<PAGE>
PROSPECTUS
[LOGO OF TCW]
TCW CONVERTIBLE SECURITIES FUND, INC.
6,396,283 SHARES OF COMMON STOCK
ISSUABLE UPON EXERCISE OF RIGHTS
TO SUBSCRIBE FOR SUCH SHARES OF COMMON STOCK
----------------
TCW Convertible Securities Fund, Inc. (the "Fund"), which invests
principally in convertible securities, is issuing to its shareholders of
record ("Record Date Shareholders") as of the close of business on March 21,
1997 rights ("Rights") entitling the holders thereof to subscribe for an
aggregate of 6,396,283 shares (the "Shares") of the Fund's Common Stock (the
"Offer") at the rate of one share of Common Stock for each five Rights held
and entitling such Record Date Shareholders to subscribe, subject to certain
limitations and subject to allotment, for any Shares not acquired by exercise
of primary subscription rights. The Rights are non-transferable and will not
be admitted for trading on the New York Stock Exchange ("NYSE"). See "The
Offer." THE SUBSCRIPTION PRICE PER SHARE (the "Subscription Price") WILL BE
THE GREATER OF (1) NET ASSET VALUE PER SHARE ON APRIL 22, 1997; AND (2) 90% OF
THE AVERAGE OF THE CLOSING SALE PRICES OF A SHARE OF THE FUND'S COMMON STOCK
AT THE CLOSE OF BUSINESS ON APRIL 22, 1997 AND THE FOUR PRECEDING BUSINESS
DAYS.
THE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON APRIL 21, 1997
(THE "EXPIRATION DATE").
The Fund announced the Offer before the start of trading on the New York
Stock Exchange on February 6, 1997. The net asset values per share of the
Fund's Common Stock at the close of business on February 6, 1997 (the day of
the announcement) and March 19, 1997 were $8.76 and $8.50, respectively, and
the last reported sale prices of a share of the Fund's Common Stock on the
NYSE (symbol: CVT) on February 6, 1997 (the day of the announcement) and March
19, 1997 were $9.625 and $9.25, respectively.
As a result of the terms of the Offer, shareholders who do not fully
exercise their Rights should expect that they will, upon completion of the
Offer, own a smaller proportional interest in the Fund than would otherwise be
the case. Such shareholders would also forego the opportunity to purchase
shares of the Fund at a discount from market price if such market price
remains above net asset value at the end of the offering period. This
Prospectus tells investors briefly the information they should know before
investing in the Fund. This Prospectus should be read and retained for future
reference. The telephone number for all questions and inquiries relating to
the Offer is 1-800-637-5242.
A Statement of Additional Information dated March 21, 1997 has been filed
with the Securities and Exchange Commission and contains certain financial
statements of the Fund. A copy may be obtained without charge by calling (800)
386-3829 or writing the Fund at 865 South Figueroa Street, Suite 1800, Los
Angeles, California 90017. The Fund's telephone number is (213) 244-0000. The
Statement of Additional Information is incorporated herein by reference.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE OR OTHER SECURITIES COMMISSION, NOR
HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE OR OTHER
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
UNDERWRITING
SUBSCRIPTION DISCOUNTS AND PROCEEDS TO
PRICE COMMISSIONS THE FUND(1)(2)
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share........................ $8.75 None $8.75
- -------------------------------------------------------------------------------------------
Total............................ $55,967,476 None $55,717,476
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(1) Estimated based on an assumed subscription price per share of $8.75.
(2) Before deduction of expenses incurred by the Fund, estimated at $250,000.
March 21, 1997
<PAGE>
FEE TABLE
<TABLE>
<S> <C>
Shareholder Transaction Expenses*
Sales Load (as a percentage of offering price)................... None
Dividend Reinvestment and Cash Purchase Plan Fees................ None
Annual Expenses (as a percentage of net assets attributable to
common shares)
Management Fees.................................................. 0.60%
Other Expenses................................................... 0.17%
----
Total Annual Expenses............................................ 0.77%
====
</TABLE>
<TABLE>
<CAPTION>
EXAMPLE 1 YEAR 3 YEARS 5 YEARS 10 YEARS
------- ------ ------- ------- --------
<S> <C> <C> <C> <C>
You would pay the following expenses* on a
$1,000 investment, assuming five percent
annual return............................ $8 $25 $44 $98
</TABLE>
- --------
* Excludes brokerage commissions paid on purchases and sales of shares of
Common Stock of the Fund.
The foregoing information is intended to assist the investor in
understanding the various costs and expenses that an investor in TCW
Convertible Securities Fund, Inc. (the "Fund") will bear directly or
indirectly. See "Investment Advisory and Other Services" for a description of
the Investment Advisory Agreement and expenses borne by the Fund. The example
is included to provide a means for the investor to compare expense levels of
investment companies with different fee structures over varying investment
periods. To facilitate such comparison, all investment companies are required
to utilize a hypothetical five percent annual return assumption. This
assumption is unrelated to the Fund's prior performance and is not a
projection of future performance. THE EXAMPLE SHOULD NOT BE CONSIDERED A
REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR
LESSER THAN THOSE SHOWN.
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to the more
detailed information included elsewhere in this Prospectus.
TERMS OF THE OFFER
TCW Convertible Securities Fund, Inc. (the "Fund") is issuing to shareholders
of record ("Record Date Shareholders") as of the close of business on March 21,
1997 (the "Record Date") rights ("Rights") to subscribe for an aggregate of
6,396,283 shares of Common Stock (sometimes referred to herein as the "Shares")
of the Fund. Each such shareholder is being issued one Right for each full
share of Common Stock owned on the Record Date. The Rights entitle the holder
thereof to acquire at the Subscription Price (as hereinafter defined) one Share
for each five Rights held. Rights may be exercised at any time during the
period (the "Subscription Period"), which commences on the date of this
Prospectus and ends at 5:00 p.m., New York City time, on April 21, 1997 (the
"Expiration Date"). The right to acquire during the Subscription Period at the
Subscription Price one additional Share for each five Rights held is
hereinafter referred to as the "Primary Subscription."
In addition, any Record Date Shareholder who fully exercises all Rights
initially issued to him (other than those Rights which cannot be exercised
because they represent the right to acquire less than one Share) is entitled to
subscribe for Shares which were not otherwise subscribed for by others on
Primary Subscription (the "Over-Subscription Privilege"). For purposes of
determining the number of Shares a Record Date Shareholder may acquire pursuant
to the Offer, broker-dealers whose shares are held of record by Cede & Company,
Inc. ("Nominee"), nominee for The Depository Trust Company, or by any other
depository or nominee, will be deemed to be the holders of the Rights that are
issued to Nominee or such other depository or nominee on their behalf. Shares
acquired pursuant to the Over-Subscription Privilege are subject to allotment,
which is more fully discussed under "The Offer--Over-Subscription Privilege."
The subscription price per share (the "Subscription Price") will be the
greater of (1) net asset value per share on April 22, 1997; and (2) 90% of the
average of the closing sale prices of a share of the Fund's Common Stock at the
close of business on April 22, 1997 and the four preceding business days. Since
the Expiration Date is prior to the Pricing Date, Record Date Shareholders who
choose to exercise their Rights will not know the Subscription Price at the
time they exercise such Rights. The steps for subscribing, including how to
pay, are specified below in "Steps to Subscribe."
Rights will be evidenced by subscription certificates ("Subscription
Certificates") and may be exercised by completing a Subscription Certificate
and delivering it, together with payment, either by means of a notice of
guaranteed delivery or a check, to The Bank of New York, Church Street Station,
New York, New York (the "Subscription Agent"). A Rights holder will have no
right to rescind a purchase after the Subscription Agent has received the
holder's Subscription Certificate or notice of guaranteed delivery. See "The
Offer--Method of Exercise of Rights" and "The Offer--Payment for Shares." The
Rights are non-transferable. Only the shares issued pursuant to an exercise of
Rights, and not the Rights, will be listed on the NYSE.
IMPORTANT DATES TO REMEMBER
<TABLE>
<CAPTION>
EVENT DATE
----- ----
<S> <C>
Record Date.................................... March 21, 1997
Subscription Period............................ March 21 through April 21, 1997
Expiration Date................................ April 21, 1997
Pricing Date................................... April 22, 1997
Confirmation to Participants................... May 2, 1997
Final Settlement for Shares.................... May 23, 1997
</TABLE>
3
<PAGE>
STEPS TO SUBSCRIBE
Complete, sign and date the enclosed Subscription Certificate. Write a check
or money order for $8.75 for each Share subscribed for through the Primary
Subscription and Over-Subscription Privilege. Mail the Subscription Certificate
and payment in the enclosed envelope to The Bank of New York. Alternatively,
follow the instructions for the enclosed notice of guaranteed delivery. If
shares are held by your broker or other nominee, contact your broker or other
nominee.
INFORMATION REGARDING THE FUND
The Fund has been engaged in business as a closed-end diversified management
investment company since January 13, 1987. The Fund's investment objective is
to seek a total investment return, comprised of current income and capital
appreciation, through investment principally in Convertible Securities (defined
in "Investment Objective and Policies--Convertible Securities") and use of
certain other investment techniques. No assurance can be given that the Fund's
investment objective will be achieved. See "Investment Objective and Policies."
The Fund's outstanding common stock, par value $.01 per share (the "Common
Stock"), is listed and traded on the NYSE under the symbol CVT. The average
weekly trading volume of the Common Stock on the NYSE during the 12 month
period ended December 31, 1996 was approximately 210,817 shares. As of December
31, 1996, the net assets of the Fund were approximately $271.3 million.
INFORMATION REGARDING THE INVESTMENT ADVISER
The Fund's investment adviser, TCW Funds Management, Inc. ("Investment
Adviser"), has served as investment adviser to the Fund since its inception.
The Investment Adviser is a wholly-owned subsidiary of The TCW Group, Inc.
(formerly, TCW Management Company), whose direct and indirect subsidiaries
provide a variety of trust, investment management and investment advisory
services and had, as of December 31, 1996, over $50 billion of assets under
management and committed to management, of which approximately $1.5 billion
were represented by investments in Convertible Securities. The Fund pays the
Investment Adviser a monthly fee computed at the annual rate of 0.75% of the
first $100 million of the Fund's average net assets, and 0.50% of the Fund's
average net assets in excess of $100 million. See "Investment Advisory and
Other Services--Fees and Expenses." Since the Investment Adviser's fees are
based on the Fund's average net assets, the Investment Adviser will benefit
from the Offer. In addition, a director who is an "interested person" of the
Fund could benefit indirectly from the Offer because of his interest in the
Investment Adviser. See "The Offer--Purposes of the Offer."
4
<PAGE>
SPECIAL CONSIDERATIONS AND RISK FACTORS
The following summarizes certain matters that should be considered, among
others, in connection with the Offer.
Dilution...................... As a result of the terms of the Offer,
shareholders who do not fully exercise
their Rights should expect that they will,
at the completion of the Offer, own a
smaller proportional interest in the Fund
than would otherwise be the case. Such
shareholders would also forego the
opportunity to purchase shares of the Fund
at a discount from market price if such
market price remains above net asset value
at the end of the offering period.
Discount From Net Asset The Fund's shareholders may dispose of
Value........................ their Shares on the NYSE or other markets
on which the Shares may trade, but since
the Fund is a closed-end fund, the Fund's
shareholders do not have the right to
redeem their Shares at net asset value. The
market price for shares of closed-end
investment companies varies from the net
asset value and such shares frequently
trade at a discount from net asset value.
The Fund's shares have traded in the market
at, above and below net asset value since
the commencement of Fund's operations.
During the past three years, the Fund's
shares have generally traded in the market
at a premium above net asset value.
Anti-Takeover Provisions...... Certain provisions of the Fund's Articles
of Incorporation may be regarded as "anti-
takeover" provisions. These provisions
require the affirmative vote or consent of
the holders of at least two-thirds of the
outstanding shares of the Fund for a merger
or consolidation of the Fund with an open-
end investment company, a merger or
consolidation of the Fund with a closed-end
investment company with different voting
requirements, dissolution of the Fund, a
sale of all or substantially all of the
assets of the Fund or an amendment to the
Fund's Articles of Incorporation making the
Common Stock a redeemable security or
reducing the two-thirds vote required by
the Articles of Incorporation. See
"Description of Common Stock--Anti-Takeover
Provisions of the Articles of
Incorporation."
Investments................... Many Convertible Securities which the Fund
purchases are unrated or rated BB or lower
by Standard & Poor's Corporation or Ba or
lower by Moody's Investor's Service, Inc.,
which ratings are considered by the rating
agencies to be speculative. Bonds with a
rating of BB/Ba or lower are commonly
referred to as "junk bonds." See
"Investment Objective and Policies--Risks
of Lower Rated Securities." Prices of
Convertible Securities generally fluctuate
in response to changes in interest rates as
well as to changes in the prices of the
underlying common stocks. The Fund may
invest up to 15% of its net assets in
illiquid unregistered convertible
securities and is not subject to any
percentage limitation on investment in
unregistered convertible
5
<PAGE>
securities which are determined to be
liquid. At December 31, 1996, approximately
47% of the Fund's net assets were invested
in restricted securities of which about 3%
were deemed to be illiquid. See "Investment
Objectives and Policies--Unregistered
Convertible Securities." The Fund intends
to employ from time to time certain
investment techniques which involve
additional risks. These investment
techniques include options, short sales
against the box, forward commitments,
lending of portfolio securities, foreign
securities and foreign issuers, repurchase
agreements, and stock index futures. Each
of these investment techniques and the
risks thereof are described under the
caption "Investment Objective and Policies"
or in the Statement of Additional
Information.
Distributions................. Since July, 1988, the Fund has made
quarterly distributions of $0.21 per share.
These distributions have required payments
substantially in excess of the Fund's
current net investment income. The portion,
if any, of a distribution which equals the
Fund's current net investment income should
be considered a dividend. The remainder
constitutes a payment out of the Fund's net
realized capital gains for each period to
the extent available; any excess is paid
from paid-in capital. See "Distributions;
Dividend Reinvestment Plan."
6
<PAGE>
FINANCIAL HIGHLIGHTS
The information below for the period March 5, 1987 through December 31, 1987
and for the fiscal years ended December 31, 1988 through 1996 has been audited
by Deloitte & Touche LLP, independent auditors, as stated in their report
included in the Statement of Additional Information. The following information
should be read in conjunction with the financial statements and related notes
thereto included in the Statement of Additional Information.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991 1990 1989 1988
-------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value Per
Share, Beginning of
Period.............. $ 8.36 $ 7.47 $ 8.79 $ 8.36 $ 8.09 $ 6.85 $ 8.36 $ 7.99 $ 7.76
-------- -------- -------- -------- -------- -------- -------- -------- --------
Income from
Operations:
Net Investment
Income............. 0.36 0.37 0.38 0.40 0.41 0.43 0.46 0.50 0.55
Impact to Capital
for Shares Issued.. -- -- -- (0.01) (0.01) -- -- -- --
Net Realized and
Unrealized Gain
(Loss) on
Securities......... 0.77 1.36 (0.86) 1.25 0.71 1.65 (1.13) 0.71 0.44
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total from
Investment
Operations....... 1.13 1.73 (0.48) 1.64 1.11 2.08 (0.67) 1.21 0.99
Less Distributions:
Dividends from
Net Investment
Income............. (0.36) (0.37) (0.38) (0.40) (0.41) (0.43) (0.46) (0.50) (0.55)
Distribution from
Net Realized
Gains.............. (0.62) (0.33) (0.30) (0.81) (0.07) -- -- (0.06) --
Distribution in
Excess of Net
Realized Gains..... -- (0.14) (0.16) -- -- -- -- -- --
Return of Capital... -- -- -- -- (0.36) (0.41) (0.38) (0.28) (0.21)
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total
Distributions.... (0.98) (0.84) (0.84) (1.21) (0.84) (0.84) (0.84) (0.84) (0.76)
-------- -------- -------- -------- -------- -------- -------- -------- --------
Net Asset Value Per
Share, End of
Period.............. $ 8.51 $ 8.36 $ 7.47 $ 8.79 $ 8.36 $ 8.09 $ 6.85 $ 8.36 $ 7.99
======== ======== ======== ======== ======== ======== ======== ======== ========
Total Investment
Return(3)........... 11.75 % 33.6 % (7.43)% 13.77 % 15.90 % 41.38 % (3.78)% 20.23 % 24.79 %
Net Asset Value Total
Return(4)........... 13.94 % 24.0 % (5.70)% 16.12 % 13.35 % 31.20 % (8.25)% 15.97 % 13.24 %
Ratios/Supplemental
Data:
Net Assets, End of
Period
(in thousands)...... $271,267 $264,608 $234,686 $273,230 $215,208 $172,331 $144,593 $175,732 $167,797
Ratio of Expenses to
Average Net Assets.. 0.77 % 0.81 % 0.79 % 0.80 % 0.88 % 0.94 % 0.94 % 0.95 % 0.94 %
Ratio of Net
Investment Income to
Average Net Assets.. 4.12 % 4.60 % 4.66 % 4.48 % 5.04 % 5.68 % 5.93 % 5.90 % 6.66 %
Portfolio Turnover
Rate................ 125.72 % 108.98 % 110.04 % 173.79 % 139.39 % 114.13 % 99.53 % 84.17 % 70.62 %
Average Commission
Rate Paid by the
Fund(6)............. $ 0.06 N/A N/A N/A N/A N/A N/A N/A N/A
<CAPTION>
MARCH 5, 1987
(COMMENCEMENT)
TO DECEMBER
31,
1987
------------------
<S> <C>
Net Asset Value Per
Share, Beginning of
Period.............. $ 9.30 (2)
------------------
Income from
Operations:
Net Investment
Income............. 0.46
Impact to Capital
for Shares Issued.. (0.03)
Net Realized and
Unrealized Gain
(Loss) on
Securities......... $ (1.53)
------------------
Total from
Investment
Operations....... (1.10)
Less Distributions:
Dividends from
Net Investment
Income............. (0.44)
Distribution from
Net Realized
Gains.............. --
Distribution in
Excess of Net
Realized Gains..... --
Return of Capital... --
------------------
Total
Distributions.... (0.44)
------------------
Net Asset Value Per
Share, End of
Period.............. $ 7.76
==================
Total Investment
Return(3)........... (32.61)%(1)
Net Asset Value Total
Return(4)........... (13.49)%(1)
Ratios/Supplemental
Data:
Net Assets, End of
Period
(in thousands)...... $162,989
Ratio of Expenses to
Average Net Assets.. 0.83 %(5)
Ratio of Net
Investment Income to
Average Net Assets.. 6.12 %(5)
Portfolio Turnover
Rate................ 76.91 %(1)
Average Commission
Rate Paid by the
Fund(6)............. N/A
</TABLE>
- -------
(1) For the period March 5, 1987 (commencement) to December 31, 1987 and not
indicative of a full year's operating results.
(2) Net of underwriting discount of $.70.
(3) Based on market value per share, adjusted for reinvestment of
distributions.
(4) Based on net asset value per share, adjusted for reinvestment of
distributions.
(5) Annualized.
(6) For fiscal years beginning on or after September 1, 1995, a fund is
required to disclose its average commission rate per share for security
trades on which commissions are charged. This amount may vary from period
to period and fund to fund depending on the mix of trades executed in
various markets where trading practices and commission rate structures may
differ.
7
<PAGE>
THE OFFER
TERMS OF THE OFFER
The Fund is issuing to Record Date Shareholders Rights to subscribe for the
Shares. Each Record Date Shareholder is being issued one non-transferable
Right for each share of Common Stock owned on the Record Date. The Rights
entitle the holder to acquire through the Primary Subscription at the
Subscription Price one Share for each five Rights held. No Rights will be
issued for fractional shares. Rights may be exercised at any time during the
Subscription Period, which commences on the date of this Prospectus and ends
at 5:00 p.m., New York City time, on April 21, 1997.
In addition, any Record Date Shareholder who fully exercises all Rights
initially issued to him (other than those Rights which cannot be exercised
because they represent the right to acquire less than one Share) is entitled
to subscribe for Shares which were not otherwise subscribed for by others
through the Primary Subscription. For purposes of determining the maximum
number of Shares a Record Date Shareholder may acquire pursuant to the Offer,
broker-dealers whose shares are held of record by Nominee or by any other
depository or nominee will be deemed to be the holders of the Rights that are
issued to Nominee or such other depository or nominee on their behalf. Shares
acquired pursuant to the Over-Subscription Privilege are subject to allotment,
which is more fully discussed below under "Over-Subscription Privilege."
Rights will be evidenced by Subscription Certificates. The number of Rights
issued to each holder will be stated on the Subscription Certificate delivered
to such holder. The method by which Rights may be exercised and Shares paid
for is set forth below in "Method of Exercise of Rights" and "Payment for
Shares." A Rights holder will have no right to rescind a purchase after the
Subscription Agent has received the holder's Subscription Certificate or
notice of guaranteed delivery. See "Payment for Shares" below. Shares issued
pursuant to an exercise of Rights will be listed on the NYSE.
The Rights are non-transferable. Only the underlying Shares, and not the
Rights, will be admitted for trading on the NYSE. Since fractional Shares will
not be issued, Rights holders who receive, or who are left with, fewer than
five Rights will be unable to exercise such Rights and will not be entitled to
receive any cash in lieu of such fractional Shares. The Fund will not offer or
sell any Shares which are not subscribed through the Primary Subscription or
the Over-Subscription Privilege.
PURPOSES OF THE OFFER
The Board of Directors of the Fund has determined that the Offer is in the
best interests of the Fund and its shareholders. The Offer will increase the
assets of the Fund available for investment thereby permitting the Fund to be
in a better position more fully to take advantage of investment opportunities
that may arise. The larger number of outstanding shares of Common Stock after
the Offer should help create a more efficient and active market for the Common
Stock and help reduce the effect on market price of individual transactions.
In addition, increasing the size of the Fund might assist in lowering the
Fund's expenses as a percentage of net assets. The Offer also seeks to reward
the long-term shareholder by giving existing shareholders the right to
purchase additional shares at a price that may be below market without
incurring any commission charge. There can be no assurance that the Fund will
achieve any of the foregoing objectives or benefits through the Offer.
The purpose of setting the determination of the Subscription Price
subsequent to the Expiration Date is to insure that the Offer will attract the
maximum participation of shareholders with the minimum dilution to non-
participating shareholders.
The Investment Adviser will benefit from the Offer because the Investment
Adviser's fee is based on the average net assets of the Fund. See "Investment
Advisory and Other Services--Fees and Expenses." It is not possible to state
precisely the amount of additional compensation the Investment Adviser will
receive as a result of the Offer because the proceeds of the Offer will be
invested in additional portfolio securities which will fluctuate in value.
However, assuming that all Rights are exercised and the Fund receives the
maximum proceeds
8
<PAGE>
of the Offer, the annual compensation to be received by the Investment Adviser
would be increased by approximately 18%. Three of the Fund's eight directors
who voted to authorize the Offer are "interested persons" of the Fund and of
the Investment Adviser within the meaning of the 1940 Act. One of these
Directors, Mr. Ernest O. Ellison, could benefit indirectly from the Offer
because of his indirect ownership interest in the Investment Adviser. See
"Management of the Fund."
The Fund may, in the future and at its discretion, choose to make additional
rights offerings from time to time for a number of shares and on terms which
may or may not be similar to the Offer. Any such future rights offering will
be made in accordance with the Investment Company Act of 1940, as amended
("1940 Act"). If all the Shares are subscribed for in this Offering, the Fund
will have a total of 11,622,303 remaining authorized but unissued shares of
Common Stock available for issuance without shareholder approval.
OVER-SUBSCRIPTION PRIVILEGE
If some Record Date Shareholders do not exercise all of the Rights initially
issued to them, any Shares for which subscriptions have not been received from
Record Date Shareholders will be offered, by means of the Over-Subscription
Privilege, to the Record Date Shareholders who have exercised all the Rights
initially issued to them (other than those Rights which cannot be exercised
because they represent the right to acquire less than one Share) and who wish
to acquire more than the number of Shares for which the Rights issued to them
are exercisable. Record Date Shareholders who exercise all the Rights
initially issued to them (other than those Rights which cannot be exercised
because they represent the right to acquire less than one Share) will have the
opportunity to indicate on the Subscription Certificate how many Shares they
are willing to acquire pursuant to the Over-Subscription Privilege. If
sufficient Shares remain after the Primary Subscriptions have been exercised,
all over-subscriptions will be honored in full. If sufficient Shares are not
available to honor all over- subscriptions, the available Shares will be
allocated among those who over subscribe based on the number of Rights
originally issued to them by the Fund. The percentage of remaining Shares each
over-subscribing shareholder may acquire will be rounded up or down to result
in delivery of whole Shares. The allocation process may involve a series of
allocations in order to assure that the total number of Shares available for
over-subscriptions is distributed on a pro rata basis.
THE SUBSCRIPTION PRICE
The Subscription Price for the Shares to be issued pursuant to the Rights
will be the greater of (1) net asset value per Share at the close of business
on April 22, 1997 (the "Pricing Date"); and (2) 90% of the average of the
closing sale prices of a share of the Fund's Common Stock at the close of
business on April 22, 1997 and the four preceding business days.
The Fund announced the Offer before the start of trading on the NYSE on
February 6, 1997. The net asset values per share of Common Stock at the close
of business on February 6, 1997 (the day of the announcement) and March 19,
1997 were $8.76 and $8.50, respectively, and the last reported sale prices of
a share of the Fund's Common Stock on the NYSE on February 6, 1997 (the day of
the announcement) and March 19, 1997 were $9.625 and $9.25, respectively.
EXPIRATION OF THE OFFER
The Offer will expire at 5:00 p.m., New York City time, on the Expiration
Date. Rights will expire on the Expiration Date and thereafter may not be
exercised. Since the Expiration Date is prior to the Pricing Date, Record Date
Shareholders who decide to acquire Shares on Primary Subscription or pursuant
to the Over-Subscription Privilege will not know, when they make such
decision, the purchase price for such Shares.
9
<PAGE>
SUBSCRIPTION AGENT
The Subscription Agent is The Bank of New York, Church Street Station, New
York, New York. The Subscription Agent will receive from the Fund a fee
estimated to be $35,000 for the processing of the exercise of Rights and
reimbursement for all out-of-pocket expenses related to the Offer. The
Subscription Agent is also the Fund's dividend disbursing agent, transfer
agent and registrar.
INFORMATION AGENT
Any questions or requests for assistance concerning the method of
subscribing for Shares or for additional copies of this Prospectus or
Subscription Certificates or notices of guaranteed delivery may be directed to
the Information Agent at its telephone number and address listed below:
CORPORATE INVESTOR COMMUNICATIONS, INC.
111 COMMERCE ROAD
CARLSTADT, NEW JERSEY 07072-2586
Toll Free--1-800-637-5242
The Information Agent will receive a fee estimated to be $9,500 and
reimbursement for all out-of-pocket expenses related to the Offer.
METHOD OF EXERCISE OF RIGHTS
Rights may be exercised by filling in and signing the reverse side of the
Subscription Certificate and mailing it in the envelope provided, or otherwise
delivering the completed and signed Subscription Certificate to the
Subscription Agent, together with payment for the Shares as described below
under "Payment for Shares." Rights may also be exercised through a Rights
holder's broker, or other nominee if such shareholder's shares of Common Stock
are held in such broker's or nominee's name. Such brokers or nominees may
charge a servicing fee for exercising such Rights. Fractional Shares will not
be issued, and Rights holders who receive, or who are left with, fewer than
five Rights will not be able to exercise such Rights.
Completed Subscription Certificates must be received by the Subscription
Agent prior to 5:00 p.m., New York City time, on the Expiration Date (unless
payment is effected by means of a notice of guaranteed delivery as described
below under "Payment for Shares"). The Subscription Certificate and payment
should be delivered to the offices of the Subscription Agent by one of the
methods described below:
(1) By mail:
The Bank of New York
Tender and Exchange Department
P.O. Box 11248
Church Street StationNew York, New York 10286-1248
(2) By Hand, Express Mail or Overnight Courier:
The Bank of New York
Tender and Exchange Department
101 Barclay Street
Receive & Delivery Window-Street Level
New York, New York 10286
10
<PAGE>
PAYMENT FOR SHARES
Holders of Rights who acquire Shares on Primary Subscription or pursuant to
the Over-Subscription Privilege may choose between the following methods of
payment.
(1) A subscription will be accepted by the Subscription Agent if, prior to
5:00 p.m., New York City time, on the Expiration Date, the Subscription Agent
has received a completed and executed notice of guaranteed delivery by
facsimile (telecopy) or otherwise from a bank, a trust company or a NYSE
member, guaranteeing delivery of (i) payment of the full Subscription Price
for the Shares subscribed for on Primary Subscription and any additional
Shares subscribed for pursuant to the Over-Subscription Privilege, and (ii) a
properly completed and executed Subscription Certificate. The Subscription
Agent will not honor a notice of guaranteed delivery if a properly completed
and executed Subscription Certificate and full payment is not received by the
Subscription Agent by the close of business on the third Business Day after
the Expiration Date. The notice of guaranteed delivery may be delivered to the
Subscription Agent in the same manner as Subscription Certificates at the
addresses set forth above, or may be transmitted to the Subscription Agent
together with a completed Subscription Certificate by facsimile transmission
(telecopy number (212) 815-6213; confirm by telephone (800) 507-9357.
(2) Alternatively, a holder of Rights can send the Subscription Certificate
together with payment in the form of a check for the Shares acquired on
Primary Subscription and additional Shares subscribed for pursuant to the
Over-Subscription Privilege to the Subscription Agent based on an assumed
purchase price of $8.75 Share. To be accepted, such payment, together with the
executed Subscription Certificate, must be received by the Subscription Agent
at its Tender and Exchange Department, P.O. Box 11248, Church Street Station,
New York, New York 10286-1248 or its Tender and Exchange Department, 101
Barclay Street, Receive and Deliver Window-Street Level, New York, New York
10286 prior to 5:00 p.m., New York City time, on the Expiration Date. The
Subscription Agent will deposit all stock purchase checks received by it prior
to the final due date into a segregated interest-bearing account (which
interest will accrue to the benefit of the Fund) pending proration and
distribution of Shares.
A PAYMENT PURSUANT TO THIS METHOD MUST BE IN UNITED STATES DOLLARS BY MONEY
ORDER OR CHECK DRAWN ON A BANK LOCATED IN THE UNITED STATES, MUST BE PAYABLE
TO TCW CONVERTIBLE SECURITIES FUND, INC., AND MUST ACCOMPANY AN EXECUTED
SUBSCRIPTION CERTIFICATE FOR SUCH SUBSCRIPTION CERTIFICATE TO BE ACCEPTED. THE
SUBSCRIPTION AGENT WILL NOT ACCEPT CASH AS A MEANS OF PAYMENT FOR SHARES.
Within five Business Days following the Pricing Date (the "Confirmation
Date"), a confirmation will be sent by the Subscription Agent to each holder
of Rights (or, if the Fund's shares are held by Nominee or any other
depository or nominee, to Nominee or such other depository or nominee),
showing (1) the number of Shares acquired pursuant to the Primary
Subscription, (2) the number of Shares, if any, acquired pursuant to the Over-
Subscription Privilege, (3) the per Share and total purchase price for the
Shares, and (4) any additional amount payable by such holder to the Fund or
any excess to be refunded by the Fund to such holder, in each case based on
the Subscription Price as determined on the Pricing Date. If any such
shareholder exercises his right to acquire Shares pursuant to the Over-
Subscription Privilege, any such excess payment which would otherwise be
refunded to him will be applied by the Fund toward payment for Shares acquired
pursuant to exercise of the Over-Subscription Privilege. Any payment required
from a holder of Rights must be received by the Subscription Agent within ten
Business Days after the Confirmation Date. Any excess payment to be refunded
by the Fund to a holder of Rights, or to be paid to a holder of Rights as a
result of exercises by Record Date Stockholders of their Over-Subscription
Privileges will be mailed by the Subscription Agent to him within fifteen
Business Days after the Confirmation Date. All payments by a holder of Rights
must be in United States dollars by money order or check drawn on a bank
located in the United States of America and payable to TCW Convertible
Securities Fund, Inc.
11
<PAGE>
Whichever of the two methods described above is used, issuance and delivery
of certificates for the Shares purchased are subject to collection of any
checks or money orders and actual payment pursuant to any notice of guaranteed
delivery.
A Rights holder will have no right to rescind a purchase after the
Subscription Agent has received payment, either by means of a notice of
guaranteed delivery or a check.
If a holder of Rights who acquires Shares pursuant to the Primary
Subscription or the Over-Subscription Privilege does not make payment of any
amounts due, the Fund reserves the right to take any or all of the following
actions: (1) find other purchasers for such subscribed-for and unpaid-for
Shares; (2) apply any payment actually received by it toward the purchase of
the greatest whole number of Shares which could be acquired by such holder
upon exercise of the Primary Subscription and/or the Over-Subscription
Privilege, and/or (3) exercise any and all other rights or remedies to which
it may be entitled, including, without limitation, the right to set off
against payments actually received by it with respect to such subscribed
Shares and to enforce the relevant guaranty of payment.
Holders who hold shares of Common Stock for the account of others, such as
brokers, trustees or depositaries for securities, should notify the respective
beneficial owners of such shares as soon as possible to ascertain such
beneficial owners' intentions and to obtain instructions with respect to the
Rights. If the beneficial owner so instructs, the record holder of such Rights
should complete Subscription Certificates and submit them to the Subscription
Agent with the proper payment. In addition, beneficial owners of Common Stock
or Rights held through such a holder should contact the holder and request the
holder to effect transactions in accordance with the beneficial owner's
instructions.
The instructions accompanying the Subscription Certificates should be read
carefully and followed in detail. DO NOT SEND SUBSCRIPTION CERTIFICATES OR
PAYMENTS TO THE FUND.
THE METHOD OF DELIVERY OF SUBSCRIPTION CERTIFICATES AND PAYMENT OF THE
SUBSCRIPTION PRICE TO THE SUBSCRIPTION AGENT WILL BE AT THE ELECTION AND RISK
OF THE RIGHTS HOLDERS, BUT IF SENT BY MAIL IT IS RECOMMENDED THAT SUCH
CERTIFICATES AND PAYMENTS BE SENT BY REGISTERED MAIL, PROPERLY INSURED, WITH
RETURN RECEIPT REQUESTED, AND THAT A SUFFICIENT NUMBER OF DAYS BE ALLOWED TO
ENSURE DELIVERY TO THE SUBSCRIPTION AGENT AND CLEARANCE OF PAYMENT PRIOR 5:00
P.M., NEW YORK CITY TIME, ON THE EXPIRATION DATE. BECAUSE UNCERTIFIED PERSONAL
CHECKS MAY TAKE SEVERAL BUSINESS DAYS TO CLEAR, YOU ARE STRONGLY URGED TO PAY,
OR ARRANGE FOR PAYMENT, BY MEANS OF CERTIFIED OR CASHIER'S CHECK OR MONEY
ORDER.
All questions concerning the timeliness, validity, form and eligibility of
any exercise of Rights will be determined by the Fund, whose determination
will be final and binding. The Fund in its sole discretion may waive any
defect or irregularity, or Permit a defect or irregularity to be corrected
within such time as it may determine, or reject the purported exercise of any
Right. Subscriptions will not be deemed to have been received or accepted
until all irregularities have been waived or cured within such time as the
Fund determines in its sole discretion. Neither the Fund nor the Subscription
Agent will be under any duty to give notification of any defect or
irregularity in connection with the submission of Subscription Certificates or
incur any liability for failure to give such notification.
NOTICE OF NET ASSET VALUE DECLINE
The Fund has undertaken, as required by the Securities and Exchange
Commission's registration form, to suspend the Offer until it amends this
Prospectus if subsequent to March 21, 1997, the effective date of the Fund's
registration statement relating to the Offering, and prior to the Expiration
Date, the Fund's net asset value declines more than 10% from its net asset
value as of March 21, 1997. In such event, the Fund will notify shareholders
of any such decline and permit them to cancel their exercise of Rights. With
this exception, a
12
<PAGE>
shareholder will have no right to rescind an exercise of Rights after the
Subscription Agent receives a Subscription Certificate or notice of guaranteed
delivery.
PURCHASE AND SALE OF RIGHTS
The Rights are non-transferable and, therefore, may not be purchased or
sold. The Rights will not be admitted to trading on the NYSE. However, the
Shares to be issued pursuant to the Rights will be listed and admitted to
trading, along with the existing outstanding shares of Common Stock, on the
NYSE.
DELIVERY OF STOCK CERTIFICATES
Participants in the Fund's Dividend Reinvestment Plan (the "Plan") will have
their Shares acquired on Primary Subscription and pursuant to the Over-
Subscription Privilege credited to their shareholder distribution reinvestment
accounts in the Plan, unless they request the issuance of stock certificates
for the Shares so acquired. Shareholders whose Shares are held of record by
Nominee or by any other depository or nominee on their behalf or their broker-
dealers' behalf will have their Shares acquired on Primary Subscription and
pursuant to the Over-Subscription Privilege credited to the account of Nominee
or such other depository or nominee. With respect to all other shareholders,
stock certificates for all Shares acquired on Primary Subscription and
pursuant to the Over-Subscription Privilege will be mailed within fifteen
business days after the Confirmation Date and after payment for the Shares
subscribed for has cleared.
CERTAIN FOREIGN SHAREHOLDERS
The Fund has been advised by outside legal counsel that this rights offering
has been qualified or is believed to be exempt from qualification only under
the federal laws of the United States and the laws of each of the States in
the United States. Residents of other jurisdictions may not purchase the
Shares of Common Stock offered hereby unless they certify that their purchases
of such Shares are effected in accordance with the applicable laws of such
jurisdictions.
FEDERAL INCOME TAX CONSEQUENCES
For Federal income tax purposes, neither the receipt nor the exercise of the
Rights will result in taxable income to holders of Common Stock, and no loss
or deduction will be allowed if Rights expire without being exercised.
A shareholder's holding period for a Share acquired upon exercise of a Right
begins on the date of exercise. In the absence of a special election under
Section 307 of the Internal Revenue Code of 1986 by the shareholder, the
shareholder's basis for determining gain or loss upon the sale of a Share
acquired upon exercise of a Right will be equal to the Subscription Price. A
shareholder's gain or loss recognized upon a sale of that Share will be
capital gain or loss if the Share was held as a capital asset at the time of
sale and will be long-term capital gain or loss if it was held, at the time of
sale, for more than one year.
The foregoing discussion is for general information only and is based upon
existing laws, regulations and judicial and administrative pronouncements.
Shareholders are advised to consult their own tax advisers with regard to the
Federal income tax consequences of exercising any Rights, as well as the tax
consequences arising under the laws of any state, foreign country or other
jurisdiction.
DILUTION
As a result of the terms of the Offer, shareholders who do not fully
exercise their Rights should expect that they will, at the completion of the
Offer, own a smaller proportional interest in the Fund than would otherwise be
the case. Such shareholders would also forego the opportunity to purchase
shares of the Fund at a discount from market price if such market price
remains above net asset value at the end of the offering period.
13
<PAGE>
SPECIAL CONSIDERATIONS AND RISK FACTORS
MARKET PRICE PREMIUM OR DISCOUNT FROM NET ASSET VALUE
Shares of the Fund are listed and traded on the NYSE. Since the Fund is a
closed-end investment company, shareholders do not have the right to redeem
shares at net asset value. The market price for shares of closed-end
investment companies generally varies from per share net asset value and such
shares frequently trade at a discount from net asset value. Shares of the Fund
have traded at, above and below net asset value since the commencement of
operations. Prior to 1990, the Fund's shares generally traded at a discount
from the net asset value. During the past three years, the Fund's shares have
generally traded at a premium above net asset value. See "Share Price Data."
To the extent that shares trade at a premium above net asset value, a
reduction in such premium or a change from a premium to a discount would
adversely affect an investor's return.
ANTI-TAKEOVER PROVISIONS
Certain provisions of the Fund's Articles of Incorporation may be regarded
as "anti-takeover" provisions. These provisions require the affirmative vote
or consent of the holders of at least two-thirds of the outstanding shares of
the Fund for a merger or consolidation of the Fund with an open-end investment
company, a merger or consolidation of the Fund with a closed-end investment
company with different voting requirements, dissolution of the Fund, a sale of
all or substantially all of the assets of the Fund or an amendment to the
Fund's Articles of Incorporation making the Common Stock a redeemable security
or reducing the two-thirds vote required by the Articles of Incorporation. See
"Description of Common Stock--Anti-Takeover Provisions of the Articles of
Incorporation."
INVESTMENTS
Many Convertible Securities which the Fund purchases are unrated or rated BB
or lower by S&P or Ba or lower by Moody's, which ratings are considered by the
rating agencies to BE SPECULATIVE. Bonds with a rating of BB/Ba or lower are
commonly referred to as "junk bonds." See "Investment Objective and Policies--
Risks of Lower Rated Securities." Prices of Convertible Securities generally
fluctuate in response to changes in interest rates as well as to changes in
the prices of the underlying common stocks. The Fund intends to employ from
time to time certain investment techniques which involve additional risks.
These investment techniques include options, short sales against the box,
forward commitments, lending of portfolio securities, foreign securities and
foreign issuers, repurchase agreements, and stock index futures. Each of these
investment techniques and the risks thereof are described under the separate
subheadings under the caption "Investment Objective and Policies" or in the
Statement of Additional Information.
DISTRIBUTIONS
Commencing with the distribution paid in July, 1988, the Fund has made
quarterly distributions of $0.21 per share. These distributions have required
payments substantially in excess of the Fund's current net investment income.
The portion, if any, of a distribution which equals the Fund's current net
investment income should be considered a dividend. The remainder constitutes a
payment out of the Fund's net realized capital gains for each period to the
extent available; any excess will be from paid-in capital. See "Distributions;
Dividend Reinvestment Plan."
14
<PAGE>
USE OF PROCEEDS
The net proceeds of the Offer, assuming all Shares offered hereby are sold,
are estimated to be approximately $55,717,476, based upon an assumed
Subscription Price of $8.75 and after deducting expenses payable by the Fund
estimated at approximately $250,000. If less than all of the Shares offered
are sold, the proceeds from the Offer would be reduced accordingly, but there
would be no material reduction in the expenses of the Offer. The Fund will
invest the net proceeds of the Offer in accordance with its investment
objective and policies. The Investment Adviser anticipates that such
investment would not take more than three months from the Expiration Date.
DESCRIPTION OF COMMON STOCK
GENERAL
The Fund, which was incorporated under the laws of the State of Maryland on
January 13, 1987, is authorized to issue 50,000,000 shares of Common Stock,
par value $.01 per share. The shares of Common Stock have no preemptive,
conversion, exchange or redemption rights. Each share has equal voting,
dividend, distribution and liquidation rights. The shares outstanding are
fully paid and non-assessable. Shareholders are entitled to one vote per
share. All voting rights for the election of directors are non-cumulative.
The following chart shows the number of shares of Common Stock authorized
and outstanding as of December 31, 1996:
<TABLE>
<CAPTION>
SHARES HELD
SHARES BY THE FUND SHARES
TITLE OF CLASS AUTHORIZED FOR ITS ACCOUNT OUTSTANDING
-------------- ---------- --------------- -----------
<S> <C> <C> <C>
Common Stock $.01 par value........... 50,000,000 0 31,894,249
</TABLE>
SHARE PRICE DATA
The Fund's shares are listed and traded on the New York Stock Exchange (the
"NYSE"). The following table sets forth for the quarters indicated the high
and low sale prices on the NYSE and the average weekly volume of trading in
such shares for the quarter. Also set forth are the related net asset values
per share of Common Stock, as calculated for such day or for the preceding
Friday business day by TCW Funds Management, Inc. (the "Investment Adviser"),
and the premium (or discount) to net asset value represented by such market
prices.
<TABLE>
<CAPTION>
NET ASSET
MARKET VALUE PREMIUM
PRICE RELATED TO (OR DISCOUNT) AVERAGE
----------- ----------- -------------- WEEKLY
QUARTER HIGH LOW HIGH LOW HIGH LOW TRADING
ENDED PRICE PRICE PRICE PRICE PRICE PRICE VOLUME
------- ----- ----- ----- ----- ------ ------ -------
<S> <C> <C> <C> <C> <C> <C> <C>
03/31/94................... 9.625 8.500 8.97 8.97 7.30% (5.24)% 226,275
06/30/94................... 9.500 8.875 8.25 8.19 15.15% 8.36 % 190,862
09/30/94................... 9.375 9.000 8.13 8.20 15.31% 9.76 % 144,564
12/31/94................... 9.000 7.750 7.98 7.45 12.78% 4.03 % 184,162
03/31/95................... 8.500 7.750 7.62 7.47 11.55% 3.75 % 150,962
06/30/95................... 8.750 8.125 8.22 7.79 6.45% 4.30 % 147,885
09/30/95................... 8.875 8.250 8.67 8.23 2.36% 0.24 % 151,854
12/31/95................... 9.500 8.500 8.53 8.39 11.37% 1.31 % 207,385
03/31/96................... 9.500 9.000 8.70 8.75 9.20% 2.86 % 179,923
06/30/96................... 9.000 8.375 8.78 8.79 2.51% (4.72)% 307,323
09/30/96................... 9.375 8.625 8.82 8.20 6.29% 5.18 % 193,608
12/31/96................... 9.750 9.125 8.78 8.75 11.05% 4.29 % 162,269
</TABLE>
15
<PAGE>
The Fund's shares have traded in the market above, at and below net asset
value since the commencement of the Fund's operations. Prior to 1990, shares
of the Fund's Common Stock generally traded at a discount from the net asset
value; however, in the last three calendar years, the Fund's shares have
generally traded in the market at a premium above net asset value.
For the net asset value per share and the reported sales price of a share of
the Fund's Common Stock on the NYSE as of a recent date, see "The Offer--The
Subscription Price."
REPURCHASE OF SHARES
The Fund's shareholders do not have the right to present their shares for
redemption by the Fund. The Fund, however, may repurchase its shares in the
open market from time to time, although nothing herein shall be considered a
commitment to repurchase such shares. Any such repurchases shall be subject to
the Maryland General Corporation Law and to limitations imposed by the
Investment Company Act of 1940 (the "1940 Act"). Subject to the Fund's
investment restriction with respect to borrowings, the Fund may incur debt in
an amount not exceeding 5% of total assets to finance share repurchase
transactions. See "Investment Objective and Policies--Investment
Restrictions." Shares repurchased by the Fund will be held as treasury shares
until reissued.
The Fund does not expect to consider the repurchase of any of its shares
except at a price below net asset value. Consequently, so long as shares of
the Fund trade at a premium above net asset offer is contemplated. If the Fund
should in the future repurchase any shares at a price below their net asset
value, the net asset value of those shares that remain outstanding will be
increased, although the market price of those outstanding shares will not
necessarily be affected, either positively or negatively. The principal
factors expected to be considered by the Board of Directors in determining
whether any repurchase, compared to alternative investments, is in the best
interests of the Fund and its shareholders is the anticipated effect on net
asset value per share and the resulting effect on the Fund's expense ratio. If
the Fund should borrow to finance share repurchase transactions, any gain in
the value of the Fund's investments during the term of the borrowing that
exceeds the interest paid on the amount borrowed would cause the net asset
value of the Fund's shares to increase more rapidly than would otherwise be
the case. Conversely, any decline in the value of the Fund's investments would
cause the net asset value of the Fund's shares to decrease more rapidly than
would otherwise be the case. The Fund has never repurchased any of its
outstanding shares and does not presently contemplate making any share
repurchases nor incurring debt to finance any share repurchases.
ANTI-TAKEOVER PROVISIONS OF THE ARTICLES OF INCORPORATION
The Fund has provisions in its Articles of Incorporation that could have the
effect of limiting the ability of other entities or persons to acquire control
of the Fund, to cause it to engage in certain transactions or to modify its
structure. The affirmative vote or consent of the holders of at least two-
thirds of the outstanding shares of the Fund is required to authorize any of
the following actions: (1) merger or consolidation of the Fund with an open-
end investment company; (2) merger or consolidation with a closed-end
investment company unless such company's charter has the same voting
requirements; (3) dissolution of the Fund; (4) sale of all or substantially
all of the assets of the Fund; or (5) amendment to the Articles of
Incorporation of the Fund which makes the Common Stock a redeemable security
(as such term is defined in the 1940 Act) or which reduces the two-thirds vote
required to authorize the actions in (1) through (5) hereof.
Reference is made to the Articles of Incorporation of the Fund, on file with
the Securities and Exchange Commission (the "SEC"), for the full text of these
provisions. These provisions could have the effect of depriving shareholders
of an opportunity 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 Board of Directors has determined that the two-thirds voting
requirements described above, which are greater than the minimum requirements
under Maryland law or the 1940 Act, are in the best interests of the Fund and
its shareholders generally.
16
<PAGE>
POSSIBLE FUTURE CONVERSION TO OPEN-END INVESTMENT COMPANY
If shares of the Fund's Common Stock have traded on the principal securities
exchange where listed at an average discount from net asset value of more than
10%, determined on the basis of the discount as of the end of the last trading
day in each week during the period of 12 calendar weeks preceding December 31
in any year, the Fund will submit to its shareholders at the next succeeding
annual meeting of shareholders a proposal, to the extent consistent with the
1940 Act, to amend the Fund's Articles of Incorporation to provide that, upon
the adoption of such amendment by the holders of two-thirds of the Fund's
outstanding shares of Common Stock, the Fund will convert from a closed-end to
an open-end investment company. If the Fund converted to an open-end
investment company, it would be able to continuously issue and offer for sale
shares of its Common Stock. Also, each share of the Fund's Common Stock could
be presented to the Fund at the option of the holder thereof for redemption at
net asset value per share and the Fund could be required to liquidate
portfolio securities to meet requests for redemption. In addition, shares of
the Fund would no longer be listed on the NYSE.
As described above, the Fund may repurchase its shares in the open market
from time to time. The Fund cannot predict whether any such repurchases would
increase or decrease the discount from net asset value. To the extent that any
such repurchase decreased the discount to below 10% during the measurement
period, the Fund would not be required to submit to shareholders a proposal to
convert the Fund to an open end investment company at the next annual meeting
of shareholders.
INVESTMENT OBJECTIVE AND POLICIES
GENERAL
The investment objective of the Fund is to seek total investment return
comprised of current income and capital appreciation through investment
principally in Convertible Securities (defined in "Convertible Securities"
below) and use of certain other investment techniques. The Fund is designed
primarily for long-term investment and not as a trading vehicle. There can be
no assurance that the Fund's objective will be achieved.
The Fund's investment objective and fundamental policies may be changed only
with the approval of the holders of a majority of the Fund's outstanding
voting securities. A "majority of the Fund's outstanding voting securities,"
when used in this Prospectus, means the lesser of (1) 67% of the shares
represented at a meeting at which more than 50% of the outstanding shares are
present in person or represented by proxy, or (2) more than 50% of the
outstanding shares.
The Fund has adopted a fundamental policy that under normal market
conditions it will invest at least 65% of its total assets in Convertible
Securities. Securities obtained upon the conversion of convertible securities
may be retained during periods when market conditions are unfavorable for
their disposition. Securities received upon conversion also may be retained in
the Fund's portfolio to permit orderly disposition or to establish long-term
holding periods for Federal income tax purposes during years in which such
gains are accorded favorable tax treatment. For temporary periods of not
greater than two months after conversion, such securities will be considered
to be convertible securities for purposes of computing whether 65% of the
Fund's total assets are invested in Convertible Securities. The Fund would
convert a Convertible Security which it holds when necessary to permit orderly
disposition of the investment when a Convertible Security reaches maturity or
has been called for redemption. Conversion could also occur to facilitate a
sale of the position or if the dividend rate on the underlying common stock
increased above the yield on the Convertible Security.
The remainder of the Fund's total assets may be invested in other
securities, including nonconvertible equity and investment grade debt
securities, options (as described below), securities issued or guaranteed by
the United States Government, its agencies and instrumentalities ("Government
Securities"), repurchase agreements (as described below), and money market
securities (as described below). Investment grade debt securities are those
rated Baa or higher by Moody's Investors Service, Inc. ("Moody's") or BBB or
higher by Standard & Poor's Corporation ("S&P"). Debt securities rated Baa by
Moody's are considered medium grade obligations with
17
<PAGE>
speculative characteristics. Government Securities may be supported by any of
the following: (1) the full faith and credit of the U.S. Government; (2) the
right of the issuer to borrow an amount limited to a specific line of credit
from the U.S. Government; (3) discretionary authority of the U.S. Government
agency or instrumentality; or (4) the credit of the instrumentality. Such
agencies or instrumentalities include, but are not limited to, the Federal
National Mortgage Association, the Government National Mortgage Association,
and the Federal Home Loan Mortgage Corporation.
The Fund may invest in certain "hybrid securities" consisting of debt
obligations with an investment return coupled to the performance of a common
stock index, such as the Standard & Poor's 500 Composite Stock Price Index or
the Standard & Poor's Pharmaceutical Index. Such hybrid securities are usually
zero coupon obligations payable at maturity at the higher of (1) face value or
(2) face value multiplied by the value of the specified index at maturity and
divided by a specified amount which may be 110% to 120% of the value of the
index at the date of issue. These hybrid securities are purchased by the Fund
only if the debt obligation is at least investment grade. In addition to the
credit risk of the issuer, the investment is subject to loss of value in the
event the index declines. The Fund does not intend to invest more than 5% of
its total assets in such hybrid securities.
In selecting Convertible Securities for the Fund, the following factors,
among others, are considered by the Investment Adviser: (1) the Investment
Adviser's own evaluations of the creditworthiness of the issuer of the
securities; (2) the interest or dividend income generated by the securities;
(3) the potential for capital appreciation of the securities and the
underlying common stock; (4) the prices of the securities relative to the
underlying common stocks; (5) the prices of the securities relative to other
comparable securities; (6) whether the securities are entitled to the benefits
of sinking funds or other protective conditions; (7) diversification of the
Fund's portfolio as to issuers; and (8) whether the securities are rated by
S&P and/or Moody's and, if so, the ratings assigned.
When business or financial conditions warrant, the Fund may take a temporary
defensive position by investing without limit in (1) Government Securities;
(2) money market securities such as certificates of deposit, bankers'
acceptances and interest-bearing savings deposits of banks having total assets
of more than $5 billion and which are members of the Federal Deposit Insurance
Corporation, and commercial paper rated Prime 1 by Moody's or A-l by S&P or,
if not rated, issued by companies which have an outstanding debt issue rated
Aa or higher by Moody's or AA or higher by S&P; (3) other debt securities
rated Aa or higher by Moody's or AA or higher by S&P; and (4) repurchase
agreements as described below.
CONVERTIBLE SECURITIES
A Convertible Security is a bond, debenture, note, preferred stock or other
security that may be converted into or exchanged for a prescribed amount of
common stock of the same or a different issuer within a particular period of
time at a specified price or formula.
A Convertible Security entitles the holder to receive interest paid or
accrued on debt or the dividend paid on preferred stock until the Convertible
Security matures or is redeemed, converted or exchanged. Before conversion,
Convertible Securities have characteristics similar to non-convertible debt
securities in that they ordinarily provide a stable stream of income with
generally higher yields than those of common stocks of the same or similar
issuers. Convertible Securities rank senior 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.
The value of a Convertible Security is a function of its "investment value"
(determined by its yield in comparison with the yields of other securities of
comparable maturity and quality that do not have a conversion privilege), and
its "conversion value" (the security's worth, at market value, if converted
into the underlying common stock).
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<PAGE>
The investment value of a Convertible Security is influenced by changes in
interest rates, with investment value declining as interest rates increase and
increasing as interest rates decline. The credit standing of the issuer and
other factors may also have an effect on the Convertible Security's investment
value. The conversion value of a Convertible Security is determined by the
market price of the underlying common stock. If the conversion value is low
relative to the investment value, the price of the Convertible Security is
governed principally by its investment value. To the extent the market price
of the underlying common stock approaches or exceeds the conversion price, the
price of the Convertible Security will be increasingly influenced by its
conversion value. In addition, a Convertible Security generally will sell at a
premium over its conversion value determined by the extent to which investors
place value on the right to acquire the underlying common stock while holding
a fixed income security.
A Convertible Security may be subject to redemption at the option of the
issuer at a price established in the Convertible Security's governing
instrument. If a Convertible Security held by the Fund is called for
redemption, the Fund will be required to permit the issuer to redeem the
security, convert it into the underlying common stock or sell it to a third
party. Any of these actions could have an adverse effect on the Fund's ability
to achieve its investment objective. The Fund has from time to time acquired
privately negotiated securities issued by a major brokerage firm and
consisting of notes with detachable warrants to purchase shares of publicly-
traded common stock. These investments are designed to permit the Fund to have
an interest in common stocks of companies which are considered attractive by
the Investment Adviser but which do not have outstanding Convertible
Securities. The combination of notes and warrants produces investment
characteristics similar to those of conventional convertible securities. These
instruments are normally unsecured obligations, and thus subject to the credit
risks of the issuing brokerage firm. In addition, they are normally
unregistered securities subject to the risks described below under
"Unregistered Convertible Securities." The Investment Adviser may acquire
similar "synthetic" or "derivative" instruments or combinations of instruments
that it believes possess properties comparable to those of standard
convertible securities and are consistent with the Fund's objectives. In
deciding whether and on what terms to acquire any such instruments, the
Investment Adviser weighs the risks against the expected total returns and
considers substantially the same factors described above with respect to the
evaluation of convertible securities generally. Synthetic convertible
securities are not included as Convertible Securities in determining whether
65% of the Fund's total assets are invested in Convertible Securities.
UNREGISTERED CONVERTIBLE SECURITIES
The Fund may invest up to 15% of its total assets in illiquid unregistered
Convertible Securities, and is not subject to any percentage limitation on
investments in unregistered convertible securities which are determined to be
liquid. Unregistered securities are securities that have been sold in the
United States without registration under the Securities Act of 1933 and are
thus subject to restrictions on resale. Unregistered securities generally may
be resold only in a privately negotiated transaction 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. These
difficulties and delays could result in the Fund's inability to realize a
favorable price upon disposition of unregistered securities, and in some cases
might make disposition of such unregistered securities at the time desired by
the Fund impossible. In those instances where the Fund determines to have
unregistered securities held by it registered prior to sale and the Fund does
not have a contractual commitment from the issuer or seller to pay the costs
of such registration, the gross proceeds from the sale of the securities would
be reduced by the registration costs and underwriting discounts in the event
of a public offering. When unregistered Convertible Securities are converted
into common stock and the common stock is publicly traded (as is typically the
case), such common stock normally may be resold beginning two years following
the acquisition of the unregistered Convertible Securities, subject to the
volume limitations and certain other conditions of Rule 144 under the
Securities Act of 1933. Beginning three years after the acquisition of the
unregistered Convertible Securities, the common stock received upon conversion
ordinarily may be resold without restriction. The Fund may not invest more
than 15% of its total assets (determined at the time of investment) in
illiquid securities, including repurchase agreements with maturities in excess
of seven days.
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<PAGE>
Rule 144A has been adopted by the SEC to provide a "safe harbor" for the
resale of certain unregistered securities among qualified institutional
investors without registration under the Securities Act of 1933. In its
release announcing the adoption of Rule 144A, the SEC indicated that a
principal purpose for the Rule is to achieve a more liquid and efficient
resale market for unregistered securities. Unregistered securities eligible
for resale pursuant to Rule 144A which the Board of Directors or the
Investment Adviser has determined under Board-approved guidelines to be liquid
are excluded from the 15% limitation on the Fund's investments in restricted
and other illiquid securities. At December 31, 1996, 44.1% of the Fund's net
assets were invested in restricted securities determined to be liquid and 3.0%
of the Fund's net assets were invested in restricted securities considered to
be illiquid.
RISKS OF LOWER-RATED SECURITIES
Convertible Securities are generally not investment grade, that is, not
rated within the four highest categories by S&P or Moody's. See Appendix A for
a description of these ratings. To the extent that Convertible Securities or
other debt securities acquired by the Fund are rated lower than investment
grade or are not rated, there is a greater risk as to the timely repayment of
the principal of, and timely payment of interest or dividends on, such
securities. The Fund will purchase Convertible Securities and other debt
securities rated BB or lower by S&P or Ba or lower by Moody's, which ratings
are considered by the rating agencies to be speculative with respect to the
issuer's continuing ability to meet principal and interest payments. Debt
securities rated BB or lower by S&P or Ba or lower by Moody's are commonly
referred to as "junk bonds." Decisions to purchase and sell these securities
are based on the Investment Adviser's evaluation of their investment potential
and risks and not on the ratings assigned by credit agencies. Because
investment in lower-rated securities involves greater investment risk, the
Fund's performance may depend to a significant degree on the Investment
Adviser's investment analysis, including its analysis of the equity
characteristics of the underlying common stocks. The market for lower-rated
debt securities is relatively new and its growth has paralleled a long
economic expansion. Past experience may not, therefore, provide an accurate
indication of future performance of this market, particularly during periods
of economic recession. Lower-rated securities may be more susceptible to real
or perceived adverse economic and competitive industry conditions than
investment grade securities. A projection of an economic downturn, for
example, could cause a decline in prices of lower-rated securities because the
advent of a recession could lessen the ability of a highly leveraged company
to make principal and interest payments on its senior securities. In addition,
the secondary trading market for lower-rated securities may be less liquid
than the market for higher grade securities. Judgment plays a greater role in
valuing lower-rated debt securities than higher-rated securities for which
more external sources of quotations and last-sale information are available
because there is less reliable objective data available. If market quotations
are not readily available for any of the Fund's lower-rated or other
securities, such securities are valued by a method that the Fund's Board of
Directors believes accurately reflects fair value.
Prices of lower-rated fixed income securities may decline rapidly in the
event a significant number of holders decide to sell. Changes in expectations
regarding an issuer, an industry or lower-rated securities generally could
reduce market liquidity for such securities and make their sale by the Fund
more difficult, at least in the absence of price concessions. An economic
downturn or an increase in interest rates could severely disrupt the market
for high yield bonds and adversely affect the value of outstanding bonds and
the ability of the issuers to repay principal and interest, meet projected
business goals and obtain additional financing. Where it deems it appropriate
and in the best interests of the Fund shareholders, the Fund may incur
additional expenses to seek recovery on a debt security on which the issuer
has defaulted and to pursue litigation to protect the interests of security
holders of its portfolio companies.
While credit ratings are only one factor the Investment Adviser reviews in
evaluating lower-rated debt securities, certain risks are associated with
using credit ratings. Credit rating agencies may fail to timely change the
credit ratings to reflect subsequent events; however, the Investment Adviser
continuously monitors the issuers of lower-rated debt securities in its
portfolio in an attempt to determine if the issuers will have sufficient cash
flow and profits to meet required principal and interest payments. Achievement
of the Fund's investment
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<PAGE>
objective may be more dependent upon the Investment Adviser's credit analysis
than is the case for higher quality debt securities. Credit ratings for
individual securities may change from time to time and the Fund may retain a
portfolio security whose rating has been changed.
Convertible Securities in which the Fund invests include convertible debt
instruments not producing immediate cash income, such as zero-coupon
convertible securities, when their effective yield premiums or conversion
privileges over comparable instruments producing cash income make these
investments attractive. Prices of non-cash-paying instruments may be more
sensitive to changes in the issuer's financial condition, fluctuations in
interest rates and market demand/supply imbalances than cash-paying securities
with similar credit ratings, and thus may be more speculative. In addition,
the non-cash interest income accrued on such instruments is income for federal
income tax purposes and thus required to be included in distributions to
shareholders (without providing the corresponding cash flow with which to pay
such distributions which must be made from cash assets or by liquidation of
portfolio securities).
It is an operating policy of the Fund not to purchase Convertible Securities
rated below B by both Moody's and S&P or non-rated securities considered by
the Investment Adviser to be of comparable quality. In the event, however,
that a rating of a Convertible Security owned by the Fund is lowered to C, Cl
or D by S&P or to C by Moody's, such security may be retained and the Fund may
add to its position. The issuers of securities so rated are financially
troubled, in default or in bankruptcy or reorganization. Debt obligations of
such companies usually sell at a deep discount from the face value of the
instrument. Unless the company's financial condition improves, such securities
may lose value or become worthless.
As of December 31, 1996, the average percentage of the Fund's assets
invested in fixed income securities (or preferred stocks) within the various
rating categories (based on the S&P ratings if the securities are rated by
S&P, otherwise based on Moody's ratings), and the nonrated debt securities,
determined on a dollar weighted average, were as follows:
<TABLE>
<S> <C>
AAA/Aaa.............................................................. 0.0%
AA/Aa................................................................ 5.5%
A/A.................................................................. 16.3%
BBB/Baa.............................................................. 16.1%
BB/Ba................................................................ 21.2%
B/B.................................................................. 36.5%
CCC/Caa.............................................................. 1.0%
CC/Ca................................................................ 0%
D.................................................................... 0%
Nonrated............................................................. 0%
Common Stocks/Warrants............................................... 1.2%
Cash and Equivalents................................................. 2.2%
Total Net Assets................................................... 100%
</TABLE>
FOREIGN SECURITIES AND FOREIGN ISSUERS
The Fund may invest in Eurodollar Convertible Securities. Eurodollar
Convertible Securities are fixed income securities of a U.S. issuer or a
foreign issuer that are issued in U.S. dollars outside the United States and
are convertible into or exchangeable for equity securities of the same or a
different issuer. Interest and dividends on Eurodollar securities are payable
in U.S. dollars outside of the United States. The Fund may invest without
limitation in Eurodollar Convertible Securities that are convertible into or
exchangeable for foreign equity securities listed, or represented by ADRs
listed, on the NYSE or the American Stock Exchange or convertible into or
exchangeable for publicly traded common stock of U.S. companies. Also, the
Fund may invest up to 15% of its total assets, taken at market value, in
Eurodollar Convertible Securities that are convertible into or exchangeable
for foreign equity securities which are not listed, or represented by ADRs
listed, on the NYSE or American Stock Exchange. Investments in securities of
foreign issuers may be affected favorably or unfavorably
21
<PAGE>
by changes in currency rates and in exchange control regulations. There may be
less publicly available information about a foreign company than about a U.S.
company, and foreign companies are not subject to as stringent accounting,
auditing and financial reporting standards and requirements as those
applicable to U.S. companies. Securities of some foreign companies may be less
liquid or more volatile than securities of U.S. companies, and foreign
brokerage commissions and custodian fees are generally higher than in the
United States. Investments in foreign securities may also be subject to other
risks different from those affecting U.S. investments, including local
political or economic developments, expropriation or nationalization of assets
and imposition of withholding taxes on dividend or interest payments.
INVESTMENT PRACTICES
LENDING OF PORTFOLIO SECURITIES
The Fund may lend securities in its portfolio representing up to 25% of its
total assets, taken at market value, to securities firms and financial
institutions and receive collateral in cash or Government Securities which is
maintained at all times in an amount equal to at least 100% of the current
market value of the loaned securities. The Fund anticipates that all or
substantially all securities loaned, if any, will be loaned to Bear, Stearns &
Co. Inc. or Bear, Stearns Securities Corp., which are affiliated with the
Fund's custodian. The purpose of such loans, generally, is to permit the
borrower to use such securities for delivery to purchasers when the borrower
or its customers have entered into short sales. The total yield on the Fund's
portfolio will be increased by loans of its portfolio securities because the
Fund will receive fees for such loans. Such loans are terminable at any time.
Voting rights may pass with the loaned securities, but if a material event
were to occur affecting an investment or loan, the Fund would call the loan in
order to exercise voting rights. The risks in lending portfolio securities, as
with other extensions of credit, consist of possible delay in recovery of the
securities or possible loss of rights in the collateral should the borrower
fail financially. In determining whether the Fund will lend securities to a
particular borrower, the Fund will consider all relevant facts and
circumstances, including the creditworthiness of the borrower.
SHORT SALES AGAINST THE BOX
The Fund may from time to time make short sales of securities it owns or has
the right to acquire through conversion or exchange of other securities it
owns. A short sale is "against the box" to the extent that the Fund
contemporaneously owns or has the right to obtain at no added cost securities
identical to those sold short. In a short sale, the Fund does not immediately
deliver the securities sold and does not receive the proceeds from the sale.
The Fund is said to have a short position in the securities sold until it
delivers the securities sold, at which time it receives the proceeds of the
sale. The Fund may not make short sales or maintain a short position if to do
so would cause more than 25% of the Fund's total assets, taken at market
value, to be held as collateral for such sales.
To secure its obligation to deliver the securities sold short, the Fund will
deposit in escrow in a separate account with its custodian an equal amount of
the securities sold short or securities convertible into or exchangeable for
such securities. The Fund may close out a short position by purchasing and
delivering an equal amount of the securities sold short, rather than by
delivering securities already held by the Fund, because the Fund may want to
continue to receive interest and dividend payments on securities in its
portfolio that are convertible into the securities sold short. However, the
Fund will not purchase and deliver new securities to satisfy its short order
if such purchase and sale would cause the Fund to violate the Three-Month Gain
Rule. See "Taxation."
The Fund may make a short sale in order to hedge against market risks when
the Investment Adviser believes that the price of a security may decline,
causing a decline in the value of a security owned by the Fund or a security
convertible into or exchangeable for such security, or when the Fund does not
want to sell the security it owns, because, among other reasons, it wishes to
defer recognition of gain or loss for Federal income
22
<PAGE>
tax purposes. In such case, any future losses in the Fund's long position
should be reduced by a gain in the short position. Conversely, any gain in the
long position should be reduced by a loss in the short position. The extent to
which such gains or losses are reduced will depend upon the amount of the
security sold short relative to the amount the Fund owns, either directly or
indirectly, and, in the case where the Fund owns Convertible Securities,
changes in the investment values or conversion premiums. Additionally, the
Fund may use short sales when it is determined that a Convertible Security can
be bought at a small conversion premium and has a yield advantage relative to
the underlying common stock sold short. The potential risk in this strategy is
the possible loss of any premium over conversion value in the Convertible
Security at the time of purchase. The purpose of this strategy is to produce
income from the yield advantage and to provide the potential for a gain should
the conversion premium increase.
FORWARD COMMITMENTS
The Fund may enter into forward commitments for the purchase of securities
in an amount up to 25% of its total assets. Such transactions may include
purchases on a "when issued" or a "delayed delivery" basis. 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" trade). When such
transactions are negotiated, the price is fixed at the time of the commitment,
with payment and delivery taking place in the future, frequently a month or
more after the date of the commitment. While the Fund 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. However, the Fund will not make such a sale if it would cause the
Fund to violate the Three-Month Gain Rule. See "Taxation." Securities issued
in connection with mergers, corporate reorganizations or debt restructuring
may involve special risks arising from greater use of leverage in the capital
structure of issuers. Such securities will not be purchased by the Fund,
however, unless they satisfy the investment criteria described above. See
"Investment Objective and Policies--General."
Securities purchased under a forward commitment are subject to market
fluctuation, and no interest (or dividends) accrue to the Fund prior to the
settlement date. At the time the Fund enters into a forward commitment, it
will record the transaction and thereafter reflect the value, each day, of the
security purchased in determining its net asset value. Any unrealized
appreciation or depreciation reflected in such valuation of a "when, as and if
issued" security would be canceled in the event that the required condition
did not occur and the trade was canceled.
The Fund maintains a segregated account (which will be marked to market
daily) of cash or liquid portfolio securities (which may have maturities that
are longer than the term of the forward commitment) with the Fund's custodian
in an aggregate amount equal to the amount of its forward commitments as long
as the obligation to purchase continues. In entering into forward commitments,
the Fund relies on the other party to complete the transaction; should the
other party fail to do so, the Fund might lose a purchase opportunity that
could be more advantageous than alternative opportunities at the time of the
failure.
REPURCHASE AGREEMENTS
The Fund may enter into "repurchase agreements" pertaining to Government
Securities with member banks of the Federal Reserve System or "primary
dealers" (as designated by the Federal Reserve Bank of New York) in such
securities. A repurchase agreement arises when the Fund purchases a security
and simultaneously agrees to resell it to the seller at an agreed upon future
date. The resale price is greater than the purchase price, reflecting an
agreed upon market rate of return which is effective for the period of time
the Fund's money is invested in the repurchase agreement and which is not
related to the coupon rate on the purchased security. Such agreements permit
the Fund to earn interest on temporarily available cash. The Fund requires the
seller to maintain the value of the securities, marked to market daily, at not
less than the repurchase price. If the seller defaults on its repurchase
obligation, the Fund could suffer delays, collection expenses and losses to
the extent that the proceeds from the sale of the collateral are less than the
repurchase price. The Fund will not invest more than 5% of its
23
<PAGE>
total assets, taken at market value, in repurchase agreements maturing in more
than seven days. The Investment Adviser will consider all relevant facts and
circumstances, including the creditworthiness of the other party, in
determining whether to cause the Fund to enter into a repurchase agreement.
OTHER INVESTMENTS AND INVESTMENT PRACTICES
The Fund may from time to time, (1) write (sell) covered call options on
common stocks that it owns or has an immediate right to acquire through
conversion or exchange of other securities on an amount up to 5% of its total
assets; or (2) purchase put options on such common stocks on an amount up to
2% of its total assets. The Fund may enter into forward commitments for the
purchase of securities which may include purchases on a "when issued" or a
"delayed delivery" basis. The Fund may enter into "repurchase agreements"
pertaining to Government Securities with or "primary dealers" (as designated
by the Federal Reserve Bank of New York) in such securities or United States
national banks. The Fund may purchase stock index futures contracts in
anticipatory hedge transactions to reduce the risk of not participating in the
stock market when the Fund is less than fully invested. The Fund's investment
in stock index futures will be limited to 5% or less of its total assets.
Additional information regarding such investments and investment practices and
the risks related thereto is set forth in the Statement of Additional
Information.
PORTFOLIO TRANSACTIONS AND BROKERAGE
The Investment Adviser is responsible for placing orders for the purchase
and sale of portfolio securities and negotiating the price of such
transactions. Most transactions made by the Fund are with dealers acting as
principals for their own accounts without a stated commission, although the
prices of the securities usually include a profit to the dealers. Broker-
dealers are selected for their professional capability and the overall value
and quality of their execution services. The Investment Adviser is authorized
to pay higher commissions to brokerage firms providing investment and research
information if the Investment Adviser deems such commissions reasonable in
relation to the overall services provided. The Investment Adviser may also use
information received to manage the assets of other advisory accounts. The Fund
does not pay any mark-up over the market price of securities acquired in
principal transactions with dealers.
PORTFOLIO TURNOVER
The Fund purchases securities primarily for investment rather than short-
term trading. However, changes are made in the portfolio whenever it appears
advisable. The Fund's annual portfolio turnover rate is shown in the table of
"Financial Highlights" and for the fiscal year ended December 31, 1996 was
125.72%. A high rate of portfolio turnover (100% or more) involves
correspondingly greater brokerage commission expenses for the Fund. High
portfolio turnover may also result in the realization of substantial net
capital gains; to the extent net capital gains are realized, any distribution
derived from such gains on securities held for less than one year are taxable
at ordinary income tax rates for federal income tax purposes.
INVESTMENT RESTRICTIONS
The Fund has adopted certain fundamental investment restrictions which, like
its investment objectives, cannot be changed without approval by a majority
(as defined in the Investment Company Act) vote of the fund's shareholders.
These restrictions are listed in the Statement of Additional Information.
24
<PAGE>
MANAGEMENT OF THE FUND
A board of eight directors is responsible for overseeing the Fund's affairs.
The Investment Adviser, which is headquartered at 865 South Figueroa Street,
Suite 1800, Los Angeles, California 90017, selects "Investments for the Fund,
provides administrative services and manages the Fund's business. The
Investment Adviser is a wholly-owned subsidiary of the TCW Group, Inc., whose
direct and indirect subsidiaries, including Trust Company of the West and TCW
Asset Management Company, have managed convertible securities portfolios for
institutional investors since 1976. Robert A. Day, who is chairman of the TCW
Group, Inc. may be deemed to be a control person of the Investment Adviser by
virtue of the aggregate ownership by Mr. Day and his family of more than 25%
of the outstanding voting stock of the TCW Group, Inc.
PORTFOLIO MANAGEMENT
Robert M. Hanisee and Kevin A. Hunter, Senior Vice Presidents of the Fund,
have been primarily responsible for the day-to-day management of the Fund's
entire portfolio since April, 1995 and were primarily responsible for the day-
to-day management of approximately 50% of the Fund's assets since March, 1992.
Each has served as an officer of the Investment Adviser for more than five
years.
ADVISORY AGREEMENT
Under the Investment Advisory Agreement dated February 17, 1987, the Fund
pays the Investment Adviser a monthly fee computed on the total net assets of
the Fund at 1/12 of the annualized rate of reimburses the Investment Adviser
for the cost (up to $25,000 per year) of providing accounting services to the
Fund. For the last fiscal year, advisory fees and accounting reimbursement
equaled 0.60% of the Fund's average net assets.
The Fund also pays for shareholder service agent fees, custodian fees, legal
and audit fees, directors' fees, reports to shareholders and proxy statements,
and all other expenses incurred in the operation of the Fund, except those
assumed by the Investment Adviser. For the last fiscal year, the Fund's total
operating expenses were 0.77% of average net assets.
DETERMINATION OF NET ASSET VALUE
The Fund calculates and makes available for weekly publication the net asset
value of its shares. Net asset value per share is determined by dividing the
value of the Fund's assets (including interest and dividends accrued but not
collected), less its liabilities (including accrued expenses), by the number
of outstanding shares. Each listed security and each security traded on the
National Association of Securities Dealers Automated Quotations National
Market System is valued at the last sale price or the mean of the reported
closing bid and asked prices if there are no sales in the trading period
immediately preceding the time of determination. Other securities which are
traded on the over-the-counter market are valued at the mean of the latest
available bid and asked prices. Securities for which quotations are not
readily available, unregistered securities and other assets are valued at fair
value as determined in good faith by, or under the direction of, the Board of
Directors. Notwithstanding the foregoing, short-term debt securities with
maturities of 60 days or less are valued at amortized cost.
25
<PAGE>
DISTRIBUTIONS; DIVIDEND REINVESTMENT PLAN
DISTRIBUTION POLICY
Commencing with the distribution paid in July, 1988, the Fund's policy has
been to make quarterly distributions of $0.21 per share to shareholders of
record at the end of each calendar quarter. This distribution policy requires
payments substantially in excess of the Fund's current net investment income.
Only the portion, if any, of a distribution which equals the Fund's current
net investment income should be considered a dividend. The remainder
constitutes a payment out of the Fund's net realized capital gains for each
period to the extent available; any excess will be from paid-in capital. A
notice accompanies each quarterly distribution to identify the estimated
source of the distribution. See "Taxation" for information concerning the
federal income tax treatment of distributions by the Fund to its shareholders.
For years in which the Fund distributes amounts in excess of its net
investment income and net realized capital gains, such distributions will
decrease the Fund's total assets and, therefore, have the likely effect of
increasing the Fund's expense ratio. In addition, in order to make such
distributions, the Fund may have to sell a portion of its investment portfolio
at a time when independent investment judgment might not dictate such action.
Such sales, if they involve assets held for less than three months, could also
adversely affect the Fund's status as a regulated investment company since, in
order for the Fund to qualify as a regulated investment company, for each
taxable year, less than 30% of the Fund's gross income must be derived from
gains realized on the sale or other disposition of stocks or securities held
for less than three months.
After expiration or offset of the Fund's capital loss carryovers, described
under "Taxation," the Fund's distributions for the third and/or fourth
quarters of a calendar year may, but need not, include net long-term capital
gains realized during the year. The Fund may retain for reinvestment and pay
federal income taxes on the excess of its net realized long-term capital gains
over its net realized short-term capital losses, if any, although the Fund
reserves the authority to distribute such excess in any year. The Fund's
distribution policy is subject to change and may be affected by future events,
including changes in tax or legal requirements.
DIVIDEND REINVESTMENT PLAN
Shareholders of record (other than brokers or nominees of banks and other
financial institutions) are eligible to participate in the Dividend
Reinvestment Plan (the "Plan"), pursuant to which dividends and any payment
out of the Fund's net realized capital gains for the year and paid-in capital
distributed to shareholders will be paid in or reinvested in additional shares
of the Fund (the "Dividend Shares"). The Bank of New York (the "Agent"),
Dividend Reinvestment Department, P.O. Box 1958, Newark, New Jersey 07101-9774
acts as agent for participants under the Plan.
A shareholder may join the Plan by signing and returning an authorization
form which may be obtained from the Agent. A shareholder may elect to withdraw
from the Plan at any time by written notice to the Agent and thereby elect to
receive cash in lieu of Dividend Shares. There is no penalty for withdrawal
from the Plan and shareholders who have previously withdrawn from the Plan may
rejoin it at any time. The Federal income tax consequences of participating in
the Plan are described below under "Taxation."
Commencing not more than five business days before the dividend payment
date, purchases of the Fund's shares may be made by the Agent, on behalf of
the participants in the Plan, from time to time to satisfy dividend rein
vestments under the Plan. Such purchases by the Agent may be made when the
price plus estimated commissions of the Fund's Common Stock on the NYSE is
lower than the Fund's most recently calculated net asset value per share. If
the Agent determines on the dividend payment date that the shares purchased as
of such date are insufficient to satisfy the dividend reinvestment
requirements, the Agent, on behalf of the participants in the Plan, will
obtain the necessary additional shares as follows. To the extent that
outstanding shares are not available at a cost of less than per share net
asset value, the Agent, on behalf of the participants in the Plan, will accept
payment of the dividend, or the remaining portion thereof, in authorized but
unissued shares of the Fund
26
<PAGE>
on the dividend payment date. Such shares will be issued at a per share price
equal to the higher of (1) the net asset value per share on the payment date,
or (2) 95% of the closing market price per share on the payment date. If the
closing sale or offer price, plus estimated commissions, of the Common Stock
on the NYSE on the payment date is less than the Fund's net asset value per
share on such day, then the Agent will purchase additional outstanding shares
on the NYSE or elsewhere. There are no brokerage charges with respect to
shares issued directly by the Fund to satisfy the dividend reinvestment
requirements. However, each participant will pay a pro rata share of brokerage
commissions incurred with respect to the Agent's open market purchases of
shares. In each case, the cost per share of shares purchased for each
shareholder's account will be the average cost, including brokerage
commissions, of any shares purchased in the open market plus the cost of any
shares issued by the Fund.
Shareholders participating in the Plan may receive benefits not available to
shareholders not participating in the Plan. If the market price plus
commissions of the Fund's shares is above the net asset value, participants in
the Plan will receive shares of the Fund at a discount of up to 5% from the
current market value. However, if the market price plus commissions is below
the net asset value, participants will receive distributions in shares at
prices below the net asset value. Also, since the Fund does not redeem its
shares, the price on resale may be more or less than the net asset value.
In the case of foreign participants whose dividends are subject to United
States income tax withholding and in the case of any participants subject to
31% federal backup withholding, the Agent will reinvest dividends after
deduction of the amount required to be withheld.
Experience under the Plan may indicate that changes are desirable.
Accordingly, the Fund reserves the right to amend or terminate the Plan. There
is no direct service charge to participants in the Plan; however, the Fund
reserves the right to amend the Plan to include a service charge payable by
the participants.
TAXATION
GENERAL
The Fund has qualified, and intends to qualify, each year as a regulated
investment company under Subchapter M of the Internal Revenue Code of 1986
(the "Code"). In order to qualify as a regulated investment company for any
taxable year, the Fund must (1) derive at least 90% of its gross income from
dividends, interest, certain payments with respect to securities loans and
gains from the sale or other disposition of stock or securities or foreign
currencies or other income derived with respect to its business of investing
in such stock, securities or currencies; (2) derive less than 30% of its gross
income from the sale or other disposition of stock or securities held for less
than three months ("Three-Month Gain Rule"); and (3) distribute at least 90%
of its investment company taxable income (net investment income and the excess
of net short-term capital gain over net long-term capital loss) for the
taxable year.
The Fund must also diversify its holdings so that, at the close of each
quarter of its taxable year, (1) at least 50% of the value of its total assets
consists of cash, cash items, Government Securities, and the securities of
other regulated investment companies and other securities limited generally
with respect to any one issuer to not more than 5% of the total assets of the
Fund and not more than 10% of the outstanding voting securities of such
issuer, and (2) not more than 25% of the value of its total assets is invested
in the securities (other than Government Securities or the securities of other
regulated investment companies) of any one issuer, or in two or more issuers
which the Fund controls and which are engaged in the same or similar trades or
business (the "Asset Diversification Test").
The foregoing requirements of the Code may limit the Fund's ability to write
call options, to acquire put options on stocks, to effect short sales, to sell
securities subject to a forward commitment prior to the settlement date and to
purchase stock index futures contracts.
27
<PAGE>
As a regulated investment company, the Fund is not subject to Federal income
tax on its investment company taxable income and net capital gains (any net
long-term capital gains in excess of the sum of net short-term capital losses
and capital loss carryovers from prior years), if any, that it distributes to
its shareholders. The Fund intends to distribute annually to its shareholders
all of its investment company taxable income and net capital gains. The Fund
is subject to a nondeductible 4% excise tax measured with respect to certain
undistributed amounts of ordinary income and capital gain net income. The Fund
intends to distribute sufficient amounts to avoid liability for the excise
tax.
Distributions of investment company taxable income generally are taxable to
shareholders as ordinary income, regardless of whether such distributions are
paid in cash or are invested in additional shares of the Fund's stock.
A capital gain distribution, whether paid in cash or reinvested in shares,
is taxable to shareholders as long-term capital gain, regardless of the length
of time a shareholder has held his shares or whether such gain was realized by
the Fund before the shareholder acquired such shares and was reflected in the
price paid for the shares. In the event a distribution constitutes a return of
capital, a shareholder reduces the tax cost basis for his stock by the amount
of the nontaxable distribution. If such distribution exceeds the shareholder's
tax cost basis, the excess is treated as a capital gain.
The Fund sends written statements and notices to shareholders regarding the
tax status of all dividends and distributions made during each calendar year.
Net realized capital gains during any year are a part of current earnings
and profits, even if there are capital loss carryovers from prior years. So
long as the Fund has unexpired capital loss carryovers, the portion of any
distributions to shareholders in excess of the Fund's net investment income,
but not in excess of the Fund's net realized capital gains for the year, is
deemed to be paid from the current year's earnings and profits, and thus is
taxable to shareholders as additional dividend income, and any remainder is
treated as a return of capital. See "Distributions; Dividend Reinvestment
Plan" for a discussion of the Fund's current distribution policy.
To the extent the Fund is able to realize capital losses in any year to
offset that year's realized capital gains, thereby minimizing or eliminating
the portion of distributions on the Common Stock which is taxable as
additional dividend income to shareholders, the Fund will not be able to
utilize its capital loss carryovers. In addition, the capital loss carryovers
will be of benefit to the Fund only to the extent that in any year net
realized capital gains exceed total distributions to shareholders over and
above distributions paid out of net investment income.
Shareholders who reinvest either distributions of investment company taxable
income or capital gain distributions in additional shares of the Fund's stock
will be treated as receiving distributions of an amount equal to the fair
market value, determined as of the payment date, of the shares received if the
shares are purchased from the Fund. Such value may exceed the amount of the
cash distribution that would have been paid. If outstanding shares are
purchased in the open market, the taxable distribution will equal the cash
distribution that would have been paid. In either event, the cost basis in the
shares received will equal the amount recognized as a taxable distribution.
A portion of the distributions of investment company taxable income paid by
the Fund is eligible for the 70% dividends received deduction allowed to
certain corporations. The eligible portion generally equals the proportion
that dividends from U.S. corporations bear to the Fund's gross income,
provided that the Fund designates such proportion as being eligible for the
deduction in the statement provided annually to shareholders. However, a
dividend received by the Fund is not treated as an "eligible dividend" if (1)
it has been received with respect to any share of stock that the Fund has held
for 45 days (90 days in the case of certain preferred stock) or less
(excluding any day more than 45 days (or 90 days in the case of certain
preferred stock) after the date on which the stock becomes ex-dividend); or
(2) to the extent that the Fund is under an obligation (pursuant to a short
sale or otherwise) to make related payments with respect to positions in
substantially similar or related
28
<PAGE>
property. The dividends received deduction is not available for capital gain
dividends. The Fund sends written notice to shareholders regarding the tax
status of all distributions made during each calendar year.
DISQUALIFICATION AS A REGULATED INVESTMENT COMPANY
If for any taxable year the Fund does not qualify as a regulated investment
company, all of its taxable income will be subject to tax at regular corporate
rates without any deduction for distributions to shareholders, and such
distributions will be taxable as ordinary dividends to the extent of the
Fund's current and accumulated earnings and profits.
BACKUP WITHHOLDING
The Fund generally will be required to withhold tax at the rate of 31% with
respect to distributions of investment company taxable income and capital gain
distributions payable to a non corporate shareholder if the shareholder fails
to provide a correct taxpayer identification number or is otherwise subject to
backup withholding.
FOREIGN WITHHOLDING TAXES
To the extent that the Fund invests in Eurodollar Convertible Securities,
dividends and interest received by the Fund on such securities may be subject
to foreign withholding taxes. The Fund will be entitled to claim a deduction
for such foreign withholding taxes for U.S. Federal income tax purposes.
However, any such taxes will reduce the income available for distribution to
the Fund's shareholders.
OTHER TAXATION
Distributions to shareholders who are nonresident aliens may be subject to a
30% United States withholding tax under provisions of the Code applicable to
foreign individuals and entities unless a reduced rate of withholding or a
withholding exemption is provided under applicable treaty law. Nonresident
shareholders are urged to consult their own tax advisers concerning the
applicability of the United States withholding tax.
The foregoing is only a brief summary of the Federal tax laws applicable to
investors in the Fund. Investors may also be subject to state and local taxes.
Investors should consult their own tax advisers regarding specific questions
as to Federal, state or local taxes.
CUSTODIAN, TRANSFER AGENT, DIVIDEND-PAYING AGENT AND REGISTRAR
The custodian of the assets of the Fund is Custodial Trust Company, 28 West
State Street, Trenton, New Jersey 08608. Rules adopted under the Investment
Company Act of 1940 permit the Fund to maintain its foreign securities in the
custody of certain eligible foreign banks and securities depositories.
Pursuant to these rules, any foreign securities in the Fund's portfolio may be
held by foreign sub-custodians and securities depositories approved by the
directors of the Fund in accordance with the regulations of the SEC.
The transfer agent, dividend disbursing agent and registrar for the Fund's
shares is The Bank of New York, Church Street Station, New York, New York.
AUDITORS
Deloitte & Touche LLP, 1000 Wilshire Boulevard, Los Angeles, California
90017, independent auditors, has performed annual audits of the Fund's
financial statements since 1987.
29
<PAGE>
LEGAL MATTERS
Counsel to the fund is O'Melveny & Myers, LLP, Los Angeles, California. A
Director of the Fund is of counsel to, and a retired partner of that firm.
O'Melveny & Myers also provides legal services to The TCW Group, Inc. and its
subsidiaries, including the Investment Adviser. A former partner of the firm
is a member of the Board of Directors of The TCW Group, Inc. and Trust Company
of the West.
REPORTS TO SHAREHOLDERS
The Fund sends unaudited semi-annual and audited annual reports to its
stockholders, including a list of investments held.
EXPERTS
The Statement of Assets and Liabilities of the Fund, including the Schedule
of Investments as of December 31, 1996, and the related Statement of
Operations for the year then ended, the Statement of Changes in Net Assets for
the years ended December 31, 1995 and December 31, 1996 and the Financial
Highlights for the period March 5, 1987 (commencement) to December 31, 1987
and the years ended thereafter included or incorporated by reference herein,
have been audited by Deloitte and Touche LLP, independent auditors, as
indicated in their report with respect thereto, and are included in reliance
upon such report and upon the authority of such firm as experts in accounting
and auditing.
FURTHER INFORMATION
This Prospectus does not contain all of the information included in the
Registration Statement filed with the Securities and Exchange Commission under
the Securities Act and the Act, with respect to the Fund's Shares offered
hereby, certain portions of which have been omitted pursuant to the rules and
regulations of the Securities and Exchange Commission. The Registration
Statement, including exhibits filed therewith, may be examined at the office
of the Securities and Exchange Commission in Washington, D.C.
Statements contained in this Prospectus as to the contents of any contract
or other document referred to are not necessarily complete, and, in each
instance, reference is made to the copy of such contract or other document
filed as an exhibit to the Registration Statement, of which this Prospectus
forms a part, each such statement being qualified in all respects by such
reference.
30
<PAGE>
DESCRIPTION OF RATINGS
APPENDIX
Description of Standard & Poor's Corporation ("S&P") and Moody's Investors
Service, Inc. ("Moody's") senior securities ratings.
MOODY'S:
Aaa--Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized
are most unlikely to impair the fundamentally strong position of such issues.
Aa--Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long term risk appear somewhat larger than in the Aaa
securities.
A--Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may
be present which suggest a susceptibility to impairment sometime in the
future.
Baa--Bonds which are rated Baa are considered as medium grade obligations
(i.e., they are neither highly protected nor poorly secured). Interest
payments and principal security appear adequate for the present but certain
protective elements may be lacking or may be characteristically unreliable
over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Fixed income securities which are rated Aaa, Aa, A and Baa are considered
investment grade.
Ba--Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B--Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa--Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal
or interest.
Ca--Bonds which are rated Ca represent obligations which are speculative in
a high degree. Such issues are often in default or have other marked
shortcomings.
C--Bonds which are rated C are the lowest rated class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
Note: Moody's applies numerical modifiers, 1, 2, and 3 in each generic
rating classification from Aa through B in its corporate bond rating system.
The modifier 1 indicates that the security ranks in the higher end of its
generic rating category; the modifier 2 indicates a mid-range ranking; and the
modifier 3 indicates that the issue ranks in the lower end of its generic
rating category.
S&P:
AAA--Debt rated AAA has the higher rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
A-1
<PAGE>
AA--Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.
A--Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB--Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
Fixed income securities rated AAA, AA, A and BBB are considered investment
grade.
BB--Debt rated BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure
to adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The BB
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BBB- rating.
B--Debt rated B has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial or economic conditions will likely impair capacity or willingness to
pay interest any repay principal. The B rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied BB or BB-
rating.
CCC--Debt rated CCC has a currently identifiable vulnerability to default,
and is dependent upon favorable business, financial and economic conditions to
meet timely payment of interest repayment of principal. In the event of
adverse business financial, or economic conditions, it is not likely to have
capacity to pay interest and repay principal. The CCC rating category is also
used for debt subordinated to senior debt that is assigned an actual or
implied B or B- rating.
CC--The rating CC is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC rating.
C--The rating C is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC- debt rating. The C rating may be
used to cover a situation where a bankruptcy petition has been filed, but debt
service payments are continued.
CI--The rating CI is reserved for income bonds on which no interest is being
paid.
D--Debt rated D is in payment default. The D rating category is used when
interest payments or principal payments are not made on the date due even if
the applicable grace period has not expired, unless S&P believes that such
payments will be made during such grace period. The D rating also will be used
upon the filing of a bankruptcy petition if debt service payments are
jeopardized.
Plus (+) or Minus (-): The ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
PREFERRED STOCK RATINGS:
Both Moody's and S&P use the same designations for corporate bonds as they
do for preferred stock except in the case of Moody's preferred stock ratings
the initial letter rating is not capitalized. While the descriptions are
tailored for preferred stocks the relative quality distinctions are comparable
to those described above for corporate bonds.
A-2
<PAGE>
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NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFER
MADE BY THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUND OR THE INVESTMENT ADVISER.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING BY THE FUND IN ANY
JURISDICTION IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Fee Table.................................................................. 2
Prospectus Summary......................................................... 3
Financial Highlights....................................................... 7
The Offer.................................................................. 8
Special Considerations and Risk Factors.................................... 14
Use of Proceeds............................................................ 15
Description of Common Stock................................................ 15
Investment Objective and Policies.......................................... 17
Investment Practices....................................................... 22
Management of the Fund..................................................... 25
Determination of Net Asset Value........................................... 25
Distributions; Dividend Reinvestment Plan.................................. 26
Taxation................................................................... 27
Custodian, Transfer Agent, Dividend-Paying Agent and Registrar............. 29
Auditors................................................................... 29
Legal Matters.............................................................. 30
Reports to Shareholders.................................................... 30
Experts.................................................................... 30
Further Information........................................................ 30
Appendix A................................................................. A-l
</TABLE>
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6,396,283 SHARES OF
COMMON STOCK
ISSUABLE UPON EXERCISE
OF RIGHTS TO SUBSCRIBE
FOR SUCH SHARES OF
COMMON STOCK
TCW CONVERTIBLE
SECURITIES FUND, INC.
---------
PROSPECTUS
MARCH 21, 1997
--------
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<PAGE>
PART B - STATEMENT OF ADDITIONAL INFORMATION
TCW CONVERTIBLE SECURITIES FUND, INC.
MARCH 21, 1997
This Statement of Additional Information is not a Prospectus but contains
information in additional to that set forth in the Prospectus dated March 21,
1997 and should be read in conjunction with the Prospectus. A Prospectus may be
obtained without charge by calling (800) 386-3829 or writing the Fund at 865
South Figueroa Street, Suite 1800, Los Angeles, California 90017.
<TABLE>
<CAPTION>
<S> <C>
Investment Policies.............................. B-2
Options..................................... B-2
Short Sales Against the Box................. B-3
Forward Commitments......................... B-4
Repurchase Agreements....................... B-4
Stock Index Futures......................... B-5
Investment Restrictions.......................... B-7
Management of the Fund........................... B-8
Directors and Officers...................... B-8
Investment Advisory and Other Services........... B-12
Investment Adviser.......................... B-12
Investment Advisory Management Agreement.... B-12
Fees and Expenses........................... B-13
Portfolio Transactions and Brokerage............. B-14
General..................................... B-14
Portfolio Turnover.......................... B-15
Taxation - Futures and Hedging Transactions...... B-16
Principal Shareholders of the Fund............... B-17
Financial Statements............................. B-18
</TABLE>
<PAGE>
INVESTMENT POLICIES
The following supplements information set forth under the captions
"Investment Objectives and Policies" and "Investment Practices" in the
Prospectus. Readers must also refer to the Prospectus.
OPTIONS
The Fund may from time to time, and to the extent described below, (1) write
(sell) covered call options on common stocks that it owns or has an immediate
right to acquire through conversion or exchange of other securities; or (2)
purchase put options on such common stocks. The Fund may also enter transactions
with respect to such options. All options written or purchased by the Fund must
be listed on a national securities exchange. The requirements for qualification
as a "regulated investment company" may limit the degree to which the Fund may
utilize option strategies. See "Taxation."
Many currently traded Convertible Securities are convertible into common
stocks against which listed call options may be written. A call option gives the
purchaser the right to buy, and the writer has the obligation to sell, the
underlying security at the option exercise price during the option period. The
Fund may only write "covered" call options, that is, options on common stock
that it holds in its portfolio or that it has an immediate right to acquire
through conversion or exchange of securities held in its portfolio. The Fund may
write call options on up to 5% of its total assets, taken at market value,
determined as of the date the options are written.
The Fund will write covered call options in order to receive premiums which
it is paid for writing options. Such premiums represent a gain to the Fund if
the option expires unexercised. Such gain may offset possible declines in the
market values of the common stocks or Convertible Securities held in its
portfolio. If, for example, the market price of a common stock underlying a
Convertible Security held by the Fund declines and the Convertible Security also
declines in value, such decline will be offset in part (or wholly) by the
receipt of the premium for writing the call options on such stock. However, if
the market price of the underlying common stock increases and the Convertible
Security held by the Fund also increases in value, such increase may be offset
in part (or wholly) by a loss resulting from the need to buy back at higher
prices the covered call options written by the Fund or through the lost
opportunity for any participation in the capital appreciation of the underlying
security above the exercise price.
In addition to writing covered call options, the Fund may invest up to 2% of
its total assets, taken at market value, determined as of the date the options
are written, in the purchase of put options on common stock that it owns or may
acquire through the conversion or exchange of other securities that it owns. A
put option gives the holder the right to sell the underlying security at the
option exercise price at any time during the option period. Any losses realized
by the Fund in connection with its purchase of put options will be limited to
the premiums paid by the Fund for the purchase of such options plus any
transaction costs.
B-2
<PAGE>
The Fund intends to purchase put options on particular securities in order to
protect against a decline in the market value of the underlying security below
the exercise price less the premium paid for the option. The authority to
purchase put options will allow the Fund to protect the unrealized gain in an
appreciated security in its portfolio without actually selling the security. In
addition, the Fund will continue to receive interest or dividend income on the
security. The Fund may sell a put option which it has previously purchased prior
to the sale of the securities underlying such option. Such sales will result in
a net gain or loss depending on whether the amount received on the sale is more
or less than the premium and other transaction costs paid for the put option
that is sold. Such gain or loss may be wholly or partially offset by a change in
the value of the underlying security which the Fund owns or has the right to
acquire.
SHORT SALES AGAINST THE BOX
The Fund may from time to time make short sales of securities it owns or has
the right to acquire through conversion or exchange of other securities it owns.
A short sale is "against the box" to the extent that the Fund contemporaneously
owns or has the right to obtain at no added cost securities identical to those
sold short. In a short sale, the Fund does not immediately deliver the
securities sold and does not receive the proceeds from the sale. The Fund is
said to have a short position in the securities sold until it delivers the
securities sold, at which time it receives the proceeds of the sale. The Fund
may not make short sales or maintain a short position if to do so would cause
more than 25% of the Fund's total assets, taken at market value, to be held as
collateral for such sales.
To secure its obligation to deliver the securities sold short, the Fund will
deposit in escrow in a separate account with its custodian an equal amount of
the securities sold short or securities convertible into or exchangeable for
such securities. The Fund may close out a short position by purchasing and
delivering an equal amount of the securities sold short, rather than by
delivering securities already held by the Fund, because the Fund may want to
continue to receive interest and dividend payments on securities in its
portfolio that are convertible into the securities sold short. However, the Fund
will not purchase and deliver new securities to satisfy its short order if such
purchase and sale would cause the Fund to violate the Three-Month Gain Rule. See
"Taxation."
The Fund may make a short sale in order to hedge against market risks when
the Investment Adviser believes that the price of a security may decline,
causing a decline in the value of a security owned by the Fund or a security
convertible into or exchangeable for such security, or when the Fund does not
want to sell the security it owns, because, among other reasons, it wishes to
defer recognition of gain or loss for Federal income tax purposes. In such case,
any future losses in the Fund's long position should be reduced by a gain in the
short position. Conversely, any gain in the long position should be reduced by a
loss in the short position. The extent to which such gains or losses are reduced
will depend upon the amount of the security sold short relative to the amount
the Fund owns, either directly or indirectly, and, in the case where the Fund
owns Convertible Securities, changes in the investment values or conversion
premiums. Additionally, the Fund may use short sales when it is determined that
a Convertible Security can be bought at a small conversion premium and has a
yield advantage relative to the underlying common stock sold short. The
potential risk in this strategy is the possible loss of any premium over
conversion value in the Convertible Security at the time of purchase. The
purpose of this strategy is to produce income from the yield advantage and to
provide the potential for a gain should the conversion premium increase.
B-3
<PAGE>
FORWARD COMMITMENTS
The Fund may enter into forward commitments for the purchase of securities in
an amount up to 25% of total assets. Such transactions may include purchases on
a "when issued" or a "delayed delivery" basis. 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" trade). When such transactions
are negotiated, the price is fixed at the time of the commitment, with payment
and delivery taking place in the future, frequently a month or more after the
date of the commitment. While the Fund 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. However, the Fund
will not make such a sale if it would cause the Fund to violate the Three-Month
Gain Rule. See "Taxation." Securities issued in connection with mergers,
corporate reorganizations or debt restructuring may involve special risks
arising from greater use of leverage in the capital structure of issuers. Such
securities will not be purchased by the Fund, however, unless they satisfy the
investment criteria described above. See "Investment Objective and Policies -
General."
Securities purchased under a forward commitment are subject to market
fluctuation, and no interest (or dividends) accrue to the Fund prior to the
settlement date. At the time the Fund enters into a forward commitment, it will
record the transaction and thereafter reflect the value, each day, of the
security purchased in determining its net asset value. Any unrealized
appreciation or depreciation reflected in such valuation of a "when, as and if
issued" security would be canceled in the event that the required condition did
not occur and the trade was canceled.
The Fund maintains a segregated account (which will be marked to market
daily) of cash or liquid portfolio securities (which may have maturities that
are longer than the term of the forward commitment) with the Fund's custodian in
an aggregate amount equal to the amount of its forward commitments as long as
the obligation to purchase continues. In entering into forward commitments, the
Fund relies on the other party to complete the transaction; should the other
party fail to do so, the Fund might lose a purchase opportunity that could be
more advantageous than alternative opportunities at the time of the failure.
REPURCHASE AGREEMENTS
The Fund may enter into "repurchase agreements" pertaining to Government
Securities with member banks of the Federal Reserve System or "primary dealers"
(as designated by the Federal Reserve Bank of New York) in such securities. A
repurchase agreement arises when the Fund purchases a security and
simultaneously agrees to resell it to the seller at an agreed upon future date.
The resale price is greater than the purchase price, reflecting an agreed upon
market rate of return which is effective for the period of time the Fund's money
is invested in the repurchase agreement and which is not related to the coupon
rate on the purchased security. Such agreements permit the Fund to earn interest
on temporarily available cash. The Fund requires the seller to maintain the
value of the securities, marked to market daily, at not less than the repurchase
price. If the seller
B-4
<PAGE>
defaults on its repurchase obligation, the Fund could suffer delays, collection
expenses and losses to the extent that the proceeds from the sale of the
collateral are less than the repurchase price. The Fund will not invest more
than 5% of its total assets, taken at market value, in repurchase agreements
maturing in more than seven days. The Investment Adviser will consider all
relevant facts and circumstances, including the creditworthiness of the other
party, in determining whether to cause the Fund to enter into a repurchase
agreement.
STOCK INDEX FUTURES
The Fund may purchase stock index futures contracts ("futures") in
anticipatory hedge transactions to reduce the risk of not participating in the
stock market when the Fund is less than fully invested. Such purchases would be
made when the Investment Adviser anticipates that the purchase of stock index
futures with a portion of its assets is desirable as a temporary substitute for
being fully invested in Convertible Securities. The Fund will not engage in
futures transactions for purposes of speculation. Thus, the Fund would not
purchase stock index futures contracts with aggregate settlement prices in
excess of the value of the cash, U.S. government securities and other liquid
portfolio securities held by the Fund. The requirements for qualification as a
"regulated investment company" may limit the degree to which the Fund may
purchase futures contracts. See "Taxation."
A stock index assigns relative value to the common stocks included in the
index (for example, the Standard & Poor's 500 Composite Stock Price Index), and
the stock index fluctuates with changes in the market value of such stocks. When
the Fund buys a future, it agrees to pay or receive an amount of cash equal to a
specified dollar amount times the difference between the stock index value at
the close of the last trading date of the future and the price at which the
future is purchased. No physical delivery of the stocks included in the index
underlying the future is made. As it purchases Convertible Securities, the Fund
may close out a future before its settlement date by effecting an offsetting
transaction. A futures purchase is closed out by effecting a sale of a futures
contract of the same type with the same settlement date. If the offsetting sales
price exceeds the purchase price, the Fund realizes a gain, whereas if the
purchase price exceeds the offsetting sale price, the Fund realizes a loss.
In purchasing stock index futures contracts the Fund will comply with rules
and interpretations of the Commodity Futures Trading Commission ("CFTC"), under
which the Fund is excluded from regulation as a "commodity pool operator." CFTC
regulations allow unlimited use of futures for "bona fide hedging" purposes, as
defined in CFTC regulations, and limit the aggregate initial margin on non-
hedging futures to 5% of the fair market value of the Fund's total assets. The
extent to which the Fund may engage in futures transactions may also be limited
by the Internal Revenue Code's requirements for qualification as a regulated
investment company. See "Taxation."
The risk of loss in trading futures contracts in speculative strategies can
be substantial. Because the futures portfolio strategies of the Fund are engaged
in only for hedging purposes, however, the Investment Adviser does not believe
that the Fund is subject to the same degree of risk sometimes associated with
futures transactions. Nevertheless, utilization of futures transactions by the
Fund does involve certain risk.
B-5
<PAGE>
There can be no assurance that hedging transactions will be successful, as
they will depend upon the Investment Adviser's ability to predict changes in
general stock market conditions and the future direction of stock prices and
interest rates. There is imperfect correlation (or no correlation) between the
price movements of the futures contracts and price movements of the Convertible
Securities that the Fund intends to purchase. To compensate for the imperfect
correlation of movements of prices of a stock index future and the Convertible
Securities being hedged, the Fund will purchase stock index futures contracts in
a lesser dollar amount than the dollar amount of the Convertible Securities that
the Fund intends to purchase because the historical volatility of the price of
Convertible Securities is less than the historical volatility of the stock
index. Nevertheless, the price of the stock index future may move less than the
price of the Convertible Securities that are subject to the anticipatory hedge
resulting in the hedge not being fully effective or the value of futures
contracts may decline while the value of the Convertible Securities that the
Fund intends to purchase may increase. The latter situation may occur if both
stock market prices and interest rates decline during the period the Fund owns
stock index futures. The price of stock index futures may not correlate
perfectly with movement in the stock index, due to certain market distortions.
This might result from decisions by a significant number of market participants
holding stock index futures positions to close out their futures contracts
through offsetting transactions rather than to make additional margin deposits.
Also, increased participation by speculators in the futures market may cause
temporary price distortions. Due to the possibility of such price distortion in
the futures markets and because of the imperfect correlation between movements
in the stock index futures, a correct forecast of general market trends by the
Investment Adviser may not result in a fully successful hedging transaction over
a short time frame. Thus if the Investment Adviser's predictions are incorrect,
the Fund would have been better off if no hedge had been made. Hedging
transactions through the use of stock index futures requires skills different
from those needed to select portfolio securities. The Fund has not invested in
stock index futures during the past five years.
Futures positions may be closed out only on an exchange or board of trade
which provides a market for such futures. Although the Fund intends to purchase
futures which have an active market, there is no assurance that a liquid market
will exist for any particular contract or at any particular time. Thus, it may
not be possible to close a futures position in anticipation of adverse price
movements.
The settlement procedure in connection with the Fund's entry into a futures
transaction requires the deposit of cash or Government Securities, constituting
initial margin, in a special segregated account with the Fund's Custodian in the
name and for the benefit of the Fund's futures commission merchant ("FCM").
Subsequent payments, called maintenance margin, are made to and from the FCM (a
process known as "marking to market") on a daily basis as the value of the long
and short positions in the futures contract fluctuates.
The Fund, on a daily basis, will monitor amounts of maintenance margin due to
it and will promptly demand payment and transfer those amounts from its FCM to
its custodian (for the general or segregated custodial account, as appropriate).
B-6
<PAGE>
Initial margin held by the custodian will continue to be regarded as the
Fund's assets, unless and until such amounts are owed to such FCM. In the event
of insolvency of an FCM, amounts held by the custodian in the segregated account
for the benefit of the FCM and by the FCM for the benefit of the Fund may become
subject to Federal bankruptcy laws and bankruptcy regulations of the CFTC, which
provide for pro rata distribution to customers of the FCM of all customer
property.
INVESTMENT RESTRICTIONS
The following restrictions are fundamental policies which may not be changed
without the approval of the holders of a majority of the Fund's outstanding
voting securities. For purposes of the investment percentage limitations set
forth below and other percentage limitations set forth in this Prospectus: (i)
all percentage limitations apply immediately after a purchase or initial
investment, and (ii) any subsequent change in any applicable percentage
resulting from market fluctuations or other changes in total or net assets does
not require elimination of any security from the Fund.
The Fund will not:
1. Purchase the securities of any issuer (other than the Government
Securities), if immediately thereafter the Fund with respect to 75% of its total
assets would (a) have more than 5% of its total assets invested in the
securities of such issuer, or (b) own more than 10% of the outstanding voting
securities of such issuer.
2. Invest 25% or more of its total assets in securities of issuers
conducting their principal business activities in the same industry; provided
that there is no limitation with respect to investments in Government
Securities.
3. Make loans of money to other persons (except the Fund may invest in
repurchase agreements and in unregistered Convertible Securities as provided in
(11) below); provided that for purposes of this restriction the acquisition of a
portion of an issue of publicly distributed Convertible Securities and other
debt securities and investment in Government Securities, short-term commercial
paper, certificates of deposit, and bankers' acceptances shall not be deemed to
be the making of a loan; and provided further that the Fund may lend portfolio
securities representing up to 25% of its total assets, taken at market value, to
securities firms and financial institutions if it receives collateral in cash or
Government Securities required to be maintained at all times in an amount equal
to at least 100% of the current market value of the loaned securities.
4. Engage in underwriting of securities of other issuers, except that
portfolio securities, including unregistered securities, may be acquired under
circumstances where, if sold, the Fund might be deemed to be an underwriter
under the Securities Act of 1933.
5. Borrow money or issue senior securities (as defined in the 1940 Act),
except that the Fund may borrow in amounts not exceeding 5% of the value of its
total assets (not including the amount borrowed) for temporary or emergency
purposes or for the purpose of financing repurchase of its shares. For the
purpose of this investment restriction, collateral or escrow arrangements with
respect to margin for futures contracts are not deemed to be a pledge of assets
and neither such arrangements nor the purchase of futures contracts are deemed
to be the issuance of a senior security.
B-7
<PAGE>
6. Purchase or sell commodities or commodity contracts, including futures
contracts or options on futures contracts in a contract market or other futures
market, except that the Fund may purchase stock index futures contracts as
described under "Investment Objective and Policies- Stock Index Futures."
7. Purchase or sell real estate or real estate mortgage loans; provided that
the Fund may invest in securities secured by real estate or interests therein or
issued by companies that invest in real estate or interests therein.
8. Purchase securities on margin, except for short-term credits as may be
necessary for the clearance of transactions.
9. Make short sales of securities or maintain a short position except as
described under "Investment Objective and Policies--Short Sales Against the
Box."
10. Purchase or sell (write) call options except as described under
"Investment Objective and Policies--Options."
11. Invest more than 15% of its total assets taken at market value, in
unregistered Convertible Securities, including any unregistered common stock
acquired upon conversion or exchange of unregistered Convertible Securities,
excluding, however, restricted securities eligible for resale pursuant to Rule
144A under the Securities Act of 1933 which the Board of Directors, or the
Fund's Investment Adviser has determined under Board-approved guidelines, are
liquid.
MANAGEMENT OF THE FUND
DIRECTORS AND OFFICERS
A board of eight directors is responsible for overseeing the Fund's affairs.
The Fund has an executive committee, consisting of Ernest O. Ellison, Chairman,
Norman Barker, Jr. and Coleman W. Morton, which may act for the Board of
Directors between meetings, except where Board action is required by law. The
directors and officers of the Fund, their business addresses and their principal
occupations for the last five years are set forth below.
B-8
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION DURING
NAME AND ADDRESS OFFICE PAST 5 YEARS
- ---------------- ------ ---------------------------
<S> <C> <C>
Ernest O. Ellison* (66) President and Director Vice Chairman of the Board and Chief
865 S. Figueroa Street Investment Officer, The TCW Group, Inc.
Los Angeles, CA 90017 (formerly TCW Management Company) and
Trust Company of the West. For more than 10
years prior to May 1992, Mr. Ellison served in
various executive positions with the Fund's
Adviser and its affiliates.
Norman Barker, Jr. (74) Director Former Chairman of the Board, First Interstate
707 Wilshire Blvd. Bank of California and former Vice Chairman
Los Angeles, CA 90017 of the Board, First Interstate Bancorp; Director,
American Health Properties, Inc., ICN
Pharmaceuticals, Inc., and TCW Galileo Funds,
Inc.; Chairman of the Board, Fidelity Federal
Bank and Pacific American Income Shares, Inc.
Richard W. Call (72) Director President, The Seaver Institute (a private
800 Wilshire Blvd. foundation); Director, TCW Galileo Funds,
Los Angeles, CA 90017 Inc.
Edmund W. Clarke (78) Director Retired; formerly Chief Investment Officer,
865 S. Figueroa St. Transamerica Investment Services.
Los Angeles, CA 90017
Coleman W. Morton (77) Director Private investor; formerly Member of the
865 S. Figueroa St. Advisory Board and President and Director,
Los Angeles, CA 90017 The Investment Company of America
Charles A. Parker (62) Director Formerly, Executive Vice President and
865 S. Figueroa St. Director, The Continental Corporation;
Los Angeles, CA 90017 formerly Chairman and Chief Executive Officer,
Continental Asset Management Corporation;
Director, Underwriters Reinsurance Co.
Lawrence J. Sheehan* (64) Director Of Counsel to, and Partner (1968 to 1994)
1999 Avenue of the Stars of the law firm of O'Melveny & Myers, legal
Suite 700 counsel to the Fund and the Investment
Los Angeles, CA 90067 Adviser; Director, Source Capital, Inc. FPA
Capital Fund, Inc., FPA New Income Fund, Inc.
and FPA Perennial Fund, Inc.
</TABLE>
B-9
<PAGE>
<TABLE>
<S> <C> <C>
Robert G. Sims* (65) Director Private Investor; Director, The TCW Group,
865 S. Figueroa St. Inc.; formerly Director, Daily Systems, Inc.
Los Angeles, CA 90017 (Computer Aided Engineering Systems).
</TABLE>
* Directors who are or may be deemed to be "interested persons" of the Fund as
defined in the 1940 Act. Mr. Ellison is an officer of the Fund and a
shareholder and director of The TCW Group, Inc., the parent corporation of the
Investment Adviser. Mr. Sims is a director of the Fund and is a shareholder of
and has served as a director of the parent corporation during the past two
years. Mr. Sheehan is Of Counsel to, and a former partner of, legal counsel to
the Fund and the Investment Adviser.
The following table illustrates the compensation paid to the Fund's
independent directors (the "Independent Directors") by the Fund for the fiscal
year ended December 31, 1996.
<TABLE>
<CAPTION>
AGGREGATE COMPENSATION
NAME OF INDEPENDENT DIRECTORS FROM THE FUND
- -------------------------------- ----------------------
<S> <C>
Norman Barker, Jr.......... $12,000
Richard W. Call............ 12,000
Edmund W. Clarke........... 10,500
Coleman W. Morton.......... 10,500
Charles A. Parker.......... 10,500
</TABLE>
The following table illustrates the compensation paid to fund's Independent
Directors for the calendar year ended December 31, 1996 by the TCW Galileo
Funds, Inc. in the case of Messrs. Barker and Call, as well as from the Fund.
The TCW Galileo Funds, Inc. is included solely because the Fund's Investment
Adviser also serves as its adviser.
<TABLE>
<CAPTION>
TOTAL CASH
COMPENSATION
FROM THE
FOR SERVICE AS TCW GALILEO
DIRECTOR AND COMMITTEE FUNDS, INC.
NAME OF INDEPENDENT DIRECTOR MEMBER OF THE FUND AND THE FUND
- ------------------------------- ------------------ ------------
<S> <C> <C>
Norman Barker, Jr......... $12,000 $51,000
Richard W. Call........... 12,000 51,000
</TABLE>
The following information relates to the executive officers of the Fund who are
not directors of the Fund. The business address of each is 865 South Figueroa
Street, Los Angeles, California 90017. Several of such officers own common stock
of The TCW Group, Inc. the parent corporation of the Investment Adviser.
B-10
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION DURING
NAME OFFICE PAST 5 YEARS
- ----- ------ ------------
<S> <C> <C>
Thomas E. Larkin, Jr. (57) Vice Chairman Vice Chairman, TCW Asset Management
Company; President and Director, Trust
Company of the West; Chairman, TCW Funds
Management, Inc.; Executive Vice President,
TCW Group, Inc.; President and Director, TCW
Galileo Funds, Inc.; President and Trustee,
TCW/DW Funds
Ronald E. Robison (58) Senior Vice Managing Director, TCW Asset Management
President and Chief Company, Trust Company of the West and
Operating Officer TCW Funds Management, Inc.; Chief Operating
Officer, TCW Funds Management, Inc.
Robert M. Hanisee (58) Senior Vice Managing Director and Co-Director of
President Research, TCW Asset Management Company
and Trust Company of the West; Managing
Director, TCW Funds Management, Inc. (1990-
present); formerly, President, Seidler Amdec
Securities, Inc.
Kevin A. Hunter (38) Senior Vice Managing Director, TCW Asset Management
President Company, Trust Company of the West and TCW
Funds Management, Inc.
Michael E. Cahill (46) General Counsel and Managing Director, General Counsel and
Assistant Secretary Secretary, TCW Asset Management Company,
Trust Company of the West, TCW Funds
Management, Inc. and The TCW Group, Inc.;
Director, TCW Asset Management Company;
Former Senior Vice President and General
Counsel, Act III Communications
David K. Sandie (41) Treasurer, Principal Managing Director, Chief Financial Officer and
Accounting Officer Assistant Secretary, The TCW Group, Inc., Trust
and Assistant Secretary Company of the West, TCW Asset Management Company
and the Adviser; Senior Vice President, Principal
Accounting Officer, Treasurer and Assistant Secretary,
TCW Galileo Funds, Inc.
Philip K. Holl (47) Secretary Vice President, Associate General Counsel and
Assistant Secretary, Trust Company of the West, TCW
Asset Management Company and TCW Funds Management,
Inc.; Secretary, TCW Galileo Funds, Inc.; Former
Vice President/Legal Affairs, the Reserve Group of
Mutual funds prior to June, 1994.
</TABLE>
B-11
<PAGE>
<TABLE>
<S> <C> <C>
Hilary G.D. Lord (42) Assistant Secretary Managing Director, Chief Compliance Officer and Assistant
Secretary, Trust Company of the West, TCW Asset
Management Company, and TCW Funds Management, Inc.;
Senior Vice President and Assistant Secretary, TCW
Galileo Funds, Inc.
</TABLE>
INVESTMENT ADVISORY AND OTHER SERVICES
INVESTMENT ADVISER
The Investment Adviser also serves as investment adviser to a number of
investment compares registered under the 1940 Act and to foreign investment
companies. The registered investment companies to which the Investment Adviser
provides investment advisory services: TCW Galileo Funds, Inc. (including the
following portfolios: TCW Galileo Convertible Securities Fund; TCW Galileo Core
Equity Fund; TCW Small Cap Growth Fund; TCW Mid-Cap Growth Fund; TCW Galileo
Earnings Momentum Fund; TCW Core Fixed Income Fund; TCW Galileo High Yield Bond
Fund; TCW Galileo Money Market Fund; TCW Galileo Asia Pacific Equity Fund; TCW
Galileo Emerging Markets Fund; TCW Galileo Latin America Growth Fund; TCW
Galileo Long-Term Mortgage Backed Securities Fund and TCW Galileo Mortgage
Backed Securities Fund); TCW/DW Core Equity Fund; TCW/DW Small Cap Growth Fund;
TCW/DW Mid-Cap Equity Trust; TCW/DW Total Return Trust; TCW/DW Income and Growth
Fund; TCW/DW Balanced Fund; TCW/DW Global Telecom Trust; TCW/DW Strategic Income
Trust; TCW/DW Latin American Growth Fund; TCW/DW Emerging Markets Opportunities
Trust; TCW/DW North American Government Income Trust; TCW/DW Term Trust 2000;
TCW/DW Term Trust 2002; TCW/DW Term Trust 2003; Endeavor Series Trust (Money
Market Portfolio and Asset Allocation Portfolio); The Sierra Trust Fund
(Corporate Income Fund); The Sierra Variable Trust (Corporate Income Fund); and
The Enterprise Group of Funds, Inc.
INVESTMENT ADVISORY AND MANAGEMENT AGREEMENT
The Fund and the Investment Adviser have entered into an Investment Advisory
and Management Agreement (the "Advisory Agreement") which was last approved by
the shareholders of the Fund on May 22, 1996 and by the Board of Directors of
the Fund, including a majority of the directors who were not interested persons
of the Fund, at a meeting of the Board of Directors held on February 21, 1996.
The Fund has retained the Investment Adviser to manage the investment of the
Fund's assets, to place orders for the purchase and sale of the Funds portfolio
securities and to administer day-to-day operations, subject to control by the
Board of Directors of the Fund. The Investment Adviser is responsible for
obtaining and evaluating economic, statistical, and financial data and for
formulating and implementing investment programs in furtherance of the Fund's
investment objective and policies.
The Investment Adviser furnishes to the Fund office space at such place
as may be agreed upon from time to time and all office facilities, business
equipment, supplies, utilities and telephone service necessary for managing the
affairs and investments and keeping the general accounts and records of the Fund
(exclusive of the necessary records of any transfer agent, registrar, dividend
disbursing or reinvesting agent or custodian) and arranges for officers or
employees of Investment Adviser to serve, without compensation from the Fund, as
officers, directors or employees of the Fund if desired and reasonably required
by the Fund.
B-12
<PAGE>
The Advisory Agreement may be continued from year to year if such continuance
is specifically approved at least annually by (1) the Board of Directors of the
Fund or by the vote of a majority of the outstanding voting securities of the
Fund, and (2) the vote of a majority of the directors who are not "interested
persons of the Fund or the Investment Adviser, cast in person at a meeting
called for the purpose of voting on such approval. The Advisory Agreement may be
terminated without penalty at any time on 60 days' written notice, by vote of a
majority of the Board of Directors of the Fund or by vote of a majority of the
outstanding voting securities of the Fund, or on 90 days' written notice by the
Investment Adviser. The Advisory Agreement terminates automatically in the event
of assignment.
FEES AND EXPENSES
As compensation for services rendered, facilities provided and expenses
borne, the Investment Adviser is paid a monthly fee computed at an annual rate
of 0.75% of the first $100,000,000 of the Fund's average net assets, and .50% of
the Fund's average net assets in excess of $100,000,000. Average net assets are
determined by taking the average of the weekly determinations of net asset value
for each week which ends during the month. In addition the Fund reimburses the
Investment Adviser for the costs (up to a maximum of $25,000 per year) of
providing accounting services to the Fund, including maintaining the Fund's
financial books and records, calculating its weekly net asset value, and
preparing its financial statements. For the years ended December 1994, 1995 and
1996, the Investment Adviser received advisory fees of $1,538,821, $1,523,587
and $1,625,243, respectively. For each of those same years, the Investment
Adviser received reimbursement for accounting services of $25,000.
Except for expenses specifically assumed by the Investment Adviser under the
Advisory Agreement, the Fund bears all expenses incurred in its operations. Such
Fund expenses include the fee of the Investment Adviser; compensation and
expenses of directors of the Fund who are not affiliated persons of the
Investment Adviser as defined in the 1940 Act; registration, filing and other
fees in connection with filings with regulatory authorities; fees and expenses
of listing and maintaining the listing of the Fund's shares on any national
securities exchange; fees and expenses of independent auditors; the expenses of
printing and mailing proxy statements and shareholder reports; custodian and
transfer and dividend disbursing agent charges; brokerage commissions and
securities transaction costs incurred by the Fund; taxes and corporate fees;
legal fees incurred in connection with the affairs of the Fund; the fees of any
trade association of which the Fund is a member; the cost of stock certificates
representing shares of the Fund; the organizational and offering expenses of the
Fund, whether or not advanced by the Investment Adviser; expenses of shareholder
and director meetings; premiums for the fidelity bond and any errors and
omissions insurance maintained by the Fund; interest and taxes; and any other
ordinary or extraordinary expenses incurred by the Fund in the course of its
business.
B-13
<PAGE>
PORTFOLIO TRANSACTIONS AND BROKERAGE
GENERAL
Subject to policies established by the Board of Directors of the Fund, the
Investment Adviser is responsible for the placement of the Fund's portfolio
transactions and the allocation of the brokerage. Total brokerage commissions
paid by the Fund during 1994, 1995 and 1996 were $112,795, $68,051 and $95,728,
respectively. During the fiscal year ended December 31, 1996, $18,051 in
brokerage commissions were paid on transactions with the value of $6,731,106 to
brokers selected primarily on the basis of research and other services provided
to the Investment Adviser and affiliated companies.
In selecting broker-dealers the Investment Adviser seeks to obtain the best
execution, taking into account such factors as price (including the applicable
dealer spread or commission, if any), size of order, difficulty of execution and
operational facilities of the firm involved and the firm's risk in positioning a
large order. Brokerage services include the ability to most effectively execute
large orders without adversely impacting markets and positioning securities in
order to enable the Investment Adviser to effect orderly sales for clients.
Accordingly, transactions will not always be executed at the lowest available
commission. In addition, the Investment Adviser may effect transactions which
cause the client to pay a commission in excess of a commission which another
broker-dealer would have charged if the Investment Adviser first determines that
such commission is reasonable in relation to the value of the brokerage and
research services provided by the broker-dealer.
Research services include such items as reports on industries and companies,
economic analyses and review of business conditions, portfolio strategy,
analytic computer software, account performance services, computer terminals and
various trading and/or quotation equipment. They also include advice from broker
dealers as to the value of securities, availability of securities, availability
of buyers, and availability of sellers. In addition, they include
recommendations as to purchase and sale of individual securities and timing of
said transactions.
Fixed income securities are generally purchased from the issuer or a primary
market maker acting as principal on a net basis with no brokerage commission
paid by the client. Such securities, as well as equity securities, may also be
purchased from underwriters at prices which include underwriting fees.
The Investment Adviser maintains an internal allocation procedure to identify
those broker-dealers who have provided it with research services and endeavors
to place sufficient transactions with them to ensure the continued receipt of
research services the Investment Adviser believes are useful.
The Directors of Research for the Investment Adviser, after close
consultation with senior management, portfolio managers and research analysts
have the responsibility for determining those broker-dealers with whom business
should be placed. The Directors evaluate such broker-dealers to consider any
additions or deletions to the list of monitored and consulting analysts.
Allocation guidelines are established to provide direction to the Trading
Department. Additional allocations also may be authorized for specific broker
dealers depending upon the timeliness and accuracy of their research input. The
head of the Equity Trading Department, with the approval of senior management,
determines the commission rates paid to broker dealers. The Investment Adviser
follows client directions on placing transactions with specific broker-dealers
to some extent and such transactions may be effected at rates or terms specified
or approved by the client.
B-14
<PAGE>
Sometimes the Investment Adviser receives products or services which are
used for both research services and other purposes, such as corporate
administration or marketing. The Investment Adviser makes a good faith effort to
determine the relative proportions of such products or services which may be
attributed to research services. The portion attributable to research services
may be paid through client brokerage commissions and the non-research services
portion will be paid in cash by the Investment Adviser.
Research services furnished by broker-dealers may be used in services for any
or all of the clients of the Investment Adviser, as well as clients of
affiliated companies, and may be used in connection with accounts other than
those which pay commissions to the broker-dealers providing the research
services.
Usually in the placement of unregistered securities, the issuer or other
seller of the securities pays all costs of the placement including the fee of
any broker-dealer involved. The Fund attempts to make all of its investments in
unregistered securities on this basis. The Fund may pay commissions or
underwriting discounts in connection with its sale of unregistered securities in
privately negotiated transactions or in underwritten public offerings.
When the Fund and one or more of the other advisory accounts managed by the
Investment Adviser or its affiliates seek to acquire, or to sell, the same
security at the same time, available investments or opportunities for sales will
be allocated in a manner the Investment Adviser believes to be equitable. In
some cases, this procedure may affect adversely the price paid or received by
the Fund or the size of the position purchased or sold by the Fund.
PORTFOLIO TURNOVER
The Fund does not engage in substantial short-term trading. The Fund's
portfolio turnover rates (the lesser of the value of securities purchased or
securities sold, divided by the average value of securities owned during the
year) for the years ended December 31, 1994, 1995 and 1996, were 110.04%,
108.98% and 125.72%, respectively. For purposes of this calculation, securities,
including options, with a maturity or expiration date at the time of purchase of
one year or less are excluded. The annual turnover rate may vary greatly from
year to year and may exceed 100%, which is higher than that of many other
investment companies. A 100% turnover rate occurs for example, if all the Fund's
portfolio securities are replaced during one year. Such high portfolio activity
(over 100% turnover rate) increases the Fund's transaction costs, including
brokerage commissions.
TAXATION
FUTURES AND HEDGING TRANSACTIONS
The stock index futures contracts which the Fund may purchase are "section
1256 contracts" under the Code. With respect to section 1256 contracts closed
out by the Fund, any realized gain or loss will be treated as long-term capital
gain or loss to the extent of 60% thereof and short-term capital gain or loss to
the extent of 40% thereof (hereinafter "60/40 gain or loss"). Open section 1256
contracts held by the Fund on December 31 of any tax year will be required to be
treated as sold at market value on such day for Federal income tax purposes
(i.e, "marked-to-market"). Gain or loss recognized under this marked-to-market
rule is 60/40 gain or loss.
B-15
<PAGE>
The short sale of, or the acquisition of a put option on, (1) stock or
securities held by the Fund or (2) stock or securities which are "substantially
identical" to stock or securities held by the Fund, may reduce the holding
period of such stock or securities for purposes of determining short-term and
long-term gains and losses and for purposes of the Three-Month Gain Rule. Where
preferred stock or bonds are convertible into common stock of the same
corporation, the relative values, price changes and other circumstances may be
such as to cause the bonds or preferred stock and the common stock to be treated
as "substantially identical" for this purpose. Short sales and purchases of put
options may increase the amount of short-term capital gain realized by the Fund
which is taxable as ordinary income when distributed to shareholders.
Certain of the hedging transactions undertaken by the Fund (i.e., the
writing of covered call options, the acquisition of put options on its stocks
and short sales) may constitute "straddles" for Federal income tax purposes. The
Code generally provides with respect to straddles (1) "loss deferral" rules
which may postpone recognition for tax purposes of losses from certain closing
purchase transactions or other dispositions of a position in a straddle to the
extent of unrealized gains in the offsetting position, (2) "wash sale" rules
which may postpone recognition for tax purposes of losses when a position
forming part of a straddle is sold and a new offsetting position is acquired
within a prescribed period, and (3) "short sale" rules which may terminate the
holding period of securities owned by the Fund when offsetting positions are
established and which may convert certain losses from short-term to long-term.
Because only a few regulations implementing the straddle rules have been
promulgated, the tax consequences of certain hedging transactions to the Fund
are not entirely clear. Straddle transactions may increase the amount of short-
term capital gain realized by the Fund which is taxable as ordinary income when
distributed to shareholders.
Because application of the straddle rules may affect the character of gains
or losses, defer losses and/or accelerate the recognition of gains or losses
from the affected straddle positions, the amount which must be distributed to
shareholders, and which will be taxed to shareholders as ordinary income or
long-term capital gain, may be increased or decreased substantially as compared
to a fund that does not engage in such hedging transactions.
The extent to which the Fund may engage in short sales against the box and
transactions in options and stock index futures contracts may be limited by the
Three-Month Gain Rule and the Asset Diversification Test.
PRINCIPAL SHAREHOLDERS OF THE FUND
On December 31, 1996, Cede & Co., Box 20, Bowling Green Station, New York,
New York 10004, held 27,477,665 shares (86.15%) of the Fund as nominee for the
beneficial owners.
On December 31, 1996, all officers and directors of the Fund, as a group,
owned less than 1% of the outstanding shares of common stock.
B-16
<PAGE>
FINANCIAL STATEMENTS
INDEX
<TABLE>
<S> <C>
Schedule of Investments as of December 31, 1996............... B-19
Statement of Assets and Liabilities as of December 31, 1996... B-23
Statement of Operations for Year Ended December 31, 1996...... B-24
Statement of Changes in Net Assets for Years Ended
December 31, 1995 and December 31, 1996.................... B-25
Notes to Financial Statements................................. B-26
Financial Highlights.......................................... B-31
Independent Auditors' Report.................................. B-32
</TABLE>
B-17
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL STATEMENTS
INDEX
<S> <C>
Schedule of Investments as of December 31, 1996 B-19
Statement of Assets and Liabilities as of December 31, 1996 B-23
Statement of Operations for Year Ended December 31, 1996 B-24
Statement of Changes in Net Assets for Years Ended
December 31, 1995 and December 31, 1996 B-25
Notes to Financial Statements B-26
Financial Highlights B-31
Independent Auditors' Report B-32
</TABLE>
B-18
<PAGE>
- -------------------------------------------------------------------------------
[LOGO TCW CONVERTIBLE SECURITIES FUND, INC.
OF TCW] Schedule of Investments
December 31, 1996
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number of
Shares or
Principal
Amount Value
--------- -----
<C> <S> <C>
CONSUMER STAPLES (48.9% OF NET ASSETS)
DRUGS AND HOSPITAL SUPPLY (4.2%)
$2,895,000 Alza Corp., 5%, due 05/01/06....................... $ 2,837,100
$5,545,000 Sandoz Capital BVI, Ltd., (Switzerland), 2%, due
10/06/02.......................................... 5,981,669*
$2,405,000 Sepracor, Inc., 7%, due 12/01/02................... 2,519,238*
-----------
Total Drugs and Hospital Supply.................. 11,338,007
-----------
ENTERTAINMENT, LEISURE AND MEDIA (8.7%)
52,500 Golden Books Family Entertainment, Inc., $4.375
Convertible Preferred............................. 2,979,375*
$ 305,000 Imax Corp., (Canada), 5.75%, due 04/01/03.......... 279,075
$2,300,000 Imax Corp., (Canada), 5.75%, due 04/01/03.......... 2,101,625*
$2,140,000 International Cabletel, Inc. (United Kingdom), 7%,
due 06/15/08...................................... 1,958,100
133,700 Merrill Lynch & Company, Inc., Exchangeable Cox
Communications, Inc., $1.3725 Convertible
Preferred......................................... 2,974,825
$5,800,000 News America Holdings, Exchangeable News Corp.
(Australia), 0%, due 03/11/13..................... 2,733,250**
$3,610,000 Scholastic Corp., 5%, due 08/15/05................. 3,853,675*
39,200 SFX Broadcasting, Inc., $3.25 Convertible
Preferred......................................... 1,715,000*
54,100 TCI Pacific Communications, Inc., $5.00 Convertible
Preferred......................................... 4,950,150
-----------
Total Entertainment, Leisure and Media........... 23,545,075
-----------
</TABLE>
<TABLE>
<CAPTION>
Number of
Shares or
Principal
Amount Value
--------- -----
<C> <S> <C>
FOODS, HOTELS AND BEVERAGES (3.3%)
$10,775,000 Boston Chicken Inc., 0%, due 06/01/15........... $ 3,299,844**
54,000 Host Marriott Financial Trust, $3.375
Convertible Preferred.......................... 2,889,000*
$ 4,995,000 Marriott Corp., 0%, due 03/25/11................ 2,790,956* **
-----------
Total Foods, Hotels and Restaurants........... 8,979,800
-----------
HEALTHCARE (14.4%)
74,200 Aetna, Inc., $4.75 Convertible Preferred........ 5,889,625
$ 1,345,000 ARV Assisted Living, Inc., 6.75%, due 04/01/06.. 1,230,675*
$ 540,000 Assisted Living Concepts, Inc., 7%, due
07/31/05....................................... 587,250*
$ 2,500,000 Completed Management, Inc., 8%, due 08/15/03.... 2,625,000
$ 1,195,000 Emeritus Corp., 6.25%, due 01/01/06............. 970,937*
$ 3,820,000 Morgan Stanley Group, Inc., Exchangeable Johnson
& Johnson, 2%, due 03/29/02.................... 3,777,025
$ 2,710,000 OccuSystems Inc., 6%, due 12/15/01.............. 3,008,100*
$ 3,330,000 PhyMatrix Corp., 6.75%, due 06/15/03............ 2,759,738*
$ 2,880,000 Physician Resource, 6%, due 12/01/01............ 2,822,400*
$ 2,750,000 Quintiles Transnational Corp., 4.25%, due
05/31/00....................................... 2,880,625*
$ 1,880,000 Renal Treatment Centers, Inc., 5.625%, due
07/15/06....................................... 1,802,450*
$ 2,720,000 Sterling House Corp., 6.75%, due 06/30/06....... 1,972,000*
$ 5,010,000 Tenet Healthcare Corp., Exchangeable Vencor,
Inc., 6%, due 12/01/05......................... 5,276,783
$ 815,000 Vivra, Inc., 5%, due 07/01/01................... 804,813
$ 2,685,000 Vivra, Inc., 5%, due 07/01/01................... 2,648,081*
-----------
Total Healthcare.............................. 39,055,502
-----------
</TABLE>
* Restricted security. (See Note 8)
**Non-income producing.
See accompanying Notes to Financial Statements.
B-19
<PAGE>
- --------------------------------------------------------------------------------
[LOGO TCW CONVERTIBLE SECURITIES FUND, INC.
OF TCW] Schedule of Investments (continued)
December 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number of
Shares or
Principal
Amount Value
--------- -----
<C> <S> <C>
RETAIL (8.5%)
$2,600,000 Charming Shoppes, Inc., 7.5%, due 07/15/06.......... $ 2,512,250
$2,475,000 Federated Department Stores, Inc., 5%, due 10/01/03. 2,880,281
$4,500,000 Home Depot, Inc., 3.25%, due 10/01/01............... 4,387,500
56,200 Kmart Corp., $3.875 Convertible Preferred........... 2,739,750
$2,630,000 Nine West Group, Inc., 5.5%, due 07/15/03........... 2,630,000*
$7,695,000 Staples, Inc., 4.5%, due 10/01/00................... 7,877,756*
------------
Total Retail...................................... 23,027,537
------------
SERVICES--BUSINESS (9.0%)
$7,690,000 Corporate Express, 4.5%, due 07/01/00............... 7,132,475*
$1,525,000 Leasing Solution, 6.875%, due 10/01/03.............. 1,519,281
$5,250,000 Omnicom Group, Inc., 4.25%, due 01/03/07............ 5,361,563*
24,500 SCI Finance LLC, Exchangeable Service Corporation
International, $3.125 Convertible Preferred........ 2,306,063
$2,590,000 UBS Securities, Inc., Exchangeable Electronic Data
Systems, 2%, due 05/22/02.......................... 2,382,800
$3,280,000 U.S. Office Products Company, 5.5%, due 05/15/03.... 3,070,900
54,300 Vanstar Corp., $3.75 Convertible Preferred.......... 2,810,025*
------------
Total Services--Business.......................... 24,583,107
------------
SUPPLY DISTRIBUTION (0.8%)
$2,265,000 Central Garden and Pet Company, 6%, due 11/15/03.... 2,248,012*
------------
TOTAL CONSUMER STAPLES (Cost: $130,993,387)....... 132,777,040
------------
</TABLE>
<TABLE>
<CAPTION>
Number of
Shares or
Principal
Amount Value
--------- -----
<C> <S> <C>
CONSUMER CYCLICALS
(COST: $2,545,952) (1.1%)
AUTOMOTIVE (1.1%)
$2,500,000 Magna International, Inc., (Canada), 5%, due
10/15/02........................................... $ 2,878,124
-----------
CAPITAL GOODS (33.3%)
AEROSPACE AND CONGLOMERATES (3.2%)
$2,675,000 Hexcel Corp., 7%, due 08/01/03...................... 3,337,063
53,200 Loral Space and Communications Ltd., (Bermuda),
$3.00 Convertible Preferred........................ 3,005,800*
$2,080,000 Titan Corp., 8.25%, due 11/01/03.................... 2,282,800
-----------
Total Aerospace and Conglomerates................. 8,625,663
-----------
BUILDING MATERIALS (2.3%)
$3,000,000 New World Infrastructure, (Hong Kong), 5%, due
07/15/01........................................... 3,551,250*
47,600 Owens-Corning Fiberglass Corp., $3.25 Convertible
Preferred.......................................... 2,725,100*
-----------
Total Building Materials.......................... 6,276,350
-----------
ELECTRICAL INSTRUMENTS AND COMMUNICATION EQUIPMENT
(0.8%)
$1,905,000 Metricom, Inc., 8%, due 09/15/03.................... 2,228,850*
-----------
ELECTRONICS--SEMICONDUCTORS AND INSTRUMENTS (7.2%)
$3,175,000 Analog Devices, Inc., 3.5%, due 12/01/00............ 4,405,313
$2,215,000 C-Cube Microsystems, Inc., 5.875%, due 11/01/05..... 2,765,981
$2,430,000 General Instrument Corp., 5%, due 06/15/00.......... 2,600,100
$2,500,000 Richey Electronics, Inc., 7%, due 03/01/06.......... 2,503,125*
$2,455,000 SCI Systems, Inc., 5%, due 05/01/06................. 2,823,250*
</TABLE>
* Restricted security. (See Note 8)
**Non-income producing.
See accompanying Notes to Financial Statements.
B-20
<PAGE>
- --------------------------------------------------------------------------------
[LOGO TCW CONVERTIBLE SECURITIES FUND, INC.
OF TCW] Schedule of Investments (continued)
December 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number of
Shares or
Principal
Amount Value
--------- -----
<C> <S> <C>
$ 4,500,000 XILINX, Inc., 5.25%, due 11/01/02............... $ 4,477,500*
-----------
Total Electronics--Semiconductors and
Instruments................................. 19,575,269
-----------
INFORMATION PROCESSING (6.5%)
41,000 Morgan Stanley Group, Inc., Exchangeable Cisco
Systems, Inc., $4.00 Convertible Preferred..... 2,665,000
$ 3,830,000 Quantum Corp., 5%, due 03/01/03................. 5,338,062*
$10,000,000 Silicon Graphics, Inc., 0%, due 11/02/13........ 5,262,500* **
$ 3,190,000 Storage Technology Corp., 8%, due 05/31/15...... 4,258,650
-----------
Total Information Processing.................. 17,524,212
-----------
POLLUTION CONTROL (8.6%)
$ 2,830,000 Molten Metal Technology, Inc., 5.5%, due
05/01/06....................................... 1,938,550*
$ 9,065,000 Thermo Electron Corp., 4.25%, due 01/01/03...... 10,685,368*
$ 8,725,000 United States Filter Corp., 4.5%, due 12/15/01.. 8,450,844
$ 350,000 United Waste Systems, Inc., 4.5%, due 06/01/01.. 420,875*
$ 1,610,000 United Waste Systems, Inc., 6.0%, due 06/01/01.. 1,925,963*
-----------
Total Pollution Control....................... 23,421,600
-----------
TELECOMMUNICATION EQUIPMENT (4.7%)
50,000 Corning Delaware, $3.00 Convertible Preferred... 3,181,250
56,200 Motorola, Inc., Common Stock.................... 3,449,275
$ 7,930,000 Motorola, Inc., 0%, due 09/27/13................ 6,145,750**
-----------
Total Telecommunications Equipment............ 12,776,275
-----------
TOTAL CAPITAL GOODS
(Cost: $81,600,748)......................... 90,428,219
-----------
</TABLE>
<TABLE>
<CAPTION>
Number of
Shares or
Principal
Amount Value
--------- -----
<C> <S> <C>
BASIC INDUSTRIES (5.6%)
METALS (1.6%)
95,600 Freeport-McMoran Copper & Gold, Inc., $1.25
Convertible Preferred............................. $ 2,652,900
63,700 USX-Marathon Group, Exchangeable RMI Titanium
Corp., $6.75 Convertible Preferred................ 1,672,125
-----------
Total Metals..................................... 4,325,025
-----------
OIL AND GAS--DOMESTIC (2.0%)
$ 2,180,000 Apache Corp., Euro, 6%,
due 01/15/02...................................... 2,735,900
46,500 Occidental Petroleum Corp., $3.875 Convertible
Preferred......................................... 2,638,875*
-----------
Total Oil and Gas--
Domestic....................................... 5,374,775
-----------
OIL AND GAS--INTERNATIONAL (0.9%)
43,300 Occidental Petroleum Corp., Exchangeable Canadian
Occidental Petroleum,
$3.00 Convertible Preferred (Canada).............. 2,554,700
-----------
PAPER AND PACKAGING (1.1%)
55,000 Crown Cork & Seal Company, Inc., $1.88 Convertible
Preferred......................................... 2,860,000
-----------
TOTAL BASIC INDUSTRIES (Cost: $13,188,123)....... 15,114,500
-----------
CREDIT SENSITIVE (13.0%)
BUILDING, REAL ESTATE AND REIT'S (4.2%)
40,000 Insignia Financial Group, Inc., $3.25 Convertible
Preferred......................................... 2,110,000*
$ 2,605,000 Liberty Property Trust, 8%,
due 07/01/01...................................... 3,344,168
</TABLE>
*Restricted security. (See Note 8)
** Non-income producing.
See accompanying Notes to Financial Statements.
B-21
<PAGE>
- --------------------------------------------------------------------------------
[LOGO TCW CONVERTIBLE SECURITIES FUND, INC.
OF TCW] Schedule of Investments (continued)
December 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number of
Shares or
Principal
Amount Value
--------- -----
<C> <S> <C>
$2,010,000 LTC Properties, Inc., 8.25%, due 07/01/01........... $ 2,140,650
$3,180,000 LTC Properties, Inc., 8.5%, due 01/01/01............ 3,772,275
-----------
Total Building, Real Estate, and REIT's........... 11,367,093
-----------
INSURANCE (3.8%)
61,000 Allstate Corp., Exchangeable PMI Group, Inc., $2.30
Convertible Preferred.............................. 2,882,250
29,800 American Bankers Insurance Group, $3.125 Convertible
Preferred.......................................... 1,778,688
43,200 Penncorp Financial, $3.50 Convertible Preferred..... 2,575,800*
95,300 Salomon, Inc., Exchangeable Financial Security
Assurance Holdings, Ltd., $2.30 Convertible
Preferred.......................................... 2,906,650
-----------
Total Insurance................................... 10,143,388
-----------
SERVICES--FINANCIAL, BANKING AND MISCELLANEOUS
(4.0%)
$3,090,000 Berkshire Hathaway, Inc., Exchangeable Salomon,
Inc., 1%, due 12/02/01............................. 2,835,075
$2,500,000 MBL International Finance Bermuda Trust,
Exchangeable Mitsubishi Bank, Ltd., (Japan), 3%,
due 11/30/02....................................... 2,625,000
$2,290,000 Southern Pacific Funding Corp., 6.75%, due 10/15/06. 2,447,437
70,000 SunAmerica Corp., $3.188 Convertible Preferred...... 2,957,500
-----------
Total Services--Financial,
Banking and Miscellaneous........................ 10,865,012
-----------
</TABLE>
<TABLE>
<CAPTION>
Principal
Amount Value
--------- -----
<C> <S> <C>
UTILITIES--GAS AND ELECTRIC (1.0%)
$ 2,765,000 Korea Electric Power Company, (South Korea), 5%,
due 08/01/01..................................... $ 2,765,000
------------
TOTAL CREDIT SENSITIVE
(Cost: $31,588,497)............................ 35,140,493
------------
REPURCHASE AGREEMENTS (5.7%)
$ 15,349 Stock Loan Repurchase,
Bear Stearns & Co., Inc., dated 12/31/96, 3.25%,
due 01/02/97 (collateralized by $20,000 U.S.
Treasury Bill, valued at $20,037)................ 15,349
$10,523,320 Stock Loan Repurchase,
Bear Stearns & Co., Inc., dated 12/31/96, 6.625%,
due 01/02/97 (collateralized by $10,835,000 U.S.
Treasury Bill, valued at $10,737,810)............ 10,523,320
$ 4,908,567 Cash Repurchase Agreement, Bear Stearns & Co.,
Inc., dated 12/31/96, 6.5%,
due 01/02/97 (collateralized by $5,035,000 U.S.
Treasury Bill, valued at $5,011,677)............. 4,908,567
------------
TOTAL REPURCHASE AGREEMENTS
(Cost: $15,447,236)............................ 15,447,236
------------
TOTAL INVESTMENTS (107.6%) (COST: $275,363,943). 291,785,612
------------
EXCESS OF LIABILITIES OVER OTHER ASSETS
(-7.6%)........................................ (20,518,915)
------------
NET ASSETS (100%)............................... $271,266,697
============
</TABLE>
*Restricted security. (See Note 8)
See accompanying Notes to Financial Statements.
B-22
<PAGE>
- --------------------------------------------------------------------------------
[LOGO TCW CONVERTIBLE SECURITIES FUND, INC.
OF TCW] Statement of Assets and Liabilities
December 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Investments at Value (Cost $275,363,943) (Note 1).............. $291,785,612
Receivables for Securities Sold................................ 4,455,625
Interest Receivable............................................ 2,372,835
Dividends Receivable........................................... 74,294
------------
Total Assets................................................. 298,688,366
------------
LIABILITIES:
Payables for Securities Purchased.............................. 5,291,675
Payable upon Return of Securities Loaned (Note 5).............. 10,538,669
Distributions Payable.......................................... 11,162,987
Accrued Investment Advisory and Service Fees (Note 3).......... 280,091
Accounts Payable............................................... 148,247
------------
Total Liabilities............................................ 27,421,669
------------
NET ASSETS....................................................... $271,266,697
============
Net Assets were comprised of:
Common Stock, par value $0.01 per share, (50,000,000 shares au-
thorized, 31,894,249 shares issued and outstanding)........... $ 318,942
Paid-in Capital................................................ 288,166,441
Distribution of Paid-in Capital (Note 1)....................... (34,179,879)
Net Unrealized Appreciation of Investments..................... 16,421,669
Accumulated Undistributed Net Realized Gains on Investments ... 539,524
------------
NET ASSETS....................................................... $271,266,697
============
NET ASSET VALUE PER SHARE........................................ $ 8.51
============
</TABLE>
See accompanying Notes to Financial Statements.
B-23
<PAGE>
- --------------------------------------------------------------------------------
[LOGO TCW CONVERTIBLE SECURITIES FUND, INC.
OF TCW] Statement of Operations
Year Ended December 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest (Note 1) (including security lending fees of $43,491)... $10,807,997
Dividends (Note 1)............................................... 2,585,041
-----------
Total Investment Income........................................ 13,393,038
-----------
EXPENSES:
Investment Advisory Fees (Note 3)................................ 1,625,243
Custodian Fees................................................... 111,964
Transfer Agent Fees.............................................. 85,234
Proxy Costs...................................................... 65,177
Directors' Fees and Expenses (Note 6)............................ 52,342
Printing and Distribution Costs.................................. 47,184
Listing Fees..................................................... 33,570
Audit and Tax Service Fees....................................... 30,085
Accounting and Other Service Fees (Note 3)....................... 25,000
Insurance Costs.................................................. 21,400
Business Tax Fees................................................ 11,990
Legal Fees (Note 6).............................................. 4,432
Miscellaneous.................................................... 503
-----------
Total Expenses................................................. 2,114,124
-----------
Net Investment Income.......................................... 11,278,914
-----------
NET REALIZED GAINS AND CHANGE IN UNREALIZED APPRECIATION
OF INVESTMENTS:
Net Realized Gains on Investments................................ 24,933,292
Change in Unrealized Appreciation of Investments................. (382,158)
-----------
Net Realized Gains and Change in Unrealized
Appreciation of Investments................................... 24,551,134
-----------
INCREASE IN NET ASSETS RESULTING FROM OPERATIONS................... $35,830,048
===========
</TABLE>
See accompanying Notes to Financial Statements.
B-24
<PAGE>
- --------------------------------------------------------------------------------
[LOGO TCW CONVERTIBLE SECURITIES FUND, INC.
OF TCW] Statements of Changes in Net Assets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, 1996 December 31, 1995
----------------- -----------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net Investment Income.................... $ 11,278,914 $ 11,649,611
Net Realized Gains on Investments........ 24,933,292 15,154,221
Change in Unrealized Appreciation of
Investments............................. (382,158) 27,541,572
------------ ------------
Increase in Net Assets Resulting from
Operations............................ 35,830,048 54,345,404
------------ ------------
Distributions to Shareholders:
From Net Investment Income............... (11,278,914) (11,649,611)
From Net Realized Gains on Investments... (19,904,764) (10,376,404)
Distribution in Excess of Net Realized
Gains................................... -- (4,489,004)
------------ ------------
Total Distributions to Shareholders.... (31,183,678) (26,515,019)
------------ ------------
Capital Share Transactions:
Shares Issued in Reinvestment of
Dividends (233,869 for the year ended
December 31, 1996 and 260,547 for the
year ended December 31, 1995)........... 2,012,418 2,091,302
------------ ------------
Total Increase in Net Assets........... 6,658,788 29,921,687
NET ASSETS:
Beginning of Year.......................... 264,607,909 234,686,222
------------ ------------
End of Year................................ $271,266,697 $264,607,909
============ ============
</TABLE>
See accompanying Notes to Financial Statements.
B-25
<PAGE>
- --------------------------------------------------------------------------------
[LOGO TCW CONVERTIBLE SECURITIES FUND, INC.
OF TCW] Notes to Financial Statements
- --------------------------------------------------------------------------------
NOTE 1--SIGNIFICANT ACCOUNTING POLICIES:
TCW Convertible Securities Fund, Inc. (the "Fund") was incorporated in Mary-
land on January 13, 1987 as a diversified, closed-end management investment
company and is registered under the Investment Company Act of 1940, as amend-
ed. The Fund commenced operations on March 5, 1987. The Fund's investment ob-
jective is to seek a total investment return, comprised of current income and
capital appreciation through investment principally in convertible securities.
The preparation of the accompanying financial statements requires management
to make estimates and assumptions that affect the reported amounts of assets
and liabilities at the date of the financial statements and the reported
amounts of income and expenses during the reporting period. Actual results
could differ from those estimates.
The following is a summary of the significant accounting policies
consistently followed by the Fund in the preparation of its financial
statements. The policies are in conformity with generally accepted accounting
principles.
SECURITY VALUATION: Securities traded on national exchanges are valued at the
last reported sales price or the mean of the current bid and asked prices if
there are no sales in the trading period immediately preceding the time of de-
termination. Other securities which are traded on the over-the-counter market
are valued at the mean of the current bid and asked prices. Short-term debt
securities with maturities of 60 days or less at the time of purchase are val-
ued at amortized cost. Securities for which quotations are not readily avail-
able and unregistered securities are valued at fair value as determined in
good faith by, or under the direction of, the Board of Directors.
SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME: Security transactions are
recorded on the trade date. Dividend income is recorded on the ex-dividend
date, while interest income is recorded on the accrual basis. Original issue
discount is accreted as interest income using a constant yield to maturity.
Discounts on securities purchased are recognized as interest income at the
time the security is sold using a constant yield to maturity. Premiums on
securities purchased are not amortized. Realized and unrealized gains and
losses on investments are recorded on the basis of identified cost.
DISTRIBUTIONS: The Fund's Board of Directors has adopted a policy under which
it has declared quarterly dividends of $0.21 per share. Payments to
shareholders under the distribution policy are reflected in the financial
statements in the following order; first from net investment income and,
depending upon the results achieved each year, secondly from net realized
capital gains, thirdly as a distribution in excess of net investment income or
capital gains which may become taxable to shareholders in the subsequent year
and, lastly, as a return of capital which is not taxable to shareholders.
Income and capital gain distributions are determined in accordance with in-
come tax regulations which may differ from generally accepted accounting prin-
ciples. These differences are primarily due to differing treatments for losses
deferred due to wash sales and spillover distributions. Permanent book and tax
basis differences relating to shareholder distributions will result in reclas-
sifications to paid in capital and may affect net investment income per share.
REPURCHASE AGREEMENT: The Fund may invest in repurchase agreements secured by
U.S. Government Securities. A repurchase agreement arises when the Fund pur-
chases a security and simultaneously agrees to resell it to the seller at an
agreed upon future date. The Fund requires the seller to maintain the value of
the securities, marked to market daily, at not less than the repurchase price.
If the seller defaults on its repurchase obligation, the Fund could suffer de-
lays, collection expenses and losses to the extent that the proceeds from the
sale of the collateral are less than the repurchase price.
B-26
<PAGE>
- --------------------------------------------------------------------------------
[LOGO TCW CONVERTIBLE SECURITIES FUND, INC.
OF TCW] Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
NOTE 2--FEDERAL INCOME TAXES:
It is the policy of the Fund to comply with the requirements of the Internal
Revenue Code applicable to regulated investment companies and distribute all
of its net taxable income, including any net realized gains on investments, to
its shareholders. Therefore, no federal income tax provision is required.
During the year ended December 31, 1996, the Fund realized on a tax basis net
realized gains of $24,933,292 on security transactions.
As of December 31, 1996, net unrealized appreciation (depreciation) for fed-
eral income tax purposes is comprised of the following components:
<TABLE>
<S> <C>
Appreciated securities............................................ $ 21,049,910
Depreciated securities............................................ (4,740,670)
------------
Net unrealized appreciation....................................... $ 16,309,240
============
Cost of securities for federal income tax purposes................ $275,476,372
============
</TABLE>
NOTE 3--INVESTMENT ADVISORY AND SERVICE FEES:
TCW Funds Management, Inc. is the Investment Adviser of the Fund and also
furnishes the Fund with accounting and other services and office space. As
compensation for the services rendered, facilities provided, and expenses
borne, the Adviser is paid a monthly fee by the Fund computed at the annual
rate of 0.75% of the first $100 million of the Fund's average net assets and
0.50% of the Fund's average net assets in excess of $100 million. In addition,
the Fund reimburses the Adviser for the costs of providing accounting services
to the Fund (up to a maximum of $25,000 per year).
NOTE 4--PURCHASES AND SALES OF SECURITIES:
For the year ended December 31, 1996, purchases and sales or maturities of
investment securities (excluding short-term investments) aggregated
$342,257,454 and $360,286,519, respectively. There were no purchases or sales
of U.S. Government securities for the year ended December 31, 1996.
NOTE 5--SECURITY LENDING:
During the year ended December 31, 1996, the Fund lent securities to a bro-
ker. The broker provided collateral, which must be maintained at not less than
100% of the value of the loaned securities, to secure the obligation. At De-
cember 31, 1996, the cash received from the borrowing broker was invested in
overnight repurchase agreements issued by the borrowing broker which, in turn,
were collateralized by U.S. Treasury securities valued at $10,757,847, or
102%, of the value of the loaned securities.
NOTE 6--DIRECTORS' AND LEGAL FEES:
Directors who are not affiliated with the Investment Adviser received, as a
group, aggregate fees and expenses of $52,342 from the Fund for the year ended
December 31, 1996. Legal fees totaled $4,432 of which $2,986 were paid to
O'Melveny & Myers, of which an individual who is of counsel, serves as a di-
rector of the Fund. Certain officers and/or directors of the Fund are also of-
ficers and/or directors of the Investment Adviser.
NOTE 7--REPORT OF ANNUAL MEETING OF SHAREHOLDERS:
The Annual Meeting of Shareholders of the Fund was held on May 22, 1996. At
the meeting, the following matters were submitted to a shareholder vote and
approved by a vote of a majority of the Fund's outstanding voting securities:
(i) the election of Ernest O. Ellison, Norman Barker, Jr., Richard W. Call,
Edmund W. Clarke, Coleman W. Morton, Charles A. Parker, Lawrence J. Sheehan
and Robert G. Sims as Directors to serve until the next annual meeting of the
Fund's shareholders and until their successors are elected and qualify (each
Director received 25,143,288 affirmative votes; votes withheld 249,992 and ex-
ceptions 253,931); (ii) Renewal of the Investment Advisory and Management
Agreement for another annual period (votes for: 24,732,136; votes against
390,891 and abstentions 524,184); and (iii) the ratification of the
B-27
<PAGE>
- --------------------------------------------------------------------------------
[LOGO TCW CONVERTIBLE SECURITIES FUND, INC.
OF TCW] Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
selection of Deloitte & Touche LLP as independent auditors of the Fund for the
fiscal year ending December 31, 1996 (votes for: 25,120,530; votes against
194,289 and abstentions 332,392). 31,718,395 shares were outstanding on the
record date for this meeting and 25,647,211 shares entitled to vote were
present in person or by proxy at the meeting.
NOTE 8--RESTRICTED SECURITIES:
The following restricted securities held by the Fund at December 31, 1996 were
valued both at the date of acquisition and December 31, 1996, in accordance
with the Security Valuation policy of the Fund described in Note 1. The
restricted securities were purchased in private placement transactions without
registration under the Securities Act of 1933. Such securities generally may be
sold only in a privately negotiated transaction with a limited number of
purchasers, in a public offering registered under the Securities Act of 1933
(the "1933 Act") or in accordance with Rule 144A under the 1933 Act. The Fund
may classify a Rule 144A security as liquid if it can be reasonably expected
that the Fund would be able to dispose of the security within seven days in the
ordinary course of business at approximately its carrying value. Rule 144A
securities for which such a determination is not made and other restricted
securities are deemed illiquid and are subject to an aggregate limitation of no
more than 15% of the Fund's investment portfolio. The Fund will bear any costs
incurred in connection with the disposition of restricted securities. The total
value of restricted securities at December 31, 1996 is $127,783,493, which
represents 47.1% of net assets. The total value of illiquid securities at
December 31, 1996 is $8,262,162, which represents 3.0% of net assets.
B-28
<PAGE>
- --------------------------------------------------------------------------------
[LOGO TCW CONVERTIBLE SECURITIES FUND, INC.
OF TCW] Notes to Financial Statements (continued)
December 31, 1996
- --------------------------------------------------------------------------------
NOTE 8--RESTRICTED SECURITIES (CONTINUED)
<TABLE>
<CAPTION>
Number of
Shares or
Principal Date of
Amount Acquisition Cost
--------- ----------- ----------
<C> <S> <C> <C>
$1,345,000 ARV Assisted Living, Inc., 6.75%, due
04/01/06................................. 03/28/96 $1,345,000
$ 540,000 Assisted Living Concepts, Inc., 7%, due
07/31/05................................. 08/02/95 540,000*
$2,265,000 Central Garden and Pet Company, 6%, due
11/15/03................................. 11/12/96 2,265,000
$7,690,000 Corporate Express, 4.5%, due 07/01/00..... 06/19/96 7,530,064
$1,195,000 Emeritus Corp., 6.25%, due 01/01/06....... 02/08/96 1,195,000*
52,500 Golden Books Family Entertainment, Inc.,
$4.375 Convertible Preferred............. 08/14/96 2,658,238
54,000 Host Marriott Financial Trust, $3.375
Convertible Preferred.................... 11/25/96 2,700,000
$2,300,000 Imax Corp., 5.75%, due 04/01/03........... 04/02/96 2,300,000
40,000 Insignia Financial Group, Inc., $3.25
Convertible Preferred.................... 10/28/96 2,000,000
53,200 Loral Space and Communications Ltd.,
(Bermuda) $3.00 Convertible Preferred.... 11/01/96 2,660,000
$4,995,000 Marriott Corp., 0%, due 03/25/11.......... 03/19/96 2,752,265
$1,905,000 Metricom, Inc., 8%, due 09/15/03.......... 08/20/96 1,905,000*
</TABLE>
<TABLE>
<CAPTION>
Number of
Shares or
Principal Date of
Amount Acquisition Cost
--------- ----------- ----------
<C> <S> <C> <C>
$2,830,000 Molten Metal Technology, Inc., 5.5%, due
05/01/96.................................. 04/26/96 $2,819,853
$3,000,000 New World Infrastructure, (Hong Kong) 5.5%,
due 07/15/01.............................. 05/15/96 3,000,000
$2,630,000 Nine West Group, Inc., 5.5%, due 07/15/03.. 06/20/96 2,658,723
46,500 Occidental Petroleum Corp., $3.875
Convertible Preferred..................... 08/03/94 2,530,076
$2,710,000 OccuSystems Inc., 6%, due 12/15/01......... 12/19/96 2,710,000
$5,250,000 Omnicom Group, Inc. 4.25%, due 01/03/07.... 08/18/96 5,291,675
47,600 Owens-Corning Fiberglass Corp., $3.25
Convertible Preferred..................... 05/03/95 2,380,000
43,200 Penncorp Financial, $3.50 Convertible
Preferred................................. 08/02/96 2,160,000
$3,330,000 PhyMatrix Corp., 6.75%, due 06/15/03....... 06/21/96 3,311,771
$2,880,000 Physician Resource, 6%, due 12/01/01....... 12/06/96 2,879,035
$3,830,000 Quantum Corp., 5%, due 03/01/03............ 02/21/96 3,886,215
$2,750,000 Quintiles Transnational Corp., 4.25%, due
05/31/00.................................. 04/23/96 2,757,313
</TABLE>
*Illiquid security.
B-29
<PAGE>
- --------------------------------------------------------------------------------
[LOGO TCW CONVERTIBLE SECURITIES FUND, INC.
OF TCW] Notes to Financial Statements (continued)
December 31, 1996
- --------------------------------------------------------------------------------
NOTE 8--RESTRICTED SECURITIES (CONTINUED)
<TABLE>
<CAPTION>
Number of
Shares or
Principal Date of
Amount Acquisition Cost
--------- ----------- ----------
<C> <S> <C> <C>
$ 1,880,000 Renal Treatment Centers, Inc., 5.625%,
due 07/15/06............................ 06/06/96 $1,880,538
$ 2,500,000 Richey Electronics, Inc., 7%, due
03/01/06................................ 02/21/96 2,500,000*
$ 5,545,000 Sandoz Capital BVI, Ltd., (Switzerland),
2%, due 10/06/02........................ 09/28/95 5,133,571
$ 3,610,000 Scholastic Corp., 5%, due 08/15/05....... 08/04/95 3,699,513
$ 2,455,000 SCI Systems, Inc., 5%, due 05/01/06...... 04/17/96 2,455,000
$ 2,405,000 Sepracor, Inc., 7%, due 12/01/02......... 11/01/95 2,395,495
39,200 SFX Broadcasting, Inc., $3.25 Convertible
Preferred............................... 05/22/96 1,960,000
$10,000,000 Silicon Graphics, Inc., 0%, due 11/02/13. 12/22/95 5,193,121
$ 7,695,000 Staples, Inc., 4.5%, due 10/01/00........ 09/12/95 7,788,877
$ 2,720,000 Sterling House Corp., 6.75%, due
06/30/06................................ 05/17/96 2,710,533*
$ 9,065,000 Thermo Electron Corp., 4.25%, due
01/01/03................................ 11/28/95 9,480,267
$ 350,000 United Waste Systems, Inc., 4.5%, due
06/01/01................................ 05/14/96 350,000
$ 1,610,000 United Waste Systems, Inc., 6.0%, due
06/01/01................................ 05/31/96 1,610,000
</TABLE>
<TABLE>
<CAPTION>
Number of
Shares or
Principal Date of
Amount Acquisition Cost
--------- ----------- ----------
<C> <S> <C> <C>
54,300 Vanstar Corp., $3.75 Convertible Preferred. 09/27/96 $2,747,338
$2,685,000 Vivra, Inc., 5%, due 07/01/01.............. 07/02/96 2,685,000
$4,500,000 XILINX, Inc., 5.25%, due 11/01/02.......... 11/07/95 4,384,494
</TABLE>
*Illiquid security.
NOTE 9--SUBSEQUENT EVENT (UNAUDITED):
On February 19, 1997, the Board of Directors ratified the action of the
Board's Executive Committee taken on February 4, 1997, which authorized the
filing of a Registration Statement to effect an offering of 6,378,850 shares of
the Fund. Such Registration Statement was filed with the U.S. Securities and
Exchange Commission on February 5, 1997.
B-30
<PAGE>
- --------------------------------------------------------------------------------
[LOGO TCW CONVERTIBLE SECURITIES FUND, INC.
OF TCW] Financial Highlights
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991 1990 1989 1988
-------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value Per
Share, Beginning of
Period............... $ 8.36 $ 7.47 $ 8.79 $ 8.36 $ 8.09 $ 6.85 $ 8.36 $ 7.99 $ 7.76
-------- -------- -------- -------- -------- -------- -------- -------- --------
Income from Opera-
tions:
Net Investment
Income............... 0.36 0.37 0.38 0.40 0.41 0.43 0.46 0.50 0.55
Impact to Capital for
Shares Issued........ -- -- -- (0.01) (0.01) -- -- -- --
Net Realized and
Unrealized Gains
(Losses) on Securi-
ties................. 0.77 1.36 (0.86) 1.25 0.71 1.65 (1.13) 0.71 0.44
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total from
Investment
Operations........ 1.13 1.73 (0.48) 1.64 1.11 2.08 (0.67) 1.21 0.99
Less Distributions:
Distributions from
Net Investment
Income............... (0.36) (0.37) (0.38) (0.40) (0.41) (0.43) (0.46) (0.50) (0.55)
Distributions from
Net Realized Gains... (0.62) (0.33) (0.30) (0.81) (0.07) -- -- (0.06) --
Distributions in
Excess of
Net Realized Gains... -- (0.14) (0.16) -- -- -- -- -- --
Return of Capital .... -- -- -- -- (0.36) (0.41) (0.38) (0.28) (0.21)
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total
Distributions..... (0.98) (0.84) (0.84) (1.21) (0.84) (0.84) (0.84) (0.84) (0.76)
-------- -------- -------- -------- -------- -------- -------- -------- --------
Net Asset Value Per
Share, End of Period. $ 8.51 $ 8.36 $ 7.47 $ 8.79 $ 8.36 $ 8.09 $ 6.85 $ 8.36 $ 7.99
======== ======== ======== ======== ======== ======== ======== ======== ========
Total Investment
Return (3)........... 11.75% 33.6% (7.43)% 13.77% 15.90% 41.38% (3.78)% 20.23% 24.79%
Net Asset Value Total
Return (4)........... 13.94% 24.0% (5.70)% 16.12% 13.35% 31.20% (8.25)% 15.97% 13.24%
RATIOS/SUPPLEMENTAL
DATA:
Net Assets, End of
Period
(in thousands)....... $271,267 $264,608 $234,686 $273,230 $215,208 $172,331 $144,593 $175,732 $167,797
Ratio of Expenses to
Average Net Assets... 0.77% 0.81% 0.79% 0.80% 0.88% 0.94% 0.94% 0.95% 0.94%
Ratio of Net
Investment Income to
Average Net Assets... 4.12% 4.60% 4.66% 4.48% 5.04% 5.68% 5.93% 5.90% 6.66%
Portfolio Turnover
Rate................. 125.72% 108.98% 110.04% 173.79% 139.39% 114.13% 99.53% 84.17% 70.62%
Average Commission
Rate Paid by the Fund
(6).................. $ 0.06 N/A N/A N/A N/A N/A N/A N/A N/A
<CAPTION>
March 5, 1987
(Commencement)
to
December 31,
1987
-------------
<S> <C>
Net Asset Value Per
Share, Beginning of
Period............... $ 9.30 (2)
--------
Income from Opera-
tions:
Net Investment
Income............... 0.46
Impact to Capital for
Shares Issued........ (0.03)
Net Realized and
Unrealized Gains
(Losses) on Securi-
ties................. (1.53)
--------
Total from
Investment
Operations........ (1.10)
Less Distributions:
Distributions from
Net Investment
Income............... (0.44)
Distributions from
Net Realized Gains... --
Distributions in
Excess of
Net Realized Gains... --
Return of Capital .... --
--------
Total
Distributions..... (0.44)
--------
Net Asset Value Per
Share, End of Period. $ 7.76
========
Total Investment
Return (3)........... (32.61)%(1)
Net Asset Value Total
Return (4)........... (13.49)%(1)
RATIOS/SUPPLEMENTAL
DATA:
Net Assets, End of
Period
(in thousands)....... $162,989
Ratio of Expenses to
Average Net Assets... 0.83 %(5)
Ratio of Net
Investment Income to
Average Net Assets... 6.12 %(5)
Portfolio Turnover
Rate................. 76.91 %(1)
Average Commission
Rate Paid by the Fund
(6).................. N/A
</TABLE>
(1) For the period March 5, 1987 (commencement) to December 31, 1987 and not
indicative of a full year's operating results.
(2) Net of underwriting discount of $0.70.
(3) Based on market value per share, adjusted for reinvestment of distributions.
(4) Based on net asset value per share, adjusted for reinvestment of distribu-
tions.
(5) Annualized.
(6) For fiscal years beginning on or after September 1, 1995, a fund is re-
quired to disclose its average commission rate per share for security
trades on which commissions are charged. This amount may vary form period
to period and fund to fund depending on the mix of trades executed in vari-
ous markets where trading practices and commission rate structures may dif-
fer.
See accompanying Notes to Financial Statements.
B-31
<PAGE>
- -------------------------------------------------------------------------------
[LOGO TCW CONVERTIBLE SECURITIES FUND, INC.
OF TCW] Independent Auditors' Report
- -------------------------------------------------------------------------------
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS
OF TCW CONVERTIBLE SECURITIES FUND, INC.:
We have audited the accompanying statement of assets and liabilities of TCW
Convertible Securities Fund, Inc. (the "Fund"), including the schedule of in-
vestments, as of December 31, 1996, the related statement of operations for
the year then ended, the statements of changes in net assets for each of the
two years in the period then ended, and the financial highlights for each of
the nine years in the period then ended and for the period March 5, 1987 (in-
ception) to December 31, 1987. These financial statements and financial high-
lights are the responsibility of the Fund's management. Our responsibility is
to express an opinion on these financial statements and financial highlights
based on our audits.
We conducted our audits in accordance with generally accepted auditing stan-
dards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements and financial highlights. Our procedures included confirmation of
securities owned as of December 31, 1996 by correspondence with the custodian
and brokers. Where confirmations were not received, we performed alternative
procedures. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the over-
all financial statement presentation. We believe our audits provide a reason-
able basis for our opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of
TCW Convertible Securities Fund, Inc. as of December 31, 1996, the results of
its operations for the year then ended, the changes in its net assets for each
of the two years in the period then ended, and the financial highlights for
each of the nine years in the period then ended and for the period March 5,
1987 (inception) to December 31, 1987 in conformity with generally accepted
accounting principles.
/s/ DELOITTE & TOUCHE LLP
February 10, 1997
Los Angeles, California
B-32
