividend payment date for the initial
dividend period. Thereafter, except during special dividend periods, auctions
for such series auction rate preferred shares normally will be held within the
frequency specified in the Prospectus Supplement for such series, and each
subsequent dividend period for such series auction rate preferred shares
normally will begin on the following day.
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 shares of auction rate preferred
shares and three current holders. The three current holders and three potential
holders submit orders through broker-dealers at the auction.
Current Holder A Owns 500 shares, wants to sell all 500 shares Bid order at 4.6% rate for all 500
if auction rate is less than 4.6% shares
Current Holder B Owns 300 shares, wants to hold Hold order will take the auction rate
A-21
Current Holder C Owns 200 shares, wants to sell all 200 shares Bid order at 4.4% rate for all 200
if auction rate is less than 4.4% shares
Potential Holder D Wants to buy 200 shares Places order to buy at or above 4.5%
Potential Holder E Wants to buy 300 shares Places order to buy at or above 4.4%
Potential Holder F Wants to buy 200 shares Places order to buy at or above 4.6%
The lowest dividend rate that will result in all 1,000 shares of
auction rate preferred shares continuing to be held is 4.5% (the offer by D).
Therefore, the dividend rate will be 4.5%. 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 Auction Rate Preferred Shares
The underwriters shall not be required to make a market in the auction
rate preferred shares. 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 auction rate preferred shares will develop or, if it does develop, that it
will provide owners with liquidity of investment. The auction rate preferred
shares will not be registered on any stock exchange. Investors who purchase
auction rate preferred shares 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 auction rate
preferred shares 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 auction rate preferred shares in the name of a broker-dealer, a
sale or transfer of your auction rate preferred shares to that broker dealer, or
to another customer of that broker-dealer, will not be considered a sale or
transfer or 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.
TAXATION
The following discussion is a brief summary of certain U.S. federal
income tax considerations affecting the Fund and its shareholders. This
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. 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 a large position in the Fund), and
the discussions set forth herein do 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 qualified and intends to continue to qualify, as a
regulated investment company under Subchapter M of the Internal Revenue Code of
1986, as amended (the "Code") (a "RIC"). Accordingly, the Fund will, among other
things, (i) derive in each taxable year at least 90% of its gross income from
(a) dividends, interest (including tax-exempt 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,
A-22
futures and forward contracts) derived with respect to its business of investing
in such stock, securities or currencies and (b) net income derived from
interests in certain publicly traded partnerships that are treated as
partnerships for U.S. federal income tax purposes and that derive less than 90%
of their gross income from the items described in (a) above (each a "Qualified
Publicly Traded Partnership"); and (ii) diversify its holdings so that, at the
end of each quarter of each taxable year (a) at least 50% of the value of its
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 value of the Fund's total assets is invested in the securities of (I)
any one issuer (other than U.S. government securities and the securities of
other RICs) or (II) any two or more issuers in which the Fund owns more than 20%
or more of the voting securities and that are determined to be engaged in the
same business or similar or related trades or businesses.
As a RIC, the Fund generally is or will not be, as the case may be,
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 gain over net
long-term capital loss and other taxable income, other than any net long-term
capital gain, 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 gain or loss) for the calendar year, (ii) 98% of
its capital gain in excess of its capital loss (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 a fund paid no
federal income tax. While the Fund intends to distribute any income and capital
gain 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 gain will be distributed to avoid entirely the imposition of the tax. In
that event, the Fund will be liable for the tax only on the amount by which it
does not meet the foregoing distribution requirement.
A distribution will be treated as paid 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.
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 its shareholders its earnings and profits
attributable to non-RIC years. In addition, if the Fund failed to qualify as a
RIC for a period greater than one taxable year, then the Fund would be subject
to corporate-level tax upon the disposition of certain assets over a ten-year
period on any net built-in gain inherent in the basis of such assets or,
alternatively, could elect to currently recognize and pay corporate-level tax,
such built-in gain, in order to qualify as a RIC in a subsequent year.
Gain or loss on the sales of securities by the Fund will generally 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 securities
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.
A-23
Investments by the Fund in certain "passive foreign investment
companies" ("PFICs") could subject such 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 a fund to mitigate the effect of this tax provided
that the PFIC complies with certain reporting requirements, 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 U.S. 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 certain U.S. federal income tax
purposes.
If the Fund does not meet the asset coverage requirements of the 1940
Act and the Statement of Preferences, the Fund will be required to suspend
distributions to the holders of 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.
Certain of the Fund's investment practices are subject to special and
complex U.S. federal income tax provisions that may, among other things, (i)
disallow, suspend or otherwise limit the allowance of certain losses or
deductions, (ii) convert lower taxed long-term capital gains into higher taxed
short-term capital gains or ordinary income, (iii) convert ordinary loss or a
deduction into capital loss (the deductibility of which is more limited), (iv)
cause a fund to recognize income or gain without a corresponding receipt of
cash, (v) adversely affect the time as to when a purchase or sale of stock or
securities is deemed to occur, (vi) adversely alter the characterization of
certain complex financial transactions and (vii) produce income that will not
qualify as good income for purposes of the 90% annual gross income requirement
described above. The Fund will monitor its transactions and may make certain tax
elections to mitigate the effect of these rules and prevent disqualification of
the fund as a regulated investment company.
Foreign Taxes
Since the Fund may invest in foreign securities, its income from such
securities may be subject to non-U.S. taxes. If the Fund invests more than 50%
of its total assets in foreign securities, the Fund will elect to have its
foreign tax deduction or credit for foreign taxes paid with respect to
qualifying taxes to be taken by its shareholders instead of on its own return.
In that case, each shareholder shall include in gross income, and also treat as
paid by him, his proportionate share of the foreign taxes paid by the Fund. If
the Fund makes this election, it will furnish its shareholders with a written
notice after the close of the taxable year.
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 gain is 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 gain in a
notice to its shareholders, each of whom (i) will be required to include in
income for tax purposes as long-term capital gain 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 gain included in such shareholder's gross
income.
Distributions paid by the Fund from its investment company taxable
income, which includes net short-term capital gain, 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 period and other requirements are met by the Fund and its shareholders)
(i) for the dividends received deduction available to corporations, but only to
the extent that the Fund's income consists of dividend income from U.S.
corporations and (ii) for taxable years
A-24
through December 31, 2010, as qualified dividend income eligible for the reduced
maximum federal tax rate to individuals of generally 15% (currently 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 qualified foreign
corporations (e.g., generally, foreign corporations incorporated in a possession
of the United States or in certain countries with a qualifying comprehensive tax
treaty with the United States, or whose shares with respect to which such
dividend is paid is readily tradable on an established securities market in the
United States). A qualified foreign corporation does not include a foreign
corporation which for the taxable year of the corporation in which the dividend
was paid, or the preceding taxable year, is a "passive foreign investment
company," as defined in the Code. If the Fund engages in certain securities
lending transactions, the amount received by the Fund that is the equivalent of
the dividends paid by the issuer on the securities loaned will not be eligible
for qualified dividend income treatment. Distributions of net capital gain
designated as capital gain distributions, if any, are taxable to shareholders at
rates applicable to long-term capital gain, whether paid in cash or in shares,
and regardless of how long the shareholder has held the Fund's shares. Capital
gain distributions are not eligible for the dividends received deduction. The
maximum federal tax rate on net long-term capital gain of individuals is reduced
generally from 20% to 15% (currently 5% for individuals in lower brackets) for
such gain realized before January 1, 2011. Unrecaptured Section 1250 gain
distributions, if any, will be subject to a 25% tax. 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, 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%.
If an individual receives a dividend that is eligible for qualified
dividend income treatment, and such dividend constitutes an "extraordinary
dividend," any loss on the sale or exchange of shares in respect of which the
extraordinary dividend was paid, then the loss will be long-term capital loss to
the extent of such extraordinary dividend. An "extraordinary dividend" for this
purpose is generally a dividend (i) in an amount greater than or equal to 5% of
the taxpayer's tax basis (or trading value) in a share of stock, aggregating
dividends with ex-dividend dates within an 85-day period or (ii) in an amount
greater than 20% of the taxpayer's tax basis (or trading value) in a share of
stock, aggregating dividends with ex-dividend dates within a 365-day period.
The IRS currently requires that a registered investment company that
has two or more classes of shares allocate to each such class proportionate
amounts of each type of its income (such as ordinary income, capital gains,
dividends qualifying for the dividends received deduction ("DRD") and qualified
dividend income) based upon the percentage of total dividends paid out of
current or accumulated earnings and profits to each class for the tax year.
Accordingly, the Fund intends each year to allocate capital gain dividends,
dividends qualifying for the DRD and dividends that constitute qualified
dividend income, if any, between its common shares and preferred shares in
proportion to the total dividends paid out of current or accumulated earnings
and profits to each class with respect to such tax year. Distributions in excess
of the Fund's current and accumulated earnings and profits, if any, however,
will not be allocated proportionately among the common shares and preferred
shares. Since the Fund's current and accumulated earnings and profits will first
be used to pay dividends on its preferred shares, distributions in excess of
such earnings and profits, if any, will be made disproportionately to holders of
common shares.
Shareholders may be entitled to offset their capital gain distributions
(but not distributions eligible for qualified dividend income treatment) with
capital loss. There are a number of statutory provisions affecting when capital
loss may be offset against capital gain, and limiting the use of loss from
certain investments and activities. Accordingly, shareholders with capital loss
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, exchange, redemption or other disposition of shares, a
shareholder will generally realize a taxable gain or loss equal to the
difference between the amount of cash and the fair market value of other
property received and the shareholder's adjusted tax 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
A-25
disallowed to the extent the shares disposed of are replaced by substantially
identical shares 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 distributions received
by the shareholder (or amounts credited to the shareholder as an undistributed
capital gain) with respect to such shares.
Ordinary income distributions and capital gain distributions also may
be subject to state and local taxes. Shareholders are urged to consult their own
tax advisers regarding specific questions about federal (including the
application of the alternative minimum tax rules), state, local or foreign tax
consequences to them of investing in the Fund.
Backup Withholding
The Fund may be required to backup withhold, currently at a rate of
28%, 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 U.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 shares of the Fund should consult their own tax advisers regarding the
purchase, ownership and disposition of shares of the Fund.
NET ASSET VALUE
The net asset value of the Fund's shares will be computed based on the
market value of the assets it holds and will generally be determined daily as of
the close of regular trading on the American Stock Exchange. The net asset value
of the Fund's shares is reported to the financial press on a weekly basis.
For purposes of determining the Fund's net asset value per share,
portfolio securities listed or traded on a nationally recognized securities
exchange 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 or a
market's official closing price 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 such day, the security is valued at the most recently
available price or, if the Board so determines, by such other method as the
Board 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 the Investment Adviser.
Portfolio securities primarily traded on foreign markets are generally
valued at the preceding closing values of such securities on the relevant
market, but may be fair valued pursuant to procedures established by the Board
if market conditions change significantly after the close of the foreign market
but prior to the close of business on the day the securities are being valued.
Debt instruments with remaining maturities of 60 days or less that are not
credit impaired are valued at amortized cost, unless the Board determines such
amount does not reflect the securities' fair value, in which case these
securities will be fair valued by or under the direction of the Board. Debt
instruments having a maturity greater than 60 days for which market quotations
are readily available are valued at the average of the latest bid and asked
prices. If there were no asked prices quoted on such day, the security is valued
using the closing bid price. Futures contracts are valued at the closing
settlement price of the exchange or board of trade on which the applicable
contract is traded.
A-26
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. Fair
valuation methodologies and procedures may include, but are not limited to:
analysis and review of available financial and non-financial information about
the company; comparisons to the valuation and changes in valuation of similar
securities, including a comparison of foreign securities to the equivalent U.S.
dollar value ADR securities at the close of the U.S. exchange; and evaluation of
any other information that could be indicative of the value of the security.
The Fund obtains valuations on the basis of prices provided by a
pricing service approved by the Board. All other investment assets, including
restricted and not readily marketable securities, are valued in good faith at
fair value under procedures established by and under the general supervision and
responsibility of the Fund's Board.
In addition, whenever developments in one or more securities markets
after the close of the principal markets for one or more portfolio securities
and before the time as of which the fund determines its net asset value would,
if such developments had been reflected in such principal markets, likely have
more than a minimal effect on the Fund's net asset value per share, the Fund may
fair value such portfolio securities based on available market information as of
the time the Fund determines its net asset value.
Amex Closings. The holidays (as observed) on which the Amex is closed,
and therefore days upon which shareholders cannot purchase or sell shares,
currently are: New Year's Day, Martin Luther King, Jr. Day, Presidents' Day,
Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day and on the preceding Friday or subsequent Monday when a holiday
falls on a Saturday or Sunday, respectively.
GENERAL INFORMATION
Book-Entry-Only Issuance
The Depository Trust Company ("DTC") will act as securities depository
for the securities 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. 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.
A-27
DTC has no knowledge of the actual beneficial owners of the securities
being offered pursuant to the 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 distributions 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.
Proxy Voting Procedures
The Fund has adopted the proxy voting procedures of the Investment
Adviser and has directed the Investment Adviser to vote all proxies relating to
the Fund's voting securities in accordance with such procedures. The proxy
voting procedures are attached. They are also on file with the Securities and
Exchange Commission and can be reviewed and copied at the Securities and
Exchange Commission's Public Reference Room in Washington, D.C., and information
on the operation of the Public Reference Room may be obtained by calling the
Securities and Exchange Commission at 202-551-8090. The proxy voting procedures
are also available on the EDGAR Database on the Securities and Exchange
Commission's internet site (http://www.sec.gov) and copies of the proxy voting
procedures may be obtained, after paying a duplicating fee, by electronic
request at the follow E-mail address: [email protected], or by writing the
Securities and Exchange Commission's Public Reference Section, Washington, D.C.
20549-0102.
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., and information
on the operation of the Public Reference Room may be obtained by calling the SEC
at (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: [email protected], or by writing the SEC's Public
Reference Section, Washington, D.C. 20549-0102.
A-28
Joint Code of Ethics for Chief Executive and Senior Financial Officers
The Fund and the Investment Adviser have adopted a joint Code of Ethics
that serves as a code of conduct. The Code of Ethics sets forth policies to
guide the chief executive and senior financial officers in the performance of
their duties. 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., and information
on the operation of the Public Reference Room may be obtained by calling the SEC
at 202-551-8090. The Code of Ethics is also available on the EDGAR Database on
the SEC's Internet site (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: [email protected], or by writing the SEC's Public
Reference Section, Washington, D.C. 20549-0102.
Financial Statements
The audited financial statements included in the annual report to the
Fund's shareholders for the year ended December 31, 2007, together with the
report of PricewaterhouseCoopers LLP are incorporated herein by reference to 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-29
APPENDIX A
GAMCO INVESTORS, INC. AND AFFILIATES
THE VOTING OF PROXIES ON BEHALF OF CLIENTS
Rules 204(4)-2 and 204-2 under the Investment Advisers Act of 1940 and
Rule 30b1-4 under the Investment Company Act of 1940 require investment advisers
to adopt written policies and procedures governing the voting of proxies on
behalf of their clients.
These procedures will be used by GAMCO Asset Management Inc., Gabelli
Funds, LLC and Gabelli Securities, Inc., and Gabelli Advisers, Inc.
(collectively, the "Advisers") to determine how to vote proxies relating to
portfolio securities held by their clients, including the procedures that the
Advisers use when a vote presents a conflict between the interests of the
shareholders of an investment company managed by one of the Advisers, on the one
hand, and those of the Advisers, the principal underwriter, or any affiliated
person of the investment company, the Advisers, or the principal underwriter.
These procedures will not apply where the Advisers do not have voting discretion
or where the Advisers have agreed to with a client to vote the client's proxies
in accordance with specific guidelines or procedures supplied by the client (to
the extent permitted by ERISA).
I. Proxy Voting Committee
The Proxy Voting Committee was originally formed in April 1989 for the
purpose of formulating guidelines and reviewing proxy statements within the
parameters set by the substantive proxy voting guidelines originally published
by GAMCO Investors, Inc. in 1988 and updated periodically, a copy of which are
appended as Exhibit A. The Committee will include representatives of Research,
Administration, Legal, and the Advisers. Additional or replacement members of
the Committee will be nominated by the Chairman and voted upon by the entire
Committee.
Meetings are held on an as needed basis to form views on the manner in
which the Advisers should vote proxies on behalf of their clients.
In general, the Director of Proxy Voting Services, using the Proxy
Guidelines, recommendations of Institutional Shareholder Corporate Governance
Service ("ISS"), other third-party services, and the analysts of Gabelli &
Company, Inc., will determine how to vote on each issue. For non-controversial
matters, the Director of Proxy Voting Services may vote the proxy if the vote is
(1) consistent with the recommendations of the issuer's Board of Directors and
not contrary to the Proxy Guidelines; (2) consistent with the recommendations of
the issuer's Board of Directors and is a non-controversial issue not covered by
the Proxy Guidelines; or (3) the vote is contrary to the recommendations of the
Board of Directors but is consistent with the Proxy Guidelines. In those
instances, the Director of Proxy Voting Services or the Chairman of the
Committee may sign and date the proxy statement indicating how each issue will
be voted.
All matters identified by the Chairman of the Committee, the Director
of Proxy Voting Services or the Legal Department as controversial, taking into
account the recommendations of ISS or other third party services and the
analysts of Gabelli & Company, Inc., will be presented to the Proxy Voting
Committee. If the Chairman of the Committee, the Director of Proxy Voting
Services or the Legal Department has identified the matter as one that (1) is
controversial; (2) would benefit from deliberation by the Proxy Voting
Committee; or (3) may give rise to a conflict of interest between the Advisers
and their clients, the Chairman of the Committee will initially determine what
vote to recommend that the Advisers should cast and the matter will go before
the Committee.
A. Conflicts of Interest.
The Advisers have implemented these proxy voting procedures in order to
prevent conflicts of interest from influencing their proxy voting decisions. By
following the Proxy Guidelines, as well as the recommendations of ISS, other
third-party services and the analysts of Gabelli & Company, the Advisers are
able to avoid, wherever possible, the influence of potential conflicts of
interest. Nevertheless, circumstances may arise in which one or more of the
Advisers are faced with a conflict of interest or the appearance of a conflict
of interest in connection with its vote. In general, a conflict of interest may
arise when an Adviser knowingly does business with an issuer, and may appear to
have a material conflict between its own interests and the interests of the
shareholders of an investment company managed by one of the Advisers regarding
how the proxy is to be voted. A conflict also may exist when an Adviser has
actual knowledge of a material business arrangement between an issuer and an
affiliate of the Adviser.
A-30
In practical terms, a conflict of interest may arise, for example, when
a proxy is voted for a company that is a client of one of the Advisers, such as
GAMCO Asset Management Inc. A conflict also may arise when a client of one of
the Advisers has made a shareholder proposal in a proxy to be voted upon by one
or more of the Advisers. The Director of Proxy Voting Services, together with
the Legal Department, will scrutinize all proxies for these or other situations
that may give rise to a conflict of interest with respect to the voting of
proxies.
B. Operation of Proxy Voting Committee
For matters submitted to the Committee, each member of the Committee
will receive, prior to the meeting, a copy of the proxy statement, any relevant
third party research, a summary of any views provided by the Chief Investment
Officer and any recommendations by Gabelli & Company, Inc. analysts. The Chief
Investment Officer or the Gabelli & Company, Inc. analysts may be invited to
present their viewpoints. If the Director of Proxy Voting Services or the Legal
Department believe that the matter before the committee is one with respect to
which a conflict of interest may exist between the Advisers and their clients,
counsel will provide an opinion to the Committee concerning the conflict. If the
matter is one in which the interests of the clients of one or more of Advisers
may diverge, counsel will so advise and the Committee may make different
recommendations as to different clients. For any matters where the
recommendation may trigger appraisal rights, counsel will provide an opinion
concerning the likely risks and merits of such an appraisal action.
Each matter submitted to the Committee will be determined by the vote
of a majority of the members present at the meeting. Should the vote concerning
one or more recommendations be tied in a vote of the Committee, the Chairman of
the Committee will cast the deciding vote. The Committee will notify the proxy
department of its decisions and the proxies will be voted accordingly.
Although the Proxy Guidelines express the normal preferences for the
voting of any shares not covered by a contrary investment guideline provided by
the client, the Committee is not bound by the preferences set forth in the Proxy
Guidelines and will review each matter on its own merits. Written minutes of all
Proxy Voting Committee meetings will be maintained. The Advisers subscribe to
ISS, which supplies current information on companies, matters being voted on,
regulations, trends in proxy voting and information on corporate governance
issues.
If the vote cast either by the analyst or as a result of the
deliberations of the Proxy Voting Committee runs contrary to the recommendation
of the Board of Directors of the issuer, the matter will be referred to legal
counsel to determine whether an amendment to the most recently filed Schedule
13D is appropriate.
II. Social Issues and Other Client Guidelines
If a client has provided special instructions relating to the voting of
proxies, they should be noted in the client's account file and forwarded to the
proxy department. This is the responsibility of the investment professional or
sales assistant for the client. In accordance with Department of Labor
guidelines, the Advisers' policy is to vote on behalf of ERISA accounts in the
best interest of the plan participants with regard to social issues that carry
an economic impact. Where an account is not governed by ERISA, the Advisers will
vote shares held on behalf of the client in a manner consistent with any
individual investment/voting guidelines provided by the client. Otherwise the
Advisers will abstain with respect to those shares.
III. Client Retention of Voting Rights
If a client chooses to retain the right to vote proxies or if there is
any change in voting authority, the following should be notified by the
investment professional or sales assistant for the client.
o Operations
o Legal Department
o Proxy Department
o Investment professional assigned to the account
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In the event that the Board of Directors (or a Committee thereof) of
one or more of the investment companies managed by one of the Advisers has
retained direct voting control over any security, the Proxy Voting Department
will provide each Board Member (or Committee member) with a copy of the proxy
statement together with any other relevant information including recommendations
of ISS or other third-party services.
IV. Voting Records
The Proxy Voting Department will retain a record of matters voted upon
by the Advisers for their clients. The Advisers' staff may request proxy-voting
records for use in presentations to current or prospective clients. Requests for
proxy voting records should be made at least ten days prior to client meetings.
If a client wishes to receive a proxy voting record on a quarterly,
semi-annual or annual basis, please notify the Proxy Voting Department. The
reports will be available for mailing approximately ten days after the quarter
end of the period. First quarter reports may be delayed since the end of the
quarter falls during the height of the proxy season.
A letter is sent to the custodians for all clients for which the
Advisers have voting responsibility instructing them to forward all proxy
materials to:
[Adviser name]
Attn: Proxy Voting Department, One Corporate Center
Rye, New York 10580-1433
The sales assistant sends the letters to the custodians along with the
trading/DTC instructions. Proxy voting records will be retained in compliance
with Rule 204-2 under the Investment Advisers Act.
V. Voting Procedures
1. Custodian banks, outside brokerage firms and First Clearing
Corporation are responsible for forwarding proxies directly to GAMCO.
Proxies are received in one of two forms:
o Vote Authorization Forms (VAFs)--Issued by ADP. VAFs must be voted
through the issuing institution causing a time lag. ADP is an
outside service contracted by the various institutions to issue
proxy materials.
o Proxy cards which may be voted directly.
2. Upon receipt of the proxy, the number of shares each form represents
is logged into the proxy system according to security.
3. In the case of a discrepancy such as an incorrect number of shares,
an improperly signed or dated card, wrong class of security, etc., the issuing
custodian is notified by phone. A corrected proxy is requested. Arrangements are
made to insure that a proper proxy is received in time to be voted (overnight
delivery, fax, etc.). When securities are out on loan on record date, the
custodian is requested to supply written verification.
4. Upon receipt of instructions from the proxy committee (see
Administrative), the votes are cast and recorded for each account on an
individual basis.
Since January 1, 1992, records have been maintained on the Proxy Edge
system. The system is backed up regularly. From 1990 through 1991, records were
maintained on the PROXY VOTER system and in hardcopy format. Prior to 1990,
records were maintained on diskette and in hardcopy format.
A-32
PROXY EDGE RECORDS INCLUDE:
Security Name and Cusip Number
Date and Type of Meeting (Annual, Special, Contest) Client Name
Adviser or Fund Account Number
Directors' Recommendation
How GAMCO voted for the client on each issue
The rationale for the vote when it appropriate
RECORDS PRIOR TO THE INSTITUTION OF THE PROXY EDGE SYSTEM INCLUDE:
Security name
Type of Meeting (Annual, Special, Contest)
Date of Meeting Name of Custodian
Name of Client
Custodian Account Number
Adviser or Fund Account Number
Directors' recommendation
How the Adviser voted for the client on each issue
Date the proxy statement was received and by whom
Name of person posting the vote
Date and method by which the vote was cast
o From these records individual client proxy voting records are
compiled. It is our policy to provide institutional clients with a
proxy voting record during client reviews. In addition, we will
supply a proxy voting record at the request of the client on a
quarterly, semiannual or annual basis.
5. VAFs are kept alphabetically by security. Records for the current
proxy season are located in the Proxy Voting Department office. In preparation
for the upcoming season, files are transferred to an offsite storage facility
during January/February.
6. Shareholder Vote Authorization Forms issued by ADP are always sent
directly to a specific individual at ADP.
7. If a proxy card or VAF is received too late to be voted in the
conventional matter, every attempt is made to vote on one of the following
manners:
o VAFs can be faxed to ADP up until the time of the meeting. This is
followed up by mailing the original form.
o When a solicitor has been retained, that person is called. At the
solicitor's direction, the proxy is faxed.
8. In the case of a proxy contest, records are maintained for each
opposing entity.
9. Voting in Person
a) At times it may be necessary to vote the shares in person. In this
case, a "legal proxy" is obtained in the following manner:
o Banks and brokerage firms using the services at ADP:
The back of the VAF is stamped indicating that we wish to vote in
person. The forms are then sent overnight to ADP. ADP issues individual legal
proxies and sends them back via overnight (or the Adviser can pay messenger
charges). Lead time of at least two weeks prior to the meeting is needed to do
this. Alternatively, the procedures detailed below for banks not using ADP may
be implemented.
A-33
Banks and brokerage firms issuing proxies directly:
The bank is called and/or faxed and a legal proxy is requested. All
legal proxies should appoint: "REPRESENTATIVE OF [ADVISER NAME] WITH FULL POWER
OF SUBSTITUTION."
b) The legal proxies are given to the person attending the meeting
along with the following supplemental material:
o A limited Power of Attorney appointing the attendee an Adviser
representative.
o A list of all shares being voted by custodian only. Client names
and account numbers are not included. This list must be presented,
along with the proxies, to the Inspectors of Elections and/or
tabulator at least one-half hour prior to the scheduled start of
the meeting. The tabulator must "qualify" the votes (i.e.
determine if the votes have previously been cast, if the votes
have been rescinded, etc.).
o A sample ERISA and Individual contract.
o A sample of the annual authorization to vote proxies form.
o A copy of our most recent Schedule 13D filing (if applicable).
A-34
PROXY VOTING GUIDELINES
GENERAL POLICY STATEMENT
It is the policy of GAMCO Investors, Inc. to vote in the best economic
interests of our clients. As we state in our Magna Carta of Shareholders Rights,
established in May 1988, we are neither for nor against management. We are for
shareholders.
At our first proxy committee meeting in 1989, it was decided that each
proxy statement should be evaluated on its own merits within the framework first
established by our Magna Carta of Shareholders Rights. The attached guidelines
serve to enhance that broad framework.
We do not consider any issue routine. We take into consideration all of
our research on the company, its directors, and their short and long-term goals
for the company. In cases where issues that we generally do not approve of are
combined with other issues, the negative aspects of the issues will be factored
into the evaluation of the overall proposals but will not necessitate a vote in
opposition to the overall proposals.
Board of Directors
The advisers do not consider the election of the Board of Directors a
routine issue. Each slate of directors is evaluated on a case-by-case basis.
Factors taken into consideration include:
o Historical responsiveness to shareholders.
This may include such areas as:
o Paying greenmail
o Failure to adopt shareholder resolutions receiving a
majority of shareholder votes
o Qualifications
o Nominating committee in place
o Number of outside directors on the board
o Attendance at meetings
o Overall performance
Selection of Auditors
In general, we support the Board of Directors' recommendation for
auditors.
Blank Check Preferred Stock
We oppose the issuance of blank check preferred stock.
Blank check preferred stock allows the company to issue stock and
establish dividends, voting rights, etc. without further shareholder approval.
A-35
Classified Board
A classified board is one where the directors are divided into classes
with overlapping terms. A different class is elected at each annual meeting.
While a classified board promotes continuity of directors facilitating
long range planning, we feel directors should be accountable to shareholders on
an annual basis. We will look at this proposal on a case-by-case basis taking
into consideration the board's historical responsiveness to the rights of
shareholders.
Where a classified board is in place we will generally not support
attempts to change to an annually elected board.
When an annually elected board is in place, we generally will not
support attempts to classify the board.
Increase Authorized Common Stock
The request to increase the amount of outstanding shares is considered
on a case-by-case basis.
Factors taken into consideration include:
o Future use of additional shares
o Stock split
o Stock option or other executive compensation plan
o Finance growth of company/strengthen balance sheet
o Aid in restructuring
o Improve credit rating
o Implement a poison pill or other takeover defense
o Amount of stock currently authorized but not yet issued or
reserved for stock option plans
o Amount of additional stock to be authorized and its dilutive
effect
We will support this proposal if a detailed and verifiable plan for the
use of the additional shares is contained in the proxy statement.
Confidential Ballot
We support the idea that a shareholder's identity and vote should be
treated with confidentiality.
However, we look at this issue on a case-by-case basis.
In order to promote confidentiality in the voting process, we endorse
the use of independent Inspectors of Election.
Cumulative Voting
In general, we support cumulative voting.
A-36
Cumulative voting is a process by which a shareholder may multiply the
number of directors being elected by the number of shares held on record date
and cast the total number for one candidate or allocate the voting among two or
more candidates.
Where cumulative voting is in place, we will vote against any proposal
to rescind this shareholder right.
Cumulative voting may result in a minority block of stock gaining
representation on the board. When a proposal is made to institute cumulative
voting, the proposal will be reviewed on a case-by-case basis. While we feel
that each board member should represent all shareholders, cumulative voting
provides minority shareholders an opportunity to have their views represented.
Director Liability And Indemnification
We support efforts to attract the best possible directors by limiting
the liability and increasing the indemnification of directors, except in the
case of insider dealing.
Equal Access to the Proxy
The SEC's rules provide for shareholder resolutions. However, the
resolutions are limited in scope and there is a 500 word limit on proponents'
written arguments. Management has no such limitations. While we support equal
access to the proxy, we would look at such variables as length of time required
to respond, percentage of ownership, etc.
Fair Price Provisions
Charter provisions requiring a bidder to pay all shareholders a fair
price are intended to prevent two-tier tender offers that may be abusive.
Typically, these provisions do not apply to board-approved transactions.
We support fair price provisions because we feel all shareholders
should be entitled to receive the same benefits.
Reviewed on a case-by-case basis.
Golden Parachutes
Golden parachutes are severance payments to top executives who are
terminated or demoted after a takeover.
We support any proposal that would assure management of its own welfare
so that they may continue to make decisions in the best interest of the company
and shareholders even if the decision results in them losing their job. We do
not, however, support excessive golden parachutes. Therefore, each proposal will
be decided on a case-by- case basis.
Note: Congress has imposed a tax on any parachute that is more than
three times the executive's average annual compensation.
Anti-Greenmail Proposals
We do not support greenmail. An offer extended to one shareholder
should be extended to all shareholders equally across the board.
Limit Shareholders' Rights to Call Special Meetings
We support the right of shareholders to call a special meeting.
Consideration Of Nonfinancial Effects Of A Merger
This proposal releases the directors from only looking at the financial
effects of a merger and allows them the opportunity to consider the merger's
effects on employees, the community, and consumers.
A-37
As a fiduciary, we are obligated to vote in the best economic interests
of our clients. In general, this proposal does not allow us to do that.
Therefore, we generally cannot support this proposal.
Reviewed on a case-by-case basis.
Mergers, Buyouts, Spin-Offs, Restructurings
Each of the above is considered on a case-by-case basis. According to
the Department of Labor, we are not required to vote for a proposal simply
because the offering price is at a premium to the current market price. We may
take into consideration the long term interests of the shareholders.
Military Issues
Shareholder proposals regarding military production must be evaluated
on a purely economic set of criteria for our ERISA clients. As such, decisions
will be made on a case-by-case basis.
In voting on this proposal for our non-ERISA clients, we will vote
according to the client's direction when applicable. Where no direction has been
given, we will vote in the best economic interests of our clients. It is not our
duty to impose our social judgment on others.
Northern Ireland
Shareholder proposals requesting the signing of the MacBride principles
for the purpose of countering the discrimination of Catholics in hiring
practices must be evaluated on a purely economic set of criteria for our ERISA
clients. As such, decisions will be made on a case-by-case basis.
In voting on this proposal for our non-ERISA clients, we will vote
according to client direction when applicable. Where no direction has been
given, we will vote in the best economic interests of our clients. It is not our
duty to impose our social judgment on others.
Opt Out Of State Anti-Takeover Law
This shareholder proposal requests that a company opt out of the
coverage of the state's takeover statutes. Example: Delaware law requires that a
buyer must acquire at least 85% of the company's stock before the buyer can
exercise control unless the board approves.
We consider this on a case-by-case basis. Our decision will be based on
the following:
o State of Incorporation
o Management history of responsiveness to shareholders
o Other mitigating factors
Poison Pill
In general, we do not endorse poison pills.
In certain cases where management has a history of being responsive to
the needs of shareholders and the stock is very liquid, we will reconsider this
position.
Reincorporation
Generally, we support reincorporation for well-defined business
reasons. We oppose reincorporation if proposed solely for the purpose of
reincorporating in a state with more stringent anti-takeover statutes that may
negatively impact the value of the stock.
A-38
Stock Option Plans
Stock option plans are an excellent way to attract, hold and motivate
directors and employees. However, each stock option plan must be evaluated on
its own merits, taking into consideration the following:
o Dilution of voting power or earnings per share by more than 10%
o Kind of stock to be awarded, to whom, when and how much
o Method of payment
o Amount of stock already authorized but not yet issued under
existing stock option plans
Supermajority Vote Requirements
Supermajority vote requirements in a company's charter or bylaws
require a level of voting approval in excess of a simple majority of the
outstanding shares. In general, we oppose supermajority-voting requirements.
Supermajority requirements often exceed the average level of shareholder
participation. We support proposals' approvals by a simple majority of the
shares voting.
Limit Shareholders Right To Act By Written Consent
Written consent allows shareholders to initiate and carry on a
shareholder action without having to wait until the next annual meeting or to
call a special meeting. It permits action to be taken by the written consent of
the same percentage of the shares that would be required to effect proposed
action at a shareholder meeting.
Reviewed on a case-by-case basis.
A-39
PART C
OTHER INFORMATION
Item 25. Financial Statements and Exhibits
(1) Financial Statements
Part A
None
Part B
Statement of Assets and Liabilities as of December 31, 2007
Statement of Operations for the Year Ended December 31, 2007
Statement of Changes in Net Assets
Report of Independent Registered Public Accounting Firm
(2) Exhibits
(a) Agreement and Declaration of Trust of Registrant (1)
(b) By-Laws of Registrant (1)
(c) Not applicable
(d) Form of Specimen Common Share Certificate (1)
(e) Included in Prospectus Automatic Dividend Reinvestment and
Voluntary Cash Purchase Plan of Registrant (1)
(f) Not applicable
(g) Form of Investment Advisory Agreement between Registrant and
Gabelli Funds, LLC (1)
(h) Form of Underwriting Agreement (4)
(i) Not applicable
(j) Form of Custodian Agreement (1)
(k) Form of Registrar, Transfer Agency and Service Agreement (1)
(l) Opinion and Consent of Paul, Hastings, Janofsky & Walker LLP with
respect to legality (3)
(m) Not applicable
(n) (i) Consent of Independent Registered Public Accounting Firm (3)
(ii) Powers of Attorney (2)
1
(o) Not applicable
(p) Form of Initial Subscription Agreement (1)
(q) Not applicable
(r) (i) Code of Ethics of the Fund and the Investment Adviser (1)
(ii) Joint Code of Ethics for Chief Executive and Senior
Financial Officers (1)
---------------------
(1) Previously filed with Pre-Effective Amendment No. 2 to the Registrant's
Registration Statement on Form N-2 filed on May 25, 2004 (333-113621).
(2) Previously filed with the Registrant's Registration Statement on Form N-2
filed November 21, 2007 (333-147575).
(3) Filed herewith.
(4) To be filed by Amendment.
Item 26. Marketing Arrangements
The information contained under the heading "Plan of Distribution" on
page __ of the Prospectus is incorporated by reference, and any information
concerning any underwriters will be contained in the accompanying Prospectus
Supplement, if any.
Item 27. Other Expenses of Issuance and Distribution
The following table sets forth the estimated expenses to be incurred in
connection with the offering described in this Registration Statement:
SEC registration fees $ _____
American Stock Exchange listing fee $ _____
Rating Agency fees $ _____
Printing/engraving expenses $ _____
Auditing fees and expenses $ _____
Legal fees and expenses $ _____
FINRA fees $ _____
Miscellaneous $ _____
Total $ _____
Item 28. Persons Controlled by or Under Common Control with Registrant
None.
2
Item 29. Number of Holders of Securities as of December 31, 2007:
Class of Shares Number of
Record Holders
Common Shares 14
Item 30. Indemnification
Article IV of the Registrant's Agreement and Declaration of Trust
provides as follows:
4.1 No personal Liability of Shareholders, Trustees, etc. No
Shareholder of the Trust shall be subject in such capacity to any personal
liability whatsoever to any Person in connection with Trust Property or the
acts, obligations or affairs of the Trust. Shareholders shall have the same
limitation of personal liability as is extended to stockholders of a private
corporation for profit incorporated under the general corporation law of the
State of Delaware. No Trustee or officer of the Trust shall be subject in such
capacity to any personal liability whatsoever to any Person, other than the
Trust or its Shareholders, in connection with Trust Property or the affairs of
the Trust, save only liability to the Trust or its Shareholders arising from bad
faith, willful misfeasance, gross negligence or reckless disregard for his duty
to such Person; and, subject to the foregoing exception, all such Persons shall
look solely to the Trust Property for satisfaction of claims of any nature
arising in connection with the affairs of the Trust. If any Shareholder, Trustee
or officer, as such, of the Trust, is made a party to any suit or proceeding to
enforce any such liability, subject to the foregoing exception, he shall not, on
account thereof, be held to any personal liability.
4.2 Mandatory Indemnification. (a) The Trust shall indemnify the
Trustees and officers of the Trust (each such person being an "indemnitee")
against any liabilities and expenses, including amounts paid in satisfaction of
judgments, in compromise or as fines and penalties, and reasonable counsel fees
reasonably incurred by such indemnitee in connection with the defense or
disposition of any action, suit or other proceeding, whether civil or criminal,
before any court or administrative or investigative body in which he may be or
may have been involved as a party or otherwise (other than, except as authorized
by the Trustees, as the plaintiff or complainant) or with which he may be or may
have been threatened, while acting in any capacity set forth above in this
Section 4.2 by reason of his having acted in any such capacity, except with
respect to any matter as to which he shall not have acted in good faith in the
reasonable belief that his action was in the best interest of the Trust or, in
the case of any criminal proceeding, as to which he shall have had reasonable
cause to believe that the conduct was unlawful, provided, however, that no
indemnitee shall be indemnified hereunder against any liability to any person or
any expense of such indemnitee arising by reason of (i) willful misfeasance,
(ii) bad faith, (iii) gross negligence (negligence in the case of Affiliated
Indemnitees), or (iv) being sometimes referred to herein as "disabling
conduct"). Notwithstanding the foregoing, with respect to any action, suit or
other proceeding voluntarily prosecuted by any indemnitee as plaintiff,
indemnification shall be mandatory only if the prosecution of such action, suit
or other proceeding by such indemnitee was authorized by a majority of the
Trustees.
(b) Notwithstanding the foregoing, no indemnification shall be made
hereunder unless there has been a determination (1) by a final decision on the
merits by a court or other body of competent jurisdiction before whom the issue
of entitlement to indemnification hereunder was brought that such indemnitee is
entitled to indemnification hereunder or, (2) in the absence of such a decision
by (i) a majority vote of a quorum of those Trustees who are neither Interested
Persons of the Trust nor parties to the proceeding ("Disinterested Non-Party
Trustees"), that the indemnitee is entitled to indemnification hereunder, or
(ii) if such quorum is not obtainable or even if obtainable, if such majority so
directs, independent legal counsel in a written opinion conclude that the
indemnitee should be entitled to indemnification hereunder. All determinations
to make advance payments in connection with the expense of defending any
proceeding shall be authorized and made in accordance with the immediately
succeeding paragraph (c) below.
(c) The Trust shall make advance payments in connection with the
expenses of defending any action with respect to which indemnification might be
sought hereunder if the Trust receives a written affirmation by the indemnitee
of the indemnitee's good faith belief that the standards of conduct necessary
for indemnification have been met and a written undertaking to reimburse the
Trust unless it is subsequently determined that he is entitled to
3
such indemnification and if a majority of the Trustees determine that the
applicable standards of conduct necessary for indemnification appear to have
been met. In addition, at least one of the following conditions must be met. (1)
the indemnitee shall provide adequate security for his undertaking, (2) the
Trust shall be insured against losses arising by reason of any lawful advances,
or (3) a majority of a quorum of the Disinterested Non-Party Trustees, or if a
majority vote of such quorum so direct, independent legal counsel in a written
opinion, shall conclude, based on a review of readily available facts (as
opposed to a full trial-type inquiry), that there is substantial reason to
believe that the indemnitee ultimately will be found entitled to
indemnification.
(d) The rights accruing to any indemnitee under these provisions shall
not exclude any other right to which he may be lawfully entitled.
(e) Notwithstanding the foregoing, subject to any limitations provided
by the 1940 Act and this Declaration, the Trust shall have the power and
authority to indemnify Persons providing services to the Trust to the full
extent provided by law as if the Trust were a corporation organized under the
Delaware General Corporation Law provided that such indemnification has been
approved by a majority of the Trustees.
4.3 No Duty of Investigation; Notice in Trust Instruments, etc. No
purchaser, lender, transfer agent or other person dealing with the Trustees or
with any officer, employee or agent of the Trust shall be bound to make any
inquiry concerning the validity of any transaction purporting to be made by the
Trustees or by said officer, employee or agent or be liable for the application
of money or property paid, loaned, or delivered to or on the order of the
Trustees or of said officer, employee or agent. Every obligation, contract,
undertaking, instrument, certificate, Share, other security of the Trust and
every other act or thing whatsoever executed in connection with the Trust shall
be conclusively taken to have been executed or done by the executors thereof
only in their capacity as Trustees under this Declaration or in their capacity
as officers, employees or agents of the Trust. The Trustees may maintain
insurance for the protection of the Trust Property, its Shareholders, Trustees,
officers, employees and agents in such amount as the Trustees shall deem
adequate to cover possible liability, and such other insurance as the Trustees
in their sole judgment shall deem advisable or is required by the 1940 Act.
4.4 Reliance on experts, etc. Each Trustee and officer or employee of
the Trust shall, in the performance of its duties, be fully and completely
justified and protected with regard to any act or any failure to act resulting
from reliance in good faith upon the books of account or other records of the
Trust, upon an opinion of counsel, or upon reports made to the Trust by any of
the Trust's officers or employees or by any advisor, administrator, manager,
distributor selected dealer, accountant, appraiser or other expert or consultant
selected with reasonable care by the Trustees, officers or employees of the
Trust, regardless of whether such counsel or other person may also be a Trustee.
Section 9 of the Investment Advisory Agreement provides as follows:
(a) The Fund hereby agrees to indemnify the Adviser and each of the
Adviser's trustees, officers, employees, and agents (including any individual
who serves at the Adviser's request as director, officer, partner, trustee or
the like of another corporation) and controlling persons (each such person being
an "indemnitee') against any liabilities and expenses, including amounts paid in
satisfaction of judgments, in compromise or as fines and penalties, and counsel
fees (all as provided in accordance with applicable corporate law) reasonably
incurred by such indemnitee in connection with the defense or disposition of any
action, suit or other proceeding, whether civil or criminal, before any court or
administrative or investigative body in which he may be or may have been
involved as a party or otherwise or with which he may be or may have been
threatened, while acting in any capacity set forth above in this paragraph or
thereafter by reason of his having acted in any such capacity, except with
respect to any matter as to which he shall have been adjudicated not to have
acted in good faith in the reasonable belief that his action was in the best
interest of the Fund and furthermore, in the case of any criminal proceeding, so
long as he had no reasonable cause to believe that the conduct was unlawful,
provided, however, that (1) no indemnitee shall be indemnified hereunder against
any liability to the Fund or its shareholders or any expense of such indemnitee
arising by reason of (i) willful misfeasance, (ii) bad faith, (iii) gross
negligence, (iv) reckless disregard of the duties involved in the conduct of his
position (the conduct referred to in such clauses (i) through (iv) being
sometimes referred to herein as "disabling conduct"), (2) as to any matter
disposed of by settlement or a compromise payment by such indemnitee, pursuant
to a consent decree or otherwise, no indemnification either for said payment or
for any other expenses shall be provided unless there has been a determination
that such settlement or compromise is in the
4
best interests of the Fund and that such indemnitee appears to have acted in
good faith in the reasonable belief that his action was in the best interest of
the Fund and did not involve disabling conduct by such indemnitee and (3) with
respect to any action, suit or other proceeding voluntarily prosecuted by any
indemnitee as plaintiff, indemnification shall be mandatory only if the
prosecution of such action, suit or other proceeding by such indemnitee was
authorized by a majority of the full Board of the Fund. Notwithstanding the
foregoing the Fund shall not be obligated to provide any such indemnification to
the extent such provision would waive any right which the Fund cannot lawfully
waive.
(b) The Fund shall make advance payments in connection with the
expenses of defending any action with respect to which indemnification might be
sought hereunder if the Fund receives a written affirmation of the indemnitee's
good faith belief that the standard of conduct necessary for indemnification has
been met and a written undertaking to reimburse the Fund unless it is
subsequently determined that he is entitled to such indemnification and if the
trustees of the Fund determine that the facts then known to them would not
preclude indemnification. In addition, at least one of the following conditions
must be met: (A) the indemnitee shall provide a security for his undertaking,
(B) the Fund shall be insured against losses arising by reason of any lawful
advances, or (C) a majority of a quorum of trustees of the Fund who are neither
"interested persons" of the Fund (as defined in Section 2(a)(19) of the Act) nor
parties to the proceeding ("Disinterested Non-Party Trustees") or an independent
legal counsel in a written opinion, shall determine, based on a review of
readily available facts (as opposed to a full trial-type inquiry), that there is
reason to believe that the indemnitee ultimately will be found entitled to
indemnification.
(c) All determinations with respect to indemnification hereunder shall
be made (1) by a final decision on the merits by a court or other body before
whom the proceeding was brought that such indemnitee is not liable by reason of
disabling conduct or, (2) in the absence of such a decision, by (i) a majority
vote of a quorum of the Disinterested Non-Party Trustees of the Fund, or (ii) if
such a quorum is not obtainable or even, if obtainable, if a majority vote of
such quorum so directs, independent legal counsel in a written opinion.
The rights accruing to any indemnitee under these provisions shall not
exclude any other right to which he may be lawfully entitled.
Underwriter indemnification provisions to be filed by Amendment.
Item 31. Business and Other Connections of Investment Adviser
The Investment Adviser, a limited liability company organized under the
laws of the State of New York, acts as investment adviser to the Registrant. The
Registrant is fulfilling the requirement of this Item 31 to provide a list of
the officers and directors of the Investment Adviser, together with information
as to any other business, profession, vocation or employment of a substantial
nature engaged in by the Investment Adviser or those officers and directors
during the past two years, by incorporating by reference the information
contained in the Form ADV of the Investment Adviser filed with the SEC pursuant
to the 1940 Act (Commission File No. 801-26202).
Item 32. Location of Accounts and Records
The accounts and records of the Registrant are maintained in part at
the office of the Investment Adviser at One Corporate Center, Rye, New York
10580-1422, in part at the offices of the Registrant's custodian, State Street
Bank and Trust, 225 Franklin Street, Boston, Massachusetts 02110, in part at the
offices of the Registrant's sub-administrator, PFPC Inc., 400 Bellevue Parkway,
Wilmington, Delaware, 19809, and in part at the offices of Computershare Trust
Company, N.A., P.O. Box 43025, Providence, RI 02940-3025.
Item 33. Management Services
Not applicable.
5
Item 34. Undertakings
1. Registrant undertakes to suspend the offering of shares until the
prospectus is amended, if subsequent to the effective date of this registration
statement, its net asset value declines more than ten percent from its net asset
value as of the effective date of the registration statement or its net asset
value increases to an amount greater than its net proceeds as stated in the
prospectus.
2. Not applicable.
3. Not applicable.
4. Registrant undertakes:
(a) to file, during and period in which offers or sales are being
made, a post-effective amendment to this Registration
Statement:
(1) to include any prospectus required by Section 10(a)
(3) of the Securities Act;
(2) to reflect in the prospectus any facts or events
after the effective date of the Registration
Statement (or the most recent post-effective
amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the
information set forth in the Registration Statement;
and
(3) to include any material information with respect to
the plan of distribution not previously disclosed in
the Registration Statement or any material change to
such information in the Registration Statement.
(b) that for the purpose of determining any liability under the
Securities Act, each post-effective amendment shall be deemed
to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering
thereof;
(c) to remove from registration by means of a pos-effective
amendment any of the securities being registered which remain
unsold at the termination of the offering; and
(d) that, for the purpose of determining liability under the
Securities Act to any purchaser, if the Registrant is subject
to Rule 430C: Each prospectus filed pursuant to Rule 497(b),
(c), (d) or (e) under the Securities Act as part of a
registration statement relating to an offering, other than
prospectuses filed in reliance on Rule 430A under the
Securities Act shall be deemed to be part of and included in
the registration statement as of the date it is first used
after effectiveness. Provided, however, that no statement made
in a registration statement or prospectus that is part of the
registration or made in a document incorporated or deemed
incorporated by reference into the registration statement or
prospectus that is part of the registration statement will, as
to a purchaser with a time of contract of sale prior to such
first use, supersede or modify any statement that was made in
the registration statement or prospectus that was part of the
registration statement or made in any such document
immediately prior to such date of first use.
6
(e) that for the purpose of determining liability of the
Registrant under the Securities Act to any purchaser in the
initial distribution of securities:
The undersigned Registrant undertakes that in a primary
offering of securities of the undersigned Registrant pursuant
to this registration statement, regardless of the underwriting
method used to sell the securities to the purchaser, if the
securities are offered or sold to such purchaser by means of
any of the following communications, the undersigned
Registrant will be a seller to the purchaser and will be
considered to offer or sell such securities to the purchaser:
(1) any preliminary prospectus or prospectus of the
undersigned Registrant relating to the offering
required to be filed pursuant to Rule 497 under the
Securities Act.
(2) the portion of any advertisement pursuant to Rule 482
under the Securities Act relating to the offering
containing material information about the undersigned
Registrant or its securities provided by or on behalf
of the undersigned Registrant; and
(3) any other communication that is an offer in the
offering made by the undersigned Registrant to the
purchaser.
5. Registrant undertakes:
(a) that, for the purpose of determining any liability under the
Securities Act the information omitted from the form of
prospectus filed as part of the Registration Statement in
reliance upon Rule 430A and contained in the form of
prospectus filed by the Registrant pursuant to Rule 497(h)
will be deemed to be a part of the Registration Statement as
of the time it was declared effective.
(b) that, for the purpose of determining any liability under the
Securities Act, each post-effective amendment that contains a
form of prospectus will be deemed to be a new Registration
Statement relating to the securities offered therein, and the
offering of such securities at that time will be deemed to be
the initial bona fide offering thereof.
6. Registrant undertakes to send by first class mail or other means
designed to ensure equally prompt delivery, within two business days of receipt
of a written or oral request, any Statement of Additional Information
constituting Part B of this Registration Statement.
7
SIGNATURES
As required by the Securities Act of 1933 and the Investment Company
Act of 1940, this Registrant's Registration Statement has been signed on behalf
of the Registrant, in the City of Rye, State of New York, on the 18th day of
March, 2008.
THE GABELLI GLOBAL UTILITY & INCOME TRUST
By: /s/ Bruce N. Alpert
-------------------
Bruce N. Alpert
President and Principal Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the 18th day of March, 2008.
NAME TITLE
* Trustee
--------------------------------------------
Anthony J. Colavita
* Trustee
--------------------------------------------
James P. Conn
* Trustee
--------------------------------------------
Mario d'Urso
* Trustee
--------------------------------------------
Vincent D. Enright
Trustee
Michael J. Melarkey
* Trustee
--------------------------------------------
Salvatore M. Salibello
* Trustee
--------------------------------------------
Salvatore J. Zizza
/s/ Bruce N. Alpert Attorney-in-Fact
-------------------
Bruce N. Alpert
--------------------------------------------
* Pursuant to Powers of Attorney
8
EXHIBIT INDEX
Exhibit Number Description of Exhibit
------------------------------------- ------------------------------------------
Ex-99(n)(i) Consent of Independent Registered Public
Accounting Firm
9