As filed with the Securities and Exchange Commission on September 24, 2002
Securities Act File No. 33-[__]
Investment Company Act File No. 811-05715
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-2
--------------------
[X] Registration Statement under the Securities Act of 1933
[ ] Pre-Effective Amendment No. 1
[ ] Post-Effective Amendment No. 1
and/or
[X] Registration Statement under the Investment
Company Act of 1940 Amendment No. [__]
(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(1) Price Fee
Shares of
Common Stock 100,000 $10.05 $1,005,000 $251.25
(1) As calculated pursuant to Rule 457(c) under the Securities Act of
1933, as amended. Based on the average of the high and low sales
prices reported on the New York Stock Exchange on____ , 2002.
CROSS-REFERENCE SHEET
PURSUANT TO RULE 481(a)
N-2 Item Number Location in Part A (Caption)
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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 Services...... 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
__________ RIGHTS FOR __________ 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 circum
stances, 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 [ ], 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 "[__ ]." 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") will also
be listed under the symbol "GCV." On [__], 2002 (the last date prior to the
Fund's common stock trading ex-Rights), 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 ______. THE OFFER WILL EXPIRE
AT 5:00 P.M., NEW YORK TIME, ON [__], 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 primary 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 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 CONSIDER ATIONS" ON
PAGE __ 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 [ ], 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 __ 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 SECURI TIES 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............................ $[ ] None $[ ]
Total................................ $[ ] None $[ ]
(1) Before deduction of expenses incurred by the Fund, estimated at $450,000.
---------------------------------
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 EXPERI ENCE 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 SUBSCRIP TION
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 Manage ment 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 in such manner and 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 [ ], 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 ___ 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
informa tion 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.
---------------------------------
September __, 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 INFORMA TION 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 SOLICI TATION 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 IN WHICH SUCH OFFER OR SOLICITATION WOULD BE
UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE
HAS BEEN NO CHANGE IN THE FACTS AS SET FORTH IN THE PROSPECTUS OR IN THE
AFFAIRS OF THE FUND SINCE THE DATE HEREOF.
---------------------------------
TABLE OF CONTENTS
PAGE
PROSPECTUS SUMMARY..................................................................................5
TABLE OF FEES AND EXPENSES.........................................................................16
FINANCIAL HIGHLIGHTS...............................................................................17
THE OFFER..........................................................................................19
USE OF PROCEEDS....................................................................................32
INVESTMENT OBJECTIVES AND POLICIES.................................................................33
MANAGEMENT OF THE FUND.............................................................................53
DIVIDENDS AND DISTRIBUTIONS........................................................................57
TAXATION ..........................................................................................58
CAPITALIZATION.....................................................................................60
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 _____.
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 NYSE.
IMPORTANT TERMS OF THE OFFER
Total number of shares of common stock
available for primary subscription.....................................................[ ]
Total number of shares of common stock
available for secondary over-
subscription if subscription price
exceeds net asset value per
share of common stock .................................................................[ ]
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...............................................................................$[ ]
--------------
* 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.
** Holders of Rights 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 by fully exercising Record
Date Stockholders to buy primary subscription stock that was not bought by
other Rights holders will be honored in full. If the requests for primary
subscription stock exceeds 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 common stock is trading
at or above its per share net asset value on the Expiration Date, the Fund
may determine to issue up to [__] 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 increase the number of
shares of secondary over-subscription stock by up to 20% of the sum of the
number of shares of primary subscription stock and secondary
over-subscription stock. Should the Fund determine to issue some or all of
the secondary over-subscription stock, it will be allocated among Record
Date Stockholders who submitted over-subscription requests in the same
manner as described in the preceding paragraph.
Stock acquired pursuant to the over-subscription privilege is
subject to allotment, which is more fully discussed under "The Offer --
Over-Subscription Privilege."
METHOD FOR EXERCISING RIGHTS
Except as described below, subscription certificates evidencing
the Rights ("Sub scription 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, Provi dence, 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 com pleted and executed
Subscription Certificate by the close of business on the
third business day after the Expiration Date pursuant to
a notice of guaran teed delivery. A fee may be charged
for this service. The notice of guaran teed 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 NYSE. Although no assurance can be given
that a market for the Rights will develop, trading in the Rights on the
NYSE will begin three 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 [__], 2002, one business day prior to the Expiration Date, due to
normal settlement procedures. Trading of the Rights on the NYSE will be
conducted on a when-issued basis 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 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 a Rights holder is unable to exercise
because the Rights represent the right to subscribe for less than one new
share of common stock. Any commissions will be paid by the selling Rights
holders. Neither the Fund nor the Subscription Agent will be responsi ble
if Rights cannot be sold and neither has guaranteed any minimum sales price
for the Rights. 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 stock holder, the Subscription Agent will attempt to
sell all of such stockholder's Rights and remit the net proceeds, if any,
to such 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 Sub scription 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 $[ ].
This figure is based on the per share Subscription Price of $[ ] 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..............................................................................[__], 2002
Subscription Period...................................................[__], 2002 through [__], 2002**
Expiration of the Offer*.................................................................[__], 2002**
Payment for Guarantees of Delivery Due*..................................................[__], 2002**
Confirmation to Participants.............................................................[__], 2002**
------------------------------------
* A Rights holder exercising Rights must deliver by [__] __, 2002
either (a) a Subscription Certificate and payment for stock or (b)
a notice of guaranteed delivery.
** Unless the offer is extended to a date no later than [__] __, 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 $[ ] 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 $[__ ] 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
-- Investment Adviser." 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 or accretion 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. If the Subscrip
tion Price is above the Fund's net asset
value per share of common stock on the
Expiration Date, you will experience an
immediate accretion of the aggregate net
asset value of your common stock, whether
or not you participate in the Offer. The
Fund cannot state precisely the extent of
this 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. For example, assuming that all
Rights are exercised, the Subscription
Price is $[__] and the Fund's net asset
value per share of common stock remains
the same ($_____ ) as on __, 2002 , the
Fund's net asset value per share of
common stock (after payment of esti mated
offering expenses) would be increased by
approxi mately $[_ ] ([ ]%) per share.
However, assuming that all rights are
exercised, the Subscription Price is
$[__] and the Fund's net asset value
increases to ____, the Fund's net asset
value per share of common stock would be
reduced by an equivalent amount. See
"Risk Factors and Special Con
siderations-- Dilution." 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 possi ble
dilution of your interest in the Fund.
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 approxi mately the last year
and one half the Fund's common stock has
traded at a premium over 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 unsus tainable 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 com
mon stock in a relatively short period of
time because, for those investors,
realization of a gain or loss on their
invest ments is likely to be more
dependent upon the existence of a premium
or discount than upon portfolio
performance. 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 per centage as
the Board may determine from time to
time) from net asset value. As of June
30, 2002, 305,200 shares of common stock
have been repurchased in the open market
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 approxi mates 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.
Charter Provisions..................As stockholders of a closed-end fund,
Fund stockholders do not have the right
to redeem their stock. Stockholders
desiring liquidity may, subject to
applicable securities laws, trade their
stock in the Fund on the New York Stock
Ex change or other markets on which the
shares may trade at the then current
market value. In addition, certain provi
sions of the Fund's charter (the
"Charter") and the Fund's by-laws (the
"By-Laws") may be regarded as "anti-take
over" provisions. Pursuant to these
provisions, only one of three classes of
directors is elected each year, and the
affir mative 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 com pany. 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
stock holders 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. There is no
minimum rating that is acceptable for
invest ment by the Fund; however, it is
expected that not more than 50% of the
Fund's portfolio will consist of
securities rated CCC or lower by Standard
& Poor's Ratings Group or Caa or lower by
Moody's Investor Service 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--
Other Invest ments."
Characteristics and Risks of
Income Securities...................The Fund will invest in two types of
income securities: fixed income
securities and equity securities that are
ex pected to periodically accrue or
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 securi ties rated CCC or lower
by S&P. 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 de crease 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 periodi cally reset and
for longer term securities.
The dividend income stream associated
with equity income securities generally
is not guaranteed and will be subordi
nate 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 Con siderations -- 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 -- Other
Investments." 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 ex change
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. These techniques may
involve special risks. See "Special Risks
of Derivative Transactions."
Foreign Securities.................The Fund may invest up to 25% of its
total assets in securi ties 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
cur rency exchange rates and revaluations
of currencies. See "Investment Objectives
and Policies-- Other Investments --
Foreign Securities" and "Risk Factors and
Special Con siderations-- Foreign
Securities and Other Investments."
Leverage............................As provided in the 1940 Act and subject
to certain excep tions, 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 convert ible 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 com mon 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 gener ally making the Fund's total
return to such stockholders more
volatile. 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 cer tain other changes. 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. See "In vestment
Objectives and Policies-- Leveraging" and
"Risk Factors and Special
Considerations-- Risks of Leveraging and
Issuance of Senior Securities."
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 Ad viser 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
require ments. The Fund is also, however,
subject to certain statu tory 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
regu lated 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
Voluntary Cash Purchase Plan Purchase Fees.............................. $0.75(1)
Automatic Dividend Reinvestment and Voluntary Cash Pur
chase Plan Sales Fees................................................... $2.50(1)
ANNUAL OPERATING EXPENSES (as a percentage of net
assets attributable to Common Stock)
Management Fees......................................................... 1.00%
Other Expenses 0.50%(2)
-----------------------------
Total Annual Operating Expenses................................ 1.50%
-----------------------------
(1) Stockholders participating in the Fund's Automatic Dividend
Reinvestment and Voluntary Cash Purchase Plan directly would pay
$0.75 per transaction to purchase shares and $2.50 per transaction
to sell shares. See "Automatic Dividend Reinvest ment and
Voluntary Cash Purchase Plan" in the SAI.
(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 expenses at levels set forth in the above
table.
You would pay the following expenses on a $1,000 investment, assuming
a 5% annual return:(2)
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
$15 $47 $82 $179
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.
----------------------------
(2) Amounts are exclusive of fees discussed in Note (1) above.
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 outstanding
throughout each period: Six Months
Ended June 30, Year Ended December 31,
Operating performance: 2002 -----------------------------------------------------
(Unaudited) 2001 2000 1999 1998 1997
------------- -------- --------- -------- -------- --------
Net asset value, beginning of period.................... $ 9.92 $ 10.02 $ 11.40 $ 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 share
holders, end of period.................................. $ 9.12 $ 9.92 $ 10.02 $ 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%(d) 6.58% 6.49% 4.35% 4.54% 4.23%
Ratio of operating expenses to average net assets
attributable to common shares (b).................. 1.50%(d) 1.46% 1.48% 1.80% 1.83% 1.68%
Ratio of operating expenses to average total net assets
including liquidation value of preferred shares.... 1.09%(d) 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 (c)................................ $ 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) Amount represents less than $0.005 per share.
(b) 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%.
(c) Based on weekly prices.
(d) Annualized.
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 $ $25.00 $
2000 $ $25.00 $
1999 $ $25.00 $
1998 $ $25.00 $
1997 $ $25.00 $
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 New York Stock Exchange 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 benefi cial 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 [__], 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 [__],
2002, and ends at 5:00 p.m., New York time, on [__], 2002 (the
"Subscription Period"), unless extended by the Fund to a date not later
than [__], 2002, 5:00 p.m., New York time. See "Expiration of the Offer."
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 Stockhold ers") 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 common
stock on the Expiration Date is trading at or above its per share net asset
value, the Fund may issue up to an additional [__] 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 increase the [__] Secondary Over-Subscription Shares by 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 and any Secondary Over-Subscription 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, bro ker-dealers whose shares
are held of record by Cede & Co., Inc., nominee for The Deposi tory 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
Certificates 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" below. 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 pur chased 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 three Business Days before the Record Date and may be
conducted until the close of trading on the last Exchange trading day prior
to the Expiration Date. Trading of the Rights on the NYSE will be conducted
on a when-issued basis 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 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 who 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 in creased by approximately $[_ ] thousand. 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 stock
holder 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 more than the number of Shares for which the
Rights issued to them are exercisable on Primary Subscription. Record Date
Stockhold ers 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-subscrip tion 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 common
stock on the Expiration Date is trading at or above its per share net asset
value, 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 increase the [__]
Secondary Over- Subscription Shares by up to 20% of the sum of the Primary
Subscription Shares and Secondary Over-Subscription Shares. Should the
Pricing Committee determine to issue some or all of these Secondary
Over-Subscription Shares, they will be allocated among Record Date
Stockholders that submitted over-subscription requests in the same manner
as described above. Any Secondary Over-Subscription Shares issued by the
Fund, collectively with any Primary Subscription Shares not subscribed for
through the Primary Subscription, 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 $[_].
The Fund announced the Offer on August 28, 2002. The net asset
value per share of common stock at the close of business on [__], 2002 and
[__], 2002 (the last date prior to the Fund's common stock trading
ex-Rights), was $[_ ] and $[_ ], respectively. The last reported sale price
of a share of the Fund's common stock on the NYSE on those dates was $[_ ]
and $[_ ], respectively, representing a [_ ]% and a [_ ]% premium,
respectively, in relation to the net asset value per share of common stock
at the close of business on these dates and a [__]% and a [__]% premium,
respectively, in relation to the Subscription Price.
SALES BY SUBSCRIPTION AGENT
Holders of Rights who 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 [__], 2002. Upon timely
receipt of the appropriate instructions to sell Rights, the Subscrip tion
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 independ ent
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 accom panying 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 commis sions,
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 [_], 2002,
unless extended by the Fund to a date not later than [_], 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 $[_
] 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 Subscrip tion 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
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 (telecopy
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 $[_] per Share. To be
accepted, the payment, together with the executed
Subscription Certificate, must be received by the Sub
scription 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 PUR SUANT 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 CERTIFI CATE 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.
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. except that holders of
Rights who are residents of the province of Ontario may make payment in
U.S. dollars by money order or check drawn on a bank located in the
province of Ontario. 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 his 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 instruc
tions.
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 pay ments 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 subscribers as soon as practicable after
the corresponding Rights have been validly exercised and full payment for
the Shares has been received and cleared. Certifi cates 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 Internal Revenue Code
of 1986, as amended (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
Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
including corporate savings and 401(k) plans, Keogh Plans of self-employed
individuals and Individual Retirement Accounts ("IRA") (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 of
nondeductible contributions. In the case of Benefit Plans qualified under
Section 401(a) 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 $[_ ] million, before deducting
expenses payable by the Fund estimated at approximately $[_ ]. 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
its net 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 after six months. These securities may be retained in the Fund's
portfolio to permit orderly disposition or to establish long-term holding
periods for Federal income tax purposes. The Fund 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 evalua tion 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 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 the underlying common stocks;
o the prices of the securities relative to the 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. See "Convertible Securities" in the Additional Statement. 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 inter ests of the Fund.
Convertible securities are generally not investment grade, that
is, not rated within the four highest categories by Standard & Poor's
Rating Group ("S&P") and Moody's Investor Services Inc. ("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."
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. 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 has no limit on the amount of its net assets it may
invest in unregistered and otherwise illiquid convertible securities,
income 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 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 fixed income securities, the 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
Options
-------
On behalf of the Fund, the Investment Adviser may, subject to
guidelines of the Board of Directors, 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 outstand ing options exceeds 10% of the Fund's total assets.
See "Investment Practices -- Derivative Instruments" in the SAI.
Futures Contracts and Options Thereon
-------------------------------------
On behalf of the Fund, the Investment Adviser may, subject to
guidelines of the Board of Directors, purchase and sell financial futures
contracts and options thereon which are traded on a commodities exchange or
board of trade for certain hedging, yield enhance ment 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
-----------------------------------
Subject to guidelines of the Board of Directors, the Fund may
enter into forward foreign currency exchange contracts to protect the value
of its portfolio against future changes in the level of currency exchange
rates. The Fund may enter into such contracts on a spot, i.e., cash, basis
at the rate then prevailing in the currency exchange market or on a forward
basis, by entering into a forward contract to purchase or sell currency. A
forward contract on foreign currency is an obligation to purchase or sell a
specific currency at a future date, which may be any fixed number of days
agreed upon by the parties from the date of the contract at a price set on
the date of the contract. The Fund's dealings in forward contracts will be
limited to hedging involving either specific transactions or portfolio
positions, 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 from time to time make short sales of securities it
owns or has the right to acquire through conversion or exchange of other
securities it owns. A short sale is "against the box" to the extent that the
Fund contemporaneously owns or has the right to obtain at no added cost
securities identical to those sold short. In a short sale, the Fund does not
immediately deliver the securities sold or receive the proceeds from the
sale. The Fund may not make short sales or maintain a short position if it
would cause more than 25% of the Fund's total assets, taken at market value,
to be held as collateral for such sales.
To secure its obligations to deliver the securities sold short,
the Fund will deposit in escrow in a separate account with its custodian an
equal amount to the securities sold short or securities convertible into,
or exchangeable for, such securities. The Fund may close out a short
position by purchasing and delivering an equal amount of the securities
sold short, rather than by delivering securities already held by the Fund,
because the Fund may want to continue to receive interest and dividend
payments on securities in its portfolio that are convertible into the
securities sold short.
The Fund may make a short sale in order to hedge against market
risks when it believes that the price of a security may decline, causing a
decline in the value of a security owned by the Fund or a security
convertible into, or exchangeable for, such security, or when the Fund does
not want to sell the security it owns, because, among other reasons, it
wishes to defer recognition of gain or loss for U.S. Federal income tax
purposes. Addition ally, 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 contra 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. While these loans of portfolio securities will
be made in accordance with guidelines approved by the Board of Directors,
there can be no assurance that borrowers will not fail financially. On
termination of the loan, the borrower is required to return the securities
to the Fund, and any gain or loss in the market price during the loan would
inure to the Fund. If the 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 "Special Investment
Methods -- 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 are currently outstanding. 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 appreci ation
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 securi ties 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 commit
ments as long as the obligation to purchase continues.
TEMPORARY 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, are not 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 broker age commissions or dealer mark-ups and other transaction
costs on the sale of securities and reinvestment in other securities. The
portfolio turnover rate is computed by dividing the lesser of the amount of
the securities purchased or securities sold by the average monthly value of
securities owned during the year (excluding securities whose maturities at
acquisi tion 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 invest ment
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.
However, if the Subscription per share Price is above the Fund's
net asset value 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 $[_ ] Subscription Price:
Scenario 1: (assumes net asset value per share is below subscription price)(1)
NAV...............................................................................$
----------
Subscription Price................................................................$
----------
Increase in NAV($)(2).............................................................$
----------
Increase in NAV(%).................................................................... %
------
Scenario 2: (assumes net asset value is above subscription price)(1)
NAV...............................................................................$
----------
Subscription Price................................................................$
----------
Reduction in NAV($)(2)..................................................................$( )
----
Reduction in NAV(%).....................................................................( )%
----
------------------------------------
(1) Both examples assume full primary and over-subscription privilege
exercise. 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 Standard & Poor's Ratings Group
("S&P") and Moody's Investor Service ("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
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.
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. Consider able 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 underwrit ing
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, like 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. Accord ingly, 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
Objec tives and Policies -- Investment Methodology of the Fund --
Convertible Securities."
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
in creased transaction costs on non-U.S. securities markets and the
increased costs of maintain ing the custody of foreign securities.
The Fund may purchase sponsored American Depository Receipts
("ADRs") or U.S. denominated securities of foreign issuers, which shall not
be included in this foreign securities limitation. ADRs are receipts issued
by United States banks or trust companies in respect of securities of foreign
issuers held on deposit for use in the United States securities markets.
While ADRs may not necessarily be denominated in the same currency as the
securities into which they may be converted, many of the risks associated
with foreign securities may also apply to ADRs.
SPECIAL RISKS OF DERIVATIVE TRANSACTIONS
Participation in the options or futures markets and in currency
exchange transac tions 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 move ments 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 instru ment 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 hedg ing techniques; and
o the creditworthiness of counterparties.
For a further description, see "Risk Factors and Special Considerations --
Futures Transac tions" 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 diminish
ing rather than enhancing the return to common stockholders. If the Fund were
to utilize leverage, these two risks would generally make the Fund's total
return to common stock holders more 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 disadvan tageous 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
Securities and Exchange Commission ("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 inconsis tently with its fundamental investment restrictions or
other fundamental policies or (iii) seeking to operate other than as an
investment company.
Preferred stock will be issued only if the Board of Directors of the
Fund determines in light of all relevant circumstances known to the Board
that to do so would be in the best interests of the Fund and its common
stockholders. The circumstances that the Board will consider before issuing
preferred stock include not only the dividend rate on the preferred stock in
comparison to the historical performance of the Fund but also such matters as
the terms on which the Fund can call the preferred stock, the circumstances
in which the Investment Adviser will earn additional investment advisory fees
on the net assets attribut able to the preferred stock and the ability of the
Fund to meet the asset coverage tests and other requirements imposed by the
rating agencies for such preferred stock.
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.
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 compensa tion 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 distribu tions 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 $[__] 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., act as primary investment adviser to
20 management investment companies with aggregate net assets of $[__]
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 $[__] 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 $[__] 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 "control ling 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, 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.
In addition to the fees of the Investment Adviser, the Fund is
responsible for the payment of all its other expenses incurred in the
operation of the Fund, which include, among other things, expenses for
legal and independent accountant's services, stock exchange listing fees,
expenses relating to the offering of preferred stock, costs of printing
proxies, stock certificates and stockholder reports, charges of State
Street Bank and Trust Company ("State Street," the "Custodian," "Transfer
Agent" or "Dividend Disbursing Agent") charges of EquiServe, SEC fees, fees
and expenses of unaffiliated directors, accounting and printing costs, the
Fund's pro rata portion of membership fees in trade organizations, fidelity
bond coverage for the Fund's officers and employees, interest, brokerage
costs, taxes, expenses of qualifying the Fund for sale in various states,
expenses of personnel performing stockholder servicing functions,
litigation and other extraordinary or non-recurring expenses and other
expenses properly payable by the Fund.
The Investment Advisory Contract contains provisions relating to
the selection of securities brokers to effect the portfolio transactions of
the Fund. Under those provisions, the 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 diversi fied manufacturing company, and Lynch
Interactive Corporation, a multimedia and communications services company;
and Director of Spinnaker Industries, Inc., a manufac turing 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. In the event the Fund's
common stock is trading at a discount to its net asset value, the Board of
Directors would consider quarterly distributions and/or adopting a policy
of distributing at least 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 stock holder 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 proposed 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 proposed 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 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 distribu tions 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.
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. The common stock of the Fund is listed
on the New York Stock Exchange under the symbol GCV and began trading March
31, 1995.
-------------------
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 approxi mately
proportionate reductions in the other ordinary rates.
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 common stock is not redeemable and has
no preemptive, conversion or cumulative voting rights.
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 [ ]
--------------------- ------------------- ------------------
Preferred Stock........... 1,000,000,000(1) 2,000,000 [ ]
--------------------- ------------------- ------------------
(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 Fund's common stock is listed and traded on the NYSE under the
symbol "GCV." The average weekly trading volume of the common stock on the
NYSE for the 12 months ended December 31, 2001 was 41,990 shares. 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
June 30, 2002
March 31, 2002
December 31, 2001
September 30, 2001
June 30, 2001
March 31, 2001
December 31, 2000
September 30, 2000
June 30, 2000
March 31, 2000
------------------------------------
(1) As reported on the NYSE
As of October [_], 2002, the Fund's common stock was trading at a
[premium] of [__]% [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.
It was a condition to the issuance of the 8% Stock that it be
rated "AAA" Standard & Poor's Ratings Services ("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. The Fund at its option may redeem the 8% Stock in
whole or in part for cash at a price equal to the redemption price.
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 (includ ing 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" transac tions in order to avoid the creation of a class
of senior security.
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, a "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.
VOTING RIGHTS
Except as otherwise stated in this Prospectus and as otherwise
required by applica ble 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 repurchases, 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 305,200 shares as of 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 outstand ing 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 RE
STATED 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 compli ance 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 incorpo rated 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 informa tion 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 docu ments, and each statement is
qualified in its entirety by reference to the copy of the applica ble
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.
TABLE OF CONTENTS OF SAI
PAGE
STATEMENT OF ADDITIONAL INFORMATION...............................................................B-1
INVESTMENT OBJECTIVES AND POLICIES................................................................B-2
INVESTMENT RESTRICTIONS..........................................................................B-21
MANAGEMENT OF THE FUND...........................................................................B-23
PORTFOLIO TRANSACTIONS...........................................................................B-33
AUTOMATIC DIVIDEND REINVESTMENT
AND VOLUNTARY CASH PURCHASE PLAN........................................................B-35
TAXATION ........................................................................................B-37
S&P DISCOUNT FACTORS.............................................................................B-43
NET ASSET VALUE..................................................................................B-47
GENERAL INFORMATION..............................................................................B-48
BENEFICIAL OWNER.................................................................................B-48
=================================
THE GABLELLI CONVERTIBLE AND INCOME SECURITIES FUND INC.
[ ] SHARES
OF COMMON STOCK
ISSUABLE UPON EXERCISE OF RIGHTS
TO SUBSCRIBE TO SUCH SHARES
[GABELLI GLOBAL LOGO]
PROSPECTUS
October __, 2002
=================================
Subject to Completion Dated September 24, 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 diversi fied, closed-end management investment company
registered under the Investment Com pany 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 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 October __, 2002 (the "Prospec tus"). This SAI does not include
any information that a prospective investor should consider before
purchasing stock of the Fund, and investors should obtain and read the
Prospectus prior to purchasing stock. 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-21
MANAGEMENT OF THE FUND...........................................................................B-23
PORTFOLIO TRANSACTIONS...........................................................................B-33
AUTOMATIC DIVIDEND REINVESTMENT
AND VOLUNTARY CASH PURCHASE PLAN........................................................B-35
TAXATION ........................................................................................B-37
S&P DISCOUNT FACTORS.............................................................................B-43
NET ASSET VALUE..................................................................................B-47
GENERAL INFORMATION..............................................................................B-48
BENEFICIAL OWNER.................................................................................B-48
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 Ex change Commission's
office at no charge.
This Statement of Additional Information is dated October __, 2002.
INVESTMENT OBJECTIVES AND POLICIES
INVESTMENT OBJECTIVES
The Fund's primary investment objective is a high level of total
return on its assets. Under normal market conditions, the Fund will
invest at least 80% 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. A Convertible Security entitles the holder to receive the
fixed income of a bond or the dividend preference of a preferred stock
until the holder elects to exercise the conversion privilege.
A Convertible Security's position in a company's capital structure
depends upon its particular provisions. In the case of subordinated
convertible debentures, the holder's claims on assets and earnings are
subordinated to the claims of others and are senior to the claims of common
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 environ ment 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 fixed income securities, the 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 Gabelli
Funds, Inc. (the "Adviser"), there is a reasonable prospect of capital
appreciation significantly greater than the brokerage and other transaction
expenses involved.
In general, securities which are the subject of such an offer or
proposal sell at a premium to their historic market price immediately prior
to the announcement of the offer or may also discount what the stated or
appraised value of the security would be if the contemplated transaction were
approved or consummated. Such investments may be advantageous when: the
discount significantly overstates the risk of the contingencies involved; the
market significantly undervalues the securities, assets or cash to be
received by 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 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 restric tions (see below, "Investment Restrictions") including
the requirement that, (a) as to 75% of its total assets, it will not invest
more than 5% of its total assets in the securities of any one issuer and
(b) it will not invest more than 25% of its total assets in any one
industry. Certain investments are short-term in nature and will tend to
increase the turnover ratio of the Fund thereby increasing its brokerage
and other transaction expenses as well as make it more difficult for the
Fund to meet the tests for favorable tax treatment as a regulated
investment company (a "RIC") under the Internal Revenue Code of 1986, as
amended (the "Code") (see "Dividends, Distributions and Taxes"). The
Adviser intends to select invest ments of the type described which, in its
view, have a reasonable prospect of capital appreciation which is
significant in relation to both the risk involved and the potential of
available alternate investments as well as to monitor the effect of such
investments on the tax qualification tests of the Code.
Unregistered Convertible Securities and Other Illiquid
Investments. As set forth in the Prospectus, the Fund may invest without
limitation in unregistered Convertible Securi ties and other illiquid
investments, including repurchase agreements having a maturity of longer
than seven days.
The staff of the Securities and Exchange Commission (the "SEC")
has taken the position that purchased over-the-counter ("OTC") options and
the assets used as "cover" for written OTC options are illiquid. The assets
used as cover for OTC options written by the Fund will be considered
illiquid unless the OTC options are sold to qualified dealers who agree
that the Fund may repurchase any OTC option it writes at a maximum price to
be calculated by a formula set forth in the option agreement. The cover for
an OTC option written subject to this procedure will be considered illiquid
only to the extent that the maximum repurchase price under the option
formula exceeds the intrinsic value of the option.
When Issued and Delayed Delivery Securities and Forward Commitments.
As discussed in the Prospectus, the Fund may purchase securities on a "when,
as and if issued" basis under which the issuance of the security depends upon
the occurrence of a subsequent event, such as approval of a merger, corporate
reorganization or debt restructuring. The commitment for the purchase of any
such security will not be recognized in the portfolio of the Fund until the
Adviser determines that issuance of the security is probable. At such time,
the Fund will record the transaction and, in determining its net asset value,
will reflect the value of the security daily. At such time, the Fund will
also establish a segregated account with its custodian bank in which it will
maintain cash or liquid high-grade debt securities at least equal in value to
the amount of its commitments. The Adviser does not believe that the net
asset value of the Fund will be adversely affected by its purchase of
securities on this basis.
Foreign Securities. Subject to the limitations described in the
Prospectus, the Fund may invest in foreign securities which involve certain
risks not associated with domestic investments.
Among other risks, foreign markets have different clearance and
settlement procedures, and in certain markets there have been times when
settlements have failed to keep pace with the volume of securities
transactions, making it difficult to conduct such transactions. Delays in
settlements could result in temporary periods when assets of the Fund are
uninvested and no return is earned thereon. The inability of the Fund to
make intended security purchases due to settlement problems could cause the
Fund to miss attractive investment opportunities. Inability to dispose of a
portfolio security due to settlement problems could result either in losses
to the Fund due to subsequent declines in the value of such portfolio
security or, if the Fund has entered into a contract to sell the security,
could result in possible liability to the purchaser.
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 compara ble quality,
are generally considered to be high yield bonds. These high yield bonds are
subject to greater risks than lower yielding, higher rated debt securities.
Lower rated securities are subject to risk factors such as: (a)
vulnerability to economic downturns and changes in interest rates; (b)
sensitivity to adverse economic changes and corporate developments; (c)
redemption or call provisions which may be exercised at inopportune times;
(d) difficulty in accurately valuing or disposing of such securities; (e)
federal legislation which could affect the market for such securities; and
(f) special adverse tax consequences associated with investments in certain
high yield, high risk bonds structured as zero coupon or pay-in-kind
securities.
High yield bonds, like other bonds, may contain redemption or call
provisions. If an issuer exercises these provisions in a declining interest
rate market, the Fund would have to replace the security with a lower
yielding security, resulting in lower return for investors. Conversely, a
high yield bond's value will decrease in a rising interest rate market.
The market for high yield bonds is in some cases more thinly
traded than the market for investment grade bonds, and recent market
quotations may not be available for some of these bonds. Market quotations
are generally available only from a limited number of dealers and may not
represent firm bids from such dealers or prices for actual sales. As a
result, the Fund may have greater difficulty valuing the high yield bonds
in its portfolio accurately and disposing of these bonds at the time or
price desired.
Ratings assigned by Moody's and S&P to high yield bonds, like
other bonds, attempt to evaluate the timeliness of principal and interest
payments on those bonds. However, such ratings do not assess the risk of a
decline in the market value of those bonds. In addition, ratings may fail
to reflect recent events in a timely manner and are subject to change. If a
rating with respect to a portfolio security is changed, the Adviser will
determine whether the security will be retained based upon the factors the
Adviser considers in acquiring or holding other securities in the
portfolio. Investment in high yield bonds may make achieve ment of the
Fund's investment objective more dependent on the Adviser's own credit
analysis than is the case for higher rated bonds.
Market prices for high yield bonds tend to be more sensitive than
those for higher rated securities due to many of the factors described
above, including the creditworthiness of the issuer, redemption or call
provisions, the liquidity of the secondary trading market and changes in
credit ratings, as well as interest rate movements and general economic
conditions. In addition, yields on such bonds will fluctuate over time. An
economic downturn could severely disrupt the market for high yield bonds.
The risk of default in payment of principal and interest on high
yield bonds is significantly greater than with higher rated debt securities
because high yield bonds are generally unsecured and are often subordinated
to other obligations of the issuer, and because the issuers of high yield
bonds usually have high levels of indebtedness and are more sensitive to
adverse economic conditions, such as recession or increasing interest
rates. Upon a default, bondholders may incur additional expenses in seeking
recovery.
As a result of all these factors, the net asset value of the Fund
to the extent it invests in high yield bonds, is expected to be more
volatile than the net asset value of funds which invest solely in higher
rated debt securities.
Derivative Instruments
Options. The Fund may, from time to time, subject to guidelines of
the Board of Directors and the limitations set forth in the Prospectus and
applicable rating agency guidelines, purchase or sell, i.e., write, options
on securities, securities indices and foreign currencies which are listed
on a national securities exchange or in the OTC market, as a means of
achieving additional return or of hedging the value of the Fund's
portfolio.
A call option is a contract that gives the holder of the option
the right to buy from the writer of the call option, in return for a
premium, the security or currency underlying the option at a specified
exercise price at any time during the term of the option. The writer of the
call option has the obligation, upon exercise of the option, to deliver the
underlying security or currency upon payment of the exercise price during
the option period.
A put option is a contract that gives the holder of the option the
right, in return for a premium, to sell to the seller the underlying
security at a specified price. The seller of the put option has the
obligation to buy the underlying security upon exercise at the exercise
price.
A call option is "covered" if the Fund owns the underlying
instrument covered by the call or has an absolute and immediate right to
acquire that instrument without additional cash consideration (or for
additional cash consideration held in a segregated account by its
custodian) upon conversion or exchange of other instruments held in its
portfolio. A call option is also covered if the Fund holds a call on the
same instrument as the call written where the exercise price of the call
held is (1) equal to or less than the exercise price of the call written or
(2) greater than the exercise price of the call written if the difference
is maintained by the Fund in cash, U.S. Government securities or other
liquid securities in a segregated account with its custodian. A put option
is "covered" if the Fund maintains cash or other high grade short-term
obligations with a value equal to the exercise price in a segregated
account with its custodian, or else holds a put on the same instrument as
the put written where the exercise price of the put held is equal to or
greater than the exercise price of the put written. The Adviser, on behalf
of the Fund, has no present intention to engage in uncovered option
transactions. If the Fund has written an option, it may terminate its
obligation by effecting a closing purchase transaction. This is
accomplished by purchasing an option of the same series as the option
previously written. However, once the Fund has been assigned an exercise
notice, the Fund will be unable to effect a closing purchase transaction.
Similarly, if the Fund is the holder of an option it may liquidate its
position by effecting a closing sale transaction. This is accomplished by
selling an option of the same series as the option previously purchased.
There can be no assurance that either a closing purchase or sale
transaction can be effected when the Fund so desires.
The Fund will realize a profit from a closing transaction if the
price of the transac tion 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 underly ing security.
Other principal factors affecting the market value of a put or a call
option include supply and demand, interest rates, the current market price
and price volatility of the underlying security and the time remaining
until the expiration date.
An option position may be closed out only on an exchange which
provides a secondary market for an option of the same series. Although the
Fund will generally purchase or write only those options for which there
appears to be an active secondary market, there is no assurance that a
liquid secondary market on an exchange will exist for any particular
option. In such event it might not be possible to effect closing
transactions in particular options, so that the Fund would have to exercise
its options in order to realize any profit and would incur brokerage
commissions upon the exercise of call options and upon the subsequent
disposition of underlying securities for the exercise of put options. If
the Fund, as a covered call option writer, is unable to effect a closing
purchase transaction in a secondary market, it will not be able to sell the
underlying security until the option expires or it delivers the underlying
security upon exercise or otherwise covers the position.
The Fund intends to qualify as a RIC under the Code. One
requirement for such qualification is that less than 30% of the Fund's
gross income must be derived from the gains from the sale or other
disposition of securities held for less than three months. Therefore, the
Fund may be limited in its ability to engage in options transactions. In
addition, investments in options may be limited or prohibited by the
applicable S&P Guidelines.
Options on Securities Indices. The Fund may purchase and sell
securities index options. One effect of such transactions may be to hedge
all or part of the Fund's securities holdings against a general decline in
the securities market or a segment of the securities market. Options on
securities indices are similar to options on stocks except that, rather
than the right to take or make delivery of stock at a specified price, an
option on a securities index gives the holder the right to receive, upon
exercise of the option, an amount of cash if the closing level of the
securities index upon which the option is based is greater than, in the
case of a call, or less than, in the case of a put, the exercise price of
the option.
The Fund's successful use of options on indices depends upon its
ability to predict the direction of the market and is subject to various
additional risks. The correlation between movements in the index and the
price of the securities being hedged against is imperfect and the risk from
imperfect correlation increases as 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
Prospec tus. Currency options may be subject to position limits which may
limit the ability of the Fund to fully hedge its positions by purchasing the
options.
As in the case of interest rate futures contracts and options
thereon, described below, the Fund may hedge against the risk of a decrease
or increase in the U.S. dollar value of a foreign currency denominated debt
security which the Fund owns or intends to acquire by purchasing or selling
options contracts, futures contracts or options thereon with respect to a
foreign currency other than the foreign currency in which such debt
security is denomi nated, where the values of such different currencies
(vis-a-vis the U.S. dollar) historically have a high degree of positive
correlation.
Futures Contracts. The Fund will enter into futures contracts only
for certain bona fide hedging, yield enhancement and risk management
purposes. The Fund may enter into futures contracts for the purchase or
sale of debt securities, financial indices, and U.S. Government securities
(collectively, "interest rate futures contracts"). It may also enter into
futures contracts for the purchase or sale of foreign currencies in which
securities held or to be acquired by the Fund are denominated, or the value
of which have a high degree of positive correlation to the value of such
currencies as to constitute an appropriate vehicle for hedging. In
addition, the Fund may enter into futures contracts on stock and bond
indices (collectively, "securities indices"). The Fund may enter into such
futures contracts both on U.S. and foreign exchanges.
A "sale" of a futures contract (or a "short" futures position)
means the assumption of a contractual obligation to deliver the assets
underlying the contract at a specified price at a specified future time. A
"purchase" of a futures contract (or a "long" futures position) means the
assumption of a contractual obligation to acquire the assets underlying the
contract at a specified price at a specified future time. Certain futures
contracts are settled on a net cash payment basis rather than by the sale
and delivery of the assets underlying the futures contracts. U.S. futures
contracts have been designed by exchanges that have been designated as
"contract markets" by the Commodity Futures Trading Commission (the
"CFTC"), an agency of the U.S. Government, and must be executed through a
futures commission merchant, i.e., a brokerage firm, which is a member of
the relevant contract market. Futures contracts trade on these contract
markets and their affiliated clearing organizations guarantee performance
of the contracts as between the clearing members of the exchange.
At the time a futures contract is purchased or sold, the Fund must
allocate cash or securities as a deposit payment (initial margin). It is
expected that the initial margin on U.S. exchanges will vary from one-half of
1% to 4% of the face value of the contract. Under certain circumstances,
however, such as during periods of high volatility, the Fund may be required
by an exchange to increase the level of its initial margin payment.
Thereafter, the futures contract is valued daily and the payment in cash of
"variation margin" may be required, a process known as "mark-to-the-market."
Each day the Fund is required to provide or is entitled to receive variation
margin in an amount equal to any change in the value of the contract since
the preceding day.
Although futures contracts by their terms may call for the actual
delivery or acquisition of underlying assets, in most cases the contractual
obligation is extinguished by offset before the expiration of the contract.
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
require ments, investors may close futures contracts through offsetting
transactions which could distort the normal relationship between the cash
and futures markets. Second, the liquidity of the futures market depends on
participants entering into offsetting transactions rather than making or
taking delivery. To the extent participants decide to make or take
delivery, liquidity in the futures market could be reduced, thus producing
price distortions. Third, from the point of view of speculators, the margin
deposit requirements in the futures market are less onerous than margin
requirements in the securities market. Increased participation by
speculators in the futures market may cause temporary price distortions.
Thus, a correct forecast of interest rate trends by the investment adviser
may still not result in a successful transaction.
If the Fund seeks to hedge against a decline in the value of its
portfolio securities and sells futures contracts on other securities which
historically have had a high degree of positive correlation to the value of
the portfolio securities, the value of its portfolio securities might
decline more rapidly than the value of a poorly correlated futures contract
rises. In that case, the hedge will be less effective than if the
correlation had been greater. In a similar but more extreme situation, the
value of the futures position might in fact decline while the value of the
portfolio securities holds steady or rises. This would result in a loss
that would not have occurred but for the attempt to hedge.
Options on Futures Contracts. The Fund may also enter into options
on futures contracts for certain bona fide hedging, yield enhancement and
risk management purposes. The Fund may purchase put and call options and
write put and call options on futures contracts that are traded on U.S. and
foreign exchanges. The Adviser, on behalf of the Fund, has no present
intention to engage in uncovered option transactions. An option on a futures
contract gives the purchaser the right, in return for the premium paid, to
assume a position in a futures contract (a long position if the option is a
call and a short position if the option is a put) at a specified exercise
price at any time during the option exercise period. The writer of the option
is required upon exercise to assume a short futures position (if the option
is a call) or a long futures position (if the option is a put). Upon exercise
of the option, the assumption of offsetting futures positions by the writer
and holder of the option will be accompanied by delivery of the accumulated
cash balance in the writer's futures margin account which represents the
amount by which the market price of the futures contract at exercise,
exceeds, in the case of a call, or is less than, in the case of a put, the
exercise of the option on the futures contract.
The Fund will be considered "covered" with respect to a call
option it writes on a futures contract if the Fund owns the asset which is
deliverable under the futures contract or an option to purchase that
futures contract having a strike price equal to or less than the strike
price of the "covered" option and having an expiration date not earlier
than the expiration date of the "covered" option, or if it segregates and
maintains with its custodian for the term of the option, cash or liquid
securities equal to the fluctuating value of the optioned futures. The Fund
will be considered "covered" with respect to a put option it writes on a
futures contract if it owns an option to sell that futures contract having
a strike price equal to or greater than the strike price of the "covered"
option and having an expira tion 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 consti tutes 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 depos ited by the Fund with its custodian with
respect to such futures contracts.
The purchase of a call option on a futures contract is similar in
some respects to the purchase of a call option on an individual security.
Depending on the pricing of the option compared to either the price of the
futures contract upon which it is based or the price of the underlying debt
securities, it may or may not be less risky than ownership of the futures
contract or underlying debt securities. As with the purchase of futures
contracts, when the Fund is not fully invested it may purchase a call option
on a futures contract to hedge against a market advance due to declining
interest rates.
The purchase of a put option on a futures contract is similar to
the purchase of protective put options on portfolio securities. The Fund
will purchase a put option on a futures contract to hedge the Fund's
portfolio against the risk of rising interest rates and consequent
reduction in the value of portfolio securities.
The writing of a call option on a futures contract constitutes a
partial hedge against declining prices of the securities which are
deliverable upon exercise of the futures contract. If the futures price at
expiration of the option is below the exercise price, the Fund will retain
the full amount of the option premium which provides a partial hedge
against any decline that may have occurred in the Fund's portfolio
holdings. The writing of a put option on a futures contract constitutes a
partial hedge against increasing prices of the securities which are
deliverable upon exercise of the futures contract. If the futures price at
expiration of the option is higher than the exercise price, the Fund will
retain the full amount of the option premium which provides a partial hedge
against any increase in the price of debt securities which the Fund intends
to purchase. If a put or call option the Fund has written is exercised, the
Fund will incur a loss which will be reduced by the amount of the premium
it received. Depending on the degree of correlation between changes in the
value of its portfolio securities and changes in the value of its futures
positions, the Fund's losses from options on futures it has written may to
some extent be reduced or increased by changes in the value of its
portfolio securities.
Currency Futures and Options Thereon. Generally, foreign currency
futures contracts and options thereon are similar to the interest rate
futures contracts and options thereon discussed previously. By entering
into currency futures and options thereon, the Fund will seek to establish
the rate at which it will be entitled to exchange U.S. dollars for another
currency at a future time. By selling currency futures, the Fund will seek
to establish the number of dollars it will receive at delivery for a
certain amount of a foreign currency. In this way, whenever the Fund
anticipates a decline in the value of a foreign currency against the U.S.
dollar, the Fund can attempt to "lock in" the U.S. dollar value of some or
all of the securities held in its portfolio that are denominated in that
currency. By purchasing currency futures, the Fund can establish the number
of dollars it will be required to pay for a specified amount of a foreign
currency in a future month. Thus, if the Fund intends to buy securities in
the future and expects the U.S. dollar to decline against the relevant
foreign currency during the period before the purchase is effected, the
Fund can attempt to "lock in" the price in U.S. dollars of the securities
it intends to acquire.
The purchase of options on currency futures will allow the Fund,
for the price of the premium and related transaction costs it must pay for
the option, to decide whether or not to buy (in the case of a call option)
or to sell (in the case of a put option) a futures contract at a specified
price at any time during the period before the option expires. If the
Adviser, in purchasing an option, has been correct in its judgment
concerning the direction in which the price of a foreign currency would
move as against the U.S. dollar, the Fund may exercise the option and
thereby take a futures position to hedge against the risk it had correctly
antici pated 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 transac tions if,
immediately thereafter, the sum of the amount of initial margin deposits on
the Fund's existing futures positions and option premiums would exceed 5%
of the market value of the Fund's liquidating value, after taking into
account unrealized profits and unrealized losses on any such transactions.
In addition, investment in future contracts and related options
will be limited by the applicable S&P Guidelines (as defined in the
Prospectus).
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
Adviser, the Fund may not be able to contract to sell the currency at a
price above the level to which the currency is anticipated to decline.
Special Risk Considerations Relating to Futures and Options Thereon
The Fund's ability to establish and close out positions in futures
contracts and options thereon will be subject to the development and
maintenance of liquid markets. Although the Fund generally will purchase or
sell only those futures contracts and options thereon for which there
appears to be a liquid market, there is no assurance that a liquid market
on an exchange will exist for any particular futures contract or option
thereon at any particular time. In the event no liquid market exists for a
particular futures contract or option thereon in which the Fund maintains a
position, it will not be possible to effect a closing transaction in that
contract or to do so at a satisfactory price and the Fund would have to
either make or take delivery under the futures contract or, in the case of
a written option, wait to sell the underlying securities until the option
expires or is exercised or, in the case of a purchased option, exercise the
option. In the case of a futures contract or an option thereon which the
Fund has written and which the Fund is unable to close, the Fund would be
required to maintain margin deposits on the futures contract or option
thereon and to make variation margin payments until the contract is closed.
Successful use of futures contracts and options thereon and forward
contracts by the Fund is subject to the ability of the Adviser to predict
correctly movements in the direction of interest and foreign currency rates.
If the Adviser's expectations are not met, the Fund will be in a worse
position than if a hedging strategy had not been pursued. For example, if the
Fund has hedged against the possibility of an increase in interest rates
which would adversely affect the price of securities in its portfolio and the
price of such securities increases instead, the Fund will lose part or all of
the benefit of the increased value of its securities because it will have
offsetting losses in its futures positions. In addition, in such situations,
if the Fund has insufficient cash to meet daily variation margin
requirements, it may have to sell securities to meet the requirements. These
sales may be, but will not necessarily be, at increased prices which reflect
the rising market. The Fund may have to sell securities at a time when it is
disadvantageous to do so.
Additional Risks of Foreign Options, Futures Contracts,
Options on Futures Contracts and Forward Contracts
Options, futures contracts and options thereon and forward
contracts on securities and currencies may be traded on foreign exchanges.
Such transactions may not be regulated as effectively as similar
transactions in the U.S., may not involve a clearing mechanism and related
guarantees, and are subject to the risk of governmental actions affecting
trading in, or the prices of, foreign securities. The value of such
positions also could be adversely affected by (i) other complex foreign
political, legal and economic factors, (ii) lesser availability than in the
U.S. of data on which to make trading decisions, (iii) delays in the Fund's
ability to act upon economic events occurring in the foreign markets during
non- business hours in the U.S., (iv) the imposition of different exercise
and settlement terms and procedures and margin requirements than in the
U.S. and (v) lesser trading volume.
Exchanges on which options, futures and options on futures are
traded may impose limits on the positions that the Fund may take in certain
circumstances.
Risks of Currency Transactions
Currency transactions are also subject to risks different from
those of other portfolio transactions. Because currency control is of great
importance to the issuing governments and influences economic planning and
policy, purchases and sales of currency and related instruments can be
adversely affected by government exchange controls, limitations or
restrictions on repatriation of currency, and manipulation, or exchange
restrictions imposed by governments. These forms of governmental action can
result in losses to the Fund if it is unable to deliver or receive currency
or monies in settlement of obligations and could also cause hedges it has
entered into to be rendered useless, resulting in full currency exposure as
well as incurring transaction costs.
Repurchase Agreements
The Fund may engage in repurchase agreements as set forth in the
Prospectus. A repurchase agreement is an instrument under which the
purchaser, i.e., the Fund, acquires a debt security and the seller agrees, at
the time of the sale, to repurchase the obligation at a mutually agreed upon
time and price, thereby determining the yield during the purchaser's holding
period. This results in a fixed rate of return insulated from market
fluctuations during such period. The underlying securities are ordinarily
U.S. Treasury or other government obligations or high quality money market
instruments. The Fund will require that the value of such underlying
securities, together with any other collateral held by the Fund, always
equals or exceeds the amount of the repurchase obligations of the contra
party. The Fund's risk is primarily that, if the seller defaults, the
proceeds from the disposition of the underlying securities and other
collateral for the seller's obligation are less than the repurchase price. If
the seller becomes insolvent, the Fund might be delayed in or prevented from
selling the collateral. In the event of a default or bankruptcy by a seller,
the Fund will promptly seek to liquidate the collateral. To the extent that
the proceeds from any sale of such collateral upon a default in the
obligation to repurchase are less than the repurchase price, the Fund will
experience a loss.
If the financial institution which is a party to the repurchase
agreement petitions for bankruptcy or becomes subject to the United States
Bankruptcy Code, the law regarding the rights of the Fund is unsettled. As
a result, under extreme circumstances, there may be a restriction on the
Fund's ability to sell the collateral and the Fund would suffer a loss.
Loans of Portfolio Securities
Consistent with applicable regulatory requirements, the Fund may
lend its portfolio securities to securities broker-dealers or financial
institutions, provided that such loans are callable at any time by the Fund
(subject to notice provisions described below), and are at all times
secured by cash or cash equivalents, which are maintained in a segregated
account pursuant to applicable regulations and that are at least equal to
the market value, determined daily, of the loaned securities. The advantage
of such loans is that the Fund continues to receive the income on the
loaned securities while at the same time earns interest on the cash amounts
deposited as collateral, which will be invested in short-term obligations.
The Fund will not lend its portfolio securities if such loans are not
permitted by the laws or regulations of any state in which its 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 applicable Rating Agency Guidelines.
A loan may generally be terminated by the borrower on one business
day's notice, or by the Fund on five business days' notice. If the borrower
fails to deliver the loaned securities within five days after receipt of
notice, the Fund could use the collateral to replace the securities while
holding the borrower liable for any excess of replacement cost over
collateral. As with any extensions of credit, there are risks of delay in
recovery and in some cases even loss of rights in the collateral should the
borrower of the securities fail finan cially. 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 credit worthiness of the contracting parties on an ongoing basis. Upon
termination of the loan, the borrower is required to return the securities to
the Fund. Any gain or loss in the market price during the loan period would
inure to the Fund. The risks associated with loans of portfolio securities
are substantially similar to those associated with repurchase agreements.
Thus, if the contra party to the loan petitions for bankruptcy or becomes
subject to the United States Bankruptcy Code, the law regarding the rights of
the Fund is unsettled. As a result, under extreme circumstances, there may be
a restriction on the Fund's ability to sell the collateral and the Fund would
suffer a loss. When voting or consent rights which accompany loaned
securities pass to the borrower, the Fund will follow the policy of calling
the loaned securities, to be delivered within one day after notice, to permit
the exercise of such rights if the matters involved would have a material
effect on the Fund's investment in such loaned securities. The Fund will pay
reasonable finder's, administrative and custodial fees in connection with a
loan of its securities.
INVESTMENT RESTRICTIONS
The investment restrictions listed below have been adopted by the
Fund as funda mental 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 in
vested in such issuer or the Fund would own more than 10%
of the out standing 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 opera tions 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 informa tion
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 arrange ments with respect
to the writing of options or entering into financial
futures transactions or forward contracts, or when issued
or delayed deliv ery 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 require
ments 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
consid eration, 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 occupa tions during the past five years
and, in the case of the directors, their positions with certain other
organizations and companies.
Directors
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 the
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
-----------------------
1 Address: One Corporate Center, Rye, NY 10580, unless otherwise noted.
+ Non-resident director with no authorized agent in the United States.
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 [__], 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 was material 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 December 31, 2001, the Investment Adviser and its
affiliates acted as registered investment advisers to 20 management
investment companies with aggregate net assets of $11.1 billion. The
Investment Adviser, together with other affiliated investment advisers, has
assets under management totaling $24.8 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 a
sub-adviser to management investment companies, having aggregate assets of
$11.5 billion under management as of December 31, 2001. 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 $1.6
billion under management as of December 31, 2001. 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 [__] and was approved
most recently by the Board of Directors on [__]. 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 $______, $_______
and $_______, 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 $____, $_______ and
$_______, respectively, in brokerage commissions, of which Gabelli &
Company, Inc. and its affiliates received $______, $______ and $_____,
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 __% of the aggregate
dollar amount of brokerage commissions paid by the Fund for such period and
approximately __% 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 common stock 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 that are traded in a market
subject to government regulation on which trades are reported
contemporaneously 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. Other readily
marketable assets will be valued at the average of quotations provided by
dealers maintaining an active market in such instruments. 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 Board of Directors. Short-term investments that mature in more than 60
days are valued at the highest bid price obtained from a dealer maintaining
an active market in that security or on the basis of prices obtained from a
pricing service approved as reliable by the Board of Directors. Short-term
investments that mature in 60 days or fewer are valued at amortized cost,
unless the Board of Directors determines that such valuation does not
constitute fair value. The Fund may employ recognized pricing services from
time to time for the purpose of pricing portfolio instruments.
Trading takes place in various foreign markets on days that are
not Business Days and therefore the Fund's respective net asset value per
share of common stock 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 Directors 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 of common stock 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 of common stock outstanding at such time.
GENERAL INFORMATION
COUNSEL AND INDEPENDENT ACCOUNTANTS
Skadden, Arps, Slate, Meagher & Flom LLP, 4 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.*
P.O. Box 20
Bowling Green Station
New York, NY 10274
* A nominee partnership of The Depository Trust Company.
** Shares held at The Depository Trust Company.
As of September 30, 2002, the Directors and Officers of the Fund
as a group beneficially owned approximately [__]% 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(2)
(iii) Articles Supplementary (2)
(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(2)
(h) Not applicable (i) Not applicable
(j) Custodian Contract between Registrant and Boston Safe Deposit
and Trust Company(2)
(k) Registrar, Transfer Agency and Service Agreement between
Registrant and Equiserve Trust Company(2)
(l) (i) Opinion and Consent of Skadden, Arps, Slate, Meagher &
Flom LLP(4)
(ii) Opinion and Consent of Miles & Stockbridge(4)
(m) Not applicable
(n) (i) Consent of PricewaterhouseCoopers LLP(3)
(ii) Powers of Attorney(3)
(o) Not applicable
(p) Not applicable
(q) Not Applicable
(r) Codes of Ethics of the Fund and the Advisor(2)
-------------------
(1) Incorporated by reference to the Fund's annual report filed on [__].
(2) Previously filed.
(3) Filed herewith.
(4) To be filed by amendment.
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............................... $
New York Stock Exchange listing fee.................
Printing and engraving expenses ....................
Auditing fees and expenses .........................
Legal fees and expenses.............................
Blue Sky fees and expenses..........................
Miscellaneous.......................................
Total........................................ $
Item 27. Persons Controlled by or Under Common Control with Registrant
NONE
Item 28. Number of Holders of Securities as of September 30, 2002
Number of Record
Title of Class Holders
Capital Stock, par value $.001 per share
8.00% Cumulative Preferred Stock, par value $.001 per share
Item 29. Indemnification
The response of this Item is incorporated by reference to the
caption "Limitation of Officers' and Directors 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 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 25th day of September, 2002.
THE GABELLI CONVERTIBLE
AND INCOME SECURITIES FUND INC.
By: /s/ 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 September __, 2002
------------------------------------Investment Officer
Mario J. Gabelli
* Director September 25, 2002
------------------------------------
Karl Otto Pohl
* Director September 25, 2002
------------------------------------
E. Val Cerutti
* Director September 25, 2002
------------------------------------
Anthony J. Colavita
* Director September 25, 2002
------------------------------------
Dugald A. Fletcher
* Director September 25, 2002
------------------------------------
Anthony R. Pustorino
* Director September 25, 2002
------------------------------------
Werner J. Roeder, MD
* Director September 25, 2002
------------------------------------
Anthonie C. van Ekris
* Director September 25, 2002
------------------------------------
Salvatore J. Zizza
/s/ /Bruce N. Alpert Vice President and Treasurer September 25, 2002
------------------------------------
Bruce N. Alpert
Attorney-in-Fact
EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION