As filed with the Securities and Exchange Commission on November 8, 2002
Securities Act File No. 333-100091
Investment Company Act File No. 811-05715
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-2
____________________
[ ] Registration Statement under the Securities Act of 1933
[X] Pre-Effective Amendment No. 2
[ ] Post-Effective Amendment No.
and/or
[X] Registration Statement under the Investment
Company Act of 1940 Amendment No. 5
(Check Appropriate Box or Boxes)
____________________
THE GABELLI CONVERTIBLE AND INCOME 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 and Income Securities Fund Inc.
One Corporate Center
Rye, New York 10580-1422
(914) 921-5100
(Name and Address of Agent for Service)
____________________
Copies to:
James E. McKee, Esq. Richard T. Prins, Esq.
The Gabelli Convertible and Income Skadden, Arps, Slate, Meagher & Flom LLP
Securities Fund Inc. Four Times Square
One Corporate Center New York, New York 10036
Rye, New York 10580
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. [X]
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
Amount Proposed Maximum Proposed Maximum Amount of
Title of Securities Being Offering Price Per Aggregate Offering Registration
Being Registered Registered Share Price Fee(1)
Shares of Common
Stock 4,145,942 $8.00 $33,167,536 $2800.16
(1) A fee of $251.25 was paid previously upon the filing of the preliminary registration statement on
September 25, 2002.
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 Commission, acting
pursuant to said Section 8(a), may determine.
CROSS-REFERENCE SHEET
PURSUANT TO RULE 481(a)
N-2 Item Number Location in Part A (Caption)
-----------------------------------------------------------------------------------------------------
PART A
1. Outside Front Cover..........................Front Cover Page
2. Inside Front and Outside
Back Cover Page..............................Front Cover Page
3. Fee Table and Synopsis.......................Prospectus Summary; Table of Fees and
Expenses
4. Financial Highlights.........................Financial Highlights
5. Plan of Distribution.........................The Offer
6. Selling Shareholders.........................Not Applicable
7. Use of Proceeds..............................Use of Proceeds
8. General Description
of the Registrant.........................Investment Objectives and Policies; The
Offer; Risk Factors and Special
Considerations; Dividends and Distributions;
Capitalization
9. Management...................................Management of the Fund
10. Capital Stock................................The Offer; Capitalization; Custodian,
Transfer Agent, Dividend-Disbursing Agent
and Registrar; Dividends and Distributions;
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
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14. Cover Page...................................Outside Front Cover Page
15. Table of Contents............................Outside Front Cover Page
16. General Information and History . . . . . Not Applicable
17. Investment Objectives and Policies...........Investment Objectives; Investment Practices;
18. Management...................................Management of the Fund
19. Control Persons and Principal
Holders of Securities ................... Management of the Fund
20. Investment Advisory and Other Ser-
vices........................................Management of the Fund
21. Brokerage Allocation and Other
Practices....................................Portfolio Transactions
22. Tax Status...................................Taxation
23. Financial Statements.........................Financial Statements
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.
PROSPECTUS
12,437,826 RIGHTS FOR 4,145,942 SHARES OF COMMON STOCK
[Gabelli Convertible and Income Securities Fund Inc. LOGO]
THE GABELLI CONVERTIBLE
AND INCOME SECURITIES FUND INC.
COMMON STOCK
The Gabelli Convertible and Income Securities Fund Inc. (the
"Fund") is issuing transferable rights ("Rights") to its common
stockholders. These Rights will allow you to subscribe for new shares of
common stock of the Fund. For every three Rights that you receive, you may
buy one new share of common stock of the Fund plus, in certain
circumstances, additional shares of common stock pursuant to an
over-subscription privilege. You will receive one Right for each
outstanding share of common stock of the Fund you own on November 14, 2002
(the "Record Date") rounded up to the nearest number of Rights evenly
divisible by three. Fractional shares will not be issued upon the exercise
of the Rights. Accordingly, new shares may be purchased only pursuant to
the exercise of Rights in integral multiples of three.
The Rights are transferable and will be admitted for trading on the
New York Stock Exchange ("NYSE") under the symbol "GCVRT." The Fund's shares
of common stock are presently listed on the NYSE under the symbol "GCV." The
new stock issued in this Rights offering (the "Offer" or "Offering") will also
be listed under the symbol "GCV." On November __, 2002 (the first trading date
after the Fund's announcement of the definitive terms of the Offer), the last
reported net asset value per share of the Fund's common stock was $___ and the
last reported sales price per share of common stock on the NYSE was $___. THE
PURCHASE PRICE PER SHARE (the "Subscription Price") WILL BE $8.00. THE OFFER
WILL EXPIRE AT 5:00 P.M., NEW YORK TIME, on December 13, 2002, unless the
Offer is extended as described in this Prospectus (the "Expiration Date").
The Fund is a diversified, closed-end management investment
company registered under the Investment Company Act of 1940, as amended
(the "1940 Act"). The Fund's investment objective is 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. Under
normal circumstances the Fund will invest at least 80% of the value of its
total assets in securities that are convertible into or represent the right
to acquire common stock, and in other securities that are expected to
periodically accrue or generate income for their holders. Gabelli Funds,
LLC (the "Investment Adviser") serves as investment adviser to the Fund. An
investment in the Fund is not appropriate for all investors. No assurances
can be given that the Fund's objectives will be achieved.
For a discussion of certain risk factors and special
considerations with respect to owning common stock of the fund, see "Risk
Factors and Special Considerations" on page 44 of this Prospectus.
The address of the Fund is One Corporate Center, Rye, New York
10580 and its telephone number (914) 921-5070.
This Prospectus sets forth certain information about the Fund an
investor should know before investing. Accordingly, this Prospectus should
be retained for future reference.
A Statement of Additional Information dated November 8, 2002
(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 70 of this Prospectus. A copy of the SAI may be
obtained without charge by writing to the Fund at: One Corporate Center,
Rye, New York 10580-1434 or calling the Fund toll-free at (800) 422-3554.
_________________________________
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or determined if
this Prospectus is truthful or complete. Any representation to the contrary
is a crime.
SUBSCRIPTION PROCEEDS
PRICE SALES LOAD TO FUND(1)
----------------------- --------------------- ---------------------
Per Share............................ $8.00 None $8.00
Total................................ $8.00 None $33,167,536(2)
(1) Before deduction of expenses incurred by the Fund, estimated at $450,000.
(2) 1,381,981 of the shares offered by this Registration Statement, representing $11,055,848 of the
proceeds to the Fund, can only be issued in the event that on the Expiration Date the Fund's per share
net asset value is equal to or greater than the Subscription Price. In the event the Fund's per share net
asset value on the Expiration Date is less than the Subscription Price the maximum proceeds to the
Fund will be $22,111,688.
_________________________________
Common Stockholders who do not exercise their Rights should expect
that they will, at the completion of the offer, own a smaller proportional
interest in the Fund than if they exercised their rights. As a result of
the Offer you may experience dilution or accretion of the aggregate net
asset value of your common stock depending upon whether the Fund's net
asset value per share of common stock is above or below the Subscription
Price on the Expiration Date. The Fund cannot state precisely the extent of
any dilution or accretion at this time because the Fund does not know what
the net asset value per share of common stock will be when the Offer
expires or what proportion of the Rights will be exercised. The Investment
Adviser's parent company, Gabelli Asset Management Inc. and its affiliates
(the "Affiliated Parties") may purchase stock through the primary
subscription and the over-subscription privilege. Mr. Mario J. Gabelli, who
may be deemed to control the Fund's investment adviser, or his affiliated
entities may also purchase additional stock through the primary
subscription and the over-subscription privilege on the same terms as other
stockholders.
_________________________________
This Prospectus sets forth concisely certain information about the
Fund that a prospective investor should know before investing. Investors
are advised to read and retain it for future reference. A Statement of
Additional Information dated November 8, 2002 (the "SAI") containing
additional information about the Fund has been filed with the SEC and is
incorporated by reference in its entirety into this Prospectus. A copy of
the SAI, the table of contents of which appears on page 70 of this
Prospectus, may be obtained without charge by contacting the Fund at (800)
GABELLI ((800) 422-3554) or (914) 921-5070. The SAI will be sent within two
business days of receipt of a request. Investors may also obtain the
Statement of Additional Information, material incorporated by reference,
and other information about the Fund from the SEC's website
(http://www.sec.gov). Stockholder inquiries should be directed to the
Subscription Agent, Equiserve, at (800) 336-6983 or (781) 575-2000.
_________________________________
November 8, 2002
No dealer, salesperson or other person has been authorized to give any
information or to make any representations not contained in this
prospectus. If given or made, such information or representation must not
be relied upon as having been authorized by the Fund or the Fund's
Investment Adviser. This Prospectus does not constitute an offer to sell or
the solicitation of an offer to buy any security other than the shares of
common stock offered by this Prospectus, nor does it constitute an offer to
sell or the solicitation of an offer to buy shares of common stock by
anyone in any jurisdiction which such offer or solicitation would be
unlawful.
_________________________________
TABLE OF CONTENTS
PAGE
PROSPECTUS SUMMARY.........................................................1
TABLE OF FEES AND EXPENSES................................................13
FINANCIAL HIGHLIGHTS......................................................15
THE OFFER.................................................................18
USE OF PROCEEDS...........................................................32
INVESTMENT OBJECTIVES AND POLICIES........................................33
MANAGEMENT OF THE FUND....................................................54
DIVIDENDS AND DISTRIBUTIONS...............................................57
TAXATION .................................................................58
CAPITALIZATION............................................................61
CUSTODIAN, TRANSFER AGENT, DIVIDEND-DISBURSING AGENT AND
REGISTRAR........................................................68
LEGAL MATTERS.............................................................69
EXPERTS .................................................................69
FURTHER INFORMATION.......................................................69
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS.........................69
TABLE OF CONTENTS OF SAI..................................................70
APPENDIX A...............................................................A-1
PROSPECTUS SUMMARY
This summary highlights some information that is described more
fully elsewhere in this Prospectus. It may not contain all of the
information that is important to you. To understand the Offer fully, you
should read the entire document carefully, including the risk factors,
which can be found on page 44, under the heading "Risk Factors and Special
Considerations."
Purpose of the Offer
The Board of Directors of the Fund has determined that it would be
in the best interests of the Fund and its existing common stockholders to
increase the assets of the Fund so that the Fund may be in a better
position to take advantage of investment opportunities that may arise. The
Offer seeks to reward existing common stockholders by giving them the
opportunity to purchase additional shares of common stock at a price that
may be below market and/or net asset value without incurring any commission
charge. The distribution of the Rights, which themselves may have intrinsic
value, will also give non-participating common stockholders the potential
of receiving a cash payment upon the sale of their Rights, which may be
viewed as partial compensation for the possible dilution of their interests
in the Fund as a result of the Offer.
The Board of Directors believes that increasing the size of the
Fund may lower the Fund's expenses as a proportion of average net assets
because the Fund's fixed costs can be spread over a larger asset base.
There can be no assurance that by increasing the size of the Fund, the
Fund's expense ratio will be lowered. The Board of Directors also believes
that a larger number of outstanding shares of common stock and a larger
number of beneficial owners of shares of common stock could increase the
level of market interest in and visibility of the Fund and improve the
trading liquidity of the Fund's stock on the New York Stock Exchange.
Important Terms of the Offer
Total number of shares of common stock
available for primary subscription.................................................2,763,961
Total number of shares of common stock
available for secondary over-
subscription if subscription price
exceeds net asset value per
share of common stock .............................................................1,381,981
Number of Rights you will receive for
each outstanding share of common
stock you own on the Record Date..............................One Right for every one share*
Number of shares of common stock you
may purchase with your Rights
at the Subscription Price per share.......................One share for every three Rights**
Subscription Price..............................................................................$8.00
___________________
* The number of Rights to be issued to a common stockholder on the Record Date
will be rounded up to the nearest number of Rights evenly divisible by three.
** Record Date Stockholders will be able to acquire additional stock pursuant to
an over-subscription privilege in certain circumstances.
===============================================================================
Stockholders' inquiries should be directed to:
Equiserve
(800) 336-6983 or (781) 575-2000
or Gabelli
(800) GABELLI (422-3554)
===============================================================================
Over-Subscription Privilege
Common stockholders on the Record Date (the "Record Date
Stockholders") who fully exercise all Rights initially issued to them are
entitled to buy those shares of common stock, referred to as "primary
subscription stock," that were not bought by other Rights holders. If
enough stock is available, all such requests will be honored in full. If
such requests for primary subscription stock exceed the shares available,
the available shares will be allocated pro rata among those fully
exercising Record Date Stockholders who over- subscribe based on the number
of Rights originally issued to them by the Fund. Stock acquired pursuant to
the over-subscription privilege is subject to allotment, which is more
fully discussed under "The Offer -- Over-Subscription Privilege."
In addition, in the event that the Fund's per share net asset
value on the Expiration Date is equal to or greater than the Subscription
Price, the Fund may determine to issue up to 1,381,981 shares of additional
new common stock, referred to as "secondary over- subscription stock," to
satisfy over-subscription requests in excess of the new common stock
available for primary subscription. The Fund would also be able to issue
additional shares of common stock in an amount of up to 20% of the sum of
shares issued pursuant to the primary subscription and secondary
over-subscription. Any such additional common stock will be allocated and
issued in conjunction with the secondary over-subscription stock only to
Record Date Stockholders who submitted over-subscription requests. Rights
holders who are not Record Date Stockholders may not participate in the
secondary over-subscription. Secondary over-subscription stock and any
additional stock issue in conjunction with it will be allocated pro rata
among those fully exercising Record Date Stockholders who over- subscribe
based on the number of Rights originally issued to them by the Fund.
Method for Exercising Rights
Except as described below, subscription certificates evidencing
the Rights ("Subscription Certificates") will be sent to Record Date
Stockholders or their nominees. If you wish to exercise your Rights, you
may do so in the following ways:
(1) Complete and sign the Subscription Certificate. Mail it
in the envelope provided or deliver it, together with
payment in full to Equiserve, Providence, Rhode Island
(the "Subscription Agent") at the address indicated on
the Subscription Certificate. Your completed and signed
Subscription Certificate and payment must be received by
the Expiration Date.
(2) Contact your broker, banker or trust company, which can
arrange, on your behalf, to guarantee delivery of payment
and delivery of a properly completed and executed
Subscription Certificate by the close of business on the
third business day after the Expiration Date pursuant to
a notice of guaranteed delivery. A fee may be charged for
this service. The notice of guaranteed delivery must be
received by the Expiration Date.
Rights holders will have no right to rescind a purchase after the
Subscription Agent has received payment. See "The Offer -- Method of
Exercise of Rights" and "The Offer -- Payment for Shares."
Sale of Rights
The Rights are transferable until the Expiration Date and have been
admitted for trading on the New York Stock Exchange. Although no assurance can
be given that a market for the Rights will develop, trading in the Rights on
the NYSE will begin two Business Days prior to the Record Date and may be
conducted until the close of trading on the last NYSE trading day prior to the
Expiration Date. The value of the Rights, if any, will be reflected by the
market price. Rights may be sold by individual holders or may be submitted to
the Subscription Agent for sale. Any Rights submitted to the Subscription
Agent for sale must be received by the Subscription Agent on or before
December 11, 2002, one Business Day prior to the last trading date for Rights,
due to normal settlement procedures. Trading of the Rights on the NYSE will be
conducted on a when-issued basis beginning one Business Day prior to the
Record Date until and including the date on which the Subscription
Certificates are mailed to Record Date Stockholders and thereafter will be
conducted on a regular-way basis until and including the last NYSE trading day
prior to the Expiration Date. Shares of common stock will begin trading
ex-Rights on the Record Date. Rights will trade with due bills for two
Business Days prior to the Record Date. If the Subscription Agent receives
Rights for sale in a timely manner, it will use its best efforts to sell the
Rights on the NYSE. The Subscription Agent will also attempt to sell any
Rights (i) a Rights holder is unable to exercise because the Rights represent
the right to subscribe for less than one new share of common stock or, (ii)
attributable to stockholders whose record addresses are outside the United
States or who have an AFO or FPO address as described below under " --
Restrictions on Foreign Stockholders." Any commissions will be paid by the
selling Rights holders. Neither the Fund nor the Subscription Agent will be
responsible if Rights cannot be sold and neither has guaranteed any minimum
sales price for the Rights. Any such sales will be deemed to have been
effected at the weighted average price received by the Subscription Agent on
the day the Rights are sold, less any applicable brokerage commissions, taxes
and other expenses. The Subscription Agent will mail any amounts realized form
the sale of Rights two Business Days after the Expiration Date. For purposes
of this Prospectus, a "Business Day" shall mean any day on which trading is
conducted on the NYSE.
===============================================================================
Common stockholders are urged to obtain a recent trading price for the
Rights on the New York Stock Exchange from their broker, bank,
financial advisor or the financial press.
===============================================================================
Offering Fees and Expenses
Offering expenses incurred by the Fund are estimated to be $450,000.
Restrictions on Foreign Stockholders
The Fund will not mail Subscription Certificates to stockholders
whose record addresses are outside the United States or who have an APO or
FPO address. Stockholders whose addresses are outside the United States or
who have an APO or FPO address and who wish to subscribe to the Offer
either in part or in full should contact the Subscription Agent, Equiserve,
by written instruction or recorded telephone conversation no later than
three Business Days prior to the Expiration Date. The Fund will determine
whether the offering may be made to any such stockholder. If the
Subscription Agent has received no instruction by the end of the third
business day prior to the Expiration Date or the Fund has determined that
the offering may not be made to a particular stockholder, the Subscription
Agent will attempt to sell all of such stockholder's Rights and remit the
net proceeds, if any, to such stockholder. Any such sales will be deemed to
have been effected at the weighted average price received by the
Subscription Agent on the day the Rights are sold, less any applicable
brokerage commissions, taxes and other expenses.
Use of Proceeds
We estimate the net proceeds of the Offer to be approximately
$32,717,536. This figure is based on the per share Subscription Price of
$8.00 and assumes all new stock offered is sold and that the expenses
related to the Offer estimated at approximately $450,000 are paid.
The Investment Adviser expects to invest such proceeds in
accordance with the Fund's investment objectives and policies within six
months after receipt of such proceeds, 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.
Important Dates to Remember
Please note that the dates in the table below may change if the
Offer is extended.
EVENT DATE
----- ----
Record Date.....................................................................November 14, 2002
Subscription Period.....................................November 14, 2002 through December 13, 2002**
Expiration of the Offer*..........................................................December 13, 2002**
Payment for Guarantees of Delivery Due*...........................................December 18, 2002**
Confirmation to Participants....................................................December 31, 2002
------------------------------------
* A Rights holder exercising Rights must deliver by 5 p.m., New York Time, on
December 13, 2002 either (i) a Subscription Certificate and payment for stock or (ii)
a notice of guaranteed delivery.
** Unless the offer is extended to a date no later than December 30, 2002.
Information Regarding the Fund
The Fund is a closed-end, diversified, management investment
company. Prior to March 31, 1995, the Fund operated as an open-end,
diversified, management investment company. The Fund was incorporated in
Maryland on December 19, 1988. 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 convertible and other income
producing securities. No assurance can be given that the Fund's investment
objectives will be achieved. See "Investment Objectives and Policies." The
Fund's outstanding shares of common stock, par value $.001 per share, are
listed and traded on the NYSE. The average weekly trading volume of the
Fund's common stock on the NYSE during the period from January 1, 2001
through December 31, 2001 was 41,990 shares. As of September 30, 2002, the
net assets of the Fund were approximately $97.622 million.
Information Regarding the Investment Adviser
The Investment Adviser has served as the investment adviser to the
Fund since its inception. The Investment Adviser also provides certain
administrative services to the Fund. The Investment Adviser and its
affiliates have been engaged in the business of providing investment
advisory and portfolio management services for over 25 years and as of
September 30, 2002, managed total assets of approximately $20.2 billion.
The Fund pays the Investment Adviser a monthly fee at the annual rate of
1.00% of the Fund's average weekly net assets. See "Management of the
Fund." Since the Investment Adviser's fees are based on the net assets of
the Fund, the Investment Adviser will benefit from the Offer. In addition,
two Directors who are "interested persons" of the Fund could benefit
indirectly from the Offer because of their interests in the Investment
Adviser. See "The Offer -- Purpose of the Offer."
Risk Factors and Special Considerations
The following summarizes some of the matters that you should
consider before investing in the Fund through the Offer.
Dilution............................Common stockholders who do not exercise
their Rights should expect that they
will, at the completion of the Offer,
own a smaller proportional interest in
the Fund than if they exercised their
Rights. As a result of the Offer you
may experience dilution of the
aggregate net asset value of your
stock. If the Subscription Price per
share is below the Fund's net asset
value per share of common stock on the
Expiration Date you will experience an
immediate dilution of the aggregate net
asset value of your common stock if you
do not participate in the Offer. The
Fund cannot state precisely at this
time the extent of dilution (if any) if
you do not exercise your Rights because
the Fund does not know what the net
asset value per share of common stock
will be when the Offer expires or what
proportion of the Rights will be
exercised. For example, assuming that
all Rights are exercised, the
Subscription Price is $8.00 and the
Fund's net asset value per share of
common stock at the expiration of the
Offer increased to $8.50, the Fund's
net asset value per share of common
stock (after payment of estimated
offering expenses) would be reduced by
approximately $0.18 (2.12%) per share.
If, however, the Subscription Price is
above the Fund's net asset value per
share on the Expiration Date you will
experience an immediate accretion of
the aggregate net asset value of your
common stock, even if you do not
exercise your Rights. See "Risk Factors
and Special Considerations --
Dilution." If you do not wish to
exercise your Rights, you should
consider selling them as set forth in
this Prospectus. The Fund cannot give
any assurance, however, that a market
for the Rights will develop or that the
Rights will have any marketable value.
Market Loss.........................Common stock of closed-end funds
frequently trades at a market price per
share that is less than the value of
the net assets attributable to those
shares, although for approximately the
last 18 months the Fund's common stock
has traded at a premium over its per
share net asset value. The possibility
that common stock of the Fund will
trade at a discount from net asset
value or at premiums that are
unsustainable over the long term are
risks separate and distinct from the
risk that the Fund's net asset value
will decrease. The risk of purchasing
common stock of a closed-end fund that
might trade at a discount or
unsustainable premium is more
pronounced for investors who wish to
sell their common stock in a relatively
short period of time because, for those
investors, realization of a gain or
loss on their investment is likely to
be more dependent on the existence of a
premium or discount than on portfolio
performance. The Fund's common stock
has traded at discounts of as much as
19 percent in the past. See "Risk
Factors and Special Considerations --
Market Value and Net Asset Value."
Share Repurchases...................You will be free to dispose of your
common stock on the NYSE or other
markets on which the common stock may
trade, but, because the Fund is a
closed-end fund, you do not have the
right to redeem your common stock. The
Fund is authorized to repurchase up to
500,000 shares of its common stock in
the open market when the common stock
is trading at a discount of 10% or more
(or such other percentage as the Board
may determine from time to time) from
net asset value. Through June 30, 2002,
the Fund has repurchased in the open
market 305,200 shares of its common
stock under this authorization. There
is no assurance that any action
undertaken to repurchase common stock
will result in the Fund's common stock
trading at a price that approximates
its net asset value. Share repurchases
by the Fund would decrease the capital
of the Fund and could have the effect
of increasing the Fund's expense ratio.
Anti-Takeover Provisions............Certain provisions of the Fund's
charter (the "Charter") and the Fund's
by-laws (the "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 is necessary to
authorize the conversion of the Fund
from a closed-end to an open-end
investment company. The overall effect
of these provisions is to render more
difficult the accomplishment of a
merger with, or the assumption of
control by, a principal stockholder.
These provisions may have the effect of
depriving Fund stockholders of an
opportunity to sell their stock at a
premium to the prevailing market price.
See "Capitalization-- Anti-Takeover
Provisions of the Charter and Amended
and Restated By-Laws of the Fund."
Characteristics and Risks of
Convertible Securities..............Convertible securities are not usually
rated within the four highest
categories by nationally recognized
statistical rating agencies and are,
therefore, not generally investment
grade. These securities and securities
rated BB or lower by Standard & Poor's
Ratings Group ("S&P") or Ba or lower by
Moody's Investor Service ("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
exposure to adverse conditions. There
is no minimum rating that 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 or, if unrated,
of comparable quality as determined by
the Fund's Investment Adviser. See
"Risk Factors and Special
Considerations-- Asset Class Risks."
The Fund will limit its investments in
securities of issuers in default to not
more than 5% of its total assets. In
addition to rated convertible
securities and income securities, the
Fund may also invest in, among other
things, unregistered convertible
securities and convertible securities
of issuers involved in corporate
reorganizations. See "Investment
Objectives and Policies -- Convertible
Securities" and "Investment Objectives
and Policies -- Special Investment
Methods."
Characteristics and Risks of
Income Securities...................The Fund will invest in two types of
income securities: fixed income
securities and equity securities that
are expected to periodically generate
income for their holders. As with its
convertible securities, there is no
minimum rating required for the fixed
income securities in which the Fund
will invest, although the Fund does not
expect to invest more than 50% of its
total assets in securities rated CCC or
lower by S&P or Caa or lower by Moody's
or, if unrated, of comparable quality
as determined by the Fund's Investment
Adviser. These securities are commonly
described as "junk bonds." See "--
Characteristics and Risks of
Convertible Securities" and "Risk
Factors and Special Considerations--
Asset Class Risks." Along with credit
downgrades and defaults, the primary
risk associated with fixed income
securities is interest rate risk. A
decrease in interest rates will
generally result in an increase in the
value of a fixed income security, while
increases in interest rates will
generally result in a decline in its
value. This effect is generally more
pronounced for longer term securities
and for fixed rate securities whose
income rate is not periodically reset.
The dividend income stream associated
with equity income securities generally
is not guaranteed and will be
subordinate to payment obligations of
the issuer on its debt and other
liabilities. Accordingly, in the event
the issuer does not realize sufficient
income in a particular period both to
service its liabilities and to pay
dividends on its equity securities, it
may forgo paying dividends on its
equity securities. In addition, because
in most instances issuers are not
obligated to pay periodic dividends on
their equity securities, such dividends
generally may be discontinued at the
issuer's discretion. See "Risk Factors
and Special Considerations -- Asset
Class Risks."
Other Fund Investments..............In addition to investing in convertible
securities and income securities, the
Fund may also invest in, among other
things, 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
"Investment Objectives and Policies --
Special Investment Methods." In
addition, the Fund may 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 credit from banks as may be
necessary for the clearance of
portfolio transactions and for
temporary or emergency purposes. See
"Investment Objective and Policies --
Special Investment Methods." Some of
theses techniques may involve special
risks. See "Risks Factors and Special
Considerations."
Temporary Defensive Periods.........During periods when it is deemed
necessary for temporary defensive
purposes, the Fund may invest without
limit in high quality money market
instruments, obligations issued or
guaranteed by the United States
Government, its instrumentalities or
agencies and, subject to statutory
limitations, unaffiliated money market
mutual funds and, if permitted by an
exemptive order, in affiliated money
market 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. See "Investment Objectives and
Policies-- Temporary Defensive
Investments."
Foreign Securities.................The Fund may invest up to 25% of its
total assets in securities of foreign
issuers. Investing in securities of
foreign companies and foreign
governments, which generally are
denominated in foreign currencies, may
involve certain risk and opportunity
considerations not typically associated
with investing in domestic companies
and could cause the Fund to be affected
favorably or unfavorably by changes in
currency exchange rates and
revaluations of currencies. The Fund
may also purchase sponsored American
Depository Receipts or U.S. denominated
securities of foreign issuers, which
shall not be included in the 25%
foreign securities limitation. See
"Investment Objectives and Policies--
Special Investment Methods-- Foreign
Securities" and "Risk Factors and
Special Considerations-- Foreign
Securities."
Leverage............................As provided in the 1940 Act and subject
to certain exceptions, the Fund may
issue additional preferred stock or
debt so long as the Fund's total assets
immediately after such issuance, less
certain ordinary course liabilities,
exceed 300% of the amount of the debt
outstanding and exceed 200% of the sum
of the amount of preferred stock and
debt 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. Use of
leverage may magnify the impact on the
holders of common stock of changes in
net asset value and 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 such
stockholders and generally making the
Fund's total return to such
stockholders more volatile. See
"Capitalization -- Effects of
Leverage." In addition, the Fund may be
required to sell investments in order
to meet dividend or interest payment
obligations on the debt or preferred
stock when it may be disadvantageous to
do so. Leveraging through the issuance
of preferred stock requires that the
holders of the preferred stock have
class voting rights on various matters
that could make it more difficult for
the holders of the common stock to
change the investment objectives or
fundamental policies of the fund, to
convert it to an open-end fund or make
certain other changes. See "Investment
Objectives and Policies -- Special
Investment Methods -- Leverage" and
"Risk Factors and Special
Considerations -- Risks to Common
Stockholders of Leveraging and Issuance
of Senior Securities."
The Fund has authorized the issuance of
2,000,000 shares of preferred stock,
1,200,000 shares of which were outstanding
on September 30, 2002. On October 7, 2002
the Fund announced that it was calling 50%
of its outstanding preferred stock. The
called shares will be redeemed by the Fund
on November 12, 2002. Following the
redemption, the Fund will have 600,000
shares of preferred stock outstanding.
Dependence on
Key Personnel.......................The Investment Adviser is dependent
upon the expertise of Mr. Mario J.
Gabelli in providing advisory services
with respect to the Fund's investments.
If the Investment Adviser were to lose
the services of Mr. Gabelli, its
ability to service the Fund could be
adversely affected. There can be no
assurance that a suitable replacement
could be found for Mr. Gabelli in the
event of his death, resignation,
retirement or inability to act on
behalf of the Investment Adviser.
Taxation............................The Fund intends to continue to be
treated and qualify as a regulated
investment company for U.S. federal
income tax purposes. Such qualification
requires, among other things,
compliance by the Fund with certain
distribution requirements. The Fund is
also, however, subject to certain
statutory limitations on distributions
on its common stock if it fails to
satisfy the 1940 Act's asset coverage
requirements, which could jeopardize
the Fund's ability to meet the
regulated investment company
distribution requirements. See
"Taxation" for a more complete
discussion of these and other U.S.
federal income tax considerations.
TABLE OF FEES AND EXPENSES
Registrant
STOCKHOLDER TRANSACTION EXPENSES
Automatic Dividend Reinvestment and Voluntary Cash
Purchase Plan voluntary cash purchase fees (1).......................... $0.75
Automatic Dividend Reinvestment and Voluntary Cash
Purchase Plan sales fees (1)............................................ $2.50
ANNUAL OPERATING EXPENSES (as a percentage of net
assets attributable to Common Stock)
Management Fees......................................................... 1.00%
Other Expenses (2) ..................................................... 0.50%
----------------------------
Total Annual Operating Expenses................................ 1.50%
----------------------------
(1) Stockholders participating in the Fund's Automatic Dividend Reinvestment and Voluntary Cash
Purchase Plan would pay $0.75 per transaction to purchase shares through voluntary cash contributions
and $2.50 per transaction to sell shares. See "Automatic Dividend Reinvestment and Voluntary Cash
Purchase Plan" in the SAI. The $0.75 per transaction purchase fee does not apply to automatic
dividend reinvestment transactions.
(2) As of June 30, 2002, annualized for the current fiscal year ending December 31, 2002.
EXAMPLE
The following examples illustrate the projected dollar amount of
cumulative expenses that would be incurred over various periods with
respect to a hypothetical investment in the Fund. These amounts are based
upon payment by the Fund of Annual Operating Expenses at levels set forth
in the above table with dividends being reinvested through the Fund's
automatic dividend reinvestment option.
You would pay the following expenses on a $1,000 investment,
assuming a 5% annual return:(3)
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
$15 $47 $82 $179
(3) Amounts are exclusive of purchase fees discussed in Note (1)
above, which do not apply to the share purchases made as automatic
dividend reinvestments.
The foregoing table is to assist you in understanding the various
costs and expenses that an investor in the Fund will bear directly or
indirectly. The assumed 5% annual return is not a prediction of, and does
not represent, the projected or actual performance of the common stock.
Actual expenses and annual rates of return may be more or less than those
assumed for purposes of the Example.
____________________________
FINANCIAL HIGHLIGHTS
The table below sets forth selected financial data for a share of
common stock outstanding throughout the periods presented. The per share
operating performance and ratios for the fiscal years ended December 31,
2001, 2000, 1999, 1998, and 1997 have been audited by
PricewaterhouseCoopers LLP, the Fund's independent accountants, as stated
in their report, which is incorporated by reference into the SAI. The per
share operating performance and ratios for the period commencing January 1,
2002 and concluding June 30, 2002 are unaudited. The following information
should be read in conjunction with the Financial Statements and Notes
thereto, which are incorporated by reference into the SAI.
THE GABELLI CONVERTIBLE
AND INCOME SECURITIES FUND INC.
FINANCIAL HIGHLIGHTS
Selected data for a Fund common share Six Months
outstanding throughout each period: Ended June 30, Year Ended December 31,
2002 ---------------------------------------------------------------
(Unaudited) 2001 2000 1999 1998 1997
----------- ---- ---- ---- ---- ----
Operating performance:
Net asset value, beginning of period..... $ 9.92 $ 10.02 $ 11.4 $ 11.45 $ 11.48 $ 11.08
----------- ---------- ---------- ---------- ----------- ----------
Net investment income.................... 0.27 0.68 0.72 0.51 0.53 0.49
Net realized and unrealized gain (loss) on
investments......................... (0.53) 0.32 (0.52) 0.77 0.65 1.23
----------- ---------- ----------- ---------- ----------- ----------
Total from investment operations......... (0.26) 1.00 0.20 1.28 1.18 1.72
----------- ---------- ----------- ----------- ----------- ----------
Distributions to preferred stock shareholders:
Net investment income.................... (0.15) (0.18) (0.13) (0.11) (0.13) (0.08)
Net realized gain on investments......... -- (0.12) (0.17) (0.19) (0.17) (0.11)
----------- ---------- ----------- ----------- ----------- ----------
Total distributions to preferred stock
shareholders........................ (0.15) (0.30) (0.30) (0.30) (0.30) (0.19)
----------- ---------- ----------- ----------- ----------- ----------
Net increase (decrease) in net assets
attributable to common stock shareholders
resulting from operations................ (0.41) 0.70 (0.10) 0.98 0.88 1.53
----------- ---------- ----------- ----------- ----------- ----------
Distributions to common stock shareholders:
Net investment income.................... (0.12) (0.48) (0.57) (0.39) (0.39) (0.40)
Net realized gain on investments......... -- (0.33) (0.73) (0.64) (0.53) (0.56)
Paid in capital.......................... (0.28) -- -- -- -- --
----------- ---------- ----------- ----------- ----------- ----------
Total distributions to common stock
shareholders........................ (0.40) (0.81) (1.30) (1.03) (0.92) (0.96)
----------- ---------- ----------- ----------- ----------- ----------
Capital share transactions:
Increase in net asset value from common
share transactions.................... 0.01 0.01 0.02 -- 0.01 0.01
Preferred share offering costs charged to
paid-in capital....................... -- -- -- -- -- (0.18)
----------- ---------- ----------- ----------- ----------- ----------
Total capital share transactions......... 0.01 0.01 0.02 0.00 0.01 (0.17)
----------- ---------- ----------- ----------- ----------- ----------
Net asset value attributable to common stock
shareholders, end of period.............. $ 9.12 $ 9.92 $ 10.0 $ 11.40 $ 11.45 $ 11.48
=========== ========== =========== =========== =========== ==========
Net asset value total return+............ (4.2)% 7.0% 0.0% 9.4% 8.3% 13.5%
=========== ========== =========== =========== =========== ==========
Market value, end of period.............. $ 10.45 $ 10.90 $ 9.13 $ 10.56 $ 11.25 $ 10.31
=========== ========== =========== =========== =========== ==========
Total investment return++................ (0.3)% 29.1% (1.7)% 3.2% 18.4% 22.2%
=========== ========== =========== =========== =========== ==========
Ratios and supplemental data:
Net assets including liquidation
value of preferred shares, end
of period (in 000's).................. $ 104,935 $ 110,074 $ 108,066 $ 120,179 $ 120,726 $ 122,382
Net assets attributable to common shares,
end of period (in 000's).............. $ 74,935 $ 80,074 $ 78,066 $ 90,179 $ 90,726 $ 92,382
Ratio of net investment income to average
net assets attributable to common
shares................................ 5.44%(c) 6.58% 6.49% 4.35% 4.54% 4.23%
Ratio of operating expenses to average
net assets attributable to common
shares (a)........................... 1.50%(c) 1.46% 1.48% 1.80% 1.83% 1.68%
Ratio of operating expenses to average
to assets including liquidation
value of total net preferred
shares (d)............................ 1.09%(c) 1.07% 1.10% 1.36% 1.38% 1.39%
Portfolio turnover rate.................. 47% 59% 169% 175% 149% 243%
Cumulative Preferred Stock:
8.00% Cumulative Preferred Stock
Liquidation value, end of period
(in 000's)............................ $ 30,000 $ 30,000 $ 30,000 $ 30,000 $ 30,000 $ 30,000
Total shares outstanding (in 000's)...... 1,200 1,200 1,200 1,200 1,200 1,200
Liquidation preference per share......... $ 25.00 $ 25.00 $ 25.00 $ 25.00 $ 25.00 $ 25.00
Average market value (b)................. $ 25.98 $ 25.80 $ 24.31 $ 25.36 $ 26.84 $ 25.69
Asset coverage........................... 350% 367% 360% 401% 402% 408%
Asset coverage per share................. $ 87.47 $ 91.72 $ 90.05 $ 100.15 $ 100.60 $ 101.99
____________________________________________
+ Based on net asset value per share, adjusted for reinvestment of
distributions. Total return for the period of less than one year is
not annualized.
++ Based on market value per share, adjusted for reinvestment of
distributions. Total return for the period of less than one year is
not annualized.
(a) The ratio of operating expenses to average net assets attributable to
common stock for the fiscal year ended December 31, 1997 does not
include a reduction of expenses for custodian fee credits on cash
balances maintained with the custodian. Including the custodian fee
credit, the ratio of operating expenses to average net assets
attributable to common stock for the year would have been 1.67%.
(b) Based on weekly prices.
(c) Annualized.
(d) Amounts are attributable to both common and preferred stock assets.
Year Ended December 31,
------------------------------------------------------------------
1996+ 1995+ 1994+ 1993+ 1992+
---------- ----------- ----------- ----------- -----------
Operating Performance:
Net asset value, beginning of period................ $ 11.01 $ 10.60 $ 11.52 $ 11.45 $ 10.91
---------- ----------- ----------- ----------- -----------
Net investment income............................... 0.49 0.53 0.69 0.76 0.65
Net realized and unrealized gain (loss)
on securities.................................... 0.31 1.03 (0.71) 0.74 0.76
---------- ----------- ----------- ----------- -----------
Total from investment operations.................... 0.80 1.56 (0.02) 1.50 1.41
---------- ----------- ----------- ----------- -----------
Distributions to common stock shareholders:
Net investment income............................... (0.49) (0.53) (0.69) (0.76) (0.65)
Net realized gain on investments.................... (0.24) (0.56) (0.21) (0.67) (0.22)
Distributions in excess of net investment income.... - (0.02) - - -
Distributions in excess of net realized gains....... - (0.01) - - -
Paid-in capital..................................... - (0.03) - - -
---------- ----------- ----------- ----------- -----------
Net asset value, end of period...................... $ 11.08 $ 11.01 $ 10.60 $ 11.52 $ 11.45
========== =========== =========== =========== ===========
Market value, end of period......................... $ 9.25 $ 10.75 - - -
========== =========== =========== =========== ===========
Total Net Asset Value Return ++ (a)................. 8.4% 15.0% (0.2)% 13.1% 13.0%
Total Investment Return ++(b)....................... (7.3)% 12.3% - - -
Ratios to average net assets/supplemental data:
Net assets, end of period (in thousands)............ $ 89,659 $ 89,137 $ 112,090 $ 108,674 $ 92,541
Ratio of operating expenses to average net assets (c) 1.45% 1.56% 1.31% 1.38% 1.40%
Ratio of net investment income (loss) to average
net assets........................................ 4.33% 4.60% 4.77% 4.58% 5.53%
Portfolio turnover rate............................. 114% 140% 67% 45% 32%
Average commission rate (d)......................... $ 0.0423 - - - -
___________________________________________
+ No preferred stock outstanding during this period.
++ 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. Includes, for 1997,
the advisory fee reduction on incremental assets raised through the
issuance of preferred shares of $36,986. Without this advisory fee
reduction, this ratio would have been 1.42%.
(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.
The following table provides information about the Fund's 8%
Cumulative Preferred stock since its issuance in May 1997. The information
has been audited by PricewaterhouseCoopers LLP, independent accountants.
Involuntary
Liquidation Average
Year ended Shares Asset Coverage Preference Market
December 31, Outstanding Per Share Per Share Value Per Share
------------ ----------- --------- --------- ---------------
2001 1,200,000 $91.72 $25.00 $25.80
2000 1,200,000 $90.05 $25.00 $24.31
1999 1,200,000 $100.15 $25.00 $25.36
1998 1,200,000 $100.60 $25.00 $26.84
1997 1,200,000 $101.99 $25.00 $25.69
For purposes of the foregoing table, the Asset Coverage Per Share
is calculated by dividing the total value of the Fund's assets on December
31 of the relevant year by the number of shares of 8% Cumulative Preferred
Stock outstanding on that date. Involuntary Liquidation Preference Per
Share refers to the amount holders of 8% Cumulative Preferred Stock are
entitled to receive per share in the event of liquidation of the Fund prior
to the holders of common stock being entitled to receive any amounts in
respect of the assets of the Fund. The Average Market Value Per Share is
the average of the weekly closing prices of the 8% Cumulative Preferred
Stock on the NYSE each week during the relevant year.
THE OFFER
Terms of the Offer
The Fund is issuing to Record Date Stockholders Rights to
subscribe for additional shares of the Fund's common stock (the "Shares").
Each Record Date Stockholder is being issued one transferable Right for
each share of common stock owned on the Record Date. The Right entitles the
holder to acquire at the Subscription Price one Share for each three Rights
held rounded up to the nearest number of Rights evenly divisible by three.
Fractional shares will not be issued upon the exercise of the Rights.
Accordingly, Shares may be purchased only pursuant to the exercise of
Rights in integral multiples of three. In the case of shares of common
stock held of record by Cede & Co., as nominee for the Depository Trust
Company, or any other depository or nominee, the number of Rights issued to
Cede & Co. or such other depository or nominee will be adjusted to permit
rounding up (to the nearest number of Rights evenly divisible by three) of
the Rights to be received by beneficial owners for whom it is the holder of
record only if Cede & Co. or such other depository or nominee provides to
the Fund on or before the close of business on November 21, 2002 a written
representation of the number of Rights required for such rounding. Rights
may be exercised at any time during the period that commences on November
14, 2002, and ends at 5:00 p.m., New York time, on December 13, 2002 (the
"Subscription Period"), unless extended by the Fund to a date not later
than December 30, 2002, 5:00 p.m., New York time. The Right to acquire one
Share for each three Rights held during the Subscription Period at the
Subscription Price will be referred to in the remainder of this Prospectus
as the "Primary Subscription."
In addition, common stockholders on the Record Date (the "Record
Date Stockholders") that fully exercise their Rights are entitled to
subscribe for Shares available for Primary Subscription (the "Primary
Subscription Shares") that were not subscribed for by other Rights holders
on Primary Subscription. In addition, in the event that the Fund's per
share net asset value on the Expiration Date is equal to or greater than
the Subscription Price, the Fund may issue up to an additional 1,381,981
Shares (the "Secondary Over- Subscription Shares") to satisfy
over-subscription requests in excess of the available Primary Subscription
Shares. The Fund would also be able to issue additional shares in an amount
of up to 20% of the sum of the Primary Subscription Shares and Secondary
Over- Subscription Shares. The entitlement to subscribe for un-subscribed
Primary Subscription Shares, any Secondary Over-Subscription Shares and any
additional Shares will be referred to in the remainder of this Prospectus
as the "Over-Subscription Privilege." For purposes of determining the
maximum number of Shares a Record Date Stockholder may acquire pursuant to
the Offer, broker-dealers whose shares are held of record by Cede & Co.,
Inc., nominee for The Depository Trust Company, or by any other depository
or nominee, will be deemed to be the holders of the Rights that are issued
to Cede & Co. or such other depository or nominee on their behalf. Shares
acquired pursuant to the Over-Subscription Privilege are subject to
allotment, which is more fully discussed below under " -- Over-Subscription
Privilege."
Officers of the Investment Adviser have advised the Fund that the
Affiliated Parties, as Record Date Stockholders, have been authorized to
purchase Shares through the Primary Subscription and the Over-Subscription
Privilege to the extent the Shares become available to them in accordance
with the Primary Subscription and the allotment provisions of the
Over-Subscription Privilege. In addition, Mario J. Gabelli individually or
his affiliated entities, as a Record Date Stockholder, may also purchase
Shares through the Primary Subscription and the Over-Subscription
Privilege. Such over-subscriptions by the Affiliated Parties and Mr.
Gabelli may disproportionately increase their already existing ownership
resulting in a higher percentage ownership of outstanding shares of common
stock of the Fund, if any Record Date Stockholder fails to fully exercise
its Rights. Any Shares acquired, whether by Primary Subscription or the
Over-Subscription Privilege, by the Affiliated Parties or Mr. Gabelli as
"affiliates" of the Fund, as that term is defined under the Securities Act
of 1933, as amended (the "Securities Act"), may only be sold in accordance
with Rule 144 under the Securities Act or another applicable exemption, or
pursuant to an effective registration statement under the Securities Act.
In general, under Rule 144, as currently in effect, an "affiliate" of the
Fund is entitled to sell, within any three-month period, a number of shares
that does not exceed the greater of 1% of the then outstanding shares of
common stock or the average weekly reported trading volume of the common
stock during the four calendar weeks preceding such sale. Sales under Rule
144 are also subject to certain restrictions on the manner of sale, to
notice requirements and to the availability of current public information
about the Fund. In addition, any profit resulting from the sale of Shares
under Rule 144, if the Shares are held for a period of less than six
months, will be returned to the Fund.
Rights will be evidenced by Subscription Certificates. The number
of Rights issued to each holder will be stated on the Subscription
Certificate delivered to the holder. The method by which Rights may be
exercised and Shares paid for is set forth below in " -- Method of Exercise
of Rights" and " -- Payment for Shares." A Rights holder will have no right
to rescind a purchase after the Subscription Agent has received payment.
See " -- Payment for Shares." Shares issued pursuant to an exercise of
Rights will be listed on the NYSE.
The Rights are transferable until the Expiration Date and will be
admitted for trading on the NYSE. Assuming a market exists for the Rights, the
Rights may be purchased and sold through usual brokerage channels and sold
through the Subscription Agent. Although no assurance can be given that a
market for the Rights will develop, trading in the Rights on the NYSE will
begin two Business Days before the Record Date and may be conducted until the
close of trading on the last NYSE trading day prior to the Expiration Date.
Trading of the Rights on the NYSE will be conducted on a when-issued basis
beginning one Business Day prior to the Record Date until and including the
date on which the Subscription Certificates are mailed to Record Date
Stockholders and thereafter will be conducted on a regular-way basis until and
including the last NYSE trading day prior to the Expiration Date. The method
by which Rights may be transferred is set forth below under " -- Method of
Transferring Rights." The common stock will begin trading ex-Rights on the
Record Date. Rights will trade with due bills for two Business Days prior to
the Record Date. For purposes of this Prospectus, a "Business Day" shall mean
any day on which trading is conducted on the NYSE.
Nominees that hold shares of the Fund's common stock for the
account of others, such as banks, brokers, trustees or depositories for
securities, should notify the respective beneficial owners of such shares
as soon as possible to ascertain such beneficial owners' intentions and to
obtain instructions with respect to the Rights. If the beneficial owner so
instructs, the nominee will complete the Subscription Certificate and
submit it to the Subscription Agent with proper payment. In addition,
beneficial owners of the Fund's common stock or Rights held through such a
nominee should contact the nominee and request the nominee to effect
transactions in accordance with such beneficial owner's instructions.
Purpose of the Offer
The Board of Directors of the Fund has determined that it would be
in the best interests of the Fund and its common stockholders to increase
the assets of the Fund available for investment, thereby permitting the
Fund to be in a better position to more fully take advantage of investment
opportunities that may arise. The Offer seeks to reward existing common
stockholders by giving them the right to purchase Shares at a price that
may be below market and/or net asset value without incurring any commission
charge. The distribution to common stockholders of transferable Rights,
which themselves may have intrinsic value, will also afford non-subscribing
common stockholders the potential of receiving a cash payment upon sale of
such Rights, receipt of which may be viewed as partial compensation for the
possible dilution of their interests in the Fund.
The Fund's Investment Adviser will benefit from the Offer because
the Investment Adviser's fee is based on the average net assets of the
Fund. See "Management of the Fund." It is not possible to state precisely
the amount of additional compensation the Investment Adviser will receive
as a result of the Offer because the proceeds of the Offer will be invested
in additional portfolio securities, which will fluctuate in value. However,
assuming all Rights are exercised and the Fund receives the maximum
proceeds of the Offer, the annual compensation to be received by the
Investment Adviser would be increased by approximately $331,675. Two of the
Fund's directors, including Mario J. Gabelli, who voted to authorize the
Offer are "interested persons" of the Investment Adviser within the meaning
of the 1940 Act and may benefit indirectly from the Offer because of their
interest in the Investment Adviser. See "Management of the Fund" in the
SAI. In determining that the Offer was in the best interest of the common
stockholders, the Fund's Board of Directors was cognizant of this benefit
as well as the possible participation of the Affiliated Parties and Mr.
Gabelli in the Offer as common stockholders on the same basis as other
common stockholders.
The Fund may, in the future and at its discretion, choose to make
additional rights offerings from time to time for a number of shares and on
terms that may or may not be similar to the Offer. Any such future rights
offering will be made in accordance with the 1940 Act. Under the laws of
Maryland, the state in which the Fund is organized, and the Fund's Charter,
the Fund is authorized to make rights offerings without obtaining
stockholder approval. The staff of the Securities and Exchange Commission
("SEC") has interpreted the 1940 Act as not requiring stockholder approval
of a rights offering at a price below the then current net asset value so
long as certain conditions are met, including a good faith determination by
the Fund's Board of Directors that such an offering would result in a net
benefit to existing stockholders.
Over-Subscription Privilege
If all of the Rights initially issued are not exercised, any
Primary Subscription Shares for which subscriptions have not been received
will be offered, by means of the Over-Subscription Privilege, to Record
Date Stockholders who have exercised all the Rights initially issued to
them and who wish to acquire additional Shares. Record Date Stockholders
who exercise all the Rights initially issued to them will have the
opportunity to indicate on the Subscription Certificate how many Shares
they are willing to acquire pursuant to the Over-Subscription Privilege. If
sufficient Primary Subscription Shares remain after the Primary
Subscriptions have been exercised, all over-subscription requests will be
honored in full. If sufficient Primary Subscription Shares are not
available to honor all over-subscription requests, the available Shares
will be allocated among those Record Date Stockholders who over-subscribe
based on the number of Rights originally issued to them by the Fund.
In addition, the Board of Directors of the Fund has established a
Pricing Committee which is authorized, in the event that the Fund's per
share net asset value on the Expiration Date is equal to or greater than
the Subscription Price, to direct the Fund to issue Secondary
Over-Subscription Shares to satisfy over-subscription requests in excess of
the available Primary Subscription Shares. The Fund would also be able to
issue additional Shares in an amount of up to 20% of the sum of the Primary
Subscription Shares and Secondary Over- Subscription Shares. Any Secondary
Over-Subscription Shares and any additional Shares issued in conjunction
with the Secondary Over-Subscription Shares will be allocated pro rata only
among those fully exercising Record Date Stockholders who over-subscribe
based on the number of Rights originally issued to them by the Fund. Rights
Holders who are not Record Date Stockholders may not participate in the
secondary over-subscription. Any Secondary Over-Subscription Shares issued
by the Fund, collectively with any Primary Subscription Shares not
subscribed for through the Primary Subscription and any additional Shares,
will be referred to in this Prospectus as the "Excess Shares."
The percentage of Excess Shares each over-subscribing Record Date
Stockholder may acquire will be rounded down to result in delivery of whole
Shares; provided, however, that if a pro rata allocation results in any
holder being allocated a greater number of Excess Shares than the holder
subscribed for pursuant to the exercise of such holder's Over- Subscription
Privilege, then such holder will be allocated only such number of Excess
Shares as such holder subscribed for and the remaining Excess Shares will
be allocated among all other holders then entitled to receive Excess Shares
whose over-subscription requests have not been fully honored. The
allocation process may be iterative in order to assure that the total
number of Excess Shares is distributed in accordance with the method
described above.
The formula to be used in allocating the Excess Shares is as follows:
Record Date Stockholder's Position x Excess Shares Remaining
Total Record Date Position
of All Over-Subscribers
The Fund will not offer or sell any Shares that are not subscribed
for under the Primary Subscription or the Over-Subscription Privilege.
The Subscription Price
The Subscription Price for the Shares to be issued pursuant to the
Rights will be $8.00.
The Fund announced the Offer on August 28, 2002. The net asset
value per share of common stock at the close of business on August 27, 2002
(the last trading date prior to the Fun's announcement of the Offer) and
November __, 2002 (the first trading date after the Fund's announcement of
the definitive terms of the Offer), was $8.60 and $_.__, respectively. The
last reported sale price of a share of the Fund's common stock on the NYSE
on those dates was $10.95 and $_.__,respectively, representing a 27.33% and
__% premium, respectively, in relation to the net asset value per share of
common stock at the close of business on these dates and a 36.88% and __%
premium, respectively in relation to the Subscription Price.
Sales by Subscription Agent
Holders of Rights who are unable or do not wish to exercise any or
all of their Rights may instruct the Subscription Agent to sell any
unexercised Rights. The Subscription Certificates representing the Rights
to be sold by the Subscription Agent must be received on or before December
11, 2002. Upon timely receipt of the appropriate instructions to sell
Rights, the Subscription Agent will use its best efforts to complete the
sale and will remit the proceeds of sale, net of commissions, to the
holders. If the Rights can be sold, sales of the Rights will be deemed to
have been effected at the weighted average price received by the
Subscription Agent on the day such Rights are sold. The selling Rights
holder will pay all brokerage commissions incurred by the Subscription
Agent. These sales may be effected by the Subscription Agent through
Gabelli & Company, Inc., a registered broker-dealer and an affiliate of the
Investment Adviser, at a commission of up to $0.02 per Right, provided
that, if the Subscription Agent is able to negotiate a lower brokerage
commission with an independent broker, the Subscription Agent will execute
these sales through that independent broker. Gabelli & Company, Inc. may
also act on behalf of its clients to purchase or sell Rights in the open
market and be compensated for its services.
The Subscription Agent will automatically attempt to sell any
unexercised Rights that remain unclaimed as a result of Subscription
Certificates being returned by the postal authorities as undeliverable as
of the fourth Business Day prior to the Expiration Date. These sales will
be made net of commissions on behalf of the nonclaiming holders of Rights.
Proceeds from those sales will be held by Equiserve, in its capacity as the
Fund's transfer agent, for the account of the nonclaiming holder of rights
until the proceeds are either claimed or escheated. There can be no
assurance that the Subscription Agent will be able to complete the sale of
any of these Rights and neither the Fund nor the Subscription Agent has
guaranteed any minimum sales price for the Rights. All of these Rights will
be sold at the market price, if any, on the NYSE or through an unaffiliated
market maker if no market exists on the NYSE.
Method of Transferring Rights
The Rights evidenced by a single Subscription Certificate may be
transferred in whole by endorsing the Subscription Certificate for transfer
in accordance with the accompanying instructions. A portion of the Rights
evidenced by a single Subscription Certificate (but not fractional Rights)
may be transferred by delivering to the Subscription Agent a Subscription
Certificate properly endorsed for transfer, with instructions to register
the portion of the Rights evidenced thereby in the name of the transferee
(and to issue a new Subscription Certificate to the transferee evidencing
the transferred Rights). In this event, a new Subscription Certificate
evidencing the balance of the Rights will be issued to the Rights holder
or, if the Rights holder so instructs, to an additional transferee.
Holders wishing to transfer all or a portion of their Rights (but
not fractional Rights) should allow at least three Business Days prior to
the Expiration Date for (i) the transfer instructions to be received and
processed by the Subscription Agent, (ii) a new Subscription Certificate to
be issued and transmitted to the transferee or transferees with respect to
transferred Rights, and to the transferor with respect to retained rights,
if any, and (iii) the Rights evidenced by the new Subscription Certificates
to be exercised or sold by the recipients thereof. Neither the Fund nor the
Subscription Agent shall have any liability to a transferee or transferor
of Rights if Subscription Certificates are not received in time for
exercise or sale prior to the Expiration Date.
Except for the fees charged by the Subscription Agent (which will
be paid by the Fund as described below), all commissions, fees and other
expenses (including brokerage commissions and transfer taxes) incurred in
connection with the purchase, sale or exercise of Rights will be for the
account of the transferor of the Rights, and none of these commissions,
fees or expenses will be paid by the Fund or the Subscription Agent.
The Fund anticipates that the Rights will be eligible for transfer
through, and that the exercise of the Primary Subscription and
Over-Subscription may be effected through, the facilities of the Depository
Trust Company. Rights exercised through the Depository Trust Company will
for the remainder of this Prospectus be referred to as "DTC Exercised
Rights."
Expiration of the Offer
The Offer will expire at 5:00 p.m., New York time, on December 13,
2002, unless extended by the Fund to a date not later than December 30,
2002, 5:00 p.m., New York time (the "Expiration Date"). Rights will expire
on the Expiration Date and thereafter may not be exercised.
Subscription Agent
The subscription agent is Equiserve, Att: Corporate Actions, PO
Box 43025, Providence, RI 02940-3025 (the "Subscription Agent"). The
Subscription Agent will receive from the Fund an amount estimated to be
$125,000 comprised of the fee for its services and the reimbursement for
certain expenses related to the Offer. INQUIRIES BY ALL HOLDERS OF RIGHTS
SHOULD BE DIRECTED TO P.O. BOX 9573, BOSTON, MASSACHUSETTS 02205-9573
(TELEPHONE (800) 336-6983 OR (781) 575-2000); HOLDERS MAY ALSO CONSULT
THEIR BROKERS OR NOMINEES.
Method of Exercise of Rights
Rights may be exercised by filling in and signing the reverse side
of the Subscription Certificate and mailing it in the envelope provided, or
otherwise delivering the completed and signed Subscription Certificate to
the Subscription Agent, together with payment for the Shares as described
below under "Payment for Shares." Rights may also be exercised through a
Rights holder's broker, who may charge the Rights holder a servicing fee in
connection with such exercise.
Completed Subscription Certificates must be received by the
Subscription Agent prior to 5:00 p.m., New York time, on the Expiration
Date (unless payment is effected by means of a notice of guaranteed
delivery as described below under " -- Payment for Shares"). The
Subscription Certificate and payment should be delivered to Equiserve at
the following address:
If By Mail: PO Box 43025
Reporting Services, Inc.
Providence, RI 02940-3025
If By Hand: Securities Transfer and Reporting Services, Inc.
c/o Equiserve
100 Williams St. Galleria
New York, NY 10038
If By Overnight Courier: Equiserve
Attn: Corporate Actions
40 Campanelli Drive
Braintree, MA 02184
Method of Exercise of Rights by Individual Retirement Accounts
Individuals who hold an interest in common shares of the Fund
through an "individual retirement account" (an "IRA", and such holders
being "IRA Holders"), within the meaning of Section 408(a) of the Internal
Revenue Code of 1986, as amended (the "Code"), will also have the
opportunity to direct their IRAs to exercise the Rights offered directly to
the IRAs. However, due to limitations imposed by the Code, the exercise of
such Rights by IRAs will be subject to the procedures outlined below.
Rights may be exercised by filling in and signing the reverse side of
the Subscription Certificate and mailing it in the envelope provided, or
otherwise delivering the completed and signed Subscription Certificate to the
Subscription Agent, together with payment for the Shares as described below in
paragraph (3) under " -- Payment for Shares."
If the Fund receives a Subscription Certificate and the full payment
from the IRA, the Fund will exercise the IRA's rights to the extent indicated
on the Subscription Certificate. It is the responsibility of the IRA Holder to
ensure that the funds used to exercise the Rights are available in the IRA at
the time payment for the Rights is due. In the event sufficient funds to
exercise the Rights are not available through the IRA, additional sources of
funds may be contributed to the IRA by means of (i) a deductible contribution
pursuant to section 408(a)(1) of the Code; (ii) a nondeductible contribution
pursuant to Section 408(o) of the Code; (iii) a trust-to-trust transfer from
another IRA account; (iv) a rollover contribution within the meaning of
Section 408(d)(3) of the Code; or (v) a combination of any of the foregoing.
IRA Holders should note that the maximum deductible IRA contribution for 2002
is $3,000, and may be less depending on an individual's particular
circumstances.
If the Fund does not receive a Subscription Certificate from
an IRA Holder by 5:00 pm, New York time, on the Expiration Date, or the IRA
does not contain sufficient funds to exercise the Right, such IRA's Rights
will be sold for the prevailing price on the NYSE, provided that a market
for the Rights develops. If the Fund is able to sell all the Rights,
proceeds from the sale will be deposited in a Gabelli money market account
held on behalf of the IRA in the name of the IRA Holder. If the Fund is
able to sell only a portion of the IRA Rights of non-exercising IRA
Holders, any proceeds from such sales will be allocated pro rata among the
non-exercising IRA Holders based on the number of IRA Rights originally
issued to them by the Fund.
The Subscription Certificate and payment should be delivered to
Equiserve at the addresses indicated above, under " -- Method of Exercise of
Rights."
The information set forth above is a discussion of certain of the
United States federal income tax issues concerning the use of IRA's. This
discussion is based on the present provisions of the Code, the regulations
promulgated hereunder, and judicial and administrative ruling authorities,
all of which are subject to change, which change may be retroactive. This
discussion does not purport to be complete or to deal with all aspects of
U.S. federal income taxation that may be relevant to investors in light of
their particular circumstances. Prospective investors should consult with
their own tax advisers with regard to the U.S. federal income tax
consequences of the purchase, ownership and disposition of the Rights, as
well as the tax consequences arising under the laws of any state, foreign
country, or other taxing jurisdiction.
Payment for Shares
Holders of Rights who acquire Shares on Primary Subscription or
pursuant to the Over-Subscription Privilege may choose between the
following methods of payment:
(1) A subscription will be accepted by the Subscription Agent
if, prior to 5:00 p.m., New York time, on the Expiration
Date, the Subscription Agent has received a notice of
guaranteed delivery by telegram or otherwise from a bank,
a trust company, or a NYSE member, guaranteeing delivery
of (i) payment of the full Subscription Price for the
Shares subscribed for on Primary Subscription and any
additional Shares subscribed for pursuant to the
Over-Subscription Privilege and (ii) a properly completed
and executed Subscription Certificate. The Subscription
Agent will not honor a notice of guaranteed delivery if a
properly completed and executed Subscription Certificate
and full payment is not received by the Subscription
Agent by the close of business on the third Business Day
after the Expiration Date. The notice of guaranteed
delivery may be delivered to the Subscription Agent in
the same manner as Subscription Certificates at the
addresses set forth above, or may be transmitted to the
Subscription Agent by facsimile transmission (fax number
(781) 380-3388; telephone number to confirm receipt (781)
575-4816).
(2) Alternatively, a holder of Rights can send the
Subscription Certificate together with payment in the
form of a check for the Shares subscribed for on Primary
Subscription and additional Shares subscribed for
pursuant to the Over-Subscription Privilege to the
Subscription Agent based on the Subscription Price of
$8.00 per Share. To be accepted, the payment, together
with the executed Subscription Certificate, must be
received by the Subscription Agent at the addresses noted
above prior to 5:00 p.m., New York time, on the
Expiration Date. The Subscription Agent will deposit all
Share purchase checks received by it prior to the final
due date into a segregated interest-bearing account
pending proration and distribution of Shares. The
Subscription Agent will not accept cash as a means of
payment for Shares. Except as otherwise set forth below,
a payment pursuant to this method must be in United
States dollars by money order or check drawn on a bank
located in the continental United States, must be payable
to The Gabelli Convertible and Income Securities Fund
Inc. and must accompany an executed Subscription
Certificate to be accepted. If the aggregate Subscription
Price paid by a Record Date Stockholder is insufficient
to purchase the number of Shares that the holder
indicates are being subscribed for, or if a Record Date
Stockholder does not specify the number of Shares to be
purchased, then such holder will be deemed to have
exercised first the Primary Subscription Rights (if not
already fully exercised), and second the
Over-Subscription Privilege to the full extent of the
payment tendered. If the aggregate Subscription Price
paid by a Record Date Stockholder is greater than the
Shares he has indicated an intention to subscribe, then
the Rights holder will be deemed to have exercised first
the Primary Subscription Rights (if not already fully
subscribed), and second the Over-Subscription Privilege
to the full extent of the excess payment tendered.
(3) IRA Holders should follow the instructions in paragraphs
(1) and (2) above.
Any payment required from a holder of Rights must be received by
the Subscription Agent on the Expiration Date, or if the Rights holder has
elected to make payment by means of a notice of guaranteed delivery, on the
third Business Day after the Expiration Date. All payments by a holder of
Rights must be in United States dollars by money order or check drawn on a
bank located in the continental United States of America and payable to The
Gabelli Convertible and Income Securities Fund Inc. Whichever of the two
methods of payment described above is used, issuance and delivery of
certificates for the Shares purchased are subject to collection of checks
and actual payment pursuant to any notice of guaranteed delivery.
Within ten Business Days following the Expiration Date (the
"Confirmation Date"), a confirmation will be sent by the Subscription Agent
to each holder of Rights (or, in the case of the Fund's common stock held
by Cede & Co. or any other depository or nominee, to Cede & Co. or such
other depository or nominee), showing (i) the number of Shares acquired
pursuant to the Primary Subscription, (ii) the number of Shares, if any,
acquired pursuant to the Over-Subscription Privilege, (iii) the per Share
and total purchase price for the Shares and (iv) any excess to be refunded
by the Fund to such holder as a result of payment for Shares pursuant to
the Over-Subscription Privilege that the holder is not acquiring. Any
excess payment to be refunded by the Fund to a holder of Rights, or to be
paid to a holder of Rights as a result of sales of Rights on such holder's
behalf by the Subscription Agent or exercises by Rights holders of their
Over-Subscription Privileges, and all interest accrued on the holder's
excess payment will be mailed by the Subscription Agent to the holder
within fifteen Business Days after the Expiration Date. Interest on the
excess payment will accrue through the date that is one Business Day prior
to the mail date of the reimbursement check.
A Rights holder will have no right to rescind a purchase after the
Subscription Agent has received payment either by means of a notice of
guaranteed delivery or a check.
If a holder of Rights who acquires Shares pursuant to the Primary
Subscription or the Over-Subscription Privilege does not make payment of
any amounts due, the Fund reserves the right to take any or all of the
following actions: (i) find other purchasers for such subscribed-for and
unpaid-for Shares; (ii) apply any payment actually received by it toward
the purchase of the greatest whole number of Shares that could be acquired
by such holder upon exercise of the Primary Subscription or the
Over-Subscription Privilege; (iii) sell all or a portion of the Shares
purchased by the holder, in the open market, and apply the proceeds to the
amounts owed; and (iv) exercise any and all other rights or remedies to
which it may be entitled, including, without limitation, the right to set
off against payments actually received by it with respect to such
subscribed Shares and to enforce the relevant guaranty of payment.
Holders who hold shares of common stock for the account of others,
such as brokers, trustees or depositories for securities, should notify the
respective beneficial owners of the common stock they hold as soon as
possible to ascertain such beneficial owners' intentions and to obtain
instructions with respect to the Rights. If a beneficial owner so
instructs, the record holder of the Rights should complete Subscription
Certificates and submit them to the Subscription Agent with the proper
payment. In addition, beneficial owners of common stock or Rights held
through such a holder should contact the holder and request the holder to
effect transactions in accordance with the beneficial owner's instructions.
The instructions accompanying the Subscription Certificates should
be read carefully and followed in detail.
Do Not Send Subscription Certificates to the Fund.
The method of delivery of Subscription Certificates and payment of
the subscription price to the Subscription Agent will be at the election
and risk of the Rights holders, but if sent by mail it is recommended that
the certificates and payments be sent by registered mail, properly insured,
with return receipt requested, and that a sufficient number of days be
allowed to ensure delivery to the subscription agent and clearance of
payment prior to 5:00 p.m., New York City time, on the Expiration Date.
Because uncertified personal checks may take at least five business days to
clear, you are strongly urged to pay, or arrange for payment, by means of a
certified or cashier's check or money order.
All questions concerning the timeliness, validity, form and
eligibility of any exercise of Rights will be determined by the Fund, whose
determinations will be final and binding. The Fund in its sole discretion
may waive any defect or irregularity, or permit a defect or irregularity to
be corrected within such time as it may determine, or reject the purported
exercise of any Right. Subscriptions will not be deemed to have been
received or accepted until all irregularities have been waived or cured
within such time as the Fund determines in its sole discretion. Neither the
Fund nor the Subscription Agent will be under any duty to give notification
of any defect or irregularity in connection with the submission of
Subscription Certificates or incur any liability for failure to give such
notification.
Delivery of Stock Certificates
Certificates representing Shares purchased pursuant to the Primary
Subscription will be delivered to registered Record Date Shareholders as
soon as practicable after the corresponding Rights have been validly
exercised and full payment for the Shares has been received and cleared.
Certificates representing Shares purchased pursuant to the Over-
Subscription Privilege will be delivered to subscribers as soon as
practicable after the Expiration Date and after all allocations have been
effected. Participants in the Fund's Automatic Dividend Reinvestment and
Voluntary Cash Purchase Plan (the "Plan") will be issued Rights for the
shares of common stock held in their accounts in the Plan. Participants
wishing to exercise these Rights must exercise the Rights in accordance
with the procedures set forth above in " -- Method of Exercise of Rights"
and " -- Payment for Shares." Rights will not be exercised automatically by
the Plan. Plan participants exercising their Rights will receive their
Primary and Over-Subscription Shares via an uncertificated credit to their
existing account. To request a stock certificate, participants in the Plan
should check the appropriate box on the Subscription Certificate. These
Shares will remain subject to the same investment option as previously
selected by the Plan participant.
Foreign Restrictions
Subscription Certificates will only be mailed to Record Date
Stockholders whose addresses are within the United States (other than an
APO or FPO address). Record Date Stockholders whose addresses are outside
the United States or who have an APO or FPO address and who wish to
subscribe to the Offer either in part or in full should contact the
Subscription Agent, Equiserve, by written instruction or recorded telephone
conversation no later than three Business Days prior to the Expiration
Date. The Fund will determine whether the offering may be made to any such
stockholder. If the Subscription Agent has received no instruction by the
third Business Day prior to the Expiration Date or the Fund has determined
that the Offering may not be made to a particular stockholder, the
Subscription Agent will attempt to sell all of such common stockholder's
Rights and remit the net proceeds, if any, to such common stockholder. If
the Rights can be sold, sales of these Rights will be deemed to have been
effected at the weighted average price received by the Subscription Agent
on the day the Rights are sold, less any applicable brokerage commissions,
taxes and other expenses.
Federal Income Tax Consequences to Stockholders
For U.S. federal income tax purposes, neither the receipt nor the
exercise of the Rights will result in taxable income to you. Moreover, you
will not realize a loss if you do not exercise the Rights. The holding
period for a Share acquired upon exercise of a Right begins with the date
of exercise. The basis for determining gain or loss upon the sale of a
Share acquired upon the exercise of a Right will be equal to the sum of:
o the subscription price per Share;
o any servicing fee charged to you by your broker, bank or
trust company; and
o the basis, if any, in the Rights that you exercised.
A gain or loss recognized upon a sale of a Share acquired upon the
exercise of a Right will be a capital gain or loss assuming the Share is
held as a capital asset at the time of sale. This gain or loss will be a
long-term capital gain or loss if the Share has been held at the time of
sale for more than one year.
As noted above, your basis in Shares issued under the Offer
includes your basis in the Rights underlying that stock. Assuming that, as
the Fund expects, the aggregate fair market value of the Rights at the time
they are distributed is less than 15% of the aggregate fair market value of
the Fund's common stock at such time, the basis of the Rights issued to you
will be zero unless you elect to allocate a portion of your basis of
previously owned common stock to the Rights issued to you in the Offer.
This allocation is based upon the relative fair market value of such common
stock and the Rights as of the date of distribution of the Rights. Thus, if
you make such an election and the Rights are later exercised, the basis in
the common stock you originally owned will be reduced by an amount equal to
the basis allocated to the Rights. This election must be made in a
statement attached to your federal income tax return for the year in which
the Rights are distributed. If the Rights expire without exercise, you will
realize no loss and you will not be permitted to allocate a portion of your
basis in the common stock to the unexercised Rights.
The foregoing is a general summary of the material United States
federal income tax consequences of the receipt and exercise of Rights. The
discussion is based upon applicable provisions of the Code, U.S. Treasury
regulations thereunder and other authorities currently in effect, and does
not cover state, local or foreign taxes. The Code and Treasury regulations
thereunder are subject to change by legislative or administrative action,
possibly with retroactive effect. You should consult your tax advisors
regarding specific questions as to federal, state, local or foreign taxes.
You should also review the discussion of certain tax considerations
affecting yourself and the Fund set forth under "Taxation."
Employee Plan Considerations
Rights holders that are employee benefit plans subject to the
Code, including corporate savings and 401(k) plans, Keogh Plans of
self-employed individuals and IRAs (each a "Benefit Plan" and collectively,
"Benefit Plans"), should be aware that additional contributions of cash in
order to exercise Rights may be treated as Benefit Plan contributions and,
when taken together with contributions previously made, may subject a
Benefit Plan to excise taxes for excess nondeductible contributions. In the
case of Benefit Plans qualified under Sections 401(a) or 408(k) of the
Code, additional cash contributions could cause the maximum contribution
limitations of Section 415 of the Code or other qualification rules to be
violated. Benefit Plans contemplating making additional cash contributions
to exercise Rights should consult with their counsel prior to making such
contributions.
Benefit Plans and other tax exempt entities, including
governmental plans, should also be aware that if they borrow in order to
finance their exercise of Rights, they may become subject to the tax on
unrelated business taxable income ("UBTI") under Section 511 of the Code.
If any portion of an IRA is used as security for a loan, the portion so
used is also treated as distributed to the IRA depositor.
ERISA contains prudence and diversification requirements and ERISA
and the Code contain prohibited transaction rules that may impact the
exercise of Rights. Among the prohibited transaction exemptions issued by
the Department of Labor that may exempt a Benefit Plan's exercise of Rights
are Prohibited Transaction Exemption 84-24 (governing purchases of stock in
investment companies) and Prohibited Transaction Exemption 75-1 (covering
sales of securities).
Due to the complexity of these rules and the penalties for
noncompliance, Benefit Plans should consult with their counsel regarding
the consequences of their exercise of Rights under ERISA and the Code.
USE OF PROCEEDS
The net proceeds of the Offer, assuming all offered Shares are
sold, are estimated to be approximately $33,167,536 million, before
deducting expenses payable by the Fund estimated at approximately $450,000.
The Investment Adviser anticipates that investment of the proceeds, in
accordance with the Fund's investment objectives and policies, will be
invested promptly as investment opportunities are identified, depending on
market conditions and the availability of appropriate securities, and is
anticipated to take not more than approximately six months.
INVESTMENT OBJECTIVES 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 stockholder approval of its Charter on
February 21, 1995 and filing of the Charter in Maryland on March 31, 1995.
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. It is, however,
a fundamental policy of the Fund and cannot be changed without stockholder
approval. Under normal circumstances the Fund will invest at least 80% of
the value of its total assets (taken at current value) in "convertible
securities," i.e., securities (bonds, debentures, corporate notes,
preferred stocks and other similar securities) that are convertible into
common stock or other equity securities, and "income securities," i.e.,
nonconvertible securities having a history of regular payments to holders.
Securities received upon conversion of a convertible security will not be
included in the calculation of the percentage of Fund assets invested in
convertible securities. 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 expects to continue its
practice of investing in convertible securities to the extent attractive
opportunities are available.
The Fund may invest up to 20% 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 securities that
do not generate any income, such as common stocks that do not pay
dividends. In selecting any of the foregoing securities for investment, the
factors that will be considered by the Investment Adviser include the
Investment Adviser's evaluation of the underlying value of the assets and
business of the issuers of the securities, the potential for capital
appreciation, the price of the securities, the issuer's balance sheet
characteristics and the perceived skills and integrity 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, unless an exemptive order permits the Fund to invest in
affiliated money market 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. See " -- Temporary Defensive Investments."
Investment Methodology of the Fund
In selecting securities for the Fund, the Investment Adviser
normally will consider the following factors, among others:
o the Investment Adviser's own evaluations of the private
market value, cash flow, earnings per share and other
fundamental aspects of the underlying assets and business
of the company;
o the interest or dividend income generated by the
securities;
o the potential for capital appreciation of the securities
and any underlying common stocks;
o the prices of the securities relative to any underlying
common stocks;
o the prices of the securities relative to other comparable
securities;
o whether the securities are entitled to the benefits of
sinking funds or other protective conditions or
covenants;
o the existence of any anti-dilution protections or
guarantees of the security; and
o the diversification of the Fund's portfolio as to
issuers.
The Investment Adviser's investment philosophy with respect to debt and
equity securities seeks to identify assets that are selling in the public
market at a discount to their private market value. The Investment Adviser
defines private market value as the value informed purchasers are willing
to pay to acquire assets with similar characteristics. The Investment
Adviser also normally evaluates the issuers' free cash flow and long-term
earnings trends. Finally, the Investment Adviser looks for a catalyst -
something indigenous to the company, its industry or country that will
surface additional value.
Convertible Securities
A convertible security is a bond, debenture, corporate note,
preferred stock or other similar security that may be converted into or
exchanged for a prescribed amount of common stock or other equity security
of the same or a different issuer within a particular period of time at a
specified price or formula. Before conversion, convertible securities have
characteristics similar to nonconvertible debt securities in that they
ordinarily provide a stream of income with generally higher yields than
those of common stock of the same or similar issuers. Convertible
securities are senior in rank to common stock in a corporation's capital
structure and, therefore, generally entail less risk than the corporation's
common stock, although the extent to which such risk is reduced depends in
large 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
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 that causes it to sell at a discount.
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 that do not have a
conversion privilege. This theoretical value, which may change with
prevailing interest rates, the credit rating of the issuer and other
pertinent factors, often referred to as the "investment value," represents
the security's theoretical price support level.
"Conversion value" is the amount a convertible security would be
worth in market value if it were to be exchanged for the underlying equity
security pursuant to its conversion privilege. Conversion value fluctuates
directly with the price of the underlying equity security, usually common
stock. If, because of low prices for the common stock, the conversion value
is substantially below the investment value, the price of the convertible
security is governed principally by the factors described in the preceding
paragraph. If the conversion value rises near or above its investment
value, the price of the convertible security generally will rise above its
investment value and, in addition, will sell at some premium over its
conversion value. This premium represents the price investors are willing
to pay for the privilege of purchasing a fixed-income security with a
possibility of capital appreciation due to the conversion privilege.
Accordingly, the conversion value of a convertible security is subject to
equity risk, that is, the risk that the price of an equity security will
fall due to general market and economic conditions, perceptions regarding
the industry in which the issuer participates or the issuing company's
particular circumstances. If the appreciation potential of a convertible
security is not realized, its conversion value premium may not be
recovered.
In its selection of convertible securities for the Fund, the
Investment Adviser will not emphasize either investment value or conversion
value, but will consider both in light of the Fund's overall investment
objective. The Fund may convert a convertible security that it holds:
o when necessary to permit orderly disposition of the
investment when a convertible security approaches
maturity or has been called for redemption;
o to facilitate a sale of the position;
o if the dividend rate on the underlying common stock
increases above the yield on the convertible security; or
o whenever the Investment 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. To the
extent that such convertible securities and other nonconvertible debt
securities, which are acquired by the Fund consistent with the factors
considered by the Investment Adviser as described in this Prospectus, 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 Investment Adviser. Those
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 exposure to adverse conditions. See "Risk Factors and Special
Considerations -- Asset Class Risks." 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. See "Appendix A --
Description of Corporate Bond Ratings."
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
Investment 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.
The Fund has no independent limit on the amount of its net assets
it may invest in unregistered and otherwise illiquid securities and other
investments. The current intention of the Investment Adviser is not to
invest in excess of 15% of the Fund's net assets in illiquid convertible
securities or income securities. Common stockholders will be notified if
the Investment Adviser changes its intention. Investments in unregistered
or otherwise illiquid securities entails certain risks related to the fact
that they cannot be sold publicly in the United States without registration
under the Securities Act. See "Risk Factors and
Special Considerations-- Asset Class Risks."
Income Securities
Although it is the Fund's policy to invest in convertible
securities to the extent attractive opportunities are available, the Fund
may also invest in income securities other than convertible securities that
are expected to periodically accrue or generate income for their holders.
Such income securities include (i) fixed income securities such as bonds,
debentures, corporate notes, preferred stock, short-term discounted
Treasury Bills or certain securities of the U.S. government sponsored
instrumentalities, as well as money market mutual funds that invest in
those securities, which, in the absence of an applicable exemptive order,
will not be affiliated with the Investment Adviser and (ii) common stocks
of issuers that have historically paid dividends. Fixed income securities
obligate the issuer to pay to the holder of the security a specified
return, which may be either fixed or reset periodically in accordance with
the terms of the security. Fixed income securities generally are senior to
an issuer's common stock and their holders generally are entitled to
receive amounts due before any distributions are made to common
stockholders. Common stocks, on the other hand, generally do not obligate
an issuer to make periodic distributions to holders.
The market value of fixed income securities, especially those that
provide a fixed rate of return, may be expected to rise and fall inversely
with interest rates and in general is affected by the credit rating of the
issuer, the issuer's performance and perceptions of the issuer in the
market place. The market value of callable or redeemable fixed income
securities may also be affected by the issuer's call and redemption rights.
In addition, it is possible that the issuer of fixed income securities may
not be able to meet its obligations on interest or principal obligations.
Further, holders of non-convertible fixed income securities do not
participate in any capital appreciation of the issuer.
The Fund may also invest in obligations of government sponsored
instrumentalities. Unlike non-U.S. government securities, obligations of
certain agencies and instrumentalities of the U.S. government, such as the
Government National Mortgage Association, are supported by the "full faith
and credit" of the U.S. government; others, such as those of the
Export-Import Bank of the U.S., are supported by the right of the issuer to
borrow from the U.S. Treasury; others, such as those of the Federal
National Mortgage Association, are supported by the discretionary authority
of the U.S. government to purchase the agency's obligations; and still
others, such as those of the Student Loan Marketing Association, are
supported only by the credit of the instrumentality. No assurance can be
given that the U.S. government would provide financial support to U.S.
government sponsored instrumentalities if it is not obligated to do so by
law.
The Fund also may invest in common stock of issuers that have
historically paid dividends or otherwise made distributions to common
stockholders. Unlike payments on fixed income securities, common stock
dividend payments generally are not guaranteed and so may be discontinued
by the issuer at its discretion or because of the issuer's inability to
satisfy its liabilities. Further, an issuer's history of paying dividends
does not guarantee that it will continue to pay dividends in the future. In
addition to dividends, under certain circumstances the holders of common
stock may benefit from the capital appreciation of the issuer.
Special Investment Methods
Subject to guidelines established by the Board of Directors, the
Investment Adviser, on behalf of the Fund, may employ the following special
investment methods.
Options
The Fund may purchase or sell (i.e., write) options on securities,
securities indices and foreign currencies that are listed on a national
securities exchange or in the U.S. over- the-counter ("OTC") markets as a
means of achieving additional return or of hedging the value of the Fund's
portfolio. The Fund may write covered call options on common stocks that it
owns or has an immediate right to acquire through conversion or exchange of
other securities in an amount not to exceed 25% of total assets or invest
up to 10% of its total assets in the purchase of put options on common
stocks that the Fund owns or may acquire through the conversion or exchange
of other securities that it owns. The Fund may not write covered call
options in an amount exceeding 25% of the value of its total assets. The
Fund's investment in OTC options is limited to 5% of its total assets.
A call option is a contract that gives the holder of the option
the right, in return for a premium paid, to buy from the writer (seller) of
the call option 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, in return for the premium paid, to sell to the writer (seller) of
the put option the underlying security at a specified price during the term
of the option. The writer of the put, who receives the premium, has the
obligation to buy the underlying security upon exercise, at the exercise
price during the option period.
If the Fund has written an option, it may terminate its obligation
by effecting a closing purchase transaction. This is accomplished by
purchasing an option of the same series as the option previously written.
There can be no assurance that a closing purchase transaction can be
effected when the Fund so desires.
An exchange traded option may be closed out only on an exchange
that 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
"Investment Objectives and Policies -- Investment Practices -- Derivative
Instruments" in the SAI.
Futures Contracts and Options Thereon
-------------------------------------
The Fund may purchase and sell financial futures contracts and
options thereon which are traded on a commodities exchange or board of
trade for certain hedging, yield enhancement and risk management purposes,
in accordance with regulations of the Commodity Futures Trading Commission
("CFTC"). These futures contracts and related options may be on debt
securities, financial indices, securities indices, U.S. government
securities and foreign currencies. A financial futures contract is an
agreement to purchase or sell an agreed amount of securities or currencies
at a set price for delivery in the future.
Under the CFTC regulations, the Investment 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 non-hedging 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.
Forward Currency Exchange Contracts
-----------------------------------
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, and
the amount the Fund may invest in forward currency contracts is limited to
the amount of its aggregate investments in foreign currencies. The Fund
will only enter into forward currency contracts with parties that it
believes to be creditworthy.
Short Sales Against the Box
---------------------------
The Fund may 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 that 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 that 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 a duration of up to a week. Repurchase
agreements may be seen to be loans by the Fund collateralized by the
underlying debt obligation. This arrangement results in a fixed rate of
return that is not subject to market fluctuations during the holding
period. The value of the underlying securities will be at least equal to
all times to the total amount of the repurchase obligation, including
interest. The Fund bears a risk of loss in the event that the other party
to a repurchase agreement defaults on its obligations and the Fund is
delayed in or prevented from exercising its rights to dispose of the
collateral securities, including the risk of a possible decline in the
value of the underlying securities during the period in which it seeks to
assert these rights. 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 counter party to the
repurchase agreements.
If the financial institution that 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
-----------------------------
To increase income, the Fund may lend its portfolio securities to
securities broker- dealers or financial institutions if (i) the loan is
collateralized in accordance with applicable regulatory requirements and
(ii) 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. There can be no assurance that borrowers will
not fail financially. On termination of the loan, the borrower is required
to return the securities to the Fund, and any gain or loss in the market
price during the loan would inure to the Fund. If the other party to the
loan petitions for bankruptcy or becomes subject to the United States
Bankruptcy Code, the law regarding the rights of the Fund is unsettled. As
a result, under extreme circumstances, there may be a restriction on the
Fund's ability to sell the collateral and the Fund would suffer a loss. See
"Investment Objectives and Policies -- Investment Practices -- Loans of
Portfolio Securities" in the SAI.
Leverage
--------
As provided in the 1940 Act and subject to compliance with the
Fund's investment objectives, policies and restrictions, the Fund is
permitted to issue additional preferred stock or debt so long as the Fund's
total assets immediately after such issuance, less certain ordinary course
liabilities, exceed 300% of the amount of the debt outstanding and exceed
200% of the sum of the amount of preferred stock and debt outstanding. Such
debt or preferred stock may be convertible in accordance with SEC staff
guidelines that may permit the Fund to obtain leverage at attractive rates.
The Fund has authorized the issuance of 2,000,000 shares of preferred
stock, of which 1,200,000 shares were outstanding on September 30, 2002.
The Fund's outstanding preferred stock has a stated dividend rate of 8% per
annum.
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 Investment 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, unless such offers or proposals are replaced by
equivalent or increased offers or proposals that are consummated, the Fund
may sustain a loss.
Warrants and Rights
-------------------
The Fund may invest without limit in warrants or rights (other
than those acquired in units or attached to other securities) that 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 Investment Adviser for inclusion in the Fund's
portfolio.
Other Investment Companies
--------------------------
The Fund may invest up to 5% of its total assets in no more than
3% of the securities of any one investment company, including small
business investment companies, and may invest up to 10% of its total assets
in the securities of other 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. See
"Risk Factors and Other Considerations-- 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.
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.
Temporary Defensive Investments
During temporary defensive periods and during periods when the
Fund's normal asset allocation is not optimal, the Fund may invest more
heavily in securities of U.S. government sponsored instrumentalities and in
money market mutual funds that invest in those securities, which, in the
absence of an exemptive order, will not be affiliated with the Investment
Adviser. Obligations of certain agencies and instrumentalities of the U.S.
government, such as the Government National Mortgage Association, are
supported by the "full faith and credit" of the U.S. government; others,
such as those of the Export-Import Bank of the U.S., are supported by the
right of the issuer to borrow from the U.S. Treasury; others, such as those
of the Federal National Mortgage Association, are supported by the
discretionary authority of the U.S. government to purchase the agency's
obligations; and still others, such as those of the Student Loan Marketing
Association, are supported only by the credit of the instrumentality. No
assurance can be given that the U.S. government would provide financial
support to U.S. government sponsored instrumentalities if it is not
obligated to do so by law. During temporary defensive periods, the Fund may
be less likely to achieve its investment objective.
Further information on the investment objective and policies of
the Fund are set forth in the SAI.
Investment Restrictions
The Fund has adopted certain investment restrictions as
fundamental policies of the Fund. 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. The Fund's investment
restrictions are more fully discussed under "Investment Restrictions" in
the SAI.
Portfolio Turnover
The Fund will buy and sell securities to accomplish its investment
objective. The investment policies of the Fund may lead to frequent changes
in investments, particularly in periods of rapidly fluctuating interest or
currency exchange rates. The portfolio turnover may be higher than that of
other investment companies.
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 and
may result in taxable gains being passed to shareholders. The portfolio
turnover rate is computed by dividing the lesser of the amount of the
securities purchased or securities sold by the average monthly value of
securities owned during the year (excluding securities whose maturities at
acquisition were one year or less).
Long-Term Objective
The Fund is intended for investors seeking long-term capital
growth and income. The Fund is not meant to provide a vehicle for those who
wish to play short-term swings in the stock market. An investment in stock
of the Fund should not be considered a complete investment program. Each
stockholder should take into account the stockholder's investment
objectives as well as the stockholder's other investments when considering
the Offering.
RISK FACTORS AND SPECIAL CONSIDERATIONS
There are a number of risks that an investor should consider in
evaluating the Fund. You should read this entire Prospectus and the SAI
before you decide whether to exercise your Rights. In addition, you should
consider the matters set forth below.
Dilution
If you do not exercise all of your Rights, you will likely own a
smaller proportional interest in the Fund when the Offer is over. In
addition, whether or not you exercise your Rights, if the Subscription
Price is below the Fund's net asset value per share of common stock on the
Expiration Date the net asset value of your common stock will be diluted
(reduced) immediately as a result of the Offer because:
o the offered stock is being sold at less than its current
net asset value;
o you will indirectly bear the expenses of the Offer; and
o the number of shares of common stock outstanding after
the Offer will have increased proportionately more than
the increase in the amount of the Fund's net assets.
On the other hand, if the Subscription Price is above the Fund's
net asset value per share on the Expiration Date after deducting the
expenses of the Offer, the Fund's net asset value per share of common stock
will be accreted (increased) immediately as a result of the Offer whether
or not you participate in the Offer because:
o the offered stock is being sold at more than its current
net asset value after deducting the expenses of the
Offer; and
o the number of shares of common stock outstanding after
the Offer will have increased proportionately less than
the increase in the amount of the Fund's net assets.
Furthermore, if you do not participate in the Over-Subscription
Privilege, your percentage ownership may also be diluted. The Fund cannot
state precisely the amount of any dilution because it is not known at this
time what the net asset value per share of common stock will be on the
Expiration Date or what proportion of the Rights will be exercised. The
impact of the Offer on net asset value per share of common stock is shown
by the following examples, assuming a $8.00 Subscription Price:
Scenario 1: (assumes net asset value per share is above subscription price)(1)
NAV..................................................................................$8.50
Subscription Price...................................................................$8.00
Reduction in NAV($)(2)...............................................................$(0.18)
Reduction in NAV(%)..................................................................(2.12)%
Scenario 2: (assumes net asset value is below subscription price)(1)
NAV..................................................................................$7.50
Subscription Price...................................................................$8.00
Increase in NAV($)(2)................................................................$0.08
Increase in NAV(%)....................................................................1.07%
------------------------------------
(1) Both examples are based on a fully exercised primary subscription only. Actual amounts may vary due
to rounding.
(2) Assumes $450,000 in estimated offering expenses.
If you do not wish to exercise your Rights, you should consider
selling them as set forth in this Prospectus. Any cash you receive from
selling your Rights should serve as partial compensation for any possible
dilution of your interest in the Fund. The Fund cannot give assurance,
however, that a market for the Rights will develop or that the Rights will
have any marketable value.
Market Risk
The market value of a security may move up and down, sometimes
rapidly and unpredictably. These fluctuations, which are often referred to
as "volatility," may cause a security to be worth less than it was worth at
an earlier time. Market risk may affect a single issuer, industry, sector
of the economy or the market as a whole. Market risk is common to most
investments, including stocks and bonds and the investment funds that
invest in them.
Asset Class Risks
Credit Risk for Convertible Securities and Fixed Income Securities
------------------------------------------------------------------
Many convertible securities are not investment grade, that is, not
rated within the four highest categories by S&P and Moody's. To the extent
that the Fund's convertible securities and any other fixed income
securities 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 Investment Adviser.
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:
o greater volatility and credit risk;
o vulnerability to economic downturns and changes in
interest rates;
o sensitivity to adverse economic changes and corporate
developments;
o additional expenses to pursue recovery from issuers that
default;
o redemption or call provisions that may be exercised at
inopportune times;
o difficulty in accurately valuing or disposing of such
securities;
o subordination to other debt of the issuer; and
o junk bonds are generally unsecured.
Convertible securities and other income securities need not meet a minimum
rating standard in order to be acceptable for investment by the Fund. See
"Appendix A -- Description of Corporate Bond Ratings."
In addition, securities ratings are relative and subjective and
are not absolute standards of quality. They are based largely on an
issuer's historical financial condition and the rating agency's analysis at
the time of the rating. Consequently, the rating assigned to any particular
security is not necessarily a reflection of the issuer's current financial
condition.
Dilution Risk for Convertible Securities
----------------------------------------
In the absence of adequate anti-dilution provisions in a
convertible security, dilution in the value of the Fund's holding may occur
in the event the underlying stock is subdivided, additional equity
securities are issued for below market value, a stock dividend is declared,
or the issuer enters into another type of corporate transaction that has a
similar effect.
Call Provision Risk
-------------------
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. As a general matter, call provisions
contained in convertible securities may limit the Fund's ability to
participate in upside equity gains associated with the underlying common
stock in excess of the call price. In addition, 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 without superior call
protection may limit the Fund's ability to maintain a high yield in a
falling interest rate environment.
Illiquid Securities
-------------------
The Fund has no limit on the amount of its net assets it may
invest in unregistered and otherwise illiquid investments. Unregistered
securities are securities that cannot be sold publicly in the United States
without registration under the Securities Act. Unregistered securities
generally can be resold only in privately negotiated transactions with a
limited number of purchasers or in a public offering registered under the
Securities Act. Considerable delay could be encountered in either event
and, unless otherwise contractually provided for, the Fund's proceeds upon
sale may be reduced by the costs of registration or underwriting discounts.
The difficulties and delays associated with such transactions could result
in the Fund's inability to realize a favorable price upon disposition of
unregistered securities, and at times might make disposition of such
securities impossible.
Unregistered convertible securities or the securities obtained
upon conversion normally may be resold publicly under certain volume and
other restrictions beginning two years following the acquisition of the
unregistered convertible securities and without any restrictions beginning
three years after the acquisition of the unregistered convertible
securities. Unregistered securities that are 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.
Interest Rate Risk for Fixed Income Securities
----------------------------------------------
The primary risk associated with fixed income securities is
interest rate risk. A decrease in interest rates will generally result in
an increase in the value of a fixed income security, while increases in
interest rates will generally result in a decline in its value. This effect
is generally more pronounced for fixed rate securities than for securities
whose income rate is periodically reset.
Further, while longer term fixed rate securities may pay higher
interest rates than shorter term securities, longer term fixed rate
securities also tend to be more sensitive to interest rate changes and,
accordingly, tend to experience larger changes in value as a result of
interest rate changes.
Distribution Risk for Equity Income Securities
----------------------------------------------
In selecting equity income securities in which the Fund will
invest, the Investment Adviser will consider the issuer's history of making
regular periodic distributions (i.e., dividends) to its equity holders. An
issuer's history of paying dividends, however, does not guarantee that the
issuer will continue to pay dividends in the future. The dividend income
stream associated with equity income securities generally is not guaranteed
and will be subordinate to payment obligations of the issuer on its debt
and other liabilities. Accordingly, in the event the issuer does not
realize sufficient income in a particular period both to service its
liabilities and to pay dividends on its equity securities, it may forgo
paying dividends on its equity securities. In addition, because in most
instances issuers are not obligated to make periodic distributions to the
holders of their equity securities, such distributions or dividends
generally may be discontinued at the issuer's discretion.
Equity Risk
-----------
The principal risk of investing in equity securities is equity
risk. Equity risk is the risk that the price of an equity security will
fall due to general market and economic conditions, perceptions regarding
the industry in which the issuer participates or the issuing company's
particular circumstances. Common stock in which the Fund will invest or
receive upon conversion of convertible securities is subject to such equity
risk. In the case of convertible securities, it is the conversion value of
a convertible security that is subject to the equity risk; that is, if the
appreciation potential of a convertible security is not realized, the
premium paid for its conversion value may not be recovered. See "Investment
Objectives and Policies -- Convertible Securities."
Ratings Risk
------------
The rating received by the Fund on its outstanding preferred
stock, or on any other senior security that it may issue, is an assessment
by the applicable rating agency of the capacity of the Fund to satisfy its
obligations on its outstanding senior securities. However, an AAA rating on
the Fund's outstanding preferred stock does not eliminate or mitigate the
risks associated with investing in the Fund's common stock. In addition,
should the rating on the Fund's preferred stock be lowered or withdrawn by
the relevant rating agency, there may be an adverse effect on the market
value of the Fund's preferred stock and the Fund may also be required to
redeem all or part of its outstanding preferred stock. If the Fund were
required to redeem its outstanding preferred stock (in whole or part) as a
result of the change in or withdrawal of the rating, the common stock of
the Fund will lose the benefits associated with a leveraged capital
structure.
Portfolio Turnover Risk
-----------------------
The Fund may buy and sell securities on a frequent basis resulting
in a portfolio turnover rate that is higher than that of other investment
companies. In such a case the Fund may incur incremental portfolio turnover
expenses (such as brokerage commissions or dealer mark-ups and other
transaction costs on the sale of securities and reinvestment in other
securities) that negatively impact the Fund's return on its investments. In
addition, portfolio turnover may result in taxable gains being passed to
stockholders.
Market Value and Net Asset Value
The Fund is a diversified, closed-end management investment
company. Closed- end funds are bought and sold in the securities markets
and may trade at either a premium or discount from net asset value. Shares
of closed-end investment companies frequently trade at a discount from net
asset value. This characteristic of stock of a closed-end fund is a risk
separate and distinct from the risk that the Fund's net asset value will
decrease. The Fund cannot predict whether its stock will trade at, below or
above net asset value. Stockholders desiring liquidity may, subject to
applicable securities laws, trade their stock in the Fund on the New York
Stock Exchange or other markets on which such stock may trade at the then
current market value, which may differ from the then current net asset
value. Stockholders will incur brokerage or other transaction costs to sell
stock.
Foreign Securities
Investments in the securities of foreign issuers involve certain
considerations and risks not ordinarily associated with investments in
securities of domestic issuers. Foreign companies are not generally subject
to 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 that could affect assets of the Fund held in
foreign countries.
There may be less publicly available information about a foreign
company than a U.S. company. Foreign securities markets may have
substantially less volume than U.S. securities markets and some foreign
company securities are less liquid than securities of otherwise comparable
U.S. companies. A portfolio of foreign securities may also be adversely
affected by fluctuations in the rates of exchange between the currencies of
different nations and by exchange control regulations. Foreign markets also
have different clearance and settlement procedures that could cause the
Fund to encounter difficulties in purchasing and selling securities on such
markets and may result in the Fund missing attractive investment
opportunities or experiencing loss. In addition, a portfolio that includes
foreign securities can expect to have a higher expense ratio because of the
increased transaction costs on non-U.S. securities markets and the
increased costs of maintaining the custody of foreign securities. The Fund
may invest up to 25% of its total assets in securities of foreign issuers.
The Fund may purchase sponsored American Depository Receipts
("ADRs") or U.S. denominated securities of foreign issuers, which will not
be included in the Fund's 25% 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.
Special Risks of Derivative Transactions
Participation in the options or futures markets and in currency
exchange transactions involves investment risks and transaction costs to
which the Fund would not be subject absent the use of these strategies. If
the Investment Adviser's prediction of movements in the direction of the
securities, foreign currency and interest rate markets is inaccurate, the
consequences to the Fund may leave the Fund in a worse position than if it
had not used such strategies. Risks inherent in the use of options, foreign
currency, futures contracts and options on futures contracts, securities
indices and foreign currencies include:
o dependence on the Investment Adviser's ability to predict
correctly movements in the direction of interest rates,
securities prices and currency markets;
o imperfect correlation between the price of options and
futures contracts and options thereon and movements in
the prices of the securities or currencies being hedged;
o the fact that skills needed to use these strategies are
different from those needed to select portfolio
securities;
o the possible absence of a liquid secondary market for any
particular instrument at any time;
o the possible need to defer closing out certain hedged
positions to avoid adverse tax consequences;
o the possible inability of the Fund to purchase or sell a
security at a time that otherwise would be favorable for
it to do so, or the possible need for the Fund to sell a
security at a disadvantageous time due to a need for the
Fund to maintain "cover" or to segregate securities in
connection with the hedging techniques; and
o the creditworthiness of counterparties.
For a further description, see "Risk Factors and Special Considerations--
Futures Transactions" and "Risk Factors and Special Considerations--
Forward Currency Exchange Contracts."
Futures Transactions
Futures and options on futures entail certain risks, including but
not limited to the following:
o no assurance that futures contracts or options on futures
can be offset at favorable prices;
o possible reduction of the yield of the Fund due to the
use of hedging;
o possible reduction in value of both the securities hedged
and the hedging instrument;
o possible lack of liquidity due to daily limits on price
fluctuation;
o imperfect correlation between the contracts and the
securities being hedged; and
o losses from investing in futures transactions that are
potentially unlimited and the segregation requirements
for such transactions.
For a further description, see "Investment Objectives and Policies
-- Investment Practices" in the SAI.
Forward Currency Exchange Contracts
The use of forward currency contracts may involve certain risks,
including the failure of the counter party to perform its obligations under
the contract and that the use of forward contracts may not serve as a
complete hedge because of an imperfect correlation between movements in the
prices of the contracts and the prices of the currencies hedged or used for
cover. For a further description of such investments, see "Investment
Objectives and Policies -- Investment Practices" in the SAI.
Risks to Common Stockholders of Leveraging and Issuance of Senior Securities
Leverage entails two primary risks. The first risk is that the use
of leverage magnifies the impact on the common stockholders of changes in
net asset value. For example, a fund that uses 33% leverage (that is, $50
of leverage per $100 of common equity) will show a 1.5% increase or decline
in net asset value for each 1% increase or decline in the value of its
total assets. The second risk is that the cost of leverage will exceed the
return on the securities acquired with the proceeds of leverage, thereby
diminishing rather than enhancing the return to common stockholders. If the
Fund were to reduce its use of leverage, these two risks would dissipate
and would generally make the Fund's total return to common stockholders
less volatile. In addition, the Fund might be required to sell investments
in order to meet dividend or interest payments on the debt or preferred
stock when it may be disadvantageous to do so.
As provided in the 1940 Act and subject to certain exceptions, the
Fund may issue additional preferred stock or debt so long as the Fund's
total assets immediately after such issuance, less certain ordinary course
liabilities, exceed 300% of the amount of the debt outstanding and exceed
200% of the sum of the amount of the preferred stock and debt outstanding.
Such debt or preferred stock may be convertible in accordance with SEC
guidelines, which may permit the registrant to obtain leverage at
attractive rates.
A leveraged capital structure creates certain special risks and
potential benefits not associated with unleveraged funds having similar
investment objectives and policies. Any investment income or gains from the
capital represented by preferred stock or debt that is in excess of the
dividends payable thereon will cause the total return of the common stock
to be higher than would otherwise be the case. Conversely, if the
investment performance of the capital represented by preferred stock or
debt fails to cover the dividends payable thereon, the total return of the
common stock would be less or, in the case of negative returns, would
result in higher negative returns to a greater extent than would otherwise
be the case. The requirement under the 1940 Act to pay in full dividends on
preferred stock or interest on debt before any dividends may be paid on the
common stock means that dividends on the common stock from earnings may be
reduced or eliminated. Although an inability to pay dividends on the common
stock could conceivably result in the Fund ceasing to qualify as a
regulated investment company under the Code, which would be materially
adverse to the holders of the common stock, such inability can be avoided
through the use of mandatory redemption requirements designed to ensure
that the Fund maintains the necessary asset coverage.
The class voting rights of the preferred stock could make it more
difficult for the Fund to take certain actions that may, in the future, be
proposed by the Board and/or the holders of common stock, such as (i) a
merger, exchange of securities, liquidation or alteration of the rights of
a class of the Fund's securities if such actions would be adverse to the
preferred stock, or (ii) changing to an open-end investment company or
acting inconsistently with its fundamental investment restrictions or other
fundamental policies or (iii) seeking to operate other than as an
investment company.
The issuance of preferred stock convertible into common stock
might also reduce the net income and net asset value per share of the
common stock upon conversion. Such income dilution would occur if the Fund
could not, from the investments made with the proceeds of the preferred
stock, earn an amount per share of common stock issuable upon conversion
greater than the dividend required to be paid on the amount of preferred
stock convertible into one share of common stock. Such net asset value
dilution would occur if preferred stock were converted at a time when the
net asset value per share of common stock was greater than the conversion
price.
The Fund currently has preferred stock outstanding and may issue
additional preferred stock or preferred stock convertible into common stock
in the future in the event the Board concludes that the issuance of
additional preferred stock would be likely to enable the Fund to earn an
incremental return for the common stockholders. See "Capitalization --
Preferred Stock."
Dependence on Key Personnel
The Investment Adviser is dependent upon the expertise of Mr. Mario
J. Gabelli in providing advisory services with respect to the Fund's
investments. If the Investment Adviser were to lose the services of Mr.
Gabelli, its ability to service the Fund could be adversely affected. There
can be no assurance that a suitable replacement could be found for Mr. Gabelli
in the event of his death, resignation, retirement or inability to act on
behalf of the Investment Adviser.
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 decides upon matters of general policy and reviews the
actions of the Investment Adviser and the Administrator (as defined below).
Pursuant to an Investment Advisory Contract with the Fund, the Investment
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; and 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 Investment Adviser, the Fund pays the Investment Adviser a fee,
computed daily and payable monthly, equal, on an annual basis, to 1.00% of
the Fund's average weekly net assets. However, the Investment 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 its
outstanding preferred stock for any calendar year in which the net asset
value total return of the Fund allocable to the common stock, including
distributions and the advisory fee subject to potential waiver, is less
than the stated annual dividend rate of such preferred stock, prorated
during the year such preferred stock is issued and the final year it is
outstanding. For purposes of the calculation of the fees payable to the
Investment Adviser by the Fund, average weekly net assets of the Fund are
determined at the end of each month on the basis of its average net assets
for each week during the month. The assets for each weekly period are
determined by averaging the net assets at the end of a week with the net
assets at the end of the prior week.
The Investment Adviser, together with other affiliated investment
advisers, has assets under management totaling over $20.2 billion as of
September 30, 2002. The Investment Adviser was organized in 1999 and is the
successor to the investment advisory division of Gabelli Funds, Inc., which
was organized in 1980. As of September 30, 2002, the Investment Adviser and
its affiliate, Gabelli Advisers, Inc., acted as primary investment adviser
to 20 management investment companies with aggregate net assets of $8.8
billion. GAMCO Investors, Inc., an affiliate of the Investment Adviser,
acts as investment adviser for individuals, pension trusts, profit sharing
trusts and endowments, and as investment sub- adviser to management
investment companies having aggregate assets of $9.3 billion under
management as of September 30, 2002. Gabelli Fixed Income LLC, an affiliate
of the Investment Adviser, acts as investment adviser for the Treasurer's
Fund and separate accounts having aggregate assets of $1.5 billion under
management as of September 30, 2002.
The Investment Adviser is a wholly-owned subsidiary of Gabelli
Asset Management Inc., a New York corporation, whose Class A Common Stock
is traded on the New York Stock Exchange under the symbol "GBL." Mr. Mario
J. Gabelli may be deemed a "controlling person" of the Investment Adviser
on the basis of his ownership of a majority of the stock of the Gabelli
Group Capital Partners, Inc., which owns a majority of the capital stock of
Gabelli Asset Management Inc.
The Investment Adviser is obligated to pay expenses associated
with providing the services contemplated by the Investment Advisory
Agreement between the Fund and the Investment Adviser (the "Advisory
Agreement") including compensation of and office space for its officers and
employees connected with investment and economic research, trading and
investment management and administration of the Fund, as well as the fees
of all directors of the Fund who are affiliated with the Investment
Adviser. The Fund pays all other expenses incurred in its operation
including, among other things, expenses for legal and independent
accountants' services, costs of printing proxies, stock certificates and
stockholder reports, expenses of personnel performing stockholder servicing
functions, charges of the custodian, any subcustodian and transfer and
dividend paying agent, expenses in connection with its respective Automatic
Dividend Reinvestment and Voluntary Cash Purchase Plan, SEC fees, fees and
expenses of unaffiliated directors, accounting and pricing costs,
membership fees in trade associations, fidelity bond coverage for its
officers and employees, directors' and officers' errors and omission
insurance coverage, interest, brokerage costs, taxes, stock exchange
listing fees and expenses, expenses of qualifying its stock for sale in
various states, 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 Investment Adviser may (i) direct
Fund portfolio brokerage to Gabelli & Company, Inc. or other broker-dealer
affiliates of the Investment Adviser and (ii) pay commissions to brokers
other than Gabelli & Company, Inc. that are higher than might be charged by
another qualified broker to obtain brokerage and/or research services
considered by the Investment Adviser to be useful or desirable for its
investment management of the Fund and/or its other 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 is responsible for the day-to-day management of
the Fund. Mr. Gabelli has served as Chairman, President and Chief
Investment Officer of the Investment Adviser since 1980. Mr. Gabelli also
serves as Portfolio Manager for several other funds in the Gabelli fund
family. Because of the diverse nature of Mr. Gabelli's responsibilities, he
will devote less than all of his time to the day-to-day management at the
Fund. Over the past five years, Mr. Gabelli has served as Chairman of the
Board and Chief Executive Officer of Gabelli Asset Management Inc.; Chief
Investment Officer of GAMCO Investors, Inc.; Chairman of the Board and
Chief Executive Officer of Lynch Corporation, a diversified manufacturing
company, and Lynch Interactive Corporation, a multimedia and communications
services company; and Director of Spinnaker Industries, Inc., a
manufacturing company.
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. Neither director has an
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 either director in United
States courts judgments predicated upon civil liability provisions of
United States securities laws. It may also not be possible to enforce
against either director 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 Investment Adviser has entered into sub-administration
agreement with PFPC Inc. (the "Sub-Administrator") pursuant to which the
Sub-Administrator provides certain administrative services necessary for
the Fund's operations which do not include the investment advisory and
portfolio management services provided by the Investment Adviser. For these
services and the related expenses borne by the Sub-Administrator, the
Investment Adviser pays a prorated monthly fee at the annual rate of .0275%
of the first $10.0 billion of the aggregate average net assets of the Fund
and all other funds advised by the Investment Adviser and administered by
the Sub-Administrator, .0125% of the aggregate average net assets exceeding
$10 billion and .01% of the aggregate average net assets in excess of $15
billion. The Sub-Administrator has its principal office at 3200 Horizon
Drive, King of Prussia, Pennsylvania 19406.
Portfolio Transactions
Principal transactions are not entered into with affiliates of the
Fund. However, Gabelli & Company may execute transactions in the
over-the-counter markets on an agency basis and receive a stated commission
therefrom. For a more detailed discussion of the Fund's brokerage
allocation practice, see the SAI under "Portfolio Transactions."
DIVIDENDS AND DISTRIBUTIONS
The Fund's Distribution Policy
The Fund may retain for reinvestment and pay federal income taxes
on its net capital gain, if any, although the Fund reserves the authority
to distribute its net capital gain in any year. The Board of Directors has
adopted a policy of distributing 8% per share of its average net asset
value per year. To implement this policy, the Fund makes quarterly
distributions of $0.20 per share at the end of each of the first three
calendar quarters of each year to holders of its common stock. The Fund's
distribution in December for each calendar year is an adjusting
distribution (equal to the sum of 2.0% of the net asset value of the Fund
as of the last day of the four preceding calendar quarters less the
aggregate distributions of $0.60 per share made for the most recent three
calendar quarters) in order to meet the Fund's 8% pay-out goal. If, for any
calendar year, the total distributions 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 stockholder's tax basis in his stock. The
amount treated as a tax-free return of capital will reduce a stockholder's
tax basis in his stock, thereby increasing his potential gain or reducing
his potential loss on the sale of his stock. Any amounts distributed to a
stockholder in excess of the basis in the stock will be taxable to the
stockholder as capital gain. See "Taxation" below.
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.
The Fund, along with other registered investment companies advised
by the Investment Adviser (the "Other Funds"), has obtained an exemption
from Section 19(b) of the 1940 Act and Rule 19b-1 thereunder permitting the
Fund to make periodic distributions of long-term capital gains provided
that the Fund maintains distribution policies with respect to the common
stock calling for periodic (e.g., quarterly or semi-annually, but in no
event more frequently than monthly) distributions in an amount equal to a
fixed percentage of the Fund's average net asset value over a specified
period of time or market price per share of common stock at or about the
time of distribution or pay-out of a fixed dollar amount. If the total
distributions required by the Fund's periodic pay-out policy exceed the
Fund's net investment income and net capital gains, the excess will be
treated as a return of capital. If the Fund's net investment income, net
short-term capital gains and net long-term capital gains for any year
exceed the amount required to be distributed under the periodic pay-out
policy, the Fund generally intends to pay such excess once a year, but may,
in its discretion, retain and not distribute net long-term capital gains to
the extent of such excess. The Fund reserves the right, but does not
currently intend, to retain for reinvestment and pay U.S. federal income
taxes on the excess of its net realized long-term capital gains over its
net short-term capital losses, if any.
TAXATION
Taxation of the Fund
The Fund has qualified and elected to be taxed as a regulated
investment company under Subchapter M of the Internal Revenue Code of 1986,
as amended (the "Code"). Accordingly, the Fund must, among other things,
(i) derive in each taxable year at least 90% of its gross income (including
tax-exempt interest) from dividends, interest, payments with respect to
certain securities loans, and gains from the sale or other disposition of
stock, securities or foreign currencies, or other income (including but not
limited to gain from options, futures and forward contracts) derived with
respect to its business of investing in such stock, securities or
currencies; and (ii) diversify its holdings so that, at the end of each
fiscal quarter (a) at least 50% of the market value of the Fund's total
assets is represented by cash and cash items, U.S. government securities,
the securities of other regulated investment companies and other
securities, with such other securities limited, in respect of any one
issuer, to an amount not greater than 5% of the value of the Fund's total
assets and not more than 10% of the outstanding voting securities of such
issuer, and (b) not more than 25% of the market value of the Fund's total
assets is invested in the securities of any issuer (other than U.S.
government securities and the securities of other regulated investment
companies) or of any two or more issuers that the Fund controls and that
are determined to be engaged in the same business or similar or related
trades or businesses.
As a regulated investment company, the Fund generally is not
subject to U.S. federal income tax on income and gains that it distributes
each taxable year to stockholders, if at least 90% of the sum of the Fund's
(i) investment company taxable income (which includes, among other items,
dividends, interest and the excess of any net short-term capital gains over
net long-term capital losses and other taxable income other than any net
capital gain (as defined below) reduced by deductible expenses) determined
without regard to the deduction for dividends paid and (ii) its net tax
exempt interest (the excess of its gross tax exempt interest over certain
disallowed deductions). The Fund intends to distribute at least annually
substantially all of such income.
Amounts not distributed on a timely basis in accordance with a
calendar year distribution requirement are subject to a nondeductible 4%
excise tax at the Fund level. To avoid the tax, the Fund must distribute
during each calendar year an amount equal to the sum of (i) at least 98% of
its ordinary income (not taking into account any capital gains or losses)
for the calendar year, (ii) at least 98% of its capital gains in excess of
its capital losses (adjusted for certain ordinary losses) for a one-year
period generally ending on October 31 of the calendar year (unless, an
election is made by a fund with a November or December year-end to use the
fund's fiscal year), and (iii) certain undistributed amounts from previous
years on which the fund paid no U.S. federal income tax. While the Fund
intends to distribute any income and capital gains in the manner necessary
to minimize imposition of the 4% excise tax, there can be no assurance that
sufficient amounts of the Fund's taxable income and capital gains will be
distributed to avoid entirely the imposition of the tax. In that event, the
Fund will be liable for the tax only on the amount by which it does not
meet the foregoing distribution requirement.
If for any taxable year the Fund does not qualify as a regulated
investment company, all of its taxable income (including its net capital
gains) will be subject to tax at regular corporate rates without any
deduction for distributions to stockholders, and such distributions will be
taxable to the stockholders as ordinary dividends to the extent of the
Fund's current and accumulated earnings and profits.
Taxation of the Stockholders
Distributions paid to you by the Fund from its ordinary income or
from an excess of net short-term capital gains over net long-term capital
losses (together referred to hereinafter as "ordinary income dividends")
are taxable to you as ordinary income to the extent of the Fund's earning
and profits. Distributions made to you from an excess of net long-term
capital gains over net short-term capital losses ("capital gain
dividends"), including capital gain dividends credited to you but retained
by the Fund, are taxable to you as long-term capital gains, regardless of
the length of time you have owned Fund stock. Distributions in excess of
the Fund's earnings and profits will first reduce the adjusted tax basis of
your stock and, after such adjusted tax basis is reduced to zero, will
constitute capital gains to you (assuming the stock is held as a capital
asset). Generally, not later than 60 days after the close of its taxable
year, the Fund will provide you with a written notice designating the
amount of any ordinary income dividends or capital gain dividends and other
distributions.
The sale or other disposition of common stock of the Fund will
generally result in capital gain or loss to you, and will be long-term
capital gain or loss if the stock has been held for more than one year at
the time of sale. Any loss upon the sale or exchange of Fund stock held for
six months or less will be treated as long-term capital loss to the extent
of any capital gain dividends received (including amounts credited as an
undistributed capital gain dividend) by you. A loss realized on a sale or
exchange of stock of the Fund will be disallowed if other Fund stock is
acquired (whether through the automatic reinvestment of dividends or
otherwise) within a 61-day period beginning 30 days before and ending 30
days after the date that the stock is disposed of. In such case, the basis
of the stock acquired will be adjusted to reflect the disallowed loss.
Present law taxes both long-term and short-term capital gains of
corporations at the rates applicable to ordinary income. For non-corporate
taxpayers, however, short-term capital gains and ordinary income will
currently be taxed at a maximum rate of 38.6% while long-term capital gains
generally will be taxed at a maximum rate of 20% and 10% for taxpayers in
the 15% bracket. The 20% capital gains rate and the 10% capital rate will
be reduced to 18% and 8% respectively, for capital assets held for more
than five years if the holding period begins after December 31, 2000.1
Dividends and other taxable distributions are taxable to you even
though they are reinvested in additional stock of the Fund. If the Fund
pays you a dividend in January that was declared in the previous October,
November or December to stockholders of record on a specified date in one
of such months, then such dividend will be treated for tax purposes as
being paid by the Fund and received by you on December 31 of the year in
which the dividend was declared.
The Fund is required in certain circumstances to backup
withholding on taxable dividends and certain other payments paid to
non-corporate holders of the Fund's stock who do not furnish the Fund with
their correct taxpayer identification number (in the case of individuals,
their social security number) and certain certifications, or who are
otherwise subject to backup withholding. Backup withholding is not an
additional tax. Any amounts withheld from payments made to you may be
refunded or credited against your U.S. federal income tax liability, if
any, provided that the required information is furnished to the Internal
Revenue Service.
The foregoing is a general and abbreviated summary of the
provisions of the Code and the Treasury regulations in effect as they
directly govern the taxation of the Fund and its stockholders. These
provisions are subject to change by legislative or administrative action,
and any such change may be retroactive. A more complete discussion of the
tax rules applicable to the Fund and its stockholders can be found in the
Statement of Additional Information that is incorporated by reference into
this prospectus. Stockholders are urged to consult their tax advisers
regarding specific questions as to U.S. federal, foreign, state, local
income or other taxes.
-------------------
1 The Economic Growth and Tax Relief Reconciliation Act of 2001,
effective for taxable years beginning after December 31, 2000,
creates a new 10 percent income tax bracket and reduces the tax
rates applicable to ordinary income over a six year phase-in
period. Beginning in the taxable year 2006, ordinary income will
be subject to a 35% maximum rate, with approximately proportionate
reductions in the other ordinary rates.
CAPITALIZATION
The Fund is authorized to issue one billion (1,000,000,000) shares
of capital stock, par value $.001 per share, in multiple classes and series
thereof as determined from time to time by the Board of Directors of the
Fund. The Board has authorized issuance of one hundred million
(100,000,000) shares of the common stock class and two million (2,000,000)
shares of the preferred stock class. Each share within a particular class
or series thereof has equal voting, dividend, distribution and liquidation
rights. There are no conversion or preemptive rights in connection with any
outstanding stock of the Fund. All stock, when issued in accordance with
the terms of the Offering, will be fully paid and non- assessable.
The following table shows the number of shares of (i) capital
stock authorized, (ii) capital stock unissued and (iii) capital stock
outstanding for each class of authorized securities of the Fund as of
September 30, 2002.
Amount Amount Amount
Title of Class Authorized Classified Outstanding
Common Stock.............. 1,000,000,000(1) 998,000,000 8,291,884
--------------------- ------------------- ------------------
Preferred Stock........... 1,000,000,000(1) 2,000,000 1,200,000
--------------------- ------------------- ------------------
(1) The total number of shares of capital stock of all
classes authorized. The Board of Directors is authorized
to classify or reclassify these one billion shares.
Common Stock
The common stock of the Fund is listed on the New York Stock
Exchange under the symbol GCV and began trading March 31, 1995. The average
weekly trading volume of the common stock on the NYSE for the 12 months
ended September 30, 2002 was 41,642 shares. The common stock is not
redeemable and has no preemptive, conversion or cumulative voting rights.
The following table sets forth for the quarters indicated the high and low
closing prices on the NYSE per share of the Fund's common stock and the net
asset value and the premium or discount from net asset value at which the
common stock was trading, expressed as a percentage of net asset value, at
each of the high and low closing prices provided.
PREMIUM OR DISCOUNT
MARKET PRICE(1) NET ASSET VALUE(2) AS % OF NAV
-------------------------- ---------------------------- ------------------------------
QUARTER ENDED HIGH LOW HIGH LOW HIGH LOW
------------- ---- --- ---- --- ---- ---
September 30, 2002 11.30 9.40 8.44 8.59 33.89 9.43
June 30, 2002 11.63 10.45 9.81 9.12 18.55 14.58
March 31, 2002 11.19 10.66 9.84 9.83 13.72 8.44
December 31, 2001 11.25 10.45 10.08 9.82 11.61 6.42
September 30, 2001 11.25 10.50 9.96 10.36 12.95 1.35
June 30, 2001 10.95 10.09 10.72 10.34 2.15 -2.42
March 31, 2001 11.00 9.375 10.37 9.99 6.08 -6.16
December 31, 2000 10.0625 8.75 10.94 9.95 - 8.02 -12.06
September 30, 2000 10.4375 9.375 11.15 10.88 - 6.39 -13.83
June 30, 2000 10.00 9.0625 11.34 11.07 -11.82 -18.13
March 31, 2000 10.8125 9.00 11.20 11.09 - 3.46 -18.85
------------------------------------
(1) As reported on the NYSE
As of September 30, 2002, the Fund's common stock was trading at a
premium of 28.96% over net asset value.
Preferred Stock
The Fund's Board of Directors has authority to cause the Fund to
issue and sell up to 2,000,000 shares of preferred stock, par value $.001 per
share. The terms of preferred stock issued by the Fund has and will be fixed
by the Board of Directors and materially limit and/or qualify the rights of
the holders of the Fund's common stock. As of September 30, 2002, the Fund has
outstanding 1,200,000 shares of 8% Cumulative Preferred Stock (the "8%
Stock"), which are senior securities of the Fund. Dividends on the 8% Stock
accrue at an annual rate of 8% of the liquidation preference of $25 per share.
Preferred stock dividends are cumulative from the date of original issuance
and are payable quarterly on March 26, June 26, September 26 and December 26
in each year. All of the Fund's outstanding 8% Stock is redeemable by the Fund
at its discretion for a redemption price of $25 per share plus accumulated but
unpaid dividends.
On October 7, 2002, the Fund announced that it was calling 50% of its
outstanding 8% Stock. The called shares will be redeemed by the Fund on
November 12. Following the redemption, the Fund will have 600,000 shares of 8%
Stock outstanding.
It was a condition to the issuance of the 8% Stock that it be
rated AAA by S&P. In connection with the receipt of an AAA rating the Fund
is required to maintain a minimum discounted asset coverage with respect to
its 8% Stock. See "S&P Discount Factors" in the SAI.
The 8% Stock is subject to mandatory redemption in whole or in
part by the Fund for cash at a redemption price equal to $25 per share plus
accumulated but unpaid dividends (whether or not earned or declared) if the
Fund fails to maintain either of the minimum asset coverages required by
S&P and the 1940 Act.
All shares of the 8% Stock are fully paid and nonassessable.
Effects of Leverage
The only obligation that the Fund has to the holders of the 8%
Stock is to pay the stated dividend rate (8% per annum). Any return earned
in excess of the stated dividend rate would directly benefit common
stockholders; however, any shortfall from the stated rate would negatively
affect the Fund's common stockholders. The following table is designed to
assist you in understanding the effects of the existing leverage on your
shares of the Fund's common stock. The assumed returns appearing in the
table are hypothetical and actual returns may be greater or less than those
appearing in the table.
Assumed return on
portfolio (net of expenses)..... -10.00% -5.00% 0.00% 5.00% 10.00%
Corresponding return
to common stockholder.......... -18.02% -10.79% -3.56% 3.66% 10.89%
The following factors associated with leveraging could increase
the investment risk and volatility of the price of the Fund's common stock:
o leveraging exaggerates any increase or decrease in the
value of the Fund's common stock;
o the dividend requirements on preferred stock may exceed
the income from the portfolio securities purchased with
the proceeds from the issuance of preferred stock;
o a decline in net asset value results if the investment
performance of the additional securities purchased fails
to cover their cost to the Fund (including any dividend
requirements of preferred stock);
o a decline in net asset value could affect the ability of
the Fund to make common stock dividend payments;
o a failure to pay dividends or make distributions on its
common stock could result in the Fund's ceasing to
qualify as a regulated investment company under the Code;
and
o if the asset coverage for preferred stock or debt
securities declines to less than two hundred percent or
three hundred percent, respectively (as a result of
market fluctuations or otherwise), the Fund may be
required to sell a portion of its investments when it may
be disadvantageous to do so.
Pursuant to Section 18 of the 1940 Act, it is unlawful for the
Fund, as a registered closed-end investment company, to issue any class of
senior security, or to sell any senior security that it issues, unless it
can satisfy certain "asset coverage." The asset coverage with respect to a
senior security representing indebtedness means the ratio of the value of
the Fund's total assets (less all liabilities and indebtedness not
represented by senior securities) to the aggregate amount of the Fund's
senior securities representing indebtedness. The asset coverage with
respect to a senior security representing stock means the ratio of the
value of the Fund's total assets (less all liabilities and indebtedness not
represented by senior securities) to the aggregate amount of the Fund's
senior securities representing indebtedness plus the aggregate liquidation
preference of the Fund's outstanding preferred stock.
If, as is the case with the Fund, a registered investment
company's senior securities are stock, such stock must have an asset
coverage of at least 200% immediately following its issuance. If a
registered investment company's senior securities represent indebtedness,
such indebtedness must have an asset coverage of at least 300% immediately
after their issuance. Subject to certain exceptions, during any period
following issuance that the Fund fails to satisfy these asset coverage
ratios, it will, among other things, be prohibited from declaring any
dividend or declaring any other distribution in respect of its common stock
except a dividend payable in common stock issued by the Fund. A registered
investment company may, to the extent permitted by the 1940 Act, segregate
assets or "cover" transactions in order to avoid the creation of a class of
senior security.
Voting Rights
Except as otherwise stated in this Prospectus and as otherwise
required by applicable law, holders of shares of the Fund's preferred stock
will be entitled to one vote per share on each matter submitted to a vote
of stockholders and will vote together with holders of shares of the Fund's
common stock as a single class.
In connection with the election of the Fund's directors, holders
of the Fund's 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 preferred stock voting together as a single class. In
addition, if at any time dividends on outstanding shares of the Fund's
preferred stock are unpaid in an amount equal to at least two full years of
dividends, the 1940 Act requires that the holders of the Fund's preferred
stock, voting as a separate class, will elect an additional number of
directors such that, when added to the two directors elected exclusively by
the holders of preferred stock as described above, directors elected
exclusively by the holders of the Fund's preferred stock constitute a bare
majority of the Fund's Board of Directors, so increased by such smallest
possible number. Such additional directors will be elected at a special
meeting of preferred stockholders that will be called and held as soon as
practicable.
So long as full cumulative dividends for two full years or more
have not been paid on the Fund's preferred stock, at each subsequent
meeting at which directors are to be elected, the holders of shares of
preferred stock, voting as a single class, will be entitled to elect the
smallest number of additional directors that, together with the two
directors that are elected routinely by the preferred stockholders voting
as a separate class, constitutes a bare majority of the total number of
directors of the Fund as so increased. The Fund's By-Laws currently limit
the maximum number of directors of the Fund to twenty-five. In the event
that an increase in the number of directors elected solely by the preferred
stockholders would cause the total number of directors to exceed
twenty-five, one or more directors, other than the two previously elected
by the holders of shares of the preferred stock voting as a separate class,
would resign so that the result would be that a majority of the Fund's
Board had been elected by the holders of the preferred stock, voting as a
separate class. Except as otherwise provided in the immediately preceding
sentence, the terms of office of the directors that do not resign 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
preferred stock for all past dividend periods, the additional voting rights
of the preferred stockholders as described above will cease, and the terms
of office of all of the additional directors elected by the preferred
stockholders (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 preferred stockholders have the right to elect as a separate
class in any event) will terminate automatically.
So long as shares of the Fund's 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 its
Articles of Incorporation, as amended and supplemented (including the
Articles Supplementary) (the "Charter"), whether by merger, consolidation
or otherwise, so as to materially adversely affect any of the contract
rights of the preferred stockholders expressly set forth in the Charter. 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). Unless a higher percentage is
provided for under the Charter, the affirmative vote of a majority (as
defined in the 1940 Act) of the votes entitled to be cast by holders of
outstanding shares of the Fund's preferred stock, voting as a separate
class, will be required to approve any plan of reorganization adversely
affecting such stock or any action requiring a vote of security holders
under Section 13(a) of the 1940 Act, including, among other things,
open-ending the Fund and changing the Fund's investment objective or
changing the investment restrictions described as fundamental policies
under "Investment Restrictions" in the SAI.
The class vote of holders of shares of the 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 preferred stock, voting
together as a single class, necessary to authorize the action in question.
The foregoing voting provisions, however, will not apply to shares of any
preferred stock that has been (i) redeemed or (ii) called for redemption,
and for which sufficient deposit assets have been provided to the
dividend-disbursing agent to effect such redemption at or prior to the time
when the act with respect to which such vote otherwise would be required
will occur. The holders of preferred stock will have no preemptive rights
or rights to cumulative voting.
Repurchase of Shares
The Fund is a closed-end, management investment company and, as
such, its stockholders do not, and will not, have the right to redeem their
stock. The Fund, however, may repurchase its common stock from time to time
as and when it deems such a repurchase advisable. The Fund's Board of
Directors has determined that such repurchase, up to 500,000 shares of
common stock, may be made when the Fund's common stock is trading at a
discount of 10% or more from net asset value. Pursuant to this
authorization the Fund has repurchased in the open market 305,200 shares
through June 30, 2002, none of which stock was repurchased during the nine
months ended September 30, 2002. Pursuant to the 1940 Act, the Fund may
repurchase its stock on a securities exchange (provided that the Fund has
informed its stockholders within the preceding six months of its intention
to repurchase such stock) or as otherwise permitted in accordance with Rule
23c-1 under the 1940 Act. Under Rule 23c-1, certain conditions must be met
for such alternative purchases regarding, among other things, distribution
of net income for the preceding fiscal year, identity of the sellers, price
paid, brokerage commissions, prior notice to stockholders of an intention
to purchase stock and purchasing in a manner and on a basis which does not
discriminate unfairly against the other stockholders through their interest
in the Fund. Any repurchase of common stock by the Fund will also be
subject to Maryland corporate law, which requires that immediately
following such repurchase the total assets of the Fund must be equal to or
greater than the sum of the Fund's total liabilities plus the aggregate
liquidation preference of its outstanding preferred stock.
When the Fund repurchases its common stock for a price below its
net asset value, the net asset value of the common stock that remains
outstanding will be enhanced. This does not, however, necessarily mean that
the market price of the Fund's remaining outstanding common stock will be
affected, either positively or negatively. Further, interest on any
borrowings made to finance the repurchase of common stock will reduce the
net income of the Fund.
From the commencement of the Fund's operations, the Fund's common
stock has traded in the market for extended periods at both a premium to
and a discount from net asset value.
Anti-Takeover Provisions of the Charter
and Amended and Restated By-Laws of the Fund
The Fund presently has provisions in its Charter and Amended and
Restated By- Laws (together, its "Governing Documents") that could have the
effect of limiting (i) the ability of other entities or persons to acquire
control of the Fund's Board of Directors, (ii) the Fund's freedom to engage
in certain transactions or (iii) the ability of the Fund's directors or
stockholders to amend the Governing Documents or effectuate changes in the
Fund's management. These provisions of the Governing Documents of the Fund
may be regarded as "anti-takeover" provisions. The Board of Directors of
the Fund is divided into three classes, each having a term of three years.
Each year the term of one class of directors will expire. Accordingly, only
those directors in one class may be changed in any one year, and it would
require two years to change a majority of the Board of Directors. Such
system of electing directors may have the effect of maintaining the
continuity of management and, thus, make it more difficult for the
stockholders of the Fund to change the majority of directors. See
"Management of the Fund." A director of the Fund may be removed with cause
by a vote of a majority of the votes entitled to be cast for the election
of directors of the Fund. A director of the Fund may not be removed without
cause. In addition, the affirmative vote of the holders of 75% of the
outstanding shares of the Fund is required to authorize its conversion from
a closed-end to an open-end investment company, or to amend certain
provisions of the Charter involving conversion to an open-end fund.
Further, unless a higher percentage is provided for under the
Charter, the affirmative vote of a majority (as defined in the 1940 Act) of
the votes entitled to be cast by holders of outstanding shares of the
Fund's preferred stock, voting as a separate class, will be required to
approve any plan of reorganization adversely affecting such stock or any
action requiring a vote of security holders under Section 13(a) of the 1940
Act, including, among other things, open-ending the Fund and changing the
Fund's investment objective or changing the investment restrictions
described as fundamental policies under "Investment Restrictions" in the
SAI.
Maryland corporations that are subject to the Securities Exchange
Act of 1934 and have at least three outside directors, such as the Fund,
may by board resolution elect to become subject to certain corporate
governance provisions set forth in the Maryland corporate law, even if such
provisions are inconsistent with the corporation's charter and by- laws.
Accordingly, notwithstanding its Charter or By-Laws, under Maryland law the
Fund's Board of Directors may elect by resolution to, among other things:
o require that special meetings of stockholders be called
only at the request of stockholders entitled to cast at
least a majority of the votes entitled to be cast at such
meeting;
o reserve for the Board the right to fix the number of Fund
directors;
o provide that directors are subject to removal only by the
vote of the holders of two-thirds of the stock entitled
to vote; and
o retain for the Board sole authority to fill vacancies
created by the death, removal or resignation of a
director, with any director so appointed to serve for the
balance of the unexpired term rather than only until the
next annual meeting of stockholders.
The Board may make any of the foregoing elections without amending
the Fund's Charter or By-Laws and without stockholder approval. Though a
corporation's charter or a resolution by its board may prohibit its
directors from making the elections set forth above, the Fund's Board
currently is not prohibited from making any such elections.
The provisions of the Governing Documents and Maryland law
described above could have the effect of depriving the owners of stock in
the Fund of opportunities to sell their shares at a premium over prevailing
market prices by discouraging a third party from seeking to obtain control
of the Fund in a tender offer or similar transaction. The overall effect of
these provisions is to render more difficult the accomplishment of a merger
or the assumption of control by a principal stockholder.
The Governing Documents of the Fund are on file with the SEC. For
the full text of these provisions see "Further Information."
CUSTODIAN, TRANSFER AGENT, DIVIDEND-DISBURSING
AGENT AND REGISTRAR
State Street Bank and Trust Company (the "Custodian"), located at
150 Royall Street, Canton, MA 02021, serves as the custodian of the Fund's
assets pursuant to a custody agreement. Under the custody agreement, the
Custodian holds the Fund's assets in compliance with the 1940 Act. For its
services, the Custodian will receive a monthly fee based upon the average
weekly value of the total assets of the Fund, plus certain charges for
securities transactions.
Equiserve Trust Company, N.A. located at PO Box 43025, Providence,
RI 02940- 3025, serves as the Fund's dividend disbursing agent, as agent
under the Fund's Plan and as transfer agent and registrar for stock of the
Fund.
LEGAL MATTERS
Certain legal matters will be passed on by Skadden, Arps, Slate,
Meagher & Flom LLP, New York, New York, special counsel to the Fund in
connection with the Offering.
EXPERTS
The financial statements of the Fund as of December 31, 2001 have
been incorporated by reference into the SAI in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority
of that firm as experts in accounting and auditing. PricewaterhouseCoopers
LLP is located at 1177 Avenue of the Americas, New York, New York 10036.
FURTHER INFORMATION
The Fund is subject to the informational requirements of the
Securities Exchange Act of 1934 and in accordance therewith files reports,
proxy statements and other information with the SEC. Such reports, proxy
statements and other information filed by the Fund can be inspected and
copied at public reference facilities maintained by the SEC at 450 Fifth
Street, N.W., Washington, D.C. 20549; and 500 West Madison Street, Chicago,
Illinois 60661. The Fund's common stock is listed on the NYSE. Reports,
proxy statements and other information concerning the Fund can be inspected
and copied at the Library of the NYSE at 20 Broad Street, New York, New
York 10005.
This Prospectus constitutes a part of a registration statement on
Form N-2 (together with the SAI and all the exhibits and the appendix
thereto, the "Registration Statement") filed by the Fund with the SEC under
the Securities Act and the 1940 Act. This Prospectus and the SAI do not
contain all of the information set forth in the Registration Statement.
Reference is hereby made to the Registration Statement and related exhibits
for further information with respect to the Fund and the Shares offered
hereby. Statements contained herein concerning the provisions of documents
are necessarily summaries of such documents, and each statement is
qualified in its entirety by reference to the copy of the applicable
document filed with the SEC.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this Prospectus constitute forward-looking
statements, which involve known and unknown risks, uncertainties and other
factors that may cause the actual results, levels of activity, performance
or achievements of the Fund to be materially different from any future
results, levels of activity, performance or achievements expressed or
implied by such forward-looking statements. Such factors include, among
others, those listed under "Risk Factors" and elsewhere in this Prospectus.
As a result of the foregoing and other factors, no assurance can be given
as to the future results, levels of activity or achievements, and neither
the Fund nor any other person assumes responsibility for the accuracy and
completeness of such statements. To the extent required by law, the Fund
undertakes to supplement this Prospectus to reflect any material changes to
the Fund after the date of this Prospectus.
TABLE OF CONTENTS OF SAI
PAGE
STATEMENT OF ADDITIONAL INFORMATION...............................................................B-1
INVESTMENT OBJECTIVES AND POLICIES................................................................B-2
INVESTMENT RESTRICTIONS..........................................................................B-20
MANAGEMENT OF THE FUND...........................................................................B-22
PORTFOLIO TRANSACTIONS...........................................................................B-33
REPURCHASE OF SHARES.............................................................................B-34
PORTFOLIO TURNOVER...............................................................................B-35
AUTOMATIC DIVIDEND REINVESTMENT
AND VOLUNTARY CASH PURCHASE PLAN........................................................B-35
TAXATION ........................................................................................B-37
S&P DISCOUNT FACTORS.............................................................................B-43
NET ASSET VALUE..................................................................................B-46
GENERAL INFORMATION..............................................................................B-47
BENEFICIAL OWNERS................................................................................B-48
FINANCIAL STATEMENTS.............................................................................B-49
_________________________________
_________________________________
THE GABLELLI CONVERTIBLE AND INCOME SECURITIES FUND INC.
4,145,942 SHARES
OF COMMON STOCK
ISSUABLE UPON EXERCISE OF RIGHTS
TO SUBSCRIBE TO SUCH SHARES
[GABELLI GLOBAL LOGO]
PROSPECTUS
November 8, 2002
_________________________________
_________________________________
Subject to Completion Dated November 8, 2002
THE GABELLI CONVERTIBLE
AND INCOME SECURITIES FUND INC.
___________________
STATEMENT OF ADDITIONAL INFORMATION
The Gabelli Convertible and Income Securities Fund Inc. (the
"Fund") is a diversified, closed-end management investment company
registered under the Investment Company Act of 1940, as amended (the "1940
Act"). The Fund seeks a high level of total return on its assets through a
combination of current income and capital appreciation. The Fund invests
primarily in a portfolio of convertible and income producing securities
selected by Gabelli Funds, LLC, the investment adviser to the Fund (the
"Investment Adviser"). It is the policy of the Fund, under normal market
conditions, to invest at least 80% of the value of its total assets in
"Convertible Securities," i.e., securities (bonds, debentures, corporate
notes, preferred stocks and other similar securities) that are convertible
into common stock or other equity securities, and "Income Securities,"
i.e., securities that are expected to periodically accrue or generate
income for securities holders, including short-term discounted Treasury
Bills. The Fund expects to continue its practice of investing in
Convertible Securities to the extent attractive opportunities are
available.
This Statement of Additional Information ("SAI") is not a
prospectus, but should be read in conjunction with the prospectus for the
Fund dated November 8, 2002 (the "Prospectus"). Investors should obtain
and read the Prospectus prior to selling, exercising or determining not to
exercise their Rights. A copy of the Prospectus may be obtained without
charge by calling the Fund at 1-800-GABELLI (1-800-422-3554) or (914)
921-5070. This SAI incorporates by reference the entire Prospectus.
Except as otherwise indicated, capitalized terms used but not
defined in this SAI have the meanings assigned to them in the Prospectus.
TABLE OF CONTENTS
PAGE
STATEMENT OF ADDITIONAL INFORMATION...............................................................B-1
INVESTMENT OBJECTIVES AND POLICIES................................................................B-2
INVESTMENT RESTRICTIONS..........................................................................B-20
MANAGEMENT OF THE FUND...........................................................................B-22
PORTFOLIO TRANSACTIONS...........................................................................B-33
REPURCHASE OF SHARES.............................................................................B-34
PORTFOLIO TURNOVER...............................................................................B-35
AUTOMATIC DIVIDEND REINVESTMENT
AND VOLUNTARY CASH PURCHASE PLAN........................................................B-35
TAXATION ........................................................................................B-37
S&P DISCOUNT FACTORS.............................................................................B-43
NET ASSET VALUE..................................................................................B-46
GENERAL INFORMATION..............................................................................B-47
BENEFICIAL OWNERS................................................................................B-48
FINANCIAL STATEMENTS.............................................................................B-49
The Prospectus and this SAI omit certain of the information
contained in the registration statement filed with the Securities and
Exchange Commission, Washington, D.C. The registration statement may be
obtained from the Securities and Exchange Commission upon payment of the
fee prescribed, or inspected at the Securities and Exchange Commission's
office at no charge.
This Statement of Additional Information is dated November 8, 2002.
INVESTMENT OBJECTIVES AND POLICIES
Investment Objectives
The Fund's investment objective is a high level of total return on
its assets. Under normal market conditions, the Fund will invest at least
80% of the value of its total assets in "Convertible Securities," i.e.,
securities (bonds, debentures, corporate notes, preferred stocks and other
similar securities) that are convertible into common stock or other equity
securities, and "Income Securities," i.e., securities that are expected to
periodically accrue or generate income for their holders, including
short-term discounted Treasury Bills. The Fund expects to continue its
practice of investing in Convertible Securities to the extent attractive
opportunities are available. See "Investment Objectives and Policies" in
the Prospectus.
Investment Practices
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 and 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
stockholders.
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.
Income Securities
-----------------
Although it is the Fund's policy to invest in convertible
securities to the extent attractive opportunities are available, the Fund
may also invest in income securities other than convertible securities that
are expected to periodically accrue or generate income for their holders.
Such income securities include (i) fixed income securities such as bonds,
debentures, corporate notes, preferred stock, short-term discounted
Treasury Bills or certain securities of U.S. government sponsored
instrumentalities, as well as money market mutual funds that invest in
those securities, which, in the absence of an applicable exemptive order,
will not be affiliated with the Investment Adviser, and (ii) common stocks
of issuers that have historically paid dividends. Fixed income securities
obligate the issuer to pay to the holder of the security a specified
return, which may be either fixed or reset periodically in accordance with
the terms of the security. Fixed income securities generally are senior to
an issuer's common stock and their holders generally are entitled to
receive amounts due before any distributions are made to common
stockholders. Common stocks generally do not obligate an issuer to make
periodic distributions to holders.
The market value of fixed income securities, especially those that
provide a fixed rate of return, may be expected to rise and fall inversely
with interest rates and in general is affected by the credit rating of the
issuer, the issuer's performance and perceptions of the issuer in the
market place. The market value of callable or redeemable fixed income
securities may also be affected by the issuer's call and redemption rights.
In addition, it is possible that the issuer of fixed income securities may
not be able to meet its obligations on interest or principal to holders.
Further, holders of non-convertible fixed income securities do not
participate in any capital appreciation of the issuer.
The Fund may also invest in obligations of government sponsored
instrumentalities. Unlike non-U.S. government securities, obligations of
certain agencies and instrumentalities of the U.S. government, such as the
Government National Mortgage Association, are supported by the "full faith
and credit" of the U.S. government; others, such as those of the
Export-Import Bank of the U.S., are supported by the right of the issuer to
borrow from the U.S. Treasury; others, such as those of the Federal
National Mortgage Association, are supported by the discretionary authority
of the U.S. government to purchase the agency's obligations; and still
others, such as those of the Student Loan Marketing Association, are
supported only by the credit of the instrumentality. No assurance can be
given that the U.S. government would provide financial support to U.S.
government sponsored instrumentalities if it is not obligated to do so by
law.
The Fund also may invest in common stock of issuers that have
historically paid dividends or otherwise made distributions to common
stockholders. Unlike payments on fixed income securities, common stock
dividend payments generally are not guaranteed and so may be discontinued
by the issuer at its discretion or because of the issuer's inability to
satisfy its liabilities. Further, an issuer's history of paying dividends
does not guarantee that it will continue to pay dividends in the future. In
addition to dividends, under certain circumstances the holders of common
stock may benefit from the capital appreciation of the issuer.
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 the
Investment 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 stockholders 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 Investment Adviser which must appraise not only the value of the
issuer and its component businesses as well as the assets or securities to
be received as a result of the contemplated transaction but also the
financial resources and business motivation 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, (i) 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
(ii) 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.
Unregistered Convertible Securities and Other Illiquid
Investments. As set forth in the Prospectus, the Fund is not subject to an
independent limitation on the amount it may invest in unregistered
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 Investment 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 Investment 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.
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 Services ("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: (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)
federal legislation which could affect the market for such securities; and
(vi) special adverse tax consequences associated with investments in
certain high yield, high risk bonds structured as zero coupon or
pay-in-kind securities.
High yield bonds, like other bonds, may contain redemption or call
provisions. If an issuer exercises these provisions in a declining interest
rate market, the Fund would have to replace the security with a lower
yielding security, resulting in lower return for investors. Conversely, a
high yield bond's value will decrease in a rising interest rate market.
The market for high yield bonds is in some cases more thinly
traded than the market for investment grade bonds, and recent market
quotations may not be available for some of these bonds. Market quotations
are generally available only from a limited number of dealers and may not
represent firm bids from such dealers or prices for actual sales. As a
result, the Fund may have greater difficulty valuing the high yield bonds
in its portfolio accurately and disposing of these bonds at the time or
price desired.
Ratings assigned by Moody's and S&P to high yield bonds, like
other bonds, attempt to evaluate the timeliness of principal and interest
payments on those bonds. However, such ratings do not assess the risk of a
decline in the market value of those bonds. In addition, ratings may fail
to reflect recent events in a timely manner and are subject to change. If a
rating with respect to a portfolio security is changed, the Investment
Adviser will determine whether the security will be retained based upon the
factors the Investment 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
Investment 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 instrument as the call written where the exercise price of the call
held is (i) equal to or less than the exercise price of the call written or
(ii) greater than the exercise price of the call written if the difference
is maintained by the Fund in cash, U.S. government 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 Investment 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.
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 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 US 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 US 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.
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 that
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 Investment 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 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.
The purchase of a put option on a futures contract is similar to
the purchase of protective put options on portfolio securities. The Fund
will purchase a put option on a futures contract to hedge the Fund's
portfolio against the risk of rising interest rates and consequent
reduction in the value of portfolio securities.
The writing of a call option on a futures contract constitutes a
partial hedge against declining prices of the securities which are
deliverable upon exercise of the futures contract. If the futures price at
expiration of the option is below the exercise price, the Fund will retain
the full amount of the option premium which provides a partial hedge
against any decline that may have occurred in the Fund's portfolio
holdings. The writing of a put option on a futures contract constitutes a
partial hedge against increasing prices of the securities that are
deliverable upon exercise of the futures contract. If the futures price at
expiration of the option is higher than the exercise price, the Fund will
retain the full amount of the option premium, which provides a partial
hedge against any increase in the price of debt securities that the Fund
intends to purchase. If a put or call option the Fund has written is
exercised, the Fund will incur a loss which will be reduced by the amount
of the premium it received. Depending on the degree of correlation between
changes in the value of its portfolio securities and changes in the value
of its futures positions, the Fund's losses from options on futures it has
written may to some extent be reduced or increased by changes in the value
of its portfolio securities.
Currency Futures and Options Thereon. Generally, foreign currency
futures contracts and options thereon are similar to the interest rate
futures contracts and options thereon discussed previously. By entering
into currency futures and options thereon, the Fund will seek to establish
the rate at which it will be entitled to exchange US 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 US
dollar, the Fund can attempt to "lock in" the US 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 US 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 US dollars of the securities it
intends to acquire.
The purchase of options on currency futures will allow the Fund,
for the price of the premium and related transaction costs it must pay for
the option, to decide whether or not to buy (in the case of a call option)
or to sell (in the case of a put option) a futures contract at a specified
price at any time during the period before the option expires. If the
Investment Adviser, in purchasing an option, has been correct in its
judgment concerning the direction in which the price of a foreign currency
would move as against the US dollar, the Fund may exercise the option and
thereby take a futures position to hedge against the risk it had correctly
anticipated or close out the option position at a gain that will offset, to
some extent, currency exchange losses otherwise suffered by the Fund. If
exchange rates move in a way the Fund did not anticipate, however, the Fund
will have incurred the expense of the option without obtaining the expected
benefit; any such movement in exchange rates may also thereby reduce rather
than enhance the Fund's profits on its underlying securities transactions.
Securities Index Futures Contracts and Options Thereon. Purchases
or sales of securities index futures contracts are used for hedging
purposes to attempt to protect the Fund's current or intended investments
from broad fluctuations in stock or bond prices. For example, the Fund may
sell securities index futures contracts in anticipation of or during a
market decline to attempt to offset the decrease in market value of the
Fund's securities portfolio that might otherwise result. If such decline
occurs, the loss in value of portfolio securities may be offset, in whole
or part, by gains on the futures position. When the Fund is not fully
invested in the securities market and anticipates a significant market
advance, it may purchase securities index futures contracts in order to
gain rapid market exposure that may, in part or entirely, offset increases
in the cost of securities that the Fund intends to purchase. As such
purchases are made, the corresponding positions in securities index futures
contracts will be closed out. The Fund may write put and call options on
securities index futures contracts for hedging purposes.
Limitations on the Purchase and Sale of Futures Contracts
and Options on Futures Contracts
---------------------------------------------------------
Subject to the guidelines of the Board of Directors, the Fund may
engage in transactions in futures contracts and options hereon only for
bona fide hedging, yield enhancement and risk management purposes, in each
case in accordance with the rules and regulations of the CFTC.
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
generally will be limited by the rating agency guidelines applicable to any
of the Fund's outstanding preferred stock.
Forward Currency Exchange Contracts
-----------------------------------
The Fund may engage in currency transactions other than on futures
exchanges to protect against future changes in the level of future currency
exchange rates. The Fund will conduct such currency exchange transactions
either on a spot, i.e., cash, basis at the rate then prevailing in the
currency exchange market or on a forward basis, by entering into forward
contracts to purchase or sell currency. A forward contract on foreign
currency involves an obligation to purchase or sell a specific currency at
a future date, which may be any fixed number of days agreed upon by the
parties from the date of the contract, at a price set on the date of the
contract. The risk of shifting of a forward currency contract will be
substantially the same as a futures contract having similar terms. The
Fund's dealing in forward currency exchange will be limited to hedging
involving either specific transactions or portfolio positions. Transaction
hedging is the purchase or sale of forward currency with respect to
specific receivables or payables of the Fund generally arising in
connection with the purchase or sale of its portfolio securities and
accruals of interest receivable and Fund expenses. Position hedging is the
forward sale of currency with respect to portfolio security positions
denominated or quoted in that currency or in a currency bearing a high
degree of positive correlation to the value of that currency.
The Fund may not position hedge with respect to a particular
currency for an amount greater than the aggregate market value (determined
at the time of making any sale of forward currency) of the securities held
in its portfolio denominated or quoted in, or currently convertible into,
such currency. If the Fund enters into a position hedging transaction, the
Fund's custodian or subcustodian will place cash or other liquid securities
in a segregated account of the Fund in an amount equal to the value of the
Fund's total assets committed to the consummation of the given forward
contract. If the value of the securities placed in the segregated account
declines, additional cash or securities will be placed in the account so
that the value of the account will, at all times, equal the amount of the
Fund's commitment with respect to the forward contract.
At or before the maturity of a forward sale contract, the Fund may
either sell a portfolio security and make delivery of the currency, or
retain the security and offset its contractual obligations to deliver the
currency by purchasing a second contract pursuant to which the Fund will
obtain, on the same maturity date, the same amount of the currency which it
is obligated to delivery. If the Fund retains the portfolio security and
engages in an offsetting transaction, the Fund, at the time of execution of
the offsetting transaction, will incur a gain or a loss to the extent that
movement has occurred in forward contract prices. Should forward prices
decline during the period between the Fund's entering into a forward
contract for the sale of a currency and the date it enters into an
offsetting contract for the purchase of the currency, the Fund will realize
a gain to the extent the price of the currency it has agreed to purchase is
less than the price of the currency it has agreed to sell. Should forward
prices increase, the Fund will suffer a loss to the extent the price of the
currency it has agreed to purchase exceeds the price of the currency it has
agreed to sell. Closing out forward purchase contracts involves similar
offsetting transactions.
The cost to the Fund of engaging in currency transactions varies
with factors such as the currency involved, the length of the contract
period and the market conditions then prevailing. Because forward
transactions in currency exchange are usually conducted on a principal
basis, no fees or commissions are involved. The use of foreign currency
contracts does not eliminate fluctuations in the underlying prices of the
securities, but it does establish a rate of exchange that can be achieved
in the future. In addition, although forward currency contracts limit the
risk of loss due to a decline in the value of the hedged currency, they
also limit any potential gain that might result if the value of the
currency increases.
If a decline in any currency is generally anticipated by the
Investment 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 Investment
Adviser to predict correctly movements in the direction of interest and
foreign currency rates. If the Investment Adviser's expectations are not
met, the Fund will be in a worse position than if a hedging strategy had
not been pursued. For example, if the Fund has hedged against the
possibility of an increase in interest rates that would adversely affect
the price of securities in its portfolio and the price of such securities
increases instead, the Fund will lose part or all of the benefit of the
increased value of its securities because it will have offsetting losses in
its futures positions. In addition, in such situations, if the Fund has
insufficient cash to meet daily variation margin requirements, it may have
to sell securities to meet the requirements. These sales may be, but will
not necessarily be, at increased prices which reflect the rising market.
The Fund may have to sell securities at a time when it is disadvantageous
to do so.
Additional Risks of Foreign Options, Futures Contracts,
Options on Futures Contracts and Forward Contracts
-------------------------------------------------------
Options, futures contracts and options thereon and forward
contracts on securities and currencies may be traded on foreign exchanges.
Such transactions may not be regulated as effectively as similar
transactions in the 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.
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
counter party. The Fund's risk is primarily that, if the seller defaults,
the proceeds from the disposition of the underlying securities and other
collateral for the seller's obligation are less than the repurchase price.
If the seller becomes insolvent, the Fund might be delayed in or prevented
from selling the collateral. In the event of a default or bankruptcy by a
seller, the Fund will promptly seek to liquidate the collateral. To the
extent that the proceeds from any sale of such collateral upon a default in
the obligation to repurchase are less than the repurchase price, the Fund
will experience a loss.
If the financial institution which is a party to the repurchase
agreement petitions for bankruptcy or becomes subject to the United States
Bankruptcy Code, the law regarding the rights of the Fund is unsettled. As
a result, under extreme circumstances, there may be a restriction on the
Fund's ability to sell the collateral and the Fund would suffer a loss.
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 stock is
qualified for sale. The Fund's loans of portfolio securities will be
collateralized in accordance with applicable regulatory requirements and no
loan will cause the value of all loaned securities to exceed 33% of the
value of the Fund's total assets. The Fund's ability to lend portfolio
securities will be limited by the rating agency guidelines applicable to
any of the Fund's outstanding preferred stock.
A loan may generally be terminated by the borrower on one business
day's notice, or by the Fund on five business days' notice. If the borrower
fails to deliver the loaned securities within five days after receipt of
notice, the Fund could use the collateral to replace the securities while
holding the borrower liable for any excess of replacement cost over
collateral. As with any extensions of credit, there are risks of delay in
recovery and in some cases even loss of rights in the collateral should the
borrower of the securities fail financially. However, these loans of
portfolio securities will only be made to firms deemed by the Fund's
management to be creditworthy and when the income which can be earned from
such loans justifies the attendant risks. The Board of Directors will
oversee the creditworthiness of the contracting parties on an ongoing
basis. Upon termination of the loan, the borrower is required to return the
securities to the Fund. Any gain or loss in the market price during the
loan period would inure to the Fund. The risks associated with loans of
portfolio securities are substantially similar to those associated with
repurchase agreements. Thus, if the counter party to the loan petitions for
bankruptcy or becomes subject to the United States Bankruptcy Code, the law
regarding the rights of the Fund is unsettled. As a result, under extreme
circumstances, there may be a restriction on the Fund's ability to sell the
collateral and the Fund would suffer a loss. When voting or consent rights
which accompany loaned securities pass to the borrower, the Fund will
follow the policy of calling the loaned securities, to be delivered within
one day after notice, to permit the exercise of such rights if the matters
involved would have a material effect on the Fund's investment in such
loaned securities. The Fund will pay reasonable finder's, administrative
and custodial fees in connection with a loan of its securities.
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 (i) 67% or more of the
shares present at a meeting of stockholders, if the holders of 50% of the
outstanding shares of the Fund are present or represented by proxy or (ii)
more than 50% of the outstanding shares of the Fund.
Under its investment restrictions the Fund may not:
o 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.
o 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.
o 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.
o 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.
o 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.
o 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 described in the
immediately following restriction.
o Issue senior securities except to the extent permitted by
applicable law.
o 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.
o 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.
o 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.
o Invest for the purpose of exercising control or
management of any other issuer.
o 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.
MANAGEMENT OF THE FUND
Directors and Officers
Overall responsibility for management and supervision of the Fund
rests with its Board of Directors. The Board of Directors approves all
significant agreements between the Fund and the companies that furnish the
Fund with services, including agreements with the Investment Adviser, the
Fund's custodian and the Fund's transfer agent. The day-to-day operations
of the Fund are delegated to the Investment Adviser.
The names and business addresses of the directors and principal
officers of the Fund are set forth in the following table, together with
their positions and their principal occupations during the past five years
and, in the case of the directors, their positions with certain other
organizations and companies.
Number of
Term of Funds in
Name (And Age), Office and Fund Other
Position with the Fund Length of Complex Principal Directorships
and Time Overseen Occupation During Held by
Business Address1 Served2 by Director Past Five Years Director
----------------- ------- ----------- --------------- --------
INTERESTED
----------
DIRECTORS3:
----------
Mario J. Gabelli Since 21 Chairman of the Board Director of Morgan
Director, President and 1989*** and Chief Executive Group Holdings, Inc.
Chief Investment Officer of Gabelli (transportation
Officer Asset Management services); Vice
Age: 60 Inc. and Chief Chairman of Lynch
Investment Officer of Corporation
Gabelli Funds, LLC (diversified
and GAMCO manufacturing)
Investors, Inc;
Chairman and Chief
Executive Officer of
Lynch Interactive
Corporation
(multimedia and
services)
Karl Otto Pohl+ Since 30 Member of the Director of Gabelli
Director 1992*** Shareholder Asset Management
Age: 72 Committee of Sal Inc. (investment
Oppenheim Jr. & Cie management);
(private investment Chairman, Incentive
bank); Former Capital and Incentive
President of the Asset Management
Deutsche Bundesbank (Zurich); Director at
and Chairman of its Sal Oppenheim Jr. &
Central Bank Council Cie, Zurich
(1980-1991)
NON-INTERESTED
--------------
DIRECTORS:
---------
E. Val Cerutti Since 7 Chief Executive Director of Lynch
Director 1989** Officer of Cerutti Corporation
Age: 62 Consultants, Inc.;
Former President and
Chief Operating
Officer of Stella D'oro
Biscuit Company
(through 1992);
Adviser, Iona College
School of Business
Anthony J. Colavita4 Since 1989* 32 President and Attorney ___
Director at Law in the law firm
Age: 66 of Anthony J.
Colavita, P.C.
Dugald A. Fletcher Since 2 President, Fletcher & Director of Harris
Director 1989** Company, Inc.; and Harris Group,
Age: 72 Former Director and Inc. (venture capital)
Chairman and Chief
Executive Officer of
Binnings Building
Products, Inc. (1997)
Anthony R. Pustorino Since 16 Certified Public ___
Director 1989** Accountant; Professor
Age: 76 Emeritus, Pace
University
Werner J. Roeder, Since 26 Medical Director of ___
MD4 2001*** Lawrence Hospital
Director and practicing private
Age: 61 physician
Anthonie C. van Ekris+ Since 1992* 17 Managing Director of Director of
BALMAC Spinnaker Industries,
Director International, Inc. Inc.
Age: 67
Salvatore J. Zizza Since 1991* 8 Chairman, Hallmark Board Member of
Director Electrical Supplies Hollis Eden
Age: 56 Corp.; Former Pharmaceuticals,
Executive Vice Bion Environmental
President of FMG Technologies Inc.
Group (OTC), a and The Credit Store
healthcare provider; Inc.
Former President and
Chief Executive
Officer of the Lehigh
Group Inc. (electrical
supply wholesaler); an
interior construction
company, through
1997
OFFICERS:
--------
Bruce N. Alpert Since 1989 ___ Executive Vice ___
Vice President and President and Chief
Treasurer Operating Officer of
Age: 50 Gabelli Funds, LLC
since 1988 and an
officer of all mutual
funds advised by
Gabelli Funds, LLC
and its affiliates;
Director and President
of Gabelli Advisors,
Inc.
Peter W. Latartara Since 1998 ___ Vice President of the ___
Vice President Fund since 1998.
Age: 35 Vice President of
Gabelli & Company,
Inc. from 1996
James E. McKee Since 1995 ___ Vice President, ___
Secretary General Counsel and
Age: 38 Secretary of Gabelli
Asset Management
Inc. since 1999 and
GAMCO Investors,
Inc. since 1993;
Secretary of all mutual
funds advised by
Gabelli Advisers, Inc.
and Gabelli Funds,
LLC
_______________________
+ Non-resident director with no authorized agent in the United States.
1 Address: One Corporate Center, Rye, NY 10580, unless otherwise noted.
2 The Fund's Board of Directors is divided into three classes, each
class having a term of three years. Each year the term of office of
one class expires and the successor or successors elected to such
class serve for a three year term. The three year term for each class
expires as follows:
* Term expires at the Fund's 2002 Annual Meeting of Shareholders
and until their successors are duly elected and qualified.
** Term expires at the Fund's 2003 Annual Meeting of Shareholders
and until their successors are duly elected and qualified.
*** Term expires at the Fund's 2004 Annual Meeting of Shareholders
and until their successors are duly elected and qualified.
3 "Interested person" of the Fund as defined in the Investment Company
Act of 1940. Messrs. Gabelli and Pohl are each considered an
"interested person" because of their affiliation with Gabelli Funds
LLC which acts as the Fund's investment adviser.
4 Represents holders of the Fund's 8.00% Cumulative Preferred Stock.
The Board of Directors of the Fund are divided into three classes,
with a class having a term of three years except as described below. Each
year the term of office of one class of directors of the Fund will expire.
However, to ensure that the term of a class of the Fund's directors expires
each year, one class of the Fund's directors will serve three-year terms.
The terms of Messrs. Colavita, van Ekris and Zizza as directors of the Fund
expire in 2002; the terms of Messrs. Fletcher and Pustorino as directors of
the Fund expire in 2003; and the terms of Messrs. Gabelli, Pohl, Cerutti
and Dr. Roeder as directors of the Fund expire in 2004.
Name of Director Dollar Range of Equity Aggregate Dollar Range of
Securities in the Fund Equity Securities in all
Registered Investment
Companies Overseen by
Directors in Family of
Investment Companies
INTERESTED DIRECTORS
Mario J. Gabelli E E
Karl Otto Pohl A A
DISINTERESTED DIRECTORS
E. Val Cerutti C E
Anthony J. Colavita E E
Dugald A Fletcher E E
Anthony R. Pustorino D E
Werner J, Roeder, MD A E
Anthonie C. van Ekris C E
Salvatore J. Zizza E E
------------------------------------------
* KEY TO DOLLAR RANGES
A. None
B. $1 - $10,000
C. $10,001 - $50,000
D. $50,001 - $100,000
E. Over $100,000
All stock was valued as of December 31, 2001.
The Directors serving on the Fund's Nominating Committee are
Messrs. Anthony J. Colavita, Chairman of the committee, and Salvatore J.
Zizza. The Nominating Committee is responsible for recommending qualified
candidates to the Board in the event that a position is vacated or created.
The Nominating Committee would consider recommendations by stockholders if
a vacancy were to exist. Such recommendations should be forwarded to the
Secretary of the Fund. The Nominating Committee met once during the year
ended December 31, 2001. The Fund does not have a standing compensation
committee.
Messrs. Anthony R. Pustorino, Chairman, Anthony J. Colavita, and
Salvatore J. Zizza serve on the Fund's Audit Committee and these directors
are not "interested persons" of the Fund as defined in the 1940 Act. The
Audit Committee is responsible for reviewing and evaluating issues related
to the accounting and financial reporting policies and internal controls of
the Fund and the internal controls of certain service providers, overseeing
the quality and objectivity of the Fund's financial statements and the
audit thereof and to act as a liaison between the Board of Directors and
the Fund's independent accountants. During the year ended December 31,
2001, the Audit Committee met twice.
The economic terms of the Advisory Agreement between the Fund and
its Investment Adviser were unanimously approved by the Fund's Board of
Directors at its May 22, 2002 meeting. The Board's approval included a
majority of the Directors who are not parties to the Advisory Agreement or
interested persons of any such party (as such term is defined in the 1940
Act). In approving the Advisory Agreement, the Board of Directors
considered, among other things, the nature and quality of services to be
provided by the Investment Adviser, the profitability to the Investment
Adviser of its relationship with the Fund, economies of scale and
comparative fees and expense ratios.
The Fund and the Investment Adviser have adopted a code of ethics
(the "Code of Ethics") under Rule 17j-1 of the 1940 Act. The Code of Ethics
permits personnel, subject to the Code of Ethics and its restrictive
provisions, to invest in securities, including securities that may be
purchased or held by the Fund. The Code of Ethics can be reviewed and
copied at the United States Securities and Exchange Commission's Public
Reference Room in Washington, D.C. Information on the operations of the
Reference Room may be obtained by calling the Securities and Exchange
Commission at (202) 942-8090. The Code of Ethics is also available on the
EDGAR database on the Securities and Exchange Commission's Internet Site at
http://www.sec.gov. Copies of the Code of Ethics may also be obtained,
after paying a duplicating fee, by electronic request at the following
e-mail address: publicinfo@sec.gov, or by writing the Securities and
Exchange Commission's Public Reference Room Section, Washington, D.C.
20549-0102.
Remuneration of Directors and Officers
The Fund pays each director who is not affiliated with the
Investment Adviser or its affiliates a fee of $5,000 per year plus $750 per
meeting attended, together with each director's actual out-of-pocket
expenses relating to attendance at such meetings.
The following table shows certain compensation information for the
directors and officers of the Fund for the fiscal year ended December 31,
2001. Mr. Latartara is employed by the Fund and his compensation is
evaluated and approved by the directors. Other officers who are employed by
the Investment Adviser receive no compensation or expense reimbursement
from the Fund.
Compensation Table
For the Fiscal Year Ended December 31, 2001
TOTAL
COMPENSATION
FROM THE FUND
AND FUND
AGGREGATE COMPLEX PAID
NAME OF PERSON AND COMPENSATION TO DIRECTORS/
POSITION* FROM THE FUND OFFICERS
MARIO J. GABELLI $0 $0
Chairman of the Board (21)
E. VAL CERUTTI Director (7) $8,000 $15,455
ANTHONY J. COLAVITA Director (32) $9,500 $145,016
DUGALD A. FLETCHER Director (2) $8,000 $16,000
KARL OTTO POHL Director (30) $0 $0
ANTHONY R. PUSTORINO Director (16) $9,000 $125,250
WERNER J. ROEDER, MD Director (26) $3,389 $72,182
ANTHONIE C. van EKRIS Director (17) $8,000 $62,750
SALVATORE J. ZIZZA Director (8) $8,500 $64,266
* Represents the total compensation paid to such persons during the calendar year ended December 31, 2001
by investment companies (including the Fund) or portfolios thereof from which such person receives
compensation that are considered part of the same fund complex as the Fund because they have common or
affiliated investment advisers. The number in parenthesis represents the number of such investment
companies and portfolios.
For his services as Vice President of the Fund, Mr. Latartara received
compensation in 2001 of $85,000.
Indemnification of Directors and Officers; Limitations On Liability.
Subject to limitations imposed by the 1940 Act, the Fund's Charter
limits the liability of the Fund's directors and officers to the Fund and
its stockholders to the fullest extent permitted by Maryland law. Under
Maryland law, Maryland corporations may limit their directors' and
officers' liability for money damages to the corporation and stockholders
except to the extent (i) that it is proved that a director or officer
actually received an improper benefit or profit in money, property or
services, in which case such director or officer may be liable for the
amount of the benefit or profit actually received or (ii) that a judgment
or other final adjudication adverse to a director or officer is entered in
a proceeding based on a finding that such director's or officer's action,
or failure to act, was the result of active and deliberate dishonesty and
wasmaterial to the cause of action adjudicated in the proceeding.
The Charter also provides for the indemnification of, and expenses
to be advanced on behalf of, directors and officers, among others, to the
fullest extent permitted by Maryland law, subject to the limitations
imposed by the 1940 Act. Under Maryland law, corporations may indemnify
present and past directors and officers, or officers of another corporation
that serve at the request of the indemnifying corporation, against
judgments, penalties, fines, settlements and reasonable expenses (including
attorneys' fees) actually incurred in connection with any threatened,
pending or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative (other than an action by or in the right of
the corporation in which such director or officer is adjudicated liable to
the corporation), in which they are made parties by reason of being or
having been directors or officers, unless it is proved that (i) the act or
omission of the director or officer was material to the matter giving rise
to the proceeding and was committed in bad faith or was the result of
active and deliberate dishonesty, (ii) the director or officer actually
received an improper personal benefit in money, property or services or
(iii) in the case of any criminal proceeding, the director or officer had
reasonable cause to believe that the act or omission was unlawful. Maryland
law also provides that, unless limited by the corporation's charter, a
corporation shall indemnify present and past directors and officers who are
successful, on the merits or otherwise, in the defense of any threatened,
pending or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative, against reasonable expenses (including
attorneys' fees) incurred in connection with such proceeding. The Fund's
Charter does not limit the extent of this indemnity.
Investment Advisory and Administrative Arrangements
Gabelli Funds, LLC acts as the Fund's Investment Adviser pursuant
to an advisory agreement with the Fund (the "Advisory Agreement"). The
Investment Adviser is a New York corporation with principal offices located
at One Corporate Center, Rye, New York 10580. The Investment Adviser was
organized in 1999 and is the successor to Gabelli Funds, Inc., which was
organized in 1980. As of September 30, 2002, the Investment Adviser and its
affiliates acted as registered investment advisers to 20 management
investment companies with aggregate net assets of $8.8 billion. The
Investment Adviser, together with other affiliated investment advisers, has
assets under management totaling $20.2 billion. GAMCO Investors, Inc., an
affiliate of the Investment Adviser, acts as investment adviser for
individuals, pension trusts, profit sharing trusts and endowments and as a
sub-adviser to management investment companies, having aggregate assets of
$9.3 billion under management as of September 30, 2002. Gabelli Fixed
Income LLC, an affiliate of the Investment Adviser, acts as investment
adviser for The Treasurer's Fund and separate accounts having aggregate
assets of $1.5 billion under management as of September 30, 2002. The
Investment Adviser is a wholly-owned subsidiary of Gabelli Asset Management
Inc., a New York corporation, whose Class A Common Stock is traded on the
New York Stock Exchange under the symbol "GBL." Mr. Mario J. Gabelli may be
deemed a "controlling person" of the Investment Adviser on the basis of his
ownership of a majority of the stock of the Gabelli Group Capital Partners,
Inc., which owns a majority of the capital stock of Gabelli Asset
Management Inc.
Under the terms of the Advisory Agreement, the Investment Adviser
manages the portfolio of the Fund in accordance with its stated investment
objective and policies, makes investment decisions for the Fund, places
orders to purchase and sell securities on behalf of the Fund and manages
its other business and affairs, all subject to the supervision and
direction of the Fund's Board of Directors. In addition, under the Advisory
Agreement, the Investment Adviser oversees the administration of all
aspects of the Fund's business and affairs and provides, or arranges for
others to provide, at the Investment Adviser's expense, certain enumerated
services, including maintaining the Fund's books and records, preparing
reports to the Fund's stockholders and supervising the calculation of the
net asset value of its stock. All expenses of computing the net asset value
of the Fund, including any equipment or services obtained solely for the
purpose of pricing shares or valuing its investment portfolio, will be an
expense of the Fund under its Advisory Agreement unless the Investment
Adviser voluntarily assumes responsibility for such expense.
The Advisory Agreement combines investment advisory and
administrative responsibilities in one agreement. For services rendered by
the Investment Adviser on behalf of the Fund under the Advisory Agreement,
the Fund pays the Investment Adviser a fee computed daily and paid monthly
at the annual rate of 1.00% of the average weekly net assets of the Fund.
Notwithstanding the foregoing, the Investment 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 applicable series of
its preferred stock for any calendar year in which the net asset value
total return of the Fund allocable to the common stock, including
distributions and the advisory fee subject to potential waiver, is less
than the stated annual dividend rate of such series, prorated during the
year such series is issued and the final year such series is outstanding.
The Advisory Agreement provides that in the absence of willful
misfeasance, bad faith, gross negligence or reckless disregard for its
obligations and duties thereunder, the Investment Adviser is not liable for
any error or judgment or mistake of law or for any loss suffered by the
Fund. As part of the Advisory Agreement, the Fund has agreed that the name
"Gabelli" is the Investment Adviser's property, and that in the event the
Investment Adviser ceases to act as an investment adviser to the Fund, the
Fund will change its name to one not including "Gabelli."
Pursuant to its terms, the Advisory Agreement will remain in
effect with respect to the Fund until the second anniversary of stockholder
approval of such Agreement, and from year to year thereafter if approved
annually (i) by the Fund's Board of Directors or by the holders of a
majority of its outstanding voting securities and (ii) by a majority of the
directors who are not "interested persons" (as defined in the 1940 Act) of
any party to the Advisory Agreement, by vote cast in person at a meeting
called for the purpose of voting on such approval. The Advisory Agreement
was initially approved by the Board of Directors at a meeting held on June
5, 1989 and was approved most recently by the Board of Directors on May 22,
2002. The Advisory Agreement terminates automatically on its assignment and
may be terminated without penalty on 60 days written notice at the option
of either party thereto or by a vote of a majority (as defined in the 1940
Act) of the Fund's outstanding shares.
For each of the years ended December 31, 1999, December 31, 2000
and December 31, 2001, the Investment Adviser was paid $1,224,337, $822,916
and $750,049, respectively, for advisory and administrative services
rendered to the Fund.
PORTFOLIO TRANSACTIONS
Subject to policies established by the Board of Directors of the
Fund, the Investment Adviser is responsible for placing purchase and sale
orders and the allocation of brokerage on behalf of the Fund. Transactions
in equity securities are in most cases effected on U.S. stock exchanges and
involve the payment of negotiated brokerage commissions. In general, there
may be no stated commission in the case of securities traded in
over-the-counter markets, but the prices of those securities may include
undisclosed commissions or mark-ups. Principal transactions are not entered
into with affiliates of the Fund. However, Gabelli & Company may execute
transactions in the over-the-counter markets on an agency basis and receive
a stated commission therefrom. To the extent consistent with applicable
provisions of the 1940 Act and the rules and exemptions adopted by the SEC
thereunder, as well as other regulatory requirements, the Fund's Board of
Directors have determined that portfolio transactions may be executed
through Gabelli & Company and its broker-dealer affiliates if, in the
judgment of the Investment Adviser, the use of those broker-dealers is
likely to result in price and execution at least as favorable as those of
other qualified broker-dealers, and if, in particular transactions, those
broker-dealers charge the Fund a rate consistent with that charged to
comparable unaffiliated customers in similar transactions. The Fund has no
obligations to deal with any broker or group of brokers in executing
transactions in portfolio securities. In executing transactions, the
Investment Adviser seeks to obtain the best price and execution for the
Fund, taking into account such factors as price, size of order, difficulty
of execution and operational facilities of the firm involved and the firm's
risk in positioning a block of securities. While the Investment Adviser
generally seeks reasonably competitive commission rates, the Fund does not
necessarily pay the lowest commission available.
Subject to obtaining the best price and execution, brokers who
provide supplemental research, market and statistical information to the
Investment Adviser or its affiliates may receive orders for transactions by
the Fund. The term "research, market and statistical information" includes
advice as to the value of securities, and advisability of investing in,
purchasing or selling securities, and the availability of securities or
purchasers or sellers of securities, and furnishing analyses and reports
concerning issues, industries, securities, economic factors and trends,
portfolio strategy and the performance of accounts. Information so received
will be in addition to and not in lieu of the services required to be
performed by the Investment Adviser under the Advisory Agreement and the
expenses of the Investment Adviser will not necessarily be reduced as a
result of the receipt of such supplemental information. Such information
may be useful to the Investment Adviser and its affiliates in providing
services to clients other than the Fund, and not all such information is
used by the Investment Adviser in connection with the Fund. Conversely,
such information provided to the Investment Adviser and its affiliates by
brokers and dealers through whom other clients of the Investment Adviser
and its affiliates effect securities transactions may be useful to the
Investment Adviser in providing services to the Fund.
Although investment decisions for the Fund are made independently
from those of the other accounts managed by the Investment Adviser and its
affiliates, investments of the kind made by the Fund may also be made by
those other accounts. When the same securities are purchased for or sold by
the Fund and any of such other accounts, it is the policy of the Investment
Adviser and its affiliates to allocate such purchases and sales in the
manner deemed fair and equitable to all of the accounts, including the
Fund.
For the fiscal years ended December 31, 1999, December 31, 2000
and December 31, 2001, the Fund paid a total of $162,961, $143,305, and
$42,738, respectively, in brokerage commissions, of which Gabelli &
Company, Inc. and its affiliates received $86,465, $116,959, and $34,251,
respectively. The amount received by Gabelli & Company, Inc. and its
affiliates from the Fund in respect of brokerage commissions for the fiscal
year ended December 31, 2001 represented approximately 80.14% of the
aggregate dollar amount of brokerage commissions paid by the Fund for such
period and approximately 86.79% of the aggregate dollar amount of
transactions by the Fund for such period.
REPURCHASE OF SHARES
The Fund is a closed-end, diversified, management investment
company and as such its stockholders do not, and will not, have the right
to redeem their stock. The Fund, however, may repurchase its stock from
time to time as and when it deems such a repurchase advisable. Such
repurchases will be made when the Fund's common stock is trading at a
discount of 10% or more (or such other percentage as the Board of Directors
of the Fund may determine from time to time) from net asset value. Pursuant
to the 1940 Act, the Fund may repurchase its stock on a securities exchange
(provided that the Fund has informed its stockholders within the preceding
six months of its intention to repurchase such stock) or as otherwise
permitted in accordance with Rule 23c-1 under the 1940 Act. Under that
Rule, certain conditions must be met regarding, among other things,
distribution of net income for the preceding fiscal year, status of the
seller, price paid, brokerage commissions, prior notice to stockholders of
an intention to purchase stock and purchasing in a manner and on a basis
that does not discriminate unfairly against the other stockholders through
their interest in the Fund.
When the Fund repurchases its common stock for a price below net
asset value, the net asset value of the common stock that remains
outstanding will be enhanced, but this does not necessarily mean that the
market price of the outstanding common stock will be affected, either
positively or negatively.
PORTFOLIO TURNOVER
The portfolio turnover rates of the Fund for the fiscal years
ending December 31, 2001 and 2000 were 59% and 169%, respectively.
Portfolio turnover rate is calculated by dividing the lesser of an
investment company's annual sales or purchases of portfolio securities by
the monthly average value of securities in its portfolio during the year,
excluding portfolio securities the maturities of which at the time of
acquisition were one year or less. A high rate of portfolio turnover
involves correspondingly greater brokerage commission expense than a lower
rate, which expense must be borne by the Fund and its stockholders, as
applicable. A higher rate of portfolio turnover may also result in taxable
gains being passed to stockholders.
AUTOMATIC DIVIDEND REINVESTMENT
AND VOLUNTARY CASH PURCHASE PLAN
Under the Automatic Dividend Reinvestment and Voluntary Cash
Purchase Plan adopted by the Fund (the "Plan"), a stockholder whose common
stock is registered in his own name, including all shares issued pursuant
to the Rights Offering and all shares held by a stockholder participating
in the Rights Offering, will have all distributions reinvested
automatically by Equiserve Trust Company ("Equiserve"), which is agent
under the Plan, unless the stockholder elects to receive cash.
Distributions with respect to shares registered in the name of a
broker-dealer or other nominee (that is, in "street name") will be
reinvested by the broker or nominee in additional shares under the Plan,
unless the service is not provided by the broker or nominee or the
stockholder elects to receive distributions in cash. Investors who own
common stock registered in street name should consult their broker-dealers
for details regarding reinvestment. All distributions to investors who do
not participate in the Plan will be paid by check mailed directly to the
record holder by Equiserve as dividend disbursing agent.
Under the Plan, whenever the market price of the common stock is
equal to or exceeds net asset value at the time shares are valued for
purposes of determining the number of shares equivalent to the cash
dividend or capital gains distribution, participants in such plan are
issued shares of common stock, valued at the greater of (i) the net asset
value as most recently determined or (ii) 95% of the then current market
price of the common stock. The valuation date is the dividend or
distribution payment date or, if that date is not a New York Stock Exchange
trading day, the next preceding trading day. If the net asset value of the
Fund's common stock at the time of valuation exceeds the market price of
the common stock, participants will receive shares from the Fund, or
acquired by the Plan agent in the open market, valued at market price. If
the Fund should declare a dividend or capital gains distribution payable
only in cash, Equiserve will buy the Fund's common stock for the Plan in
the open market, on the New York Stock Exchange or elsewhere, for the
participants' accounts, except that Equiserve will endeavor to terminate
purchases in the open market and cause the Fund to issue shares at net
asset value if, following the commencement of such purchases, the market
value of its common stock exceeds net asset value.
Participants in the Plan have the option of making additional cash
payments to Equiserve, twice per month for the Fund, for investment in
common stock. Such payments may be made in any amount from $250 to $10,000.
Equiserve will use all funds received from participants to purchase common
stock of the Fund in the open market on the 1st and 15th of each month. It
is suggested that participants send voluntary cash payments to Equiserve in
a manner that ensures that Equiserve will receive these payments
approximately 10 days before the investment date. A participant may without
charge withdraw a voluntary cash payment by written notice, if the notice
is received by Equiserve at least 48 hours before such payment is to be
invested.
Equiserve maintains all stockholder accounts in the Plan and
furnishes written confirmations of all transactions in the account,
including information needed by stockholders for personal and tax records.
Common stock in the account of each Plan participant will be held by
Equiserve in noncertificated form in the name of the participant, and each
stockholder's proxy will include the common stock purchased pursuant to the
Plan. A Plan participant may send his stock certificates to Equiserve so
that the stock represented by such certificates will be held by Equiserve
in the participant's stockholder account under the Plan.
In the case of stockholders such as banks, brokers or nominees,
which hold stock for others who are the beneficial owners, Equiserve will
administer the Plan on the basis of the number of shares certified from
time to time by the stockholder as representing the total amount registered
in the stockholder's name and held for the account of beneficial owners who
participate in the Plan.
There is no charge to participants for reinvesting dividends or
capital gains distributions payable in either stock or cash. Equiserve's
fees for handling the reinvestment of such dividends and capital gains
distributions are paid by the Fund. There are no brokerage charges with
respect to stock issued directly by the Fund as a result of dividends or
capital gains distributions payable in stock or in cash. However, each
participant bears a pro rata share of brokerage commissions incurred with
respect to Equiserve's open market purchases in connection with the
reinvestment of dividends or capital gains distributions.
With respect to purchases from voluntary cash payments, Equiserve
will charge $0.75 for each such purchase for a participant, plus a pro rata
share of the brokerage commissions. Brokerage charges for purchasing small
amounts of stock for individual accounts through the Plan are expected to
be less than the usual brokerage charges for such transactions, as
Equiserve will be purchasing stock for all participants in blocks and
prorating the lower commission thus attainable.
The automatic reinvestment of dividends and distributions will not
relieve participants of any income tax that may be payable on such
dividends or distributions.
Experience under the Plan may indicate that changes are desirable.
Accordingly, the Fund reserves the right to amend or terminate its Plan as
applied to any voluntary cash payments made and any dividend or
distribution paid subsequent to written notice of the change sent to the
members of such Plan at least 90 days before the record date for such
dividend or distribution. The Plan also may be amended or terminated by
Equiserve on at least 90 days' written notice to the participants in such
Plan. All correspondence concerning the Plan should be directed to
Equiserve at PO Box 43025, Providence, RI 02940-3025.
TAXATION
Set forth below is a discussion of certain U.S. federal income tax
issues concerning the Fund and the purchase, ownership and disposition of
Fund stock. This discussion is based upon present provisions of the
Internal Revenue Code of 1986, as amended (the "Code"), the regulations
promulgated thereunder, and judicial and administrative ruling authorities,
all of which are subject to change, which change may be retroactive. This
discussion does not purport to be complete or to deal with all aspects of
U.S. federal income taxation that may be relevant to investors in light of
their particular circumstances. Prospective investors should consult their
own tax advisers with regard to the U.S. federal tax consequences of the
purchase, ownership, or disposition of Fund stock, as well as the tax
consequences arising under the laws of any state, foreign country, or other
taxing jurisdiction.
Tax Status of the Fund
The Fund has qualified and elected to be taxed as a regulated
investment company under Subchapter M of the Code. Accordingly, the Fund
must, among other things, (i) derive in each taxable year at least 90% of
its gross income (including tax-exempt interest) from dividends, interest,
payments with respect to certain securities loans, and gains from the sale
or other disposition of stock, securities or foreign currencies, or other
income (including but not limited to gain from options, futures and forward
contracts) derived with respect to its business of investing in such stock,
securities or currencies; and (ii) diversify its holdings so that, at the
end of each fiscal quarter (a) at least 50% of the market value of the
Fund's total assets is represented by cash and cash items, U.S. government
securities, the securities of other regulated investment companies and
other securities, with such other securities limited, in respect of any one
issuer, to an amount not greater than 5% of the value of the Fund's total
assets and not more than 10% of the outstanding voting securities of such
issuer, and (b) not more than 25% of the value of the Fund's total assets
is invested in the securities of any one issuer (other than U.S. government
securities and the securities of other regulated investment companies) or
of any two or more issuers that the Fund controls and that are determined
to be engaged in the same business or similar or related trades or
businesses.
As a regulated investment company, the Fund generally is not
subject to U.S. federal income tax on income and gains that it distributes
each taxable year to stockholders, if at least 90% of the sum of the Fund's
(i) investment company taxable income (which includes, among other items,
dividends, interest, the excess of any net short-term capital gains over
net long-term capital losses) and other taxable income other than any net
capital gain (as defined below) reduced by deductible expenses) determined
without regard to the deduction for dividends paid and (ii) its net tax
exempt interest (the excess of its gross tax exempt interest over certain
disallowed deductions). The Fund may retain for investment its net capital
gain (which consists of the excess of its net long-term capital gain over
its net short-term capital loss). However, if the Fund retains any net
capital gain or any investment company taxable income, it will be subject
to tax at regular corporate rates on the amount retained. The Fund intends
to distribute annually substantially all of such income.
Amounts not distributed on a timely basis in accordance with a
calendar year distribution requirement are subject to a nondeductible 4%
excise tax at the Fund level. To avoid the tax, the Fund must distribute
during each calendar year an amount equal to the sum of (i) at least 98% of
its ordinary income (not taking into account any capital gains or losses)
for the calendar year, (ii) at least 98% of its capital gains in excess of
its capital losses (adjusted for certain ordinary losses) for a one-year
period generally ending on October 31 of the calendar year (unless, an
election is made by a fund with a November or December year-end to use the
fund's fiscal year) and (iii) certain undistributed amounts from previous
years on which the Fund paid no U.S. federal income tax. While the Fund
intends to distribute income and capital gains in the manner necessary to
minimize imposition of the 4% excise tax, there can be no assurance that
sufficient amounts of the Fund's taxable income and capital gains will be
distributed to avoid entirely the imposition of the tax. In that event, the
Fund will be liable for the tax only on the amount by which it does not
meet the foregoing distribution requirement.
A distribution will be treated as paid on December 31 of a
calendar year if it is declared by the Fund in October, November or
December of that year with a record date in such a month and paid by the
Fund during January of the following year. Such a distribution will be
taxable to stockholders in the calendar year in which the distribution is
declared, rather than the calendar year in which it is received.
If for any taxable year the Fund does not qualify as a regulated
investment company, all of its taxable income (including its net capital
gains) will be subject to tax at regular corporate rates without any
deduction for distributions to stockholders, and such distributions will be
taxable to the stockholders as ordinary dividends to the extent of the
Fund's current and accumulated earnings and profits.
Distributions
Distributions paid by the Fund from its ordinary income or from an
excess of net short- term capital gains over net long-term capital losses
(together referred to hereinafter as "ordinary income dividends") are
taxable to stockholders as ordinary income to the extent of the Fund's
earnings and profits. Distributions made from an excess of net long-term
capital gains over net short-term capital losses ("capital gain
dividends"), including capital gain dividends credited to a stockholder but
retained by the Fund (as described below), are taxable to stockholders as
long- term capital gains, regardless of the length of time the stockholder
has owned Fund stock. Distributions in excess of the Fund's earnings and
profits will first reduce the adjusted tax basis of a holder's stock and,
after such adjusted tax basis is reduced to zero, will constitute capital
gains to such holder (assuming the stock is held as a capital asset).
Dividend distributions of investment company taxable income are taxable to
a stockholder as ordinary income, whether paid in cash or stock. Dividends
paid by the Fund to a corporate stockholder, to the extent such dividends
are attributable to dividends received by the Fund from U.S. corporations,
may, subject to limitations, be eligible for the dividends received
deduction. Generally, not later than 60 days after the close of its taxable
year, the Fund will provide its stockholders with a written notice
designating the amount of any ordinary income dividends, capital gain
dividends or dividends qualifying for a dividends received deduction and
other distributions.
Investors should be careful to consider the tax implications of
buying stock of the Fund just prior to the record date of a distribution
(including a capital gain dividend). The price of stock purchased at such a
time will reflect the amount of the forthcoming distribution, but the
distribution will generally be taxable to the stockholder.
If the Fund retains any net capital gain, it may designate the
retained amount as undistributed capital gains in a notice to its
stockholders who, if subject to U.S. federal income tax on long-term
capital gains, (i) will be required to include in income their share of
such undistributed long-term capital gain and (ii) will be entitled to
credit their proportionate share of the tax paid by the Fund against their
U.S. federal tax liability, if any, and to claim refunds to the extent the
credit exceeds such liability. For U.S. federal income tax purposes, the
tax basis of stock owned by a stockholder of the Fund will be increased by
the amount of undistributed capital gain included in the gross income of
such stockholder less the tax deemed paid by such stockholder under clause
(ii) of the preceding sentence.
Foreign Taxes
The Fund may be subject to certain taxes imposed by the countries
in which it invests or operates. If the Fund qualifies as a regulated
investment company and if more than 50% of the value of the Fund's total
assets at the close of any taxable year consists of stocks or securities of
foreign corporations, the Fund may elect, for U.S. federal income tax
purposes, to treat any foreign taxes paid by the Fund that qualify as
income or similar taxes under U.S. federal income tax principles as having
been paid by the Fund's stockholders. For any year for which the Fund makes
such an election, each stockholder will be required to include in its gross
income an amount equal to its allocable share of such taxes paid by the
Fund and the stockholders will be entitled, subject to certain limitations,
to credit their portions of these amounts against their U.S. federal income
tax liability, if any, or to deduct their portions from their U.S. taxable
income, if any. No deduction for foreign taxes may be claimed by
individuals who do not itemize deductions. In any year in which it elects
to "pass through" foreign taxes to stockholders, the Fund will notify
stockholders within 60 days after the close of the Fund's taxable year of
the amount of such taxes and the sources of its income. Because application
of the credit depends on the particular circumstances for each stockholder,
stockholders are advised to consult their own tax advisers.
Dispositions
The sale or other disposition of shares of common stock of the
Fund will generally result in capital gain or loss to stockholders, and
will be long-term capital gain or loss if the stock has been held for more
than one year at the time of sale. Any loss upon the sale or exchange of
Fund stock held for six months or less will be treated as long-term capital
loss to the extent of any capital gain dividends received (including
amounts credited as an undistributed capital gain dividend) by the
stockholder. A loss realized on a sale or exchange of stock of the Fund
will be disallowed if other Fund stock is acquired (whether through the
automatic reinvestment of dividends or otherwise) within a 61-day period
beginning 30 days before and ending 30 days after the date that the stock
is disposed of. In such case, the basis of the stock acquired will be
adjusted to reflect the disallowed loss. Present law taxes both long- term
and short-term capital gains of corporations at the rates applicable to
ordinary income. For non-corporate taxpayers, however, short-term capital
gains and ordinary income will currently be taxed at a maximum rate of
38.6% while long-term capital gains generally will be taxed at a maximum
rate of 20% and 10% for taxpayers in the 15% bracket. The 20% capital gains
rate and the 10% capital gains rate will be reduced to 18% and 8%
respectively, for capital assets held for more than five years if the
holding period begins after December 31, 2000.
Backup Withholding
The Fund generally will be required to withhold U.S. federal
income tax ("backup withholding") from dividends, capital gain
distributions and certain other amounts paid to stockholders who are U.S.
citizens or resident aliens if (i) the stockholder fails to furnish the
Fund with the stockholder's correct taxpayer identification number or
social security number, (ii) the Internal Revenue Service notifies the
stockholder or the Fund that the stockholder has failed to report properly
certain interest and dividend income to the Internal Revenue Service and to
respond to notices to that effect or (iii) when required to do so, the
stockholder fails to certify that he or she is not subject to backup
withholding. Any amounts withheld may be credited against the stockholder's
U.S. federal income tax liability.
Foreign Investors
A stockholder that is a nonresident alien individual or a foreign
corporation (a "foreign investor") generally may be subject to U.S.
withholding tax at the rate of 30% (or possibly a lower rate provided by an
applicable tax treaty) on ordinary income dividends. Different tax
consequences may result if the foreign investor is engaged in a trade or
business in the United States or, in the case of an individual, is present
in the United States for 183 or more days during a taxable year and certain
other conditions are met.
Fund Investments
The Fund will invest in securities rated in the lower rating
categories of nationally recognized rating organizations ("junk bonds" or
"high yield bonds"). Some of these junk bonds or high-yield bonds may be
purchased at a discount and may therefore cause the Fund to accrue and
distribute income before amounts due under the obligations are paid. In
addition, a portion of the interest on such junk bonds and high-yield bonds
may be treated as dividends for U.S. federal income tax purposes. In such
cases, if the issuer of the junk bonds or high-yield bonds is a domestic
corporation, dividend payments by the Fund will be eligible for the
dividends received deduction to the extent of the deemed dividend portion
of such interest.
The Fund may write (i.e., sell) covered call and covered put
options on its portfolio securities, purchase call and put options on
securities and engage in transactions in financial futures and related
options on such futures. Such options and futures contracts that are
"Section 1256 contracts" will be "marked to market" for U.S. federal income
tax purposes at the end of each taxable year, i.e., each such option or
futures contract will be treated as sold for its fair market value on the
last day of the taxable year. Subject to certain exceptions, generally gain
or loss from Section 1256 contracts will be 60% long-term and 40%
short-term capital gain or loss. Application of these rules to Section 1256
contracts held by the Fund may alter the timing and character of
distributions to stockholders. The mark-to-market rules outlined above,
however, will not apply to certain transactions entered into by the Fund
primarily to reduce the risk of changes in price or interest or currency
exchange rate with respect to its investments.
The U.S. federal income tax rules governing the taxation of
interest rate swaps are not entirely clear and may require the Fund to
treat payment received under such arrangements as ordinary income and to
amortize such payment under certain circumstances. The Fund does not
anticipate that its activity in this regard will affect its qualification
as a regulated investment company.
Code Section 1092, which applies to certain "straddles," may
affect the taxation of the Fund's sales of securities and transactions in
options and futures. Under Code Section 1092, the Fund may, for U.S.
federal income tax purposes, be required to postpone recognition of losses
incurred in certain sales of securities and certain closing transactions in
options and futures.
Passive Foreign Investment Companies. The Fund may invest in
shares of foreign corporations that may be classified under the Code as
passive foreign investment companies ("PFICs"). In general, a foreign
corporation is classified as a PFIC if at least one-half of its assets
constitute investment-type assets, or 75% or more of its gross income is
investment-type income. If the Fund receives a so-called "excess
distribution" with respect to PFIC stock, the Fund itself may be subject to
a tax on a portion of the excess distribution, whether or not the
corresponding income is distributed by the Fund to stockholders. In
general, under the PFIC rules, any excess distribution is treated as having
been realized ratably over the period during which the Fund held the PFIC
shares. The Fund will itself be subject to tax on the portion, if any, of
an excess distribution that is so allocated to prior Fund taxable years and
an interest factor will be added to the tax, as if the tax had been payable
in such prior taxable years. Certain distributions from a PFIC as well as
gain from the sale of PFIC shares are treated as excess distributions.
Excess distributions are characterized as ordinary income even though,
absent application of the PFIC rules, certain excess distributions might
have been classified as capital gain.
The Fund may be eligible to elect alternative tax treatment with
respect to PFIC shares. Under one election currently available in some
circumstances, the Fund would be required to include in its gross income
its share of the earnings of a PFIC, on a current basis, whether or not
distributions were received from the PFIC in a given year. Under another
election, the Fund would be required to mark to market the Fund's PFIC
shares at the end of each taxable year, with the result that unrealized
gains would be treated as realized and such gains would be required to be
reported as ordinary income. Any mark-to-market losses and any loss from an
actual disposition of PFIC shares would be deductible as ordinary losses to
the extent of any net mark-to-market gains included in income in prior
years. If either one of these elections were made the special rules,
discussed above, relating to the taxation of excess distributions would not
apply.
Certain of the Fund's investment practices are subject to special
and complex federal income tax provisions that may, among other things, (i)
disallow, suspend or otherwise limit the allowance of certain losses or
deductions, (ii) convert lower taxed long-term capital gains into higher
taxed short-term capital or ordinary income, (iii) convert ordinary loss or
a deduction into capital loss (the deductibility of which is more limited),
(iv) cause the Fund to recognize income or gain without a corresponding
receipt of cash, (v) adversely affect the time as to when a purchase or
sale of stock or securities is deemed to occur and (vi) adversely alter the
characterization of certain complex financial transactions.
The foregoing is a general summary of the provisions of the Code
and the Treasury Regulations in effect as they directly govern the U.S.
federal income taxation of the Fund and its stockholders. These provisions
are subject to change by legislative or administrative action, and any such
change may be retroactive. Ordinary income and capital gain dividends may
also be subject to state, local, foreign income or other taxes. Certain
states exempt from state income taxation dividends paid by regulated
investment companies that are derived from interest on United States
government obligations. State law varies as to whether dividend income
attributable to United States government obligations is exempt from state
income tax. Stockholders are urged to consult their tax advisers regarding
specific questions as to U.S. federal, foreign, state, local income or
other taxes.
S&P DISCOUNT FACTORS
The following table identifies the Moody's discount factors used to discount particular
Standard & Poor's Rating Services ("S&P") eligible assets in determining the minimum
discounted asset coverage the Fund is required by S&P to maintain with respect to its
outstanding 8% Cumulative Preferred Stock. Terms that are used but not defined in this section
have the meanings ascribed to them in the Fund's Articles Supplementary creating and fixing the
rights of the 8% Cumulative Preferred Stock as filed with the State of Maryland on May 14,
1997.
S&P
TYPE OF S&P ELIGIBLE ASSET: DISCOUNT FACTOR:
------------------------------------------------------------------ ------------------------------------
SEASONED UNSEASONED
ELIGIBLE ELIGIBLE
ASSETS ASSETS
---------------- ------------------
Common stocks..................................................... 1.85 2.44
Preferred stocks rated AAA to BBB- or issued by
Issuers having senior debt rated at least BBB-................. 2.40 --
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 --
Short-Term Money Market Investments maturing between
1 day and 180 days............................................. 1.034 --
Short-Term Money Market Investments maturing between
180 days and one year.......................................... 1.106 --
U.S. Government Obligations maturing between 90 days
and one year................................................... 1.049 --
U.S. Government Obligations maturing between 1 year
and 2 years.................................................... 1.078 --
U.S. Government Obligations maturing between 2 years
and 3 years.................................................... 1.10 --
U.S. Government Obligations maturing between 3 years
and 5 years.................................................... 1.106 --
U.S. Government Obligations maturing between 5 years
and 10 years................................................... 1.18 --
U.S. Government Obligations maturing between 10 years
and 30 years................................................... 1.223 --
Unsecured U.S. Government Agency Obligations (add .10 to
corresponding maturity for U.S. Government Obligations)........
Other Indebtedness rated AAA to AAA-.............................. 1.50 --
Other Indebtedness rated AA+ to AA-............................... 1.55 --
Other Indebtedness rated A+ to A-................................. 1.60 --
Other Indebtedness rated BBB+ to BBB-............................. 1.65 --
Other Indebtedness rated BB+ to BB-............................... 1.70 --
Other Indebtedness rated B+ to B.................................. 1.80 --
Other Indebtedness rated B-....................................... 1.90 --
Other Indebtedness rated CCC+..................................... 2.05 --
Other Indebtedness rated CCC...................................... 2.20 --
In the foregoing table "S&P Eligible Assets" refers to the sum of
S&P Seasoned Eligible Assets and S&P Unseasoned Assets. S&P Seasoned Assets
are any of the following that may be held by the Fund:
(a) Deposit Assets;
(b) U.S. Government Obligations;
(c) unsecured evidences of indebtedness of U.S. Government Agencies;
(d) 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;
(e) evidences 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 all of the
following conditions: (i) such evidences of indebtedness are rated at
least CCC by S&P; (ii) if such evidences of indebtedness are rated BB+
to CCC by S&P, the original issue size thereof is at least $100 million
as to 80% of such evidences of indebtedness and at least $50 million as
to 20% of such evidences of indebtedness; and (iii) the issuer of such
evidences of indebtedness files periodic financial statements with the
SEC; 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), (ii) and (iii) above shall be included in S&P
Eligible Assets only to the extent that if such evidences of
indebtedness are 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 does not exceed 10%, 5%, 4% or 3%,
respectively, of the market value of the Fund's S&P Eligible Assets and
the aggregate market value of the Fund's holdings of all other similarly
eligible evidences of indebtedness of issuers in the same industry
classification does not exceed the Indebtedness Diversification
Percentage (as defined in the Articles Supplementary) of the aggregate
market value of the Fund's S&P Eligible Assets;
(f) evidences 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 evidences of indebtedness are rated at
least CCC by S&P; and (ii) if such evidences of indebtedness are rated
BB+ to CCC by S&P, the market capitalization of the issuer of such
evidences of indebtedness is at least $100 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 evidences of indebtedness are 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 does not exceed 10%, 5%,
4% or 3%, respectively, of the market value of the Fund's S&P Eligible
Assets and the aggregate market value of such S&P Eligible Assets, when
added to the aggregate market value of the Fund's holdings of all 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;
(g) preferred stocks that satisfy all of the following conditions:
(i) such preferred stock is rated at least BBB- or the senior debt of
the issuer of such preferred stock is rated at least BBB-; (ii) the
market capitalization of the issuer of such preferred stock is at least
$100 million; (iii) such preferred stock is traded on a recognized
national securities exchange or quoted on the National Market System (or
any equivalent or successor thereto) of Nasdaq; (iv) dividends on such
preferred stock are cumulative; and (v) the original issue size of such
preferred stock is at least $50 million; and
(h) 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; provided, however, that the Fund's
holdings of the common stock of any single issuer that satisfies the
conditions set forth in clauses (i) through (v) above shall be included
in S&P Seasoned 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 SEC 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.
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.
An S&P Unseasoned Eligible Asset is any common stock that would be
an S&P Seasoned Eligible Asset but for the fact that the 450 trading day
requirement referenced above is not satisfied.
NET ASSET VALUE
The net asset value of the Fund's shares will be computed, based
on the market value of the securities it holds and determined daily as of
the close of regular trading on the New York Stock Exchange.
Portfolio instruments of the Fund which are traded in a market
subject to government regulation on which trades are reported
contemporaneously generally will be valued at the last sale price on the
principal market for such instruments as of the close of regular trading on
the day the instruments are being valued, or lacking any sales, at the
average of the bid and asked price on the principal market for such
instruments on the most recent date on which bid and asked prices are
available. Initial public offering securities are initially valued at cost,
and thereafter as any other equity security. Other readily marketable
assets will be valued at the average of quotations provided by dealers
maintaining an active market in such instruments. Short-term debt
instruments that are credit impaired or mature in more than 60 days for
which market quotations are available are valued at the latest average of
the bid and asked prices obtained from a dealer maintaining an active
market in that security. Short-term investments that are not credit
impaired or mature in 60 days or fewer are valued at amortized cost from
purchase price or value on the 61st day prior to maturity. Securities and
other assets for which market quotations are not readily available will be
valued at fair value as determined in good faith by or under the direction
of the Investment Adviser in accordance with guidelines adopted by the
Fund. The Fund may employ recognized pricing services from time to time for
the purpose of pricing portfolio instruments (including non-US dollar
denominated assets and futures and options).
Trading takes place in various foreign markets on days which are
not Business Days and therefore the Fund's respective net asset value per
share is not calculated. The calculation of the Fund's net asset value may
not take place contemporaneously with the determination of the prices of
portfolio securities held by the Fund. Events affecting the values of
portfolio securities that occur between the time their prices are
determined and the close of the NYSE will not be reflected in the Fund's
calculation of net asset value unless the Board of Trustees deems that the
particular event would materially affect the net asset value, in which case
the fair value of those securities will be determined by consideration of
other factors by or under the direction of the Board of Directors.
Net asset value per share is calculated by dividing the value of
the securities held plus any cash or other assets minus all liabilities,
including accrued expenses, by the total number of shares outstanding at
such time.
GENERAL INFORMATION
Counsel and Independent Accountants
Skadden, Arps, Slate, Meagher & Flom LLP, Four Times Square, New
York, New York 10036 is special counsel to the Fund in connection with the
rights offering.
PricewaterhouseCoopers LLP, independent accountants, 1177 Avenue
of the Americas, New York, New York 10036, serve as auditors of the Fund
and will annually render an opinion on the financial statements of the
Fund.
BENEFICIAL OWNER
Name and Address of
Beneficial/Record Owner Amount of Shares and
as of May 31, 2002 Title of Class Nature of Ownership Percent of Class
------------------ -------------- ------------------- ----------------
Cede & Co.* Common 4,583,495 55.28%
P.O. Box 20 (record)
Bowling Green Station
New York, NY 10274
Mario J. Gabelli and affiliates Common 1,072,046 12.93%
One Corporate Center (beneficial)
Rye, NY 10580
Bear Stearns Securities Corp** Common 941,327 11.35%
One Metrotech Center North, 4th Floor (record)
Brooklyn, NY 11201
Charles Schwab & Co., Inc.** Common 520,289 6.27%
C/) ADP Proxy Services, 51 Mercedes Way (record)
Edgewood, NY 11717
* A nominee partnership of The Depository Trust Company.
** Shares held at The Depository Trust Company.
*** Includes 155,677 shares owned directly by Mr. Gabelli, 10,000
shares owned by a family partnership for which Mr. Gabelli serves as general
partner, 40,180 shares held by custodial accounts for which Mr. Gabelli serves
as Trustee, 732,893 shares owned by Gabelli Asset Management Inc. or its
affiliates, 58,686 shares owned by the Gabelli & Company, Inc. Profit-Sharing
Plan, and 74,610 shares owned by discretionary accounts managed by GAMCO
Investors, Inc., a wholly-owned subsidiary of Gabelli Asset Management Inc.
Mr. Gabelli disclaims beneficial ownership of the shares held by custodial
accounts, the discretionary accounts, and by the entities named except to the
extent of his interest in such entities.
As of October 31, 2002, the Directors and Officers of the Fund
as a group beneficially owned approximately 14.10% 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, 2001, together with
the report of PricewaterhouseCoopers LLP thereon, are also incorporated herein
by reference from the Fund's Annual Report to Shareholders. In addition, the
Fund's unaudited financial statements for the six months ended June 30, 2002
are incorporated herein by reference from the Fund's Semi- Annual Report to
Shareholders. All other portions of the Annual Report to Shareholders and the
Semi-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).
APPENDIX A
CORPORATE BOND RATINGS
MOODY'S INVESTORS SERVICE, INC.
Aaa Bonds that are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are
generally referred to as "gilt edge." Interest payments are
protected by a large or exceptionally stable margin and principal
is secure. While the various protective elements are likely to
change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
Aa Bonds that are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are
generally known as high grade bonds. They are rated lower than the
best bonds because margins of protection may not be as large as in
Aaa securities or fluctuation of protective elements may be of
greater amplitude or there may be other elements present that make
the long-term risk appear somewhat larger than in Aaa Securities.
A Bonds that are rated A possess many favorable investment
attributes and are to be considered as upper-medium-grade
obligations. Factors giving security to principal and interest are
considered adequate, but elements may be present that suggest a
susceptibility to impairment some time in the future.
Baa Bonds that are rated Baa are considered as medium-grade
obligations i.e., they are neither highly protected nor poorly
secured. Interest payments and principal security appear adequate
for the present, but certain protective elements may be lacking or
may be characteristically unreliable over any great length of
time. Such bonds lack outstanding investment characteristics and
in fact have speculative characteristics as well.
Ba Bonds that are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the
protection of interest and principal payments may be very moderate
and thereby not well safeguarded during both good and bad times
over the future. Uncertainty of position characterizes bonds in
this class.
B Bonds that are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments
or of maintenance of other terms of the contract over any long
period of time may be small. Moody's applies numerical modifiers
(1, 2, and 3) with respect to the bonds rated "Aa" through "B."
The modifier 1 indicates that the company ranks in the higher end
of its generic rating category; the modifier 2 indicates a
mid-range ranking; and the modifier 3 indicates that the company
ranks in the lower end of its generic rating category.
Caa Bonds that are rated Caa are of poor standing. These issues may be
in default or there may be present elements of danger with respect
to principal or interest.
Ca Bonds that are rated Ca represent obligations that are speculative
in a high degree. Such issues are often in default or have other
marked shortcomings.
C Bonds that are rated C are the lowest rated class of bonds and
issues so rated can be regarded as having extremely poor prospects
of ever attaining any real investment standing.
STANDARD & POOR'S RATINGS SERVICES
AAA This is the highest rating assigned by S&P to a debt obligation
and indicates an extremely strong capacity to pay interest and
repay principal.
AA Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from AAA issues only in small degree.
Principal and interest payments on bonds in this category are
regarded as safe.
A Debt rated A has a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the
adverse effects of changes in circumstances and economic
conditions than debt in higher rated categories.
BBB This is the lowest investment grade. Debt rated BBB has an
adequate capacity to pay interest and repay principal. Whereas it
normally exhibits adequate protection parameters, adverse economic
conditions or changing circumstances are more likely to lead to a
weakened capacity to pay interest and repay principal for debt in
this category than in higher rated categories.
Speculative Grade
Debt rated BB, CCC, CC and C are regarded, on balance, as
predominantly speculative with respect to capacity to pay interest and
repay principal in accordance with the terms of the obligation. BB
indicates the lowest degree of speculation, and C the highest degree of
speculation. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major
exposures to adverse conditions. Debt rated C1 is reserved for income bonds
on which no interest is being paid and debt rated D is in payment default.
In July 1994, S&P initiated an "r" symbol to its ratings. The "r"
symbol is attached to derivatives, hybrids and certain other obligations
that S&P believes may experience high variability in expected returns due
to non-credit risks created by the terms of the obligations.
"AA" to "CCC" may be modified by the addition of a plus or minus
sign to show relative standing within the major categories.
"NR" indicates that no public rating has been requested, that
there is insufficient information on which to base a rating, or that S&P
does not rate a particular type of obligation as a matter of policy.
_________________________________
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(1) Financial Statements
(a) Financial Statements (audited) for the fiscal year 2001(1)
(i) Portfolio of Investments as of December 31, 2001
(ii) Statement of Assets and Liabilities as of December 31, 2001
(iii) Statement of Operations for the year ended December 31, 2001
(iv) Statement of Changes in Net Assets for the year ended December 31, 2001
(v) Financial highlights for a share outstanding throughout the periods 2001 and 2000
and 1999.
(vi) Notes to Financial Statements
(vii) Report of Independent Accountants
(2) Exhibits
(a) Articles of Amendment and Restatement(2)
(b) Amended and Restated By-Laws of Registrant(2)
(c) Not applicable
(d) (i) Form of Registrant's Common Stock Certificate(2)
(ii) Form of Registrants 8.00% Cumulative Preferred Stock Certificate(3)
(iii) Articles Supplementary (4)
(iv) Form of Subscription Certificate (5)
(v) Form of Notice of Guaranteed Delivery of Payment (5)
(e) Automatic Dividend Reinvestment and Voluntary Cash Purchase Plan of Registrant(2)
(f) Not applicable
(g) Investment Advisory Agreement between Registrant and Gabelli Funds, LLC(4)
(h) Not applicable
(i) Not applicable
(j) Custodian Contract between Registrant and Boston Safe Deposit and Trust
Company(4)
(k) (i) Form of Transfer Agency and Service Agreement between Registrant
and Equiserve Trust Company(5)
(ii) Form of Subscription Agreement between Registrant and Equiserve Trust Company(5)
(l) Opinion and Consent of Miles & Stockbridge(5)
(m) Not applicable
(n) (i) Consent of PricewaterhouseCoopers LLP(5)
(ii) Powers of Attorney(5)
(o) Not applicable
(p) Not applicable
(q) Not Applicable
(r) Codes of Ethics of the Fund and the Advisor(5)
___________________
(1) Incorporated by reference to the Fund's annual report filed on March
8, 2002.
(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 811-05715, as filed
with the Securities and Exchange Commission on April 4, 1997.
(4) Incorporated by reference from the Registrant's Registration
Statement on Form N-2, File No. 333-24541 and 811-05715, as filed
with the Securities and Exchange Commission on May 9, 1997.
(5) Filed herewith.
Item 25. Marketing Arrangements
Not Applicable
Item 26. Other Expenses of Issuance and Distribution
The following table sets forth the estimated expenses to be
incurred in connection with the offering described in this Registration
Statement:
SEC registration fees.......................................... $6,929
New York Stock Exchange listing fee............................ $37,304
Printing and engraving expenses ............................... $75,000
Subscription Agent fee $125,000
Auditing fees and expenses .................................... $10,000
Legal fees and expenses........................................ $150,000
Blue Sky fees and expenses..................................... $5,000
Miscellaneous.................................................. $42,317
Total................................................... $451,550
Item 27. Persons Controlled by or Under Common Control with Registrant
NONE
Item 28. Number of Holders of Securities as of September 30, 2002
Title of Class Number of Record Holders
Capital Stock, par value $.001 per share 5,862
8.00% Cumulative Preferred Stock, par value $.001 per share 2,180
Item 29. Indemnification
The response of this Item is incorporated by reference to the
caption "Indemnification of Directors and Officers; Limitations on
Liability" in the Part B of this Registration Statement.
Insofar as indemnification for liability arising under the
Securities Act may be permitted to trustees, officers and controlling
persons of Registrant pursuant to the foregoing provisions, or otherwise,
Registrant has been advised that, in the opinion of the Commission, such
indemnification is against public policy as expressed in the Securities
Act, and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by
Registrant of expenses incurred or paid by a director, officer or
controlling person of Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered. 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 whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final
adjudication of such issue.
Item 30. Business and Other Connections of Investment Adviser
The Investment Adviser, a limited liability company organized
under the laws of the State of New York, acts as investment adviser to the
Registrant. The Registrant is fulfilling the requirement of this Item 30 to
provide a list of the officers and directors of the Investment Adviser,
together with information as to any other business, profession, vocation or
employment of a substantial nature engaged in by the Investment Adviser or
those officers and directors during the past two years, by incorporating by
reference the information contained in the Form ADV of the Investment
Adviser filed with the Commission pursuant to the Investment Advisers Act
of 1940 (Commission File No. 801-26202).
Item 31. Location of Accounts and Records
The accounts and records of the Registrant are maintained in part
at the office of the Investment Adviser at One Corporate Center, Rye, New
York 10580-1434, in part at the offices of the Custodian, Boston Safe
Deposit and Trust Company, One Boston Place, Boston, Massachusetts 02108,
at the offices of the Fund's Administrator, PFPC, Inc, 3200 Horizon Drive,
King of Prussia, Pennsylvania 19406, and in part at the offices of
Equiserve Trust Company, N.A., PO Box 43025, Providence, RI 02940-3025.
Item 32. Management Services
Not applicable.
Item 33. Undertakings
o 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.
o Not applicable.
o Not applicable.
o The undersigned registrant hereby undertakes:
1. To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration
statement:
(i) To include any prospectus required by section
10(a)(3) of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events
arising after the effective date of the
registration statement (or the most recent
post-effective amendment thereof) which,
individually or in the aggregate, represent a
fundamental change in the information set forth
in the registration statement. Notwithstanding
the foregoing, any increase or decrease in
volume of securities offered (if the total
dollar value of securities offered would not
exceed that which was registered) and any
deviation from the low or high end of the
estimated maximum offering range may be
reflected in the form of prospectus filed with
the Commission pursuant to Rule 424(b) if, in
the aggregate, the changes in volume and price
represent no more than 20% change in the maximum
aggregate offering price set forth in the
"Calculation of Registration Fee" table in the
effective registration statement.
(iii) To include any material information with respect
to the plan of distribution not previously
disclosed in the registration statement or any
material change to such information in the
registration statement;
2. To remove from registration by means of a post-effective
amendment any of the securities being registered which remain
unsold at the termination of the offering.
3. The undersigned registrant hereby undertakes to supplement
the prospectus, after expiration of the subscription period,
to set forth the results of the subscription offer, and the
terms of any subsequent reoffering thereof.
o 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.
o 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.
o Registrant undertakes to send by first class mail or other means
designed to ensure equally prompt delivery, within two business
days of receipt of a written or oral request, any Statement of
Additional Information constituting Part B of this Registration
Statement.
SIGNATURES
As required by the Securities Act of 1933, this Registrant's
Registration Statement has been signed on behalf of the Registrant, in the
City of Rye, State of New York, on the 8th day of November, 2002.
THE GABELLI CONVERTIBLE
AND INCOME SECURITIES FUND INC.
By: /s/ Bruce N. Alpert
----------------------------------------
Bruce N. Alpert
Vice President and Treasurer
As required by the Securities Act of 1933, this Registration
Statement has been signed below by the following persons in the capacities
and on the dates indicated.
Signature Title Date
*
------------------------------ Director, President and Chief November 8, 2002
Mario J. Gabelli Investment Officer
*
------------------------------ Director November 8, 2002
Karl Otto Pohl
*
------------------------------ Director November 8, 2002
E. Val Cerutti
*
------------------------------ Director November 8, 2002
Anthony J. Colavita
*
------------------------------ Director November 8, 2002
Dugald A. Fletcher
*
------------------------------ Director November 8, 2002
Anthony R. Pustorino
*
------------------------------ Director November 8, 2002
Werner J. Roeder, MD
*
------------------------------ Director November 8, 2002
Anthonie C. van Ekris
*
------------------------------ Director November 8, 2002
Salvatore J. Zizza
/s/ Bruce N. Alpert
------------------------------ Vice President and Treasurer November 8, 2002
Bruce N. Alpert
Attorney-in-Fact
EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION
EX-99 (d) (iv) Form of Subscription Certificate
EX-99 (d) (v) Form of Notice of Guaranteed Delivery of Payment
EX-99 (k) (i) Form of Transfer Agency and Service Agreement between
Registrant and Equiserve Trust Company
EX-99 (k) (ii) Form of Subscription Agreement between Registrant
and Equiserve Trust Company
EX-99 (l) (i) Opinion and Consent of Miles & Stockbridge
EX-99 (n) (i) Consent of PricewaterhouseCoopers LLP
EX-99 (n) (ii) Powers of Attorney
EX-99 (r) Code of Ethics