As filed with the Securities and Exchange Commission on May 16, 2007
Securities Act File No. 333-[ ]
Investment Company Act File No. 811-[ ]
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 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
[ ] Pre-Effective Amendment No.
[ ] Post-Effective Amendment No.
and/or
[X] REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
[ ] Amendment No. __
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THE GABELLI GLOBAL GOLD, NATURAL RESOURCES & 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
Bruce N. Alpert
The Gabelli Global Gold, Natural Resources & 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:
Richard T. Prins, Esq. James E. McKee, Esq.
Skadden, Arps, Slate, Meagher & The Gabelli Global Gold, Natural
Flom LLP Resources & Income Trust
4 Times Square One Corporate Center
New York, New York 10036 Rye, New York 10580-1422
(212) 735-3000 (914) 921-5100
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 filed [post-effective amendment] [registration statement].
[ ] This form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act and the Securities Act
registration number of the earlier effective registration statement for the same
offering is __________.
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CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
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Amount Being Proposed Maximum Proposed Maximum Amount of
Title of Securities Registered Offering Price Per Share Aggregate Offering Price(1) Registration Fee
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Preferred Shares of Beneficial Ownership [ ] Shares $[ ] $100 million $3,070
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Common Shares of Beneficial Ownership [ ] Shares $[ ] $250 million $7,675
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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 $350 million.
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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.
THE GABELLI GLOBAL GOLD, NATURAL RESOURCES & 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. Cover Pages; Other Offering Information Front Cover Page; Inside Front Cover Pate
Item 3. Fee Table and Synopsis Prospectus Summary: Table of Fees and Expenses
Item 4. Financial Highlights Financial Highlights
Item 5. Plan of Distribution Prospectus Summary; Underwriting
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 Objective and Policies;
Price Range of Common Stock; 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 Securities Prospectus Summary; Dividends and Distributions;
Taxation; Risk Factors and Special Considerations;
Description of the Shares; Anti-Takeover Provisions
of the Fund's Governing Documents; Closed-end Fund
Structure; 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 Additional Information Table of Contents of the Statement of Additional
Information
PART B - STATEMENT OF ADDITIONAL INFORMATION
Items in Part B of Form N-2(1) Location in Prospectus
Item 14. Cover Page Not Applicable
Item 15. Table of Contents Table of Contents
Item 16. General Information and History Not Applicable
Item 17. Investment Objective and Policies Investment Objective and Policies
Item 18. Management of the Company Management of the Fund
Item 19. Control Persons and Principal Shareholders Management of the Fund
Item 20. Investment Advisory and Other Services Management of the Fund; Experts
Item 21. Portfolio Managers Not Applicable
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.
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(1) Pursuant to General Instructions to Form N-2, all information
required by Part B: Statement of Additional Information has been
incorporated into Part A: The Prospectus of the Registration
Statement.
TABLE OF CONTENTS
Page
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PROSPECTUS SUMMARY.............................................................1
SUMMARY OF FUND EXPENSES......................................................15
USE OF PROCEEDS...............................................................16
FINANCIAL HIGHLIGHTS............................................................
THE FUND 16
INVESTMENT OBJECTIVE AND POLICIES.............................................16
RISK FACTORS AND SPECIAL CONSIDERATIONS.......................................24
MANAGEMENT OF THE FUND........................................................35
PORTFOLIO TRANSACTIONS........................................................38
DIVIDENDS AND DISTRIBUTIONS...................................................38
AUTOMATIC DIVIDEND REINVESTMENT AND VOLUNTARY CASH PURCHASE PLAN..............38
DESCRIPTION OF THE SHARES.....................................................39
ANTI-TAKEOVER PROVISIONS OF THE FUND'S GOVERNING DOCUMENTS....................47
CLOSED-END FUND STRUCTURE.....................................................48
REPURCHASE OF COMMON SHARES...................................................49
NET ASSET VALUE...............................................................49
TAXATION 50
CUSTODIAN, TRANSFER AGENT AND DIVIDEND DISBURSING AGENT.......................52
PLAN OF DISTRIBUTION..........................................................52
LEGAL MATTERS.................................................................54
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM.................................54
ADDITIONAL INFORMATION........................................................54
PRIVACY PRINCIPLES OF THE FUND................................................55
TABLE OF CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION......................55
Subject to Completion,
Preliminary Base Prospectus dated _________, 2007
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PROSPECTUS [GABELLI GRAPHIC OMITTED]
The Gabelli Global Gold, Natural Resources & Income Trust
Common Shares of Beneficial Interest
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Investment Objective. The Gabelli Global Gold, Natural Resources & Income
Trust, (the "Fund") is a non-diversified, closed-end management investment
company registered under the Investment Company Act of 1940, as amended. The
Fund's primary investment objective is to provide a high level of current
income. The Fund's secondary investment objective is to seek capital
appreciation consistent with the Fund's strategy and its primary objective. The
Fund's investment adviser is Gabelli Funds, LLC. An investment in the Fund is
not appropriate for all investors. We cannot assure you that the Fund's
objectives will be achieved.
Under normal market conditions, the Fund will attempt to achieve its
objectives by investing at least 80% of its assets in equity securities of
companies principally engaged in the gold industry and the natural resources
industries. The Fund will invest at least 25% of its assets in the equity
securities of companies principally engaged in the exploration, mining,
fabrication, processing, distribution or trading of gold or the financing,
managing, controlling or operating of companies engaged in "gold-related"
activities. In addition, the Fund will invest at least 25% of its assets in the
equity securities of companies principally engaged in the exploration,
production or distribution of natural resources, such as gas, oil, paper, food
and agriculture, forestry products, metals and minerals as well as related
transportation companies and equipment manufacturers. The Fund may invest in the
securities of companies located anywhere in the world. As part of its investment
strategy, the Fund intends to earn income through an option strategy of writing
(selling) covered call options on equity securities in its portfolio. When the
Fund sells a covered call option, it receives income in the form of the premium
paid by the buyer of the call option, but the Fund forgoes the opportunity to
participate in any increase in the value of the underlying equity security above
the exercise price of the option. See "Investment Objective and Policies."
We may offer, from time to time, in one or more offerings, our common
shares or preferred shares, each having a par value of $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 common shares.
Our common shares are listed on the American Stock Exchange under the symbol
"GGN." On ________, 2007, the last reported sale price of our common shares was
$ . 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 an
initial public offering.
Investing in the Fund's shares involves risks. See "Risk Factors and
Special Considerations" on page for factors that should be considered before
investing in the 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 sets forth concisely the information about us that a
prospective investor should know before investing. You should read this
prospectus, which contains important information about the Fund, before deciding
whether to invest in the common shares, and retain it for future reference. A
Statement of Additional Information, dated __________, 2007, containing
additional information about the Fund, has been filed with the Securities and
Exchange Commission and is incorporated by reference in its entirety into this
prospectus. You may request a free copy of our annual and semi-annual reports,
request a free copy of the Statement of Additional Information, the table of
contents of which is on page of this prospectus, request other information about
us and make shareholder inquiries by calling (800) GABELLI (422-3554) or by
writing to the Fund, or obtain a copy (and other information regarding the Fund)
from the Securities and Exchange Commission'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
Federal Reserve Board or any other government agency.
You should rely only on the information contained or incorporated by
reference in this 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 is accurate as of any
date other than the date of this prospectus.
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 __________, 2007 (the "SAI").
The Fund The Gabelli Global Gold, Natural Resources &
Income Trust is a closed-end, non-diversified
management investment company organized under the laws
of the State of Delaware. Throughout this prospectus,
we refer to The Gabelli Global Gold, Natural Resources
& Income Trust as the "Fund" or as "we." See "The
Fund."
The Offering We may offer, from time to time, in one or more
offerings, our common or 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").
The offering price per share of our common shares will
not be less than the net asset value per share of our
common shares at the time we make the offering,
exclusive of any underwriting commissions or discounts.
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, 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. 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. Our common shares are listed on the American
Stock Exchange under the symbol "GGN." On ________,
2007, the last reported sale price of our common shares
was $ .
Investment Objective
and Policies The Fund's primary investment objective is to provide a
high level of current income. The Fund's secondary
investment objective is to seek capital appreciation
consistent with the Fund's strategy and its primary
objective.
Under normal market conditions, the Fund will attempt
to achieve its objectives by investing at least 80% of
its assets in equity securities of companies
principally engaged in the gold and natural resources
industries. The Fund will invest at least 25% of its
assets in the equity securities of companies
principally engaged in the exploration, mining,
fabrication, processing, distribution or trading of
gold or the financing, managing, controlling or
operating of companies engaged in "gold-related"
activities ("Gold Companies"). In addition, the Fund
will invest at least 25% of its assets in the equity
securities of companies principally engaged in the
exploration, production or distribution of natural
resources, such as gas, oil, paper, food and
agriculture, forestry products, metals and minerals as
well as related transportation companies and equipment
manufacturers ("Natural Resources Companies"). The Fund
may invest in the securities of companies
1
located anywhere in the world. The Fund anticipates
that application of its investment policies and
strategy currently would cause it to invest in issuers
located in eight countries globally, including the U.S.
Under normal market conditions, the Fund will invest in
the securities of issuers in at least three different
countries, including the U.S.
Principally engaged, as used in this prospectus, means
a company that derives at least 50% of its revenues or
earnings or devotes at least 50% of its assets to the
indicated businesses. Equity securities may include
common stocks, preferred stocks, convertible
securities, warrants, depository receipts and equity
interests in trusts and other entities. Other Fund
investments may include investment companies, including
exchange-traded funds, securities of issuers subject to
reorganization, derivative instruments, debt (including
obligations of the U.S. Government) and money market
instruments. As part of its investment strategy, the
Fund intends to earn income through an option strategy
which will normally consist of writing (selling) call
options on equity securities in its portfolio ("covered
calls"), but may, in amounts up to 15% of the Fund's
assets, consist of writing uncovered call options on
securities not held by the Fund, indices comprised of
Gold Companies or Natural Resources Companies or
exchange traded funds comprised of such issuers and put
options on securities in its portfolio. When the Fund
sells a call option, it receives income in the form of
the premium paid by the buyer of the call option, but
the Fund forgoes the opportunity to participate in any
increase in the value of the underlying equity security
above the exercise price of the option. When the Fund
sells a put option, it receives income in the form of
the premium paid by the buyer of the put option, but
the Fund will have the obligation to buy the underlying
security at the exercise price if the price of the
security decreases below the exercise price of the
option. See "Investment Objective and Policies."
The Fund is not intended for those who wish to exploit
short-term swings in the stock market.
The Investment Adviser's investment philosophy with
respect to selecting investments in the gold industry
and the natural resources industries is to emphasize
quality and value, as determined by such factors as
asset quality, balance sheet leverage, management
ability, reserve life, cash flow, and commodity hedging
exposure. In addition, in making stock selections, the
Investment Adviser looks for securities that it
believes may have a superior yield as well as capital
gains potential and that allow the Fund to earn income
from writing covered calls on such stocks.
Preferred Shares
and Borrowings The Fund has not issued preferred stock or borrowed
money to leverage its investments. If the Fund's Board
of Trustees determines that it may be advantageous to
the holders of the Fund's common shares for the Fund to
utilize such leverage, the Fund may issue preferred
shares or borrow money. Any preferred shares issued by
the Fund will pay distributions either at a fixed rate
or at rates that will be reset frequently based on
short-term interest rates. Any borrowings may also be
at fixed or floating 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
"Principal Risks of the Fund - Leverage Risks". The
Fund may also engage in investment management
techniques which will not be considered senior
securities if the
2
Fund establishes in a segregated account cash or other
liquid securities equal to the Fund's obligations in
respect of such techniques.
Dividends and
Distributions The Fund intends to make regular monthly cash
distributions of all or a portion of its investment
company taxable income (which includes ordinary income
and realized short-term capital gains) to common
shareholders. The Fund also intends to make annual
distributions of its realized capital gains (which is
the excess of net long-term capital gains over net
short-term capital losses). Various factors will affect
the level of the Fund's income, such as its asset mix
and use of covered call strategies. To permit the Fund
to maintain more stable monthly distributions, the Fund
may from time to time distribute less than the entire
amount of income earned in a particular period, which
would be available to supplement future distributions.
As a result, the distributions paid by the Fund for any
particular monthly period may be more or less than the
amount of income actually earned by the Fund during
that period. Because the Fund's distribution policy may
be changed by the Board of Trustees at any time and the
Fund's income will fluctuate, there can be no assurance
that the Fund will pay dividends or distributions at a
particular rate. See "Dividends and Distributions."
Investment company taxable income (including dividend
income) and capital gain distributions paid by the Fund
will be automatically reinvested in additional shares
of the Fund unless a shareholder elects to receive cash
or the shareholder's broker does not provide
reinvestment services. See "Automatic Dividend
Reinvestment and Voluntary Cash Purchase Plan."
Use of Proceeds The Fund will use the net proceeds from
the offering to purchase portfolio securities in
accordance with its investment objective and policies.
See "Use of Proceeds."
Listing of the
Common Shares Common shares are listed on the American Stock Exchange
("Amex"), under the trading or "ticker" symbol "GGN."
See "Description of the Shares." Any fixed rate
preferred shares would also likely be listed on a stock
exchange.
Market Price of
Shares Common shares of closed-end investment companies often
trade at prices lower than their net asset value.
Common shares of closed-end investment companies may
trade during some periods at prices higher than their
net asset value and during other periods at prices
lower than their net asset value. The Fund cannot
assure you that its common shares will trade at a price
higher than or equal to net asset value. The Fund's net
asset value will be reduced immediately following this
offering by the sales load and the amount of the
offering expenses paid by the Fund. See "Use of
Proceeds."
In addition to net asset value, the market price of the
Fund's common shares may be affected by such factors as
the Fund's dividend and distribution levels (which are
affected by expenses) and stability, market liquidity,
market supply and demand, unrealized gains, general
market and economic conditions and other factors. See
"Risk Factors and Special Considerations," "Description
of the Shares" and "Repurchase of Common Shares."
3
The common shares are designed primarily for long-term
investors, and you should not purchase common shares of
the Fund if you intend to sell them shortly after
purchase.
Fixed rate preferred shares may also trade at premiums
to or discounts from their liquidation preference for a
variety of reasons, including changes in interest
rates.
Risk Factors and Special
Considerations Risk is inherent in all investing.Therefore, before
investing in common shares you should consider the
risks carefully.
Industry Risks. The Fund's investments will be
concentrated in each of the gold industry and in the
natural resources industries. Because the Fund is
concentrated in these industries, it may present more
risks than if it were broadly diversified over numerous
industries and sectors of the economy. A downturn in
the gold or natural resources industries would have a
larger impact on the Fund than on an investment company
that does not concentrate in such industries.
Under normal market conditions the Fund will invest at
least 25% of its assets in equity securities of Gold
Companies. Equity securities of Gold Companies may
experience greater volatility than companies not
involved in the gold industry. Investments related to
gold are considered speculative and are affected by a
variety of worldwide economic, financial and political
factors. The price of gold may fluctuate sharply over
short periods of time due to changes in inflation or
expectations regarding inflation in various countries,
the availability of supplies of gold, changes in
industrial and commercial demand, gold sales by
governments, central banks or international agencies,
investment speculation, monetary and other economic
policies of various governments and government
restrictions on private ownership of gold. The
Investment Adviser's judgments about trends in the
prices of securities of Gold Companies may prove to be
incorrect. It is possible that the performance of
securities of Gold Companies may lag the performance of
other industries or the broader market as a whole.
Under normal market conditions the Fund will invest at
least 25% of its assets in equity securities of Natural
Resources Companies. A downturn in the indicated
natural resources industries would have a larger impact
on the Fund than on an investment company that does not
invest significantly in such industries. Such
industries can be significantly affected by supply and
demand for the indicated commodities and related
services, exploration and production spending,
government regulations, world events and economic
conditions. The oil, paper, food and agriculture,
forestry products, metals and minerals industries can
be significantly affected by events relating to
international political developments, the success of
exploration projects, commodity prices, and tax and
government regulations. The stock prices of Natural
Resources Companies may also experience greater price
volatility than other types of common stocks.
Securities issued by Natural Resources Companies are
sensitive to changes in the prices of, and in supply
and demand for, the indicated commodities. The value of
securities issued by Natural Resources Companies may be
affected by changes in overall market movements,
changes in interest rates, or factors affecting a
particular
4
industry or commodity, such as weather, embargoes,
tariffs, policies of commodity cartels and
international economic, political and regulatory
developments. The Investment Adviser's judgments about
trends in the prices of these securities and
commodities may prove to be incorrect. It is possible
that the performance of securities of Natural Resources
Companies may lag the performance of other industries
or the broader market as a whole. See "Risk Factors and
Special Considerations -- Industry Risks."
Supply and Demand Risk. A decrease in the production
of, or exploitation of, gold, gas, oil, paper, food and
agriculture, forestry products, metals or minerals or a
decrease in the volume of such commodities available
for transportation, mining, processing, storage or
distribution may adversely impact the financial
performance of the Fund's investments. Production
declines and volume decreases could be caused by
various factors, including catastrophic events
affecting production, depletion of resources, labor
difficulties, environmental proceedings, increased
regulations, equipment failures and unexpected
maintenance problems, import supply disruption,
increased competition from alternative energy sources
or commodity prices. Sustained declines in demand for
the indicated commodities could also adversely affect
the financial performance of Gold and Natural Resources
Companies over the long-term. Factors which could lead
to a decline in demand include economic recession or
other adverse economic conditions, higher fuel taxes or
governmental regulations, increases in fuel economy,
consumer shifts to the use of alternative fuel sources,
changes in commodity prices, or weather.
Depletion and Exploration Risk. Many Gold and Natural
Resources Companies are either engaged in the
production or exploitation of the particular
commodities or are engaged in transporting, storing,
distributing and processing such commodities. To
maintain or increase their revenue level, these
companies or their customers need to maintain or expand
their reserves through exploration of new sources of
supply, through the development of existing sources,
through acquisitions, or through long-term contracts to
acquire reserves. The financial performance of Gold and
Natural Resources Companies may be adversely affected
if they, or the companies to whom they provide products
or services, are unable to cost-effectively acquire
additional products or reserves sufficient to replace
the natural decline.
Regulatory Risk. Gold Companies and Natural Resources
Companies may be subject to extensive government
regulation in virtually every aspect of their
operations, including how facilities are constructed,
maintained and operated, environmental and safety
controls, and in some cases the prices they may charge
for the products and services they provide. Various
governmental authorities have the power to enforce
compliance with these regulations and the permits
issued under them, and violators are subject to
administrative, civil and criminal penalties, including
civil fines, injunctions or both. Stricter laws,
regulations or enforcement policies could be enacted in
the future, which would likely increase compliance
costs and may adversely affect the financial
performance of Gold Companies and Natural Resources
Companies.
Commodity Pricing Risk. The operations and financial
performance of Gold
5
and Natural Resources Companies may be directly
affected by the prices of the indicated commodities,
especially those Gold and Natural Resources Companies
for whom the commodities they own are significant
assets. Commodity prices fluctuate for several reasons,
including changes in market and economic conditions,
levels of domestic production, impact of governmental
regulation and taxation, the availability of
transportation systems and, in the case of oil and gas
companies in particular, conservation measures and the
impact of weather. Volatility of commodity prices which
may lead to a reduction in production or supply, may
also negatively affect the performance of Gold and
Natural Resources Companies which are solely involved
in the transportation, processing, storing,
distribution or marketing of commodities. Volatility of
commodity prices may also make it more difficult for
Gold and Natural Resources Companies to raise capital
to the extent the market perceives that their
performance may be directly or indirectly tied to
commodity prices.
Risks Associated with Covered Calls and Other Option
Transactions. There are several risks associated with
writing covered calls and entering into other types of
option transactions. For example, there are significant
differences between the securities and options markets
that could result in an imperfect correlation between
these markets, resulting in a given transaction not
achieving its objectives. In addition, a decision as to
whether, when and how to use covered call options
involves the exercise of skill and judgment, and even a
well-conceived transaction may be unsuccessful because
of market behavior or unexpected events. As the writer
of a covered call option, the Fund forgoes, during the
option's life, the opportunity to profit from increases
in the market value of the security covering the call
option above the exercise price of the call option, but
has retained the risk of loss should the price of the
underlying security decline. As the writer of an
uncovered call option, the Fund has no risk of loss
should the price of the underlying security decline,
but bears unlimited risk of loss should the price of
the underlying security increase above the exercise
price until the Fund covers its exposure.
There can be no assurance that a liquid market will
exist when the Fund seeks to close out an option
position. If the Fund were unable to close out a
covered call option that it had written on a security,
it would not be able to sell the underlying security
unless the option expired without exercise. Reasons for
the absence of a liquid secondary market for
exchange-traded options include the following: (i)
there may be insufficient trading interest; (ii)
restrictions may be imposed by an exchange on opening
transactions or closing transactions or both; (iii)
trading halts, suspensions or other restrictions may be
imposed with respect to particular classes or series of
options; (iv) unusual or unforeseen circumstances may
interrupt normal operations on an exchange; (v) the
trading facilities may not be adequate to handle
current trading volume; or (vi) the relevant exchange
could discontinue the trading of options. In addition,
the Fund's ability to terminate over-the-counter
options may be more limited than with exchange-traded
options and may involve the risk that counterparties
participating in such transactions will not fulfill
their obligations. See "Risk Factors and Special
Considerations -- Risks Associated with Covered Calls
and Other Option Transactions."
6
Limitation on Covered Call Writing Risk. The number of
covered call options the Fund can write is limited by
the number of shares of common stock the Fund holds.
Furthermore, the Fund's covered call options and other
options transactions will be subject to limitations
established by the exchanges on which such options are
traded. As a result, the number of covered call options
that the Fund may write or purchase may be affected by
options written or purchased by it and other investment
advisory clients of the Investment Adviser. See "Risk
Factors and Special Considerations -- Risks Associated
with Covered Calls and Other Option Transactions --
Limitation on Covered Call Writing Risk."
Equity Risk. Investing in the Fund involves 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 economic stake 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."
Foreign Securities Risk. Because many of the world's
Gold Companies and Natural Resources Companies are
located outside of the United States, the Fund may have
a significant portion of its investments in securities
that are traded primarily in foreign markets and that
are not subject to the requirements of the U.S.
securities laws, markets and accounting requirements
("Foreign Securities"). Such investments involve
certain risks not involved in domestic investments.
Securities markets in certain foreign countries are not
as developed, efficient or liquid as securities markets
in the U.S. Therefore, the prices of Foreign Securities
may be more volatile. In addition, with respect to
these securities, the Fund will be subject to risks
associated with adverse political and economic
developments in foreign countries, which could cause
the Fund to lose money on its investments in Foreign
Securities. See "Risk Factors and Special
Considerations -- Foreign Securities Risk."
Emerging Markets Risk. The Fund may invest without
limit in securities of issuers whose primary operations
or principal trading market is in an "emerging market."
An "emerging market" country is any country that is
considered to be an emerging or developing country by
the International Bank for Reconstruction and
Development (the "World Bank"). 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
7
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.
Other risks include high concentration of market
capitalization and trading volume in a small number of
issuers representing a limited number of industries, as
well as a high concentration of investors and financial
intermediaries; overdependence on exports, including
gold and natural resources exports, making these
economies vulnerable to changes in commodity prices;
overburdened infrastructure and obsolete or unseasoned
financial systems; environmental problems; less
developed legal systems; and less reliable securities
custodial services and settlement practices.
Foreign Currency Risk. The Fund expects to invest in
companies whose securities are denominated or quoted in
currencies other than U.S. dollars or have significant
operations or markets 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."
Market Discount Risk. Whether investors will realize
gains or losses upon the sale of common shares of the
Fund will depend upon the market price of the shares at
the time of sale, which may be less or more than the
Fund's net asset value per share. Since the market
price of the common shares will be affected by such
factors as the Fund's dividend and distribution levels
(which are in turn affected by expenses) and stability,
net asset value, market liquidity, the relative demand
for and supply of the common shares in the market,
unrealized gains, general market and economic
conditions and other factors beyond the control of the
Fund, the Fund cannot predict whether the common shares
will trade at, below or above net asset value or at,
below or above the public offering price. Shares of
closed-end funds often trade at a discount from their
net asset value and the Fund's shares may trade at such
a discount. This risk may be greater for investors
expecting to sell their common shares of the Fund soon
after the completion of the public offering. The common
shares of the Fund are designed primarily for long-term
8
investors, and investors in the common shares should
not view the Fund as a vehicle for trading purposes.
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. Common stock is
structurally subordinated as to income and residual
value to preferred stock and debt in a company's
capital structure, and therefore will be subject to
greater dividend risk than preferred stock or debt
instruments of such issuers. While common stock has
historically generated higher average returns over long
measurement periods than fixed income securities,
common stock has also experienced significantly more
volatility in those returns. See "Risk Factors and
Special Considerations -- Common Stock Risk."
Convertible Securities Risk. Convertible securities
generally offer lower interest or dividend yields than
non-convertible securities of similar quality. The
market values of convertible securities tend to decline
as interest rates increase and, conversely, to increase
as interest rates decline. 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. See "Risk
Factors and Special Considerations -- Convertible
Securities Risk."
Income Risk. The income shareholders receive from the
Fund is expected to be based primarily on income the
Fund earns from its investment strategy of writing
covered calls and dividends and other distributions
received from its investments. If the Fund's covered
call strategy fails to generate sufficient income or
the distribution rates or yields of the Fund's holdings
decrease, shareholders' income from the Fund could
decline. See "Risk Factors and Special Considerations
-- Income Risk."
Distribution Risk for Equity Income Portfolio
Securities. The Fund intends to invest in the shares of
issuers that pay dividends or other distributions. Such
dividends or other distributions are not guaranteed,
and an issuer may forgo paying dividends or other
distributions at any time and for any reason. See "Risk
Factors and Special Considerations -- Distribution Risk
for Equity Income Portfolio Securities."
Special Risks Related to 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 to debt and other
liabilities, 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
9
Preferred Securities."
Interest Rate Risk. Rising interest rates generally
adversely affect the financial performance of Natural
Resources Companies by increasing their costs of
capital. This may reduce their ability to execute
acquisitions or expansion projects in a cost-effective
manner.
During periods of declining interest rates, the issuer
of a preferred stock or fixed income security may be
able to 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. 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 prolong the length of time
the security pays a below market interest rate,
increase the security's duration and reduce the value
of the security. This is known as extension risk. 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 stock 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."
Illiquid Investments. Although the Fund expects that
its portfolio will primarily be comprised of liquid
securities, the Fund anticipates that it may invest up
to 15% of its assets in unregistered securities and
otherwise illiquid investments. Unregistered securities
are securities that cannot be sold publicly in the
United States without registration under the Securities
Act of 1933. An illiquid investment is a security or
other investment that cannot be disposed of within
seven days in the ordinary course of business at
approximately the value at which the Fund has valued
the investment. Unregistered securities often can be
resold only in privately negotiated transactions with a
limited number of purchasers or in a public offering
registered under the Securities Act of 1933.
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. In addition,
the Fund may be unable to sell other illiquid
investments when it desires to do so, resulting in the
Fund obtaining a lower price or being required to
retain the investment. Illiquid investments generally
must be valued at fair value, which is inherently less
precise than utilizing market values for liquid
investments, and may lead to differences between the
price a security is valued for determining the Fund's
net asset value and the price the Fund actually
receives upon sale. See "Risk Factors and Special
Considerations -- Illiquid Investments."
10
Investment Companies. The Fund anticipates that it may
invest in the securities of other investment companies,
including exchange traded funds. 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 in effect subject
to duplicative investment expenses. See "Risk Factors
and Special Considerations -- Investment Companies."
Special Risks of Derivative Transactions. The Fund may
participate in 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."
Lower Grade Securities. The Fund anticipates that it
may invest up to 10% of its assets in fixed income and
convertible securities rated in the lower rating
categories of recognized statistical rating agencies,
such as securities rated "CCC" or lower by Standard &
Poor's Ratings Services ("S&P") or "Caa" by Moody's
Investors Service, Inc. ("Moody's"), or non-rated
securities of comparable 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. See "Risk Factors and Special
Considerations -- Lower Grade Securities."
Leverage Risk. The 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, borrowing or
other forms of market exposure, magnifies both the
favorable and unfavorable effects of price movements in
the investments made by the Fund. To the extent that
the Fund determines to employ leverage in its
investment operations, the Fund will be subject to
substantial risk of loss. The Fund cannot assure you
that borrowings or the issuance of preferred shares
will result in a higher yield or return to the holders
of the common shares.
o Preferred Share 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.
11
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 additional
advisory fees. Holders of preferred shares may
have different interests than holders of common
shares and at times may 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 of trustees at all times and in the
event dividends become in arrears for two full
years would have the right to elect a majority of
the trustees until the 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.
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 or borrowings, 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.
Dependence on Key Personnel. The Investment Adviser is
dependent upon the expertise of Mr. Mario J. Gabelli.
If the Investment Adviser were to lose the services of
Mr. Gabelli, it 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."
Long-Term Objective; Not a Complete Investment Program.
The Fund is intended for investors seeking a high level
of current income. The Fund is not meant to provide a
vehicle for those who wish to exploit 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
12
other investments when considering an investment in the
Fund. See "Risk Factors and Special Considerations --
Long-term Objective; Not a Complete Investment
Program."
Management Risk. The Fund is subject to management risk
because its portfolio will be actively managed. 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."
Non-Diversified Status. As a non-diversified investment
company under the 1940 Act, the Fund may invest a
greater portion of its assets in a more limited number
of issuers than may a diversified fund, and
accordingly, an investment in the Fund may present
greater risk to an investor than an investment in a
diversified company. See "Risk Factors and Special
Considerations -- Non-Diversified Status."
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."
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 "Risk Factors and Special Considerations --
Anti-Takeover Provisions" and "Anti-takeover Provisions
of the Fund's Governing Documents."
Management and Fees Gabelli Funds, LLC serves as the Fund's Investment
Adviser and is compensated for its services and its
related expenses at an annual rate of 1.00% of the
Fund's average weekly net assets. The Investment
Adviser is responsible for administration of the Fund
and currently utilizes and pays the fees of a third
party sub-administrator. See "Management of the Fund."
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 requests and have implemented
additional compliance policies and procedures in
response to
13
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 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
Shares and
Anti-takeover
Provisions The Fund's Board of Trustees has authorized the Fund
to repurchase its common shares in the open market
when the common shares are trading at a discount of
7.5% or more from net asset value (or such other
percentage as the Board of Trustees may determine from
time to time). Such repurchases are subject to certain
notice and other requirements under the Investment
Company Act of 1940, as amended (the "1940 Act"). See
"Repurchase of Common Shares."
Certain provisions of the Fund's Agreement and
Declaration of Trust and By-Laws (collectively, the
"Governing Documents") may be regarded as
"anti-takeover" provisions. Pursuant to these
provisions, only one of three classes of Trustees is
elected each year, and the affirmative vote of the
holders of 75% of the outstanding shares of the Fund
are necessary to authorize the conversion of the Fund
from a closed-end to an open-end investment company or
to authorize certain transactions between the Fund and
a beneficial owner of more than 5% of any class of the
Fund's capital stock. 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. The issuance
of preferred shares could make it more difficult for
the holders of common shares to avoid the effect of
these provisions. See "Anti-takeover Provisions of the
Fund's Governing Documents."
Custodian, Transfer
Agent and Dividend
Disbursing Agent Mellon Trust of New England, NA ("Mellon"), located at
135 Santilli Highway, Everett, Massachusetts 02149,
serves as the custodian (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 paid
by the Fund based upon, among other things, the average
value of the total assets of the Fund, plus certain
charges for securities transactions.
American Stock Transfer & Trust Company ("American
Stock Transfer"), located at 59 Maiden Lane, New York,
New York 10038, serves as the Fund's distribution
disbursing agent, as agent under the Fund's automatic
dividend reinvestment and voluntary cash purchase plan
and as transfer agent and registrar with respect to the
common shares of the Fund.
14
SUMMARY OF FUND EXPENSES
The following table shows the Fund's expenses, including preferred share
expenses as a percentage of net assets attributable to common shares.
Shareholder Transaction Expenses
Sales Load (as a percentage of offering price) %(1)
Offering Expenses Excluding Preferred
Share Offering Expenses (as a percentage of
offering price) (1)
Dividend Reinvestment Plan Fees None(2)
Preferred Share Offering Expenses (as a
percentage of net assets attributable to
common shares) (3)
Percentage of Net Assets
Attributable to Common Shares
-----------------------------
Annual Expenses
Management Fees --%(4)
Other Expenses 0.17%(4)
-----------------------------
Total Annual Expenses --%(4)
=============================
Dividends on Preferred Shares -- (5)
=============================
Total Annual Expenses and Dividends on Preferred Shares -- (5)
=============================
--------------------
(1) If the shares to which this prospectus relates are sold to or through
underwriters, the Prospectus Supplement will set forth any applicable sales
load and the estimated offering expenses borne by us.
(2) You will be charged a $1.00 service charge and pay brokerage charges if you
direct the plan agent to sell your common shares held in a dividend
reinvestment account.
(3) For preferred shares this amount will likely approximate .03% per $10
million in the case of Variable Rate Preferred Shares and .09% per $10
million in the case of Fixed Rate Preferred Shares based on an offering of
$100 million in liquidation preference of preferred shares and net assets
attributable to common shares of $___ million. The actual amount in
connection with any offering will be set forth in the Prospectus Supplement
if applicable.
(4) The Investment Adviser's fee is 1.00% per year of the Fund's average weekly
net assets, with no deduction for the liquidation preference of any
outstanding preferred shares. Consequently, if the Fund has preferred
shares outstanding, the investment management fees and other expenses as a
percentage of net assets attributable to common shares will be higher than
if the Fund does not utilize a leveraged capital structure.
(5) Assumes issuance of $100 million in liquidation preference of preferred
shares at an annual dividend rate (including other ongoing expenses
associated with maintaining such preferred shares and any hedging costs) of
___% and net assets attributable to common shares of $____ million. The
actual amount in connection with any offering will be set forth in the
Prospectus Supplement if applicable.
The purpose of the table above and the example below is to help you
understand all fees and expenses that you, as a holder of common shares, would
bear directly or indirectly.
The following example illustrates the expense you would pay on a $1,000
investment in common shares, assuming a 5% annual portfolio total return.* If
the shares to which this prospectus relates are sold to or through underwriters,
the Prospectus Supplement will show an example taking into account the
applicable sales load and the estimated offering expenses borne by us.
15
1 Year 3 Years 5 Years 10 Years
Total Expenses Incurred $ $ $ $
--------------------
* The example should not be considered a representation of future expenses.
The example assumes that the amounts set forth in the Annual Expenses table
are accurate and that all distributions are reinvested at net asset value.
Actual expenses may be greater or less than those assumed. Moreover, the
Fund's actual rate of return may be greater or less than the hypothetical
5% return shown in the example.
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 objective 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.
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 year ending December 31, 2006, and for
each of the preceding years since inception has been audited by
PricewaterhouseCoopers LLP, the Fund's independent accountants, whose
unqualified report on such Financial Statements is incorporated by reference
into the SAI.
Selected data for a Fund common share outstanding throughout each period:
Year Ender Period Ended
December 31, 2006 December 31, 2005(b)
Operating Performance:
Net asset value, beginning of period ........................ $ 21.99 $ 19.06(c)
---------- -----------
Net investment income ....................................... 0.08 0.08
Net realized and unrealized gain on investments, swap
contracts, securities sold short, written options, and
foreign currency transactions ............................. 3.77 4.01
---------- -----------
Total from investment operations............................. 3.85 4.09
---------- -----------
Distributions to Common Shareholders:
Net investment income ...................................... -- (0.07)
Net realized gains on investments, swap contracts,
securities sold short, written options, and
foreign currency transactions ............................. (1.74) (1.09)
---------- -----------
Total distributions to common shareholders .................. (1.74) (1.16)
---------- -----------
Fund Share Transactions:
Decrease in net asset value from common share transactions... -- (0.00)(d)
---------- -----------
Total fund share transactions ............................... -- (0.00)(d)
---------- -----------
Net Asset Value, End of Period .............................. $ 24.10 $ 21.99
========== ===========
NAV total return+ ........................................... 18.29% 22.0%
========== ===========
Market value, end of period ................................. $ 24.60 $ 21.80
========== ===========
Investment total return++ ................................... 21.86% 15.2%
========== ===========
Ratios to Average Net Assets and Supplemental Data:
Net assets end of period (in 000's) ......................... $ 432,741 $ 390,209
Ratio of net investment income to average net assets ........ 0.42% 0.47%(e)
Ratio of operating expenses to average net assets(a) ........ 1.17% 1.15%(e)
Portfolio turnover rate ..................................... 114.8% 142.5%
---------------------
+ 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 the period of less than
one year is not annualized.
++ Based on market value per share, adjusted for reinvestment of distributions at prices
obtained under the Fund's dividend reinvestment plan. Total return for the period of less
than one year is not annualized.
(a) The Fund incurred interest expense during the year ended December 31, 2006. If interest
expense had not been incurred, the ratio of operating expenses to average net assets
would have been 1.16%.
(b) The Fund commenced investment operations on March 31, 2005.
(c) The beginning of period NAV reflects a $0.04 reduction for costs associated with the
initial public offering.
(d) Amount represents less than $0.005 per share.
(e) 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.
THE FUND
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 was organized as a Delaware statutory trust on January 4, 2005,
pursuant to an Agreement and Declaration of Trust governed by the laws of the
State of Delaware. The Fund's principal office is located at One Corporate
Center, Rye, New York, 10580-1422 and its telephone number is (800) 422-3554.
INVESTMENT OBJECTIVE AND POLICIES
Investment Objective
The Fund's primary investment objective is to provide a high level of
current income. The Fund's secondary investment objective is to seek capital
appreciation consistent with the Fund's strategy and its primary objective.
Under normal market conditions, the Fund will attempt to achieve its objectives
by investing at least 80% of its assets in equity securities of companies
principally engaged in the gold industry and the natural resources industries.
The Fund will invest at least 25% of its assets in the equity securities of
companies principally engaged in the exploration, mining, fabrication,
processing, distribution or trading of gold or the financing, managing,
controlling or operating of companies engaged in "gold-related" activities. In
addition, the Fund will invest at least 25% of its assets in the equity
securities of companies principally engaged in the exploration, production or
distribution of natural resources, such as gas, oil, paper, food and
agriculture, forestry products, metals and minerals as well as related
transportation companies and equipment manufacturers. The Fund may invest in the
securities of companies located anywhere in the world. The Fund anticipates that
application of its investment policies and strategy currently would cause it to
invest in issuers located in eight countries globally, including the U.S. Under
normal market conditions, the Fund will invest in the securities of issuers in
at least three different countries, including the U.S. Equity securities may
include common stocks, preferred stocks, convertible securities, warrants,
depository receipts and equity interests in trusts and other entities. Other
Fund investments may include investment companies,
16
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.
As part of its investment strategy, the Fund intends to earn income through
an option strategy of writing (selling) covered call options on equity
securities in its portfolio. When the Fund sells a covered call option, it
receives income in the form of the premium paid by the buyer of the call option,
but the Fund forgoes the opportunity to participate in any increase in the value
of the underlying equity security above the exercise price of the option.
Investment Methodology of the Fund
In selecting securities for the Fund, the Investment Adviser normally will
consider the following factors, among others:
o the industry of the issuer of a security;
o the ability of the Fund to earn income from writing covered call
options on such securities;
o the interest or dividend income generated by the securities;
o the potential for capital appreciation of 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 as to issuers.
The Investment Adviser's investment philosophy with respect to selecting
investments in the gold industry and the natural resources industries is to
emphasize quality and value, as determined by such factors as asset quality,
balance sheet leverage, management ability, reserve life, cash flow, and
commodity hedging exposure. In addition, in making stock selections, the
Investment Adviser looks for securities that it believes may have a superior
yield as well as capital gains potential.
Certain Investment Practices
Gold Industry Concentration. Under normal market conditions the Fund will
invest at least 25% of its assets in the equity securities of Gold Companies.
"Gold Companies" are those that are principally engaged in the exploration,
mining, fabrication, processing, distribution or trading of gold, or the
financing, managing, controlling or operating of companies engaged in
"gold-related" activities. The Fund's investments in Gold Companies will
generally be in the common equity of Gold Companies, but the Fund may also
invest in preferred stocks, securities convertible into common stocks, and
securities such as rights and warrants that have common stock characteristics.
In selecting investments in Gold Companies for the Fund, the Investment
Adviser focuses on stocks that are undervalued, but which appear to have
favorable prospects for growth. Factors considered in this determination include
capitalization per ounce of gold production, capitalization per ounce of
recoverable reserves, quality of management and ability to create shareholder
wealth. Because most of the world's gold production is outside of the United
States, the Fund may have a significant portion of its investments in Gold
Companies in securities of foreign issuers, including those located in developed
as well as emerging markets. The percentage of Fund assets invested in
particular countries or regions will change from time to time based on the
Investment Adviser's judgment. Among other things, the Investment Adviser will
consider the economic stability and economic outlook of these countries and
regions. See "Risk Factors and Special Considerations -- Industry Risks."
Natural Resources Industries Concentration. Under normal market conditions,
the Fund will invest at least 25% of its assets in equity securities of Natural
Resources Companies. "Natural Resources Companies" are those that are
principally engaged in the exploration, production or distribution of energy or
natural resources, such as gas,
17
oil, paper, food and agriculture, forestry products, metals and minerals as well
as related transportation companies and equipment manufacturers.
Principally engaged, as used in this prospectus, means a company that
derives at least 50% of its revenues or earnings or devotes at least 50% of its
assets to gold or natural resources related activities, as the case may be.
Covered Calls and Other Option Transactions. The Fund intends to earn
income through an option strategy which will normally consist of writing
(selling) call options on equity securities in its portfolio ("covered calls"),
but may, in amounts up to 15% of the Fund's assets, consist of writing uncovered
call options on additional amounts of such securities beyond the amounts held in
its portfolio, on other securities not held in its portfolio, on indices
comprised of Gold Companies or Natural Resources Companies or on exchange traded
funds comprised of such issuers and also may consist of writing put options on
securities in its portfolio. Writing a covered call is the selling of an option
contract entitling the buyer to purchase an underlying security that the Fund
owns, while an uncovered call is the selling of such a contract to purchase a
security the Fund does not own or in an amount in excess of the amount the Fund
owns. When the Fund sells a call option, it receives income in the form of the
premium paid by the buyer of the call option, but the Fund forgoes the
opportunity to participate in any increase in the value of the underlying equity
security above the exercise price 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 buyer 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. When the Fund sells a put option, it receives
income in the form of the premium paid by the buyer of the put option, but the
Fund will have the obligation to buy the underlying security at the exercise
price if the price of the security decreases below the exercise price of the
option.
If the Fund has written a call option, it may terminate its obligation by
effecting a closing purchase transaction. This is accomplished by purchasing a
call option with the same terms 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 with the same terms 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 it received from writing the option or
is more than the premium it 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 it received from writing the option or is less than the premium it 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 that provides a
secondary market for an option with the same terms or in a private transaction.
Although the Fund will generally purchase or write 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 and purchasing of put and
call options, there can be no assurance that the Fund will succeed in any
option-writing program it undertakes.
18
When the Fund writes an uncovered call option or put option, it will
segregate liquid assets with its custodian in an amount equal to the amount,
adjusted daily, by which such option is in the money or will treat the
unsegregated amount as borrowings.
Foreign Securities. Because many of the world's Gold Companies and Natural
Resources Companies are located outside of the U.S., the Fund may have a
significant portion of its investments in securities of foreign issuers, which
are generally denominated in foreign currencies. See "Risk Factors and Special
Considerations -- Foreign Securities Risk."
The Fund may also purchase sponsored American Depository Receipts ("ADRs")
or U.S. dollar denominated securities of foreign issuers. ADRs are receipts
issued by U.S. banks or trust companies in respect of securities of foreign
issuers held on deposit for use in the U.S. securities markets.
Emerging Markets. The Fund anticipates that it may invest without limit in
securities of emerging market issuers. These securities may be U.S. dollar
denominated or non-U.S. dollar denominated, including emerging market country
currency denominated. An "emerging market" country is any country that is
considered to be an emerging or developing country by the International Bank for
Reconstruction and Development (the "World Bank"). Emerging market countries
generally include every nation in the world except the U.S., Canada, Japan,
Australia, New Zealand and most countries located in Western Europe.
Registered Investment Companies. The Fund anticipates that it may invest in
registered investment companies in accordance with the 1940 Act, to the extent
consistent with the Fund's investment objective, including exchange traded funds
that concentrate in investments in the gold or natural resources industries. The
1940 Act generally prohibits the Fund from investing more than 5% of its assets
in any one other investment company or more than 10% of its assets in all other
investment companies. However, many exchange-traded funds are exempt from these
limitations.
Illiquid Investments. The Fund anticipates that it may invest up to 15% of
its net assets in securities for which there is no readily available trading
market or are otherwise illiquid. Illiquid securities include, among other
things, securities legally restricted as to resale such as commercial paper
issued pursuant to Section 4(2) of the Securities Act, 144A securities, written
over-the-counter options, repurchase agreements with maturities in excess of
seven days, certain loan participation interests, fixed time deposits which are
not subject to prepayment or provide for withdrawal penalties upon prepayment
(other than overnight deposits), and other securities whose disposition is
restricted under the federal securities laws. Section 4(2) and Rule 144A
securities may, however, be treated as liquid by the Investment Adviser pursuant
to procedures adopted by the Board of Trustees of the Fund (the "Board of
Trustees," each member of the Board of Trustees individually a "Trustee"), 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 illiquid 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.
Income Securities. The Fund expects to invest in other equity securities
that are expected to periodically accrue or generate income for their holders
such as common and preferred stocks of issuers that have historically paid
periodic dividends or otherwise made distributions to 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.
In addition, the Fund also may invest in fixed income securities such as
convertible securities, bonds, debentures, notes, stock, short-term discounted
Treasury Bills or certain securities of the U.S. government sponsored
19
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. Fixed income securities obligate the
issuer to pay to the holder of the security a specified return, 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 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 of government sponsored instrumentalities
that are supported by the "full faith and credit" of the U.S. government.
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 as a form of hedging to offset
potential declines in long positions in the same or similar securities,
including short sales against the box. The short sale of a security is
considered a speculative investment technique. At the time of the sale, the Fund
will own, or have the immediate and unconditional right to acquire at no
additional cost, identical or similar securities or establish a hedge against a
security of the same issuer which may involve additional cost, such as an "in
the money" warrant.
Short sales "against the box" are subject to special tax rules, one of the
effects of which may be to accelerate the recognition of income by the Fund.
Other than with respect to short sales against the box, the Fund will limit
short sales of securities to not more than 5% of the Fund's assets. When the
Fund makes a short sale, it must deliver the security 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.
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 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 Trustees of the
Fund, reviews the creditworthiness of those banks and dealers with which the
Fund enters into repurchase agreements to evaluate these risks and monitors on
an ongoing basis the value of the securities subject to repurchase agreements to
ensure that the
20
value is maintained at the required level. The Fund will not enter into
repurchase agreements with the Investment Adviser or any of its affiliates.
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 non-convertible 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 measure upon the degree to which the convertible
security sells above its value as a fixed income security. See "Risk Factors and
Special Considerations -- Convertible Securities Risk."
Lower Grade Securities. The Fund anticipates that it may invest up to 10%
of its net assets in fixed income and convertible securities rated in the lower
rating categories of recognized statistical rating agencies, such as securities
rated "CCC" or lower by Standard & Poor's Ratings 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 grade 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 grade 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
grade 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 grade categories is
more volatile than that of higher quality securities, and the markets in which
such lower grade 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 grade securities, 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
21
will not continue to honor their obligations or emerge from bankruptcy
protection or that the value of the securities will not appreciate.
In addition to using recognized rating agencies and other sources, the
Investment Adviser also performs its own analysis of issues in seeking
investments that it believes to be underrated (and thus higher-yielding) in
light of the financial condition of the issuer. Its analysis of issuers may
include, among other things, current and anticipated cash flow and borrowing
requirements, value of assets in relation to historical cost, strength of
management, responsiveness to business conditions, credit standing and current
anticipated results of operations. In selecting investments for the Fund, the
Investment Adviser may also consider general business conditions, anticipated
changes in interest rates and the outlook for specific industries.
Subsequent to its purchase by the Fund, an issue of securities may cease to
be rated or its rating may be reduced. In addition, it is possible that
statistical rating agencies might change their ratings of a particular issue to
reflect subsequent events on a timely basis. Moreover, such ratings do not
assess the risk of a decline in market value. None of these events will require
the sale of the securities by the Fund, although the Investment Adviser will
consider these events in determining whether the Fund should continue to hold
the securities.
Fixed income securities, including lower grade 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 grade 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.
Other Derivative Instruments. The Fund may also utilize other types of
derivative instruments, primarily for hedging or risk management purposes. These
instruments include futures, forward contracts, options on such contracts and
interest rate, total return and other kinds of swaps. These investment
management techniques generally 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. For a further
description of such derivative investments, see "Investment Objective and
Policies -- Additional Investment Policies" in the SAI.
Borrowings and Issuance of Preferred Shares. The Fund may, with the
approval of the Trustees, borrow money or issue preferred shares in an effort to
earn incremental total return for the holders of the Fund's common shares. The
1940 Act permits the Fund to issue a single class of debt and a single class of
preferred stock. Under the 1940 Act, such debt or 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 stock and debt
outstanding. Under the 1940 Act the holders of any such debt or preferred stock
have certain mandatory voting rights and other protections of their senior
rights to the assets of the Fund.
Temporary Defensive Investments. Although under normal market conditions
the Fund intends to invest at least 80% of its assets in equity securities of
companies principally engaged in the gold industry and the natural resources
industries, 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 Federal
Deposit Insurance Corporation. During temporary defensive periods, the Fund may
also invest to the extent permitted by applicable law in shares of money market
mutual funds. Money market mutual funds are investment companies and the
investments in those companies by the Fund are in some cases subject to
applicable law. See "Investment Restrictions" in the SAI. The Fund may find it
more difficult to achieve the long-term growth of capital component of its
investment objective during temporary defensive periods.
22
Portfolio Turnover. The Fund will buy and sell securities to accomplish its
investment objective. The investment policies of the Fund, including its
strategy of writing covered call options on securities in its portfolio, is
expected to result in portfolio turnover that is higher than that of other
investment companies, and is 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 in the portion of
the Fund's distributions that is attributable to long-term capital gain.
Interest Rate Transactions
If the Fund borrows money or issues Variable Rate Preferred Shares, the
Fund may enter into interest rate swap or cap transactions in relation to all or
a portion of such borrowings or shares in order to manage the impact on its
portfolio of changes in the interest or dividend rate of such borrowings or
shares. Through these transactions the Fund may, for example, obtain the
equivalent of a fixed rate for such auction 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
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 borrowings auction 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
interest or preferred shares dividends when due 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 interest payments or dividend
payments on the 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 be as favorable as on the expiring transaction. If
this occurs, it could have a negative impact on the Fund's ability to make
interest payments or dividend payments on the 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 borrowings
or preferred shares. A sudden and dramatic decline in interest rates may result
in a significant decline in the asset coverage. If the Fund fails to maintain
the required asset coverage on any outstanding preferred shares or fails to
comply with other covenants, the Fund may be required to redeem some or all of
these shares. Any 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.
23
RISK FACTORS AND SPECIAL CONSIDERATIONS
Investors should consider the following risk factors and special
considerations associated with investing in the Fund:
Industry Risks
Industry Risks. The Fund's investments will be concentrated in each of the
gold and natural resources industries. Because the Fund is concentrated in these
industries, it may present more risks than if it were broadly diversified over
numerous industries and sectors of the economy. A downturn in the gold or
natural resources industries would have a larger impact on the Fund than on an
investment company that does not concentrate in such industries.
Under normal market conditions the Fund will invest at least 25% of its
assets in equity securities of Gold Companies. Equity securities of Gold
Companies may experience greater volatility than companies not involved in the
gold industry. Investments related to gold are considered speculative and are
affected by a variety of worldwide economic, financial and political factors.
The price of gold may fluctuate sharply over short periods of time due to
changes in inflation or expectations regarding inflation in various countries,
the availability of supplies of gold, changes in industrial and commercial
demand, gold sales by governments, central banks or international agencies,
investment speculation, monetary and other economic policies of various
governments and government restrictions on private ownership of gold. In times
of significant inflation or great economic uncertainty, Gold Companies have
historically outperformed securities markets generally. However, in times of
stable economic growth, traditional equity and debt investments could offer
greater appreciation potential and the value of gold and the prices of equity
securities of Gold Companies may be adversely affected, which could in turn
affect the Fund's returns. Some Gold Companies hedge, to varying degrees, their
exposure to declines in the price of gold. Such hedging limits a Gold Company's
ability to benefit from future rises in the price of gold. The Investment
Adviser's judgments about trends in the prices of securities of Gold Companies
may prove to be incorrect. It is possible that the performance of securities of
Gold Companies may lag the performance of other industries or the broader market
as a whole.
Under normal market conditions, the Fund will invest at least 25% of its
assets in equity securities of Natural Resources Companies. A downturn in the
indicated natural resources industries would have a larger impact on the Fund
than on an investment company that does not invest significantly in such
industries. Such industries can be significantly affected by the supply of and
demand for the indicated commodities and related services, exploration and
production spending, government regulation, world events and economic
conditions. The oil, gas, paper, food and agriculture, forestry products, metals
and minerals industries can be significantly affected by events relating to
international political developments, the success of exploration projects,
commodity prices, and tax and government regulations. The stock prices of
Natural Resources Companies may also experience greater price volatility than
other types of common stocks. Securities issued by Natural Resources Companies
are sensitive to changes in the prices of, and in supply and demand for, the
indicated commodities. The value of securities issued by Natural Resources
Companies may be affected by changes in overall market movements, changes in
interest rates, or factors affecting a particular industry or commodity, such as
weather, embargoes, tariffs, policies of commodity cartels and international
economic, political and regulatory developments. The Investment Adviser's
judgments about trends in the prices of these securities and commodities may
prove to be incorrect. It is possible that the performance of securities of
Natural Resources Companies may lag the performance of other industries or the
broader market as a whole.
Supply and Demand Risk. A decrease in the production of or exploitation of,
gold, gas, oil, paper, food and agriculture, forestry products, metals or
minerals or a decrease in the volume of such commodities available for
transportation, mining, processing, storage or distribution may adversely impact
the financial performance of the Fund's investments. Production declines and
volume decreases could be caused by various factors, including catastrophic
events affecting production, depletion of resources, labor difficulties,
environmental proceedings, increased regulations, equipment failures and
unexpected maintenance problems, import supply disruption, increased competition
from alternative energy sources or commodity prices. Sustained declines in
demand for the indicated commodities could also adversely affect the financial
performance of Gold and Natural Resources Companies over the long-term. Factors
which could lead to a decline in demand include economic recession or other
adverse economic conditions, higher fuel taxes or governmental regulations,
increases in fuel economy, consumer shifts to the use of alternative fuel
sources, changes in commodity prices, or weather.
24
Depletion and Exploration Risk. Many Gold and Natural Resources Companies
are either engaged in the production or exploitation of the particular
commodities or are engaged in transporting, storing, distributing and processing
such commodities. To maintain or increase their revenue level, these companies
or their customers need to maintain or expand their reserves through exploration
of new sources of supply, through the development of existing sources, through
acquisitions, or through long-term contracts to acquire reserves. The financial
performance of Gold and Natural Resources Companies may be adversely affected if
they, or the companies to whom they provide products or services, are unable to
cost-effectively acquire additional products or reserves sufficient to replace
the natural decline.
Regulatory Risk. Gold Companies and Natural Resources Companies may be
subject to extensive government regulation in virtually every aspect of their
operations, including how facilities are constructed, maintained and operated,
environmental and safety controls, and in some cases the prices they may charge
for the products and services they provide. Various governmental authorities
have the power to enforce compliance with these regulations and the permits
issued under them, and violators are subject to administrative, civil and
criminal penalties, including civil fines, injunctions or both. Stricter laws,
regulations or enforcement policies could be enacted in the future, which would
likely increase compliance costs and may adversely affect the financial
performance of Gold Companies and Natural Resources Companies.
Commodity Pricing Risk. The operations and financial performance of Gold
and Natural Resources Companies may be directly affected by the prices of the
indicated commodities, especially those Gold and Natural Resources Companies for
whom the commodities they own are significant assets. Commodity prices fluctuate
for several reasons, including changes in market and economic conditions, levels
of domestic production, impact of governmental regulation and taxation, the
availability of transportation systems and, in the case of oil and gas companies
in particular, conservation measures and the impact of weather. Volatility of
commodity prices, which may lead to a reduction in production or supply, may
also negatively affect the performance of Gold and Natural Resources Companies
which are solely involved in the transportation, processing, storing,
distribution or marketing of commodities. Volatility of commodity prices may
also make it more difficult for Gold and Natural Resources Companies to raise
capital to the extent the market perceives that their performance may be
directly or indirectly tied to commodity prices.
Risks Associated with Covered Calls and Other Option Transactions
There are several risks associated with transactions in options on
securities. For example, there are significant differences between the
securities and options markets that could result in an imperfect correlation
between these markets, causing a given covered call option transaction not to
achieve its objectives. A decision as to whether, when and how to use covered
calls (or other options) involves the exercise of skill and judgment, and even a
well-conceived transaction may be unsuccessful because of market behavior or
unexpected events. As the writer of a covered call option, the Fund forgoes,
during the option's life, the opportunity to profit from increases in the market
value of the security covering the call option above the exercise price of the
call option, but has retained the risk of loss should the price of the
underlying security decline, although such loss would be offset in part by the
option premium received. The writer of an option has no control over the time
when it may be required to fulfill its obligation as a writer of the option.
Once an option writer has received an exercise notice, it cannot effect a
closing purchase transaction in order to terminate its obligation under the
option and must deliver the underlying security at the exercise price. As the
writer of an uncovered call option, the Fund has no risk of loss should the
price of the underlying security decline but bears unlimited risk of loss should
the price of the underlying security increase above the exercise price until the
Fund covers its exposure.
There can be no assurance that a liquid market will exist when the Fund
seeks to close out a covered call position. Reasons for the absence of a liquid
secondary market on an exchange include the following: (i) there may be
insufficient trading interest; (ii) restrictions may be imposed by an exchange
on opening transactions or closing transactions or both; (iii) trading halts,
suspensions or other restrictions may be imposed with respect to particular
classes or series of options; (iv) unusual or unforeseen circumstances may
interrupt normal operations on an exchange; (v) the trading facilities of an
exchange or the Options Clearing Corporation (the "OCC") may not at all times be
adequate to handle current trading volume; or (vi) the relevant exchange could,
for economic or other reasons, decide or be compelled at some future date to
discontinue the trading of options (or a particular class or series of options).
If trading were discontinued, the secondary market on that exchange (or in that
class or series of options) would cease to exist. However, outstanding options
on that exchange that had been issued by the OCC as a
25
result of trades on that exchange would continue to be exercisable in accordance
with their terms. The Fund's ability to terminate over-the-counter options may
be more limited than with exchange-traded options and may involve the risk that
counterparties participating in such transactions will not fulfill their
obligations. If the Fund were unable to close out a covered call option that it
had written on a security, it would not be able to sell the underlying security
unless the option expired without exercise.
The hours of trading for options may not conform to the hours during which
the underlying securities are traded. To the extent that the options markets
close before the markets for the underlying securities, significant price and
rate movements can take place in the underlying markets that cannot be reflected
in the options markets. Call options are marked to market daily and their value
will be affected by changes in the value of and dividend rates of the underlying
common stocks, an increase in interest rates, changes in the actual or perceived
volatility of the stock market and the underlying common stocks and the
remaining time to the options' expiration. Additionally, the exercise price of
an option may be adjusted downward before the option's expiration as a result of
the occurrence of certain corporate events affecting the underlying equity
security, such as extraordinary dividends, stock splits, merger or other
extraordinary distributions or events. A reduction in the exercise price of an
option would reduce the Fund's capital appreciation potential on the underlying
security.
Limitation on Covered Call Writing Risk. The number of covered call options
the Fund can write is limited by the number of shares of common stock the Fund
holds. Furthermore, the Fund's covered options transactions will be subject to
limitations established by each of the exchanges, boards of trade or other
trading facilities on which such options are traded. These limitations govern
the maximum number of options in each class which may be written or purchased by
a single investor or group of investors acting in concert, regardless of whether
the options are written or purchased on the same or different exchanges, boards
of trade or other trading facilities or are held or written in one or more
accounts or through one or more brokers. Thus, the number of covered call
options that the Fund may write may be affected by options written or purchased
by other investment advisory clients of the Investment Adviser. An exchange,
board of trade or other trading facility may order the liquidation of positions
found to be in excess of these limits, and it may impose certain other
sanctions.
Equity Risk
Investing in the Fund involves 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 economic stake 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 distribution.
Foreign Securities Risk
Because many of the world's Gold Companies and Natural Resources Companies
are located outside of the U.S., the Fund may have a significant portion of its
investments in securities that are traded in foreign markets and that are not
subject to the requirements of the U.S. securities laws, markets and accounting
requirements ("Foreign Securities"). Investments in the securities of foreign
issuers involve certain considerations and risks not ordinarily associated with
investments in securities of domestic issuers. Foreign companies are not
generally subject to 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 U.S. 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, and 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
26
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 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 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.
The Fund also may purchase sponsored ADRs or U.S. dollar-denominated
securities of foreign issuers. ADRs are receipts issued by U.S. banks or trust
companies in respect of securities of foreign issuers held on deposit for use in
the U.S. 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.
Emerging Markets Risk
The Fund anticipates that it may invest in securities of issuers located or
having significant operations in "emerging markets." An "emerging market"
country is any country that is considered to be an emerging or developing
country by the World Bank. 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. Other risks include high concentration
of market capitalization and trading volume in a small number of issuers
representing a limited number of industries, as well as a high concentration of
investors and financial intermediaries; over-dependence on exports, including
gold and natural resources exports, making these economies vulnerable to changes
in commodity prices; overburdened infrastructure and obsolete or unseasoned
financial systems; environmental problems; less developed legal systems; and
less reliable securities custodial services and settlement practices.
Foreign Currency Risk
The Fund expects to invest in companies whose securities are denominated or
quoted in currencies other than U.S. dollars or have significant operations or
markets 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.
27
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.
Market Discount Risk
Whether investors will realize gains or losses upon the sale of common
shares of the Fund will depend upon the market price of the shares at the time
of sale, which may be less or more than the Fund's net asset value per share.
Since the market price of the common shares will be affected by such factors as
the Fund's dividend and distribution levels (which are in turn affected by
expenses), dividend and distribution stability, net asset value, market
liquidity, the relative demand for and supply of the shares in the market,
general market and economic conditions and other factors beyond the control of
the Fund, we cannot predict whether the common shares will trade at, below or
above net asset value or at, below or above the public offering price. Common
shares of closed-end funds often trade at a discount to their net asset values
and the Fund's common shares may trade at such a discount. This risk may be
greater for investors expecting to sell their common shares of the Fund soon
after completion of the public offering. The common shares of the Fund are
designed primarily for long-term investors, and investors in the shares should
not view the Fund as a vehicle for trading purposes.
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.
Convertible Securities Risk
Convertible securities generally offer lower interest or dividend yields
than non-convertible securities of similar quality. The market values of
convertible securities tend to decline as interest rates increase and,
conversely, to increase as interest rates decline. 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.
Income Risk
The income shareholders receive from the Fund is expected to be based
primarily on income the Fund earns from its investment strategy of writing
covered calls and dividends and other distributions received from its
investments. If the Fund's covered call strategy fails to generate sufficient
income or the distribution rates or yields of the Fund's holdings decrease,
shareholders' income from the Fund could decline.
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 or other distributions, however, does not guarantee that the
issuer will continue to pay dividends or
28
other distributions 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, an issuer 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 Preferred Securities
There are special risks associated with investing in preferred securities,
including:
Deferral. Preferred securities may include provisions that permit the
issuer, at its discretion, to defer distributions for a stated period without
any adverse consequences to the issuer. If the Fund owns a preferred security on
which distributions are being deferred by the issuer, the Fund may be required
to report income for tax purposes although it has not yet received such deferred
distributions.
Non-Cumulative Dividends. Some preferred stocks 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 stock held by the
Fund determine not to pay dividends on such stock, the Fund's return from that
security may be adversely affected. There is no assurance that dividends or
distributions on non-cumulative preferred stocks in which the Fund invests will
be declared or otherwise made payable.
Subordination. Preferred securities are subordinated to bonds and other
debt instruments in a company'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.
Liquidity. Preferred securities may be substantially less liquid than many
other securities, such as common stocks or U.S. Government securities.
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.
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. As with call
provisions, a redemption by the issuer may negatively impact the return of the
security held by the Fund.
Interest Rate Risk
Rising interest rates generally adversely affect the financial performance
of Natural Resources Companies by increasing their costs of capital. This may
reduce their ability to execute acquisitions or expansion projects in a
cost-effective manner.
During periods of declining interest rates, the issuer of a preferred stock
or fixed income security may be able to 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 prolong the length of time the security pays a below market interest
rate, increase the security's duration and reduce the value of the security.
This is known as extension risk.
29
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 stock or debt
securities issued by the Fund would likely increase, which would tend to further
reduce returns to common shareholders.
Illiquid Investments
Although the Fund expects that its portfolio will primarily be comprised of
liquid securities, the Fund anticipates that it may invest up to 15% of its
assets in unregistered securities and otherwise illiquid investments.
Unregistered securities are securities that cannot be sold publicly in the
United States without registration under the Securities Act of 1933. An illiquid
investment is a security or other investment that cannot be disposed of within
seven days in the ordinary course of business at approximately the value at
which the Fund has valued the securities. Unregistered and illiquid securities
often can be resold only in privately negotiated transactions with a limited
number of purchasers or in a public offering registered under the Securities Act
of 1933. 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.
In addition, the Fund may be unable to sell other illiquid investments when it
desires to do so, resulting in the Fund obtaining a lower price or being
required to retain the investment. Illiquid investments generally must be valued
at fair value, which is inherently less precise than utilizing market values for
liquid investments, and may lead to differences between the price a security is
valued for determining the Fund's net asset value and the price the Fund
actually receives upon sale.
Investment Companies
The Fund anticipates that it may invest in the securities of other
investment companies, including exchange traded funds, 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 in effect subject to duplicative investment
expenses.
Special Risks of Derivative Transactions
Participation in the options or futures markets, in currency exchange
transactions and in other derivatives 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, interest rate or other referenced
instruments or markets is inaccurate, the consequences to the Fund may leave the
Fund in a worse position than if it had not used such strategies. Risks inherent
in the use of options, foreign currency, futures contracts and options on
futures contracts, securities indices and foreign currencies include:
o dependence on the Investment Adviser's ability to predict correctly
movements in the direction of the relevant measure;
o imperfect correlation between the price of the derivative instrument
and movements in the prices of the referenced assets;
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;
30
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 an instrument at a disadvantageous
time due to a need for the Fund to maintain "cover" or to segregate
securities in connection with the hedging techniques; and
o the creditworthiness of counterparties.
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.
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.
Lower Grade Securities
The Fund anticipates that it may invest up to 10% of its assets in fixed
income and convertible securities rated in the lower rating categories of
recognized statistical rating agencies or unrated securities of comparable
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;
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, 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.
31
Leverage Risk
The 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, borrowing or other forms of market exposure,
magnifies both the favorable and unfavorable effects of price movements in the
investments made by the Fund. To the extent the Fund determines to employ
leverage in its investment operations, the Fund will be subject to substantial
risks of loss. The Trust cannot assure that borrowings or the issuance of
preferred shares will result in a higher yield or return to the holders of the
common shares.
o Preferred Share 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.
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 higher advisory fees if
the Fund's total return exceeds the dividend rate on the preferred
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
of trustees 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 stock and
preferred shares, both by the 1940 Act and by requirements imposed by
rating agencies, might impair the Funds 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 or borrowings, 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.
o Impact on Common Shares. The following table is furnished in response
to requirements of the SEC. It is designed to illustrate the effect of
leverage on common share total return, assuming investment portfolio
total returns (comprised of income and changes in the value of debt
securities held in Fund's portfolio) of -10%, -5%, 0%, 5% and 10%.
These assumed investment portfolio returns are hypothetical figures
and are
32
not necessarily indicative of the investment portfolio returns
experienced or expected to be experience by the Fund. See "Risks" The
table further reflects leverage representing 25% of the Fund's total
assets and the Fund's current projected blended annual average
leverage dividend or interest rate of 5.25%.
Assumed Portfolio Total Return (Net of Expenses)..........(10)% (5)% 0% 5% 10%
Common Share Total Return................................. (-)% (-)% (-)% (-)% (-)%
Common share total return is composed of two elements--the common share
dividends paid by the Fund (the Amount of which is largely determined by the net
investment income of the Fund after paying interest on debt and/or dividends on
preferred shares) and gains or losses on the value of the securities the Fund
owns. As required by SEC rules, the table assumes that the Fund is more likely
to suffer capital losses than to enjoy total return. For example, to assume a
total return of 0% the Fund must assume that the income it receives on its
investments is entirely offset by expenses and losses in the value of those
investments.
Until the Fund borrows or issues preferred shares, the Fund's shares will
not be leveraged, and the risks and special considerations related to leverage
described in this prospectus will not apply. Such leveraging of the shares
cannot be fully achieved until the proceeds resulting from the use of leverage
have been invested in longer-term debt instruments in accordance with the Fund's
investment objective and policies.
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 Fixed Rate Preferred Shares. In the event any Fixed
Rate Preferred Shares are issued, prior application will have been made to list
such shares on the Annex or NYSE. 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. Fixed Rate Preferred Shares 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 auction rate preferred shares are issued,
you may not be able to sell your auction rate preferred shares at an auction if
the auction fails, i.e., if more auction 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 auction rate preferred shares only at a specified
rate that exceeds the rate set at the auction, you will not retain your auction
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
auction rate preferred shares, which could also affect the liquidity of your
investment.
Secondary Market Risk. In the event any auction rate preferred shares are
issued, if you try to sell your auction 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 auction
rate preferred shares are not required to maintain this market, and the Fund is
not required to redeem auction rate preferred shares if either an auction or an
attempted secondary market sale fails because of a lack of buyers. The auction
rate preferred shares will not be registered on a stock exchange. If you sell
your auction 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.
33
Dependence on Key Personnel
The Investment Adviser is dependent upon the expertise of Mr. Mario J.
Gabelli. If the Investment Adviser were to lose the services of Mr. Gabelli, it
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.
Long-term Objective; Not a Complete Investment Program
The Fund is intended for investors seeking a high level of current income.
The Fund is not meant to provide a vehicle for those who wish to exploit
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.
Management Risk
The Fund is subject to management risk because its portfolio will be
actively managed. 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.
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.
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.
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."
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 shares and preferred
shares, if any, voting together as a single class. See "Investment Restrictions"
in the SAI for a complete list of the fundamental investment policies of the
Fund. Should the Fund decide to issue preferred shares in the future, it may
become subject to rating agency guidelines that are more limiting than its
fundamental investment restrictions in order to obtain and maintain a desired
rating on its preferred shares.
34
MANAGEMENT OF THE FUND
General
The Fund's Board of Trustees (who, with its officers, are described in the
SAI) has overall responsibility for the management of the Fund. The Board of
Trustees 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 between the Fund and the Investment Adviser
(the "Investment Advisory Agreement"), the Investment Adviser, under the
supervision of the Fund's Board of Trustees, provides a continuous investment
program for the Fund's portfolio; provides investment research and makes and
executes recommendations for the purchase and sale of securities; and provides
all facilities and personnel, including officers required for its administrative
management and pays the compensation of Trustees of the Fund who are officers or
employees of the Investment Adviser or its affiliates. As compensation for its
services and the related expenses borne by the Investment Adviser, the Fund pays
the Investment Adviser a fee, computed daily and payable monthly, equal, on an
annual basis, to 1.00% of the Fund's average weekly net assets, including assets
attributable preferred shares to the extent the total return of the Fund to the
common shares exceeds the dividends and other ongoing expense of preferred
shares.
The Investment Adviser
Gabelli Funds, LLC acts as the Fund's Investment Adviser pursuant to an
Investment Advisory Agreement with the Fund. The Investment Adviser is a New
York corporation with principal offices located at One Corporate Center, Rye,
New York 10580-1422. The Investment Adviser was organized in 1999 and is the
successor to Gabelli Funds, Inc., which was organized in 1980. As of March 31,
2007, the Investment Adviser acted as registered investment adviser to
twenty-three management investment companies with aggregate net assets of $____
billion. The Investment Adviser, together with the other affiliated investment
advisers noted below had assets under management totaling approximately $______
billion as of March 31, 2007. GAMCO Asset Management Inc. ("GAMCO"), an
affiliate of the Investment Adviser, acts as investment adviser for individuals,
pension trusts, profit sharing trusts and endowments, and as a sub-adviser to
management investment companies having aggregate assets of $_____ billion under
management as of March 31, 2007. Gabelli Securities, Inc., an affiliate of the
Investment Adviser, acts as investment adviser for investment partnerships and
entities having aggregate assets of approximately $___ million as of March 31,
2007. Gabelli Fixed Income LLC, an affiliate of the Investment Adviser, acts as
investment adviser for separate accounts having aggregate assets of
approximately $____ million under management as of March 31, 2007. Gabelli
Advisers, Inc., an affiliate of the Investment Adviser, acts as investment
manager to the Westwood Funds having aggregate assets of approximately $____
million under management as of March 31, 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 New
York Stock Exchange (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), 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 things, 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 of the
Fund's custodian, charges of the transfer agent and distribution disbursing
agent, SEC fees, 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
35
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.
Selection of Securities Brokers
The Investment 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 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 Investment
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 Management
As Chairman and Chief Executive Officer of GAMCO Investors, Inc., Mr.
Gabelli ultimately has oversight over the investment professionals responsible
for the day-to-day management of the Fund. 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 Products for the
Investment Adviser and GAMCO. Mr. Gabelli serves as Portfolio Manager for
several funds in the Gabelli fund family and is a director of most of the funds
in the family. 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.
Vincent Hugonnard-Roche serves as a Co-Lead Portfolio Manager for the Fund
and is primarily responsible for the day-to-day management of the covered call
portion of the Fund's portfolio. Mr. Roche joined GAMCO Investors, Inc. in 2000
as Director of Quantitative Strategies and Head of Risk Management. Prior
thereto, Mr. Roche worked at Credit Lyonnais in New York as a proprietary equity
analyst focused on Risk Arbitrage.
Caesar M.P. Bryan serves as a Co-Lead Portfolio Manager for the Fund and is
primarily responsible for the day-to-day management of the Gold Companies
portion of the Fund's portfolio. Mr. Bryan joined GAMCO Investors, Inc. in 1994
and has been primarily responsible for the day-to-day investment management of
the GAMCO Gold Fund, a registered open-end investment company, since its
inception in 1994. Mr. Bryan has been Portfolio Manager of The GAMCO
International Growth Fund, a registered open-end investment company, since 1995
and Co-Portfolio Manager of The GAMCO Global Opportunity Fund, a registered
open-end investment company, since 1998. Mr. Bryan is also a Portfolio Manager
for The GAMCO Global Growth Fund and The Gabelli Equity Trust.
Barbara G. Marcin and Joshua W. Fenton are jointly and primarily
responsible for the day-to-day management of the Natural Resources Companies
portion of the Fund's portfolio.
Ms. Marcin joined GAMCO Investors, Inc. in 1999 to manage larger
capitalization value style portfolios. Ms. Marcin currently serves as the
Portfolio Manager for the Gabelli Blue Chip Value Fund, a registered open-end
investment company, and as a Portfolio Manager for the Gabelli Dividend & Income
Trust, a registered closed-end investment company. Prior thereto, she worked at
Citibank Global Asset Management where she was head of value investments and was
a member of the Global Investment Policy Committee and co-Chair of the U.S.
Equity Policy Committee.
Mr. Fenton is currently the Director of Buy-Side Research for GAMCO
Investors, Inc. Mr. Fenton was a Securities Analyst for Gabelli & Company, Inc.
from 2001 through 2002. Mr. Fenton is among those primarily responsible for the
day-to-day management of the GAMCO Global Convertible Securities Fund, a
registered open-end investment company. Prior thereto, Mr. Fenton was a Director
of Research at Douglas, Noyes & Co., Inc. from 1996 through 2001.
36
The Statement of Additional Information provides additional information
about the Portfolio Managers' compensation, other accounts managed by the
Portfolio Managers, and the Portfolio Managers' ownership of securities of the
Fund.
Non-resident Trustees
Messrs. d'Urso and van Ekris are not U.S. residents and substantially all
of each of their assets may be located outside of the United States. Messrs.
d'Urso and van Ekris do not have agents for service of process in the United
States. As a result, it may be difficult for U.S. investors to effect service of
process upon Messrs. d'Urso or van Ekris within the United States or to realize
judgments of courts of the United States predicated upon civil liabilities under
the federal securities laws of the United States. In addition, it is not certain
that civil liabilities predicated upon the federal securities laws on which a
valid judgment of a court in the United States is obtained would be enforceable
in the courts of the jurisdictions in which Messrs. d'Urso or van Ekris reside.
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,
Gabelli Advisers, Inc. and Gabelli Fixed Income, 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 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 from the staff and the NYAG in connection with these inquiries and
have been complying with these requests. The Investment Adviser 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. 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 Investment Advisory Agreement. More specifically, the
Investment Adviser has not found any evidence of facilitating trading in the
Gabelli mutual funds after the 4:00 p.m. pricing time or 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 SEC staff for
communication to the SEC for its consideration to resolve this matter. This
offer of settlement is subject to final agreement regarding specific language of
the SEC's administrative order and other settlement documents. Since these
discussions are ongoing, the Investment Advisor 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 the
matter will not have an adverse impact on the Investment Adviser or on its
ability to fulfill its obligations under the Investment Advisory Agreement.
37
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
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 1040 Act since
that time. 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
adverse effect on the Investment Adviser's ability to fulfill its obligations
under the Advisory Agreement.
PORTFOLIO TRANSACTIONS
Principal transactions are not entered into with affiliates of the Fund.
However, Gabelli & Company, Inc., an affiliate of the Investment Adviser, may
execute portfolio transactions on stock exchanges and in the over-the-counter
markets on an agency basis and receive a stated commission therefor. For a more
detailed discussion of the Fund's brokerage allocation practices, see "Portfolio
Transactions" in the SAI.
DIVIDENDS AND DISTRIBUTIONS
The Fund intends to make regular monthly cash distributions of all or a
portion of its investment company taxable income (which includes ordinary income
and realized short-term capital gains) to common shareholders. The Fund also
intends to make annual distributions of its realized capital gains (which is the
excess of net long-term capital gains over net short-term capital losses). The
Fund will pay common shareholders at least annually all, or at least 90%, of its
investment company taxable income. Various factors will affect the level of the
Fund's income, such as its asset mix and use of option strategies. To permit the
Fund to maintain more stable monthly distributions, the Fund may from time to
time distribute less than the entire amount of income earned in a particular
period, which would be available to supplement future distributions. As a
result, the distributions paid by the Fund for any particular monthly period may
be more or less than the amount of income actually earned by the Fund during
that period. However, as the Fund is covered by an exemption from the 1940 Act
which allows the Board of Trustees to implement a level dividend policy, the
Board of Trustees in the future may determine to cause the Fund to distribute a
fixed percentage of the Fund's average net asset value or market price per
common share over a specified period of time at or about the time of
distribution or the pay-out of a fixed dollar amount. The Board of Trustees has
no present intention to implement a level dividend policy. Because the Fund's
distribution policy may be changed by the Board of Trustees at any time and the
Fund's income will fluctuate, there can be no assurance that the Fund will pay
dividends or distributions at a particular rate. See "Dividends and
Distributions" in the SAI.
Shareholders will automatically have all dividends and distributions
reinvested in common shares of the Fund issued by the Fund or purchased in the
open market in accordance with the Fund's dividend reinvestment plan unless an
election is made to receive cash. 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.
38
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 within one business day
prior to the 1st or 15th of the month. A participant may without charge withdraw
a voluntary cash payment by written notice, if the notice is received by the
Plan agent at least one business day 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.
In the case of shareholders such as banks, brokers or nominees, that 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 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 THE SHARES
The following is a brief description of the terms of the common 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 shares, please refer to the actual terms of such series,
which are set forth in the Agreement and Declaration of Trust.
Common Shares
The Fund is an unincorporated statutory trust organized under the laws of
Delaware pursuant to a Certificate of Trust dated as of January 4, 2005. The
Fund is authorized to issue an unlimited number of common shares of beneficial
interest, par value $0.001 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.
39
Offerings of shares require approval by the Fund's Board of Trustees. 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 common shares are listed on the Amex, under the symbol "GGN."
The Fund's net asset value per share will be reduced immediately following
the offering of common shares by the amount of the sales load and offering
expenses paid by the Fund. See "Use of Proceeds." 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. 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 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 will vote as a single class to elect the
Fund's Board of Trustees and on additional matters with respect to which the
1940 Act, the Fund's Declaration of Trust, By-Laws 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."
Book Entry
The common shares are generally 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
Currently, an unlimited amount of the Fund's shares have been classified by
the Board of Trustees as preferred shares, par value $0.001 per share. The terms
of such preferred shares may be fixed by the Board of Trustees and would
materially limit and/or qualify the rights of the holders of the Fund's common
shares.
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.
Upon a liquidation, each holder of the preferred shares will be entitled to
receive out of the assets of the Fund available for distribution to shareholders
(after payment of claims of the Fund's creditors but before any distributions
with respect to the Fund's common shares or any other shares of the Fund ranking
junior to the preferred shares as to liquidation payments) an amount per share
equal to such share's liquidation preference plus any accumulated but unpaid
distributions (whether or not earned or declared, excluding interest thereon) to
the date of distribution, and such shareholders shall be entitled to no further
participation in any distribution or payment in connection with such
liquidation. Each series of the preferred shares will rank on a parity with any
other series of preferred shares of the Fund as to the payment of distributions
and the distribution of assets upon liquidation, and will be junior to the
Fund's obligations with respect to any outstanding senior securities
representing debt. The preferred shares carry one vote per share on all matters
on which such shares are entitled to vote. The preferred shares will, upon
issuance, be fully paid and nonassessable and will have no preemptive, exchange
or conversion rights. The Board of Trustees may by resolution classify or
reclassify any authorized but unissued capital shares of the Fund from time to
time by setting or changing the preferences, conversion or other rights, voting
powers,
40
restrictions, limitations as to distributions or terms or conditions of
redemption. The Fund will not issue any class of shares senior to the Preferred
Shares.
Rating Agency Guidelines. Upon issuance, it is expected that the preferred
shares will be rated "Aaa" by Moody's and "AAA" by S&P. The Fund expects that it
will be 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 Trust'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 of
Trustees, without further action by the shareholders, may amend, alter, add to
or repeal certain of the definitions and related provisions that have been
adopted by the Fund pursuant to the rating agency guidelines if the Board of
Trustees determines that such modification is necessary to prevent a reduction
in rating of the preferred shares by 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 of Trustees may amend the Statement of Preferences definition of
"Maximum Rate" (the "maximum rate" as defined below under " -- Distributions on
the Preferred Shares -- 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 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 the preferred
shares are assessments of the capacity and willingness of the Fund to pay the
obligations of each of the preferred shares. The ratings on the preferred shares
are not recommendations to purchase, hold or sell shares of either series,
inasmuch as the ratings do not comment as to market price or suitability for a
particular investor. The rating agency guidelines also do not address the
likelihood that an owner of 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.
41
The rating agency guidelines will apply to the preferred shares, as the
case may be, only so long as such rating agency is rating such shares at the
request of the Fund. The Fund will pay fees to Moody's and S&P for rating the
preferred shares.
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, such debt or 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 stock and debt
outstanding.
The Fund will be required under the preferred shares Statement of
Preferences (the "Statement of Preferences") 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 the number of preferred shares
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
("Fixed Rate Preferred Shares"), holders of such Preferred Shares will be
entitled to receive, out of funds legally available therefor, 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 the 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 ("Variable Rate Preferred
Shares"). 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 out 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 NYSE 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.
42
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 Percentage Applicable Spread
Moody's S&P
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 "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 Maximum Applicable Method Used to
Reference Rate Using the Rate Using the Determine the
Rate Applicable Percentage Applicable Spread Maximum Applicable 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
43
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. 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 (M: already defined), 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.
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 the preferred shares
as to the payment of dividends and the distribution of assets upon liquidation),
unless:
44
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 share
dividend or distribution;
o the Fund has redeemed the full number of preferred shares 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 " -- Rating Agency Guidelines"
and " -- Asset Maintenance Requirements."
No full distribution will be declared or made on any series of the
preferred shares for any dividend period, or part thereof, unless full
cumulative distributions due through the most recent dividend payment dates
therefor 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
of the Fund's 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 Prospectus Supplement
accompanying the issuance of such 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 Fixed Rate Preferred Shares or
Variable Rate Preferred Shares having a dividend period of more than one year)
any applicable redemption premium determined by the Board of Trustees and
included in the Statement of Preferences.
The number of preferred shares that will be redeemed in the case of a
mandatory redemption will equal the minimum number of outstanding preferred
shares, the redemption of which, if such redemption had occurred immediately
prior to the opening of business on the applicable cure date, would have
resulted in the relevant asset coverage requirement having been met or, if the
required asset coverage cannot be so restored, all of the preferred shares. In
the event that preferred shares are redeemed due to a failure to satisfy the
1940 Act asset coverage requirements, the Fund may, but is not required to,
redeem a sufficient number of preferred shares so that the Fund's assets exceed
the asset coverage requirements under the 1940 Act after the redemption by 10%
(that is, 220% asset coverage). In the event that preferred shares are redeemed
due to a failure to satisfy applicable rating agency guidelines, the Fund may,
but is not required to, redeem a sufficient number of preferred shares so that
the Fund's discounted portfolio value (as determined in accordance with the
applicable rating agency guidelines) after redemption exceeds the asset coverage
requirements of each applicable rating agency by up to 10% (that is, 110% rating
agency asset coverage). In addition, as discussed under " -- Optional Redemption
of the Preferred Shares" below, the Fund generally may redeem Variable Rate
Preferred Shares subject to a variable rate, 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.
45
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 and 1940 Act, will select the one or more series of
preferred shares from which shares will be redeemed and the amount of preferred
shares to be redeemed from each such series. If less than all preferred shares
of a series are to be redeemed, such redemption will be made as among the
holders of that series pro rata in accordance with the respective number of
shares of such series held by each such holder on the record date for such
redemption (or by such other equitable method as the Fund may determine). If
fewer than all the preferred shares held by any holder are to be redeemed, the
notice of redemption mailed to such holder will specify the number of shares to
be redeemed from such holder, which may be expressed as a percentage of shares
held on the applicable record date.
Optional Redemption of Fixed Rate Preferred Shares. Fixed Rate Preferred
Shares will not be subject to optional redemption by the Trust until the date,
if any, specified in the applicable Prospectus Supplement, and only if 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 Trust 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
initial 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 and 1940
Act.
Optional Redemption of Variable Rate Preferred Shares. The Fund generally
may redeem Variable Rate Preferred Shares, if issued, 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 initial 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 initial 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 Governing
Documents and 1940 Act.
Redemption Procedures. A notice of redemption with respect to an optional
redemption will be given to the holders of record of preferred shares selected
for redemption not less than 15 days (subject to NYSE requirements), in the case
of 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 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, as applicable, under which the
redemption is being made and (viii) any conditions precedent to such redemption.
No defect in the notice of redemption or in the mailing thereof will affect the
validity of the redemption proceedings, except as required by applicable law.
The holders of any 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 Preference. In the event of any voluntary or involuntary
liquidation, dissolution or winding up of the Fund, the holders of preferred
shares 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
46
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. The 1940 Act requires that the holders of any preferred
shares, voting separately as a single class, have the right to elect at least
two Trustees at all times. The remaining Trustees will be elected by holders of
common shares and preferred shares, voting together as a single class. In
addition, subject to the prior rights, if any, of the holders of any other class
of senior securities outstanding, the holders of any preferred shares have the
right to elect a majority of the Trustees at any time two years' dividends on
any preferred shares are unpaid. The 1940 Act also requires that, in addition to
any approval by shareholders that might otherwise be required, the approval of
the holders of a majority of any outstanding preferred shares, voting separately
as a class, would be required to (i) adopt any plan of reorganization that would
adversely affect the preferred shares, and (ii) take any action requiring a vote
of security holders under Section 13(a) of the 1940 Act, including, among other
things, changes in the Fund's subclassification as a closed-end investment
company to an open-end company or changes in its fundamental investment
restrictions. As a result of these voting rights, the Fund's ability to take any
such actions may be impeded to the extent that there are any preferred shares
outstanding. The Board of Trustees presently intends that, except as otherwise
indicated in this prospectus and except as otherwise required by applicable law,
holders of preferred shares will have equal voting rights with holders of common
shares (one vote per share, unless otherwise required by the 1940 Act) and will
vote together with holders of common shares as a single class.
The affirmative vote of the holders of a majority of the outstanding
preferred shares, voting as a separate class, will be required to amend, alter
or repeal any of the preferences, rights or powers of holders of preferred
shares so as to affect materially and adversely such preferences, rights or
powers, or to increase or decrease the authorized number of preferred shares.
The class vote of holders of preferred shares described above will in each case
be in addition to any other vote required to authorize the action in question.
The foregoing voting provisions will not apply to any 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.
Book-Entry. Fixed Rate Preferred Shares 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 preferred 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 stock purchased for purposes of dividends,
voting and liquidation rights. Purchasers of Fixed Rate Preferred Shares
referred may obtain registered certificates by contacting the Transfer Agent.
Variable Rate Preferred Shares will initially be held by the auction agent
as custodian for Cede & co., in whose name the shares of the Variable Rate
Preferred Shares will be registered. The Fund will treat Cede & Co. as the
holder of record of the Variable Rate Preferred Shares for all purposes.
ANTI-TAKEOVER PROVISIONS OF THE FUND'S GOVERNING DOCUMENTS
The Fund presently has provisions in its Agreement and Declaration of Trust
and By-Laws (together, its "Governing Documents") which could have the effect of
limiting, in each case, (i) the ability of other entities or persons to acquire
control of the Fund, (ii) the Fund's freedom to engage in certain transactions
or (iii) the ability of the Fund's Trustees or shareholders to amend the
Governing Documents or effectuate changes in the Fund's management. These
provisions of the Governing Documents of the Fund may be regarded as
"anti-takeover" provisions. The Board of Trustees of the Fund is divided into
three classes, each having a term of no more than three years (except, to ensure
that the term of a class of the Fund's Trustees expires each year, one class of
the Fund's Trustees will serve an initial one-year term and three-year terms
thereafter and another class of its Trustees will serve an initial two-year term
and three-year terms thereafter). Each year the term of one class of Trustees
will expire. Accordingly, only those Trustees in one class may be changed in any
one year, and it would require a minimum of two years to change a majority of
the Board of Trustees. Such system of electing Trustees may have the effect of
maintaining the continuity of management and, thus, make it more difficult for
the shareholders of the Fund to change the majority of Trustees. See "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
47
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 of Trustees 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).
The provisions of the Governing Documents described above could have the
effect of depriving the owners of shares in the Fund of opportunities to sell
their shares at a premium over prevailing market prices, by discouraging a third
party from seeking to obtain control of the Fund in a tender offer or similar
transaction. The overall effect of these provisions is to render more difficult
the accomplishment of a merger or the assumption of control by a principal
shareholder.
The Governing Documents of the Fund are on file with the SEC. For the full
text of these provisions see "Additional Information."
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, to have greater
flexibility to make certain types of investments and to use certain investment
strategies such as financial leverage and investments in illiquid securities.
48
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 of Trustees might
consider from time to time engaging in open-market repurchases, tender offers
for shares or other programs intended to reduce a discount. We cannot guarantee
or assure, however, that the Fund's Board of Trustees 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 of Trustees 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 and a separate vote of any outstanding
preferred shares. We cannot assure you that the Fund's common shares will not
trade at a discount.
REPURCHASE OF COMMON SHARES
The Fund is a non-diversified, closed-end 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 of Trustees has authorized such repurchases to be made when the Fund's
common shares are trading at a discount from net asset value of 7.5% or more (or
such other percentage as the Board of Trustees 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 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.
NET ASSET VALUE
For purposes of determining the Fund's NAV 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 of
Trustees so determines, by such other method as the Board of Trustees shall
determine in good faith, to reflect its fair market value. Portfolio securities
traded on more than one national securities exchange or market are valued
according to the broadest and most representative market, as determined by the
Adviser.
Portfolio securities primarily traded on foreign markets are generally
valued at the preceding closing values of such securities on their respective
exchanges or if after the close, market conditions change significantly, certain
foreign securities may be fair valued pursuant to procedures established by the
Board of Trustees. Debt instruments that are not credit impaired with remaining
maturities of 60 days or less are valued at amortized cost, unless the Board of
Trustees determines such does not reflect fair value, in which case these
securities will be valued at their fair value as determined by the Board of
Trustees. Debt instruments having a maturity greater than 60 days for which
market quotations are readily available are valued at the latest average of the
bid and asked prices. If there were no asked prices quoted on such day, the
security is valued using the closing bid price. Futures contracts are valued at
the closing settlement price of the exchange or board of trade on which the
applicable contract is traded.
Securities and assets for which market quotations are not readily available
are valued at their fair value as determined in good faith under procedures
established by and under the general supervision of the Board of Trustees. 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
49
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 of Trustees. 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 of Trustees.
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.
TAXATION
The following discussion is a brief summary of certain U.S. federal income
tax considerations affecting the Fund and the purchase, ownership and
disposition of the Fund's common shares. A more complete discussion of the tax
rules applicable to the Fund and its shareholders can be found in the SAI that
is incorporated by reference into this prospectus. This discussion assumes you
are a U.S. person and that you hold your common shares as capital assets. This
discussion is based upon current provisions of the Code, the regulations
promulgated thereunder and judicial and administrative authorities, all of which
are subject to change or differing interpretations by the courts or the Internal
Revenue Service (the "IRS"), possibly with retroactive effect. No attempt is
made to present a detailed explanation of all U.S. federal tax concerns
affecting the Fund and its shareholders (including shareholders owning large
positions in the Fund).
The discussion set forth herein does not constitute tax advice and
potential investors are urged to consult their own tax advisers to determine the
specific U.S. federal, state, local and foreign tax consequences to them of
investing in the Fund.
Taxation of the Fund
The Fund intends to elect to be treated and to qualify annually 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").
50
(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.
Income from the Fund's investments in grantor trusts and equity interest of MLPs
that are not Qualified Publicly Traded Partnerships (if any) will be Qualifying
Income to the extent it is attributable to items of income of such trust or MLP
that would be Qualifying Income if earned directly by the Fund.
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.
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 common 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 common shares. There can be
no assurance as to what portion of the Fund's ordinary income dividends will
constitute qualified dividend income.
51
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 common shares, and thereafter
as capital gain from the sale of common 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 common shares, thereby increasing your potential gain
or reducing your potential loss on any subsequent sale or other disposition of
your common shares.
Dividends and other taxable distributions are taxable to you even though
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 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 common shares of the Fund will generally
result in capital gain or loss to you, and will be long-term capital gain or
loss if you have held such common shares for more than one year at the time of
sale. Any loss upon the sale or exchange of common 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 common shares. Any loss you realize on a
sale or exchange of common shares will be disallowed if you acquire other common
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 common shares. In such case, your tax basis in the
common shares acquired will be adjusted to reflect the disallowed loss.
The Fund may be required to withhold, for U.S. federal backup withholding
tax purposes, 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.
CUSTODIAN, TRANSFER AGENT
AND DIVIDEND DISBURSING AGENT
Mellon, located at 135 Santilli Highway, Everett, Massachusetts 02149,
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
paid by the Fund based upon, among other things, the average value of the total
assets of the Fund, plus certain charges for securities transactions.
American Stock Transfer, located at 59 Maiden Lane, New York, New York
10038, serves as the Fund's dividend disbursing agent, as agent under the Fund's
Plan and as transfer agent and registrar for the common shares of the Fund.
PLAN OF DISTRIBUTION
We may sell our 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 market
prices at the time of sale, at prices related to such prevailing
52
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 common shares directly to, and solicit offers from,
institutional investors or others who may be deemed to be underwriters as
defined in the 1933 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 of 1933, 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 of 1933. 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.
To facilitate an offering of common shares in an underwritten transaction
and in accordance with industry practice, the underwriters may engage in
transactions that stabilize, maintain, or otherwise affect the market price of
the shares. Those transactions may include overallotment, entering stabilizing
bids, effecting syndicate covering transactions, and reclaiming selling
concessions allowed to an underwriter or a dealer.
o An overallotment in connection with an offering creates a short
position in the common shares for the underwriter's own account.
o An underwriter may place a stabilizing bid to purchase the shares for
the purpose of pegging, fixing, or maintaining the price of the common
shares.
o Underwriters may engage in syndicate covering transactions to cover
overallotments or to stabilize the price of the shares subject to the
offering by bidding for, and purchasing, the shares or any other
securities in the open market in order to reduce a short position
created in connection with the offering.
o The managing underwriter may impose a penalty bid on a syndicate
member to reclaim a selling concession in connection with an offering
when the shares originally sold by the syndicate member is purchased
in syndicate covering transactions or otherwise.
Any of these activities may stabilize or maintain the market price of the
securities above independent market levels. The underwriters are not required to
engage in these activities, and may end any of these activities at any time.
Any underwriters to whom the offered securities are sold for offering and
sale may make a market in the offered securities, but the underwriters will not
be obligated to do so and may discontinue any market-making at any time without
notice. The offered securities may or may not be listed on a securities
exchange. We cannot assure you that there will be a liquid trading market for
the offered securities.
Any common shares sold pursuant to a Prospectus Supplement will be listed
on the Amex.
Under agreements into which we may enter, underwriters, dealers and agents
who participate in the distribution of our common shares may be entitled to
indemnification by us against certain liabilities, including liabilities under
53
the Securities Act of 1933. Underwriters, dealers and agents may engage in
transactions with us, or perform services for us, in the ordinary course of
business.
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 common 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 common 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 Skadden, Arps, Slate, Meagher &
Flom LLP, counsel to the Fund in connection with the offering of the common
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, as amended, and the 1940 Act and in accordance therewith
files reports and other information with the SEC. Reports, proxy statements and
other information filed by the Fund with the SEC pursuant to the informational
requirements of such Acts can be inspected and copied at the public reference
facilities maintained by the SEC, 450 Fifth Street, N.W., Washington, D.C.
20549. The SEC maintains a web site at http://www.sec.gov containing reports,
proxy and information statements and other information regarding registrants,
including the Fund, that file electronically with the SEC.
The common shares are listed on the Amex, under the symbol "GGN." Reports,
proxy statements and other information concerning the Fund and filed with the
SEC by the Fund will be available for inspection at the American Stock Exchange,
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 of 1933 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 common
shares offered hereby. Any statements contained herein concerning the
54
provisions of any document are not necessarily complete, and, in each instance,
reference is made to the copy of such document filed as an exhibit to the
Registration Statement or otherwise filed with the SEC. Each such statement is
qualified in its entirety by such reference. The complete Registration Statement
may be obtained from the SEC upon payment of the fee prescribed by its rules and
regulations or free of charge through the SEC's web site (http://www.sec.gov).
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.
TABLE OF CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION
An SAI dated as of _____________, 2007, 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.......................................................................3
INVESTMENT OBJECTIVE AND POLICIES..............................................3
INVESTMENT RESTRICTIONS.......................................................13
MANAGEMENT OF THE FUND........................................................14
AUCTIONS FOR AUCTION RATE PREFERRED SHARES....................................23
DIVIDENDS AND DISTRIBUTIONS...................................................25
PORTFOLIO TRANSACTIONS........................................................26
PORTFOLIO TURNOVER............................................................27
TAXATION......................................................................27
GENERAL INFORMATION...........................................................33
Appendix A - Proxy Voting Policy.............................................A-1
55
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.
56
_________ Shares
[GABELLI GRAPHIC OMITTED]
The Gabelli Global Gold,
Natural Resources & Income Trust
Common Shares of Beneficial Interest
----------------
PROSPECTUS
________, 2007
----------------
Filed Pursuant to Rule 497
Registration Statement No. 333-
PROSPECTUS SUPPLEMENT
(To Prospectus dated __________, 2007)
__________ Shares
[GRAPHIC OMITTED]
Common Shares of Beneficial Interest
We are offering for sale ________ shares of our common shares. Our common
shares are traded on the American Stock Exchange under the symbol "GGN." 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 common shares.
Per Share Total (1)
--------- ---------
Public offering price............................... $____ $ ____
Underwriting discounts and commissions.............. $____ $ ____
Proceeds, before expenses, to us.................... $____ $ ____
------------------
(1) The aggregate expenses of the offering are estimated to be $________, which
represents approximately $____ per share.
The underwriters may also purchase up to an additional common shares from
us at the public offering price, less underwriting discounts and commissions, to
cover over-allotments, if any, within 30 days after the date of this Prospectus
Supplement. If the over-allotment option is exercised in full, the total
proceeds, before expenses, to the Fund would be $________ and the total
underwriting discounts and commissions would be $________. The common shares
will be ready for delivery on or about __________, ____.
You should read this Prospectus Supplement and the accompanying Prospectus
before deciding whether to invest in our common shares and retain it for future
reference. The Prospectus Supplement and the accompanying Prospectus contain
important information about us. Material that has been incorporated by reference
and other information about us can be obtained from us by calling 1-800-GABELLI
(422-3554) or from the Securities and Exchange Commission's ("SEC") website
(http://www.sec.gov).
Neither the SEC nor any state securities commission has approved or
disapproved these securities or determined if this Prospectus Supplement is
truthful or complete. Any representation to the contrary is a criminal offense.
____________, ____
S-1
You should rely only on the information contained or incorporated by
reference in this Prospectus Supplement and the accompanying Prospectus. 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 in which the offer or sale is not permitted.
In this Prospectus Supplement and in the accompanying Prospectus, unless
otherwise indicated, "Fund," "us," "our" and "we" refer to Gabelli Global Gold,
Natural Resources & Income Fund. This Prospectus Supplement also includes
trademarks owned by other persons.
TABLE OF CONTENTS
Prospectus Supplement
Page
----
TABLE OF FEES AND EXPENSES...................................................S-3
USE OF PROCEEDS..............................................................S-3
PRICE RANGE OF COMMON STOCK..................................................S-3
UNDERWRITING.................................................................S-4
LEGAL MATTERS................................................................S-4
Prospectus
PROSPECTUS SUMMARY.............................................................1
SUMMARY OF FUND EXPENSES......................................................15
USE OF PROCEEDS...............................................................16
FINANCIAL HIGHLIGHTS..........................................................16
THE FUND 16
INVESTMENT OBJECTIVE AND POLICIES.............................................16
RISK FACTORS AND SPECIAL CONSIDERATIONS.......................................24
MANAGEMENT OF THE FUND........................................................35
PORTFOLIO TRANSACTIONS........................................................38
DIVIDENDS AND DISTRIBUTIONS...................................................38
AUTOMATIC DIVIDEND REINVESTMENT AND VOLUNTARY CASH PURCHASE PLAN..............38
DESCRIPTION OF THE SHARES.....................................................39
ANTI-TAKEOVER PROVISIONS OF THE FUND'S GOVERNING DOCUMENTS....................47
CLOSED-END FUND STRUCTURE.....................................................48
REPURCHASE OF COMMON SHARES...................................................49
NET ASSET VALUE...............................................................49
TAXATION 50
CUSTODIAN, TRANSFER AGENT AND DIVIDEND DISBURSING AGENT.......................52
PLAN OF DISTRIBUTION..........................................................52
LEGAL MATTERS.................................................................54
INDEPENDENT PUBLIC ACCOUNTING FIRM............................................54
ADDITIONAL INFORMATION........................................................54
PRIVACY PRINCIPLES OF THE FUND................................................55
TABLE OF CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION......................55
S-2
TABLE OF FEES AND EXPENSES
The following tables are intended to assist you in understanding the
various costs and expenses directly or indirectly associated with investing in
our common shares as a percentage of net assets attributable to common shares.
Amounts are for the current fiscal year after giving effect to anticipated net
proceeds of the offering, assuming that we incur the estimated offering
expenses, including preferred share offering expenses.
Shareholder Transaction Expenses
Sales Load (as a percentage of offering price).............. ___%
Offering Expenses Excluding Preferred Share
Offering Expense (as a percentage of
offering price)........................................... 5%
Dividend Reinvestment Plan Fees............................. None(1)
Preferred Share Offering Expenses
(as a percentage of net assets attributable
to common shares)......................................... None(2)
Percentage of Net Assets
Attributable to Common Shares
-----------------------------
Annual Expenses
Management Fees......................................... ___(3)
Other Expenses.......................................... ___(3)
Total Annual Expenses................................... ___(3)
Dividends on Preferred Shares........................... ___(4)
Total Annual Expenses and Dividends on Preferred Shares. ___(4)
------------------
(1) You will be charged a $1.00 services charge and pay brokerage charges if
you direct the plan agent to sell you common shares held in a dividend
reinvestment account.
(2) For preferred shares this amount will likely approximate .03% per $10
million in the case of variable rate or auction rate preferred shares and
.09% per $10 million in the case of fixed rate preferred shares based on an
offering of $100 million in liquidation preference of preferred shares and
net assets attributable to common shares of $___ million. The actual amount
in connection with any offering of preferred shares will be set forth in
the Prospectus Supplement if applicable.
(3) The Investment Advisor's fee is 1.00% per year of the Fund's average weekly
net assets, with no deductions for the liquidation preference of any
outstanding preferred shares. Consequently, if the Fund has preferred
shares outstanding, the investment management fees and other expenses as a
percentage of the net assets attributable to common shares will be higher
than if the Fund does not utilize a leveraged capital structure.
(4) These line items will be removed if no preferred shares are outstanding and
none are being offered in conjunction with the offering of common shares
and will be completed with actual information if preferred shares are
outstanding or being offered.
Example
The following example illustrates the expenses you would pay on a $1,000
investment in common shares, assuming a 5% annual portfolio total return.*
1 Year 3 Years 5 Years 10 Years
Total Expenses Incurred _____ _____ _____ _____
------------------
* The example should not be considered a representation of future expenses.
The example assumes that the amounts set forth in the Annual Expenses table
are accurate and that all distributions are reinvested at net asset value.
Actual expenses may be greater or less than those assumed. Moreover, the
Fund's actual rate of return may be greater or less than the hypothetical
5% return shown in the example.
S-3
USE OF PROCEEDS
We estimate the total net proceeds of the offering to be $_________
($________ if the over-allotment option is exercised in full), 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 objective 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.
PRICE RANGE OF COMMON SHARES
The following table sets forth for the quarters indicated, the high and low
sale prices on the American Stock Exchange per share of our common shares and
the net asset value and the premium or discount from net asset value per share
at which the common shares were trading, expressed as a percentage of net asset
value, at each of the high and low sale prices provided.
Net Asset Value Premium or Discount as a
Market Price ("NAV") Per Share at % of NAV
Quarter Ended High Low End of Period High Low
------------------- ----- ----- ------------------- ----- ----
March 31, 2005 20.01 20.00 4.93 -4.93
June 30, 2005 20.05 18.03 10.25 -3.48
September 30, 2005 21.93 19.80 2.39 -2.25
December 31, 2005 21.80 20.22 4.43 -4.61
March 31, 2006 23.90 21.45 3.96 -3.01
June 30, 2006 23.93 19.98 1.11 -5.62
September 30, 2006 22.89 21.15 2.41 -6.11
December 31, 2006 24.77 21.00 3.65 -1.41
March 31, 2007 26.74 22.92 6.89 -1.29
June 30, 2007
Third Quarter
through ______, 2007
The last reported price for our common shares on _____, ____ was $____
per share.
UNDERWRITING
[To Come]
LEGAL MATTERS
Certain legal matters will be passed on by Skadden, Arps, Slate, Meagher & Flom
LLP, New York, New York, our special counsel in connection with the offering of
Common Stock. Certain legal matters in connection with this offering will be
passed upon for the underwriters by __________________________.
S-4
Filed Pursuant to Rule 497
Registration Statement No. 333-
PROSPECTUS SUPPLEMENT
(To Prospectus dated __________, 2007)
__________ Shares
[GRAPHIC OMITTED]
Series ___ Preferred Shares of Beneficial Interest
We are offering for sale ________ shares of our Series __ preferred shares.
Our common shares are traded on the American Stock Exchange under the symbol
"GGN." 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 (1)
---------- -----------
Public offering price........................ $____ $ ____
Underwriting discounts and commissions....... $____ $ ____
Proceeds, before expenses, to us............. $____ $ ____
------------------
(1) The aggregate expenses of the offering are estimated to be $________, which
represents approximately $____ per share.
The Series __ preferred shares will be ready for delivery on or about
__________, ____.
You should read this Prospectus Supplement and the accompanying Prospectus
before deciding whether to invest in our preferred shares and retain it for
future reference. The Prospectus Supplement and the accompanying Prospectus
contain important information about us. Material that has been incorporated by
reference and other information about us can be obtained from us by calling
1-800-GABELLI (422-3554) or from the Securities and Exchange Commission's
("SEC") website (http://www.sec.gov).
Neither the SEC nor any state securities commission has approved or
disapproved these securities or determined if this Prospectus Supplement is
truthful or complete. Any representation to the contrary is a criminal offense.
____________, ____
S-1
TABLE OF CONTENTS
Prospectus Supplement
Page
----
TERMS OF THE SERIES - PREFERRED SHARES........................................P-
USE OF PROCEEDS...............................................................P-
UNDERWRITING..................................................................P-
LEGAL MATTERS.................................................................P-
S-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
[No-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 Aaa
Moodys.
------------------------
1 Applicable only if the preferred shares being offered are auction rate shares.
2 Applicable only if the preferred shares being offered are fixed rate shares.
S-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 objective 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.
UNDERWRITING
[To Come]
LEGAL MATTERS
Certain legal matters will be passed on by Skadden, Arps, Slate, Meagher & Flom
LLP, New York, New York, our special counsel in connection with the offering of
Common Stock. Certain legal matters in connection with this offering will be
passed upon for the underwriters by __________________________.
S-4
Dated _______, 2007
THE GABELLI GLOBAL GOLD, NATURAL RESOURCES & 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.
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 _______, 2007, 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 common 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.
The Gabelli Global Gold, Natural Resources & Income Trust, or the "Fund,"
is a non-diversified, closed-end management investment company registered under
the Investment Company Act of 1940, as amended (the "1940 Act"). The Fund's
primary investment objective is to provide a high level of current income. The
Fund's secondary investment objective is to seek capital appreciation consistent
with the Fund's strategy and its primary objective. An investment in the Fund is
not appropriate for all investors. We cannot assure you that the Fund's
objectives will be achieved. Gabelli Funds, LLC serves as Investment Adviser to
the Fund. See "Management of the Fund."
Under normal market conditions, the Fund will attempt to achieve its
objectives by investing at least 80% of its assets in equity securities of
companies principally engaged in the gold industry and the natural resources
industries. The Fund will invest at least 25% of its assets in the equity
securities of companies principally engaged in the exploration, mining,
fabrication, processing, distribution or trading of gold or the financing,
managing, controlling or operating of companies engaged in "gold-related"
activities. In addition, the Fund will invest at least 25% of its assets in the
equity securities of companies principally engaged in the exploration,
production or distribution of natural resources, such as gas, oil, paper, food
and agriculture, forestry products, metals and minerals as well as related
transportation companies and equipment manufacturers. The Fund may invest in the
securities of companies located anywhere in the world. The Fund anticipates that
application of its investment policies and strategy currently would cause it to
invest in issuers located in eight countries globally, including the U.S. Under
normal market conditions, the Fund will invest in the securities of issuers in
at least three different countries, including the U.S. As part of its investment
strategy, the Fund intends to earn income through an option strategy of writing
(selling) covered call options on equity securities in its portfolio. When the
Fund sells a covered call option, it receives income in the form of the premium
paid by the buyer of the call, but the Fund forgoes the opportunity to
participate in any increase in the value of the underlying equity security above
the exercise price of the option. See "Investment Objective and Policies."
This Statement of Additional Information is dated ________, 2007.
1
TABLE OF CONTENTS
Page
----
THE FUND....................................................................3
INVESTMENT OBJECTIVE AND POLICIES...........................................3
INVESTMENT RESTRICTIONS....................................................13
MANAGEMENT OF THE FUND.....................................................14
AUCTIONS FOR AUCTION RATE PREFERRED SHARES.................................23
DIVIDENDS AND DISTRIBUTIONS................................................25
PORTFOLIO TRANSACTIONS.....................................................26
PORTFOLIO TURNOVER.........................................................27
TAXATION...................................................................27
GENERAL INFORMATION........................................................33
Appendix A - Proxy Voting Policy..........................................A-1
2
THE FUND
The Gabelli Global Gold, Natural Resources & Income Trust is a
non-diversified, closed-end management investment company organized under the
laws of the State of Delaware. The Fund's common shares of beneficial interest,
par value $0.001, are listed on the Amex under the symbol "GGN."
INVESTMENT OBJECTIVE AND POLICIES
Investment Objective and Policies
The Fund's primary investment objective is to provide a high level of
current income. The Fund's secondary investment objective is to seek capital
appreciation consistent with the Fund's strategy and its primary objective.
Under normal market conditions, the Fund will attempt to achieve its
objectives by investing at least 80% of its assets in equity securities of
companies principally engaged in the gold industry and the natural resources
industries. The Fund will invest at least 25% of its assets in the equity
securities of companies principally engaged in the exploration, mining,
fabrication, processing, distribution or trading of gold or the financing,
managing, controlling or operating of companies engaged in "gold-related"
activities ("Gold Companies"). In addition, the Fund will invest at least 25% of
its assets in the equity securities of companies principally engaged in the
exploration, production or distribution of natural resources, such as gas, oil,
paper, food and agriculture, forestry products, metals and minerals as well as
related transportation companies and equipment manufacturers ("Natural Resources
Companies"). The Fund may invest in the securities of companies located anywhere
in the world. The Fund anticipates that application of its investment policies
and strategy currently would cause it to invest in issuers located in eight
countries globally, including the U.S. Under normal market conditions, the Fund
will invest in the securities of issuers in at least three different countries,
including the U.S.
Principally engaged, as used in this SAI, means a company that derives at
least 50% of its revenues or earnings or devotes at least 50% of its assets to
the indicated businesses. Equity securities may include common stocks, preferred
stocks, convertible securities, warrants, depository receipts and equity
interests in trusts and other entities. Other Fund investments may include
investment companies, including exchange-traded funds, securities of issuers
subject to reorganization or other risk arbitrage investments, derivative
instruments, debt (including obligations of the U.S. Government) and money
market instruments. As part of its investment strategy, the Fund intends to earn
income through an option strategy of writing (selling) covered call options on
equity securities in its portfolio. When the Fund sells a covered call option,
it receives income in the form of the premium paid by the buyer of the call
option, but the Fund forgoes the opportunity to participate in any increase in
the value of the underlying equity security above the exercise price of the
option. See "Investment Objective and Policies."
The Fund is not intended for those who wish to exploit short-term swings in
the stock market.
The Investment Adviser's investment philosophy with respect to selecting
investments in the gold industry and the natural resources industries is to
emphasize quality and value, as determined by such factors as asset quality,
balance sheet leverage, management ability, reserve life, cash flow and
commodity hedging exposure. In addition, in making stock selections, the
Investment Adviser looks for securities that it believes may have a superior
yield, as well as capital gains potential and that allow the Fund to earn income
from writing covered calls on such stocks.
Additional Investment Policies
Canadian Royalty Trusts. The Fund may invest in equity interests in
Canadian Royalty Trusts. A Canadian Royalty Trust is a royalty trust whose
securities are generally listed on a Canadian securities exchange and which
controls an underlying company whose business is the acquisition, exploitation,
production and sale of oil and natural gas. These trusts generally pay out to
unitholders the majority of the cash flow that they receive from the production
and sale of underlying oil and natural gas reserves. The amount of distributions
paid on a Canadian Royalty Trust's units will vary from time to time based on
production levels, commodity prices, royalty rates and certain expenses,
deductions and costs, as well as on the distribution payout ratio policy
adopted. As a result of distributing the bulk of its cash flow to unitholders,
the ability of a Canadian Royalty Trust to finance internal growth through
exploration is limited. Therefore, Canadian Royalty Trusts typically grow
through acquisition of
3
additional oil and gas properties or producing companies with proven reserves
of oil and gas, funded through the issuance of additional equity or, where the
trust is able, additional debt.
Canadian Royalty Trusts, like other types of Natural Resources Companies,
are exposed to pricing risk, supply and demand risk and depletion and
exploration risk with respect to their underlying commodities, among other
risks. An investment in units of Canadian Royalty Trusts involves some risks
which differ from an investment in common stock of a corporation, including
increased liability for the obligations of the trust. There are certain
regulatory and tax risks associated with an investment in Canadian Royalty
Trusts resulting from reliance on beneficial Canadian incentive programs and tax
laws that may be changed in the future. In addition, securities of certain
Canadian Royalty Trusts may not be qualifying assets for the Fund's asset
diversification requirements.
Master Limited Partnerships ("MLPs"). MLPs in which the Fund intends to
invest will be limited partnerships (or limited liability companies taxable as
partnerships), the units of which will generally be listed and traded on a U.S.
securities exchange. MLPs normally derive income and gains from the exploration,
development, mining or production, processing, refining, transportation
(including pipeline transporting gas, oil, or products thereof), or the
marketing of mineral or natural resources. MLPs generally have two classes of
owners, the general partner and limited partners. When investing in an MLP, the
Fund intends to purchase publicly traded common units issued to limited partners
of the MLP. The general partner typically controls the operations and management
of the MLP. MLPs are typically structured such that common units and general
partner interests have first priority to receive quarterly cash distributions up
to an established minimum amount ("minimum quarterly distributions" or "MQD").
Common and general partner interests also accrue arrearages in distributions to
the extent the MQD is not paid. Once common and general partner interests have
been paid, subordinated units receive distributions of up to the MQD; however,
subordinated units do not accrue arrearages. Distributable cash in excess of the
MQD paid to both common and subordinated units is distributed to both common and
subordinated units generally on a pro rata basis. The general partner is also
eligible to receive incentive distributions if the general partner operates the
business in a manner that results in distributions paid per common unit
surpassing specified target levels.
MLPs, like other types of Natural Resources Companies, are exposed to
pricing risk, supply and demand risk and depletion and exploration risk with
respect to their underlying commodities, among other risks. An investment in MLP
units involves some risks which differ from an investment in the common stock of
a corporation. Holders of MLP units have limited control and voting rights on
matters affecting the partnership. In addition, there are certain tax risks
associated with an investment in MLP units and conflicts of interest may exist
between common unit holders and the general partner, including those arising
from incentive distribution payments.
Risk Arbitrage. The Fund may invest up to 10% of its assets at the time of
investment 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. However, 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.
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 but 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
4
also the financial resources and business motivation behind the offer and/or
the dynamics and business climate when the offer or proposal is in process.
Since such investments are ordinarily short-term in nature, they will tend to
increase the turnover ratio of the Fund, thereby increasing its brokerage and
other transaction expenses. Risk arbitrage strategies may also involve short
selling, options hedging and other arbitrage techniques to capture price
differentials.
Derivative Instruments
Options. The Fund may, from time to time, subject to guidelines of the
Board of Trustees and the limitations set forth in the prospectus, 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 gives the holder of the option the right
to buy from the writer of the call option, in return for a premium, the security
or currency underlying the option at a specified exercise price at any time
during the term of the option. The writer of the call option has the obligation,
upon exercise of the option, to deliver the underlying security or currency upon
payment of the exercise price during the option period.
A put option is a contract that gives the holder of the option the right,
in return for a premium, to sell to the seller the underlying security at a
specified price. The seller of the put option has the obligation to buy the
underlying security upon exercise at the exercise price.
A call option is "covered" if the Fund owns the underlying instrument
covered by the call or has an absolute and immediate right to acquire that
instrument without additional cash consideration (or for additional cash
consideration held in a segregated account by its custodian) upon conversion or
exchange of other instruments held in its portfolio. A call option is also
covered if the Fund holds a call option on the same instrument as the call
option written where the exercise price of the call option held is (i) equal to
or less than the exercise price of the call option written or (ii) greater than
the exercise price of the call option written if the difference is maintained by
the Fund in cash, U.S. Government Securities or other high-grade short-term
obligations in a segregated account with its custodian. A put option is
"covered" if the Fund maintains cash or other liquid securities with a value
equal to the exercise price in a segregated account with its custodian, or else
holds a put option on the same instrument as the put option written where the
exercise price of the put option held is equal to or greater than the exercise
price of the put option 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 that 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
5
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.
To the extent that the Fund purchases options pursuant to a hedging
strategy, the Fund will be subject to the following additional risks. If a put
or call option purchased by the Fund is not sold when it has remaining value,
and if the market price of the underlying security remains equal to or greater
than the exercise price (in the case of a put), or remains less than or equal to
the exercise price (in the case of a call), the Fund will lose its entire
investment in the option.
Where a put or call option on a particular security is purchased to hedge
against price movements in that or a related security, the price of the put or
call option may move more or less than the price of the security. If
restrictions on exercise are imposed, the Fund may be unable to exercise an
option it has purchased. If the Fund is unable to close out an option that it
has purchased on a security, it will have to exercise the option in order to
realize any profit or the option may expire worthless.
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 option, or less than, in the case of a put
option, the exercise price of the option.
The Fund's successful use of options on indices depends upon its ability to
predict the direction of the market and is subject to various additional risks.
The correlation between movements in the index and the price of the securities
being hedged against is imperfect and the risk from imperfect correlation
increases as the composition of the Fund diverges from the composition of the
relevant index. Accordingly, a decrease in the value of the securities being
hedged against may not be wholly offset by a gain on the exercise or sale of a
securities index put option held by the Fund.
Options on Foreign Currencies. Instead of purchasing or selling currency
futures (as described below), the Fund may attempt to accomplish similar
objectives by purchasing put or call options on currencies or by writing put
options or call options on currencies either on exchanges or in OTC markets. A
put option gives the Fund the right to sell a currency at the exercise price
until the option expires. A call option gives the Fund the right to purchase a
currency at the exercise price until the option expires. Both types of options
serve to insure against adverse currency price movements in the underlying
portfolio assets designated in a given currency. The Fund's use of options on
currencies will be subject to the same limitations as its use of options on
securities, described above and in the prospectus. Currency options may be
subject to position limits that 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 that
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 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
6
Exchange Act. Accordingly, the Fund's investments in derivative instruments
described in this prospectus and the Statement of Additional Information (the
"SAI") are not limited by or subject to regulation under the Commodity Exchange
Act or otherwise regulated by the Commodity Futures Trading Commission.
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
Securities.
A "sale" of a futures contract (or a "short" futures position) means the
assumption of a contractual obligation to deliver the securities underlying the
contract at a specified price at a specified future time. A "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 option, or is less than, in the case of a put
option, the exercise price of the option on the futures contract. The potential
loss related to the purchase of an option on a futures contract is limited to
the premium paid for the option (plus transaction costs). Because the value of
the option purchased is fixed at the point of sale, there are no daily cash
payments by the purchaser to reflect changes in the value of the underlying
contract; however, the value of the option does change daily and that change
would be reflected in the net assets of the Fund.
Futures and options on futures entail certain risks, including but not
limited to the following: no assurance that futures contracts or options on
futures can be offset at favorable prices, possible reduction of the yield of
the Fund due to the use of hedging, possible reduction in value of both the
securities hedged and the hedging instrument, possible lack of liquidity due to
daily limits on price fluctuations, imperfect correlation between the contracts
and the securities being hedged, losses from investing in futures transactions
that are potentially unlimited and the segregation requirements described below.
In the event the Fund sells a put option or enters into long futures
contracts, under current interpretations of the 1940 Act, an amount of cash,
U.S. Government Securities or other liquid securities equal to the market value
of the contract must be deposited and maintained in a segregated account with
the Fund's custodian (the "Custodian") to collateralize the positions, in order
for the Fund to avoid being treated as having issued a senior security in the
amount of its obligations. For short positions in futures contracts and sales of
call options, the Fund may establish a segregated account (not with a futures
commission merchant or broker) with cash, U.S. Government Securities or other
high grade debt securities that, when added to amounts deposited with a futures
commission merchant or a broker as margin, equal the market value of the
instruments or currency underlying the futures contracts or call
7
options, respectively (but are no less than the stock price of the call option
or the market price at which the short positions were established).
Interest Rate Futures Contracts and Options Thereon. The Fund may purchase
or sell interest rate futures contracts to take advantage of or to protect the
Fund against fluctuations in interest rates affecting the value of debt
securities which the Fund holds or intends to acquire. For example, if interest
rates are expected to increase, the Fund might sell futures contracts on debt
securities, the values of which historically have a high degree of positive
correlation to the values of the Fund's portfolio securities. Such a sale would
have an effect similar to selling an equivalent value of the Fund's portfolio
securities. If interest rates increase, the value of the Fund's portfolio
securities will decline, but the value of the futures contracts to the Fund will
increase at approximately an equivalent rate thereby keeping the net asset value
of the Fund from declining as much as it otherwise would have. The Fund could
accomplish similar results by selling debt securities with longer maturities and
investing in debt securities with shorter maturities when interest rates are
expected to increase. However, since the futures market may be more liquid than
the cash market, the use of futures contracts as a risk management technique
allows the Fund to maintain a defensive position without having to sell its
portfolio securities.
Similarly, the Fund may purchase interest rate futures contracts when it is
expected that interest rates may decline. The purchase of futures contracts for
this purpose constitutes a hedge against increases in the price of debt
securities (caused by declining interest rates), which the Fund intends to
acquire. Since fluctuations in the value of appropriately selected futures
contracts should approximate that of the debt securities that will be purchased,
the Fund can take advantage of the anticipated rise in the cost of the debt
securities without actually buying them. Subsequently, the Fund can make its
intended purchase of the debt securities in the cash market and currently
liquidate its futures position. To the extent the Fund enters into futures
contracts for this purpose, it will maintain in a segregated asset account with
the Fund's Custodian, assets sufficient to cover the Fund's obligations with
respect to such futures contracts, which will consist of cash or other liquid
securities from its portfolio in an amount equal to the difference between the
fluctuating market value of such futures contracts and the aggregate value of
the initial margin deposited by the Fund with its Custodian with respect to such
futures contracts.
The purchase of a call option on a futures contract is similar in some
respects to the purchase of a call option on an individual security. Depending
on the pricing of the option compared to either the price of the futures
contract upon which it is based or the price of the underlying debt securities,
it may or may not be less risky than ownership of the futures contract or
underlying debt securities. As with the purchase of futures contracts, when the
Fund is not fully invested it may purchase a call option on a futures contract
to hedge against a market advance due to declining interest rates.
The purchase of a put option on a futures contract is similar to the
purchase of protective put options on portfolio securities. The Fund will
purchase a put option on a futures contract to hedge the Fund's portfolio
against the risk of rising interest rates and a 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 that 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
8
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 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.
Forward Currency Exchange Contracts. Subject to guidelines of the Board of
Trustees, the Fund may enter into forward foreign currency exchange contracts to
protect the value of its portfolio against uncertainty in the level of future
currency exchange rates between a particular foreign currency and the U.S.
dollar or between foreign currencies in which its securities are or may be
denominated. The Fund may enter into such contracts on a spot (i.e., cash) basis
at the rate then prevailing in the currency exchange market or on a forward
basis by entering into a forward contract to purchase or sell currency. A
forward contract on foreign currency is an obligation to purchase or sell a
specific currency at a future date, which may be any fixed number of days agreed
upon by the parties from the date of the contract at a price set on the date of
the contract. Forward currency contracts (i) are traded in a market conducted
directly between currency traders (typically, commercial banks or other
financial institutions) and their customers, (ii) generally have no deposit
requirements and (iii) are typically consummated without payment of any
commissions. The Fund, however, may enter into forward currency contracts
requiring deposits or involving the payment of commissions. To assure that its
forward currency contracts are not used to achieve investment leverage, the Fund
will segregate liquid assets consisting of cash, U.S. Government Securities or
other liquid securities with its Custodian, or a designated sub-custodian, in an
amount at all times equal to or exceeding its commitment with respect to the
contracts.
The dealings of the Fund in forward foreign currency 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 when 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
9
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 that the Investment Adviser believes to be
creditworthy institutions.
Special Risk Considerations Relating to Futures and Options Thereon. The
Fund's ability to establish and close out positions in futures contracts and
options thereon will be subject to the development and maintenance of liquid
markets. Although the Fund generally will purchase or sell only those futures
contracts and options thereon for which there appears to be a liquid market,
there is no assurance that a liquid market on an exchange will exist for any
particular futures contract or option thereon at any particular time. In the
event no liquid market exists for a particular futures contract or option
thereon in which the Fund maintains a position, it will not be possible to
effect a closing transaction in that contract or to do so at a satisfactory
price and the Fund would have to either make or take delivery under the futures
contract or, in the case of a written option, wait to sell the underlying
securities until the option expires or is exercised or, in the case of a
purchased option, exercise the option. In the case of a futures contract or an
option thereon which the Fund has written and which the Fund is unable to close,
the Fund would be required to maintain margin deposits on the futures contract
or option thereon and to make variation margin payments until the contract is
closed.
Successful use of futures contracts and options thereon and forward
contracts by the Fund is subject to the ability of the Investment Adviser to
predict correctly movements in the direction of interest and foreign currency
rates. If the Investment Adviser's expectations are not met, the Fund will be in
a worse position than if a hedging strategy had not been pursued. For example,
if the Fund has hedged against the possibility of an increase in interest rates
that would adversely affect the price of securities in its portfolio and the
price of such securities increases instead, the Fund will lose part or all of
the benefit of the increased value of its securities because it will have
offsetting losses in its futures positions. In addition, in such situations, if
the Fund has insufficient cash to meet daily variation margin requirements, it
may have to sell securities to meet the requirements. These sales may be, but
will not necessarily be, at increased prices that reflect the rising market. The
Fund may have to sell securities at a time when it is disadvantageous to do so.
Additional Risks of Foreign Options, Futures Contracts, Options on Futures
Contracts and Forward Contracts. Options, futures contracts and options thereon
and forward contracts on securities and currencies may be traded on foreign
exchanges. Such transactions may not be regulated as effectively as similar
transactions in the U.S., may not involve a clearing mechanism and related
guarantees, and are subject to the risk of governmental actions affecting
trading in, or the prices of, securities of foreign issuers ("Foreign
Securities"). The value of such positions also could be adversely affected by
(i) other complex foreign political, legal and economic factors, (ii) lesser
availability than in the U.S. of data on which to make trading decisions, (iii)
delays in the Fund's ability to act upon economic events occurring in the
foreign markets during non-business hours in the U.S., (iv) the imposition of
different exercise and settlement terms and procedures and margin requirements
than in the U.S. and (v) less 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.
Swaps. The Fund may enter into total rate of return, credit default or
other types of swaps and related derivatives for the purpose of 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
10
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 better had the
Fund not engaged in the interest rate hedging transactions), 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 hedging instrument
utilized, which may make it difficult for the Fund to close out or unwind one or
more hedging transactions.
Total rate of return swaps and related derivatives are a relatively recent
development in the financial 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.
Commodities-Linked Equity Derivative Instrument Risk. The Fund may invest
in structured notes that are linked to one or more underlying commodities. Such
structured notes provide exposure to the investment returns of physical
commodities without actually investing directly in physical commodities. Such
structured notes in which the Fund expects to invest are hybrid instruments that
have substantial risks, including risk of loss of all or a significant portion
of their principal value. Because the payouts on these notes are linked to the
price change of the underlying commodities, these investments are subject to
market risks that relate to the movement of prices in the commodities markets.
They may also be subject to additional special risks that do not affect
traditional equity and debt securities that may be greater than or in addition
to the risks of derivatives in general, including risk of loss of interest, risk
of loss of principal, lack of liquidity and risk of greater volatility.
Risk of Loss of Interest. If payment of interest on a structured note or
other hybrid instrument is linked to the value of a particular commodity,
futures contract, index or other economic variable, the Fund might not receive
all (or a portion) of the interest due on its investment if there is a loss in
value of the underlying instrument.
Risk of Loss of Principal. To the extent that the amount of the principal
to be repaid upon maturity is linked to the value of a particular commodity,
futures contract, index or other economic variable, the Fund might not receive
all or a portion of the principal at maturity of the investment. At any time,
the risk of loss associated with a particular instrument in the Fund's portfolio
may be significantly higher than 50% of the value of the investment.
Lack of Secondary Market. A liquid secondary market may not exist for the
specially created hybrid instruments the Fund buys, which may make it difficult
for the Fund to sell them at an acceptable price or accurately value them.
Risk of Greater Volatility. The value of the commodities-linked equity
derivative investments the Fund buys may fluctuate significantly because the
values of the underlying investments to which they are linked are themselves
extremely volatile. Additionally, economic leverage will increase the volatility
of these hybrid instruments, as they may increase or decrease in value more
quickly than the underlying commodity index, futures contract or other economic
variable.
11
The Investment Adviser is Not Registered as a Commodity Pool Operator. The
Investment Adviser has claimed an exclusion from the definition of the term
"commodity pool operator" under the Commodity Exchange Act. Accordingly, the
Fund's investments in derivative instruments described in the prospectus and
this SAI are not limited by or subject to regulation under the Commodity
Exchange Act or otherwise regulated by the Commodity Futures Trading
Commission.
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. 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.
The Investment Adviser, acting under the supervision of the Board of
Trustees of the Fund, reviews the creditworthiness of those banks and dealers
with which the Fund enters into repurchase agreements to evaluate these risks
and monitors on an ongoing basis the value of the securities subject to
repurchase agreements to ensure that the value is maintained at the required
level. The Fund will not enter into repurchase agreements with the Investment
Adviser or any of its affiliates.
If the financial institution which is a party to the repurchase agreement
petitions for bankruptcy or becomes subject to the United States Bankruptcy
Code, the law regarding the rights of the Fund is unsettled. As a result, under
extreme circumstances, there may be a restriction on the Fund's ability to sell
the collateral and the Fund would suffer a loss.
Loans of Portfolio Securities. Consistent with applicable regulatory
requirements and the Fund's investment restrictions, the Fund may lend its
portfolio securities to securities broker-dealers or financial institutions,
provided that such loans are callable at any time by the Fund (subject to
notice provisions described below), and are at all times secured by cash, cash
equivalents or other liquid securities 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 may be limited by rating agency
guidelines.
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
12
of portfolio securities will only be made to firms deemed by the Investment
Adviser to be creditworthy and when the income that can be earned from such
loans justifies the attendant risks. The Board of Trustees will oversee the
creditworthiness of the contracting parties on an ongoing basis. Upon
termination of the loan, the borrower is required to return the securities to
the Fund. Any gain or loss in the market price during the loan period would
inure to the Fund. The risks associated with loans of portfolio securities are
substantially similar to those associated with repurchase agreements. Thus, if
the counter party to the loan petitions for bankruptcy or becomes subject to
the United States Bankruptcy Code, the law regarding the rights of the Fund is
unsettled. As a result, under extreme circumstances, there may be a restriction
on the Fund's ability to sell the collateral and the Fund would suffer a loss.
When voting or consent rights which accompany loaned securities pass to the
borrower, the Fund will follow the policy of calling the loaned securities, to
be delivered within one day after notice, to permit the exercise of such rights
if the matters involved would have a material effect on the Fund's investment
in such loaned securities. The Fund will pay reasonable finder's,
administrative and custodial fees in connection with a loan of its securities.
When Issued, Delayed Delivery Securities and Forward Commitments. The Fund
may enter into forward commitments for the purchase or sale of securities,
including on a "when issued" or "delayed delivery" basis, in excess of customary
settlement periods for the type of security involved. In some cases, a forward
commitment may be conditioned upon the occurrence of a subsequent event, such as
approval and consummation of a merger, corporate reorganization or debt
restructuring (i.e., a when, as and if issued security). When such transactions
are negotiated, the price is fixed at the time of the commitment, with payment
and delivery taking place in the future, generally a month or more after the
date of the commitment. While it will only enter into a forward commitment with
the intention of actually acquiring the security, the Fund may sell the security
before the settlement date if it is deemed advisable by the Investment Adviser.
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 other liquid
securities in an aggregate amount at least equal to the amount of its
outstanding forward commitments.
Leverage. The Fund has no present intention to issue senior securities or
borrow money. However, the Fund may incur leverage through the use of certain
investment management techniques (e.g., purchasing "when-issued" securities, the
entering into of firm or standby commitment agreements, the use of reverse
repurchase agreements and selling short, "uncovered" sales of put and call
options, among others). Upon the use of such techniques, the Fund will establish
in a segregated account cash or other liquid securities equal to the Fund's
obligations in respect of such techniques. Such investment management techniques
are speculative and involve certain risks, including the possibility of higher
volatility of the net asset value of the common shares and potentially more
volatility in the market value of the common shares. During periods in which
leverage results in greater total Fund assets, the fees paid to the Investment
Adviser for advisory services will be higher than if the Fund did not incur such
leverage because the fees paid will be calculated on any assets attributable to
the incurrence of leverage. So long as the rate of return, net of applicable
Fund expenses, on the investments exceeds amounts paid to incur such techniques,
the usage of such techniques will generate more income than will be needed to
pay any resulting payments. The Fund reserves the right to borrow money or issue
senior securities in the future. The Fund's Board of Trustees may determine that
the use of leverage or issuance of preferred shares is appropriate and the Fund
may do so in the future.
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:
13
(1) other than with respect to its concentrations in Gold Companies and
Natural Resources Companies, 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 gold industry and the natural resources industries;
(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, up to 20% of the Fund's total assets, 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, the Fund's Investment Objective is a fundamental policy.
Unless specifically stated as such, no policy of the Fund is fundamental and
each policy may be changed by the Board of Trustees without shareholder
approval.
MANAGEMENT OF THE FUND
Trustees and Officers
Overall responsibility for management and supervision of the Fund rests
with its Board of Trustees. The Board of Trustees approves all significant
agreements between the Fund and the companies that furnish the Fund with
services, including agreements with the Investment Adviser, the Fund's
Custodian and the Fund's transfer agent. The day-to-day operations of the Fund
are delegated to the Investment Adviser.
The names and business addresses of the trustees and principal officers of
the Fund are set forth in the following table, together with their positions
and their principal occupations during the past five years and, in the case of
the trustees, their positions with certain other organizations and companies.
Number of Other
Name (and Age), Position Term of Office Principal Directorships Directorships
with the Fund and and Length of Occupation During in Fund Complex Held by
Business Address(1) Time Served(2) Past Five Years Overseen by Trustee Trustee
------------------- -------------- --------------- ------------------- -------
Interested Person Trustee(3)
Salvatore M Salibello (61) Since November 2005* Certified Public Accountant 2 0
and Managing Partner of the
public accounting firm of
Salibello & Broder LLP
Non-Interested Person Trustees
Anthony J. Colavita (71) Since February 2005** Partner in the law firm of 37
Trustee Anthony J. Colavita, P.C
14
Number of Other
Name (and Age), Position Term of Office Principal Directorships Directorships
with the Fund and and Length of Occupation During in Fund Complex Held by
Business Address(1) Time Served(2) Past Five Years Overseen by Trustee Trustee
------------------- -------------- --------------- ------------------- -------
James P. Conn (69) Since February 2005* Former Managing Director 14 Director of First
Trustee and Chief Investment Republic Bank
Officer of Financial (banking)
Security Assurance
Holdings Ltd. (1992-
1998) (insurance
holding company)
Mario d'Urso (66) Since February 2005*** Chairman of Mittel Capital 3
Trustee Markets S.p.A, since 2001;
Senator in the Italian
Parliament (1996-2001)
Vincent D. Enright (63) Since February 2005*** Former Senior Vice President 14 Director of Aphton
Trustee and Chief Financial Officer Corp. (bio-
of KeySpan Energy Corp pharmaceuticals)
through 1998
Frank J. Fahrenkopf, Jr. (67) Since February 2005** President and CEO of the 5 Director of First
Trustee American Gaming Association; Republic Bank
Partner in the law firm (banking)
of Hogan & Hartson;
Co-Chairman of the
Commission on
Presidential Debates;
Former Chairman
of the Republican
National Committee
(years)
Michael J. Melarkey (57) Since February 2005*** Partner and Attorney at law 3 --
Trustee in the law firm of Avansino,
Melarkey, Knobel & Mulligan
Anthonie C. van Ekris (72) Since February 2005** Chairman of BALMAC 21 Director of Aurado
International Inc. Energy Inc. (oil
(commodities and futures and gas operations)
trading)
Salvatore J. Zizza (61) Since February 2005** Zizza & Company, Ltd. 25 Director of Hollis
Trustee Eden Pharmaceuticals
(biotechnology) and
Earl Scheib, Inc.
(automotive
services)
Officers
Bruce N. Alpert (55) Since February 2005 Executive Vice President and
President Chief Operating Officer of
Gabelli Funds, LLC since
1988; Director and President
of Gabelli Advisers, Inc.
since 1998; Officer of all
the registered investment
companies in the Gabelli
fund complex
Carter W. Austin (40) Since February 2005 Vice President of The
Vice President Gabelli Global Deal Fund
since November 2006, The
Gabelli Dividend & Income
Trust since 2003 and The
Gabelli Equity Trust since
2000; Vice President of
Gabelli Funds, LLC since
1996
15
Number of Other
Name (and Age), Position Term of Office Principal Directorships Directorships
with the Fund and and Length of Occupation During in Fund Complex Held by
Business Address(1) Time Served(2) Past Five Years Overseen by Trustee Trustee
------------------- -------------- --------------- ------------------- -------
Peter D. Goldstein (53) Since February 2005 Director of Regulatory
Chief Compliance Officer Affairs for GAMCO Asset
Management Inc. since 2004;
Vice President of Goldman
Sachs Asset Management
(2000 -- 2004).
Molly A.F. Marion (53) Since 2005 Ombudsman of the Fund
Assistant Vice President since 205; Assistant Vice
and Ombudsman President of GAMCO
Investors, Inc. since
2006; Assistant
Portfolio Manager
of Gabelli Fixed Income
from 1994-2004.
James E. McKee (43) Since February 2005 Vice President, General
Secretary Counsel and Secretary
of GAMCO Investors,
Inc. since 1999 and
of GAMCO Asset
Management since
1993; Secretary
of all of the
registered investment
companies advised
by Gabelli Funds,
LLC and Gabelli
Advisers, Inc.
Agnes Mullady (48) Since 2006 Treasurer of all registered
Treasurer and Principal investment companies in the
Financial Officer Gabelli Funds complex;
Senior Vice President of
U.S. Trust Company, N.A.
and Treasurer and Chief
Financial Office of
Excelsior Funds from
2004-2005; Chief Financial
Officer of AMIC Distribution
Partners from 2002-2004;
Controller of Reserve
Management, Inc. and Reserve
Partners, Inc. and Treasurer
of Reserve Funds from
2000-2002.
--------------------------
(1) Address: One Corporate Center, Rye, NY 10580-1422, unless otherwise noted.
(2) The Fund's Board is divided into three classes, each class having a term of three years. Each year the term of office of
one class expires and the successor or successors elected to such class serve for a three year term. The three year term
for each class expires as follows:
* Term expires at the Fund's 2009 Annual Meeting of Shareholders or until their successors are duly elected and qualified.
** Term expires at the Fund's 2008 Annual Meeting of Shareholders or until their successors are duly elected and qualified.
*** Term expires at the Fund's 2007 Annual Meeting of Shareholders or until their successors are duly elected and qualified.
(3) "Interested person" of the Trust, as defined in the 1940 Act. Mr. Salibello may be considered an "interested person" of the
Trust as a result of being a partner in a accounting firm that provides professional services to affiliates of the
Investment Adviser.
16
Dollar Range Aggregate Dollar Range of Equity
of Equity Securities held in all Registered
Securities in Investment Companies in the
Name of Trustee the Fund Gabelli fund complex
--------------- -------- --------------------
Anthony J. Colavita* none over $100,000
James P. Conn over $100,000 over $100,000
Mario d'Urso $25,001-$50,000 $50,001 - $100,000
Vincent D. Enright none over $100,000
Frank J. Fahrenkopf, Jr. none $1-$10,000
Michael J. Melarkey none over $100,000
Salvatore M. Salibello none over $100,000
Anthonie C. van Ekris* $50,001-$100,000 over $100,000
Salvatore J. Zizza none over $100,000
-----------------
[* Messrs. Colavita and van Ekris each beneficially own less than 1% of the
common stock of Lynch Corporation, having a value of $9,338 and $11,200,
respectively, as of December 31, 2006. Mr. van Ekris beneficially owns less than
1% of the common stock of Lynch Interactive Corporation, having a value of
$37,200 as of December 31, 2006. Lynch Corporation and Lynch Interactive
Corporation may be deemed to be controlled by Mario J. Gabelli and affiliated
persons and in that event would be deemed to be under common control with the
Fund's Adviser.]
The Trustees serving on the Fund's Nominating Committee are Anthony J.
Colavita (Chair), Michael J. Melarkey and Salvatore J. Zizza. The Nominating
Committee is responsible for recommending qualified candidates to the Board of
Trustees 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.
Vincent D. Enright, Frank J. Fahrenkopf, Jr. and Salvatore J. Zizza
(Chair), who are not "interested persons" of the Fund as defined in the 1940
Act, serve on the Fund's Audit Committee. The Audit Committee is generally
responsible for reviewing and evaluating issues related to the accounting and
financial reporting policies and internal controls of the Fund and, as
appropriate, the internal controls of certain service providers, overseeing the
quality and objectivity of the Fund's financial statements and the audit
thereof and to act as a liaison between the Board of Trustees and the Fund's
independent registered public accounting firm.
Remuneration of Trustees and Officers
The Fund pays each Trustee who is not an officer or employee of the
Investment Adviser or its affiliates a fee of $3,000 per annum plus $1,000 per
board meeting attended in person ($500 if attended telephonically) and $500 per
committee meeting attended, together with each Trustee's actual out-of-pocket
expenses relating to attendance at such meetings.
The following table shows the compensation that the Trustees earned in
their capacity as Trustees during the Fund's Fiscal Year ending December 31,
2006. The table also shows, for the year ended December 31, 2006, the
compensation Trustees earned in their capacity as Trustees for other funds in
the Gabelli fund complex.
17
COMPENSATION TABLE
Total
Compensation
From the
Fund and
Name of Person Compensation Fund Complex
and Position From the Fund Paid to Trustees*
------------ ------------- -----------------
Anthony J. Colavita $ 8,500 $ 199,383
James P. Conn $ 8,500 $ 88,500
Mario d'Urso $ 8,000 $ 32,000
Vincent D. Enright $ 9,500 77,883
Frank J. Fahrenkopf, Jr. $ 7,500 $ 60,000
Michael J. Melarkey $ 8,000 $ 32,500
Salvatore M. Salibello $ 8,500 $ 33,000
Anthonie C. van Ekris $ 8,500 $ 95,383
Salvatore J. Zizza $ 9,500 $ 139,383
---------- -----------
Total $ 76,500 $ 758,033
========== ===========
* Represents the total compensation paid to such persons during the
calendar year ended December 31, 2006 by investment companies (including the
Fund) or portfolios thereof from which such person receives compensation that
are considered part of the same fund complex as the Fund because they have
common or affiliated investment advisers. The total does not include, among
other things, out of pocket Trustee expenses.
Indemnification of Officers and Trustees; Limitations on Liability
The Agreement and Declaration of Trust of the Fund provides 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 Agreement and
Declaration of Trust of the Fund protects or indemnifies a trustee, officer,
employee or agent of the Fund against any liability to which such person would
otherwise be subject in the event of such person's willful misfeasance, bad
faith, gross negligence or reckless disregard of the duties involved in the
conduct of his or her position.
Investment Advisory and Administrative Arrangements
Gabelli Funds, LLC acts as the Fund's Investment Adviser pursuant to the
investment advisory agreement between the Fund and the Investment Adviser (the
"Investment Advisory Agreement"). The Investment Adviser is a New York Limited
Liability Corporation with principal offices located at One Corporate Center,
Rye, New York 10580-1422. The Investment Adviser was organized in 1999 and is
the successor to Gabelli Funds, Inc., which was organized in 1980. As of March
31, 2007, the Investment Adviser acted as registered investment adviser to __
management investment companies with aggregate net assets of $____ billion. The
Investment Adviser, together with the other affiliated investment advisers
noted below had assets under management totaling approximately $____ billion as
of March 31, 2007. GAMCO Investors, Inc., an affiliate of the Investment
Adviser, acts as investment adviser for individuals, pension trusts, profit
sharing trusts and endowments, and as a sub-adviser to management investment
companies having aggregate assets of $____ billion under management as of March
31, 2007. Gabelli Securities, Inc., an affiliate of the Investment Adviser,
acts as investment adviser for investment partnerships and entities having
aggregate assets of approximately $_____ as of March 31, 2007. Gabelli Fixed
Income LLC, an affiliate of the Investment Adviser, acts as investment adviser
for separate accounts having aggregate assets of approximately $___________
under management as of March 31, 2007. Gabelli Advisers, Inc., an affiliate of
the Investment Adviser, acts as investment manager to the Westwood Funds having
aggregate assets of approximately $___________ under management as of March 31,
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
18
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 procedures, approved by the
Board of Trustees, 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 that 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 (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 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 of Trustees. 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 into 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 net assets of the
Fund. There is no deduction for the liquidation preference of any outstanding
preferred shares.
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 from year to year if approved annually (i) by
the Fund's Board of Trustees or by the holders of a majority of its outstanding
voting securities and (ii) by a majority of the Trustees who are not
"interested persons" (as defined in the 1940 Act) of any party to the
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 most recently approved by a majority
of the Fund's Board of Trustees, including a majority of the Trustees who are
not interested persons as that term is defined in the 1940 Act, at an in person
meeting of the Board of Trustees held on February 22, 2007.
19
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 the number of other accounts for which each
portfolio manager was primarily responsible for the day-to-day management as of
the fiscal year ended December 31, 2006.
# of
Accounts Total
Managed Assets
with with
Advisory Advisory
Name of Portfolio Total # of Fee Fee
Manager or Accounts Total Based on Based on
Team Member Type of Accounts Managed Assets Performance Performance
----------- ---------------- ------- ------ ----------- -----------
1. Caesar M.P. Bryan Registered Investment Companies: 5 $ 2.9 billion 1 $ 2.2 billion
Other Pooled Investment Vehicles: 1 $ 4.0 million 1 $ 4.0 million
Other Accounts: 5 $ 50.5 million 0 $ 0
2. Barbara G. Marcin Registered Investment Companies: 2 $ 2.5 billion 1 $ 2.5 billion
Other Pooled Investment Vehicles: 0 $ 0 0 $ 0
Other Accounts: 21 $ 138.0 million 0 $ 0
3. Vincent Roche Registered Investment Companies: 0 $ 0 0 $ 0
Other Pooled Investment Vehicles: 1 $ 21 million 1 $ 21 million
Other Accounts: 0 $ 0 0 $ 0
4. Joshua W. Fenton Registered Investment Companies: 2 $ 48.4 million 0 $ 0
Other Pooled Investment Vehicles: 5 $ 2.6 million 5 $ 2.6 million
Other Accounts: 13 $ 16.6 million 0 $ 0
* Represents the portion of assets for which the portfolio manager has
primary responsibility in the accounts indicated. The accounts indicated may
contain additional assets under the primary responsibility of other portfolio
managers
Potential Conflicts of Interest
Actual or apparent conflicts of interest may arise when a portfolio
manager for a fund also has day-to-day management responsibilities with respect
to one or more other funds or accounts. These potential conflicts include:
Allocation of Limited Time and Attention. A portfolio manager who is
responsible for managing multiple funds or other accounts may devote unequal
time and attention to the management of those funds or accounts. As a result,
the portfolio manager may not be able to formulate as complete a strategy or
identify equally attractive investment opportunities for each of those accounts
as might be the case if he or she were to devote substantially more attention
to the management of a single fund.
Allocation of Limited Investment Opportunities. If a portfolio manager
identifies an investment opportunity that may be suitable for multiple funds or
other accounts, a fund may not be able to take full advantage of that
opportunity because the opportunity may be allocated among several of these
funds or accounts.
Pursuit of Differing Strategies. At times, a portfolio manager may
determine that an investment opportunity may be appropriate for only some of
the funds or accounts for which he or she exercises investment responsibility,
or may decide that certain of the funds or accounts should take differing
positions with respect to a particular security. In these cases, the portfolio
manager may place separate transactions for one or more funds or accounts which
may affect the market price of the security or the execution of the
transaction, or both, to the detriment of one or more other funds or accounts.
20
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 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 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.
Variation in Compensation. A conflict of interest may arise where the
financial or other benefits available to the portfolio manager differ among the
funds or accounts that he or she manages. If the structure of the Adviser's
management fee or the portfolio manager's compensation differs among funds or
accounts (such as where certain funds or accounts pay higher management fees or
performance-based management fees), the portfolio manager may be motivated to
favor certain funds or accounts over others. The portfolio manager also may be
motivated to favor funds or accounts in which he or she has an investment
interest, or in which the Adviser or its affiliates have investment interests.
Similarly, the desire to maintain assets under management or to enhance a
portfolio manager's performance record or to derive other rewards, financial or
otherwise, could influence the portfolio manager in affording preferential
treatment to those funds or other accounts that could most significantly
benefit the portfolio manager.
The 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 Adviser and its staff members. However, there is no guarantee that such
policies and procedures will be able to detect and prevent every situation in
which an actual or potential conflict may arise.
Compensation Structure
The compensation of the portfolio managers is reviewed annually and
structured to enable the Adviser to attract and retain highly qualified
professionals in a competitive environment. The portfolio managers named above
receive a compensation package that includes a minimum draw or base salary,
equity-based incentive compensation via awards of stock options, and incentive
based variable compensation based on a percentage of net revenues received by
the Adviser for managing the Fund to the extent that it exceeds a minimum level
of compensation. This method of compensation is based on the premise that
superior long-term performance in managing a portfolio will be rewarded through
growth of assets through appreciation and cash flow. Incentive based equity
compensation is based on an evaluation of quantitative and qualitative
performance evaluation criteria. Mr. Fenton and Mr. Roche also may receive
discretionary bonuses based primarily on qualitative performance evaluation
criteria.
Compensation for managing other accounts is based on a percentage of net
revenues received by the Adviser for managing the account. Compensation for
managing the pooled investment vehicles and other accounts that have a
performance-based fee will have two components. One component of the fee is
based on a percentage of net revenues received by the Adviser for managing the
account or pooled investment vehicle. The second component of the fee is based
on absolute performance from which a percentage of such fee is paid to the
portfolio manager.
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
21
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 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):
(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.
Ownership of Shares in the Fund
As of December 31, 2006, the portfolio managers of the Fund own the
following amounts of equity securities of the Fund.
22
Barbara Marcin $50,001-$100,000 Josh Fenton $10,001-$25,000
Caesar Bryan $10,001-$25,000 Vincent Roche $10,001-$25,000
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 Charter, including the provisions of the Articles Supplementary
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 stock: sell,
bid and hold.
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.
If you enter a bid (or "hold at a rate") order, which must
spec 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.
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 of stock.
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.
23
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 shares 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.
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 shares 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 shares 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 Articles
Supplementary establishing the auction rate preferred shares.
The auction procedures include a pro rata allocation of shares 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 prospectus, a business day is a day
on which the NYSE is open for trading, and which is not a Saturday, Sunday or
any other day on which banks in New York City are authorized or obligated by
law to close.
The first auction for 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.
24
Current Holder A Owns 500 shares, wants to sell all 500 shares if Bid order at 4.6% rate for all 500 shares
auction rate is less than 4.6%
Current Holder B Owns 300 shares, wants to hold Hold order will take the auction rate
Current Holder C Owns 200 shares, wants to sell all 200 shares if Bid order at 4.4% rate for all 200 shares
auction rate is less than 4.4%
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 Series E 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.
DIVIDENDS AND DISTRIBUTIONS
The Fund, along with other closed-end registered investment companies
advised by the Investment Adviser, is covered by an exemption from Section
19(b) of the 1940 Act and Rule 19b-1 thereunder permitting the Fund to make
periodic distributions of long-term capital gains provided that any
distribution policy of the Fund with respect to its common shares calls for
periodic (e.g., quarterly or semi-annually, but in no event more frequently
than monthly) distributions in an amount equal to a fixed percentage of the
Fund's average net asset value or market price per common share over a
specified period of time at or about the time of distribution or the pay-out of
a fixed dollar amount. The exemption also permits the Fund to make such
distributions with respect to its senior securities, if any,
25
in accordance with such shares' terms. As of the date of this SAI, the Fund has
not adopted a dividend policy that would subject it to such exemption.
Were such a policy adopted, to the extent the Fund's total monthly
distributions for a year 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 gains 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 which (based
upon the Fund's full year performance) constitute a tax-free return of capital
would 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 would generally be taxable to the shareholder
as capital gain. See "Taxation." Distribution notices provided by the Fund to
its shareholders will clearly indicate what portion of the monthly
distributions would constitute net income, net capital gains, and 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
that year and would be communicated to shareholders promptly. In the event that
the Fund distributes amounts in excess of its investment company taxable income
and net capital gain, such distributions will decrease the Fund's total assets
and, therefore, have the likely effect of increasing the Fund's expense ratio,
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.
PORTFOLIO TRANSACTIONS
Subject to policies established by the Board of Trustees of the Fund, the
Investment Adviser is responsible for placing purchase and sale orders and the
allocation of brokerage on behalf of the Fund. Transactions in equity
securities are in most cases effected on U.S. stock exchanges and involve the
payment of negotiated brokerage commissions. There may be no stated commission
in the case of securities traded in over-the-counter markets, but the prices of
those securities may include undisclosed commissions or mark-ups. Principal
transactions are not entered into with affiliates of the Fund. However, Gabelli
& Company, Inc. may execute transactions in the over-the-counter markets on an
agency basis and receive a stated commission therefrom. To the extent
consistent with applicable provisions of the 1940 Act and the rules and
exemptions adopted by the SEC thereunder, as well as other regulatory
requirements, the Fund's Board of Trustees has 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.
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.
26
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 over time to all of the accounts, including the Fund.
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 investment policies of the Fund,
including its strategy of writing covered call options on securities in its
portfolio, is expected to result in portfolio turnover that is higher than that
of other investment companies, and is expected to be higher than 100%. For the
fiscal years ended December 31, 2005 and 2006, the portfolio turnover rates
were 142.5% and 114.8%, respectively.
TAXATION
The following discussion is a brief summary of certain U.S. federal income
tax considerations affecting the Fund and the purchase, ownership and
disposition of the Fund's common shares. This discussion assumes you are a U.S.
person and that you hold your common shares as capital assets. This discussion
is based upon current provisions of the Internal Revenue Code of 1986, as
amended (the "Code"), the regulations promulgated thereunder and judicial and
administrative authorities, all of which are subject to change or differing
interpretations by the courts or the Internal Revenue Service (the "IRS"),
possibly with retroactive effect. No attempt is made to present a detailed
explanation of all U.S. federal tax concerns affecting the Fund and its
shareholders (including shareholders owning large positions in the Fund).
The discussions set forth herein and in the prospectus do not constitute
tax advice and potential investors are urged to consult their own tax advisers
to determine the specific U.S. federal, state, local and foreign tax
consequences to them of investing in the Fund.
Taxation of the Fund
The Fund has elected to be treated and intends to qualify annually 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").
27
(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.
Income from the Fund's investments in grantor trusts and equity interest of MLPs
that are not Qualified Publicly Traded Partnerships (if any) will be Qualifying
Income to the extent it is attributable to items of income of such trust or MLP
that would be Qualifying Income if earned directly by the Fund.
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, and such distributions will be taxable to the
shareholders as ordinary dividends to the extent of the Fund's current or
accumulated earnings and profits. Such dividends, however, would be eligible
(i) to be treated as qualified dividend income in the case of shareholders
taxed as individuals and (ii) for the dividends received deduction in the case
of corporate shareholders. The Fund could be required to recognize unrealized
gains, pay taxes and make distributions (which could be subject to interest
charges) before requalifying for taxation as a regulated investment company. If
the Fund fails to qualify as a regulated investment company in any year, it
must pay out its earnings and profits accumulated in that year in order to
qualify again as a regulated investment company. If the Fund failed to qualify
as a regulated investment company for a period greater than two taxable years,
the Fund may be required to recognize and pay tax on any net built-in gains
with respect to certain of its assets (i.e., the excess of the aggregate gains,
including items of income, over aggregate losses that would have been realized
with respect to such assets if the Fund had been liquidated) or, alternatively,
to elect to be subject to taxation on such built-in gain recognized for a
period of ten years, in order to qualify as a regulated investment company in a
subsequent year.
The MLPs in which the Fund intends to invest are expected to be treated as
partnerships for U.S. federal income tax purposes. The cash distributions
received by the Fund from an MLP may not correspond to the amount of income
allocated to the Fund by the MLP in any given taxable year. If the amount of
income allocated by an MLP to the Fund exceeds the amount of cash received by
the Fund from such MLP, the Fund may have difficulty making distributions to
its shareholders in the amounts necessary to satisfy the requirements for
maintaining its status as a regulated investment company or avoiding U.S.
federal income or excise taxes. Accordingly, the Fund may have to dispose of
securities under disadvantageous circumstances in order to generate sufficient
cash to satisfy the distribution requirements.
The Fund expects that the income derived by the Fund from the MLPs in which
it invests will be Qualifying Income. If, however, an MLP in which the Fund
invests is not a Qualified Publicly Traded Partnership, the income derived by
the Fund from such investment may not be Qualifying Income and, therefore, could
adversely affect the Fund's status as a
28
regulated investment company. The Fund intends to monitor its investments in
MLPs to prevent the disqualification of the Fund as a regulated investment
company.
The premium received by the Fund for writing a call option is not included
in income at the time of receipt. If the option expires, the premium is
short-term capital gain to the Fund. If the Fund enters into a closing
transaction, the difference between the amount paid to close out its position
and the premium received is short-term capital gain or loss. If a call option
written by the Fund is exercised, thereby requiring the Fund to sell the
underlying security, the premium will increase the amount realized upon the
sale of the security and any resulting gain or loss will be long-term or
short-term, depending upon the holding period of the security. With respect to
a put or call option that is purchased by the Fund, if the option is sold, any
resulting gain or loss will be a capital gain or loss, and will be short-term
or long-term, depending upon the holding period for the option. If the option
expires, the resulting loss is a capital loss and is short-term or long-term,
depending upon the holding period for the option. If the option is exercised,
the cost of the option, in the case of a call option, is added to the basis of
the purchased security and, in the case of a put option, reduces the amount
realized on the underlying security in determining gain or loss. Because the
Fund does not have control over the exercise of the call options it writes,
such exercises or other required sales of the underlying securities may cause
the Fund to realize capital gains or losses at inopportune times.
The Fund's transactions in foreign currencies, forward contracts, options,
futures contracts (including options and futures contracts on foreign
currencies) and short sales, to the extent permitted, will be subject to
special provisions of the Code (including provisions relating to "hedging
transactions," "straddles" and "constructive sales") that may, among other
things, affect the character of gains and losses realized by the Fund (i.e.,
may affect whether gains or losses are ordinary or capital), accelerate
recognition of income to the Fund and defer Fund losses. These rules could
therefore affect the character, amount and timing of distributions to common
shareholders. Certain of these provisions may also (a) require the Fund to
mark-to-market certain types of the positions in its portfolio (i.e., treat
them as if they were closed out at the end of each year), (b) cause the Fund to
recognize income without receiving cash with which to pay dividends or make
distributions in amounts necessary to satisfy the distribution requirements for
avoiding income and excise taxes, (c) treat dividends that would otherwise
constitute qualified dividend income as non-qualified dividend income and (d)
treat dividends that would otherwise be eligible for the corporate
dividends-received deduction as ineligible for such treatment.
The Fund's investment in so-called "section 1256 contracts," such as
regulated futures contracts, most foreign currency forward contracts traded in
the interbank market and options on most stock indices, are subject to special
tax rules. All section 1256 contracts held by the Fund at the end of its
taxable year are required to be marked to their market value, and any
unrealized gain or loss on those positions will be included in the Fund's
income as if each position had been sold for its fair market value at the end
of the taxable year. The resulting gain or loss will be combined with any gain
or loss realized by the Fund from positions in section 1256 contracts closed
during the taxable year. Provided such positions were held as capital assets
and were not part of a "hedging transaction" nor part of a "straddle," 60% of
the resulting net gain or loss will be treated as long-term capital gain or
loss, and 40% of such net gain or loss will be treated as short-term capital
gain or loss, regardless of the period of time the positions were actually held
by the Fund.
If the Fund purchases shares in certain foreign investment entities,
called passive foreign investment companies ("PFICs"), the Fund may be subject
to U.S. federal income tax on a portion of any "excess distribution" or gain
from the disposition of such shares even if such income is distributed as a
taxable dividend by the Fund to the shareholders. Additional charges in the
nature of interest may be imposed on the Fund in respect of deferred taxes
arising from such distributions or gains. Elections may be available to the
Fund to mitigate the effect of this tax, but such elections generally
accelerate the recognition of income without the receipt of cash. Dividends
paid by PFICs are not treated as qualified dividend income, as discussed below
under "Taxation of Shareholders."
29
If the Fund invests in the stock of a PFIC, or any other investment that
produces income that is not matched by a corresponding cash distribution to the
Fund, the Fund could be required to recognize income that it has not yet
received. Any such income would be treated as income earned by the Fund and
therefore would be subject to the distribution requirements of the Code. This
might prevent the Fund from distributing 90% of its net investment income as is
required in order to avoid Fund-level U.S. federal income taxation on all of
its income, or might prevent the Fund from distributing enough ordinary income
and capital gain net income to avoid completely the imposition of the excise
tax. To avoid this result, the Fund may be required to borrow money or dispose
of securities to be able to make required distributions to the 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.
Under Section 988 of the Code, gains or losses attributable to
fluctuations in exchange rates between the time the Fund accrues income or
receivables or expenses or other liabilities denominated in a foreign currency
and the time the Fund actually collects such income or receivables or pays such
liabilities are generally treated as ordinary income or loss. Similarly, gains
or losses on foreign currency forward contacts and the disposition of debt
securities denominated in a foreign currency, to the extent attributable to
fluctuations in exchange rates between the acquisition and disposition dates,
are also treated as ordinary income or loss.
Dividends or other income (including, in some cases, capital gains)
received by the Fund from investments in foreign securities may be subject to
withholding and other taxes imposed by foreign countries. Tax conventions
between certain countries and the U.S. may reduce or eliminate such taxes in
some cases. If more than 50% of the Fund's total assets at the close of its
taxable year consists of stock or securities of foreign corporations, the Fund
may elect for U.S. federal income tax purposes to treat foreign income taxes
paid by it as paid by its shareholders. The Fund may qualify for and make this
election in some, but not necessarily all, of its taxable years. If the Fund
were to make such an election, shareholders of the Fund would be required to
take into account an amount equal to their pro rata portions of such foreign
taxes in computing their taxable income and then treat an amount equal to those
foreign taxes as a U.S. federal income tax deduction or as a foreign tax credit
against their U.S. federal income liability. Shortly after any year for which
it makes such an election, the Fund will report to its shareholders the amount
per share of such foreign income tax that must be included in each
shareholder's gross income and the amount that may be available for the
deduction or credit.
Taxation of Shareholders
The Fund will either distribute or 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 U.S. 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
common 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 both the Fund and the shareholder) (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) in the case of individual shareholders, as qualified dividend income
eligible to be taxed at a maximum rate of generally 15% (5% for individuals in
lower tax brackets) to the extent that the Fund receives qualified dividend
income. If the Fund's qualified dividend income is less than 95% of its gross
income, a shareholder of the Fund may only include as qualified dividend income
that portion of the dividends that may be and are so designated by the Fund as
qualified dividend income. These special rules relating to the taxation of
ordinary income dividends paid by RICs to individual taxpayers generally apply
to taxable years beginning on or before December 31, 2010. Thereafter, the
30
Fund's dividends, other than capital gains dividends, will be fully taxable at
ordinary income rates unless further Congressional action is taken. There can
be no assurance as to what portion of the Fund's distributions will qualify for
favorable treatment as 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 stock 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 that 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 lends portfolio securities, 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 stock, and regardless of how
long the shareholder has held the Fund's common shares. Capital gain
distributions are not eligible for the dividends received deduction. The
maximum U.S. federal tax rate on net long-term capital gain of individuals is
generally 15% (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. 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, for any calendar year, the total distributions exceed both current
earnings and profits and accumulated earnings and profits, the excess will
generally be treated as a tax-free return of capital up to the amount of a
shareholder's tax basis in the common shares. The amount treated as 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 his or her basis in the common shares will be taxable
to the shareholder as capital gain (assuming your common shares are held as a
capital asset).
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.
An investor should be aware that if Fund common shares are purchased
shortly before the record date for any taxable distribution (including a
capital gain dividend), the purchase price likely will reflect the value of the
distribution and the investor then would receive a taxable distribution that is
likely to reduce the trading value of such Fund common shares, in effect
resulting in a taxable return of some of the purchase price.
Certain types of income received by the Fund from real estate investment
trusts ("REITs"), real estate mortgage investment conduits ("REMICs"), taxable
mortgage pools or other investments may cause the Fund to designate some or all
of its distributions as "excess inclusion income." To Fund shareholders such
excess inclusion income will (i) constitute taxable income, as "unrelated
business taxable income" ("UBTI") for those shareholders who would otherwise be
tax-exempt such as individual retirement accounts, 401(k) accounts, Keogh
plans, pension plans and certain charitable entities; (ii) not be offset
against net operating losses for tax purposes; (iii) not be eligible for
reduced U.S. withholding for non-U.S. shareholders even from tax treaty
countries; and (iv) cause the Fund to be subject to tax if certain
"disqualified organizations," as defined by the Code (such as certain
governments or governmental agencies and charitable remainder trusts), are Fund
shareholders.
Upon a sale, exchange or other disposition of common 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 common shares. Such gain or loss will
be treated as long-term capital gain or loss if the common shares have been
held for more than one year. Any loss realized on a sale or exchange of common
shares of the Fund will be disallowed to the extent the common shares disposed
of are replaced by substantially identical common shares within a 61 day period
beginning 30 days before and ending 30 days after the
31
date that the common shares are disposed of. In such a case, the basis of the
common shares acquired will be adjusted to reflect the disallowed loss.
Any loss realized by a shareholder on the sale of Fund common 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 common 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 U.S. federal (including the
application of the alternative minimum tax rules), state, local or foreign tax
consequences to them of investing in the Fund.
A shareholder that is a nonresident alien individual or a foreign
corporation (a "foreign investor") generally will be subject to U.S.
withholding tax at the rate of 30% (or possibly a lower rate provided by an
applicable tax treaty) on ordinary income dividends (except as discussed
below). Different tax consequences may result if the foreign investor is
engaged in a trade or business in the United States or, in the case of an
individual, is present in the United States for 183 days or more during a
taxable year and certain other conditions are met. Foreign investors should
consult their tax advisors regarding the tax consequences of investing in the
Fund's common shares.
In general, U.S. federal withholding tax will not apply to any gain or
income realized by a foreign investor in respect of any distributions of net
long-term capital gains over net short-term capital losses, exempt-interest
dividends, or upon the sale or other disposition of common shares of the Fund.
For taxable years beginning before January 1, 2008, properly-designated
dividends are generally exempt from U.S. federal withholding tax where they (i)
are paid in respect of the Fund's "qualified net interest income" (generally,
the Fund's U.S. source interest income, other than certain contingent interest
and interest from obligations of a corporation or partnership in which the Fund
is at least a 10% shareholder, reduced by expenses that are allocable to such
income) or (ii) are paid in respect of the Fund's "qualified short-term capital
gains" (generally, the excess of the Fund's net short-term capital gain over
the Fund's long-term capital loss for such taxable year). However, depending on
its circumstances, the Fund may designate all, some or none of its potentially
eligible dividends as such qualified net interest income or as qualified
short-term capital gains, and/or treat such dividends, in whole or in part, as
ineligible for this exemption from withholding. In order to qualify for this
exemption from withholding, a foreign investor will need to comply with
applicable certification requirements relating to its non-U.S. status
(including, in general, furnishing an IRS Form W 8BEN or substitute Form). In
the case of common shares held through an intermediary, the intermediary may
withhold even if the Fund designates the payment as qualified net interest
income or qualified short-term capital gain.
Foreign investors should contact their intermediaries with respect to the
application of these rules to their accounts. There can be no assurance as to
what portion of the Fund's distributions will qualify for favorable treatment
as qualified net interest income or qualified short-term capital gains.
Backup Withholding
The Fund may be required to withhold U.S. federal income tax on all
taxable distributions and redemption proceeds payable to non-corporate
shareholders who fail to provide the Fund with their correct taxpayer
identification number or to make required certifications, or who have been
notified by the IRS that they are subject to backup withholding. Backup
withholding is not an additional tax. Any amounts withheld may be refunded or
credited against such shareholder's 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 common shares of the Fund should consult their own tax advisers
regarding the purchase, ownership and disposition of Fund common shares.
32
GENERAL INFORMATION
Book-Entry-Only Issuance
The Depository Trust Company ("DTC") will act as securities depository for
the common shares 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.
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.
33
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 proxing
voting procedures may be obtained, after paying a duplicating fee, by
electronic request at the follow E-mail address: publicinfo@sec.gov, 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 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 SEC at (202) 942-8090. The code of ethics is
also available on the EDGAR Database on the Securities and Exchange
Commission's Internet site at http://www.sec.gov, and copies of the code of
ethics may be obtained, after paying a duplicating fee, by electronic request
at the following E-mail address: publicinfo@sec.gov, or by writing the
Securities and Exchange Commission's Public Reference Section, Washington, D.C.
20549-0102
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 froth 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 Securities and Exchange
Commission and can be review 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 Code of Ethics is also
available on the EDGAR Database on the Securities and Exchange Commission'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: publicinfo@sec.gov, or by writing the Securities and
Exchange Commission's Public Reference Section, Washington, D.C. 20549-0102.
34
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, 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 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
A-1
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.
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.
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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.
- Operations
- Legal Department
- Proxy Department
- Investment professional assigned to the account
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 Wexford Clearing Services
Corporation are responsible for forwarding proxies directly to GAMCO.
Proxies are received in one of two forms:
o Shareholder 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.
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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.
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 is 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, semi-annual 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 ways:
o VAFs can be faxed to ADP up until the time of the meeting. This is
followed up by the mailing of 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).
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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.
o 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 vote have previously been
cast, if the votes have been rescinded, etc. vote have previously been
cast, 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).
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Appendix A
Proxy Guidelines
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:
- Paying greenmail
- 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
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.
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.
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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 authorized shares is considered on a
case-by-case basis.
Factors taken into consideration include:
o Future use of additional shares
-Stock split
-Stock option or other executive compensation plan -Finance growth of
company/strengthen balance sheet -Aid in restructuring -Improve credit
rating -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.
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.
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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.
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.
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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 anti-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.
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.
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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.
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PART C
OTHER INFORMATION
Item 25. Financial Statements and Exhibits
(1) Financial Statements
Financial Highlights
Part B
Statement of Assets and Liabilities December 31, 2006*
Statement of Operations For the Year Ended December 31, 2006*
Statement of Changes in Net Assets*
Schedule of Investments, December 31, 2006*
Report of Independent Registered Public Accounting Firm*
------------------
* Incorporated by reference to the Fund's annual report to shareholders
included as an exhibit to the Fund's Form N-CSR for the period ended
December 31, 2006
(2) Exhibits
(a) Agreement and Declaration of Trust of Registrant
(b) By-Laws of Registrant
(c) Not applicable
(d) Form of Specimen Common Share Certificate (1)
(e) 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
(i) Not applicable
(j) Form of Custodian Contract (1)
(k) Form of Registrar, Transfer Agency and Service Agreement (1)
(l) Opinion and Consent of Skadden, Arps, Slate, Meagher & Flom
LLP with respect to legality
(m) Not applicable
(n) (i) Consent of Independent Registered Public Accounting Firm
(ii) Powers of Attorney
(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) Code of Conduct for Chief Executive and Senior Financial
Officers (1)
--------------------
(1) Previously filed with _______ to the Registration Statement on form N-2
filed on January 12, 2005.
(2) Previously filed with _______ to the Registration Statement on Form N-2
filed on ________, 2005.
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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:
Exchange listing fee................................................... [ ]
SEC Registration fees.................................................. [ ]
Printing/engraving expenses............................................ [ ]
Accounting fees........................................................ [ ]
Legal fees............................................................. [ ]
NASD fee............................................................... [ ]
Miscellaneous.......................................................... [ ]
Total............................................................. [ ]
Item 28. Persons Controlled by or Under Common Control with Registrant
NONE
Item 29. Number of Holders of Securities as of [ ], 2007
Number of Record
Title of Class Holders
-------------- -----------------
Common Shares of Beneficial Interest [ ]
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,
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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) 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"). 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 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
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Trustees, officers or employees of the Trust, regardless of whether such
counsel or other person may also be a Trustee.
Investment Advisory Agreement indemnification provisions to be filed by
Amendment.
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 30 to provide a list
of the officers and Trustees 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
Trustees during the past two years, by incorporating by reference the
information contained in the Form ADV of the Investment Adviser filed with the
commission pursuant to the Investment Advisers Act of 1940 (Commission File No.
801-26202).
Item 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 Custodian, 185 Santilli Highway,
Everett, Massachusetts 01249, in part at the offices of the Fund's
sub-administrator, PFPC Inc. at 760 Moore Road, King of Prussia, PA 19406, and
in part at the offices of American Stock Transfer 59 Maiden Lane, New York, NY
10038.
Item 33. Management Services
Not applicable.
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 hereby 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 of 1933;
(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 of 1933, 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-4
(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 purposes of determining any liability under the
Securities Act of 1933, each filing of the Company's annual report
or quarterly reports pursuant to section 13(a) or section 15(d) of
the Securities Exchange Act of 1934 that is incorporated by
reference in the registration statement 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.
5. Registrant undertakes that, for the purpose of determining any
liability under the 1933 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.
Registrant undertakes that, for the purpose of determining any liability
under the 1933 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.
C-5
SIGNATURES
As required by the Securities Act of 1933, as amended, this Registrant's
Registration Statement has been signed on behalf of the Registrant, in the City
of Rye, State of New York, on the __th day of _________, 2007.
THE GABELLI GLOBAL GOLD, NATURAL
RESOURCES & INCOME TRUST
By: /s/ Bruce N. Alpert
-----------------------------
Bruce N. Alpert
President and Chief Executive
Officer
As required by the Securities Act of 1933, as amended, this Registration
Statement has been signed below by the following persons in the capacities set
forth below on the __th day of_________, 2007.
NAME TITLE
/s/ Anthony J. Colavita Trustee
---------------------------
Anthony J. Colavita
/s/ James P. Conn Trustee
---------------------------
James P. Conn
/s/ Maria d'Urso Trustee
---------------------------
Maria d'Urso
/s/ Vincent D. Ehright Trustee
---------------------------
Vincent D. Ehright
/s/ Frank J. Fahrenkopf, Jr. Trustee
---------------------------
Frank J. Fahrenkopf, Jr.
/s/ Michael J. Melarkey Trustee
---------------------------
Michael J. Melarkey
/s/ Salvatore M. Salibello Trustee
---------------------------
Salvatore M. Salibello
/s/ Anthonie C. Van Ekris Trustee
---------------------------
Anthonie C. Van Ekris
/s/ Salvatore J. Zizza Trustee
---------------------------
Salvatore J. Zizza
C-6
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
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C-7