AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 4, 1997
SECURITIES ACT FILE NO. 333-
INVESTMENT COMPANY ACT FILE NO. 811-05715
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------
FORM N-2
[x] REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
--------------------
[ ] PRE-EFFECTIVE AMENDMENT NO.
[ ] POST-EFFECTIVE AMENDMENT NO.
AND/OR
[x] REGISTRATION STATEMENT UNDER THE INVESTMENT
COMPANY ACT OF 1940 AMENDMENT NO. 1
(CHECK APPROPRIATE BOX OR BOXES)
--------------------
THE GABELLI CONVERTIBLE SECURITIES FUND, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
--------------------
ONE CORPORATE CENTER
RYE, NEW YORK 10580-1434
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (800) 422-3554
BRUCE N. ALPERT
THE GABELLI CONVERTIBLE SECURITIES FUND, INC.
ONE CORPORATE CENTER
RYE, NEW YORK 10580-1434
(914) 921-5105
(NAME AND ADDRESS OF AGENT FOR SERVICE)
--------------------
COPIES TO:
RICHARD T. PRINS, ESQ. JAMES E. MCKEE, ESQ. GARY S. SCHPERO, ESQ.
SKADDEN, ARPS, SLATE, THE GABELLI CONVERTIBLE SIMPSON THACHER &
MEAGHER & FLOM LLP SECURITIES FUND, INC. BARTLETT
919 THIRD AVENUE ONE CORPORATE CENTER 425 LEXINGTON AVENUE
NEW YORK, NEW YORK RYE, NEW YORK 10580-1434 NEW YORK, NEW YORK 10017
10022 (914) 921-5294 (212) 455-2000
(212) 735-3000
--------------------
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING: As soon as
practicable after the effective date of this Registration Statement.
If any securities being registered on this form will be offered
on a delayed or continuous basis in reliance on Rule 415 under the
Securities Act of 1933, as amended, other than securities offered in
connection with a dividend reinvestment plan, check the following box. []
It is proposed that this filing will become effective (check
appropriate box)
[ ] when declared effective pursuant to section 8(c)
If appropriate, check the following box: [ ] this [post-
effective] amendment designates a new effective date for a previously
filed [post-effective amendment] [registration statement].
[ ] This form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act and the
Securities Act registration statement number of the earlier effective
registration statement for the same offering is .
If delivery of the prospectus is expected to be made pursuant to
Rule 434, please check the following box. [x]
--------------------
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
<S> <C> <C> <C> <C>
PROPOSED MAXIMUM PROPOSED
MAXIMUM AGGREGATE AMOUNT OF
AMOUNT BEING OFFERING PRICE OFFERING REGISTRATION
TITLE OF SECURITIES BEING REGISTERED REGISTERED PER SHARE PRICE(1) FEE
% Cumulative Preferred Stock........ 120,000 Shares $25 $3,000,000 $909.10
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH
DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE
REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT
THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN
ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE
REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE
SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
----------------------------------------------
<TABLE>
<CAPTION>
CROSS-REFERENCE SHEET
PURSUANT TO RULE 481(a)
<S> <C> <C>
N-2 Item Number Location in Part A (Caption)
PART A
1. Outside Front Cover........................... Outside Front Cover Page
2. Inside Front and Outside Back Cover Page...... Outside Front Cover Page; Inside Front Cover Page
3. Fee Table and Synopsis........................ Not Applicable
4. Financial Highlights.......................... Financial Highlights
5. Plan of Distribution.......................... Outside Front Cover Page; Prospectus Summary;
Underwriting
6. Selling Shareholders.......................... Not Applicable
7. Use of Proceeds............................... Use of Proceeds; Investment Objective and Policies
8. General Description of the Registrant......... Outside Front Cover Page; Prospectus Summary; In-
vestment Objective and Policies; Convertible Securi-
ties; Other Investments; Derivative Investments;
Description of Common Stock
9. Management.................................... Outside Prospectus Summary; Management of the Fund;
Custodian, Transfer Agent and Dividend-Dis-
bursing Agent
10. Capital Stock, Long-Term Debt, and
Other Securities............................ Outside Front Cover Page; Prospectus Summary; Net -
Investment Income Equivalent Yield Tables; Capi-
talization; Investment Objective and Policies;
Description of Cumulative Preferred Stock; Descrip-
tion of Capital Stock and Other Securities; Taxation
11. Defaults and Arrears on Senior Securities..... Not Applicable
12. Legal Proceedings............................. Not Applicable
13. Table of Contents of the Statement of Table of Contents of the Statement of Additional
Additional Information.. Information
PART B Location in Statement of Additional Information
14. Cover Page.................................... Outside Front Cover Page
15. Table of Contents............................. Outside Front Cover Page
16. General Information and History............... Not Applicable
17. Investment Objective and Policies............. Convertible Securities; Other Investments; Derivative
Investments; Special Investment Methods
18. Management.................................... The Adviser; Directors and Officers
19. Control Persons and Principal Holders
of Securities............................... The Adviser; Directors and Officers
20. Investment Advisory and Other Services........ The Adviser; Directors and Officers
21. Brokerage Allocation and Other Practices...... Portfolio Transactions and Brokerage
22. Tax Status.................................... Dividends; Distributions and Taxes
23. Financial Statements.......................... Financial Statements; Dividends; Report of Independent
Accountants
</TABLE>
PART C
Information required to be included in Part C is set forth under
the appropriate Item, so numbered, in Part C to this Registration
Statement.
SUBJECT TO COMPLETION, DATED APRIL , 1997
PROSPECTUS
120,000 SHARES
THE GABELLI CONVERTIBLE SECURITIES FUND, INC.
% CUMULATIVE PREFERRED STOCK,
LIQUIDATION PREFERENCE $25 PER SHARE
--------------------
The ____% Cumulative Preferred Stock, liquidation preference $25
per share (the "Cumulative Preferred Stock"), to be issued by The Gabelli
Convertible Securities Fund, Inc. (the "Fund") will be senior securities
of the Fund. Prior to this offering, there has been no public market for
the Cumulative Preferred Stock. The Fund is a closed-end diversified
management investment company. The Fund's investment objective is to seek
a high level of total return on its assets. The Fund seeks to achieve its
investment objective through a combination of current income and capital
appreciation by investing primarily in "Convertible Securities." Gabelli
Funds, Inc. is the Fund's investment adviser.
Dividends on the Cumulative Preferred Stock offered hereby, at
the annual rate of ____% of the liquidation preference of $25 per share,
are cumulative from the Date of Original Issue thereof and are payable
quarterly on March [25], June [25], September [25] and December [25] in
each year, commencing on , 1997.
During the Fund's last four fiscal years, distributions paid by
the Fund on its Common Stock have consisted of net investment income and
net long-term capital gains, and under current market conditions it is
expected that dividends paid on the Cumulative Preferred Stock similarly
will consist of net investment income and net long-term capital gains. No
assurance can be given, however, as to what percentage, if any, of the
dividends paid on the Cumulative Preferred Stock will consist of net
long-term capital gains.
It is a condition to its issuance that the Cumulative Preferred
Stock be rated ['aaa'] by __________ (the "Rating Agency"). In connection
with the receipt of such rating, the composition of the Fund's portfolio
must reflect guidelines established by the Rating Agency and the Fund
will be required to maintain a minimum discounted asset coverage with
respect to the Cumulative Preferred Stock. See "Description of Cumulative
Preferred Stock -- Rating Agency Guidelines."
The Cumulative Preferred Stock is subject to mandatory
redemption in whole or in part by the Fund for cash at a price equal to
$25 per share plus accumulated but unpaid dividends (whether or not
earned or declared) (the "Redemption Price") if the Fund fails to
maintain the minimum asset coverage required by the Rating Agency and the
Investment Company Act of 1940, as amended. Commencing , ____ and
thereafter, the Fund at its option may redeem the Cumulative Preferred
Stock in whole or in part for cash at a price equal to the Redemption
Price. Prior to , _____, the Cumulative Preferred Stock will be
redeemable, at the option of the Fund, for cash at a price equal to the
Redemption Price, only to the extent necessary for the Fund to continue
to qualify for tax treatment as a regulated investment company. See
"Description of Cumulative Preferred Stock -- Redemption."
APPLICATION WILL BE MADE TO LIST THE CUMULATIVE PREFERRED STOCK ON THE
NEW YORK STOCK EXCHANGE (THE "NYSE"). TRADING OF THE CUMULATIVE
PREFERRED STOCK ON THE NYSE IS EXPECTED TO COMMENCE WITHIN
30 DAYS OF THE DATE OF THIS PROSPECTUS. SEE "UNDERWRITING."
--------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
============================================================================
UNDERWRITING
PRICE TO DISCOUNTS OR COM-
PUBLIC (1) MISSIONS(2) PROCEEDS TO FUND(3)
- ----------------------------------------------------------------------------
Per Share.... $ $
- ----------------------------------------------------------------------------
Total (3)....$ $
============================================================================
- --------------------
(1) Plus accumulated dividends, if any, from the Date of Original Issue.
(2) The Fund and the Adviser have agreed to indemnify the Underwriters
against certain liabilities, including liabilities under the Securities
Act of 1933, as amended.
(3) Before deducting offering expenses payable by the Fund, estimated
at $1,434,000.
---------------------
The shares of Cumulative Preferred Stock are being offered by
the Underwriters named herein, subject to prior sale, when, as and if
accepted by them and subject to certain conditions. It is expected that
certificates for the shares of Cumulative Preferred Stock will be
available for delivery on or about , 1997, at the offices of Smith Barney
Inc., 333 West 34th Street, New York, New York 10001.
--------------------
SMITH BARNEY INC. GABELLI & COMPANY, INC.
, 1997
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH
THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD
NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION
STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN
OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE
ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER,
SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR
QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
This Prospectus sets forth certain information an investor should know
before investing and should be retained for future reference.
A Statement of Additional Information dated , 1997 (the "SAI") has been
filed with the Securities and Exchange Commission and is incorporated by
reference in this Prospectus. The table of contents of the SAI appears on page
__ of this Prospectus. A copy of the SAI may be obtained without charge by
writing to the Fund at its address at One Corporate Center, Rye, New York
10580-1434 or calling the Fund toll-free at (800) 422-3554.
--------------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE MARKET PRICE OF THE
CUMULATIVE PREFERRED STOCK OF THE FUND, INCLUDING THE ENTRY OF STABILIZING
BIDS, SYNDICATE COVERING TRANSACTIONS OR THE IMPOSITION OF PENALTY BIDS. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
PROSPECTUS SUMMARY
The following information is qualified in its entirety by reference
to the more detailed information included elsewhere in this Prospectus
and the SAI. Capitalized terms not defined in this Summary are defined in
the Glossary that appears at the end of this Prospectus.
The Fund The Gabelli Convertible Securities
Fund, Inc. is a closed-end diversified
management investment company. Prior
to March 31, 1995, the Fund operated
as an open-end diversified management
investment company since commencement
of operations in July 3, 1989.
Investment Objective The Fund's investment objective is to
seek a high level of total return on
its assets. The Fund will seek to
achieve this objective through a
combination of current income and
capital appreciation by investing
primarily in securities which are
convertible into common stock or other
equity securities ("Convertible
Securities"). See "Investment Ob-
jective and Policies."
Special Characteristics
and Risks Convertible Securities are not typically
rated within the four highest
categories by the rating agencies and
are, therefore, not generally
investment grade. There is no minimum
rating which is acceptable for
investment by the Fund; however, it is
expected that not more than 50% of the
Fund's portfolio will consist of
securities rated CCC or lower by
Standard & Poor's Ratings Group or Caa
or lower by Moody's Investor Services,
Inc. or if unrated, of comparable
quality as determined by the Fund's
investment adviser. The Fund will,
however, limit its investments in
securities of issuers in default to
not more than 5% of its total assets.
The Fund may also invest in, among
other things, unregistered Convertible
Securities, securities of issuers
involved in corporate reorganizations,
warrants, rights, securities of
foreign issuers and forward
commitments for securities purchased
on a "when issued" or "delayed deliv-
ery" basis. See "Other Investments."
The Fund may also purchase or sell
options, engage in transactions in
financial futures and options thereon,
engage in short sales of securities
it owns or has the right to acquire,
enter into repurchase agreements and
forward foreign currency exchange con-
tracts, lend its portfolio securities
to securities broker-dealers or
financial institutions and borrow
money for short-term credits from
banks as may be necessary for the
clearance of portfolio transactions
and for temporary or emergency
purposes. These techniques may involve
special risks. See "Special Investment
Methods."
The Offering The Fund is offering 120,000 shares
of ___% Cumulative Preferred Stock,
par value $.001 per share, liquidation
preference $25 per share (the
"Cumulative Preferred Stock"), at a
purchase price of $25 per share.
Dividends Dividends on the Cumulative Preferred
Stock, at the annual rate of ____% of
the liquidation preference, are
cumulative from the Date of Original
Issue and are payable, when, as and if
declared by the Board of Directors of
the Fund, out of funds legally
available therefor, quarterly on March
[25], June [25], September [25] and
December [25] in each year, commencing
, 1997. See "Description of Cumula-
------------- tive Preferred Stock --
Dividends."
Potential Tax Benefit
to Certain Investors The Fund intends to allocate long-term
capital gain distributions, as well
as other types of income,
proportionately among holders of
shares of Common Stock and shares of
Cumulative Preferred Stock in
accordance with the current position
of the Internal Revenue Service
(the"IRS"). During the Fund's last
four fiscal years, distributions paid
by the Fund have consisted of net
long-term capital gains and net
investment income, and it is expected
that under current market conditions
dividends paid on the Cumulative Pre-
ferred Stock will likewise consist of
net long-term capital gains and net
investment income. Accordingly,
certain investors in the Cumulative
Preferred Stock may realize a tax
benefit to the extent that dividends
paid by the Fund on those shares are
composed of net long-term capital
gains taxed at long-term capital gains
rates. See "--Net Investment Income
Equivalent Yield Tables." Subject to
statutory limitations, investors may
also be entitled to offset the net
long-term capital gain portion of a
Cumulative Preferred Stock dividend
with capital losses incurred by such
investors. See "Taxation." No
assurance can be given, however, as to
what percentage, if any, of the
dividends paid on the Cumulative
Preferred Stock will consist of net
long-term capital gains. To the extent
that dividends on the shares of
Cumulative Preferred Stock are not
paid from net long-term capital gains,
they will be paid from net investment
income taxed at ordinary rates or
return of capital.
Rating It is a condition to their issuance
that the Cumulative Preferred Stock
be issued with a rating of ['aaa']
from __________ (the "Rating Agency"
or "__________")]. The Articles
Supplementary creating and fixing the
rights and preferences of the
Cumulative Preferred Stock (the
"Articles Supplementary") contain
certain provisions which reflect
guidelines established by the Rating
Agency (the "Rating Agency
Guidelines") in order to obtain such
rating on the Cumulative Preferred
Stock on the Date of Original Issue.
See "Description of Cumulative
Preferred Stock -- Rating Agency
Guidelines."
Asset Coverage In order to maintain the ['aaa'] rating
on the Cumulative Preferred Stock, the
Fund will be required to maintain
Adjusted Assets greater than or equal
to the Base Amount in accordance with
discount factors and guidelines
established by the Rating Agency.
Based on the Fun's portfolio, as of
March 31, 1997, this test would
translate into asset coverage of
395% which is greater than the 200%
required by the 1940 Act. See
"Description of Cumulative Preferred
Stock -- Rating Agency Guidelines."
Voting Rights At all times, holders of shares of
Cumulative Preferred Stock or any
other Preferred Stock, voting as a
single class, will be entitled to
elect two members of the Fund's Board
of Directors, and holders of
Cumulative Preferred Stock, any other
Preferred Stock and Common Stock,
voting as a single class, will elect
the remaining directors. However, upon
a failure by the Fund to pay dividends
on the Cumulative Preferred Stock or
any other Preferred Stock in an amount
equal to two full years' dividends,
holders of Cumulative Preferred Stock
and any other Preferred Stock of the
Fund, voting as a single class, will
have the right to elect the smallest
number of directors that would
constitute a majority of the directors
until all cumulative dividends have
been paid or provided for. Holders of
Cumulative Preferred Stock and any
other Preferred Stock will vote
separately as a class on certain other
matters, as required under the Fund's
Articles Supplementary, the 1940 Act
and Maryland law. Except as otherwise
indicated in this Prospectus and as
otherwise required by applicable law,
holders of Cumulative Preferred
Stock will be entitled to one vote per
share on each matter submitted to a
vote of shareholders and will vote
together with holders of shares of
Common Stock as a single class. See
"Description of Cumulative Preferred
Stock -- Voting Rights."
Mandatory Redemption The Cumulative Preferred Stock is subject
to mandatory redemption in whole or in
part by the Fund in the event that the
Fund fails to maintain Adjusted Assets
equal to or greater than the Base
Amount or fails to maintain Asset
Coverage and does not cure such
failure by the applicable cure date.
Any such redemption will be made for
cash at a price equal to $25 per share
plus accumulated and unpaid divi-
dends (whether or not earned or
declared) to the redemption date (the
"Redemption Price"). The Fund may
redeem a sufficient number of shares
of Cumulative Preferred Stock so that
the Adjusted Assets of the remaining
outstanding shares of Cumulative
Preferred Stock and any other Pre-
ferred Stock after redemption is as
high as [110%] of the Base Amount and
the asset coverage, as defined in the
1940 Act, of the remaining outstanding
shares of Cumulative Preferred Stock
and any other Preferred Stock is as
high as [220%]. See "Description of
Cumulative Preferred Stock --
Redemption -- Mandatory Redemption."
Optional Redemption Commencing May 15, 2002 and thereafter,
the Fund at its option may redeem the
Cumulative Preferred Stock, in whole
or in part, for cash at a price per
share equal to the Redemption Price.
Prior to May 15, 2002, the Cumulative
Preferred Stock will be redeemable at
the option of the Fund at the
Redemption Price only to the extent
necessary for the Fund to continue to
qualify for tax treatment as a
regulated investment company. See
"Description of Cumulative Preferred
Stock -- Redemption -- Optional Re-
demption."
Liquidation Preference The liquidation preference of each share
of Cumulative Preferred Stock is $25
plus an amount equal to accumulated
and unpaid dividends (whether or not
earned or declared) to the date of
distribution. See "Description of
Cumulative Preferred Stock --
Liquidation Rights."
Use of Proceeds The Fund will use the net proceeds
from the offering of the Cumulative
Preferred Stock to purchase additional
portfolio securities in accordance
with its investment objective and
policies. See "Use of Proceeds."
Listing Prior to this offering, there has been
no public market for the Cumulative
Preferred Stock. Application will be
made to list the shares of Cumulative
Preferred Stock on the New York Stock
Exchange. However, during an initial
period which is not expected to exceed
30 days from the date of this
Prospectus, the Cumulative Preferred
Stock will not be listed on any
securities exchange. During such
period, the Underwriters intend to
make a market in the Cumulative
Preferred Stock; however, they have no
obligation to do so. Consequently, an
investment in the Cumulative Preferred
Stock may be illiquid during such
period.
Special Considerations and The market price for the Cumulative
Risk Factors Preferred Stock will be influenced
by changes in interest rates, the
perceived credit quality of the
Cumulative Preferred Stock and other
factors. As indicated above, the
Cumulative Preferred Stock is subject
to redemption under specified
circumstances. Subject to such
circumstances, the Cumulative
Preferred Stock is perpetual. The
credit rating on the Cumulative
Preferred Stock could be reduced or
withdrawn while an investor holds
shares, and the credit rating does not
eliminate or mitigate the risks of
investing in the Cumulative Preferred
Stock. A reduction or withdrawal of
the credit rating would likely have an
adverse effect on the market value of
the Cumulative Preferred Stock. The
Cumulative Preferred Stock is not an
obligation of the Fund. Although
highly unlikely, precipitous declines
in the value of the Fund's assets
could result in the Fund having
insufficient assets to redeem all of
the Cumulative Preferred Stock for the
full Redemption Price.
Federal Income Tax
Considerations The Fund has qualified as and intends
to remain qualified for Federal income
tax purposes as a regulated investment
company. Qualification requires, among
other things, compliance by the Fund
with certain distribution
requirements. Statutory limitations on
distributions on the Fund's common
stock if the Fund fails to satisfy the
1940 Act's asset coverage
requirements could jeopardize the
Fund's ability to meet the
distribution requirements. The Fund
presently intends, however, to
purchase or redeem Cumulative
Preferred Stock to the extent
necessary in order to maintain
compliance with such asset coverage
requirements. See "Taxation" for a
more complete discussion of these and
other Federal income tax
considerations.
Management and Fees Gabelli Funds, Inc. serves as the Fund's
investment adviser (the "Adviser") and
is compensated for its services and
its related expenses at an annual rate
of 1.00% of the Fund's average daily
net assets. This fee is higher than
that paid by most mutual funds. The
Adviser is responsible for
administration of the Fund and
currently utilizes and pays the fees
of a third party administrator.
Notwithstanding the foregoing, the
Adviser will waive the portion of its
investment advisory fee attributable
to an amount of assets of the Fund
equal to the aggregate liquidation
preference of the Cumulative Preferred
Stock for any calendar year in which
the total return of the Fund,
including distributions and the
advisory fee subject to potential
waiver, allocable to common stock is
less than the stated dividend rate of
the Cumulative Preferred Stock.
Repurchase of Common Stock and
Anti-takeover Provisions The Fund is authorized, subject to main-
taining required asset coverage on the
Cumulative Preferred Stock, to repur-
chase its Common Stock on the open
market when the shares are trading at
a discount of 10% or more (or such
other percentage as its Board of
Directors may determine from time to
time) from their net asset value. In
addition, certain provisions of the
Fund's Articles of Incorporation (the
"Charter") and By-Laws may be regarded
as "anti- takeover" provisions.
Pursuant to these provisions, only one
of three classes of directors is
elected each year, and the affirmative
vote of the holders of 75% of the
outstand- ing shares of the Fund and a
majority of the shares of Cumulative
Preferred Stock is necessary to
authorize the conversion of the Fund
from a closed-end to an open-end in-
vestment company and an affirmative
vote of 66-2/3% of the outstanding
shares of the Fund may be necessary to
authorize certain business
transactions with any beneficial owner
of more than 5% of the outstanding
shares of the Fund. The overall effect
of these provisions is to render more
difficult the accomplishment of a
merger with, or the assumption of
control by, a principal shareholder.
These provisions may have the effect
of depriving Fund shareholders of an
opportunity to sell their shares at a
premium to the prevailing market
price.
Custodian, Transfer and
Dividend-Disbursing
Agent and Registrar State Street Bank and Trust Company
serves as the Fund's custodian and,
with respect to the Cumulative
Preferred Stock, as transfer and
dividend-disbursing agent and regis-
trar and as agent to provide notice of
redemption and certain voting rights.
See "Custodian, Transfer and
Dividend-Disbursing Agent and
Registrar."
NET INVESTMENT INCOME EQUIVALENT YIELD TABLES
Over the Fund's last four fiscal years, distributions paid by
the Fund on its Common Stock have consisted, on average, of 29% net
long-term capital gains ("L/T Capital Gains") and 71% net investment
income).(1) Cumulative Preferred Stock investors who are in a Federal
marginal income tax bracket higher than the current 28.0% maximum Federal
tax rate on long-term capital gains would, under the current position of
the IRS, realize a tax advantage on their investment to the extent that
distributions by the Fund to its shareholders continue to be partially
composed of the more favorably taxed L/T Capital Gains.
The following table shows examples of the pure Net Investment
Income equivalent yield that would be generated by the indicated dividend
rates on the Cumulative Preferred Stock, assuming distributions
consisting of four different proportions of L/T Capital Gains and Net
Investment Income for an investor in the 39.6% Federal marginal tax
bracket and assuming no change in the current maximum Federal long-term
capital gains tax rate of 28.0%.
PERCENTAGE OF CUMULATIVE PREFERRED A CUMULATIVE PREFERRED STOCK
STOCK DIVIDEND COMPOSED OF* DIVIDEND RATE OF
---------------------------------- ----------------------------------
7.50% 7.75% 8.00%
NET INVESTMENT IS EQUIVALENT TO A NET INVESTMENT
L/T CAPITAL GAINS INCOME INCOME YIELD OF
- ----------------- ------ ----------------------------------
15% 85% 7.72% 7.97% 8.23%
25% 75% 7.86% 8.12% 8.38%
35% 65% 8.00% 8.27% 8.54%
45% 55% 8.15% 8.42% 8.69%
- ---------------------
(1) Percentage Composition of Common Stock Distribution
-------------------------------------------------------------------
L/T Capital Net Investment Return of
Year Gains Income Capital
1993 47% 53% -
1994 24% 76% -
1995 31% 66% 3%
1996 14% 86% -
* A number of factors could affect the composition of the Fund's
distributions to investors of the Cumulative Preferred Stock. Such
factors include (i) active management of the Fund's assets may result in
varying proportions of L/T Capital Gains, Net Investment Income and/or
return of capital in Fund distributions; and (ii) the continued
effectiveness of an IRS revenue ruling requiring the proportionate
allocation of L/T Capital Gains among holders of various classes of
capital stock.
As illustrated in the table below, the yield advantage of the
lower Federal long-term capital gains tax rate would be diminished for
investors in tax brackets below the 39.6% rate assumed in the table
above, and there would be no effect on the yield for an investor in a
Federal marginal income tax bracket of 28.0% or lower. Assuming a
Cumulative Preferred Stock dividend composed of 25% L/T Capital Gains and
75% Net Investment Income (representing the approximate average annual
composition of distributions paid by the Fund for its last four fiscal
years), the following table shows the pure Net Investment Income
equivalent yields that would be generated at the assumed dividend rates
for taxpayers in the indicated tax brackets.
A CUMULATIVE PREFERRED STOCK DIVIDEND
RATE OF
7.50% 7.75% 8.00%
1996 FEDERAL IS EQUIVALENT TO AN NET INVESTMENT
TAX BRACKET(1) INCOME YIELD OF
------------ ---------------
39.6%.......................... 7.86% 8.12% 8.38%
36.0%.......................... 7.73% 7.99% 8.25%
31.0%.......................... 7.58% 7.83% 8.09%
28.0%.......................... 7.50% 7.75% 8.00%
- --------------------
(1) Annual taxable income levels corresponding to the 1996 Federal
marginal tax brackets are as follows:
- ---------------------------------------------------------------
39.6% over $263,750 for both single and joint
returns
- ---------------------------------------------------------------
36.0% $121,301-$263,750 for single returns,
$147,701-$263,750 for joint returns
- ---------------------------------------------------------------
31.0% $58,151-$121,300 for single returns,
$96,901-$147,700 for joint returns
- ---------------------------------------------------------------
28.0% $24,001-$58,150 for single returns,
$40,101-$96,900 for joint returns
- ---------------------------------------------------------------
An investor's marginal tax rate may exceed the rates shown in the above
table due to various factors. Income also may be subject to certain
state, local and foreign taxes. For investors who pay alternative minimum
tax, equivalent yields may be lower than those shown above. The tax rates
shown above do not apply to corporate taxpayers.
--------------------
The tax characteristics of the Fund are described more fully
under "Taxation." Consult your tax adviser for further details.
The charts above are for illustrative purposes only and cannot
be taken as an indication of an anticipated dividend rate on the
Cumulative Preferred Stock or of the composition of future distributions
by the Fund.
FINANCIAL HIGHLIGHTS
The selected data set forth below is for a share of Common Stock
outstanding for the periods presented. The financial information was
derived from and should be read in conjunction with the Financial
Statements of the Fund incorporated by reference into this Prospectus and
the SAI. The financial information for each of the five years ended
December 31, 1996 has been audited by Price Waterhouse LLP, independent
accountants whose unqualified report on such financial statements is
incorporated by reference into this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991 1990 1989*
---- ---- ---- ---- ---- ---- ---- ----
OPERATING PERFORMANCE:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning $11.01 $10.60 $11.52 $11.45 $10.91 $10.47 $10.51 $10.00
of Period ..................... ------ ------ ------ ------ ------ ------ ------ ------
Net investment income............ 0.49 0.53 0.69 0.76 0.65 0.71 0.69 0.12
Net realized and unrealized gains
(loss) on securities .......... .31 1.03 (0.71) 0.74 0.76 0.60 (0.04) 0.51
------ ------ ------ ------ ------ ------ ------ ------
Total from Investment
Operations................... .80 1.56 (0.02) 1.50 1.41 1.31 0.65 0.63
------ ------ ------ ------ ------ ------ ------ ------
LESS DISTRIBUTIONS:
Dividends from net investment
income ........................ (.49) (0.53) (0.69) (0.76) (0.65) (0.71) (0.69) (0.12)
------ ------ ------ ------ ------ ------ ------ ------
Distributions from net realized
gain on investments ........... (.24) (0.56) (0.21) (0.67) (0.22) (0.16) --- ---
Distributions in excess of net
investment income ............. --- (0.02) --- --- --- --- --- ---
Distributions in excess of net
realized gains ................ --- (0.01) --- --- --- --- --- ---
Distributions from paid-in
capital ....................... --- (0.03) --- --- --- --- --- ---
------------------------------------------------------------------------------
Total Distributions.............. (.73) ($1.15) (0.90) (1.43) (0.87) (0.87)) (0.69) (0.12)
------- ------- ------ ------ ------ ------- ------ ------
Net Asset Value, End of
Period....................... $11.08 $11.01 $10.60 $11.52 $11.45 $10.91 $10.47 $10.51
====== ====== ====== ====== ====== ====== ====== ======
Market Value, End of Period...... $9.25 $10.75 -- -- -- -- --- ---
===== ====== ====== ====== ====== ====== ====== ======
Total Net Asset Value Return
+ (a).......................... 8.4% 15.0% (0.2)% 13.1% 13.0% 12.5% 6.3% 6.3%
Total Investment Return+(b)...... (7.3)% 12.3% --- --- --- --- --- ---
RATIOS TO AVERAGE NET ASSETS/
SUPPLEMENTAL DATA:
Net Assets, end of period
(in thousands)................. $89,659 $89,137 112,090 $108,674 $92,541 $92,565 $81,868 $52,105
Ratio of Operating Expenses to
Average Net Assets (c)......... 1.45% 1.56% 1.31% 1.38% 1.40% 1.45% 1.52% 2.50%
Ratio of Net Investment In-
come to Average Net Assets..... 4.33% 4.60% 4.77% 4.58% 5.53% 5.50% 6.85% 5.74%
Portfolio Turnover Rate.......... 114.00% 140.00% 67.00% 45.00% 32.00% 51.00% 282.00% 83.00%
Average Commission Rate
Paid ......................... $0.0423 --- --- --- --- --- --- ---
</TABLE>
- --------------------
* The Fund commenced operations on July 3, 1989.
+ Total return is calculated assuming a purchase of shares on the first
day and a sale on the last day of each period reported and includes
reinvestment of distributions.
(a) Based on net asset value per share, adjusted for reinvestment of all
distributions.
(b) Based on net asset value per share through March 31, 1995, the date
of conversion of the Fund to closed- end status, and market value
thereafter, adjusted for reinvestment of all distributions.
(c) Includes, for 1995, a current period expense associated with the
conversion of the Fund to closed-end status. Without the conversion
expense, this ratio would have been 1.28% in 1995.
(d) For fiscal years beginning on or after September 1, 1995, a fund is
required to disclose its average commission rate paid per share for
purchases and sales of investment securities.
USE OF PROCEEDS
The net proceeds of the offering are estimated at $ , after
deduction of the underwriting discounts and estimated offering expenses
payable by the Fund. The Fund's investment adviser expects to invest such
proceeds in accordance with the Fund's investment objective and policies
within six months from the completion of the offering, depending on
market conditions for the types of securities in which the Fund
principally invests. Pending such investment, the proceeds will be held
in high quality short-term debt securities and instruments.
CAPITALIZATION
The following table sets forth the capitalization of the Fund as of
December 31, 1996, and as adjusted to give effect to this offering.
<TABLE>
<CAPTION>
<S> <C> <C>
ACTUAL AS ADJUSTED(a)
Shareholders' equity:
Preferred Stock, $.001 par value:
Authorized 2,000,000 shares; issued
and outstanding 0 shares; as
adjusted, 120,000 shares of
--% Cumulative Preferred
Stock issued and outstanding.................... $0 $3,000,000
Common Stock, $.001 par value:
Authorized 100,000 shares; issued and
outstanding 8,092,945 shares.................... 8,093 8,093
Additional paid-in capital........................ 85,233,814 83,799,814
Net investment income............................. (241,821) (241,821)
Net realized gains on investments................. (64,030) (64,030)
Unrealized appreciation on investments............ 4,723,235 4,723,235
--------- ---------
Net assets applicable to outstanding
Common Stock............................... $89,659,291 $118,225,291
</TABLE>
- ------------------
(a) After deducting underwriting discounts and estimated costs of
this offering of $1,434,000.
INVESTMENT OBJECTIVE AND POLICIES
The Fund was incorporated in Maryland on December 19, 1988 as an
open-end diversified management investment company, and converted to
closed-end status after receiving shareholder approval of its Charter on
February 21, 1995 and filing the Charter in Maryland on March 31, 1995
(the "Conversion").
The investment objective of the Fund is to seek a high level of
total return on its assets. The Fund seeks to achieve its investment
objective through a combination of current income and capital
appreciation. There is no assurance that this objective will be achieved.
The Fund's investment objective is, however, a fundamental policy of the
Fund and cannot be changed without shareholder approval. The Fund will
normally invest at least 65% of its total assets (taken at current value)
in "Convertible Securities," i.e., securities (bonds, debentures,
corporate notes, preferred stocks and other similar securities) which are
convertible into or exchangeable for common stock or other equity
securities. Securities received upon conversion of a Convertible Security
will be included in the calculation of the percentage of Fund assets
invested in Convertible Securities until the Fund has held such
securities for twelve months. These securities may be retained in the
Fund's portfolio to permit orderly disposition or to establish long-term
holding periods for Federal income tax purposes.
The Fund may invest up to 35% of its total assets (taken at current
value and subject to any restrictions appearing elsewhere in this
Registration Statement) in any combination and quantity of the following
securities: common stock; non-convertible preferred stock;
non-convertible corporate debt securities; options on debt and equity
securities; and money market instruments. In selecting any of the
foregoing securities for investment, the factors which will be considered
by the Adviser include the Adviser's evaluation of the underlying value
of the assets and business of the issuers of the securities, the
potential for capital appreciation, the price of the securities, the
issuer's balance sheet characteristics and the perceived skills of the
issuer's management.
During periods when it is deemed necessary for temporary defensive
purposes, the Fund may invest without limit in high quality money market
instruments, including commercial paper of domestic and foreign
corporations, certificates of deposit, bankers' acceptances and other
obligations of domestic and foreign banks and obligation issued or
guaranteed by the United States Government, its instrumentalities or
agencies and, subject to statutory limitations, unaffiliated money market
mutual funds. The yield on these securities will, as a general matter,
tend to be lower than the yield on other securities to be purchased by
the Fund.
CONVERTIBLE SECURITIES
A Convertible Security is a bond, debenture, corporate note,
preferred stock or other similar security that may be converted into or
exchangeable for a prescribed amount of common stock or other equity
security of the same or a different issuer within a particular period of
time at a specified price or formula. Before conversion, Convertible
Securities have characteristics similar to nonconvertible debt securities
in that they ordinarily provide a stream of income with generally higher
yields than those of common stock of the same or similar issuers.
Convertible Securities are senior in rank to common stock in a
corporation's capital structure and, therefore, generally entail less
risk than the corporation's common stock, although the extent to which
such risk is reduced depends in large measure upon the degree to which
the Convertible Security sells above its value as a fixed income
security.
The Fund believes that the characteristics of Convertible Securities
make them appropriate investments for an investment company seeking a
high level of total return on its assets. These characteristics include
the potential for capital appreciation if the value of the underlying
common stock increases, the relatively high yield received from preferred
dividend or interest payments as compared to common stock dividends and
decreased risks of decline in value, relative to the underlying common
stock due to their fixed income nature. As a result of the conversion
feature, however, the interest rate or dividend preference on a
Convertible Security is generally less than would be the case if the
securities were not convertible. During periods of rising interest rates,
it is possible that the potential for capital gain on a Convertible
Security may be less than that of a common stock equivalent if the yield
on the Convertible Security is at a level which causes it to sell at a
discount.
In selecting Convertible Securities for the Fund, the following
factors, among others, will be considered by the Adviser: (1) the
Adviser's own evaluations of the basis underlying value of the assets and
businesses of the issuers 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 stocks; (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) the existence of any anti-dilution
protections of the security; and (8) the diversification of the Fund's
portfolio as to issuers. The Fund may convert a Convertible Security
which it holds; (1) when necessary to permit orderly disposition of the
investment when a Convertible Security approaches maturity or has been
called for redemption; (2) to facilitate a sale of the position; (3) if
the dividend rate on the underlying common stock increases above the
yield on the Convertible Security; or (4) whenever the Adviser believes
it is otherwise in the best interests of the Fund.
Convertible Securities are generally not investment grade, that is,
not rated within the four highest categories by Standard & Poor's Ratings
Group ("S&P") and Moody's Investor Services, Inc. (Moody's"). To the
extent that such Convertible Securities and other non-convertible debt
securities, which are acquired by the Fund consistent with the factors
considered by the Adviser as described herein, are rated lower than
investment grade or are not rated, there would be a greater risk as to
the timely repayment of the principal of, and timely payment of interest
or dividends on, those securities. It is expected that not more than 50%
of the Fund's portfolio will consist of securities rated CCC or lower by
S&P or Caa or lower by Moody's or, if unrated, are of comparable quality
as determined by the Adviser. These securities and securities rated BB or
lower by S&P or Ba or lower by Moody's are often referred to in the
financial press as "junk bonds" and may include securities of issuers in
default. "Junk bonds" are considered by the rating agencies to be
predominantly speculative and may involve major risk exposures such as:
(i) vulnerability to economic downturns and changes in interest rates;
(ii) sensitivity to adverse economic changes and corporate developments;
(iii) redemption or call provisions which may be exercised at inopportune
times; (iv) difficulty in accurately valuing or disposing of such
securities; (v) subordination to other debt of the issuer; and (vi) junk
bonds are generally unsecured.
The Fund's investments in securities of issuers in default will be
limited to not more than 5% of the total assets of the Fund. Further, the
Fund will invest in securities of issuers in default only when the
Adviser believes that such issuers will emerge from bankruptcy and the
value of such securities will appreciate. By investing in securities of
issuers in default the Fund bears the risk that such issuers will not
emerge from bankruptcy or that the value of such securities will not
appreciate. Securities rated BBB by S&P or Baa by Moody's, in the opinion
of the rating agencies, also have speculative characteristics. Securities
need not meet a minimum rating standard in order to be acceptable for
investment by the Fund.
In the absence of adequate anti-dilution provisions in a Convertible
Security, dilution in the value of the Fund's holding may occur in the
event the underlying stock is subdivided, additional securities are
issued for below market value, a stock dividend is declared, or the
issuer enters into another type of corporate transaction which has a
similar effect. Every Convertible Security may be valued, on a
theoretical basis, as if it did not have a conversion privilege. This
theoretical value is determined by the yield it provides in comparison
with the yields of other securities of comparable character and quality
which do not have a conversion privilege. This theoretical value, which
may change with prevailing interest rates, the credit rating of the
issuer and other pertinent factors, often referred to as the "investment
value," represents the security's theoretical price support level.
"Conversion value" is the amount a Convertible Security would be
worth in market value if it were to be exchanged for the underlying
equity security pursuant to its conversion privilege. Conversion value
fluctuates directly with the price of the underlying equity security,
usually common stock. If, because of low prices for the common stock, the
conversion value is substantially below the investment value, the price
of the Convertible Security is governed principally by the factors
described in the preceding paragraph. If the conversion value rises near
or above its investment value, the price of the Convertible Security
generally will rise above its investment value and, in addition, will
sell at some premium over its conversion value. This premium represents
the price investors are willing to pay for the privilege of purchasing a
fixed-income security with a possibility of capital appreciation due to
the conversion privilege. If this appreciation potential is not realized,
this premium may not be recovered. In its selection of Convertible
Securities for the Fund, the Adviser will not emphasize either investment
value or conversion value, but will consider both in light of the Fund's
overall investment objective. See "Convertible Securities" in the SAI.
ILLIQUID CONVERTIBLE SECURITIES
The Fund has no limit on the amount of its assets it may invest in
unregistered and otherwise illiquid Convertible Securities and other
investments. The current intention of the Adviser is not to invest in
excess of 15% of the Funds's net assets in illiquid Convertible
Securities. Shareholders will be notified if the Adviser changes such
intention. Unregistered securities are securities that cannot be sold
publicly in the United States without registration under the Securities
Act of 1933, as amended (the "1933 Act"). Unregistered securities
generally can be resold only in privately negotiated transactions with a
limited number of purchasers or in a public offering registered under the
1933 Act. Considerable delay could be encountered in either event and,
unless otherwise contractually provided for, the Fund's proceeds upon
sale may be reduced by the costs of registration or underwriting
discounts. The difficulties and delays associated with such transactions
could result in the Fund's inability to realize a favorable price upon
disposition of unregistered securities, and at times might make
disposition of such securities impossible. When unregistered Convertible
Securities are converted into common stock and the common stock is
publicly traded (as is typically the case), the common stock normally may
be resold publicly under certain volume and other restrictions beginning
one year following the acquisition of the unregistered Convertible
Securities and without any restrictions beginning two years after the
acquisition of the unregistered Convertible Securities. Securities freely
salable among qualified institutional investors under special rules
adopted by the Securities and Exchange Commission (the "SEC") may be
treated as liquid if they satisfy institutional liquidity standards
established by the Board of Directors. The continued liquidity of such
securities is not as well assured as that of publicly traded securities,
and accordingly, the Board of Directors will monitor their liquidity.
OTHER INVESTMENTS
The Fund will normally invest at least 65% of its total assets
(taken at current value) in Convertible Securities and up to 35% of the
remaining assets in non-convertible securities and the investments
described below. However, to the extent that any investments described
below are Convertible Securities, they will be included when determining
the Fund's holdings of Convertible Securities.
CORPORATE REORGANIZATIONS
The Fund may invest without limit in securities of companies for
which a tender or exchange offer has been made or announced and in
securities of companies for which a merger, consolidation, liquidation or
similar reorganization proposal has been announced if, in the judgment of
the Adviser, there is a reasonable prospect of capital appreciation
significantly greater than the added portfolio turnover expenses inherent
in the short term nature of such transactions. The principal risk is that
such offers or proposals may not be consummated within the time and under
the terms contemplated at the time of the investment, in which case the
Fund may sustain a loss. For further information on such investments, see
"Other Investments" in the SAI.
WARRANTS AND RIGHTS
The Fund may invest without limit in warrants or rights which
entitle the holder to buy equity securities at a specific price for a
specific period of time but will do so only if such equity securities are
deemed appropriate by the Adviser for inclusion in the Fund's portfolio.
OTHER INVESTMENT COMPANIES
The Fund may invest up to 5% of its total assets in no more than 3%
of the securities of any one investment company including small business
investment companies and may invest up to 10% of its total assets in the
securities of all investment companies in the aggregate. The purchase of
securities in investment companies will result indirectly in the payment
of duplicative management fees by the Fund. The Fund will not purchase
the securities of affiliated investment companies.
FOREIGN SECURITIES
The Fund may invest up to 25% of its total assets in securities of
foreign issuers which are generally denominated in foreign currencies.
Investments in the securities of foreign issuers involve certain
considerations and risks not ordinarily associated with investments in
securities of domestic issuers. Foreign companies are not generally
subject to uniform accounting, auditing and financial standards and
requirements comparable to those applicable to U.S. companies. Foreign
securities exchanges, brokers and listed companies may be subject to less
government supervision and regulation than exists in the United States.
Dividend and interest income may be subject to withholding and other
foreign taxes which may adversely affect the net return on such
investments. There may be difficulty in obtaining or enforcing a court
judgment abroad. In addition, it may be difficult to effect repatriation
of capital invested in certain countries. In addition, with respect to
certain countries, there are risks of expropriation, confiscatory
taxation, political or social instability or diplomatic developments
which could affects assets of the Fund held in foreign countries.
There may be less publicly available information about a foreign
company than a U.S. company. Foreign securities markets may have
substantially less volume than U.S. securities markets and some foreign
company securities are less liquid than securities of otherwise
comparable U.S. companies. A portfolio of foreign securities may also be
adversely affected by fluctuations in the rates of exchange between the
currencies of different nations and by exchange control regulations.
Foreign markets also have different clearance and settlement procedures
which could cause the Fund to encounter difficulties in purchasing and
selling securities on such markets and may result in the Fund missing
attractive investment opportunities or experiencing loss. In addition, a
portfolio which includes foreign securities can expect to have a higher
expense ratio because of the increased transaction costs on non-U.S.
securities markets and the increased costs of maintaining the custody of
foreign securities.
The Fund may purchase sponsored American Depository Receipts
("ADRs") or U.S. denominated securities of foreign issuers which shall
not be included in this foreign securities limitation. ADRs are receipts
issued by United States banks or trust companies in respect of securities
of foreign issuers held on deposit for use in the United States
securities markets. While ADRs may not necessarily be denominated in the
same currency as the securities into which they may be converted, many of
the risks associated with foreign securities may also apply to ADRs.
WHEN ISSUED, DELAYED DELIVERY
SECURITIES AND FORWARD COMMITMENTS
The Fund may enter into forward commitments for the purchase of
securities. Such transactions may include purchases on a "when issued" or
"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 security. When such
transactions are negotiated, the price is fixed at the time of the
commitment, with payment and delivery taking place in the future,
generally a month or more after the date of the commitment. While 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.
Securities purchased under a forward commitment are subject to
market fluctuation, and no interest (or dividends) accrues to the Fund
prior to the settlement date. The Fund will maintain a segregated account
of cash or liquid high-grade debt securities with the Fund's custodian in
an aggregate amount at least equal to the amount of its forward
commitments as long as the obligation to purchase continues. See "Other
Investments -- When Issued, Delayed Delivery Securities and Forward
Commitments" in the SAI.
SPECIAL CHARACTERISTICS AND RISKS
There are a number of issues that an investor should consider in
evaluating the Fund. The Fund invests primarily in lower rated
securities, including securities of issuers that are in default. These
securities carry a higher risk of failure to pay principal and interest
when due and the market to sell such securities may be limited. See
"Convertible Securities." The Fund may invest in securities of companies
that are involved or may become involved in extraordinary transactions,
including corporate reorganizations. See "Other Investments --
Corporate Reorganizations." Many companies in the past several years have
adopted so-called "poison pill" and other defensive measures that may
have the effect of limiting the amount of securities in any one issuer
that may be acquired by the Adviser and its affiliates for the account of
the Fund and other investment management clients, discouraging or
hindering non-negotiated offers for a company or possibly preventing the
completion of any such offer. The Adviser relies to a considerable extent
on the expertise of Mario J. Gabelli, and there is no assurance that a
suitable replacement could be found for him in the event of his death,
disability or resignation. See "Management of the Fund."
In addition, there are a number of risks associated with an
investment in Cumulative Preferred Stock. The market price for the
Cumulative Preferred Stock will be influenced by changes in interest
rates, the perceived credit quality of the Cumulative Preferred Stock and
other factors. The Cumulative Preferred Stock is subject to redemption
under specified circumstances. Subject to such circumstances, the
Cumulative Preferred Stock is perpetual. The credit rating on the
Cumulative Preferred Stock could be reduced or withdrawn while an
investor holds shares, and the credit rating does not eliminate or
mitigate the risks of investing in the Cumulative Preferred Stock. A
reduction or withdrawal of the credit rating would likely have an adverse
effect on the market value of the Cumulative Preferred Stock. The
Cumulative Preferred Stock is not an obligation of the Fund. Although
highly unlikely, precipitous declines in the value of the Fund's assets
could result in the Fund having insufficient assets to redeem all of the
Cumulative Preferred Stock for the full Redemption Price.
SPECIAL INVESTMENT METHODS
OPTIONS. On behalf of the Fund, the adviser may, subject to
guidelines of the Board of Directors, purchase or sell (i.e., write)
options on securities, securities indices and foreign currencies which
are listed on a national securities exchange or in the U.S.
over-the-counter ("OTC") markets as a means of achieving additional
return or of hedging the value of the Fund's portfolio. The Fund may
write covered call options on common stocks that it owns or has an
immediate right to acquire through conversion or exchange of other
securities in an amount not to exceed 25% of total assets or invest up to
10% of its total assets in the purchase of put options on common stocks
that the Fund owns or may acquire through the conversion or exchange of
other securities that it owns. The Fund may not write covered call
options in an amount exceeding 25% of the value of its total assets.
A call option is a contract that gives the holder of the option the
right to buy from the writer (seller) of the call option, in return for a
premium paid, the security underlying the option at a specified exercise
price at any time during the term of the option.
The writer of the call option has the obligation upon exercise of
the option to deliver the underlying security upon payment of the
exercise price during the option period. A put option is a contract that
gives the holder of the option the right to sell to the writer (seller),
in return for the premium, the underlying security at a specified price
during the term of the option. The writer of the put, who receives the
premium, has the obligation to buy the underlying security upon exercise,
at the exercise price during the option period.
If the Fund has written an option, it may terminate its obligation
by effecting a closing purchase transaction. This is accomplished by
purchasing an option of the same series as the option previously written.
There can be no assurance that a closing purchase transaction can be
effected when the Fund so desires.
An exchange traded option may be closed out only on an exchange
which provides a secondary market for an option of the same series.
Although the Fund will generally purchase or write only those options for
which there appears to be an active secondary market, there is no
assurance that a liquid secondary market on an exchange will exist for
any particular option.
The Fund will not purchase options if, as a result, the aggregate
cost of all outstanding options exceeds 10% of the Fund's total assets.
See "Special Investment Methods -- Options" in the SAI. In addition,
investments in options may be limited or prohibited by the applicable
Rating Agency Guidelines. See "Description of Cumulative Preferred Stock
- -- Rating Agency Guidelines."
FUTURES CONTRACTS AND OPTIONS THEREON
On behalf of the Fund, the Adviser may, subject to guidelines of the
Board of Directors, purchase and sell financial futures contracts and
options thereon which are traded on a commodities exchange or board of
trade for certain hedging, yield enhancement and risk management
purposes, in accordance with regulations of the Commodity Futures Trading
Commission ("CFTC"). These futures contracts and related options may be
on debt securities, financial indices, securities indices, U.S.
Government securities and foreign currencies. A financial futures
contract is an agreement to purchase or sell an agreed amount of
securities or currencies at a set price for delivery in the future.
Under the CFTC regulations, the Adviser on behalf of the Fund (i)
may purchase and sell futures contracts and options thereon for bona fide
hedging purposes, as defined under CFTC regulations, without regard to
the percentage of the Fund's assets committed to margin and option
premiums, and (ii) may enter into nonhedging transactions, provided that,
immediately thereafter, the sum of the amount of the initial margin
deposits on the Fund's existing futures positions and option premiums
does not exceed 5% of the market value of the Fund's total assets. In
addition, investments in futures contracts and related options may be
limited or prohibited by the applicable Rating Agency Guidelines. See
"Description of Cumulative Preferred Stock -- Rating Agency Guidelines."
FORWARD CURRENCY EXCHANGE CONTRACTS
Subject to guidelines of the Board of Directors, the Fund may enter
into forward foreign currency exchange contracts to protect the value of
its portfolio against future changes in the level of currency exchange
rates. The Fund may enter into such contracts on a spot, i.e., cash,
basis at the rate then prevailing in the currency exchange market or on a
forward basis, by entering into a forward contract to purchase or sell
currency. A forward contract on foreign currency is an obligation to
purchase or sell a specific currency at a future date, which may be any
fixed number of days agreed upon by the parties from the date of the
contract at a price set on the date of the contract. The Fund's dealings
in forward contracts will be limited to hedging involving either specific
transactions or portfolio positions.
SPECIAL RISKS OF DERIVATIVE TRANSACTIONS
Participation in the options or futures markets and in currency
exchange transactions involves investment risks and transaction costs to
which the Fund would not be subject absent the use of these strategies.
If the Adviser's prediction of movements in the direction of the
securities, foreign currency and interest rate markets are inaccurate,
the consequences to the Fund may leave the Fund in a worse position than
if such strategies were not used. Risks inherent in the use of options,
foreign currency, futures contracts and options on futures contracts,
securities indices and foreign currencies include (1) dependence on the
Adviser's ability to predict correctly movements in the direction of
interest rates, securities prices and currency markets; (2) imperfect
correlation between the price of options and futures contracts and
options thereon and movements in the prices of the securities or
currencies being hedged; (3) the fact that skills needed to use these
strategies are different from those needed to select portfolio
securities; (4) the possible absence of a liquid secondary market for any
particular instrument at any time; (5) the possible need to defer closing
out certain hedged positions to avoid adverse tax consequences; and (6)
the possible inability of the Fund to purchase or sell a security at a
time that otherwise would be favorable for it to do so, or the possible
need for the Fund to sell a security at a disadvantageous time due to a
need for the Fund to maintain "cover" or to segregate securities in
connection with the hedging techniques.
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 or receive the proceeds
from the sale. The Fund may not make short sales or maintain a short
position if it 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 obligations to deliver the securities sold short, the
Fund will deposit in escrow in a separate account with its custodian an
equal amount to 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.
The Fund may make a short sale in order to hedge against market
risks when it 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 U.S. Federal income
tax purposes. Additionally, the Fund may use short sales in conjunction
with the purchase of a Convertible Security 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.
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements with primary
government securities dealers recognized by the Federal Reserve Bank of
New York and member banks of the Federal Reserve System which furnish
collateral at least equal in value or market price to the amount of their
repurchase obligation. In a repurchase agreement, the Fund purchases a
debt security from a seller which undertakes to repurchase the security
at a specified resale price on an agreed future date. Repurchase
agreements are generally for one business day but may have longer
durations. The SEC has taken the position that, in economic reality, a
repurchase agreement is a loan by the Fund to the other party to the
transaction secured by securities transferred to the Fund. The resale
price generally exceeds the purchase price by an amount which reflects an
agreed upon market interest rate for the term of the repurchase
agreement. The principal risk is that, if the seller defaults, the Fund
might suffer a loss to the extent that the proceeds from the sale of the
underlying securities and other collateral held by the Fund are less than
the repurchase price. In the event of a default or bankruptcy by a
seller, the Fund will promptly seek to liquidate the collateral. The
Board of Directors will monitor the creditworthiness of the contra party
to the repurchase agreements.
If the financial institution which is a party to the repurchase
agreement petitions for bankruptcy or becomes subject to the United
States Bankruptcy Code, the law regarding the rights of the Fund is
unsettled. As a result, under these circumstances, there may be a
restriction on the Fund's ability to sell the collateral and the Fund
would suffer a loss.
LOANS OF PORTFOLIO SECURITIES
To increase income, the Fund may lend its portfolio securities to
securities broker-dealers or financial institutions if (1) the loan is
collateralized in accordance with applicable regulatory requirements and
(2) no loan will cause the value of all loaned securities to exceed 33%
of the value of the Fund's total assets.
If the borrower fails to maintain the requisite amount of
collateral, the loan automatically terminates and the Fund could use the
collateral to replace the securities while holding the borrower liable
for any excess of replacement cost over the value of the collateral. As
with any extension of credit, there are risks of delay in recovery and in
some cases even loss of rights in collateral should the borrower of the
securities fail financially. While these loans of portfolio securities
will be made in accordance with guidelines approved by the Board of
Directors, there can be no assurance that borrowers will not fail
financially. On termination of the loan, the borrower is required to
return the securities to the Fund, and any gain or loss in the market
price during the loan would inure to the Fund. If the contra party to the
loan petitions for bankruptcy or becomes subject to the United States
Bankruptcy Code, the law regarding the rights of the Fund is unsettled.
As a result, under these circumstances, there may be a restriction on the
Fund's ability to sell the collateral and the Fund would suffer a loss.
See "Special Investment Methods -- Loans of Portfolio Securities" in the
SAI.
BORROWING
As provided in the 1940 Act, the Fund may issue debt or preferred
stock so long as the Fund's net assets exceed 300% of the amount of the
debt outstanding and exceed 200% of the amount of preferred stock
outstanding. Such debt or preferred stock may be convertible in
accordance with SEC staff guidelines which may permit the Fund to obtain
leverage at attractive rates. Leverage entails two primary risks. The
first risk is that the use of leverage magnifies the impact on the common
shareholders of changes in net asset value. For example, a fund that uses
33% leverage will show a 1.5% increase or decline in net asset value for
each 1% increase or decline in the value of its total assets. The second
risk is that the cost of leverage will exceed the return on the
securities acquired with the proceeds of leverage, thereby diminishing
rather than enhancing the return to common shareholders. These two risks
would generally make the Fund's total return to common shareholders more
volatile.
A decline in net asset value could affect the ability of the Fund to
make common stock dividend payments and such a failure to pay dividends
or make distributions could result in the Fund ceasing to qualify as a
regulated investment company under the Internal Revenue Code of 1986, as
amended ("the Code"). See "Dividends, Distributions and Taxes". Finally,
if the asset coverage for preferred stock or debt securities declines to
less than 200% or 300%, respectively (as a result of market fluctuations
or otherwise), the Fund may be required to sell a portion of its
investments when it may be disadvantageous to do so.
Further information on the investment objective and policies of the
Fund are set forth in the SAI.
PORTFOLIO TURNOVER
The Fund buys and sells securities to accomplish its investment
objective. The investment policies of the Fund may lead to frequent
changes in investments, particularly in periods of rapidly fluctuating
interest or currency exchange rates. The portfolio turnover may be higher
than that of other investment companies. While it is impossible to
predict with certainty the portfolio turnover, the Adviser expects that
the annual turnover rate of the Fund will not exceed 200%. During the
years ended December 31, 1996 and 1995, the portfolio turnover of the
Fund was 114% and 140%, respectively.
Portfolio turnover generally involves some expense to the Fund,
including brokerage commissions or dealer mark-ups and other transaction
costs on the sale of securities and reinvestment in other securities. A
high portfolio turnover rate may make it more difficult to qualify as a
regulated investment company, since, in order for the Fund to so qualify
each taxable year, less than 30% of its gross income must be derived from
the sale or other disposition of stocks or securities held for less than
three months. See "Dividends, Distributions and Taxes" in the SAI for a
more complete discussion of this requirement. The portfolio turnover rate
is computed by dividing the lesser of the amount of the long-term
securities purchased or securities sold by the average monthly value of
securities owned during the year (excluding securities whose maturities
at acquisition were one year or less).
INVESTMENT RESTRICTIONS
The Fund has adopted various investment restrictions as fundamental
policies requiring certification, limiting industry concentration,
prohibiting investing for control purposes and limiting certain other
policies as described in greater detail in the SAI.
MANAGEMENT OF THE FUND
The Fund's Board of Directors (who, with its officers, are described
in the SAI) has overall responsibility for the management of the Fund.
The Board of Directors decides upon matters of general policy and reviews
the actions of the Adviser and the Administrator. Pursuant to an
Investment Advisory Contract with the Fund, the Adviser, under the
supervision of the Fund's Board of Directors, provides a continuous
investment program for the Fund's portfolio; provides investment research
and makes and executes recommendations for the purchase and sale of
securities; provides all facilities and personnel, including officers
required for its administrative management and pays the compensation of
all officers and directors of the Fund who are its affiliates. As
compensation for its services and the related expenses borne by the
Adviser, the Fund pays the Adviser a fee, computed daily and payable
monthly, equal, on an annual basis, to 1.00%, of the Fund's average daily
net assets, which is higher than that paid by most mutual funds. For the
fiscal years ended December 31, 1994, 1995 and 1996 the Fund paid a
management fee of $1,177,574, $969,629 and $912,913, respectively.
Notwithstanding the foregoing, the Adviser will waive the portion of its
investment advisory fee attributable to an amount of assets of the Fund
equal to the aggregate redemption preference of the Cumulative Preferred
Stock for any calendar year in which the total return of the Fund,
including distributions and the advisory fee subject to potential waiver,
allocable to common stock is less than the stated dividend rate of the
Cumulative Preferred Stock.
The Adviser was formed in 1980 and acts as investment adviser to
other closed-end and open-end investment companies with total net assets
in excess of $4.2 billion as of January 1, 1997. GAMCO Investors, Inc.
("GAMCO"), a subsidiary of the Adviser, acts as investment adviser for
individuals, pension trusts, profit sharing trusts and endowments. As of
January 1, 1997, GAMCO had aggregate assets in excess of $5.2 billion
under its management. Mr. Mario J. Gabelli may be deemed a "controlling
person" of the Adviser on the basis of his ownership of stock of the
Adviser.
In addition to the fees of the Adviser, the Fund is responsible for
the payment of all its other expenses incurred in the operation of the
Fund, which include, among other things, expenses for legal and
independent accountant's services, stock exchange listing fees, expenses
relating to the offering of Cumulative Preferred Stock, costs of printing
proxies, stock certificates, and shareholder reports, charges of State
Street Bank and Trust Company ("State Street", the "Custodian," "Transfer
Agent" or "Dividend-Disbursing Agent"), SEC fees, fees and expenses of
unaffiliated directors, accounting and printing costs, the Fund's pro
rata portion of membership fees in trade organizations, fidelity bond
coverage for the Fund's officers and employees, interest brokerage costs,
taxes, expenses of qualifying the Fund for sale in various states,
expenses of personnel performing shareholder servicing functions,
litigation and other extraordinary or non-recurring expenses and other
expenses properly payable by the Fund.
The Investment Advisory Contract contains provisions relating to the
selection of securities brokers to effect the portfolio transactions of
the Fund. Under those provisions, the Adviser may (1) direct Fund
portfolio brokerage to Gabelli & Company, Inc. or other broker-dealer
affiliates of the Adviser; and (2) pay commissions to brokers other than
Gabelli & Company, Inc. which are higher than might be charged by another
qualified broker to obtain brokerage and/or research services considered
by the Adviser to be useful or desirable for its investment management of
the Fund and/or its other advisory accounts or those of any investment
adviser affiliated with it. The SAI contains further information about
the Investment Advisory Contract including a more complete description of
the advisory and expense arrangements, exculpatory and brokerage
provisions, as well as information on the brokerage practices of the
Fund.
PORTFOLIO MANAGER
Mario J. Gabelli serves as Portfolio Manager and is primarily
responsible for the day-to-day management of the Fund. Mr. Gabelli has
served as the Fund's Portfolio Manager since its inception and has served
as Chairman, President and Chief Executive Officer of the Adviser since
1980.
NON-RESIDENT DIRECTORS
Karl Otto Pohl and Anthonie C. van Ekris, directors of the Fund,
reside outside the United States and all or a significant portion of
their assets are located outside the United States. They have no
authorized agent in the United States to receive service of process. As a
result, it may not be possible for investors to effect service of process
within the United States or to enforce against them in United States
courts judgments predicated upon civil liability provisions of United
States securities laws.
ADMINISTRATOR
The Adviser has entered into an Administration Contract with BISYS
Fund Services ("BISYS" or the "Administrator") pursuant to which the
Administrator provides certain administrative services necessary for the
Fund's operations which do not include the investment advisory and
portfolio management services provided by the Adviser. For these services
and the related expenses borne by BISYS, the Adviser pays a monthly fee
at the annual rate of .10% of the first $350 million of the aggregate
average net assets of the Fund and other Funds advised by Gabelli Funds,
Inc. and Teton Advisers LLC and administered by BISYS and .075% of the
aggregate average net assets exceeding $350 million and .06% of the
aggregate average net assets in excess of $600 million (with a minimum
annual fee of $40,000 per portfolio), which, together with the services
to be rendered, is subject to negotiation between the parties and both
parties retain the right unilaterally to terminate the arrangement on not
less than 60 days' notice.
BISYS has its principal office at 3435 Stetzer Road, Columbus, Ohio
43219.
DIVIDEND AND DISTRIBUTION POLICY
The Fund intends to distribute its net capital gain each year but
may retain for reinvestment and pay Federal income taxes on its net
capital gain, if any. In the event the Fund's shares of common stock are
trading at a discount to their net asset value, the Board of Directors
would consider quarterly distributions and/or adopting a policy of
distributing at least 10% per common share of its average net asset value
per year. Any such policy would be subject to limitations on distribution
and on repurchase of common stock of the Fund while any preferred stock
is outstanding. If, for any calendar year, the total distributions by the
Fund on its common stock and preferred stock exceed net investment income
and net capital gain, the excess will generally be treated as a tax-free
return of capital up to the amount of the shareholder's tax basis in his
shares. The amount treated as a tax-free return of capital will reduce a
shareholder's tax basis in his shares, thereby increasing his potential
gain or reducing his potential loss on the sale of his shares. Any
amounts distributed to a shareholder in excess of the basis in the shares
will be taxable to the shareholder as capital gain.
In the event the Fund distributes amounts in excess of its net
investment income and net capital gain, such distributions will decrease
the Fund's total assets and, therefore, have the likely effect of
increasing the Fund's expense ratio. In addition, in order to make such
distributions, the Fund 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 so qualify,
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.
Over the past few months the Fund's shares have traded at an average
discount of approximately 15% to the net asset value. Within this
framework, the Adviser and its affiliates have announced their intention
to buy up to one million shares in the open market (500,000 of which have
been acquired as of March 31, 1997.)
DESCRIPTION OF CUMULATIVE PREFERRED STOCK
The following is a brief description of the terms of the Cumulative
Preferred Stock. This description does not purport to be complete and is
qualified by reference to the Articles Supplementary, the form of which
is filed as an exhibit to the Fund's Registration Statement. Certain of
the capitalized terms used herein are defined in the Glossary that
appears at the end of this Prospectus.
GENERAL
Under the Articles Supplementary, the Fund will be authorized to
issue up to _______ shares of Cumulative Preferred Stock. No fractional
shares of Cumulative Preferred Stock will be issued. As of the date of
this Prospectus, there were no shares of Cumulative Preferred Stock or
any other Preferred Stock of the Fund outstanding. The Board of Directors
reserves the right to issue additional shares of Preferred Stock,
including Cumulative Preferred Stock, from time to time, subject to the
restrictions in the Articles Supplementary. The shares of Cumulative
Preferred Stock will, upon issuance, be fully paid and nonassessable and
will have no preemptive, exchange or conversion rights. Any shares of
Cumulative Preferred Stock repurchased or redeemed by the Fund will be
classified as authorized but unissued Preferred Stock. The Board of
Directors may by resolution classify or reclassify any authorized but
unissued Preferred Stock from time to time by setting or changing the
preferences, rights, voting powers, restrictions, limitations or terms of
redemption. The Fund will not issue any class of stock senior to the
shares of Cumulative Preferred Stock.
RATING AGENCY GUIDELINES
[The Rating Agency has established guidelines in connection with the
Fund's receipt of a rating for the Cumulative Preferred Stock on the date
of original issue of ['aaa'] by the Rating Agency. The Rating Agency, a
nationally-recognized securities rating organization, issues ratings for
various securities reflecting the perceived creditworthiness of such
securities. The guidelines utilized for the Cumulative Preferred Stock
have been developed by the Rating Agency in connection with issuances of
asset-backed and similar securities, including debt obligations and
various types of preferred stocks, generally on a case-by-case basis
through discussions with the issuers of these securities. The guidelines
are designed to ensure that assets underlying outstanding debt or
preferred stock will be sufficiently varied and will be of sufficient
quality and amount to justify investment-grade ratings. The guidelines do
not have the force of law but are being adopted by the Fund in order to
satisfy current requirements necessary for the Rating Agency to issue the
above-described rating for the Cumulative Preferred Stock, which rating
is generally relied upon by investors in purchasing such securities. The
guidelines provide a set of tests for portfolio composition and
discounted asset coverage that supplement (and in some cases are more
restrictive than) the applicable requirements of Section 18 of the 1940
Act. The Rating Agency guidelines are included in the Articles
Supplementary and are referred to in this Prospectus as the "Rating
Agency Guidelines."
The Rating Agency Guidelines require that the Fund maintain Adjusted
Assets greater than or equal to the Base Amount. Based upon the Fund;s
portfolio as of March 31, 1997, this test would translate into asset
coverage of 395%. If the Fund fails to meet such requirement and such
failure is not cured by the applicable cure date, the Fund will be
required to redeem some or all of the Cumulative Preferred Stock. See
"Description of Cumulative Preferred Stock -- Redemption -- Mandatory
Redemption." The Rating Agency Guidelines also exclude from the Rating
Agency Eligible Assets and, therefore, from Adjusted Assets, certain
types of securities in which the Fund may invest and also prohibit the
Fund's acquisition of futures contracts or options on futures contracts,
prohibit reverse repurchase agreements, limit the writing of options on
portfolio securities and limit the lending of portfolio securities to 5%
of the Fund's total assets. The Adviser does not believe that compliance
with the Rating Agency Guidelines will have an adverse effect on its
management of the Fund's portfolio or on the achievement of the Fund's
investment objective. It is the Fund's present intention to continue to
comply with the Rating Agency Guidelines.
The Fund may, but is not required to, adopt any modifications to the
Rating Agency's guidelines that may hereafter be established by the
Rating Agency. Failure to adopt such modifications, however, may result
in a change in the Rating Agency's rating or a withdrawal of a rating
altogether. In addition, the Rating Agency may, at any time, change or
withdraw such rating. However, failure to comply with the Rating Agency
Guidelines would require the Fund to redeem all or part of the Cumulative
Preferred Stock.
As recently described by the Rating Agency, a preferred stock rating
is an assessment of the capacity and willingness of an issuer to pay
preferred stock obligations. The rating on the Cumulative Preferred Stock
is not a recommendation to purchase, hold or sell such shares, inasmuch
as the rating does not comment as to market price or suitability for a
particular investor. Nor do the Rating Agency requirements address the
likelihood that a holder of Cumulative Preferred Stock will be able to
sell such shares. The rating is based on current information furnished to
the Rating Agency by the Fund and the Adviser and information obtained
from other sources. The rating may be changed, suspended or withdrawn as
a result of changes in, or the unavailability of, such information.]
DIVIDENDS
Holders of shares of Cumulative Preferred Stock will be entitled to
receive, when, as and if declared by the Board of Directors of the Fund
out of funds legally available therefor, cumulative cash dividends, at
the annual rate of ___% of the liquidation preference of $25 per share,
payable quarterly on the [25th] day of the last month of each calendar
quarter (the "Dividend Payment Date"), commencing on , 1997, to the
persons in whose names the shares of Cumulative Preferred Stock are
registered at the close of business on the preceding
. Dividends on the shares of Cumulative Preferred Stock will
accumulate from the date on which such shares are originally issued (the
"Date of Original Issue").
No dividends will be declared or paid or set apart for payment on
shares of Cumulative Preferred Stock for any dividend period or part
thereof unless full cumulative dividends have been or contemporaneously
are declared and paid on all outstanding shares of Cumulative Preferred
Stock through the most recent Dividend Payment Dates thereof. If full
cumulative dividends are not paid on the Cumulative Preferred Stock, all
dividends on the shares of Cumulative Preferred Stock will be paid pro
rata to the holders of the shares of Cumulative Preferred Stock. Holders
of Cumulative Preferred Stock will not be entitled to any dividends,
whether payable in cash, property or stock, in excess of full cumulative
dividends. No interest, or sum of money in lieu of interest, will be
payable in respect of any dividend payment that may be in arrears.
For so long as any shares of Cumulative Preferred Stock are
outstanding, the Fund will not declare, pay or set apart for payment any
dividend or other distribution (other than a dividend or distribution
paid in shares of, or options, warrants or rights to subscribe for or
purchase, shares of Common Stock or other stock, if any, ranking junior
to the Cumulative Preferred Stock as to dividends or upon liquidation) in
respect of the Common Stock or any other stock of the Fund ranking junior
to or on a parity with the Cumulative Preferred Stock as to dividends or
upon liquidation, or call for redemption, redeem, purchase or otherwise
acquire for consideration any shares of its Common Stock or any other
junior stock (except by conversion into or exchange for stock of the Fund
ranking junior to or on a parity with the Cumulative Preferred Stock as
to dividends and upon liquidation), unless, in each case, (A) immediately
after such transaction, the Fund will have Adjusted Assets greater than
or equal to the Base Amount and will have the required Asset Coverage
(see " -- Asset Maintenance" and " -- Redemption" below), (B) full
cumulative dividends on shares of Cumulative Preferred Stock due on or
prior to the date of the transactions have been declared and paid (or
sufficient Deposit Assets to cover such payment have been deposited with
the Paying Agent) and (C) the Fund has redeemed the full number of shares
of Cumulative Preferred Stock required to be redeemed by any provision
for mandatory redemption contained in the Articles Supplementary.
ASSET MAINTENANCE
The Fund will be required to satisfy two separate asset maintenance
requirements under the terms of the Articles Supplementary. These
requirements are summarized below.
Asset Coverage. The Fund will be required under the Articles
Supplementary to maintain as of the last Business Day of each March,
June, September and December of each year, an asset coverage of at least
200% (or such higher or lower percentage as may be required at the time
under the 1940 Act) with respect to all outstanding senior securities of
the Fund which are stock, including the Cumulative Preferred Stock (the
"Asset Coverage"). If the Fund fails to maintain the Asset Coverage on
such dates and such failure is not cured within 60 days, the Fund will be
required under certain circumstances to redeem certain of the shares of
Cumulative Preferred Stock. See "Redemption" below.
If the shares of Cumulative Preferred Stock offered hereby had been
issued and sold as of March 31, 1997, the Asset Coverage immediately
following such issuance and sale (after giving effect to the deduction of
the underwriting discounts and estimated offering expenses for such
shares of $ ), would have been computed as follows:
Value of Fund assets less
liabilities not constituting
senior securities $118,633,554
______________ = %395
____________
Senior securities $ 30,000,000
representing indebtedness
plus liquidation
preference of the
Cumulative Preferred
Stock
Base Amount. The Fund will be required under the Articles
Supplementary to maintain, as of each Valuation Date, portfolio holdings
("Adjusted Assets") meeting specified guidelines of the Rating Agency, as
described under "Description of Cumulative Preferred Stock -- Rating
Agency Guidelines", having an aggregate discounted value greater than or
equal to the Base Amount, which is in general the sum of the aggregate
liquidation preference of the Cumulative Preferred Stock, any
indebtedness for borrowed money and current liabilities and dividends. If
the Fund fails to meet such requirement as to any Valuation Date and such
failure is not cured within 14 days after such Valuation Date, the Fund
will be required to redeem certain of the shares of Cumulative Preferred
Stock. See " -- Redemption" below.
Any security not in compliance with the Rating Agency Guidelines
will be excluded from the calculation of Adjusted Assets .
The Rating Agency Discount Factors and guidelines for determining
the market value of the Fund's portfolio holdings have been based on
criteria established in connection with the rating of the Cumulative
Preferred Stock. These factors include, but are not limited to, the
sensitivity of the market value of the relevant asset to changes in
interest rates, the liquidity and depth of the market for the relevant
asset, the credit quality of the relevant asset (for example, the lower
the rating of a corporate debt obligation, the higher the related
discount factor) and the frequency with which the relevant asset is
marked to market. The Rating Agency Discount Factor relating to any asset
of the Fund and the Base Amount, the assets eligible for inclusion in the
calculation of the discounted value of the Fund's portfolio and certain
definitions and methods of calculation relating thereto may be changed
from time to time by the Board of Directors, provided that, among other
things, such changes will not impair the rating then assigned to the
Cumulative Preferred Stock by the Rating Agency.
On or before the third Business Day after each quarterly Valuation
Date, the Fund is required to deliver to the Rating Agency a base amount
report (the "Base Amount Report"). Within ten Business Days after
delivery of such report relating to the quarterly Valuation Date, the
Fund will deliver letters prepared by the Fund's independent accountants
regarding the accuracy of the calculations made by the Fund in its most
recent Base Amount Report. If any such letter prepared by the Fund's
independent accountants shows that an error was made in the most recent
Base Amount Report, the calculation or determination made by the Fund's
independent accountants will be conclusive and binding on the Fund.
REDEMPTION
Mandatory Redemption. The Fund will be required to redeem, at a
redemption price equal to $25 per share plus accumulated and unpaid
dividends through the date of redemption (whether or not earned or
declared) (the "Redemption Price"), certain of the shares of Cumulative
Preferred Stock (to the extent permitted under the 1940 Act and Maryland
law) in the event that:
(i) the Fund fails to maintain the Asset Coverage and such
failure is not cured on or before 60 days following such failure (a
"Cure Date"); or
(ii) the Fund fails to maintain Adjusted Assets greater than
or equal to the Base Amount as of any Valuation Date, and such
failure is not cured on or before the 14th day after such Valuation
Date (also, a "Cure Date").
The amount of such mandatory redemption will equal the minimum
number of outstanding shares of Cumulative Preferred Stock the redemption
of which, if such redemption had occurred immediately prior to the
opening of business on a Cure Date, would have resulted in the Asset
Coverage having been satisfied or the Fund having Adjusted Assets for the
Rating Agency equal to or greater than the Base Amount on such Cure Date
or, if the Asset Coverage or Adjusted Assets for the Rating Agency equal
to or greater than the Base Amount, as the case may be, cannot be so
restored, all of the shares of Cumulative Preferred Stock, at the
Redemption Price. In the event that shares of Cumulative Preferred Stock
are redeemed due to the occurrence of (i) above, the Fund may, but is not
required to, redeem a sufficient number of shares of Cumulative Preferred
Stock so that the asset coverage (as defined in the 1940 Act) of the
remaining outstanding shares of Cumulative Preferred Stock and any other
Preferred Stock remaining after redemption is up to 220%. In the event
that shares of Cumulative Preferred Stock are redeemed due to the
occurrence of (ii) above, the Fund may, but is not required to, redeem a
sufficient number of shares of Cumulative Preferred Stock so that the
Adjusted Assets of the remaining outstanding shares of Cumulative
Preferred Stock and any other Preferred Stock remaining after redemptions
up to 110% of the Base Amount.
If the Fund does not have funds legally available for the redemption
of, or is otherwise unable to redeem, all the shares of Cumulative
Preferred Stock to be redeemed on any redemption date, the Fund will
redeem on such redemption date that number of shares for which it has
legally available funds, or is otherwise able, to redeem ratably from
each holder whose shares are to be redeemed, and the remainder of the
shares required to be redeemed will be redeemed on the earliest
practicable date on which the Fund will have funds legally available for
the redemption of, or is otherwise able to redeem, such shares upon
written notice of redemption ("Notice of Redemption").
If fewer than all shares of Cumulative Preferred Stock are to be
redeemed, such redemption will be made pro rata from each holder of
shares in accordance with the respective number of shares held by each
such holder on the record date for such redemption. If fewer than all
shares of Cumulative Preferred Stock held by any holder are to be
redeemed, the Notice of Redemption mailed to such holder will specify the
number of shares to be redeemed from such holder. Unless all accumulated
and unpaid dividends for all past dividend periods will have been or are
contemporaneously paid or declared and Deposit Securities for the payment
thereof deposited with the Paying Agent, no redemptions of Cumulative
Preferred Stock may be made.
Optional Redemption. Prior to May 15, 2002, the shares of Cumulative
Preferred Stock are not subject to any optional redemption by the Fund
unless such redemption is necessary, in the judgment of the Fund, to
maintain the Fund's status as a regulated investment company ("RIC")
under the Internal Revenue Code of 1986, as amended (the "Code").
Commencing May 15, 2002 and thereafter, the Fund may at any time redeem
shares of Cumulative Preferred Stock in whole or in part at the
Redemption Price. Such redemptions are subject to the limitations of the
1940 Act and Maryland law.
Redemption Procedures. A Notice of Redemption will be given to the
holders of record of Cumulative Preferred Stock selected for redemption
not less than 30 or more than 45 days prior to the date fixed for the
redemption. Each Notice of Redemption will state (i) the redemption date,
(ii) the number of shares of Cumulative Preferred Stock to be redeemed,
(iii) the CUSIP number(s) of such shares, (iv) the Redemption Price, (v)
the place or places where such shares are to be redeemed, (vi) that
dividends on the shares to be redeemed will cease to accrue on such
redemption date, and (vii) the provision of the Articles Supplementary
under which the redemption is being made. No defect in the Notice of
Redemption or in the mailing thereof will affect the validity of the
redemption proceedings, except as required by applicable law.
LIQUIDATION RIGHTS
Upon a liquidation, dissolution or winding up of the affairs of the
Fund (whether voluntary or involuntary), holders of shares of Cumulative
Preferred Stock then outstanding will be entitled to receive out of the
assets of the Fund available for distribution to shareholders, after
satisfying claims of creditors but before any distribution or payment of
assets is made to holders of the Common Stock or any other class of stock
of the Fund ranking junior to the Cumulative Preferred Stock as to
liquidation payments, a liquidation distribution in the amount of $25 per
share, plus an amount equal to all unpaid dividends accrued to and
including the date fixed for such distribution or payment (whether or not
earned or declared by the Fund but excluding interest thereon) (the
"Liquidation Payment"), and such holders will be entitled to no further
participation in any distribution payment in connection with any such
liquidation, dissolution or winding up. If, upon any liquidation,
dissolution or winding up of the affairs of the Fund, whether voluntary
or involuntary, the assets of the Fund available for distribution among
the holders of all outstanding shares of Cumulative Preferred Stock and
any other outstanding class or series of Preferred Stock of the Fund
ranking on a parity with the Cumulative Preferred Stock as to payment
upon liquidation, will be insufficient to permit the payment in full to
such holders of Cumulative Preferred Stock of the Liquidation Payment and
the amounts due upon liquidation with respect to such other Preferred
Stock, then such available assets will be distributed among the holders
of Cumulative Preferred Stock and such other Preferred Stock ratably in
proportion to the respective preferential amounts to which they are
entitled. Unless and until the Liquidation Payment has been paid in full
to the holders of Cumulative Preferred Stock, no dividends or
distributions will be made to holders of the Common Stock or any other
stock of the Fund ranking junior to the Cumulative Preferred Stock as to
liquidation.
VOTING RIGHTS
Except as otherwise stated in this Prospectus and as otherwise
required by applicable law, holders of shares of Cumulative Preferred
Stock will be entitled to one vote per share on each matter submitted to
a vote of shareholders and will vote together with holders of shares of
Common Stock and of any other Preferred Stock then outstanding as a
single class.
In connection with the election of the Fund's directors, holders of
shares of Cumulative Preferred Stock and any other Preferred Stock,
voting as a separate class, will be entitled at all times to elect two of
the Fund's directors, and the remaining directors will be elected by
holders of shares of Common Stock and holders of shares of Cumulative
Preferred Stock and any other Preferred Stock, voting together as a
single class. In addition, if at any time dividends on outstanding shares
of Cumulative Preferred Stock and/or any other Preferred Stock are unpaid
in an amount equal to at least two full years' dividends thereon or if at
any time holders of any shares of Preferred Stock are entitled, together
with the holders of shares of Cumulative Preferred Stock, to elect a
majority of the directors of the Fund under the 1940 Act, then the number
of directors constituting the Board of Directors automatically will be
increased by the smallest number that, when added to the two directors
elected exclusively by the holders of shares of Cumulative Preferred
Stock and any other Preferred Stock as described above, would constitute
a majority of the Board of Directors as so increased by such smallest
number. Such additional directors will be elected by the holders of
Cumulative Preferred Stock and any other Preferred Stock, voting as a
separate class, at a special meeting of shareholders which will be called
and held as soon as practicable, and at all subsequent meetings at which
directors are to be elected the holders of shares of Cumulative Preferred
Stock and any other Preferred Stock, voting as a separate class, will be
entitled to elect the smallest number of additional directors that,
together with the two directors which such holders in any event will be
entitled to elect, constitutes a majority of the total number of
directors of the Fund as so increased. The terms of office of the persons
who are directors at the time of that election will continue. If the Fund
thereafter pays, or declares and sets apart for payment in full, all
dividends payable on all outstanding shares of Cumulative Preferred Stock
and any other Preferred Stock for all past Dividend Periods, the
additional voting rights of the holders of shares of Cumulative Preferred
Stock and any other Preferred Stock as described above will cease, and
the terms of office of all of the additional directors elected by the
holders of shares of Cumulative Preferred Stock and any other Preferred
Stock (but not of the directors with respect to whose election the
holders of shares of Common Stock were entitled to vote or the two
directors the holders of shares of Cumulative Preferred Stock and any
other Preferred Stock have the right to elect as a separate class in any
event) will terminate automatically.
So long as shares of the Cumulative Preferred Stock are outstanding,
the Fund will not, without the affirmative vote of the holders of a
majority of the shares of Preferred Stock outstanding at the time, voting
separately as one class, amend, alter or repeal the provisions of the
Charter, whether by merger, consolidation or otherwise, so as to
materially adversely affect any of the contract rights expressly set
forth in the Charter of holders of shares of the Cumulative Preferred
Stock or any other Preferred Stock. To the extent permitted under the
1940 Act, in the event shares of more than one series of Preferred Stock
are outstanding, the Fund will not approve any of the actions set forth
in the preceding sentence which materially adversely affects the contract
rights expressly set forth in the Charter of a holder of shares of a
series of Preferred Stock differently than those of a holder of shares of
any other series of Preferred Stock without the affirmative vote of at
least a majority of votes entitled to be cast by holders of the Preferred
Stock of each series materially adversely affected and outstanding at
such time (each such materially adversely affected series voting
separately as a class). The Board of Directors, however, without
shareholder approval, may amend, alter or repeal the Rating Agency
Guidelines in the event the Fund receives confirmation from the Rating
Agency that any such amendment, alteration or repeal would not impair the
rating then assigned to the Cumulative Preferred Stock. The affirmative
vote of a majority of the votes entitled to be cast by holders of
outstanding shares of the Cumulative Preferred Stock and any other
Preferred Stock, voting as a separate class, will be required to approve
any plan of reorganization adversely affecting such shares or any action
requiring a vote of security holders under Section 13(a) of the 1940 Act,
including, among other things, changes in the Fund's investment objective
or changes in the investment restrictions described as fundamental
policies under "Investment Objectives and Policies." The class vote of
holders of shares of the Cumulative Preferred Stock and any other
Preferred Stock described above in each case will be in addition to a
separate vote of the requisite percentage of shares of Common Stock and
Cumulative Preferred Stock and any other Preferred Stock, voting together
as a single class, necessary to authorize the action in question.
The foregoing voting provisions will not apply to any shares of
Cumulative Preferred Stock if, at or prior to the time when the act with
respect to which such vote otherwise would be required will be effected,
such shares will have been (i) redeemed or (ii) called for redemption and
sufficient Deposit Securities provided to the Dividend-Disbursing Agent
to effect such redemption.
LIMITATION ON INCURRENCE OF ADDITIONAL INDEBTEDNESS AND
ISSUANCE OF ADDITIONAL PREFERRED STOCK
So long as any shares of Cumulative Preferred Stock are outstanding,
the Fund may issue and sell one or more series of a class of senior
securities of the Fund representing indebtedness under the 1940 Act
and/or otherwise create or incur indebtedness, provided that the Fund
will, immediately after giving effect to the incurrence of such
indebtedness and to its receipt and application of the proceeds thereof,
have an "asset coverage" for all senior securities of the Fund
representing indebtedness, as defined in the 1940 Act, of at least 200%
of the amount of all indebtedness of the Fund then outstanding and no
such additional indebtedness will have any preference or priority over
any other indebtedness of the Fund upon the distribution of the assets of
the Fund or in respect of the payment of interest. Any possible liability
resulting from lending and/or borrowing portfolio securities, entering
into reverse repurchase agreements, entering into futures contracts and
writing options, to the extent such transactions are made in accordance
with the investment restrictions of the Fund then in effect, will not be
considered to be indebtedness limited by the Articles Supplementary.
So long as any shares of Cumulative Preferred Stock are outstanding,
the Fund may issue and sell shares of one of more other series of
Preferred Stock constituting a series of a class of senior securities of
the Fund representing stock under the 1940 Act in addition to the shares
of Cumulative Preferred Stock, provided that the Fund will, immediately
after giving effect to the issuance of such additional Preferred Stock
and to its receipt and application of the proceeds thereof, have an
"asset coverage" for all senior securities of the Fund which are stock,
as defined in the 1940 Act, of at least 200% of the liquidation
preference of the shares of Cumulative Preferred Stock and all other
Preferred Stock of the Fund then outstanding and no such additional
Preferred Stock will have any preference or priority over any other
Preferred Stock of the Fund upon the distribution of the assets of the
Fund or in respect of the payment of dividends.
REPURCHASE OF CUMULATIVE PREFERRED STOCK
The Fund is a closed-end investment company and, as such, holders of
Cumulative Preferred Stock do not, and will not, have the right to redeem
their shares of the Fund. The Fund, however, may repurchase shares of the
Cumulative Preferred Stock when it is deemed advisable by the Board of
Directors in compliance with the requirements of the 1940 Act and the
rules and regulations thereunder.
DESCRIPTION OF CAPITAL STOCK AND OTHER SECURITIES
CAPITAL STOCK
Common Stock. On February 21, 1995, shareholders approved the
Charter changing the status of the Fund to a closed-end fund. The Charter
was filed on March 31, 1995, the date of the Fund's conversion from an
open-end to a closed-end investment company. The authorized capital stock
consists of one billion shares of stock having a par value of one tenth
of one cent ($.001) per share, one hundred million of which have been
initially classified as Fund shares. Shares of the Fund are listed on the
New York Stock Exchange under the symbol GCV and began trading March 31,
1995. All shares of Common Stock have equal dividend, liquidation and
voting rights and each fractional share has those rights in proportion to
the percentage that the fractional share represents of a whole share.
There are no conversion or preemptive rights in connection with any
outstanding shares of the Common Stock. All issued and outstanding shares
of the Fund are fully paid and nonassessable.
The Fund's Board of Directors can reclassify unissued shares as
preferred stock with such terms and conditions as determined by the Board
of Directors.
As a New York Stock Exchange-listed company, the Fund is required to
hold annual meetings of its shareholders.
Preferred Stock. The Fund's Board of Directors has authority to
cause the Fund to issue and sell up to 2,000,000 shares of Preferred
Stock, par value $.001 per share, that may be convertible into shares of
the Fund's Common Stock. The terms of such Preferred Stock would be fixed
by the Board of Directors and would materially limit and/or qualify the
rights of the holders of the Fund's Common Stock. The Board of Directors
has designated 120,000 shares of Preferred Stock as the Cumulative
Preferred Stock offered hereby. All shares of Cumulative Preferred Stock,
when issued in accordance with the terms of the offering, will be fully
paid and nonassessable. See "Description of Cumulative Preferred Stock."
The following table shows the number of shares of (i) capital stock
authorized, (ii) capital stock held by the Fund for its own account and
(iii) capital stock outstanding for each class of authorized securities
of the Fund as of the completion of this offering.
AMOUNT HELD
BY FUND
AMOUNT FOR ITS OWN AMOUNT
TITLE OF CLASS AUTHORIZED ACCOUNT OUTSTANDING
Common Stock.................. 100,000,000 0 8,092,945
Cumulative Preferred Stock.... 2,000,000 0 120,000
TAXATION
The following is a summary of the Federal income tax consequences to
a shareholder of acquiring, holding and disposing of Preferred and Common
Shares of the Fund. The discussion reflects applicable tax laws of the
United States as of the date of this Prospectus, which tax laws may be
changed or subject to new interpretations by the courts or the Internal
Revenue Service retroactively or prospectively.
No attempt is made to present a detailed explanation of all U.S.
Federal, state, local and foreign tax concerns affecting the Fund and its
shareholders, and the discussions set forth here do not constitute tax
advice. Investors are urged to consult their own tax advisers to
determine the tax consequences to them of investing in the Fund.
TAXATION OF THE FUND
The Fund has qualified as and intends to continue to qualify as and
elect to be a regulated investment company (a "RIC") under Subchapter M
of the Code. If it so qualifies, the Fund will not be subject to U.S.
Federal income tax on the portion of its net investment income (i.e., its
investment company taxable income as defined in the Code) and its net
capital gain (i.e., the excess of its net realized long-term capital
gains over its net realized short-term capital losses) which it
distributes to its shareholders in each taxable year., provided that it
distributes to its shareholders at least 90% of its net investment income
for such taxable year.
Qualification as a RIC requires, among other things, that the Fund:
(a) derive at least 90% of its gross income in each taxable year from
dividends, interest, payments with respect to securities loans, gains
from the sale or other disposition of stock or securities, foreign
currencies or other income (including gains from options, futures or
forward contracts) derived with respect to its business of investing in
stock, securities or currencies; (b) derive less than 30% of its gross
income in each taxable year from the sale or other disposition of any of
the following held for less than three months: stock, securities,
options, futures, certain forward contracts, or foreign currencies (or
any options, futures or forward contracts on foreign currencies) but only
if such currencies are not directly related to the Fund's principal
business of investing in stock or securities (the "30% limitation"); and
(c) diversify its holdings so that, at the end of each quarter of each
taxable year, (i) at least 50% of the market value of the Fund's assets
is represented by cash, cash items, U.S. government securities,
securities of other RICs and other securities with such other securities
limited, in respect of any one issuer, to an amount not greater than 5%
of the value of the Fund's assets and 10% of the outstanding voting
securities of such issuer, and (ii) not more than 25% of the value of its
assets is invested in the securities of any one issuer (other than U.S.
government securities or the securities of other RICs).
If the Fund were unable to satisfy the 90% distribution requirement
or otherwise were to fail to qualify to be taxed as a RIC in any year, it
would be subject to tax in such year on all of its taxable income,
whether or not the Fund made any distributions. To qualify again to be
taxed as a RIC in a subsequent year, the Fund would be required to
distribute to Cumulative Preferred Shareholders and Common Shareholders
as an net investment income dividend, its earnings and profits
attributable to non-RIC years reduced by an interest charge on 50% of
such earnings and profits payable by the Fund to the IRS. In addition, if
the Fund failed to qualify as a RIC for a period greater than one taxable
year, then the Fund would be required to recognize and pay tax on any net
built-in gains (the excess of aggregate gains, including items of income,
over aggregate losses that would have been realized if the Fund had been
liquidated) in order to qualify as a RIC in a subsequent year. To the
extent possible, the Fund intends to make sufficient distributions to
avoid application of the corporate income tax.
Under the Code, amounts not distributed by a regulated investment
company on a timely basis in accordance with a calendar year distribution
requirement are subject to a 4% excise tax. To avoid the tax, the Fund
must distribute during each calendar year, an amount equal to, at the
minimum, the sum of (1) 98% of its net investment income (not taking into
account any capital gains or losses) for the calendar year, (2) 98% of
its net capital gains for the calendar year (unless an election is made
by a fund with a November or December year-end to use the fund's fiscal
year), and (3) all net investment income and net capital gain for
previous years that were not previously distributed. A distribution will
be treated as paid during the calendar year if it is paid during the
calendar year or declared by the Fund in October, November or December of
the year, payable to shareholders of record on a date during such month
and paid by the Fund during January of the following year. Any such
distributions paid during January of the following year will be deemed to
be received on December 31 of the year the distributions are declared,
rather than when the distributions are received. While the Fund intends
to distribute its ordinary income and capital gains in the manner
necessary to minimize imposition of the 4% excise tax, there can be no
assurance that sufficient amounts of the Fund's taxable income and
capital gains will be distributed to avoid entirely the imposition of the
tax. In such event, the Fund will be liable for the tax only on the
amount by which it does not meet the foregoing distribution requirements.
If the Fund does not meet the asset coverage requirements of the
1940 Act the Articles Supplementary, the Fund will be required to suspend
distributions to the holders of the common stock until the asset coverage
is restored. See "Description of Cumulative Preferred Stock -- Dividends"
and "Description of Capital Stock and Other Securities." Such a
suspension of distributions might prevent the Fund from distributing 90%
of its investment company taxable income, as is required in order to
avoid Fund-level taxation on the Fund's distributions, or might prevent
it from distributing enough income and capital gain to avoid completely
the imposition of the excise tax. Upon any failure to meet the asset
coverage requirements of the 1940 Act or the Articles Supplementary, the
Fund may, and in certain circumstances will, be required to partially
redeem the shares of Cumulative Preferred Stock in order to restore the
requisite asset coverage and avoid the adverse consequences to the Fund
and its shareholders of failing to qualify as a RIC. If asset coverage
were restored, the Fund would again be able to pay dividends and might be
able to avoid Fund-level taxation on the Fund's undistributed income.
TAXATION OF SHAREHOLDERS
Distributions by the Fund from its net investment income (referred
to hereafter as "net investment income dividends") are taxable to
shareholders as net investment income. A portion of the Fund's net
investment income dividends may qualify for the dividends received
deduction available to corporations.
At the time of a shareholder's purchase, the market price of the
Fund's Common Stock or Cumulative Preferred Stock may reflect
undistributed net investment income or net capital gains. A subsequent
distribution of these amounts by the Fund will be taxable to the
shareholder even though the distribution economically is a return of part
of the shareholder's investment. Investors should carefully consider the
tax implications of acquiring shares just prior to a distribution, as
they will receive a distribution that would be taxable to them.
Distributions made from net capital gains which are designated by
the Fund as capital gain dividends are taxable to shareholders as
long-term capital gains, regardless of the length of time the shareholder
has owned Fund shares. In general, the maximum Federal income tax rate
imposed on individuals with respect to capital gain dividends is 28%,
whereas the maximum federal income tax rate imposed on individuals with
respect to net investment income (and short-term capital gains, which
currently are taxed at the same rates as net investment income) is 39.6%.
With respect to corporate taxpayers, long-term capital gains currently
are taxed at the same Federal income tax rates as net investment income
and short-term capital gains.
In recent years, a number of legislative proposals concerning the
tax treatment of capital gains have been introduced in Congress. The
proposals have ranged from eliminating the preferential treatment of
capital gains to eliminating tax on capital gains. It cannot be predicted
whether any of these proposals may ultimately become law, nor can the
effective date of any legislation be anticipated. Any change in the tax
treatment of capital gains, however, would have an effect on the tax
consequences of an investment in Cumulative Preferred Stock. Shareholders
may be entitled to offset their capital gain dividends with capital
losses. There are a number of statutory provisions affecting when capital
losses may be offset against capital gains and limiting the use of losses
from certain investments and activities. Accordingly, shareholders with
capital losses are urged to consult their tax advisers.
Dividends are taxable to shareholders whether they are paid in cash
or, paid in additional shares of Stock under the Fund's plan for the
automatic reinvestment of dividends. Generally, shareholders will be
taxed on dividends in the year of receipt, however, if the Fund declares
a dividend in October, November or December to shareholders of record on
a specified date in such a month which is actually paid during the
following January, the dividend will be deemed to have been paid by the
Fund (and received by the shareholders) on December 31 of the year in
which the dividend is declared. Not later than 60 days after the close of
its taxable year, the Fund will provide its shareholders with a written
notice designating the amounts of any net investment income dividends or
capital gain dividends. Distributions in excess of the Fund's earnings
and profits will first reduce the adjusted tax basis of a holder's shares
and, after such adjusted tax basis is reduced to zero, will constitute
capital gains to such holder (assuming the shares are held as a capital
asset).
The sale, redemption or other disposition of Fund shares is a
taxable event and may result in a gain or loss. Such gain or loss will
generally be a capital gain or loss if the shares are capital assets in
the hands of the shareholder and will be long-term capital gain or loss
if the shares have been held for more than one year. Any loss upon the
sale or exchange of Fund shares held for six months or less, however,
will be treated as long-term capital loss to the extent of any capital
gain dividends received by the shareholder. A loss realized on a sale or
exchange of shares of the Fund will be disallowed if other Fund shares of
the same class are acquired within a 61-day period beginning 30 days
before and ending 30 days after the date on which the shares are
disposed. In such a case, the basis of the shares acquired will be
adjusted to reflect the disallowed loss.
Designation of Capital Gain Dividends to Cumulative Preferred Stock.
The IRS has taken the position in Revenue Ruling 89-81 that if a RIC has
two classes of shares, it may designate distributions made to each class
in any year as consisting of no more than such class's proportionate
share of particular types of income, such as long-term capital gain. A
class's proportionate share of a particular type of income is determined
according to the percentage of total dividends paid by the RIC during
such year that was paid to such class. Consequently, the Fund will
designate distributions made to the Common Stock and Cumulative Preferred
Stock and any other Preferred Stock series as consisting of particular
types of income in accordance with the classes' proportionate shares of
such income. Because of this rule, the Fund is required to allocate a
portion of its net capital gains to holders of Common Stock, holders of
Cumulative Preferred Stock and any other Preferred Stock. The amount of
net capital gains and other types of income allocable among holders of
the Common Stock, the Cumulative Preferred Stock and any other Preferred
Stock will depend upon the amount of such gains and other income realized
by the Fund and the total dividends paid by the Fund on shares of Common
Stock and Cumulative Preferred Stock and any other Preferred Stock during
a taxable year.
The Fund believes that under current law the manner in which the
Fund intends to allocate net capital gains and other taxable income
between shares of Common Stock and Cumulative Preferred Stock will be
respected for Federal income tax purposes. However, the Fund has not
requested and will not request direct guidance from the IRS specifically
addressing whether the Fund's method of allocation will be respected for
Federal income tax purposes, and it is possible that the IRS could
disagree with the Fund and attempt to reallocate the Fund's net capital
gains or other taxable income.
WITHHOLDING AND OTHER TAXES
Net investment income dividends (but not capital gain dividends)
paid to shareholders who are nonresident aliens or foreign entities will
be subject to a 30% United States withholding tax under existing
provisions of the Code applicable to foreign individuals and entities
unless a reduced rate of withholding or a withholding exemption is
provided under applicable treaty law. Nonresident shareholders are urged
to consult their own tax advisers concerning the applicability of the
United States withholding tax.
Under certain provisions of the Code, some shareholders may be
subject to a 31% withholding tax on net investment income dividends,
capital gain dividends and redemption payments ("backup withholding"). A
shareholder, however, may generally avoid becoming subject to this
requirement by filing an appropriate form with the payor (i.e., the
financial institution or brokerage firm where the shareholder maintains
his or her account), certifying under penalties of perjury that such
shareholder's taxpayer identification number is correct and that such
shareholder has never been notified by the IRS that he or she is subject
to backup withholding, has been notified by the IRS that he or she is no
longer subject to backup withholding, or is exempt from backup
withholding. Corporate shareholders and certain other shareholders are
exempt from backup withholding. Backup withholding is not an additional
tax. Any amounts withheld under the backup withholding rules from
payments made to a shareholder may be credited against such shareholder's
Federal income tax liability.
Distributions may also be subject to additional state, local and
foreign taxes, depending on each shareholder's particular situation.
Shareholders are advised to consult their own tax advisers with respect
to the particular tax consequences to them of an investment in the
Cumulative Preferred Stock.
THE FOREGOING IS A GENERAL AND ABBREVIATED SUMMARY OF THE APPLICABLE
PROVISIONS OF THE CODE AND TREASURY REGULATIONS PRESENTLY IN EFFECT. A
MORE COMPLETE DISCUSSION OF THE TAX RULES APPLICABLE TO THE FUND CAN BE
FOUND IN THE SAI INCORPORATED BY REFERENCE INTO ATTACHED TO THIS
PROSPECTUS. FOR THE COMPLETE PROVISIONS APPLICABLE TO BOTH SHAREHOLDERS
AND THE FUND, REFERENCE SHOULD BE MADE TO THE PERTINENT CODE SECTIONS AND
THE TREASURY REGULATIONS PROMULGATED THEREUNDER. THE CODE AND THE
TREASURY REGULATIONS ARE SUBJECT TO CHANGE BY LEGISLATIVE, JUDICIAL OR
ADMINISTRATIVE ACTION, EITHER PROSPECTIVELY OR RETROACTIVELY.
CUSTODIAN, TRANSFER AGENT AND DIVIDEND-DISBURSING AGENT
State Street Bank and Trust Company serves as Custodian for the
Fund's cash and securities as well as the Transfer Agent and
Dividend-Disbursing Agent for its shares. Boston EquiServe LP, an
affiliate of State Street, performs the shareholder services on behalf of
State Street and is located at 150 Royall Street, Canton, MA 02021. State
Street does not assist in and is not responsible for investment decisions
involving assets of the Fund.
UNDERWRITING
Upon the terms and subject to the conditions contained in the
Underwriting Agreement dated the date hereof, each Underwriter named
below has severally agreed to purchase, and the Fund has agreed to sell
to such Underwriter, the number of shares of Cumulative Preferred Stock
set forth opposite the name of such Underwriter.
NUMBER OF
NAME SHARES
Smith Barney Inc......................
Gabelli & Company, Inc................
Total _________
The Underwriting Agreement provides that the obligations of the
Underwriters to pay for and accept delivery of the shares of Cumulative
Preferred Stock offered hereby are subject to the approval of certain
legal matters by counsel and to certain other conditions. The
Underwriters are obligated to take and pay for all shares of Cumulative
Preferred Stock offered hereby if any are taken.
The Underwriters propose to offer part of the shares of Cumulative
Preferred Stock offered hereby directly to the public at the public
offering price set forth on the cover page of this Prospectus and part of
the shares to certain dealers at a price which represents a concession
not in excess of $ per share under the public offering price. The
Underwriters may allow, and such dealers may reallow, a concession not in
excess of $ per share to certain other dealers. After the initial
offering of the shares of Cumulative Preferred Stock to the public, the
public offering price and such concessions may be changed by the
Underwriters. The Underwriting discount of $ per share is equal to % of
the initial offering price. Investors must pay for any shares of
Cumulative Preferred Stock purchased on or before , 1997.
The Fund and the Adviser have agreed to indemnify the Underwriters
against certain liabilities, including liabilities under the 1933 Act.
The Underwriters have advised the Fund that, pursuant to Regulation
M under the 1933 Act, certain persons participating in the Offering may
engage in transactions, including stabilizing bids, syndicate covering
transactions or the imposition of penalty bids, which may have the effect
of stabilizing or maintaining the market price of the Cumulative
Preferred Stock at a level above that which might otherwise prevail in
the open market. A "stabilizing bid" is a bid for or the purchase of the
Cumulative Preferred Stock on behalf of the Underwriters for the purpose
of fixing or maintaining the price of the Cumulative Preferred Stock. A
"syndicate covering transaction" is a bid for or purchase of the
Cumulative Preferred Stock on behalf of the Underwriters to reduce a
short position incurred by the Underwriters in connection with the
Offering. A "penalty bid" is an arrangement permitting the Underwriters
to reclaim the selling concession otherwise accruing to an Underwriter or
selling group member in connection with the Offering if any of the
Cumulative Preferred Stock originally sold by such Underwriter or selling
group member is purchased in a syndicate covering transaction and has
therefore not been effectively placed by such Underwriter or selling
group member. The Underwriters have advised the Company that such
transactions may be effected on the New York Stock Exchange or otherwise
and, if commenced, may be discontinued at any time.
The Underwriters have in the past and may continue during and
subsequent to the completion of the offering of Cumulative Preferred
Stock hereunder, from time to time act as a broker or dealer in
connection with the execution of portfolio transactions for the Fund. See
"Brokerage Allocation and Other Practices" in the SAI.
Prior to this offering, there has been no public market for the
Cumulative Preferred Stock. Application will be made to list the
Cumulative Preferred Stock on the New York Stock Exchange. However,
during an initial period which is not expected to exceed 30 days from the
date of this Prospectus, the Cumulative Preferred Stock will not be
listed on any securities exchange. During such period, the Underwriters
intend to make a market in the Cumulative Preferred Stock; however, they
have no obligation to do so. Consequently, an investment in the
Cumulative Preferred Stock may be illiquid during such period.
Gabelli & Company, Inc. is a wholly-owned subsidiary of Gabelli
Securities, Inc., which is majority-owned subsidiary of the Adviser and
is controlled by Mario J. Gabelli, the Fund's President and Chief
Investment Officer. For additional Information regarding these
affiliations, see "Management of the Funds".
The principal business address of each of the Underwriters is as
follows: Smith Barney Inc., 388 Greenwich Street, New York, New York
10013; and Gabelli & Company, Inc., One Corporate Center, Rye, New York
10580-1459.
LEGAL MATTERS
Certain matters concerning the legality under Maryland law of the
Cumulative Preferred Stock will be passed on by Miles & Stockbridge,
Baltimore, Maryland. Certain legal matters will be passed on by Skadden,
Arps, Slate, Meagher & Flom LLP, New York, New York, special counsel to
the Fund, and by Simpson Thacher & Bartlett (a partnership which includes
professional corporations), New York, New York, counsel to the
Underwriters. Skadden, Arps, Slate, Meagher & Flom LLP and Simpson
Thacher & Bartlett will each rely as to matters of Maryland law on the
opinion of Miles & Stockbridge.
EXPERTS
Price Waterhouse LLP, independent accountants, are the independent
accountants of the Fund. The audited financial statements of the Fund and
certain of the information appearing under the caption "Financial
Highlights" included in this Prospectus have been audited by Price
Waterhouse LLP for the periods indicated in its 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. Price
Waterhouse LLP has an office at 1177 Avenue of the Americas, New York,
New York 10036, and also performs tax and other professional services for
the Fund.
ADDITIONAL INFORMATION
The Fund is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended, and the 1940 Act and in
accordance therewith files reports and other information with the SEC.
Reports, proxy statements and other information filed by the Fund with
the SEC pursuant to the informational requirements of such Acts can be
inspected and copied at the public reference facilities maintained by the
SEC at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549, and at the following Regional Offices of the SEC: Northeast
Regional Office, Seven World Trade Center, Suite 1300, New York, New York
10048; Pacific Regional Office, 5670 Wilshire Boulevard, 11th Floor, Los
Angeles, California 90036-3648; and Midwest Regional Office, Northwestern
Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661-2511; and copies of such material can be obtained from the Public
Reference Section of the SEC, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. The SEC maintains a Web site
at http://www.sec.gov containing reports, proxy and information
statements and other information regarding registrants, including the
Fund, that file electronically with the SEC.
The Fund's Common Stock is listed on the New York Stock Exchange,
and reports, proxy statements and other information concerning the Fund
and filed with the SEC by the Fund can be inspected at the offices of the
New York Stock Exchange, Inc., 20 Broad Street, New York, New York 10005.
This Prospectus constitutes part of a Registration Statement filed
by the Fund with the SEC under the 1933 Act and the 1940 Act. This
Prospectus omits certain of the information contained in the Registration
Statement, and reference is hereby made to the Registration Statement and
related exhibits for further information with respect to the Fund and the
Cumulative Preferred Stock offered hereby. Any statements contained
herein concerning the provisions of any document are not necessarily
complete, and, in each instance, reference is made to the copy of such
document filed as an exhibit to the Registration Statement or otherwise
filed with the SEC. Each such statement is qualified in its entirety by
such reference. The complete Registration Statement may be obtained from
the SEC upon payment of the fee prescribed by its rules and regulations.
TABLE OF CONTENTS OF SAI
An SAI dated April __, 1997 has been filed with the SEC and is
incorporated by reference in this Prospectus. An SAI may be obtained
without charge by writing to the Fund at its address at One Corporate
Center, Rye, New York 10580-1434 or by calling the Fund toll-free at
(800) GABELLI (422-3554). The Table of Contents of the SAI is as follows:
TABLE OF CONTENTS
PAGE
CONVERTIBLE SECURITIES................................................B-2
OTHER INVESTMENTS.....................................................B-2
DERIVATIVE INSTRUMENTS................................................B-5
THE ADVISER..........................................................B-13
INVESTMENT RESTRICTIONS..............................................B-15
DIRECTORS AND OFFICERS...............................................B-16
PORTFOLIO TRANSACTIONS AND BROKERAGE.................................B-19
DETERMINATION OF NET ASSET VALUE.....................................B-21
DIVIDENDS, DISTRIBUTIONS AND TAXES...................................B-21
RATING AGENCY DISCOUNT FACTORS.......................................B-26
GENERAL INFORMATION..................................................B-28
FINANCIAL STATEMENTS.................................................B-28
GLOSSARY
"Adjusted Assets" means the aggregate Discounted Value of all the
Rating Agency Eligible Assets.
"Articles Supplementary" means the Fund's Articles Supplementary
creating and fixing the rights of the Cumulative Preferred Stock.
"Asset Coverage" has the meaning set forth on page ____ of this
Prospectus.
"Base Amount" means, as of any Valuation Date, the dollar amount
equal to (i) the sum of (A) the product of the number of shares of
Cumulative Preferred Stock outstanding on such Valuation Date multiplied
by the Liquidation Preference; (B) the aggregate amount of cash dividends
(whether or not earned or declared) that will have accumulated for each
outstanding share of Cumulative Preferred Stock from the most recent
Dividend Payment Date to which dividends have been paid or duly provided
for (or, in the event the Base Amount is calculated on a date prior to
the initial Dividend Payment Date with respect to the Cumulative
Preferred Stock, then from the Date of Original Issue) through the
Valuation Date plus all dividends to accumulate on the Cumulative
Preferred Stock then outstanding during the 70 days following such
Valuation Date; (C) the Fund's other liabilities due and payable as of
such Valuation Date (except that dividends and other distributions
payable by the Fund by the issuance of Common Stock will not be included
as a liability) and such liabilities projected to become due and payable
the Fund during the 90 days following such Valuation Date (excluding
liabilities for investments to be purchased and for dividends and other
distributions not declared as of such Valuation Date); (D) any current
liabilities of the Fund as of such Valuation Date to the extent not
reflected in any of (i)(A) through (i)(C) (including, without limitation,
and immediately upon determination, any amounts due and payable by the
Fund pursuant to reverse repurchase agreements and any payables for
assets purchased as of such Valuation Date) less (ii) (A) the Discounted
Value of any of the Fund's assets and/or (B) the face value of any of the
Fund's assets if, in the case of both (ii)(A) and (ii)(B), such assets
are either cash or securities which mature prior to or on the date of
redemption or repurchase of Cumulative Preferred Stock or payment of
another liability and are either U.S. Government Obligations or
securities which have a rating assigned by [Moody's of at least Aaa, P-1,
VMIG-1 or MIG-1 or by S&P of at least AAA, SP-1+ or A-1+,] in both cases
irrevocably held by the Fund's custodian bank in a segregated account or
deposited by the Fund with the Paying Agent for the payment of the
amounts needed to redeem or repurchase Cumulative Preferred Stock subject
to redemption or repurchase or any of (i)(B) through (i)(D) and provided
that in the event the Fund has repurchased Cumulative Preferred Stock
at a price of less than the Liquidation Preference thereof and
irrevocably segregated or deposited assets as described above with its
custodian bank or the Paying Agent for the payment of the repurchase
price the Fund may deduct 100% of the Liquidation Preference of such
Cumulative Preferred Securities to be repurchased from (i) above.
"Base Amount Report" has the meaning set forth on page __ of this
Prospectus.
"Business Day" means a day on which the New York Stock Exchange is
open for trading and that is neither a Saturday, Sunday nor any other day
on which banks in the City of New York are authorized by law to close.
"Charter" means the Articles of Incorporation, as amended and
supplemented (including the Articles Supplementary), of the Fund on file
in the State Department of Assessments and Taxation of Maryland.
"Common Stock" means the Common Stock, par value $.001 per share, of
the Fund.
"Cumulative Preferred Stock" means the ___% Cumulative Preferred
Stock, par value $.001 per share, of the Fund.
"Cure Date" has the meaning set forth on page __ of this Prospectus.
"Date of Original Issue" has the meaning set forth on page __ of
this Prospectus.
"Deposit Securities" means cash, Short-Term Money Market Instruments
and U.S. Government Obligations. Except for determining whether the Fund
has Adjusted Assets equal to or greater than the Base Amount, each
Deposit Security will be deemed to have a value equal to its principal or
face amount payable at maturity plus any interest payable thereon after
delivery of such Deposit Security but only if payable on or prior to the
applicable payment date in advance of which the relevant deposit is made.
"Discounted Value" means, with respect to a Rating Agency Eligible
Asset, the quotient of (A) in the case of non-convertible fixed income
securities, the lower of the principal amount and the market value
thereof or (B) in the case of any other Rating Agency Eligible Assets,
the market value thereof, divided by the applicable Rating Agency
Discount Factor.
"Dividend Payment Date" has the meaning set forth on page of this
Prospectus.
"Dividend-Disbursing Agent" means State Street Bank and Trust
Company and its successors or any other paying agent appointed by the
Fund.
"Dividend Periods" has the meaning set forth on page of this
Prospectus.
"Fund" means The Gabelli Convertible Securities Fund, Inc., a
Maryland corporation.
"Liquidation Preference" has the meaning set forth on page of this
Prospectus.
"Moody's" means Moody's Investor Services, Inc.
"1933 Act" means The Securities Act of 1933, as amended.
"1940 Act" means the Investment Company Act of 1940, as amended.
"Notice of Redemption" has the meaning set forth on page of this
Prospectus.
"Preferred Stock" means the preferred stock, par value $.001 per
share, of the Fund, and includes the Cumulative Preferred Stock.
"Rating Agency Discount Factor" means, with respect to a Rating
Agency Eligible Asset specified below, the numbers set forth in the SAI
under the heading "Rating Agency Discount Factors."
"Rating Agency Eligible Assets" means
i. cash (including, for this purpose, receivables for investments
sold to a counterparty whose senior debt securities are rated at
least Baa3 by the Rating Agency or a counterparty approved by the
Rating Agency and payable within five Business Days following such
Valuation Date and dividends and interest receivable within 70 days
on investments);
ii. Short-Term Money Market Instruments;
[iii. commercial paper that is not includible as a Short-Term
Money Market Instrument having on the Valuation Date a rating from
the Rating Agency of at least P-1 and maturing within 270 days;
iv. preferred stocks (A) which either (1) are issued by issuers
whose senior debt securities are rated at least Baa1 by the Rating
Agency or (2) are rated at least "baa3" by the Rating Agency (or in
the event of an issuer's senior debt securities or preferred stock
is not rated by the Rating Agency, which either (1) are issued by an
issuer whose senior debt securities are rated at least A by S&P or
(2) are rated at least A by S&P and for this purpose have been
assigned a Rating Agency equivalent rating of at least "baa3"), (B)
of issuers which have (or, in the case of issuers which are special
purpose corporations, whose parent companies have) common stock
listed on the New York Stock Exchange or the American Stock
Exchange, (C) which have a minimum issue size (when taken together
with other of the issuer's issues of similar tenor) of $50,000,000,
(D) which have paid cash dividends consistently during the preceding
three-year period (or, in the case of new issues without a dividend
history, are rated at least "A1" by the Rating Agency or, if not
rated by the Rating Agency, are rated at least AA by another rating
agency), (E) which pay cumulative cash dividends in U.S. dollars,
(F) which are not convertible into any other class of stock and do
not have warrants attached, (G) which are not issued by issuers in
the transportation industry and (H) in the case of auction rate
preferred stocks, which are rated at least "aa" by the Rating
Agency, or if not rated by the Rating Agency, AAA by another rating
agency or are otherwise approved in writing by the Rating Agency and
have never had a failed auction; provided, however, that for this
purpose the aggregate Market Value of the Company's holdings of any
issue of preferred stock will not be less than $500,000 nor more
than $5,000,000;
v. common stocks (A) which are traded on the New York Stock
Exchange, the American Stock Exchange or through the NASDAQ system
in the over-the-counter market, (B) which, if cash dividend paying,
pay cash dividends in U.S. dollars, and (C) which are not privately
placed; provided, however, that (1) common stock which, while a
Rating Agency Eligible Asset owned by the Fund, ceases paying any
regular cash dividend will no longer be considered a Rating Agency
Eligible Asset until 71 days after the date of the announcement of
such cessation, unless the issuer of the common stock has senior
debt securities rated at least A3 by the Rating Agency and (2) the
aggregate Market Value of the Fund's holdings of the common stock of
any issuer will not exceed 4% in the case of utility common stock
and 6% in the case of non-utility common stock of the number of
outstanding shares times the Market Value of such common stock;]
vi. U.S. Government Obligations;
[vii. corporate bonds (A) which are not privately placed, rated
at least B3 (Caa subordinate) by the Rating Agency (or, in the event
the bond is not rated by the Rating Agency, the bond is rated at
least BB-by another rating agency and which for this purpose is
assigned a Rating Agency equivalent rating of one full rating
category lower), with such rating confirmed on each Valuation Date,
(B) which have a minimum issue size of at least (x) $100,000,000 if
rated at least Baa3 or (y) $50,000,000 if rated B or Ba3, (C) which
are U.S. dollar denominated and pay interest in cash in U.S.
dollars, (D) which are not convertible or exchangeable into equity
of the issuing corporation and have a maturity of not more than 30
years, (E) for which, if rated below Baa3, the aggregate Market
Value of the Company's holdings do not exceed 10% of the aggregate
Market Value of any individual issue of corporate bonds calculated
at the time of original issuance, (F) the cash flow from which must
be controlled by an Indenture trustee and (G) which are not issued
in connection with a reorganization under any bankruptcy law;]
[viii. convertible corporate bonds (A) which are issued by
issuers whose senior debt securities are rated at least B2 by the
Rating Agency (or, in the event an issuer's senior debt securities
are not rated by the Rating Agency, which are issued by issuers
whose senior debt securities are rated at least BB by another rating
agency and which for this purpose is assigned a Rating Agency
equivalent rating of one full rating category lower), (B) which are
convertible into common stocks which are traded on the New York
Stock Exchange or the American Stock Exchange or are quoted on the
NASDAQ National Market System and (C) which, if cash dividend
paying, pay cash dividends in U.S. dollars; provided, however, that
once convertible corporate bonds have been converted into common
stock, the common stock issued upon conversion must satisfy the
criteria set forth in clause (v) above and other relevant criteria
set forth in this definition in order to be a Rating Agency Eligible
Asset;]
provided, however, that the Fund's investment in preferred stock, common
stock, corporate bonds and convertible corporate bonds described above
must be within the following diversification requirements (utilizing
the Rating Agency industry and sub-industry categories) in order to be
included in the Rating Agency Eligible Assets:
ISSUER:
UTILITY MAXIMUM SINGLE
RATING AGENCY RATING NON-UTILITY ISSUER
(1)(2) (3)(4) (3)(4)
- ----------------------------- --------------- ----------------------
"aaa", Aaa................... 100% 100%
"aa", Aa..................... 20% 20%
"a", A....................... 10% 10%
CS/CB, "Baa", Baa(5)......... 6% 4%
Ba........................... 4% 4%
B1/B2........................ 3% 3%
B3 (Caa subordinate)......... 2% N/A
<TABLE>
<CAPTION>
NON-UTILITY UTILITY
RATING AGENCY MAXIMUM MAXIMUM SINGLE SUB UTILITY MAXIMUM
RATING(1) SINGLE INDUSTRY(3) INDUSTRY(3)(6) SINGLE STATE(3)
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
"aaa", Aaa............... 100% 100% 100%
"aa", Aa................. 60% 60% 20%
"a", A................... 40% 50% 10%(7)
CS/CB, "baa", Baa(5)..... 20% 50% 7%(7)
Ba....................... 12% 12% N/A
B1/B2.................... 8% 8% N/A
B3 (Caa subordinate)..... 5% 5% N/A
</TABLE>
- --------------------
(1) The equivalent Rating Agency rating must be lowered one full rating
category for preferred stocks, corporate bonds and convertible corporate
bonds rated by S&P but not by the Rating Agency.
(2) Corporate bonds from issues ranging $50,000,000 to $100,000,000 are
limited to 20% of the Rating Agency Eligible Assets.
(3) The referenced percentages represent maximum cumulative totals only
for the related the Rating Agency rating category and each lower
Rating Agency rating category.
(4) Issuers subject to common ownership of 25% or more are considered
as one name.
(5) CS/CB refers to common stock and convertible corporate bonds, which
are diversified independently from the rating level.
(6) In the case of utility common stock, utility preferred stock, utility
bonds and utility convertible bonds, the definition of industry
refers to sub-industries (electric, water, hydro power, gas,
diversified). Investments in other sub-industries are eligible only
to the extent that the combined sum represents a percentage position
of the Rating Agency Eligible Assets less than or equal to the
percentage limits in the diversification tables above.
(7) Such percentage will be 15% in the case of utilities regulated by
California, New York and Texas.
; and provided, further, that the Fund's investments in auction rate
preferred stocks described in clause (iv) above will be included in the
Rating Agency Eligible Assets only to the extent that the aggregate
Market Value of such stocks does not exceed 10% of the aggregate Market
Value of all of the Fund's investments meeting the criteria set forth in
clauses (i) through (viii) above less the aggregate Market Value of those
investments excluded from the Rating Agency Eligible Assets pursuant to
the immediately preceding proviso; and
ix. no assets which are subject to any lien or irrevocably deposited
by the Fund for the payment of amounts needed to meet the obligations
described in clauses (i)(A) through (i)(E) of the definition of "Base
Amount" may be includible in the Rating Agency Eligible Assets.
"Redemption Price" has the meaning set forth on page ___ of this
Prospectus.
"SEC" means the Securities and Exchange Commission.
"Short-Term Money Market Instruments" means the following types of
instruments if, on the date of purchase or other acquisition thereof by
the Fund (or, in the case of an instrument specified by clauses (i) and
(ii) below, on the Valuation Date), the remaining terms to maturity
thereof are not in excess of 90 days:
(i) U.S. Government Obligations;
(ii) commercial paper that is rated at the time of purchase or
acquisition and the Valuation Date at least P-1 by the Rating Agency
and is issued by an issuer (or guaranteed or supported by a person
or entity other than the issuer) whose long-term unsecured debt
obligations are rated at least Aa by the Rating Agency;
(iii) demand or time deposits in or certificates of deposit of
or banker's acceptances issued by (A) a depository institution or
trust company incorporated under the laws of the United States of
America or any state thereof or the District of Columbia or (B) a
United States branch office or agency of a foreign depository
institution (provided that such branch office or agency is subject
to banking regulation under the laws of the United States, any state
thereof or the District of Columbia) if, in each case, the
commercial paper, if any, and the long-term unsecured debt
obligations (other than such obligations the ratings of which are
based on the credit of a person or entity other than such depository
institution or trust company) of such depository institution or
trust company at the time of purchase or acquisition and the
Valuation Date, have [(1) credit ratings from the Rating Agency of
at least P-1 in the case of commercial paper and (2) credit ratings
from the Rating Agency of at least Aa in the case of long-term
unsecured debt obligations; provided, however, that in the case of
any such investment that matures in no more than one Business Day
from the date of purchase or other acquisition by the Fund, all of
the foregoing requirements will be applicable except that the
required long-term unsecured debt credit rating of such depository
institution or trust company from the Rating Agency will be at least
A2; and provided, further, however, that the foregoing credit rating
requirements will be deemed to be met with respect to a depository
institution or trust company if (1) such depository institution or
trust company is the principal depository institution in a holding
company system, (2) the commercial paper, if any, of such depository
institution or trust company is not rated below P-1 by the Rating
Agency and (3) the holding company will meet all of the foregoing
credit rating requirements (including the preceding proviso in the
case of investments that mature in no more than one Business Day
from the date of purchase or other acquisition by the Fund);]
[(iv) repurchase obligations with respect to any U.S. Government
Obligation entered into with a depository institution, trust company
or securities dealer (acting as principal) which is rated (A) at
least Aa3 if the maturity is three months or less, (B) at least A1
if the maturity is two months or less and (C) at least A2 if the
maturity is one month or less; and]
(v) Eurodollar demand or time deposits in, or certificates of
deposit of, the head office or the London branch office of a
depository institution or trust company meeting the credit rating
requirements of commercial paper and long-term unsecured debt
obligations specified in clause (iii) above, provided that the
interest receivable by the Fund will be payable in U.S. dollars and
will not be subject to any withholding or similar taxes.
"S&P" means Standard & Poor's Ratings Group.
"U.S. Government Obligations" means direct non-callable obligations
of the United States, provided that such direct obligations are entitled
to the full faith and credit of the United States and that any such
obligations, other than United States Treasury Bills and U.S. Treasury
Securities Strips, provide for the periodic payment of interest and the
full payment of principal at maturity.
"Valuation Date" means every Friday or, if such day is not a
Business Day, the immediately preceding Business Day.
========================================= =================================
NO DEALER, SALESPERSON OR ANY OTHER
PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRE-
SENTATIONS OTHER THAN THOSE CONTAINED IN
THE PROSPECTUS IN CONNECTION WITH THIS
OFFER CONTAINED AND, IF GIVEN OR MADE,
SUCH OTHER INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED BY THE FUND,
ITS INVESTMENT ADVISER OR THE
UNDERWRITERS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY
SECURITIES OTHER THAN THE CUMULATIVE
PREFERRED STOCK TO WHICH IT RELATES.
THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY THE CUMULATIVE PREFERRED
STOCK IN ANY JURISDICTION IN ANY
CIRCUMSTANCES IN WHICH IT IS UNLAWFUL TO
MAKE SUCH OFFER OR SOLICITATION. NEITHER
THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER WILL, UNDER ANY
CIRCUMSTANCES, CREATE AN IMPLICATION
THAT THERE HAS BEEN NO CHANGE IN THE
FACTS SET FORTH IN THIS PROSPECTUS OR IN 1,200,000 Shares
THE AFFAIRS OF THE FUND SINCE THE DATE
HEREOF.
--------------------
TABLE OF CONTENTS
Page
PROSPECTUS SUMMARY..................... 2
NET INVESTMENT INCOME EQUIVALENT
YIELD TABLES......................... 7
FINANCIAL HIGHLIGHTS................... 9 THE GABELLI
USE OF PROCEEDS........................ 10 CONVERTIBLE
CAPITALIZATION......................... 10 SECURITIES FUND, INC.
INVESTMENT OBJECTIVE AND POLICIES...... 10
CONVERTIBLE SECURITIES................. 11
Illiquid Convertible Securities..... 12
OTHER INVESTMENTS...................... 13
Corporate Reorganizations........... 13 Cumulative Preferred Stock
Warrants and Rights................. 13
Other Investment Companies.......... 13
Foreign Securities.................. 14
When Issued, Delayed Delivery
Securities and Forward Commitments..... 14 ____________
SPECIAL CHARACTERISTICS AND RISKS...... 15
SPECIAL INVESTMENT METHODS............. 15
Options............................. 15
Futures Contracts and Options
Thereon........................... 16 PROSPECTUS
Forward Currency Exchange
Contracts......................... 16
Special Risks of Derivative
Transactions...................... 16 April __, 1997
Short Sales Against the Box......... 17
Repurchase Agreements............... 17
Loans of Portfolio Securities....... 18
Borrowing........................... 18 ____________
Portfolio Turnover.................. 18
Investment Restrictions............. 19
MANAGEMENT OF THE FUND................. 19
Portfolio Manager................... 20
Non-Resident Directors.............. 20
Administrator....................... 20
DIVIDEND AND DISTRIBUTION POLICY....... 20
DESCRIPTION OF CUMULATIVE PREFERRED
STOCK ............................... 21
General............................. 21
Rating Agency Guidelines............ 21 SMITH BARNEY INC.
Dividends........................... 22 GABELLI & COMPANY, INC.
Asset Maintenance................... 23
Asset Coverage.................... 23
Base Amount....................... 24
Redemption.......................... 24
Mandatory Redemption.............. 24
Optional Redemption............... 25
Redemption Procedures............. 25
Liquidation Rights.................. 25
Voting Rights....................... 26
Limitation on Incurrence of
Additional Indebtedness and
Issuance of Additional Preferred
Stock........................... 27
Repurchase of Cumulative Preferred
Stock............................. 27
DESCRIPTION OF CAPITAL STOCK AND OTHER
SECURITIES .......................... 28
Capital Stock....................... 28
Common Stock...................... 28
Preferred Stock................... 28
TAXATION............................... 28
Taxation of the Fund................ 29
Taxation of Shareholders............ 30
========================================== =================================
SUBJECT TO COMPLETION, DATED APRIL __, 1997
THE GABELLI CONVERTIBLE SECURITIES FUND, INC.
One Corporate Center
Rye, New York 10580-1434
Telephone 1-800-GABELLI (1-800-422-3554)
Statement of Additional Information
April __, 1997
This Statement of Additional Information (the "SAI") relates to The
Gabelli Convertible Securities Fund, Inc. (the "Fund"), and is not a
prospectus. This SAI contains additional and more detailed information
and should be read in conjunction with the balance of the Fund's
prospectus dated April , 1997 (the "Prospectus"). Additional copies of
the SAI may be obtained without charge by writing or telephoning the Fund
at the address and telephone number set forth above.
TABLE OF CONTENTS
PAGE
CONVERTIBLE SECURITIES.............................................B-2
OTHER INVESTMENTS..................................................B-2
DERIVATIVE INSTRUMENTS.............................................B-5
THE ADVISER.......................................................B-13
INVESTMENT RESTRICTIONS...........................................B-15
DIRECTORS AND OFFICERS............................................B-16
PORTFOLIO TRANSACTIONS AND BROKERAGE..............................B-19
DETERMINATION OF NET ASSET VALUE..................................B-21
DIVIDENDS, DISTRIBUTIONS AND TAXES................................B-21
RATING AGENCY DISCOUNT FACTORS....................................B-26
GENERAL INFORMATION...............................................B-28
FINANCIAL STATEMENTS..............................................B-28
CONVERTIBLE SECURITIES
A Convertible Security entitles the holder to exchange such security
for a fixed number of shares of common stock or other equity security,
usually of the same company, at fixed prices within a specified period of
time. A Convertible Security entitles the holder to receive the fixed
income of a bond or the dividend preference of a preferred stock until
the holder elects to exercise the conversion privilege.
A Convertible Security's position in a company's capital structure
depends upon its particular provisions. In the case of subordinated
convertible debentures, the holder's claims on assets and earnings are
subordinated to the claims of others and are senior to the claims of
common shareholders.
To the degree that the price of a Convertible Security rises above
its investment value because of a rise in price of the underlying common
stock, the value of such security is influenced more by price
fluctuations of the underlying common stock and less by its investment
value. The price of a Convertible Security that is supported
principally by its conversion value will rise along with any increase in
the price of the common stock, and such price generally will decline
along with any decline in the price of the common stock except that the
security will receive additional support as its price approaches
investment value. A Convertible Security purchased or held at a time when
its price is influenced by its conversion value will produce a lower
yield than nonconvertible senior securities with comparable investment
values. Convertible Securities may be purchased by the Fund at varying
price levels above their investment values and/or their conversion values
in keeping with the Fund's investment objective.
Many Convertible Securities in which the Fund will invest have call
provisions entitling the issuer to redeem the security at a specified
time and at a specified price. This is one of the features of a
Convertible Security which affects valuation. Calls may vary from
absolute calls to provisional calls. Convertible Securities with superior
call protection usually trade at a higher premium. If long-term interest
rates decline, the interest rates of new Convertible Securities will also
decline. Therefore, in a falling interest rate environment companies may
be expected to call Convertible Securities with high coupons and the Fund
would have to invest the proceeds from such called issues in securities
with lower coupons. Thus, Convertible Securities with superior call
protection will permit the Fund to maintain a higher yield than with
issues without call protection.
OTHER INVESTMENTS
The Fund may without limit invest in securities of companies for
which a tender or exchange offer has been made or announced and in
securities of companies for which a merger, consolidation, liquidation or
reorganization proposal has been announced if, in the judgement of
Gabelli Funds, Inc. (the "Adviser), there is a reasonable prospect of
capital appreciation significantly greater than the brokerage and other
transaction expenses involved.
In general, securities which are the subject of such an offer or
proposal sell at a premium to their historic market price immediately
prior to the announcement of the offer or may also discount what the
stated or appraised value of the security would be if the contemplated
transaction were approved or consummated. Such investments may be
advantageous when: the discount significantly overstates the risk of the
contingencies involved; the market significantly undervalues the
securities, assets or cash to be received by shareholders of the
prospective portfolio company as a result of the contemplated
transaction; or the market fails adequately to recognize the possibility
that the offer or proposal may be replaced or superseded by an offer or
proposal of greater value. The evaluation of such contingencies requires
unusually broad knowledge and experience on the part of the Adviser which
must appraise not only the value of the issuer and its component
businesses as well as the assets or securities to be received as a result
of the contemplated transaction but also the financial resources and
business motivation of the offeror and the dynamics and business climate
when the offer or proposal is in process.
In making the investments, the Fund will not violate any of its
investment restrictions (see below, "Investment Restrictions") including
the requirement that, (a) as to 75% of its total assets, it will not
invest more than 5% of its total assets in the securities of any one
issuer and (b) it will not invest more than 25% of its total assets in
any one industry. Since such investments are ordinarily short-term in
nature, they will tend to increase the turnover ratio of the Fund thereby
increasing its brokerage and other transaction expenses as well as make
it more difficult for the Fund to meet the tests for favorable tax
treatment as a "Regulated Investment Company" under the Internal Revenue
Code of 1986, as amended (the "Code") (see "Dividends, Distributions and
Taxes" in the Prospectus). The Adviser intends to select investments of
the type described which, in its view, have a reasonable prospect of
capital appreciation which is significant in relation to both the risk
involved and the potential of available alternate investments as well as
to monitor the effect of such investments on the tax qualification tests
of the Code.
UNREGISTERED CONVERTIBLE SECURITIES AND OTHER ILLIQUID INVESTMENTS
As set forth in the Prospectus, the Fund may invest without
limitation in unregistered Convertible Securities and other illiquid
investments, including repurchase agreements having a maturity of longer
than seven days.
The staff of the Securities and Exchange Commission (the "SEC") has
taken the position that purchased over-the-counter ("OTC") options and
the assets used as "cover" for written OTC options are illiquid. The
assets used as cover for OTC options written by the Fund will be
considered illiquid unless the OTC options are sold to qualified dealers
who agree that the Fund may repurchase any OTC option it writes at a
maximum price to be calculated by a formula set forth in the option
agreement. The cover for an OTC option written subject to this procedure
will be considered illiquid only to the extent that the maximum
repurchase price under the option formula exceeds the intrinsic value of
the option.
WHEN ISSUED AND DELAYED DELIVERY SECURITIES AND FORWARD COMMITMENTS
As discussed in the Prospectus, the Fund may purchase securities on
a "when, as and if issued" basis under which the issuance of the security
depends upon the occurrence of a subsequent event, such as approval of a
merger, corporate reorganization or debt restructuring. The commitment
for the purchase of any such security will not be recognized in the
portfolio of the Fund until the Adviser determines that issuance of the
security is probable. At such time, the Fund will record the transaction
and, in determining its net asset value, will reflect the value of the
security daily. At such time, the Fund will also establish a segregated
account with its custodian bank in which it will maintain cash or liquid
high-grade debt securities at least equal in value to the amount of its
commitments. The Adviser does not believe that the net asset value of the
Fund will be adversely affected by its purchase of securities on this
basis.
FOREIGN SECURITIES
Subject to the limitations described in the Prospectus, the Fund may
invest in foreign securities which involve certain risks not associated
with domestic investments.
Among other risks, foreign markets have different clearance and
settlement procedures, and in certain markets there have been times when
settlements have failed to keep pace with the volume of securities
transactions, making it difficult to conduct such transactions. Delays in
settlements could result in temporary periods when assets of the Fund are
uninvested and no return is earned thereon. The inability of the Fund to
make intended security purchases due to settlement problems could cause
the Fund to miss attractive investment opportunities. Inability to
dispose of a portfolio security due to settlement problems could result
either in losses to the Fund due to subsequent declines in the value of
such portfolio security or, if the Fund has entered into a contract to
sell the security, could result in possible liability to the purchaser.
RISK FACTORS -- HIGH YIELD/HIGH RISK SECURITIES
Subject to the limitations described in the Prospectus, the Fund may
invest in high yielding, lower rated bonds, commonly called "junk bonds."
Bonds that are rated "Baa" or lower by Moody's Investors Services, Inc.
("Moody's") or "BBB" or lower by Standard & Poor's Ratings Group ("S&P"),
or unrated bonds of comparable quality, are generally considered to be
high yield bonds. These high yield bonds are subject to greater risks
than lower yielding, higher rated debt securities.
Lower rated securities are subject to risk factors such as: (a)
vulnerability to economic downturns and changes in interest rates; (b)
sensitivity to adverse economic changes and corporate developments; (c)
redemption or call provisions which may be exercised at inopportune
times; (d) difficulty in accurately valuing or disposing of such
securities; (e) federal legislation which could affect the market for
such securities; and (f) special adverse tax consequences associated with
investments in certain high yield, high risk bonds structured as zero
coupon or pay-in-kind securities.
High yield bonds, like other bonds, may contain redemption or call
provisions. If an issuer exercises these provisions in a declining
interest rate market, the Fund would have to replace the security with a
lower yielding security, resulting in lower return for investors.
Conversely, a high yield bond's value will decrease in a rising interest
rate market.
The market for high yield bonds is in some cases more thinly traded
than the market for investment grade bonds, and recent market quotations
may not be available for some of these bonds. Market quotations are
generally available only from a limited number of dealers and may not
represent firm bids from such dealers or prices for actual sales. As a
result, the Fund may have greater difficulty valuing the high yield bonds
in its portfolio accurately and disposing of these bonds at the time or
price desired.
Ratings assigned by Moody's and S&P to high yield bonds, like other
bonds, attempt to evaluate the timeliness of principal and interest
payments on those bonds. However, such ratings do not assess the risk of
a decline in the market value of those bonds. In addition, ratings may
fail to reflect recent events in a timely manner and are subject to
change. If a rating with respect to a portfolio security is changed, the
Adviser will determine whether the security will be retained based upon
the factors the Adviser considers in acquiring or holding other
securities in the portfolio. Investment in high yield bonds may make
achievement of the Fund's investment objective more dependent on the
Adviser's own credit analysis than is the case for higher rated bonds.
Market prices for high yield bonds tend to be more sensitive than
those for higher rated securities due to many of the factors described
above, including the creditworthiness of the issuer, redemption or call
provisions, the liquidity of the secondary trading market and changes in
credit ratings, as well as interest rate movements and general economic
conditions. In addition, yields on such bonds will fluctuate over time.
An economic downturn could severely disrupt the market for high yield
bonds.
The risk of default in payment of principal and interest on high
yield bonds is significantly greater than with higher rated debt
securities because high yield bonds are generally unsecured and are often
subordinated to other obligations of the issuer, and because the issuers
of high yield bonds usually have high levels of indebtedness and are more
sensitive to adverse economic conditions, such as recession or increasing
interest rates. Upon a default, bondholders may incur additional expenses
in seeking recovery.
As a result of all these factors, the net asset value of the Fund to
the extent it invests in high yield bonds, is expected to be more
volatile than the net asset value of funds which invest solely in higher
rated debt securities. This volatility may result in an increased number
of redemptions from time to time. High levels of redemptions in turn may
cause the Fund to sell its portfolio securities at inopportune times and
decrease the asset base upon which expenses can be spread.
DERIVATIVE INSTRUMENTS
OPTIONS
The Fund may, from time to time, subject to guidelines of the Board
of Directors and the limitations set forth in the Prospectus and
applicable rating agency guidelines, purchase or sell, i.e., write,
options on securities, securities indices and foreign currencies which
are listed on a national securities exchange or in the OTC market, as a
means of achieving additional return or of hedging the value of the
Fund's portfolio.
A call option is a contract that gives the holder of the option the
right to buy from the writer of the call option, in return for a premium,
the security underlying the option at a specified exercise price at any
time during the term of the option. The writer of the call option has the
obligation, upon exercise of the option, to deliver the underlying
security upon payment of the exercise price during the option period.
A call option is "covered" if the Fund owns the underlying security
covered by the call or has an absolute and immediate right to acquire
that security without additional cash consideration (or for additional
cash consideration held in a segregated account by its custodian) upon
conversion or exchange of other securities held in its portfolio. A call
option is also covered if the Fund holds a call on the same security as
the call written where the exercise price of the call held is (1) equal
to or less than the exercise price of the call written or (2) greater
than the exercise price of the call written if the difference is
maintained by the Fund in cash, U.S. Government securities or other
liquid securities in a segregated account with its custodian. A put
option is "covered" if the Fund maintains with a value equal to the
exercise price in a segregated account with its custodian, or else holds
a put on the same security as the put written where the exercise price of
the put held is equal to or greater than the exercise price of the put
written. The Adviser, on behalf of the Fund, has no present intention to
engage in uncovered option transactions. If the Fund has written an
option, it may terminate its obligation by effecting a closing purchase
transaction. This is accomplished by purchasing an option of the same
series as the option previously written. However, once the Fund has been
assigned an exercise notice, the Fund will be unable to effect a closing
purchase transaction. Similarly, if the Fund is the holder of an option
it may liquidate its position by effecting a closing sale transaction.
This is accomplished by selling an option of the same series as the
option previously purchased. There can be no assurance that either a
closing purchase or sale transaction can be effected when the Fund so
desires.
The Fund will realize a profit from a closing transaction if the
price of the transaction is less than the premium received from writing
the option or is more than the premium paid to purchase the option; the
Fund will realize a loss from a closing transaction if the price of the
transaction is more than the premium received from writing the option or
is less than the premium paid to purchase the option. Since call option
prices generally reflect increases in the price of the underlying
security, any loss resulting from the repurchase of a call option may
also be wholly or partially offset by unrealized appreciation of the
underlying security. Other principal factors affecting the market value
of a put or a call option include supply and demand, interest rates, the
current market price and price volatility of the underlying security and
the time remaining until the expiration date.
An option position may be closed out only on an exchange which
provides a secondary market for an option of the same series. Although
the Fund will generally purchase or write only those options for which
there appears to be an active secondary market, there is no assurance
that a liquid secondary market on an exchange will exist for any
particular option. In such event it might not be possible to effect
closing transactions in particular options, so that the Fund would have
to exercise its options in order to realize any profit and would incur
brokerage commissions upon the exercise of call options and upon the
subsequent disposition of underlying securities for the exercise of put
options. If the Fund, as a covered call option writer, is unable to
effect a closing purchase transaction in a secondary market, it will not
be able to sell the underlying security until the option expires or it
delivers the underlying security upon exercise or otherwise covers the
position.
The Fund intends to qualify as a "regulated investment company"
under the Code. One requirement for such qualification is that less than
30% of the Fund's gross income must be derived from the gains from the
sale or other disposition of securities held for less than three months.
Therefore, the Fund may be limited in its ability to engage in options
transactions. In addition, investments in options may be limited or
prohibited by the applicable Rating Agency Guidelines.
OPTIONS ON SECURITIES INDICES.
The Fund may purchase and sell securities index options. One effect
of such transactions is to hedge all or part of the Fund's securities
holdings against a general decline in the securities market or a segment
of the securities market. Options on securities indices are similar to
options on stock except that, rather than the right to take or make
delivery of stock at a specified price, an option on a securities index
gives the holder the right to receive, upon exercise of the option, an
amount of cash if the closing level of the securities index upon which
the option is based is greater than, in the case of a call, or less than,
in the case of a put, the exercise price of the option.
The Fund's successful use of options on indices depends upon its
ability to predict the direction of the market and is subject to various
additional risks. The correlation between movements in the index and the
price of the securities being hedged against is imperfect and the risk
from imperfect correlation increases as the composition of the Fund
diverges from the composition of the relevant index. Accordingly, a
decrease in the value of the securities being hedged against may not be
wholly offset by a gain on the exercise or sale of a securities index put
option held by the Fund.
OPTIONS ON FOREIGN CURRENCIES.
Instead of purchasing or selling futures (as described below), the
Fund may attempt to accomplish similar objectives by purchasing put or
call options on currencies or by writing put options or call options on
currencies either on exchanges or in OTC markets. A put option gives the
Fund the right to sell a currency at the exercise price until the option
expires. A call option gives the Fund the right to purchase a currency at
the exercise price until the option expires. Both types of options serve
to insure against adverse currency price movements in the underlying
portfolio assets designated in a given currency. The Fund's use of
options on currencies will be subject to the same limitations as its use
of options on securities, described above and in the Prospectus. Currency
options may be subject to position limits which may limit the ability of
the Fund to fully hedge its positions by purchasing the options.
As in the case of interest rate futures contracts and options
thereon, described below, the Fund may hedge against the risk of a
decrease or increase in the U.S. dollar value of a foreign currency
denominated debt security which the Fund owns or intends to acquire by
purchasing or selling options contracts, futures contracts or options
thereon with respect to a foreign currency other than the foreign
currency in which such debt security is denominated, where the values of
such different currencies (vis-a-vis the U.S. dollar) historically have a
high degree of positive correlation.
FUTURES CONTRACTS
The Fund will enter into futures contracts only for certain hedging,
yield enhancement and risk management purposes. The Fund may enter into
futures contracts for the purchase or sale of debt securities, financial
indices, and U.S. Government securities (collectively, "interest rate
futures contracts"). It may also enter into futures contracts for the
purchase or sale of foreign currencies in which securities held or to be
acquired by the Fund are denominated, or the value of which have a high
degree of positive correlation to the value of such currencies as to
constitute an appropriate vehicle for hedging. The Fund may enter into
such futures contracts both on U.S. and foreign exchanges. In addition,
the Fund may enter into futures contracts on stock and bond indices
(collectively, "securities indices").
A "sale" of a futures contract (or a "short" futures position) means
the assumption of a contractual obligation to deliver the securities
underlying the contract at a specified price at a specified future time.
A "purchase" of a futures contract (or a "long" futures position) means
the assumption of a contractual obligation to acquire the securities
underlying the contract at a specified price at a specified future time.
Certain futures contracts are settled on a net cash payment basis rather
than by the sale and delivery of the securities underlying the futures
contracts. U.S. futures contracts have been designed by exchanges that
have been designated as "contract markets" by the Commodity Futures
Trading Commission (the "CFTC"), an agency of the U.S. Government, and
must be executed through a futures commission merchant, i.e., a brokerage
firm, which is a member of the relevant contract market. Futures
contracts trade on these contract markets and the exchange's affiliated
clearing organization guarantees performance of the contracts as between
the clearing members of the exchange.
At the time a futures contract is purchased or sold, the Fund must
allocate cash or securities as a deposit payment (initial margin). It is
expected that the initial margin on U.S. exchanges will vary from
one-half of 1% to 4% of the face value of the contract. Under certain
circumstances, however, such as during periods of high volatility, the
Fund may be required by an exchange to increase the level of its initial
margin payment. Thereafter, the futures contract is valued daily and the
payment in cash of "variation margin' may be required, a process known as
'mark-to-the-market.' Each day the Fund is required to provide or is
entitled to receive variation margin in an amount equal to any change in
the value of the contract since the preceding day.
Although futures contracts by their terms may call for the actual
delivery or acquisition of underlying assets, in most cases the
contractual obligation is extinguished by offset before the expiration of
the contract. The offsetting of a contractual obligation is accomplished
by buying (to offset an earlier sale) or selling (to offset an earlier
purchase) an identical futures contract calling for delivery in the same
month. Such a transaction cancels the obligation to make or, take
delivery of the underlying commodity. When the Fund purchases or sells
futures contracts, the Fund will incur brokerage fees and related
transactions costs.
In addition, futures contracts entail risks. The ordinary spreads
between values in the cash and futures markets, due to differences in the
characters of those markets, are subject to distortions. First, all
participants in the futures market are subject to initial and variation
margin requirements. Rather than meeting additional variable margin
requirements, investors may close futures contracts through offsetting
transactions which could distort the normal relationship between the cash
and futures markets. Second, the liquidity of the futures market depends
on participants entering into offsetting transactions rather than making
or taking delivery. To the extent participants decide to make or take
delivery, liquidity in the futures market could be reduced, thus
producing price distortions. Third, from the point of view of
speculators, the margin deposit requirements in the futures market are
less onerous than margin requirements in the securities market. Increased
participation by speculators in the futures market may cause temporary
price distortions. Thus, a correct forecast of interest rate trends by
the investment adviser may still not result in a successful transaction.
If the Fund seeks to hedge against a decline in the value of its
portfolio securities and sells futures contracts on other securities
which historically have had a high degree of positive correlation to the
value of the portfolio securities, the value of its portfolio securities
might decline more rapidly than the value of a poorly correlated futures
contract rises. In that case, the hedge will be less effective than if
the correlation had been greater. In a similar but more extreme
situation, the value of the futures position might in fact decline while
the value of the portfolio securities holds steady or rises. This would
result in a loss that would not have occurred but for the attempt to
hedge.
OPTIONS ON FUTURES CONTRACTS.
The Fund will also enter into options on futures contracts for
certain bona fide hedging, yield enhancement and risk management
purposes. The Fund may purchase put and call options and write put and
call options on futures contracts that are traded on U.S. and foreign
exchanges. The Adviser, on behalf of the Fund, has no present intention
to engage in uncovered option transactions. An option on a futures
contract gives the purchaser the right, in return for the premium paid,
to assume a position in a futures contract (a long position if the option
is a call and a short position if the option is a put) at a specified
exercise price at any time during the option exercise period. The writer
of the option is required upon exercise to assume a short futures
position (if the option is a call) or a long futures position (if the
option is a put). Upon exercise of the option, the assumption of
offsetting futures positions by the writer and holder of the option will
be accompanied by delivery of the accumulated cash balance in the
writer's futures margin account which represents the amount by which the
market price of the futures contract at exercise, exceeds, in the case of
a call, or is less than, in the case of a put, the exercise of the option
on the futures contract.
The Fund will be considered "covered" with respect to a call option
it writes on a futures contract if the Fund owns the securities or
currency which is deliverable under the futures contract or an option to
purchase that futures contract having a strike price equal to or less
than the strike price of the "covered" option and having an expiration
date not earlier than the expiration date of the "covered" option, or if
it segregates and maintains with its custodian for the term of the
option, cash or liquid securities equal to the fluctuating value of the
optioned futures. The Fund will be considered "covered" with respect to a
put option it writes on a futures contract if it owns an option to sell
that futures contract having a strike price equal to or greater than the
strike price of the "covered" option and having an expiration date not
earlier than the expiration date of the "covered" option, or if it
segregates and maintains with its custodian for the term of the option,
cash or liquid securities at all times equal in value to the exercise
price of the put (less any initial margin deposited by the Fund with its
custodian with respect to such put option). There is no limitation on the
amount of the Fund's assets which can be placed in the segregated
account.
Writing a put option on a futures contract serves as a partial hedge
against an increase in the value of debt securities the Fund intends to
acquire. If the futures price at expiration of the option is above the
exercise price, the Fund will retain the full amount of the option
premium which provides a partial hedge against any increase that may have
occurred in the price of the debt securities the Fund intends to acquire.
If the market price of the underlying futures contract is below the
exercise price when the option is exercised, the Fund will incur a loss,
which may be wholly or partially offset by the decrease in the value of
the securities the Fund intends to acquire.
Writing a call option on a futures contract serves as a partial
hedge against a decrease in the value of the Fund's portfolio securities.
If the market price of the underlying futures contract at expiration of a
written call option is below the exercise price, the Fund will retain the
full amount of the option premium, thereby partially hedging against any
decline that may have occurred in the Fund's holding of debt securities.
If the futures price when the option is exercised is above the exercise
price, however, the Fund will incur a loss, which may be wholly or
partially offset by the increase in the value of the securities in the
Fund's portfolio which were being hedged.
The Fund will purchase put options on futures contracts to hedge its
portfolio against the risk of a decline in the value of the debt
securities it owns as a result of rising interest rates or fluctuating
currency exchange rates. The Fund will also purchase call options on
futures contracts as a hedge against an increase in the value of
securities the Fund intends to acquire as a result of declining interest
rates or fluctuating currency exchange rates.
INTEREST RATE FUTURES CONTRACTS AND OPTIONS THEREON.
The Fund will purchase or sell interest rate futures contracts to
take advantage of or to protect the Fund against fluctuations in interest
rates affecting the value of debt securities which the Fund holds or
intends to acquire. For example, if interest rates are expected to
increase, the Fund might sell futures contracts on debt securities, the
values of which historically have a high degree of positive correlation
to the values of the Fund's portfolio securities. Such a sale would have
an effect similar to selling an equivalent value of the Fund's portfolio
securities. If interest rates increase, the value of the Fund's portfolio
securities will decline, but the value of the futures contracts to the
Fund will increase at approximately an equivalent rate thereby keeping
the net asset value of the Fund from declining as much as it otherwise
would have. The Fund could accomplish similar results by selling debt
securities with longer maturities and investing in debt securities with
shorter maturities when interest rates are expected to increase. However,
since the futures market may be more liquid than the cash market, the use
of futures contracts as a risk management technique allows the Fund to
maintain a defensive position without having to sell its portfolio
securities.
Similarly, the Fund may purchase interest rate futures contracts
when it is expected that interest rates may decline. The purchase of
futures contracts for this purpose constitutes a hedge against increases
in the price of debt securities (caused by declining interest rates)
which the Fund intends to acquire. Since fluctuations in the value of
appropriately selected futures contracts should approximate that of the
debt securities that will be purchased, the Fund can take advantage of
the anticipated rise in the cost of the debt securities without actually
buying them. Subsequently, the Fund can make its intended purchase of the
debt securities in the cash market and currently liquidate its futures
position. To the extent the Fund enters into futures contracts for this
purpose, it will maintain in a segregated asset account with the Fund's
custodian, assets sufficient to cover the Fund's obligations with respect
to such futures contracts, which will consist of cash or other liquid
securities from its portfolio in an amount equal to the difference
between the fluctuating market value of such futures contracts and the
aggregate value of the initial margin deposited by the Fund with its
custodian with respect to such futures contracts.
The purchase of a call option on a futures contract is similar in
some respects to the purchase of a call option on an individual security.
Depending on the pricing of the option compared to either the price of
the futures contract upon which it is based or the price of the
underlying debt securities, it may or may not be less risky than
ownership of the futures contract or underlying debt securities. As with
the purchase of futures contracts, when the Fund is not fully invested it
may purchase a call option on a futures contract to hedge against a
market advance due to declining interest rates.
The purchase of a put option on a futures contract is similar to the
purchase of protective put options on portfolio securities. The Fund will
purchase a put option on a futures contract to hedge the Fund's portfolio
against the risk of rising interest rates and consequent reduction in the
value of portfolio securities.
The writing of a call option on a futures contract constitutes a
partial hedge against declining prices of the securities which are
deliverable upon exercise of the futures contract. If the futures price
at expiration of the option is below the exercise price, the Fund will
retain the full amount of the option premium which provides a partial
hedge against any decline that may have occurred in the Fund's portfolio
holdings. The writing of a put option on a futures contract constitutes a
partial hedge against increasing prices of the securities which are
deliverable upon exercise of the futures contract. If the futures price
at expiration of the option is higher than the exercise price, the Fund
will retain the full amount of the option premium which provides a
partial hedge against any increase in the price of debt securities which
the Fund intends to purchase. If a put or call option the Fund has
written is exercised, the Fund will incur a loss which will be reduced by
the amount of the premium it received. Depending on the degree of
correlation between changes in the value of its portfolio securities and
changes in the value of its futures positions, the Fund's losses from
options on futures it has written may to some extent be reduced or
increased by changes in the value of its portfolio securities.
CURRENCY FUTURES AND OPTIONS THEREON.
Generally, foreign currency futures contracts and options thereon
are similar to the interest rate futures contracts and options thereon
discussed previously. By entering into currency futures and options
thereon on U.S. and foreign exchanges, the Fund will seek to establish
the rate at which it will be entitled to exchange U.S. dollars for
another currency at a future time. By selling currency futures, the Fund
will seek to establish the number of dollars it will receive at delivery
for a certain amount of a foreign currency. In this way, whenever the
Fund anticipates a decline in the value of a foreign currency against the
U.S. dollar, the Fund can attempt to "lock in" the U.S. dollar value of
some or all of the securities held in its portfolio that are denominated
in that currency. By purchasing currency futures, the Fund can establish
the number of dollars it will be required to pay for a specified amount
of a foreign currency in a future month. Thus, if the Fund intends to buy
securities in the future and expects the U.S. dollar to decline against
the relevant foreign currency during the period before the purchase is
effected, the Fund can attempt to "lock in" the price in U.S. dollars of
the securities it intends to acquire.
The purchase of options on currency futures will allow the Fund, for
the price of the premium and related transaction costs it must pay for
the option, to decide whether or not to buy (in the case of a call
option) or to sell (in the case of a put option) a futures contract at a
specified price at any time during the period before the option expires.
If the Adviser, in purchasing an option, has been correct in its judgment
concerning the direction in which the price of a foreign currency would
move as against the U.S. dollar, the Fund may exercise the option and
thereby take a futures position to hedge against the risk it had
correctly anticipated or close out the option position at a gain that
will offset, to some extent, currency exchange losses otherwise suffered
by the Fund. If exchange rates move in a way the Fund did not anticipate,
however, the Fund will have incurred the expense of the option without
obtaining the expected benefit; any such movement in exchange rates may
also thereby reduce rather than enhance the Fund's profits on its
underlying securities transactions.
SECURITIES INDEX FUTURES CONTRACTS AND OPTIONS THEREON.
Purchases or sales of securities index futures contracts are used
for hedging purposes to attempt to protect the Fund's current or intended
investments from broad fluctuations in stock or bond prices. For example,
the Fund may sell securities index futures contracts in anticipation of
or during a market decline to attempt to offset the decrease in market
value of the Fund's securities portfolio that might otherwise result. If
such decline occurs, the loss in value of portfolio securities may be
offset, in whole or part, by gains on the futures position. When the Fund
is not fully invested in the securities market and anticipates a
significant market advance, it may purchase securities index futures
contracts in order to gain rapid market exposure that may, in part or
entirely, offset increases in the cost of securities that the Fund
intends to purchase. As such purchases are made, the corresponding
positions in securities index futures contracts will be closed out. The
Fund may write put and call options on securities index futures contracts
for hedging purposes.
LIMITATIONS ON THE PURCHASE AND SALE OF FUTURES CONTRACTS AND
OPTIONS ON FUTURES CONTRACTS
Subject to the guidelines of the Board of Directors, the Fund may
engage in transactions in futures contracts and options hereon only for
bona fide hedging, yield enhancement and risk management purposes, in
each case in accordance with the rules and regulations of the CFTC, and
not for speculation.
Regulations of the CFTC applicable to the Fund permit the Fund's
futures and options on futures transactions to include (i) bona fide
hedging transactions without regard to the percentage of the Fund's
assets committed to margin and option premiums, and (ii) non-hedging
transactions, provided that the Fund not enter into such non-hedging
transactions if, immediately thereafter, the sum of the amount of initial
margin deposits on the Fund's existing futures positions and option
premiums would exceed 5% of the market value of the Fund's liquidating
value after taking into account unrealized profits and unrealized losses
on any such transactions.
In addition, investment in future contracts and related options may
be limited or prohibited by the applicable Rating Agency Guidelines.
FORWARD CURRENCY EXCHANGE CONTRACTS
The Fund may engage in currency transactions otherwise than on
futures exchanges to protect against future changes in the level of
future currency exchange rates. The Fund will conduct such currency
exchange transactions either on a spot, i.e., cash, basis at the rate
then prevailing in the currency exchange market or on a forward basis, by
entering into forward contracts to purchase or sell currency. A forward
contract on foreign currency involves an obligation to purchase or sell a
specific currency at a future date, which may be any fixed number of days
agreed upon by the parties from the date of the contract, at a price set
on the date of the contract. The risk of shifting of a forward currency
contract will be substantially the same as a futures contract having
similar terms. The Fund's dealing in forward currency exchange will be
limited to hedging involving either specific transactions or portfolio
positions. Transaction hedging is the purchase or sale of forward
currency with respect to specific receivables or payables of the Fund
generally arising in connection with the purchase or sale of its
portfolio securities and accruals of interest receivable and Fund
expenses. Position hedging is the forward sale of currency with respect
to portfolio security positions denominated or quoted in that currency or
in a currency bearing a high degree of positive correlation to the value
of that currency.
The Fund may not position hedge with respect to a particular
currency for an amount greater than the aggregate market value
(determined at the time of making any sale of forward currency) of the
securities held in its portfolio denominated or quoted in, or currently
convertible into, such currency. If the Fund enters into a position
hedging transaction, the Fund's custodian or subcustodian will place cash
or other liquid securities in a segregated account of the Fund in an
amount equal to the value of the Fund's total assets committed to the
consummation of the given forward contract. If the value of the
securities placed in the segregated account declines, additional cash or
securities will be placed in the account so that the value of the account
will, at all times, equal the amount of the Fund's commitment with
respect to the forward contract.
At or before the maturity of a forward sale contract, the Fund may
either sell a portfolio security and make delivery of the currency, or
retain the security and offset its contractual obligations to deliver the
currency by purchasing a second contract pursuant to which the Fund will
obtain, on the same maturity date, the same amount of the currency which
it is obligated to delivery. If the Fund retains the portfolio security
and engages in an offsetting transaction, the Fund, at the time of
execution of the offsetting transaction, will incur a gain or a loss to
the extent that movement has occurred in forward contract prices. Should
forward prices decline during the period between the Fund's entering into
a forward contract for the sale of a currency and the date it enters into
an offsetting contract for the purchase of the currency, the Fund will
realize a gain to the extent the price of the currency it has agreed to
purchase is less than the price of the currency it has agreed to sell.
Should forward prices increase, the Fund will suffer a loss to the extent
the price of the currency it has agreed to purchase exceeds the price of
the currency it has agreed to sell. Closing out forward purchase
contracts involves similar offsetting transactions.
The cost to the Fund of engaging in currency transactions varies
with factors such as the currency involved, the length of the contract
period and the market conditions then prevailing. Because forward
transactions in currency exchange are usually conducted on a principal
basis, no fees or commissions are involved. The use of foreign currency
contracts does not eliminate fluctuations in the underlying prices of the
securities, but it does establish a rate of exchange that can be achieved
in the future. In addition, although forward currency contracts limit the
risk of loss due to a decline in the value of the hedged currency, they
also limit any potential gain that might result if the value of the
currency increases.
If a decline in any currency is generally anticipated by the
Adviser, the Fund may not be able to contract to sell the currency at a
price above the level to which the currency is anticipated to decline.
ADDITIONAL RISKS OF OPTIONS, FUTURES CONTRACTS, OPTIONS ON FUTURES
CONTRACTS AND FORWARD CONTRACTS OPTIONS
Options, futures contracts and options thereon and forward contracts
on securities and currencies may be traded on foreign exchanges. Such
transactions may not be regulated as effectively as similar transactions
in the U.S., may not involve a clearing mechanism and related guarantees,
and are subject to the risk of governmental actions affecting trading in,
or the prices of, foreign securities. The value of such positions also
could be adversely affected by (i) other complex foreign political, legal
and economic factors, (ii) lesser availability than in the U.S. of data
on which to make trading decisions, (iii) delays in the Fund's ability to
act upon economic events occurring in the foreign markets during
non-business hours in the U.S., (iv) the imposition of different exercise
and settlement terms and procedures and margin requirements than in the
U.S. and (v) lesser trading volume.
Exchanges on which options, futures and options on futures are traded may
impose limits on the positions that the Fund may take in certain
circumstances.
SPECIAL RISK CONSIDERATIONS RELATING TO FUTURES AND OPTIONS THEREON
The Fund's ability to establish and close out positions in futures
contracts and options thereon will be subject to the development and
maintenance of liquid markets. Although the Fund generally will purchase
or sell only those futures contracts and options thereon for which there
appears to be a liquid market, there is no assurance that a liquid market
on an exchange will exist for any particular futures contract or option
thereon at any particular time. In the event no liquid market exists for
a particular futures contract or option thereon in which the Fund
maintains a position, it will not be possible to effect a closing
transaction in that contract or to do so at a satisfactory price and the
Fund would have to either make or take delivery under the futures
contract or, in the case of a written option, wait to sell the underlying
securities until the option expires or is exercised or, in the case of a
purchased option, exercise the option. In the case of a futures contract
or an option thereon which the Fund has written and which the Fund is
unable to close, the Fund would be required to maintain margin deposits
on the futures contract or option thereon and to make variation margin
payments until the contract is closed.
Successful use of futures contracts and options thereon and forward
contracts by the Fund is subject to the ability of the Adviser to predict
correctly movements in the direction of interest and foreign currency
rates. If the Adviser's expectations are not met, the Fund will be in a
worse position than if a hedging strategy had not been pursued. For
example, if the Fund has hedged against the possibility of an increase in
interest rates which would adversely affect the price of securities in
its portfolio and the price of such securities increases instead, the
Fund will lose part or all of the benefit of the increased value of its
securities because it will have offsetting losses in its futures
positions. In addition, in such situations, if the Fund has insufficient
cash to meet daily variation margin requirements, it may have to sell
securities to meet the requirements. These sales may be, but will not
necessarily be, at increased prices which reflect the rising market. The
Fund may have to sell securities at a time when it is disadvantageous
to do so.
REPURCHASE AGREEMENTS
The Fund may engage in repurchase agreements as set forth in the
Prospectus. A repurchase agreement is an instrument under which the
purchaser, i.e., the Fund, acquires a debt security and the seller
agrees, at the time of the sale, to repurchase the obligation at a
mutually agreed upon time and price, thereby determining the yield during
the purchaser's holding period. This results in a fixed rate of return
insulated from market fluctuations during such period. The underlying
securities are ordinarily U.S. Treasury or other government obligations
or high quality money market instruments. The Fund will require that the
value of such underlying securities, together with any other collateral
held by the Fund, always equals or exceeds the amount of the repurchase
obligations of the contra party. The Fund's risk is primarily that, if
the seller defaults, the proceeds from the disposition of the underlying
securities and other collateral for the seller's obligation are less than
the repurchase price. If the seller becomes insolvent, the Fund might be
delayed in or prevented from selling the collateral. In the event of a
default or bankruptcy by a seller, the Fund will promptly seek to
liquidate the collateral. To the extent that the proceeds from any sale
of such collateral upon a default in the obligation to repurchase are
less than the repurchase price, the Fund will experience a loss.
If the financial institution which is a party to the repurchase
agreement petitions for bankruptcy or becomes subject to the United
States Bankruptcy Code, the law regarding the rights of the Fund is
unsettled. As a result, under extreme circumstances, there may be a
restriction on the Fund's ability to sell the collateral and the Fund
would suffer a loss.
LOANS OF PORTFOLIO SECURITIES
Consistent with applicable regulatory requirements, the Fund may
lend its portfolio securities to securities broker-dealers or financial
institutions, provided that such loans are callable at any time by the
Fund (subject to notice provisions described below), and are at all times
secured by cash or cash equivalents, which are maintained in a segregated
account pursuant to applicable regulations and that are at least equal to
the market value, determined daily, of the loaned securities. The
advantage of such loans is that the Fund continues to receive the income
on the loaned securities while at the same time earns interest on the
cash amounts deposited as collateral, which will be invested in
short-term obligations. The Fund will not lend its portfolio securities
if such loans are not permitted by the laws or regulations of any state
in which its shares are qualified for sale and will not lend more than
33% of the value of its total assets.
A loan may generally be terminated by the borrower on one business
day's notice, or by the Fund on five business days' notice. If the
borrower fails to deliver the loaned securities within five days after
receipt of notice, the Fund could use the collateral to replace the
securities while holding the borrower liable for any excess of
replacement cost over collateral. As with any extensions of credit, there
are risks of delay in recovery and in some cases even loss of rights in
the collateral should the borrower of the securities fail financially.
However, these loans of portfolio securities will only be made to firms
deemed by the Fund's management to be creditworthy and when the income
which can be earned from such loans justifies the attendant risks. The
Board of Directors will oversee the creditworthiness of the contracting
parties on an ongoing basis. Upon termination of the loan, the borrower
is required to return the securities to the Fund. Any gain or loss in the
market price during the loan period would inure to the Fund. The risks
associated with loans of portfolio securities are substantially similar
to those associated with repurchase agreements. Thus, if the contra
party to the loan petitions for bankruptcy or becomes subject to the
United States Bankruptcy Code, the law regarding the rights of the Fund
is unsettled. As a result, under extreme circumstances, there may be a
restriction on the Fund's ability to sell the collateral and the Fund
would suffer a loss. When voting or consent rights which accompany loaned
securities pass to the borrower, the Fund will follow the policy of
calling the loaned securities, to be delivered within one day after
notice, to permit the exercise of such rights if the matters involved
would have a material effect on the Fund's investment in such loaned
securities. The Fund will pay reasonable finder's, administrative and
custodial fees in connection with a loan of its securities.
THE ADVISER
The Adviser is a New York Corporation with principal offices located
at One Corporate Center, Rye, New York 10580-1434. The Adviser also
serves as adviser to other closed-end and open-end investment companies
with net assets in excess of $4.2 billion as of January 1, 1997.
Pursuant to an Investment Advisory Contract, the Adviser furnishes a
continuous investment program for the Fund's portfolio, makes the
day-to-day investment decisions for the Fund, arranges the portfolio
transactions for the Fund and generally manages the Fund's investments in
accordance with the stated policies of the Fund, subject to the general
supervision of the Board of Directors of the Fund.
Under the Investment Advisory Contract, the Adviser also (1)
provides the Fund with the services of persons competent to perform such
supervisory, administrative and clerical functions as are necessary to
provide efficient administration of the Fund, including maintaining
certain books and records; (2) oversees the performance of
administrative and professional services provided to the Fund by others,
including the Fund's Custodian, Transfer Agent and Dividend Disbursing
Agent, as well as legal, accounting, auditing and other services
performed for the Fund; (3) provides the Fund, if requested, with
adequate office space and facilities; (4) prepares, but does not pay for,
periodic updating of the Fund's Registration Statement, Prospectus and
SAI, including the printing of such documents for the purpose of filings
with the SEC; (5) supervises the calculation of the net asset value of
shares of the Fund; (6) prepares, but does not pay for, all filings under
state "Blue Sky" laws of such states or countries, which may be required
to register or qualify, or continue the registration or qualification, of
the Fund and/or its shares under such laws; and (7) prepares notices and
agendas for meetings of the Fund's Board of Directors and minutes of such
meetings in all matters required by the Investment Company Act of 1940,
as amended (the "1940 Act") to be acted upon by the Board.
The Adviser has entered into an Administration Contract with BISYS
Fund Services ("BISYS" or the "Administrator"), 3435 Stetzer Road,
Columbus, Ohio 43219, pursuant to which the Administrator provides
certain administrative services necessary for the Fund's operations but
which do not concern the investment advisory and portfolio management
services provided by the Adviser. For such services and the related
expenses borne by BISYS, the Adviser pays a monthly fee of .10% of the
first $350 million of the aggregate average net assets of the Fund and
other funds administered by BISYS and advised by the Adviser, .075% of
the aggregate average net assets exceeding $350 million up to $600
million, and .06% in excess of $600 million (minimum annual fee of
$40,000 per portfolio) which, together with the services to be rendered,
is subject to negotiation between the parties and both parties retain the
right unilaterally to terminate the arrangement on not less than sixty
days' notice.
The Investment Advisory Contract provides that absent willful
misfeasance, bad faith, gross negligence or reckless disregard of its
duty, the Adviser is not liable to the Fund or any of its investors for
any act or omission by the Adviser or for any error of judgment or for
losses sustained by the Fund. The Investment Advisory Contract in no way
restricts the Adviser from acting as adviser to others. The Fund has
agreed by the terms of the Investment Advisory Contract that the word
"Gabelli" in its name is derived from the name of the Adviser which in
turn is derived from the name of Mario J. Gabelli; that such name is the
property of the Adviser for copyright and/or other purposes; and that,
therefore, such name may freely be used by the Adviser for other
investment companies, entities or products. The Fund has further agreed
that, in the event that for any reason the Adviser ceases to be its
investment adviser, the Fund will, unless the Adviser otherwise consents
in writing, promptly take all steps necessary to change its name to one
which does not include "Gabelli."
The Investment Advisory Contract was approved by the Board of
Directors on June 3, 1989 and by the Fund's shareholders at a meeting
held on May 14, 1990 and was approved most recently by the Board of
Directors on May 15, 1996. The Investment Advisory Contract is terminable
without penalty by the Fund on not more than sixty days' written notice
when authorized by the Board of Directors of the Fund, by the holders of
a majority of the outstanding voting securities of the Fund, as defined
in the 1940 Act, or by the Adviser. The Investment Advisory Contract will
automatically terminate in the event of its assignment, as defined in the
1940 Act. The Investment Advisory Contract provides that, unless
terminated, it will remain in effect so long as continuance of the
Investment Advisory Contract is approved annually by the Board of
Directors of the Fund, or the shareholders of the Fund and in either
case, by a majority vote of the Directors who are not parties to the
Investment Advisory Contract or "interested persons" as defined in the
1940 Act of any such person cast in person at a meeting called
specifically for the purpose of voting on the continuance of the
Investment Advisory Contract. For the fiscal years ended December 31,
1996, December 31, 1995 and December 31, 1994, the Adviser earned fees of
$912,913, $969,629, and $1,177,574 respectively.
INVESTMENT RESTRICTIONS
The investment restrictions listed below have been adopted by the
Fund as fundamental policies, except as otherwise indicated. Under the
1940 Act, a fundamental policy may not be changed without the vote of a
majority of the outstanding voting securities of the Fund, as defined in
the 1940 Act. Such a majority is defined as the lesser of (1) 67% or more
of the shares present at a meeting of shareholders, if the holders of 50%
of the outstanding shares of the Fund are present or represented by proxy
or (2) more than 50% of the outstanding shares of the Fund.
The Fund may not:
1. Purchase the securities of any one issuer, other than the United
States Government or any of its agencies or instrumentalities,
if immediately after such purchase more than 5% of the value of
its total assets would be invested in such issuer or the Fund
would own more than 10% of the outstanding voting securities of
such issuer, except that up to 25% of the value of the Fund's
total assets may be invested without regard to such 5% and 10%
limitations.
2. Purchase or otherwise acquire real estate or interests therein,
although the Fund may purchase securities of issuers which
engage in real estate operations and securities secured by real
estate or interests therein.
3. Purchase or otherwise acquire or sell commodities or commodity
contracts except that the Fund may purchase or sell financial
futures contracts and related options thereon.
4. Purchase oil, gas or other mineral leases, rights or royalty
contracts, or exploration or development programs, except that
the Fund may invest in the securities of companies which
operate, invest in, or sponsor such programs.
5. Purchase securities of other investment companies, except in
connection with a merger, consolidation, reorganization or
acquisition of assets, except that the Fund reserves the right
to invest up to 5% of its total assets in not more than 3% of
the securities of any one investment company including small
business investment companies or invest up to 10% of its total
assets in the securities of investment companies, nor make any
such investments other than through purchases in the open market
where to the best information of the Fund no commission or
profit to a sponsor or dealer (other than the customary broker's
commission) results from such purchase.
6. Pledge its assets or assign or otherwise encumber them except to
secure permitted borrowings. For the purpose of this
restriction, collateral arrangements with respect to the writing
of options or entering into financial futures transactions or
forward contracts, or when issued or delayed delivery securities
are not deemed to be pledges of assets and such arrangements are
not deemed to be the issuance of a senior security as set forth
in restriction (7).
7. Issue senior securities except to the extent permitted by
applicable law.
8. Make loans of money or securities, except: (a) that the Fund
may engage in repurchase agreements as set forth in the
Prospectus and (b) the Fund may lend its portfolio securities
consistent with applicable regulatory requirements and as set
forth in the Prospectus.
9. Make short sales of securities or maintain a short position,
unless at all times when a short position is open, it either
owns an equal amount of such securities or owns securities
which, without payment of any further consideration, are
convertible into or exchangeable for securities of the same
issue as, and equal in amount to, the securities sold short.
10. Engage in the underwriting of securities, except insofar as
the Fund may be deemed an underwriter under the Securities Act
of 1933, as amended in disposing of a portfolio security.
11. Invest for the purpose of exercising control or management
of any other issuer.
12. Invest more than 25% of the value of its total assets in
any one industry.
If a percentage restriction is adhered to at the time of investment,
a later increase or decrease in percentage resulting from a change in
values of portfolio securities or amount of total or net assets will not
be considered a violation of any of the foregoing restrictions.
DIRECTORS AND OFFICERS
The Directors and Officers of the Fund, their principal business
occupations during the last five years and their affiliations, if any,
with the Adviser or the Administrator, are shown below. Directors deemed
to be "interested persons" of the Fund for purposes of the 1940 Act are
indicated by an asterisk.
As of March 3, 1997 the Directors and Officers of the Fund as a
group beneficially owned 1,013,832 shares of the Fund equaling 12.53% of
the Fund's outstanding shares. As of that same date, Mario J. Gabelli and
companies controlled by him beneficially owned approximately 11.56% of
the Fund's outstanding shares.
Principal Occupations During Last
Five Years; Affiliations with
Name, Position with Fund and Address the Adviser or Administrator
- ------------------------------------ ---------------------------------
Mario J. Gabelli* Chairman, President, Chief Executive
President, and Chief Officer and a Director of
Investment Officer Gabelli Funds, Inc. since 1980;
One Corporate Center Chairman, Chief Executive Officer,
Rye, New York 10580 Chief Investment Officer and Director
of GAMCO Investors, Inc.;
President and Chairman of The
Gabelli Equity Trust, Inc.;
President, Chief Investment
Officer and Director of Gabelli
Equity Series Funds, Inc., The
Gabelli Value Fund, Inc., Gabelli
Global Series Funds, Inc., and
Gabelli Investor Funds, Inc., and
Trustee of The Gabelli Asset
Fund, The Gabelli Growth Fund and
The Gabelli Money Market Funds;
Chairman and Director of Lynch
Corporation; Director and Adviser
of Gabelli International Ltd.
Mr. Gabelli is 54 years old.
Anthony J. Colavita President and Attorney at law in the
Director law firm of Anthony J. Colavita, P.C.;
c/o Gabelli Funds, Inc. Director of The Gabelli Value Fund
One Corporate Center Inc., Gabelli Global Series Funds,
Rye, New York 10580 Inc., Gabelli Investor Funds, Inc.
and Gabelli Equity Series Funds,
Inc.; Trustee of The Gabelli
Asset Fund and The Gabelli Growth
Fund, The Gabelli Money Market
Funds since 1992 and The Westwood
Funds. Mr. Colavita is 62 years
old.
E. Val Cerutti Chief Executive Officer of Cerutti
Director Consultants, Inc.; Former President
c/o Gabelli Funds, Inc. and Chief Operating Officer of Stella
One Corporate Center D'oro Biscuit Company (____ through
Rye, New York 10580 1992); Adviser, Iona College
School of Business; Director of
Lynch Corporation and Gabelli
Gold Fund, Inc. Mr. Cerutti is 58
years old.
Felix J. Christiana Formerly Senior Vice President of
Director Dollar Dry Dock Savings Bank;
c/o Gabelli Funds, Inc. Director, The Gabelli Equity Trust
One Corporate Center Inc., Gabelli Global Series Funds,
Rye, New York 10580 Inc., The Gabelli Value Fund
Inc., Gabelli Investor Funds,
Inc., Gabelli Equity Series
Funds, Inc., The Treasurer's
Fund, Inc.; Trustee, The Gabelli
Growth Fund and The Gabelli Asset
Fund. Mr. Christiana is 71 years
old.
Anthonie C. van Ekris Managing Director of BALMAC
Director International, Inc.; Formerly
c/o Gabelli Funds, Inc. Chairman and Chief Executive
One Corporate Center Officer of Balfour MacLaine Corporation
Rye, New York 10580 and Kay Corporation (through
1990); Director of Spinmaker
Industries, Inc.; Director of
Stahel Hardmeyer A.Z., Gabelli
Equity Series Funds, Inc. and
Gabelli Global Series Funds,
Inc.; Trustee of The Gabelli
Asset Fund, The Gabelli Growth
Fund and The Gabelli Money
Market Funds. Mr. van Ekris is 63
years old.
Dugald A. Fletcher* President, Fletcher & Company, Inc.;
Director Director (since 1989) and Chairman
c/o Gabelli Funds, Inc. (since February of 1991) of Binnings
One Corporate Center Building Products, Inc.; Trustee.
Rye, New York 10580 Mr. Fletcher is 68 years old.
Karl Otto Pohl* Partner of Sal Oppenheim Jr. & Cie.
Director (private investment bank); Former
c/o Gabelli Funds, Inc. President of the Deutsche
One Corporate Center Bundesbank (Germany's Central
Rye, New York 10580 Bank) and Chairman of its Central
Bank Council (1980-1991);
Currently board member of Zurich
Versicherungs-Gesellschaft
(insurance); the International
Council for JP Morgan & Co.; the
Board of Supervisory Directors
of ROBECo/o Group; and the
Supervisory Board of Royal Dutch
(petroleum company); Advisory
Director of Unilever N.V. and
Unilever Deutschland;
Director/Trustee of all Funds
managed by the Adviser. Mr. Pohl
is 67 years old.
Anthony R. Pustorino, CPA Professor of Accounting, Pace
Director University since 1965; Direc-
c/o Gabelli Funds, Inc. tor, President and shareholder
One Corporate Center of Pustorino, Puglisi & Co., RC.,
Rye, New York 10580 certified public accountants
from 1961 to 1990; Director,
The Gabelli Equity Trust Inc.,
The Gabelli Value Fund Inc.,
Gabelli Equity Series Funds,
Inc., The Treasurer's Fund, Inc.,
Trustee, The Gabelli Growth Fund,
The Gabelli Asset Fund and The
Gabelli Global Multimedia Trust
Inc. Mr. Pustorino is 71 years
old.
Salvatore J. Zizza* Director and Chief Executive Officer
Director of The Lehigh Group, Inc.; President
c/o Gabelli Funds, Inc of Binnings Building Products, Inc.;
One Corporate Center Director of The Gabelli Equity Trust
Rye, New York 10580 Inc. and Debe Computer Systems
Corp.; Trustee, The Gabelli Asset
Fund and The Gabelli Growth Fund. Mr.
Zizza is 51 years old.
Bruce N. Alpert Vice President, Chief Operating
Vice President and Officer of the investment advisory
Treasurer division of the Adviser; Treasurer
One Corporate Center of The Gabelli Equity Trust Inc.;
Rye, New York 10580 Vice President and Treasurer
of Gabelli Equity Series Funds,
Inc., Gabelli Global Series
Funds, Inc., The Gabelli Money
Market Funds, The Gabelli Value
Fund Inc. and Gabelli Investor
Funds, Inc.; President and Trea-
surer of The Gabelli Asset Fund,
The Gabelli Growth Fund; Manager
of Teton Advisers LLC and Vice
President of The Westwood Funds.
Mr. Alpert is 45 years old.
Douglas Neviera Assistant Vice President of Gabelli
Assistant Vice President Global Multimedia Trust Inc.; Client
One Corporate Center Services Representative of Gabelli &
Rye, New York 10580 Company, Inc. until 1995. Senior
Analyst for Putnam Investments
from 1991 to 1994. Master of
Science in Finance student at
Boston College from 1993 to
1994. Mr. Neviera is 27 years
old.
James E. McKee Vice President and General Counsel
Secretary of Gabelli Funds, Inc.; General
One Corporate Center Counsel of Gamco Investor, Inc.;
Rye, New York 10580 Secretary of all Funds advised
by Gabelli Funds, Inc. and Teton
Advisers LLC; Branch Chief U.S.
Securities and Exchange Commis-
sion - Northeast Regional Office,
1992-1993; Staff Attorney, U.S.
Securities and Exchange
Commission - Northeast Regional
Office, 1989-1992. Mr. McKee is
33 years old.
The Fund pays each Director who is not an employee of the Adviser or
an affiliated company an annual fee of $3,000 and $500 for each meeting
of the Board of Directors attended by the Director, and reimburses
Directors for certain travel and other out-of-pocket expenses incurred by
them in connection with attending such meetings. Directors and officers
of the Fund who are employed by the Adviser or an affiliated company
receive no compensation or expense reimbursement from the Fund.
Mr. Gabelli is an "interested person" as a result of his employment
as an officer of the Fund and the Adviser. Mr. Gabelli is a registered
representative of an affiliated broker-dealer. Mr. Pohl receives fees
from the Adviser but has no obligation to provide any services to the
Adviser. Although this relationship does not appear to require
designation of Mr. Pohl as an "interested person," the Fund has made such
designation in order to avoid the possibility that Mr. Pohl's
independence would be questioned. Mr. Fletcher and Mr. Zizza may be
"interested persons" as a result of their association with Binnings
Building Products, Inc., an entity controlled by GLI, Inc.
Karl Otto Pohl and Anthonie C. van Ekris, Directors of the Fund,
reside outside the United States and all or a significant portion of
their assets are located outside the United States. They have no
authorized agent in the United States to receive service of process. As a
result, it may not be possible for investors to effect service of process
within the United States or to enforce against them in United States
courts judgments predicated upon civil liability provisions of United
States securities laws.
The following table sets forth certain information regarding the
compensation of the Fund's Directors and Executive Officers. Except as
disclosed below, no Executive Officer or person affiliated with the Fund
received compensation from the Fund for the calendar year ended December
31, 1996 in excess of $60,000.
<TABLE>
<CAPTION>
COMPENSATION TABLE
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Name of Person, Aggregate Compensation Total Compensation from
Position from Registrant (fiscal Registrant and Fund Complex
year) Paid to Directors
- ---------------------------------------------------------------------------------------
Mario J. Gabelli $ 0 $ 0
President, and Chief
Investment Officer
E. Val Cerutti $6,000 $ 8,000(2)
Director
Felix Christiana $6,000 $74,000(11)
Director
Anthony J. Colavita $6,000 $70,000(15)
Director
Dugald Fletcher $6,000 $14,000(2)
Director
Karl Otto Pohl $5,500 $77,750(16)
Director
Anthony R. Pustorino $6,000 $84,500(9)
Director
Anthonie C. van Ekris $6,000 $49,000(12)
Director
Salvatore Zizza $6,00 $42,500(5)
Director
</TABLE>
- --------------
* Represents the total compensation paid to such persons during the
calendar year ended December 31, 1996 (and, with respect to the
Fund, to be paid during a full calendar year). The parenthetical
number represents the number of investment companies (including
the Fund) from which such person receives compensation that are
considered part of the same fund complex as the Fund, because,
among other things, the Adviser is their common investment
adviser.
PORTFOLIO TRANSACTIONS AND BROKERAGE
Under the Investment Advisory Contract, the Adviser is
authorized on behalf of the Fund to employ brokers to effect the purchase
or sale of portfolio securities with the objective of obtaining prompt,
efficient and reliable execution and clearance of such transactions at
the most favorable price obtainable ("best execution") at reasonable
expense. Transactions in securities other than those for which a
securities exchange is the principal market are generally done with a
brokerage firm and a commission is paid whenever it appears that the
broker can obtain a more favorable overall price. In general, there may
be no stated commission in the case of certain debt securities and
securities traded on the over-the-counter markets, but the prices of
those securities may include undisclosed commissions or markups. Options
transactions will usually be effected through a broker and a commission
will be charged. The Fund also expects that securities will be purchased
at times in underwritten offerings where the price includes a fixed
amount of compensation generally referred to as the underwriter's
concession or discount.
The Adviser currently serves as adviser to a number of
investment company clients and may in the future act as adviser to
others. It is the practice of the Adviser to cause purchase and sale
transactions to be allocated among the Fund and others whose assets it
manages in such manner as it deems equitable. In making such allocations
among the Fund and other client accounts, the main factors considered are
the respective investment objectives, the relative size of portfolio
holdings of the same or comparable securities, the availability of cash
for investment, the size of investment commitments generally held and the
opinions of the persons responsible for managing the portfolios of the
Fund and other client accounts.
The policy of the Fund regarding purchases and sales of
securities and options for its portfolio is that primary consideration
will be given to obtaining the most favorable prices and efficient
execution of transactions. In seeking to implement the Fund's policies,
the Adviser effects transactions with those brokers and dealers who the
Adviser believes provide the most favorable prices and are capable of
providing efficient executions. If the Adviser believes such price and
executions are obtainable from more than one broker or dealer, it may
give consideration to placing portfolio transactions with those brokers
and dealers who also furnish research and other services to the Fund or
the Adviser of the type described in Section 28(e) of the Securities
Exchange Act of 1934, as amended. In doing so, the Fund may also pay
higher commission rates than the lowest available when the Adviser
believes it is reasonable to do so in light of the value of the brokerage
and research services provided by the broker effecting the transaction.
Such services may include, but are not limited to, any one or more of the
following: information as to the available ability of securities for
purchase or sale; statistical or factual information or opinions
pertaining to investment; wire services; and appraisals or evaluations of
portfolio securities.
The Adviser may also place orders for the purchase or sale of
portfolio securities with Gabelli and Company, Inc. ("Gabelli"), a
broker-dealer member of the National Association of Securities Dealers,
Inc. and an affiliate of the Adviser, when it appears that, as an
introducing broker or otherwise, Gabelli can obtain a price and execution
which is at least as favorable as that obtainable by other qualified
brokers.
As required by Rule 17e-1 under the 1940 Act, the Board of
Directors has adopted "Procedures" which provide that the commissions
paid to Gabelli or other affiliates on stock exchange transactions may
not exceed that which would have been charged by another qualified broker
or member firm able to affect the same or a comparable transaction an at
equally favorable price. Rule 17e-1 and the Procedures contain
requirements that the Board, including its Independent Directors, conduct
periodic compliance reviews of such brokerage allocations and review such
schedule at least annually for its continuing compliance with the
foregoing standard. The Adviser and Gabelli are also required to furnish
reports and maintain records in connection with such reviews. For the
fiscal years ended December 31, 1994, December 31, 1995 and December 31,
1996 the Fund paid a total of $_____, $_____ and $_____, respectively, in
brokerage commissions, of which Gabelli received $_____, $_____ and
$_____, respectively. In addition, the Fund paid brokerage commissions
during the year ended December 31, 1996 of $7,212 to Gabelli & Company,
Inc. and its affiliates.
To obtain the best execution of portfolio trades on the New York
Stock Exchange (the "Exchange"), Gabelli controls and monitors the
execution of such transactions on the floor of the Exchange through
independent "floor brokers" or through the Designated Order Turnaround
("DOT") System of the Exchange. Such transactions are then cleared,
confirmed to the Fund for the account of Gabelli, and settled directly
with the Custodian of the Fund by a clearing house member firm which
remits the commission less its clearing charges to Gabelli.
Pursuant to an agreement with the Fund, Gabelli pays all charges
incurred for such services and reports at least quarterly to the Board
the amount of such expenses and commissions; and the net compensation
realized by Gabelli for its brokerage services is subject to the approval
of the Board and the "non interested" Directors of the Fund who must
approve the continuation of the arrangement at least annually.
Commissions paid by the Fund pursuant to the arrangement may not exceed
the commission level specified by the Procedures described above. Gabelli
may also effect Fund portfolio transactions in the same manner and
pursuant to the same arrangements on other national securities exchanges
which adopt direct access rules similar to those of the Exchange.
DETERMINATION OF NET ASSET VALUE
Net asset value will normally be calculated (a) no less
frequently than weekly, (b) on the last business day of each month and
(c) at any other times determined by the Fund's Board of Directors. Net
asset value is calculated by dividing the value of the Fund's net assets
(the value of its assets less its liabilities, exclusive of capital stock
and surplus, and less the liquidation value of any outstanding shares of
preferred stock) by the total number of shares of common stock
outstanding. All securities for which market quotations are readily
available, which include the options and futures in which the Fund may
invest, are valued at the last sales price on the primary exchange on
which they are traded prior to the time of determination, or, if no sales
price is available at that time, at the closing price quoted for the
securities (but if bid and asked quotations are available, at the mean
between the last current bid and asked prices, rather than the quoted
closing price). Securities that are traded in the unregulated market are
valued at the mean between the bid and the asked quotations, if bid and
asked quotations are available, at the current bid price. If bid and
asked quotations are not available, then such securities are valued as
determined pursuant to procedures established in good faith by the Board
of Directors of the Fund.
Short-term debt securities with remaining maturities of sixty
days or less at the time of purchase are varied at amortized cost, unless
the Directors determine such does not reflect the securities' fair value,
in which case these securities will be valued at their fair value as
determined by the Directors. Other debt securities will be valued on a
marked-to-market basis until such time as they reach a remaining maturity
of sixty days, whereupon they will be valued at amortized value unless
the Directors determine such does not reflect the securities' fair value,
in which case these securities will be valued at their fair value as
determined by the Directors.
The offering costs of the Cumulative Preferred Stock (including
the underwriting discount) will be charged to the additional paid-in
capital.
DIVIDENDS, DISTRIBUTIONS AND TAXES
The following discussion is a brief summary of certain
additional tax considerations affecting the Fund and its shareholders. No
attempt is made to present a detailed explanation of all U.S. Federal,
state, local and foreign tax concerns, and the discussions set forth here
and in the Prospectus do not constitute tax advice. Investors are urged
to consult their own tax advisers with any specific questions relating to
federal, state, local and foreign taxes. The discussion reflects
applicable tax laws of the United States as of the date of this Statement
of Additional Information, which tax laws may be changed or subject to
new interpretations by the courts or the Internal Revenue Service
retroactively or prospectively.
GENERAL
The Fund has qualified as and intends to continue to qualify as
and elect to be a regulated investment company (a "RIC") under Subchapter
M of the Code. If it so qualifies, the Fund will not be subject to U.S.
Federal income tax on the portion of its net investment income (i.e., its
investment company taxable income as defined in the Code) and its net
capital gain (i.e., the excess of its net realized long-term capital
gains over its net realized short-term capital losses) which it
distributes to its shareholders in each taxable year., provided that it
distributes to its shareholders at least 90% of its net investment income
for such taxable year.
Qualification as a RIC requires, among other things, that the
Fund: (a) derive at least 90% of its gross income in each taxable year
from dividends, interest, payments with respect to securities loans,
gains from the sale or other disposition of stock or securities, foreign
currencies or other income (including gains from options, futures or
forward contracts) derived with respect to its business of investing in
stock, securities or currencies; (b) derive less than 30% of its gross
income in each taxable year from the sale or other disposition of any of
the following held for less than three months: stock, securities,
options, futures, certain forward contracts, or foreign currencies (or
any options, futures or forward contracts on foreign currencies) but only
if such currencies are not directly related to the Fund's principal
business of investing in stock or securities (the "30% limitation"); and
(c) diversify its holdings so that, at the end of each quarter of each
taxable year, (i) at least 50% of the market value of the Fund's assets
is represented by cash, cash items, U.S. government securities,
securities of other RICs and other securities with such other securities
limited, in respect of any one issuer, to an amount not greater than 5%
of the value of the Fund's assets and 10% of the outstanding voting
securities of such issuer, and (ii) not more than 25% of the value of its
assets is invested in the securities of any one issuer (other than U.S.
government securities or the securities of other RICs).
TAXATION OF THE FUND
If the Fund were unable to satisfy the 90% distribution
requirement or otherwise were to fail to qualify to be taxed as a RIC in
any year, it would be subject to tax in such year on all of its taxable
income, whether or not the Fund made any distributions. To qualify again
to be taxed as a RIC in a subsequent year, the Fund would be required to
distribute to Cumulative Preferred Shareholders and Common Shareholders
as an net investment income dividend, its earnings and profits
attributable to non-RIC years reduced by an interest charge on 50% of
such earnings and profits payable by the Fund to the IRS. In addition, if
the Fund failed to qualify as a RIC for a period greater than one taxable
year, then the Fund would be required to recognize and pay tax on any net
built-in gains (the excess of aggregate gains, including items of income,
over aggregate losses that would have been realized if the Fund had been
liquidated) in order to qualify as a RIC in a subsequent year.
Under the Code, amounts not distributed by a RIC on a timely
basis in accordance with a calendar year distribution requirement are
subject to a 4% excise tax. To avoid the tax, the Fund must distribute
during each calendar year, an amount equal to, at the minimum, the sum of
(1) 98% of its net investment income (not taking into account any capital
gains or losses) for the calendar year, (2) 98% of its net capital gains
for the calendar year (unless an election is made by a fund with a
November or December year-end to use the fund's fiscal year), and (3) all
net investment income and net capital gain for previous years that were
not previously distributed. A distribution will be treated as paid during
the calendar year if it is paid during the calendar year or declared by
the Fund in October, November or December of the year, payable to
shareholders of record on a date during such month and paid by the Fund
during January of the following year. Any such distributions paid during
January of the following year will be deemed to be received on December
31 of the year the distributions are declared, rather than when the
distributions are received. While the Fund intends to distribute its
ordinary income and capital gains in the manner necessary to minimize
imposition of the 4% excise tax, there can be no assurance that
sufficient amounts of the Fund's taxable income and capital gains will be
distributed to avoid entirely the imposition of the tax. In such event,
the Fund will be liable for the tax only on the amount by which it does
not meet the foregoing distribution requirements.
Gains or losses on the sales of securities by the Fund will be
long-term capital gains or losses if the securities have been held by the
Fund for more than twelve months. Gains or losses on the sale of
securities held for twelve months or less will be short-term capital
gains or losses.
Foreign currency gains or losses on non-U.S. dollar denominated
bonds and other similar debt instruments and on any non-U.S. dollar
denominated futures contracts, options and forward contracts that are not
section 1256 contracts (as defined below) generally will be treated as
net investment income and loss.
If the Fund invests in stock of a passive foreign investment
company ("PFIC"), the Fund may be subject to Federal income tax on a
portion of any "excess distribution" with respect to, or gain from the
disposition of, such stock. The tax would be determined by allocating
such distribution or gain ratably to each day of the Fund's holding
period for the stock. The amount so allocated to any taxable year of the
Fund prior to the taxable year in which the excess distribution or
disposition occurs would be taxed to the Fund at the highest marginal
income tax rate in effect for the year to which it was allocated, and the
tax would be further increased by an interest charge. The amount
allocated to the taxable year of the distribution or disposition would be
included in the Fund's net investment income and, accordingly, would not
be taxable to the Fund to the extent distributed by the Fund as a
dividend to shareholders.
If the Fund invests in stock of a PFIC, the Fund may be able to
elect to be a "qualified electing fund," in lieu of being taxable in the
manner described in the above paragraph and to include annually in income
its pro rata share of the ordinary earnings and net capital gain (whether
or not distributed) of the PFIC. In order to make this election, the Fund
would be required to obtain annual information from the PFICs in which it
invests, which may be difficult to obtain. [Alternatively, under proposed
regulations not currently in effect, the Fund may be able to elect to
mark to market its PFIC stock, resulting in the stock being treated as
sold at fair market value on the last business day of each taxable year.
Any resulting gain would be reported as net investment income, and any
resulting loss would not be recognized.]
The Fund may invest in securities purchased at a discount and
may therefore cause the Fund to accrue income before amounts due under
the obligation are paid. The Fund may invest in securities rated in the
medium to lower rating categories of nationally recognized rating
organizations, and in unrated securities ("high yield securities"). A
portion of the interest payments on such high yield securities may be
treated as dividends for Federal income tax purposes.
As a result of investing in stock of PFICs or securities
purchased at a discount or any other investment that produces income that
is not matched by a corresponding cash distribution to the Fund, the Fund
could be required to include in current income, income it has not yet
received. Any such income would be treated as income earned by the Fund
and therefore would be subject to the distribution requirements of the
Code. This might prevent the Fund from distributing 90% of its net
investment income, as is required in order to avoid Fund-level taxation
on the Fund's distributions, or might prevent it from distributing enough
income and capital gain to avoid completely the imposition of the excise
tax. To avoid this result, the Fund may be required to borrow money or
dispose of other securities to be able to make distributions to its
investors. The extent to which the Fund may liquidate securities at a
gain may be limited by the 30% limitation (discussed above).
If the Fund does not meet the asset coverage requirements of the
1940 Act the Articles Supplementary, the Fund will be required to suspend
distributions to the holders of the common stock until the asset coverage
is restored. See "Description of Cumulative Preferred Stock -- Dividends"
and "Description of Capital Stock and Other Securities." Such a
suspension of distributions might prevent the Fund from distributing 90%
of its investment company taxable income, as is required in order to
avoid Fund-level taxation on the Fund's distributions, or might prevent
it from distributing enough income and capital gain to avoid completely
imposition of the excise tax. Upon any failure to meet the asset coverage
requirements of the 1940 Act or the Articles Supplementary, the Fund may,
and in certain circumstances will, be required to partially redeem the
shares of Cumulative Preferred Stock in order to restore the requisite
asset coverage and avoid the adverse consequences to the Fund and its
shareholders of failing to qualify as a RIC. If asset coverage were
restored, the Fund would again be able to pay dividends and might be able
to avoid Fund-level taxation on the Fund's undistributed income.
Hedging Transactions
Certain options, futures contracts and options on futures
contracts are "section 1256 contracts". Any gains or losses on section
1256 contracts are generally considered 60% long-term and 40% short-term
capital gains or losses ("60/40"). Also, section 1256 contracts held by
the Fund at the end of each taxable year are "marked-to-the-market" with
the result that unrealized gains or losses are treated as though they
were realized and the resulting gain or loss is treated as 60/40 gain or
loss.
Hedging transactions undertaken by the Fund may result in
"straddles" for U.S. Federal income tax purposes. The straddle rules may
affect the character of gains (or losses) realized by the Fund. In
addition, losses realized by the Fund on positions that are part of a
straddle may be deferred under the straddle rules, rather than being
taken into account in calculating the taxable income for the taxable year
in which such losses are realized. Further, the Fund may be required to
capitalize, rather than deduct currently, any interest expense on
indebtedness incurred or continued to purchase or carry any positions
that are part of a straddle.
The Fund may make one or more of the elections available under
the Code which are applicable to straddles. If the Fund makes any of the
elections, the amount, character and timing of the recognition of gains
or losses from the affected straddle positions will be determined under
rules that vary according to the election(s) made. The rules applicable
under certain of the elections accelerate the recognition of gains or
losses from the affected straddle positions.
Because application of the straddle rules may affect the
character and timing of the Fund's gains, losses and deductions, the
amount which must be distributed to shareholders, and which will be taxed
to shareholders as net investment income or long-term capital gain, may
be increased or decreased substantially as compared to a fund that did
not engage in such hedging transactions.
The 30% limitation (discussed above) may limit the Fund's
ability to engage in transactions in options, spreads, straddles, hedging
transactions, forward or futures contracts and options on any of these
positions because these transactions (1) are often consummated in less
than three months, (2) may require the sale of portfolio securities held
less than three months, and (3) may reduce the holding periods of certain
securities within the Fund.
Foreign Withholding Taxes
Income received by the Fund from sources within foreign
countries may be subject to withholding and other taxes imposed by such
countries. Tax conventions between certain countries and the United
States may reduce or eliminate such taxes. It is impossible to determine
the rate of foreign tax in advance since the amount of the Fund's assets
to be invested in various countries is not known. Because the Fund will
not have more than 50% of its total assets invested in securities of
foreign governments or corporations, the Fund will not be entitled to
"pass-through" to shareholders the amount of foreign taxes paid by the
Fund.
TAXATION OF SHAREHOLDERS
The Fund will determine either to distribute or to retain for
reinvestment all or part of its net capital gain. If any such gains are
retained, the Fund will be subject to a tax of 35% of such amount. In
that event, the Fund expects to designate the retained amount as
undistributed capital gains in a notice to its shareholders, each of whom
(1) will be required to include in income for tax purposes as long-term
capital gains its share of such undistributed amount, (2) will be
entitled to credit its proportionate share of the tax paid by the Fund
against its Federal income tax liability and to claim refunds to the
extent that the credit exceeds such liability, and (3) will increase its
basis in its shares of the Fund by an amount equal to 65% of the amount
of undistributed capital gains included in such shareholder's gross
income.
Distributions of net investment income as ordinary dividends are
taxable to a U.S. shareholder as net investment income, whether paid in
cash or shares. Ordinary dividends paid by the Fund may qualify for the
dividends received deduction available to corporations, but only to the
extent that the Fund's income consists of qualified dividends received
from U.S. corporations. The amount of any dividend distribution eligible
for the dividends received deduction will be designated by the Fund in a
written notice to shareholders within 60 days of the close of the taxable
year. Distributions of net capital gains as designated capital gain
dividends, if any, are taxable as long-term capital gains, whether paid
in cash or in shares, regardless of how long the shareholder has held the
Fund's shares, and are not eligible for the dividends received deduction.
Shareholders receiving distributions in the form of newly issued
shares will have a basis in such shares of the Fund equal to the fair
market value of such shares on the distribution date. If the net asset
value of shares is reduced below a shareholder's cost as a result of a
distribution by the Fund, such distribution will be taxable even though
it represents a return of invested capital. The price of shares purchased
at any time may reflect the amount of a forthcoming distribution. Those
purchasing shares just prior to a distribution will receive a
distribution which will be taxable to them, even though it represents in
part a return of invested capital.
Upon a sale or exchange of shares, a shareholder will realize a
taxable gain or loss depending upon his or her basis in the shares. Such
gain or loss will be treated as capital gain or loss if the shares have
been held for more than one year. Any loss realized on a sale or exchange
will be disallowed to the extent the shares disposed of are replaced
within a 61-day period beginning 30 days before and ending 30 days after
the day that the shares are disposed of. In such a case, the basis of the
shares acquired will be adjusted to reflect the disallowed loss.
Any loss realized by a shareholder on the sale of Fund shares
held by the shareholder for six months or less will be treated for tax
purposes as a long-term capital loss to the extent of any capital gain
dividends received by the shareholder with respect to such shares.
Dividends and capital gains distributions also may be subject to
state and local taxes. Shareholders are urged to consult their own tax
advisers regarding specific questions about the U.S. Federal, state,
local or foreign tax consequences to them of investing in the Fund.
BACKUP WITHHOLDING
The Fund may be required to withhold Federal income tax at a
rate of 31% on all taxable distributions payable to shareholders who fail
to provide the Fund with their correct taxpayer identification number or
to make required certifications, or who have been notified by the
Internal Revenue Service that they are subject to backup withholding.
Backup withholding is not an additional tax. Any amounts withheld may be
credited against the shareholder's Federal income tax liability.
THE FOREGOING IS A GENERAL AND ABBREVIATED SUMMARY OF THE APPLICABLE
PROVISIONS OF THE CODE AND TREASURY REGULATIONS PRESENTLY IN EFFECT. FOR THE
COMPLETE PROVISIONS, REFERENCE SHOULD BE MADE TO THE PERTINENT CODE SECTIONS
AND THE TREASURY REGULATIONS PROMULGATED THEREUNDER. THE CODE AND THE TREASURY
REGULATIONS ARE SUBJECT TO CHANGE BY LEGISLATIVE, JUDICIAL OR ADMINISTRATIVE
ACTION, EITHER PROSPECTIVELY OR RETROACTIVELY.
RATING AGENCY DISCOUNT FACTORS
The following table identifies the Rating Agency Discount
Factors used to discount particular Eligible Assets, as defined in the
Prospectus, for a range of exposure periods.
<TABLE>
<CAPTION>
RATING AGENCY
TYPE OF RATING AGENCY ELIGIBLE ASSET: DISCOUNT FACTOR:
- --------------------------------------------------------------------------------------------------------------
<S> <C>
Rating Agency Short Term Money Market Instruments (other than U.S. Government
Obligations set forth below) and other commercial paper:
Demand or time deposits, certificates of deposit and bankers' acceptances
includible in the Rating Agency Short Term Money Market Instruments............... 1.00
Commercial paper rated P-1 by the Rating Agency maturing in 30 days or less........ 1.00
Commercial paper rated P-1 by the Rating Agency maturing in more than 30 days
but in 270 days or less........................................................... 1.15
Commercial paper rated A-1+ by S&P maturing in 270 days or less.................... 1.25
Repurchase obligations includible in the Rating Agency Short Term Money Market
Instruments if term is less than 30 days and counterparty is rated at
least A2.......................................................................... 1.00
Discount Factor
applicable
to underlying
assets
Other repurchase obligations.......................................................
Common stocks:
Other issuers...................................................................... 3.00
Preferred stocks:
Auction rate preferred stocks...................................................... 3.50
Other preferred stocks issued by issuers in the financial and industrial
industries........................................................................ 2.35
Other preferred stocks issued by issuers in the utilities industry................. 1.60
U.S. Government Obligations (other than U.S. Treasury Securities Strips set forth
below) with remaining terms to maturity of:
1 year or less..................................................................... 1.08
2 years or less.................................................................... 1.15
3 years or less.................................................................... 1.20
4 years or less.................................................................... 1.26
5 years or less.................................................................... 1.31
7 years of less.................................................................... 1.40
10 years or less................................................................... 1.48
15 years or less................................................................... 1.54
20 years or less................................................................... 1.61
30 years or less................................................................... 1.63
U.S. Treasury Securities Strips with remaining terms to maturity of:
1 year or less..................................................................... 1.08
2 years or less.................................................................... 1.16
3 years or less.................................................................... 1.23
4 years or less.................................................................... 1.30
5 years or less.................................................................... 1.37
7 years or less.................................................................... 1.51
10 years or less................................................................... 1.69
15 years or less................................................................... 1.99
20 years or less................................................................... 2.28
30 years or less................................................................... 2.56
Corporate bonds:
Corporate bonds rated Aaa with remaining terms to maturity of:
1 year or less................................................................. 1.14
2 years or less................................................................ 1.21
3 years or less................................................................ 1.26
4 years or less................................................................ 1.32
5 years or less................................................................ 1.38
7 years or less................................................................ 1.47
10 years or less............................................................... 1.55
15 years or less............................................................... 1.62
20 years or less............................................................... 1.69
30 years or less............................................................... 1.71
Corporate bonds rated Aa with remaining terms to maturity of:
1 year or less................................................................. 1.19
2 years of less................................................................ 1.26
3 years or less................................................................ 1.32
4 years or less................................................................ 1.38
5 years or less................................................................ 1.44
7 years or less................................................................ 1.54
10 years or less............................................................... 1.63
15 years or less............................................................... 1.69
20 years or less............................................................... 1.77
30 years or less............................................................... 1.79
Corporate bonds rated A with remaining terms to maturity of:
1 year or less................................................................. 1.24
2 years or less................................................................ 1.32
3 years or less................................................................ 1.38
4 years or less................................................................ 1.45
5 years or less................................................................ 1.51
7 years or less................................................................ 1.61
10 years or less............................................................... 1.70
15 years or less............................................................... 1.77
20 years or less............................................................... 1.85
30 years or less............................................................... 1.87
Convertible corporate bonds with senior debt securities rated Aa issued by
the following type of issuers:
Utility........................................................................ 1.80
Industrial..................................................................... 2.97
Financial...................................................................... 2.92
Transportation................................................................. 4.27
Convertible corporate bonds with senior debt securities rated A issued by
the following type of issuers:
Utility........................................................................ 1.85
Industrial..................................................................... 3.02
Financial...................................................................... 2.97
Transportation................................................................. 4.32
Convertible corporate bonds with senior debt securities rated Baa issued by
the following type of issuers:
Utility........................................................................ 2.01
Industrial..................................................................... 3.18
Financial...................................................................... 3.13
Transportation................................................................. 4.48
Convertible corporate bonds with senior debt securities rated Ba issued by
the following type of issuers:
Utility........................................................................ 2.02
Industrial..................................................................... 3.19
Financial...................................................................... 3.14
Transportation................................................................. 4.49
Convertible corporate bonds with senior debt securities rated B1 or B2
issued by the following type of issuers:
Utility........................................................................ 2.12
Industrial..................................................................... 3.29
Financial...................................................................... 3.24
Transportation................................................................. 4.59]
</TABLE>
GENERAL INFORMATION
COUNSEL AND INDEPENDENT ACCOUNTANTS
Skadden, Arps, Slate, Meagher & Flom LLP, 919 Third Avenue, New
York, New York 10022 is counsel to the Fund.
Price Waterhouse LLP, 1177 Avenue of the Americas, New York, New
York 10036, has been selected as independent accountants for the Fund.
FINANCIAL STATEMENTS
The audited financial statements included in the Annual Report to
the Fund's Shareholders for the fiscal year ended December 31, 1996,
together with the report of Price Waterhouse LLP thereon, are
incorporated herein by reference from the Fund's Annual Report to
Shareholders filed with the Securities and Exchange Commission on
March 19, 1997. All other portions of the Annual Report to Shareholders
are not incorporated herein by reference and are not part of the
Registration Statement. A copy of the Annual Report to Shareholders may
be obtained without charge by writing to the Fund at its address at
One Corporate Center, Rye, New York 10580-1434 or by calling the Fund
toll-free at 800-GABELLI (422-3554).
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(1) Financial Statements (1)
(2) (a) Articles of Amendment and Restatement (2)
(b) Amended and Restated By-Laws (2)
(c) Not Applicable
(d) (1) Specimen Stock Certificate (3)
(2) Articles Supplementary (4)
(e) Automatic Dividend Reinvestment and Voluntary
Cash Purchase Plan (2)
(f) Not Applicable
(g) Investment Advisory Agreement (4)
(h) (1) Form of Underwriting Agreement (4)
(2) Form of Agreement Among Underwriters (4)
(3) Form of Selected Dealers Agreement (4)
(i) Not Applicable
(j) Custodian Agreement (4)
(k) Not Applicable
(l) (1) Opinion and Consent of Skadden, Arps, Slate,
Meagher & Flom LLP (4)
(2) Opinion and Consent of Miles & Stockbridge (4)
(m) Not Applicable
(n) Consent of Price Waterhouse LLP (4)
(o) Not Applicable
(p) Not Applicable
(q) Not Applicable
(r) Financial Data Schedule (3)
(1) Incorporated by reference from the Registrant's Annual Report for
the year ended December 31, 1996, as filed with the Securities
and Exchange Commission on March 19, 1997.
(2) Incorporated by reference from the Registrant's Registration
Statement on Form N-2, File No. 811-05715, as filed with the
Securities and Exchange Commission on March 31, 1995.
(3) Filed herein.
(4) To be filed by amendment.
ITEM 25. MARKETING ARRANGEMENTS
See Exhibit 2(h) to this Registration Statement.
ITEM 26. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the estimated expenses to be
incurred in connection with the offering described in this Registration
Statement:
SEC Registration fees................................. $ 909
New York Stock Exchange listing fee................... 17,700
Rating Agency fee..................................... 20,000
Printing and engraving expenses....................... 100,000
Auditing fees and expenses............................ 25,000
Legal fees and expenses............................... 135,000
Blue Sky fees and expenses............................ 20,000
Consulting fees....................................... 150,000
Miscellaneous......................................... 10,956
------
Total.............................................. $479,565
========
- ----------------
* To be furnished by amendment.
ITEM 27. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
Insofar as the following have substantially identical boards of directors
or trustees they may be deemed with Registrant to be under common
control: The Gabelli Asset Fund, The Gabelli Growth Fund and The Westwood
Funds, each a Massachusetts Business Trust, The Gabelli Equity Trust
Inc., The Gabelli Value Fund Inc., The Gabelli ABC Fund, Gabelli Capital
Series Funds, Inc., The Gabelli Global Series Funds, Inc., The Gabelli
Money Market Funds, The Gabelli Global Multimedia Trust Inc., Gabelli
International Growth Fund, Inc., Gabelli Gold Funds Inc. and Gabelli
Equity Series Funds, Inc., each a Maryland corporation.
ITEM 28. NUMBER OF HOLDERS OF SECURITIES AS OF MARCH __, 1997
Title of Class Number of Record Holders
Capital Stock, par _____
value $.001 per share
ITEM 29. INDEMNIFICATION
Under the Fund's Articles of Amendment and Restatement and Amended and
Restated By-Laws, the directors and officers of the Company and Fund will
be indemnified to the fullest extent allowed and in the manner provided
by Maryland law and applicable provisions of the Investment Company Act
of 1940, as amended including advancing of expenses incurred in
connection therewith. Indemnification shall not be provided however to
any officer or director against any liability to the Registrant or its
security-holders to which he or she would otherwise be subject by reasons
of willful misfeasance, bad faith, gross negligence or reckless disregard
of the duties involved in the conduct of his or her office.
Insofar as indemnification for liabilities under the Securities Act of
1933, as amended (the "Securities Act") may be permitted to the directors
and officers, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is therefore unenforceable.
If a claim for indemnification against such liabilities under the
Securities Act (other than for expenses incurred in a successful defense)
is asserted against the Company by the directors or officers in
connection with the Shares, the Registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit
to a court of appropriate jurisdiction the question of whether such
indemnification by it is against public policy as expressed in the
Securities such Act and will be governed by the final adjudication of
such issue.
ITEM 30. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
For information as to the business, profession, vocation or employment of
a substantial nature of each of the officers and partners of Gabelli
Funds, Inc., reference is made to the Adviser's current Form ADV filed
under the Investment Advisers Act of 1940, as amended, incorporated
herein by reference.
ITEM 31. LOCATION OF ACCOUNTS AND RECORDS
The accounts and records of the Registrant are maintained in part at the
office of the Advisor at One Corporate Center, Rye, New York 10580-1434,
in part at the offices of the Custodian, State Street Bank & Trust
Company, with offices at 1776 Heritage Drive, North Quincy, MA 02171, at
the offices of the Fund's Administrator, BISYS Fund Series, 3435 Stetzer
Road, Columbus, Ohio 43219, and in part at the offices of Boston
Financial Data Services Inc., BFDS Building, 4th Floor, 2 Heritage Drive,
Quincy, MA 02171.
ITEM 32. MANAGEMENT SERVICES
Except as described above in Item 9, the Registrant is not a party to any
management service related contract.
ITEM 33. UNDERTAKINGS
1. Registrant undertakes to suspend the offering of shares until the
prospectus is amended, if subsequent to the effective date of
this registration statement, its net asset value declines more
than ten percent from its net asset value, as of the effective
date of the registration statement or its net asset value
increases to an amount greater than its net proceeds as stated
in the prospectus.
2. Not applicable.
3. Not applicable.
4. Not applicable.
5. Registrant undertakes that, for the purpose of determining any
liability under the Securities Act, the information omitted from
the form of prospectus filed as part of the Registration
Statement in reliance upon Rule 430A and contained in the form
of prospectus filed by the Registrant pursuant to Rule 497(h)
will be deemed to be a part of the Registration Statement as of
the time it was declared effective.
Registrant undertakes that, for the purpose of determining any
liability under the Securities Act, each post-effective
amendment that contains a form of prospectus will be deemed to
be a new Registration Statement relating to the securities
offered therein, and the offering of such securities at that
time will be deemed to be the initial bona fide offering
thereof.
6. Registrant undertakes to send by first class mail or other means
designed to ensure equally prompt delivery, within two business
days of receipt of a written or oral request, any SAI
constituting Part B of this Registration Statement.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and
Investment Company Act of 1940, the Registrant has duly caused this
amendment to its Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Rye, State of New
York, on the 4th day of April 1997.
THE GABELLI CONVERTIBLE SECURITIES FUND, INC.
BY: /s/ BRUCE N. ALPERT
Bruce N. Alpert
Vice President and Treasurer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in
the capacities and on the dates indicated:
NAME TITLE DATE
/s/ MARIO J. GABELLI President and
- ---------------------------- Chief Investment
Mario J. Gabelli Officer
/s/ E. VAL CERUTTI Director
- ----------------------------
E. Val Cerutti
/s/ FELIX J. CHRISTIANA Director
- ----------------------------
Felix J. Christiana
/s/ ANTHONY J. COLAVITA Director
- ----------------------------
Anthony J. Colivita
/s/ DUGALD A.FLETCHER Director
- ----------------------------
Dugald A. Fletcher
/s/ KARL OTTO POHL Director
- ----------------------------
Karl Otto Pohl
/s/ ANTHONY R. PUSTORINO Director
- ----------------------------
Anthony R. Pustorino
/s/ ANTHONIE C. VAN EKRIS Director
- ----------------------------
Anthonie C. Van Ekris
/s/ SALVATORE J. ZIZZA Director
- ----------------------------
Salvatore J. Zizza
SCHEDULE OF EXHIBITS TO FORM N-2
Exhibit Page
Number Exhibit Number
Exhibit A Articles of Amendment and Restatement*..............
Exhibit B Amended and Restated By-Laws*.......................
Exhibit C Not Applicable......................................
Exhibit D (1) Specimen Stock Certificate......................
(2) Articles Supplementary..........................
Exhibit E Automatic Dividend Reinvestment and
Voluntary Cash Purchase Plan*.....................
Exhibit F Not Applicable......................................
Exhibit G Investment Advisory Agreement.......................
Exhibit H (1) Form of Underwriting Agreement..................
(2) Form of Agreement Among Underwriters............
(3) Form of Selected Dealers Agreement..............
Exhibit I Not Applicable......................................
Exhibit J Custodian Agreement.................................
Exhibit K Not Applicable......................................
Exhibit L (1) Opinion and Consent of Skadden, Arps,
Slate, Meagher & Flom LLP ....................
(2) Opinion and Consent of Miles & Stockbridge .....
Exhibit M Not Applicable......................................
Exhibit N Consent of Price Waterhouse LLP.....................
Exhibit O Not Applicable......................................
Exhibit P Not Applicable......................................
Exhibit Q Not Applicable......................................
Exhibit R Financial Data Schedule.............................
- ---------------
*Previously filed.
Exhibit D
TEMPORARY CERTIFICATE: EXCHANGEABLE FOR DEFINITIVE
ENGRAVED CERTIFICATE WHEN READY FOR DELIVERY
CUMULATIVE PREFERRED STOCK
PAR VALUE $.001
PER SHARE
THE GABELLI CONVERTIBLE SECURITIES FUND, INC.
INCORPORATED UNDER THE LAWS OF THE STATE OF MARYLAND
THIS CERTIFICATE IS TRANSFERABLE IN BOSTON, MASSACHUSETTS AND NEW
YORK, NEW YORK
CUSIP 36240B 10 9
SEE REVERSE FOR CERTAIN DEFINITIONS
THIS CERTIFIES THAT
is the owner of
FULLY PAID AND NONASSESSABLE SHARES OF THE COMMON STOCK OF
THE GABELLI CONVERTIBLE SECURITIES FUND, INC.
transferable on the books of the Corporation by the holder hereto
in person or by duly authorized attorney upon surrender of this
Certificate properly endorsed. This Certificate and the shares
represented hereby are issued and shall be subject to all the
provisions of the Articles of Incorporation and By-Laws of the
Corporation, each as from time to time amended, copies of which are
on file with the Transfer Agent, to all of which the holder by
acceptance hereof assents.
This Certificate is not valid until countersigned and registered by
the Transfer Agent and Registrar.
Witness the facsimile seal of the Corporation and the facsimile
signatures of its duly authorized officers.
DATED:
COUNTERSIGNED AND REGISTERED:
STATE STREET BANK AND TRUST COMPANY
(BOSTON, MASS.) Chairman of the Board
TRANSFER AGENT
AND REGISTRAR
BY
AUTHORIZED SIGNATURE Vice President & Treasurer
THE GABELLI CONVERTIBLE SECURITIES FUND, INC.
The following abbreviations, when used in the inscription
on the face of this certificate, shall be construed as though they
were written out in full according to applicable laws or
regulations.
<TABLE>
<CAPTION>
<S> <C> <C>
TEN COM - as tenants in common UNIF GIFT MIN ACT________ Custodian _________
(Cust) (Minor)
TEN ENT - as tenants by the under Uniform Gifts to Minors
entireties
JT TEN - as joint tenants with Act_______________________________
right of survivorship (State)
and not as tenants in
common
</TABLE>
Additional abbreviations may also be used though not in the above
list.
For value Received, ______________________ hereby sell, assign and
transfer unto
NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH THE
NAME AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY
PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT, OR ANY CHANGE
WHATEVER.
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
__________________________________________________________________
PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF
ASSIGNEE
__________________________________________________________________
__________________________________________________________________
___________________________________________________________ Shares
of the capital stock represented by the within Certificate, and do
hereby irrevocably constitute and appoint ________________________
________________________________________________________ Attorney
to transfer the said stock on the books of the within-named
Corporation, with full power of substitution in the premises.
Dated ___________________
______________________________
<TABLE> <S> <C>
<ARTICLE> 6
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> $86,975,762
<INVESTMENTS-AT-VALUE> 91,572,100
<RECEIVABLES> 1,137,416
<ASSETS-OTHER> 466,644
<OTHER-ITEMS-ASSETS> 499,623
<TOTAL-ASSETS> 93,675,796
<PAYABLE-FOR-SECURITIES> 1,578,380
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 2,438,115
<TOTAL-LIABILITIES> 4,016,495
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 85,233,814
<SHARES-COMMON-STOCK> 8,092,945
<SHARES-COMMON-PRIOR> 8,092,945
<ACCUMULATED-NII-CURRENT> 3,950,672
<OVERDISTRIBUTION-NII> 241,821
<ACCUMULATED-NET-GAINS> 1,983,186
<OVERDISTRIBUTION-GAINS> 64,030
<ACCUM-APPREC-OR-DEPREC> 4,723,235
<NET-ASSETS> 89,659,291
<DIVIDEND-INCOME> 1,006,328
<INTEREST-INCOME> 4,267,896
<OTHER-INCOME> 0
<EXPENSES-NET> 1,323,552
<NET-INVESTMENT-INCOME> 3,950,672
<REALIZED-GAINS-CURRENT> 1,983,186
<APPREC-INCREASE-CURRENT> 536,303
<NET-CHANGE-FROM-OPS> 6,470,161
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 3,950,672
<DISTRIBUTIONS-OF-GAINS> 1,982,772
<DISTRIBUTIONS-OTHER> 14,871
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 521,846
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 912,913
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,323,552
<AVERAGE-NET-ASSETS> 91,279,448
<PER-SHARE-NAV-BEGIN> 11.01
<PER-SHARE-NII> 0.49
<PER-SHARE-GAIN-APPREC> 0.31
<PER-SHARE-DIVIDEND> 0.49
<PER-SHARE-DISTRIBUTIONS> 0.29
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 11.08
<EXPENSE-RATIO> 1.45
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
