<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 6, 1997
SECURITIES ACT FILE NO. 333-24541
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
[X] PRE-EFFECTIVE AMENDMENT NO. 1
[ ] POST-EFFECTIVE AMENDMENT NO.
AND/OR
[X]REGISTRATION STATEMENT UNDER THE INVESTMENT
COMPANY ACT OF 1940 AMENDMENT NO. 2
(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) 921-5100
(NAME AND ADDRESS OF AGENT FOR SERVICE)
------------------------
Copies to:
<TABLE>
<S> <C> <C>
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 10022 RYE, NEW YORK 10580-1434 NEW YORK, NEW YORK 10017
(212) 735-3000 (914) 921-5100 (212) 455-2000
</TABLE>
------------------------
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 [posteffective] 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]
------------------------
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
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<S> <C> <C> <C> <C>
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</TABLE>
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED
MAXIMUM AGGREGATE AMOUNT OF
AMOUNT BEING OFFERING PRICE OFFERING REGISTRATION
TITLE OF SECURITIES BEING REGISTERED REGISTERED PER SHARE PRICE(1) FEE
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------
% Cumulative Preferred Stock....... 1,200,000 Shares $25 $30,000,000 $9,091(2)
============================================================================================================
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee.
(2) $909.10 previously paid.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
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<PAGE> 2
CROSS-REFERENCE SHEET
PURSUANT TO RULE 481(a)
<TABLE>
<CAPTION>
N-2 ITEM NUMBER LOCATION IN PART A (CAPTION)
- --------------------------------------------- ---------------------------------------------
<S> <C>
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;
Investment Objective and Policies;
Convertible Securities; Other Investments;
Derivative Investments; Description of
Cumulative Preferred Stock
9. Management............................... Outside Prospectus Summary; Management of the
Fund; Custodian, Transfer Agent and
Dividend-Disbursing Agent
10. Capital Stock, Long-Term Debt, and Other
Securities............................. Outside Front Cover Page; Prospectus Summary;
Capitalization; Investment Objective and
Policies; Description of Cumulative
Preferred Stock; Description 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
Additional Information................. Table of Contents of the Statement of
Additional 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.......... The Fund
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.
<PAGE> 3
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.
SUBJECT TO COMPLETION, DATED MAY 6, 1997
P R O S P E C T U S
1,200,000 SHARES
THE GABELLI CONVERTIBLE
SECURITIES FUND, INC.
% CUMULATIVE PREFERRED STOCK
(LIQUIDATION PREFERENCE $25 PER SHARE)
LOGO
------------------------
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 December 25,
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 capital gain,
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 capital gain. 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
capital gain.
It is a condition to its issuance that the Cumulative Preferred Stock be
rated 'AAA' by Standard & Poor's Ratings Group ("S&P"). 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 either of the minimum asset
coverages required by the Rating Agency and the Investment Company Act of 1940,
as amended. 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
equal to the Redemption Price. Prior to May 15, 2002, 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."
(Continued on next page)
APPLICATION HAS BEEN 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.
<TABLE>
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</TABLE>
<TABLE>
<CAPTION>
UNDERWRITING DISCOUNTS
PRICE TO OR PROCEEDS
PUBLIC (1) COMMISSIONS(2) TO FUND(3)
<S> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------
Per Share $ $
- ----------------------------------------------------------------------------------------------------------
Total (3) $ $
==========================================================================================================
</TABLE>
(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
$512,000.
------------------------
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
May, 1997, at the offices of Smith Barney Inc., 333 West 34th Street, New York,
New York 10001.
------------------------
SMITH BARNEY INC. GABELLI & COMPANY, INC.
May , 1997
<PAGE> 4
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 May , 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
35 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."
2
<PAGE> 5
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 Objective 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 S&P 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 delivery" 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
contracts, 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 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. 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 unlikely, precipitous declines in the
value of the Fund's assets could
3
<PAGE> 6
result in the Fund having insufficient assets to
redeem all of the Cumulative Preferred Stock for
the full Redemption Price.
The Offering............... The Fund is offering 1,200,000 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, December 25 1997. See
"Description of Cumulative Preferred
Stock -- Dividends."
Potential Tax Benefit to
Certain Investors.......... The Fund intends to allocate net capital gain (the
excess of its net long-term capital gain over its
net short-term capital loss) income, 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 capital gain and net investment
income, and it is expected that under current
market conditions dividends paid on the
Cumulative Preferred Stock will likewise consist
of net capital gain 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 capital gain taxed at
long-term capital gain rates. See "-- Ordinary
Income Equivalent Yield Tables." Subject to
statutory limitations, investors may also be
entitled to offset the net 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 capital gain. To the extent that
dividends on the shares of Cumulative Preferred
Stock are not paid from net capital gain, they
will be paid from net investment income
(investment company taxable income as defined in
the Internal Revenue Code, without regard for the
deduction for dividends paid) and will be taxed
at ordinary rates or treated as a return of
capital.
Rating..................... It is a condition to their issuance that the
Cumulative Preferred Stock be issued with a
rating of 'AAA' from S&P. 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 S&P (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 Basic Maintenance Amount in
accordance with
4
<PAGE> 7
discount factors and guidelines established by
S&P. 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, 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 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
and any other Preferred 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
Basic Maintenance 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 dividends
(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
Preferred 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 Redemption."
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."
5
<PAGE> 8
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 the Offering, there has been no public
market for the Cumulative Preferred Stock.
Application has been made to list the shares of
Cumulative Preferred Stock on the NYSE. However,
during an initial period which is not expected to
exceed 30 days after 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.
Federal Income Tax
Considerations........... The Fund has qualified and intends to remain
qualified for Federal income tax purposes as a
regulated investment company. Qualification
requires, among other things, compliance by the
Fund with certain distribution requirements.
Statutory limitations on distributions on the
Common 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 the
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 stated value 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 maintaining
required asset coverage on the Cumulative
Preferred Stock, to repurchase its Common Stock
on the open market when such 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 outstanding 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
investment company
6
<PAGE> 9
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 registrar and as
agent to provide notice of redemption and certain
voting rights. See "Custodian, Transfer and
Dividend-Disbursing Agent and Registrar."
7
<PAGE> 10
ORDINARY 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 capital gain ("L/T
Capital Gain") which is taxed at long-term capital gain rates, and 71% net
investment income ("Ordinary Income") which is taxed at ordinary income rates.
(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 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 ordinary 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 Gain and Ordinary 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%.
<TABLE>
<CAPTION>
A CUMULATIVE PREFERRED STOCK
PERCENTAGE OF CUMULATIVE PREFERRED STOCK DIVIDEND RATE OF
DIVIDEND COMPOSED OF* ------------------------------
------------------------------------------------
ORDINARY 7.50% 7.75% 8.00%
IS EQUIVALENT TO AN
L/T CAPITAL GAIN ORDINARY INCOME YIELD OF
-------------------------------- INCOME ------------------------------
--------------
<S> <C> <C> <C> <C>
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%
</TABLE>
- ---------------
(1)
<TABLE>
<CAPTION>
PERCENTAGE COMPOSITION OF COMMON STOCK DISTRIBUTION
-------------------------------------------------------------------------------------
L/T CAPITAL ORDINARY RETURN OF
YEAR GAIN INCOME CAPITAL
-------------------------------------------- ----------- -------- ----------
<S> <C> <C> <C>
1993........................................ 47% 53% --
1994........................................ 24% 76% --
1995........................................ 31% 66% 3%
1996........................................ 14% 86% --
</TABLE>
* 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 Gain, Ordinary 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 Gain 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 Gain and 75% Ordinary Income, the following table shows the ordinary
income equivalent yields that would be generated at the indicated dividend rates
for taxpayers in the indicated tax brackets.
8
<PAGE> 11
<TABLE>
<CAPTION>
A CUMULATIVE PREFERRED
STOCK DIVIDEND RATE OF
--------------------------
7.50% 7.75% 8.00%
IS EQUIVALENT TO AN
1996 FEDERAL TAX BRACKET(1) ORDINARY INCOME YIELD OF
------------------------------------------------- --------------------------
<S> <C> <C> <C>
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%
</TABLE>
- ---------------
(1) Annual taxable income levels corresponding to the 1996 Federal marginal tax
brackets are as follows:
<TABLE>
<S> <C>
39.6%........ over $263,750 for both single and joint returns
$121,301-$263,750 for single returns, $147,701-$263,750 for
36.0%........ joint returns
$58,151-$121,300 for single returns, $96,901-$147,700 for
31.0%........ joint returns
$24,001-$58,150 for single returns, $40,101-$96,900 for joint
28.0%........ returns
</TABLE>
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.
9
<PAGE> 12
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 and
the SAI.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991 1990 1989*
------- ------- -------- -------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING PERFORMANCE:
Net Asset Value, Beginning of
Period............................. $ 11.01 $ 10.60 $ 11.52 $ 11.45 $ 10.91 $ 10.47 $ 10.51 $ 10.00
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)............................. 8.40% 15.00% (0.20)% 13.10% 13.00% 12.50% 6.30% 6.30%
Total Investment Return+(b)........ (7.30)% 12.30% -- -- -- -- -- --
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 Income 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(d).... $0.0423 -- -- -- -- -- -- --
</TABLE>
- ---------------
<TABLE>
<C> <S>
* 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.
</TABLE>
10
<PAGE> 13
USE OF PROCEEDS
The net proceeds of the offering are estimated at $28,543,000, 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
after 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>
ACTUAL AS ADJUSTED(a)
----------- --------------
<S> <C> <C>
Shareholders' equity:
Preferred Stock, $.001 par value:
Authorized 2,000,000 shares; issued and
outstanding 0 shares; as adjusted,
1,200,000 shares of --% Cumulative
Preferred Stock issued and
outstanding............................. $ 0 $ 30,000,000
Common Stock, $.001 par value:
Authorized 1,000,000,000 shares; as
adjusted,
998,000,000 shares authorized;
issued and outstanding 8,092,945
shares.................................. 8,093 8,093
Additional paid-in capital................ 85,233,814 83,776,814
Distributions in excess of net investment
income.................................. (241,821) (241,821)
Distributions in excess of net realized
gains on investments.................... (64,030) (64,030)
Net unrealized appreciation on
investments............................. 4,723,235 4,723,235
------------ -------------
Net assets........................... 89,659,291 118,202,291
Net assets applicable to outstanding
Common Stock....................... 89,659,291 88,202,291
</TABLE>
- ---------------
(a) After deducting underwriting discounts and estimated costs of the Offering
of $1,457,000.
11
<PAGE> 14
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 issuer 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 obligations 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.
12
<PAGE> 15
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 basic 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 securities; 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 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
13
<PAGE> 16
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
14
<PAGE> 17
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 and Delayed
Delivery Securities and Forward Commitments" in the SAI.
15
<PAGE> 18
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.
Since its inception, the Fund has held U.S. Treasury Securities, which may
provide lower returns relative to Convertible Securities but whose value tends
to be more stable in periods of market volatility. Over the past three years,
U.S. Treasury Securities have ranged from approximately 25% to approximately 45%
of the Fund's total assets. The Investment Adviser is dependent upon the
expertise of Mr. Mario J. Gabelli in providing advisory services with respect to
the Fund's investments. There is no contract of employment between the
Investment Adviser and Mr. Gabelli. If the Investment Adviser were to lose the
services of Mr. Gabelli, its ability to service the Fund could be adversely
affected. There can be no assurance that a suitable replacement could be found
for Mr. Gabelli in the event of his death, resignation, retirement or inability
to act on behalf of the Investment Adviser.
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 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.
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.
16
<PAGE> 19
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
will be limited 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 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 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; (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
17
<PAGE> 20
disadvantageous time due to a need for the Fund to maintain "cover" or to
segregate securities in connection with the hedging techniques; and (7) the
creditworthiness of counterparties.
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
18
<PAGE> 21
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. In addition, loans of portfolio securities will be limited by the
Applicable Rating Agency Guidelines. See "Description of Cumulative Preferred
Stock -- Rating Agency Guidelines."
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 may 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. In addition,
the Fund may be required to sell investments in order to meet dividend payments
on the Cumulative Preferred Stock when it may be disadvantageous to do so.
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 to redeem the preferred stock or
repay the debt when it may be disadvantageous to do so.
Further information on the investment objective and policies of the Fund is
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.
19
<PAGE> 22
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 (as defined below). 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 stated value 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. Because of the diverse nature
of Mr. Gabelli's responsibilities, he will devote less than all of his time to
the day-to-day management of the Fund.
20
<PAGE> 23
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. It may also not be possible to
enforce against them in foreign courts judgments of United States courts or
liabilities in original actions predicated upon civil liability provisions of
the United States securities laws.
ADMINISTRATOR
The Adviser has entered into an Administration Contract with BISYS Fund
Services Limited Partnership ("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.
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 may 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, thus could result in a reduction of the
Shareholders' principal investment. 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 (535,664 of which have been acquired as of
March 31, 1997.)
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<PAGE> 24
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 1,200,000 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 and the
1940 Act. 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
S&P 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 S&P. S&P, 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 S&P 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 S&P 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 Basic Maintenance Amount. 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 S&P Eligible
Assets and, therefore, from Adjusted Assets, certain types of securities in
which the Fund may invest and also limit 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 Guidelines that may hereafter be established by the Rating Agency.
Failure to adopt such modifications, however, may result in a
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<PAGE> 25
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.
An S&P 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 S&P 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 S&P 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 December 25, 1997, to the persons in whose names the
shares of Cumulative Preferred Stock are registered at the close of business on
the 5th business day preceding the payable date.
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 Date 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 Basic Maintenance 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" (as defined
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<PAGE> 26
by the 1940 Act) of at least 200% (or such higher or lower percentage as may be
required at the time under the 1940 Act) with respect to all outstanding senior
securities of the Fund 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 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 $1,457,000), would
have been computed as follows:
<TABLE>
<S> <C> <C> <C>
Value of Fund assets less liabilities not constituting
senior securities $118,610,554
= 395%
----------------- -------------
Senior securities representing indebtedness plus
liquidation preference of the Cumulative Preferred
Stock $ 30,000,000
</TABLE>
Basic Maintenance 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
Basic Maintenance 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 S&P 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 S&P Discount Factor relating to any asset of the Fund and
the Basic Maintenance 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 S&P.
So long as S&P is rating the Preferred Stock and except to the extent
waived by S&P, as of each Business Day and each Cure Date, the Fund shall
determine the aggregate Adjusted Value of all S&P Eligible Assets on that day
and whether such aggregate Adjusted Value on such date equals or exceeds the
Basic Maintenance Amount on such date which shall be set forth in a certificate
(a "Certificate of Basic Maintenance Amount"), dated as of each such Business
Day and Cure Date and signed by an Authorized Officer. With respect to the
Certificate of S&P Required Asset Coverage relating to (1) the first Business
Day in the months of January, April, July and October of each year, and (2)
another day during each calendar quarter, which day shall be selected at random
by the independent accountants, the Fund shall deliver to S&P, within three
Business Days of each such date, an Accountant's Certificate certifying as to
(i) the mathematical accuracy of the calculations reflected in the related
Certificate of S&P Required Asset Coverage, including the calculation of the
Adjusted Value of the S&P Eligible Assets referred to therein and confirming
that the S&P Eligible Assets referred to therein conform to the definition of
S&P Eligible Assets herein, (ii) that the methodology used in determining
whether the Adjusted Value of S&P Eligible Assets equals or exceeds the Basic
Maintenance Amount is in accordance with the applicable requirements of the
Articles Supplementary, and (iii) that the written or published price quotations
used in such determination conform to such written or published quotations and
that the S&P Eligible Assets listed in such Certificate of
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<PAGE> 27
Basic Maintenance Amount constitute S&P Eligible Assets. If the Accountant's
Certificate differs from the Fund's calculations, then the Accountant's
Certificate shall control unless any such difference results from an error in
calculation by the preparers of the Accountant's Certificate.
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 S&P equal to or greater than the Basic
Maintenance Amount on such Cure Date or, if the Asset Coverage or Adjusted
Assets for S&P equal to or greater than the Basic Maintenance 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 Basic Maintenance 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 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.
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<PAGE> 28
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 single
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
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<PAGE> 29
single 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 S&P 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 Objective 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 300% 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.
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<PAGE> 30
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 and other applicable requirements.
DESCRIPTION OF CAPITAL STOCK AND OTHER SECURITIES
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, 998 million of which are currently classified as Common Stock. Shares of
Common Stock of the Fund are listed on the NYSE 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 NYSE-listed company, the Fund is required to hold annual meetings of
its shareholders.
Preferred Stock. The Fund's Board of Directors has authorized the Fund to
reclassify up to 2,000,000 shares as Preferred Stock, par value $.001 per share.
The terms of such Preferred Stock will be fixed by the Board of Directors and
will materially limit and/or qualify the rights of the holders of the Fund's
Common Stock. The Board of Directors has designated 1,200,000 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 March 31, 1997 as if the Offering had been completed by such date.
<TABLE>
<CAPTION>
AMOUNT HELD
BY FUND
AMOUNT FOR ITS OWN AMOUNT
TITLE OF CLASS AUTHORIZED ACCOUNT OUTSTANDING
----------------------------------------------- ----------- ------------ -----------
<S> <C> <C> <C>
Common Stock................................... 998,000,000 0 8,092,945
Preferred Stock................................ 2,000,000 0 1,200,000
</TABLE>
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<PAGE> 31
TAXATION
The following is a description of certain 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 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 (its investment company taxable income as defined in the Code without
regard for the deduction for dividends paid) and its net capital gain (the
excess of its net realized long-term capital gain over its net realized
short-term capital loss) 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 ordinary 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 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 ordinary
income for the calendar year, (2) 98% of its capital gain net income for the one
year period ending on October 31 of such 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 ordinary income and capital gain net income for previous years that were
not previously distributed. While the Fund intends to distribute its ordinary
income and capital gain net income in the manner necessary to minimize
imposition of the 4% excise tax, there can be no assurance that sufficient
29
<PAGE> 32
amounts of the Fund's ordinary income and capital gain net income will be
distributed to avoid entirely the imposition of the tax. In such event, the Fund
will be liable for the tax only on the amount by which it does not meet the
foregoing distribution requirements.
If the Fund does not meet the asset coverage requirements of the 1940 Act
and 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 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. 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 "ordinary income dividends") are taxable to shareholders as
ordinary income. A portion of the Fund's ordinary 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 gain,
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 is 28%, whereas the maximum federal income tax rate imposed on
individuals with respect to ordinary income (and short-term capital gains, which
currently are taxed at the same rates as ordinary income) is 39.6%. With respect
to corporate taxpayers, long-term capital gains currently are taxed at the same
Federal income tax rates as ordinary 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 ordinary income dividends
or capital gain dividends.
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<PAGE> 33
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
Ordinary 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 ordinary 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
31
<PAGE> 34
CAN BE FOUND IN THE SAI WHICH IS INCORPORATED BY REFERENCE INTO 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.
CERTAIN PROVISIONS OF THE ARTICLES OF INCORPORATION AND BY-LAWS
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 outstanding 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 investment 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 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 in the Underwriting Agreement
dated the date hereof, each Underwriter named below for whom Smith Barney Inc.
and Gabelli and Company, Inc. are acting as the Representatives (the
"Representatives") 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.
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
- -------------------------------------------------------------------------------- ----------
<S> <C>
Smith Barney Inc................................................................
Gabelli & Company, Inc. ........................................................
----------
Total.........................................................................
</TABLE>
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
May, 1997.
32
<PAGE> 35
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 NYSE or
otherwise and, if commenced, may be discontinued at any time.
The Underwriters have acted in the past and may continue to act, from time
to time, during and subsequent to the completion of the offering of Cumulative
Preferred Stock as a broker or dealer in connection with the execution of
portfolio transactions for the Fund. See "Portfolio Transactions and Other
Practices" in the SAI.
Prior to this offering, there has been no public market for the Cumulative
Preferred Stock. Application has been made to list the Cumulative Preferred
Stock on the NYSE. However, during an initial period which is not expected to
exceed 30 days after 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 a majority-owned subsidiary of the Adviser which is, in turn,
controlled by Mario J. Gabelli. As a result of these relationships, Mr. Gabelli,
the Fund's President and Chief Investment Officer, may be deemed a "controlling
person" of Gabelli & Company, Inc. For additional Information regarding these
affiliations, see "Management of the Funds". The Underwriters have retained
Financial Products Group, Inc. to provide certain services in connection with
the Offering.
Smith Barney Inc. and Gabelli & Company, Inc. have provided investment
banking and financial advisory services to the Fund.
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
33
<PAGE> 36
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 Common Stock is listed on the NYSE, and reports, proxy statements and
other information concerning the Fund and filed with the SEC by the Fund can be
inspected at the offices of the New York Stock Exchange, Inc., 20 Broad Street,
New York, New York 10005.
This Prospectus constitutes part of a Registration Statement filed by the
Fund with the SEC under the 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.
34
<PAGE> 37
TABLE OF CONTENTS OF SAI
An SAI dated May , 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
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
THE FUND............................................................................. B-1
CONVERTIBLE SECURITIES............................................................... B-1
OTHER INVESTMENTS.................................................................... B-2
DERIVATIVE INSTRUMENTS............................................................... B-4
THE ADVISER.......................................................................... B-13
INVESTMENT RESTRICTIONS.............................................................. B-14
DIRECTORS AND OFFICERS............................................................... B-15
PORTFOLIO TRANSACTIONS AND BROKERAGE................................................. B-18
DETERMINATION OF NET ASSET VALUE..................................................... B-19
DIVIDENDS, DISTRIBUTIONS AND TAXES................................................... B-20
S&P DISCOUNT FACTORS................................................................. B-24
GENERAL INFORMATION.................................................................. B-25
BENEFICIAL OWNER..................................................................... B-25
FINANCIAL STATEMENTS................................................................. B-25
</TABLE>
35
<PAGE> 38
GLOSSARY
"Accountant's Certificate" shall mean a letter or certificate signed by or
on behalf of a nationally recognized independent public accounting firm.
"Adjusted Assets" means the aggregate Discounted Value of all the S&P
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 24 of this Prospectus.
"Basic Maintenance Amount" means, as of any Valuation Date, the dollar
amount equal to (i) the sum of (A) the product, calculated separately for each
series of Cumulative Preferred Stock, of the number of shares of each series of
Cumulative Preferred Stock Outstanding on such Valuation Date multiplied by the
Liquidation Preference per share; (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 Basic Maintenance Amount is calculated on a date prior to the initial
Dividend Payment Date with respect to a series of the Cumulative Preferred
Stock, then from the Date of Original Issue) through the Valuation Date plus all
dividends to accumulate on the Preferred Stock then Outstanding during the 70
days following such Valuation Date or, if less, during the number of days
following such Valuation Date that shares of Preferred Stock called for
redemption are scheduled to remain Outstanding; (C) the Fund's other liabilities
due and payable as of such Valuation Date (except that dividends and other
distributions payable by the Fund by the issuance of Common Stock shall not be
included as a liability) and such liabilities projected to become due and
payable by the Fund during the 90 days following such Valuation Date (excluding
liabilities for investments to be purchased and for dividends and other
distributions not declared as of such Valuation Date); (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 Adjusted Value of any of the Fund's assets if such
assets are either cash or evidences of indebtedness which mature prior to or on
the date of redemption or repurchase of shares of Preferred Stock or payment of
another liability and are either U.S. Government Obligations or evidences of
indebtedness which have a rating assigned by Moody's of at least Aaa, P-1,
VMIG-1 or MIG-1 or by S&P of at least AAA, SP-1+ or A-1+, and are irrevocably
held by the Fund's custodian bank in a segregated account or deposited by the
Fund with the Paying Agent for the payment of the amounts needed to redeem or
repurchase Preferred Stock subject to redemption or repurchase or any of (i)(B)
through (i)(E) and provided that in the event the Fund has repurchased
Cumulative Preferred Stock at a price of less than the Liquidation Payment
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 Payment of such Cumulative Preferred
Securities to be repurchased from (i) above.
"Business Day" means a day on which the NYSE 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.
"Certificate of Basic Maintenance Amount" shall have the meaning set forth
on pp. 24-25 of this Prospectus.
"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 25 of this Prospectus.
"Date of Original Issue" has the meaning set forth on page 23 of this
Prospectus.
36
<PAGE> 39
"Deposit Assets" 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 an S&P 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 S&P Eligible Assets, the market value thereof, divided by the
applicable Discount Factor.
"Dividend Payment Date" has the meaning set forth on page 23 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.
"Fund" means The Gabelli Convertible Securities Fund, Inc., a Maryland
corporation.
"Liquidation Payment" has the meaning set forth on page 26 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 25 of this
Prospectus.
"Preferred Stock" means the preferred stock, par value $.001 per share, of
the Fund, and includes the Cumulative Preferred Stock.
"S&P Discount Factor" means, with respect to S&P Eligible Asset specified
below, the numbers set forth in the SAI under the heading "S&P Discount
Factors."
"Redemption Price" has the meaning set forth on page of this Prospectus.
"SEC" means the Securities and Exchange Commission.
"S&P" means Standard & Poor's Ratings Group.
"S&P Eligible Assets" shall mean the sum of S&P Seasoned Eligible Assets
and S&P Unseasoned Eligible Assets.
"S&P Seasoned Eligible Assets" shall mean any of the following held by the
Fund:
(a) Deposit Assets;
(b) U.S. Government Obligations;
(c) evidence of indebtedness other than Deposit Assets and U.S.
Government Obligations that are not convertible into or exchangeable or
exercisable for stock of a corporation and that satisfy certain S&P
criteria described in the Articles Supplementary.
(d) evidence of indebtedness other than Deposit Assets and U.S.
Government Obligations that are convertible into or exchangeable or
exercisable for stock of a corporation and that satisfy all of the
following conditions: (i) such evidence of indebtedness is rated at least
CCC by S&P; and (ii) if such evidence of indebtedness is rated BB+ to CCC
by S&P, the market capitalization of the issuer of such evidence of
indebtedness is at least $120 million; provided, however, that the Fund's
holdings of such evidences of indebtedness of any single issuer that
satisfies the conditions set forth in clauses (i) and (ii) above shall be
included in S&P Eligible Assets only to the extent that if such evidence of
indebtedness is rated AAA to A-, BBB+ to BBB-, BB+ to BB- or B+ to CCC by
S&P, the aggregate market value of such evidences of indebtedness of such
issuer held by the Fund do not exceed 10%, 5%,
37
<PAGE> 40
4% or 3%, respectively, of the market value of the Fund's S&P Eligible
Assets and the aggregate market value of such eligible holdings, when added
to the aggregate market value of the Fund's holdings of other similarly
eligible evidences of indebtedness of issuers in the same Industry
Classification, does not exceed the applicable Convertible Diversification
Percentage (as defined in the Articles Supplementary) of the aggregate
market value of the Fund's S&P Eligible Assets;
(e) preferred stocks that satisfy certain S&P criteria described in
the Articles Supplementary; and
(f) common stocks that satisfy all of the following conditions: (i)
such common stock (including the common stock of any predecessor or
constituent issuer) has been traded on a recognized national securities
exchange or quoted on the National Market System (or any equivalent or
successor thereto) of Nasdaq for at least 450 days, (ii) the market
capitalization of such issuer of common stock exceeds $100 million, (iii)
the issuer of such common stock is not an entity that elects to be taxed
under Section 856 of the Code or that is treated as a partnership for
federal income taxes, (iv) if such issuer is organized under the laws of
any jurisdiction other than the United States, any state thereof, any
possession or territory thereof or the District of Columbia, the common
stock of such issuer held by the Fund is traded on a recognized national
securities exchange or quoted on the National Market System of Nasdaq
either directly or in the form of depository receipts and (v) if such
issuer is registered as an investment company under the 1940 Act, such
issuer does not invest more than 25% of the value of its gross assets in
securities that are not S&P Eligible Assets by reason of clause (iv) above.
Notwithstanding the foregoing, an asset will not be considered an S&P
Seasoned Eligible Asset if it (A) is held in a margin account, (B) is subject to
any material lien, mortgage, pledge, security interest or security agreement of
any kind or (C) has been deposited irrevocably for the payment of dividends,
redemption payments or any other payment or obligation hereunder.
"S&P Unseasoned Eligible Assets" shall mean any common stock that would be
an S&P Seasoned Eligible Asset but for the fact that the 450 trading day
requirement of clause (i) of the definition thereof is not satisfied; provided,
however, that the Fund's holdings of the common stock of any single issuer that
satisfies the conditions set forth in clauses (ii) through (v) above shall be
included in S&P Unseasoned Eligible Assets only to the extent that (1) such
holdings may be sold publicly by the Fund at any time without registration, (2)
to the extent remaining eligible after the operation of item (1) above, the
aggregate market value of such holdings does not exceed 5% of the market
capitalization of such issuer of common stock, (3) to the extent remaining
eligible after the operation of items (1) and (2) above, such holdings do not
exceed a number of shares representing 5% of (x) the market capitalization of
such issuer of common stock, less (y) the number of outstanding shares of such
common stock held by directors and executive officers of the issuer of such
common stock (such number to be computed solely by reference to information on
file with the Commission on the last day of the preceding calendar month), (4)
to the extent remaining eligible after the operation of items (1) through (3)
above, such holdings do not exceed a number of shares representing the average
weekly trading volume of such common stock during the preceding 30 day period,
(5) to the extent remaining eligible after the operation of items (1) through
(4) above, the aggregate market value of such holdings, when added to the
aggregate market value of the Fund's holdings of all other similarly eligible
shares of common stock of issuers in the same Industry Classification (other
than Utilities, as to which this item (5) shall not apply), does not exceed 25%
of the aggregate market value of the Fund's S&P Eligible Assets and (6) to the
extent remaining eligible after the operation of items (1) through (5) above,
the aggregate market value of such holdings in excess of 5% of the aggregate
market value of the Fund's S&P Eligible Assets, when added to the aggregate
market value of the Fund's holdings of all other similarly eligible shares of
each other issuer in excess of 5% of the aggregate market value of the Fund's
S&P Eligible Assets, does not exceed 30% of the aggregate market value of the
Fund's S&P Eligible Assets.
"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.
38
<PAGE> 41
======================================================
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS IN CONNECTION WITH THE OFFER CONTAINED HEREIN, AND, IF GIVEN OR
MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE FUND, THE ADVISER OR THE UNDERWRITERS. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE FUND SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY
SECURITIES OTHER THAN THE SECURITIES TO WHICH IT RELATES. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY SUCH
SECURITIES IN ANY CIRCUMSTANCE IN WHICH SUCH AN OFFER OR SOLICITATION IS
UNLAWFUL.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Financial Highlights.................. 10
Use of Proceeds....................... 11
Capitalization........................ 11
Investment Objective and Policies..... 12
Convertible Securities................ 12
Other Investments..................... 14
Special Characteristics and Risks..... 16
Special Investment Methods............ 16
Management of the Fund................ 20
Dividend and Distribution Policy...... 21
Description of Cumulative Preferred
Stock............................... 22
Description of Capital Stock and Other
Securities.......................... 28
Taxation.............................. 29
Certain Provisions of the Articles of
Incorporation and By-Laws........... 32
Custodian, Transfer Agent and Dividend
Disbursing Agent.................... 32
Underwriting.......................... 32
Legal Matters......................... 33
Experts............................... 33
Additional Information................ 34
Table of Contents of SAI.............. 35
</TABLE>
======================================================
======================================================
1,200,000 SHARES
LOGO
% CUMULATIVE PREFERRED STOCK
------------
PROSPECTUS
MAY , 1997
---------------
SMITH BARNEY INC.
GABELLI & COMPANY, INC.
======================================================
<PAGE> 42
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.
SUBJECT TO COMPLETION, DATED MAY 6, 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
MAY , 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 May , 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
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
THE FUND.............................................................................. B-1
CONVERTIBLE SECURITIES................................................................ B-1
OTHER INVESTMENTS..................................................................... B-2
DERIVATIVE INSTRUMENTS................................................................ B-4
THE ADVISER........................................................................... B-13
INVESTMENT RESTRICTIONS............................................................... B-14
DIRECTORS AND OFFICERS................................................................ B-15
PORTFOLIO TRANSACTIONS AND BROKERAGE.................................................. B-18
DETERMINATION OF NET ASSET VALUE...................................................... B-19
DIVIDENDS, DISTRIBUTIONS AND TAXES.................................................... B-20
S&P DISCOUNT FACTORS..................................................................
GENERAL INFORMATION................................................................... B-24
BENEFICIAL OWNER...................................................................... B-24
FINANCIAL STATEMENTS.................................................................. B-24
</TABLE>
THE FUND
The Fund commenced operations on July 3, 1989 as The Gabelli Convertible
Securities Fund, a series of The Gabelli Series Fund, Inc., an open-end
diversified management investment company. On March 31, 1995, the Fund converted
to a closed-end diversified management investment company and changed its name
to The Gabelli Convertible Securities Fund, Inc.
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.
B-1
<PAGE> 43
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. Certain investments are
short-term in nature and 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 (a "RIC") under the Internal Revenue Code of
1986, as amended (the "Code") (see "Dividends, Distributions and Taxes"). 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.
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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 Ba or lower by Moody's Investors Services, Inc. ("Moody's") or BB 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
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<PAGE> 45
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.
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
or currency underlying the option at a specified exercise price at any time
during the term of the option. The writer of the call option has the obligation,
upon exercise of the option, to deliver the underlying security or currency upon
payment of the exercise price during the option period.
A put option is a contract that gives the holder of the option the right,
in return for a premium, to sell to the seller the underlying security at a
specified price. The seller of the put option has the obligation to buy the
underlying security upon exercise at the exercise price.
A call option is "covered" if the Fund owns the underlying instrument
covered by the call or has an absolute and immediate right to acquire that
instrument without additional cash consideration (or for additional cash
consideration held in a segregated account by its custodian) upon conversion or
exchange of other instruments held in its portfolio. A call option is also
covered if the Fund holds a call on the same
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<PAGE> 46
instrument 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 cash or other high grade short-term obligations with a value equal to
the exercise price in a segregated account with its custodian, or else holds a
put on the same instrument as the put written where the exercise price of the
put held is equal to or greater than the exercise price of the put written. 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 RIC 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 may be to hedge all or part of the Fund's securities holdings
against a general decline in the securities market or a segment of the
securities market. Options on securities indices are similar to options on
stocks except that, rather than the right to take or make delivery of stock at a
specified price, an option on a securities index gives the holder the right to
receive, upon exercise of the option, an amount of cash if the closing level of
the securities index upon which the option is based is greater than, in the case
of a call, or less than, in the case of a put, the exercise price of the option.
The Fund's successful use of options on indices depends upon its ability to
predict the direction of the market and is subject to various additional risks.
The correlation between movements in the index and the price of the securities
being hedged against is imperfect and the risk from imperfect correlation
increases as
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<PAGE> 47
the composition of the Fund diverges from the composition of the relevant index.
Accordingly, a decrease in the value of the securities being hedged against may
not be wholly offset by a gain on the exercise or sale of a securities index put
option held by the Fund.
Options on Foreign Currencies.
Instead of purchasing or selling currency futures (as described below), the
Fund may attempt to accomplish similar objectives by purchasing put or call
options on currencies or by writing put options or call options on currencies
either on exchanges or in OTC markets. A put option gives the Fund the right to
sell a currency at the exercise price until the option expires. A call option
gives the Fund the right to purchase a currency at the exercise price until the
option expires. Both types of options serve to insure against adverse currency
price movements in the underlying portfolio assets designated in a given
currency. The Fund's use of options on currencies will be subject to the same
limitations as its use of options on securities, described above and in the
Prospectus. Currency options may be subject to position limits 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 bona fide
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. In addition, the Fund may enter into futures contracts on stock and
bond indices (collectively, "securities indices"). The Fund may enter into such
futures contracts both on U.S. and foreign exchanges.
A "sale" of a futures contract (or a "short" futures position) means the
assumption of a contractual obligation to deliver the assets 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 assets 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
assets 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 their affiliated clearing
organizations guarantee 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.
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<PAGE> 48
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 variation 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 may 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 asset 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
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<PAGE> 49
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 may 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 may 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 may purchase or sell interest rate futures contracts to take
advantage of or to protect the Fund against fluctuations in interest rates
affecting the value of debt securities which the Fund holds or intends to
acquire. For example, if interest rates are expected to increase, the Fund might
sell futures contracts on debt securities, the values of which historically have
a high degree of positive correlation to the values of the Fund's portfolio
securities. Such a sale would have an effect similar to selling an equivalent
value of the Fund's portfolio securities. If interest rates increase, the value
of the Fund's portfolio securities will decline, but the value of the futures
contracts to the Fund will increase at approximately an equivalent rate thereby
keeping the net asset value of the Fund from declining as much as it otherwise
would have. The Fund could accomplish similar results by selling debt securities
with longer maturities and investing in debt securities with shorter maturities
when interest rates are expected to increase. However, since the futures market
may be more liquid than the cash market, the use of futures contracts as a risk
management technique allows the Fund to maintain a defensive position without
having to sell its portfolio securities.
Similarly, the Fund may purchase interest rate futures contracts when it is
expected that interest rates may decline. The purchase of futures contracts for
this purpose constitutes a hedge against increases in the price of debt
securities (caused by declining interest rates) which the Fund intends to
acquire. Since fluctuations in the value of appropriately selected futures
contracts should approximate that of the debt securities that will be purchased,
the Fund can take advantage of the anticipated rise in the cost of the debt
securities without actually buying them. Subsequently, the Fund can make its
intended purchase of the debt securities in the cash market and currently
liquidate its futures position. To the extent the Fund enters into futures
contracts for this purpose, it will maintain in a segregated asset account with
the Fund's custodian, assets sufficient to cover the Fund's obligations with
respect to such futures contracts, which will consist of cash or other liquid
securities from its portfolio in an amount equal to the difference between the
fluctuating market value of such futures contracts and the aggregate value of
the initial margin deposited by the Fund with its custodian with respect to such
futures contracts.
The purchase of a call option on a futures contract is similar in some
respects to the purchase of a call option on an individual security. Depending
on the pricing of the option compared to either the price of the futures
contract upon which it is based or the price of the underlying debt securities,
it may or may not be less risky than ownership of the futures contract or
underlying debt securities. As with the purchase of futures contracts, when the
Fund is not fully invested it may purchase a call option on a futures contract
to hedge against a market advance due to declining interest rates.
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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, 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.
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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.
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 will be
limited by the applicable Rating Agency Guidelines (as defined in the
Prospectus).
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.
B-10
<PAGE> 52
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.
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.
ADDITIONAL RISKS OF FOREIGN OPTIONS, FUTURES CONTRACTS, OPTIONS ON FUTURES
CONTRACTS AND FORWARD CONTRACTS
Options, futures contracts and options thereon and forward contracts on
securities and currencies may be traded on foreign exchanges. Such transactions
may not be regulated as effectively as similar transactions in the U.S., may not
involve a clearing mechanism and related guarantees, and are subject to the risk
of governmental actions affecting trading in, or the prices of, foreign
securities. The value of such positions also could be adversely affected by (i)
other complex foreign political, legal and economic factors, (ii) lesser
availability than in the U.S. of data on which to make trading decisions, (iii)
delays in the Fund's ability to act upon economic events occurring in the
foreign markets during non-business hours in the U.S., (iv) the imposition of
different exercise and settlement terms and procedures and margin requirements
than in the U.S. and (v) lesser trading volume.
Exchanges on which options, futures and options on futures are traded may
impose limits on the positions that the Fund may take in certain circumstances.
B-11
<PAGE> 53
RISKS OF CURRENCY TRANSACTIONS
Currency transactions are also subject to risks different from those of
other portfolio transactions. Because currency control is of great importance to
the issuing governments and influences economic planning and policy, purchases
and sales of currency and related instruments can be adversely affected by
government exchange controls, limitations or restrictions on repatriation of
currency, and manipulation, or exchange restrictions imposed by governments.
These forms of governmental action can result in losses to the Fund if it is
unable to deliver or receive currency or monies in settlement of obligations and
could also cause hedges it has entered into to be rendered useless, resulting in
full currency exposure as well as incurring transaction costs.
REPURCHASE AGREEMENTS
The Fund may engage in repurchase agreements as set forth in the
Prospectus. A repurchase agreement is an instrument under which the purchaser,
i.e., the Fund, acquires a debt security and the seller agrees, at the time of
the sale, to repurchase the obligation at a mutually agreed upon time and price,
thereby determining the yield during the purchaser's holding period. This
results in a fixed rate of return insulated from market fluctuations during such
period. The underlying securities are ordinarily U.S. Treasury or other
government obligations or high quality money market instruments. The Fund will
require that the value of such underlying securities, together with any other
collateral held by the Fund, always equals or exceeds the amount of the
repurchase obligations of the 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. The Fund's ability to lend portfolio securities will be
limited by the applicable Rating Agency Guidelines.
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
B-12
<PAGE> 54
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 "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; and (6) 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 Limited Partnership ("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 at the annual rate 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
(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 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 permits 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."
B-13
<PAGE> 55
The Investment Advisory Contract was approved by the Board of Directors on
June 5, 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.
B-14
<PAGE> 56
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. Of that 12.53%, Mario J. Gabelli and companies controlled by
him beneficially owned approximately 11.56% of the Fund's outstanding shares.
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS DURING LAST
NAME, POSITION WITH FUND FIVE YEARS; AFFILIATIONS WITH
AND ADDRESS THE ADVISER OR ADMINISTRATOR; AGE
- --------------------------- ---------------------------------------------------------------
<S> <C>
Mario J. Gabelli*.......... Chairman, President, Chief Executive Officer and a Director of
President, and Chief Gabelli Funds, Inc. since 1980; Chairman, Chief Executive
Investment Officer Officer, Chief Investment Officer and Director of GAMCO
One Corporate Center Investors, Inc.; President and Chairman of The Gabelli Equity
Rye, New York 10580-1434 Trust, Inc. and The Gabelli Global Multimedia 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; Mr. Gabelli is 54 years old.
Anthony J. Colavita........ President and Attorney at law in the law firm of Anthony J.
Director Colavita, P.C.; Director of The Gabelli Value Fund Inc.,
c/o Gabelli Funds, Inc. Gabelli Global Series Funds, Inc., Gabelli Investor Funds, Inc.
One Corporate Center and Gabelli Equity Series Funds, Inc.; Trustee of The Gabelli
Rye, New York 10580-1434 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 Consultants, Inc.; Former
Director President and Chief Operating Officer of Stella D'oro Biscuit
c/o Gabelli Funds, Inc. Company (through 1992); Adviser, Iona College School of
One Corporate Center Business; Director of Lynch Corporation and Gabelli Gold Fund,
Rye, New York 10580-1434 Inc. Mr. Cerutti is 58 years old.
Felix J. Christiana........ Formerly Senior Vice President of Dollar Dry Dock Savings Bank;
Director Director, The Gabelli Equity Trust Inc., The Gabelli Multimedia
c/o Gabelli Funds, Inc. Trust Inc., Gabelli Global Series Funds, Inc., The Gabelli
One Corporate Center Value Fund Inc., Gabelli Investor Funds, Inc., Gabelli Equity
Rye, New York 10580-1434 Series Funds, Inc., The Treasurer's Fund, Inc.; Trustee, The
Gabelli Growth Fund and The Gabelli Asset Fund. Mr. Christiana
is 71 years old.
</TABLE>
B-15
<PAGE> 57
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS DURING LAST
NAME, POSITION WITH FUND FIVE YEARS; AFFILIATIONS WITH
AND ADDRESS THE ADVISER OR ADMINISTRATOR; AGE
- --------------------------- ---------------------------------------------------------------
<S> <C>
Anthonie C. van Ekris...... Managing Director of BALMAC International, Inc.; Formerly
Director Chairman and Chief Executive Officer of Balfour MacLaine
c/o Gabelli Funds, Inc. Corporation and Kay Corporation (through 1990); Director of
One Corporate Center Spinnaker Industries, Inc.; Director of Stahel Hardmeyer A.Z.,
Rye, New York 10580-1434 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 (since 1989) and
Director Chairman (since February of 1991) of Binnings Building
c/o Gabelli Funds, Inc. Products, Inc.; Trustee. Mr. Fletcher is 68 years old.
One Corporate Center
Rye, New York 10580-1434
Karl Otto Pohl*............ Partner of Sal Oppenheim Jr. & Cie. (private investment bank);
Director Former President of the Deutsche Bundesbank (Germany's Central
c/o Gabelli Funds, Inc. Bank) and Chairman of its Central Bank Council (1980-1991);
One Corporate Center Current board member of Zurich Versicherungs-Gesellschaft
Rye, New York 10580-1434 (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 University since 1965; Director,
Director President and shareholder of Pustorino, Puglisi & Co., RC.,
c/o Gabelli Funds, Inc. certified public accountants from 1961 to 1990; Director, The
One Corporate Center Gabelli Equity Trust Inc., The Gabelli Value Fund Inc., Gabelli
Rye, New York 10580-1434 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 of The Lehigh Group, Inc.;
Director Chairman of the Executive Committee and a Director of Binnings
c/o Gabelli Funds, Inc. Building Products, Inc.; Director of The Gabelli Equity Trust
One Corporate Center Inc. and Debe Computer Systems Corp.; Trustee, The Gabelli
Rye, New York 10580-1434 Asset Fund and The Gabelli Growth Fund. Mr. Zizza is 51 years
old.
Bruce N. Alpert............ Vice President, Chief Operating Officer of the investment
Vice President and advisory division of the Adviser; Vice President and Treasurer
Treasurer of Gabelli Equity Series Funds, Inc., The Gabelli Equity Trust
One Corporate Center Inc., The Gabelli Global Multimedia Trust Inc., Gabelli Global
Rye, New York 10580-1434 Series Funds, Inc., The Gabelli Money Market Funds, The Gabelli
Value Fund Inc. and Gabelli Investor Funds, Inc.; President and
Treasurer 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 P. Neviera......... Assistant Vice President of The Gabelli Global Multimedia Trust
Assistant Vice President Inc.; Client Services Representative of Gabelli & Company, Inc.
One Corporate Center until 1995. Senior Analyst for Putnam Investments from 1991 to
Rye, New York 10580-1434 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, General Counsel and Secretary of Gabelli Funds,
Secretary Inc.; General Counsel of GAMCO Investors, Inc.; Secretary of
One Corporate Center all Funds advised by Gabelli Funds, Inc. and Teton Advisers
Rye, New York 10580-1434 LLC; Branch Chief U.S. Securities and Exchange
Commission -- Northeast Regional Office, 1992-1993; Staff
Attorney, U.S. Securities and Exchange Commission -- Northeast
Regional Office, 1989-1992. Mr. McKee is 34 years old.
</TABLE>
The Fund pays each Director who is not an employee of the Adviser or an
affiliated company an annual fee of $5,000 and $750 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
B-16
<PAGE> 58
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., an indirect subsidiary of the
Adviser.
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. It may also not be possible to
enforce against them in foreign courts judgments of United States courts or
liabilities in original actions predicated upon civil liability provisions of
the 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.
COMPENSATION TABLE
<TABLE>
<CAPTION>
AGGREGATE
COMPENSATION TOTAL COMPENSATION
FROM FROM REGISTRANT
REGISTRANT AND FUND COMPLEX
(FISCAL PAID
POSITION YEAR) TO DIRECTORS
- --------------------------------------------------------- ------------ ------------------
<S> <C> <C>
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.......................................... $6,000 $ 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, they have a common investment adviser.
B-17
<PAGE> 59
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 & Company, Inc., 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 & Company, Inc. 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 & Company, Inc. 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 $53,877, $98,896 and $69,058, respectively, in
brokerage commissions, of which Gabelli & Company, Inc. received $9,261, $17,775
and $7,212, respectively. The amounts received by Gabelli & Company, Inc. from
the Fund in respect of brokerage commissions for the fiscal year ended December
31, 1996 represented 10.4% of the aggregate dollar amount of brokerage
commissions paid by the Fund for such period. In addition, for the fiscal year
ended December 31, 1996, the
B-18
<PAGE> 60
Fund paid brokerage commissions to Gabelli & Company, Inc. with respect to 9.34%
of the aggregate dollar amount of transactions by the Fund.
To obtain the best execution of portfolio trades on the New York Stock
Exchange (the "NYSE"), Gabelli & Company, Inc. controls and monitors the
execution of such transactions on the floor of the NYSE through independent
"floor brokers" or through the Designated Order Turnaround ("DOT") System of the
NYSE. Such transactions are then cleared, confirmed to the Fund for the account
of Gabelli & Company, Inc., 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 & Company, Inc.
Pursuant to an agreement with the Fund, Gabelli & Company, Inc. 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 & Company, Inc. 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 & Company, Inc. 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 NYSE.
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 is a brief description 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.
B-19
<PAGE> 61
GENERAL
The Fund has qualified as and intends to continue to qualify as and elect
to be 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 (its investment company taxable income as defined in the Code without
regard to the deduction for dividends paid) and its net capital gain (the excess
of its net realized long-term capital gain over its net realized short-term
capital loss), 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 ordinary
income for the calendar year, (2) 98% of its capital gain net income for the one
year period ending on October 31 of such 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 ordinary income and capital gain net income 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 gain net income in the manner
necessary to minimize imposition of the 4% excise tax, there can be no assurance
that sufficient amounts of the Fund's ordinary income and capital gain net
income will be distributed to avoid entirely the imposition of the tax. In such
event, the Fund will be liable for the tax only on the amount by which it does
not meet the foregoing distribution requirements.
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.
B-20
<PAGE> 62
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 ordinary 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 would 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 ordinary 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. A portion of the interest payments on such high yield bonds 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
and 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 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 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
B-21
<PAGE> 63
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 net 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 income dividends are
taxable to a U.S. shareholder as net investment income, whether paid in cash or
shares. Ordinary income 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
gain as designated capital gain dividends, if any, are taxable as long-term
capital gains, whether paid in cash or in shares,
B-22
<PAGE> 64
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.
S&P DISCOUNT FACTORS
The following table identifies the S&P Discount Factors used to discount
particular S&P Eligible Assets, as defined in the Prospectus.
<TABLE>
<CAPTION>
DISCOUNT FACTOR
-----------------------
FOR S&P FOR S&P
SEASONED UNSEASONED
ELIGIBLE ELIGIBLE
TYPE OF S&P ELIGIBLE ASSET ASSETS ASSETS
- ----------------------------------------------------------------------- -------- ----------
<S> <C> <C>
Common stocks.......................................................... 1.85 2.44
Preferred stocks rated AAA to AAA-..................................... 2.40 --
Preferred stocks rated AA+ to AA-...................................... 2.15 --
Preferred stocks rated A+ to A-........................................ 1.92 --
Preferred stocks rated BBB+ to BBB-.................................... 1.80 --
Preferred stocks rated BB+ to BB-...................................... -- --
Preferred stocks rated B+ to B-........................................ -- --
Preferred stocks rated CCC+ to CCC-.................................... -- --
</TABLE>
B-23
<PAGE> 65
<TABLE>
<CAPTION>
DISCOUNT FACTOR
-----------------------
FOR S&P
UNSEASONED
TYPE OF S&P ELIGIBLE ASSET ELIGIBLE
- ASSETS
----------
FOR S&P
SEASONED
ELIGIBLE
ASSETS
--------
<S> <C> <C>
Convertible bonds rated AAA to AAA-.................................... 1.65 --
Convertible bonds rated AA+ to AA-..................................... 1.70 --
Convertible bonds rated A+ to A-....................................... 1.75 --
Convertible bonds rated BBB+ to BBB-................................... 1.80 --
Convertible bonds rated BB+ to BB-..................................... 1.85 --
Convertible bonds rated B+ to B-....................................... 1.90 --
Convertible bonds rated CCC+........................................... 2.05 --
Convertible bonds rated CCC............................................ 2.20 --
Indebtedness other than Short-Term Money Market Instruments rated AAA
to AAA-.............................................................. -- --
Indebtedness other than Short-Term Money Market Instruments rated AA+
to AA-............................................................... -- --
Indebtedness other than Short-Term Money Market Instruments rated A+ to
A-................................................................... -- --
Indebtedness other than Short-Term Money Market Instruments rated BBB+
to BBB-.............................................................. -- --
Indebtedness other than Short-Term Money Market Instruments rated BB+
to BB-............................................................... -- --
Indebtedness other than Short-Term Money Market Instruments rated B+ to
B-................................................................... -- --
Indebtedness other than Short-Term Money Market Instruments rated CCC+
to CCC-.............................................................. -- --
U.S. Government Obligations and U.S. Short-Term Money Market
Investments.......................................................... 1.00 --
</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.
BENEFICIAL OWNER
Other than Mario J. Gabelli, there are no persons known to the Fund who may
be deemed beneficial owners of 5% or more of shares of the Fund's Common Stock
because they possessed or shared voting or investment power with respect to
shares of the Fund's Common Stock. As of March 3, 1997, the Directors and
Officers of the Fund as a group beneficially owned approximately 12.53% of the
outstanding shares of the Fund's Common Stock.
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).
B-24
<PAGE> 66
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
<TABLE>
<S> <C> <C> <C>
(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 (5)
(e) Automatic Dividend Reinvestment and Voluntary Cash Purchase Plan (2)
(f) Not Applicable
(g) Investment Advisory Agreement (5)
(h) (1) Form of Underwriting Agreement (5)
(2) Form of Master Agreement Among Underwriters (5)
(i) Not Applicable
(j) Custodian Agreement (5)
(k) Not Applicable
(l) (1) Opinion and Consent of Skadden, Arps, Slate, Meagher & Flom LLP (5)
(2) Opinion and Consent of Miles & Stockbridge (5)
(m) Not Applicable
(n) Consent of Price Waterhouse LLP (4)
(o) Not Applicable
(p) Not Applicable
(q) Not Applicable
(r) Financial Data Schedule (3)
</TABLE>
- ---------------
(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)Incorporated by reference from the Registrant's Registration Statement on
Form N-2, File No. 333-24541 and 811-05115, as filed with the Securities and
Exchange Commission on April 4, 1997.
(4) Filed herein.
(5) To be filed by amendment.
ITEM 25. MARKETING ARRANGEMENTS
See Exhibit 2(h) to this Registration Statement.
C-1
<PAGE> 67
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:
<TABLE>
<S> <C>
SEC Registration fees............................................................. $ 9,091
New York Stock Exchange listing fee............................................... 17,700
Rating Agency fee................................................................. 18,000
Printing and engraving expenses................................................... 100,000
Auditing fees and expenses........................................................ 50,000
Legal fees and expenses........................................................... 135,000
Blue Sky fees and expenses........................................................ 20,000
Consulting fees................................................................... 150,000
Miscellaneous..................................................................... 12,209
--------
Total........................................................................... $512,000
========
</TABLE>
- ---------------
* 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 to be under common control with the Registrant:
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 31, 1997
<TABLE>
<CAPTION>
TITLE OF CLASS NUMBER OF RECORD HOLDERS
--------------------------------------------------------------- ------------------------
<S> <C>
Capital Stock, par value $.001 per share....................... 6,710
</TABLE>
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.
C-2
<PAGE> 68
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 EquiServe, 150 Royall Street, Canton, MA 02021.
ITEM 32. MANAGEMENT SERVICES
Not applicable.
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.
C-3
<PAGE> 69
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 6th day of May
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:
<TABLE>
<CAPTION>
NAME TITLE DATE
- ------------------------------------------ ------------------------------------ ------------
<C> <S> <C>
/s/ MARIO J. GABELLI President and Chief Investment May 6, 1997
- ------------------------------------------ Officer
Mario J. Gabelli
/s/ E. VAL CERUTTI Director May 6, 1997
- ------------------------------------------
E. Val Cerutti
/s/ FELIX J. CHRISTIANA Director May 6, 1997
- ------------------------------------------
Felix J. Christiana
/s/ ANTHONY J. COLAVITA Director May 6, 1997
- ------------------------------------------
Anthony J. Colivita
/s/ DUGALD A. FLETCHER Director May 6, 1997
- ------------------------------------------
Dugald A. Fletcher
/s/ KARL OTTO POHL Director May 6, 1997
- ------------------------------------------
Karl Otto Pohl
/s/ ANTHONY R. PUSTORINO Director May 6, 1997
- ------------------------------------------
Anthony R. Pustorino
/s/ ANTHONIE C. VAN EKRIS Director May 6, 1997
- ------------------------------------------
Anthonie C. Van Ekris
/s/ SALVATORE J. ZIZZA Director May 6, 1997
- ------------------------------------------
Salvatore J. Zizza
</TABLE>
C-4
<PAGE> 70
SCHEDULE OF EXHIBITS TO FORM N-2
<TABLE>
<CAPTION>
EXHIBIT PAGE
NUMBER EXHIBIT NUMBER
- ---------- ------------------------------------------------------------------------- ------
<S> <C> <C>
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..................................................
</TABLE>
- ---------------
* Previously filed.
C-5
<PAGE> 1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus and
Statement of Additional Information constituting parts of this Pre-Effective
Amendment No. 1 to the registration statement on Form N-2 (the "Registration
Statement") of our report dated February 27, 1997, relating to the financial
statements and financial highlights appearing in the December 31, 1996 Annual
Report to Shareholders of The Gabelli Convertible Securities Fund, Inc., which
are also incorporated by reference into the Registration Statement. We also
consent to the references to us under the headings "Financial Highlights" and
"Experts" in the Prospectus and under the headings "Counsel and Independent
Accountants" and "Financial Statements" in the Statement of Additional
Information.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York 10036
May 6, 1997
