N-2 1 REGISTRATION STATEMENT As filed with the Securities and Exchange Commission on March 31, 1995. Registration Nos. 33-26644 811-05715 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 ------------ FORM N-2 REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 /X/ ------------ The Gabelli Convertible Securities Fund, Inc. (Exact Name of Registrant as Specified in Charter) One Corporate Center, Rye, New York 10580-1434 (Address of Principal Executive Offices) Registrant's Telephone Number, including Area Code (800) 422-3554 ------------ Bruce N. Alpert J. Hamilton Crawford, Jr., Esq. One Corporate Center Rye, New York 10580-1434 (914) 921-5105 (Name and Address of Agent for Service) ------------ Copy to: Richard T. Prins, Esq. Skadden, Arps, Slate, Meagher & Flom 919 Third Avenue New York, New York 10022 (212) 735-3000 ------------ THE GABELLI CONVERTIBLE SECURITIES FUND, INC. Form N-2 Cross-Reference Sheet N-2 Item Number Location in Part A (Caption) --------------- ---------------------------- Part A Item 1 Outside Front Cover .............. Not Applicable Item 2 Inside Front and Outside Back Cover Page ........ Not Applicable Item 3 Fee Table and Synopsis ........... Table of Fees and Expenses Item 4 Financial Highlights ............. Not Applicable Item 5 Plan of Distribution ............. Not Applicable Item 6 Selling Shareholders ............. Not Applicable Item 7 Use of Proceeds .................. Not Applicable Item 8 General Description of the Registrant ................. The Fund; Investment Objective and Policies; Convertible Securities; Other Investments; Derivative Instruments; Repurchase of Shares; Description of Common Stock Item 9 Management ....................... Management of the Fund; Description of Common Stock - Custodian, Transfer Agent and Dividend Disbursing Agent Item 10 Capital Stock, Long-Term Debt, and Other Securities ............... Distribution Arrangements; Taxation; Description of Common Stock Item 11 Defaults and Arrears on Senior Securities ........... Not Applicable Item 12 Legal Proceedings ................ Not Applicable Item 13 Table of Contents of the Statement of Additional Information ......... Table of Contents of the Statement of Additional Information Location in Statement of Additional Information (Caption) --------------------- Part B Item 14 Cover Page ....................... Outside Front Cover Page Item 15 Table of Contents ................ Outside Front Cover Page Item 16 General Information and History .................... Not Applicable Item 17 Investment Objective and Policies ................... Convertible Securities; Other Investments; Derivative Instruments; Special Investment Methods Item 18 Management ....................... The Adviser; Directors and Officers Item 19 Control Persons and Principal Holders of Securities ..................... The Adviser; Directors and Officers Item 20 Investment Advisory and Other Services ............. The Adviser; Directors and Officers Item 21 Brokerage Allocation and Other Practices ............ Portfolio Transactions and Brokerage Item 22 Tax Status ....................... Dividends, Distributions and Taxes Item 23 Financial Statements ............. Financial Statements; Report of Independent Accountants 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. -------------------------------------------------------------------------------- The Gabelli Convertible Securities Fund, Inc. GABELLI FUNDS, INC. Investment Adviser -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- The Gabelli Convertible Securities Fund, Inc. One Corporate Center Rye, New York 10580-1434 Telephone: 1-800-GABELLI (1-800-422-3554) ================================================================================ March 31, 1995 The Gabelli Convertible Securities Fund, Inc. (the "Fund"), a Maryland corporation, is a closed-end, diversified, management investment company, whose investment objective is to seek a high level of total return on its assets. The Fund seeks to achieve its investment objective through a combination of current income and capital appreciation by investing primarily in "Convertible Securities." --------- This Registration Statement sets forth concisely the information a prospective investor should know before investing in the Fund. A Statement of Additional Information, dated March 31, 1995 (the "Additional Statement") containing additional information about the Fund has been filed with the Securities and Exchange Commission and is incorporated by reference into this Registration Statement. For a free copy, write or call the Fund at the address or telephone number set forth above. --------- This Registration Statement should be retained by investors for future reference. --------- -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- SUMMARY The following summary is qualified in its entirety by the more detailed information appearing elsewhere in this Registration Statement. The Fund: The Gabelli Convertible Securities Fund, Inc. is a closed-end, diversified, management investment company. Prior to March 31, 1995, the Fund operated as an open-end, diversified, management investment company since July 3, 1989. Investment Objective: The Fund's investment objective is to seek a high level of total return on its assets. The Fund will seek to achieve this objective through a combination of current income and capital appreciation by investing primarily in securities which are convertible into common stock or other equity securities ("Convertible Securities"). See "Investment Objective and Policies." Special Characteristics and Risks: Convertible Securities are not typically rated within the four highest categories by the rating agencies and are, therefore, not generally investment grade. There is no minimum rating which is acceptable for investment by the Fund; however, it is expected that not more than 50% of the Fund's portfolio will consist of securities rated CCC or lower by 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. The Fund will, however, limit its investments in securities of issuers in default to not more than 5% of its total assets. The Fund may also invest in, among other things, unregistered Convertible Securities, securities of issuers involved in corporate reorganizations, warrants, rights, securities of foreign issuers and forward commitments for securities purchased on a "when issued" or "delayed delivery" basis. See "Other Investments." The Fund may also purchase or sell options, engage in transactions in financial futures and options thereon, engage in short sales of securities it owns or has the right to acquire, enter into repurchase agreements and forward foreign currency exchange contracts, lend its portfolio securities to securities broker-dealers or financial institutions and borrow money for short-term credits from banks as may be necessary for the clearance of portfolio transactions and for temporary or emergency purposes. These techniques may involvespecial risks. See "Special Investment Methods." Management and Fees: Gabelli Funds, Inc. serves as the Fund's investment adviser (the "Adviser") and is compensated for its services and its related expenses at an annual rate of 1.00% of the Fund's average daily net assets. This fee is higher than that paid by most mutual funds. The Adviser will pay the fee of Furman Selz Incorporated, the administrator to the Fund ("Furman Selz" or the "Administrator"), from its investment advisory fee. How to Purchase Shares: Shares of the Fund are listed on the New York Stock Exchange under the symbol GCV. Repurchase and Charter Provisions: As shareholders of a closed-end fund, Fund shareholders do not have the right to redeem their shares. Shareholders desiring liquidity may, subject to applicable securities laws, trade their shares in the Fund on the New York Stock Exchange or other markets on which the shares may trade at the then current market value. The Fund is authorized to repurchase its shares on the open market when the shares are trading at a discount of 10% or more (or such other percentage as its Board of Directors may determine from time to time) from the net asset value. In addition, certain provisions of the Fund's Articles of Amendment and Restatement (the "Charter") and Amended and Restated By-Laws may be regarded as "anti-takeover" provisions. Pursuant to these provisions, only one of three classes of directors is elected each year, and the affirmative vote of the holders of 75% -------------------------------------------------------------------------------- 2 -------------------------------------------------------------------------------- of the outstanding shares of the Fund is necessary to authorize the conversion of the Fund from a closed-end to an open-end investment company and an affirmative vote of 66 2/3% of the outstanding shares of the Fund may be necessary to authorize certain business transactions with any beneficial owner of more than 5% of the outstanding shares of the Fund. The overall effect of these provisions is to render more difficult the accomplishment of a merger with, or the assumption of control by, a principal shareholder. These provisions may have the effect of depriving Fund shareholders of an opportunity to sell their shares at a premium to the prevailing market price. See "Description of Common Stock -- Certain Provisions of the Charter and Amended and Restated By-Laws of the Fund." Discount to Net Asset Value: Shares of closed-end investment companies frequently trade at a discount from net asset value. This characteristic of shares of a closed-end investment company is a risk separate and distinct from the risk that the Fund's net asset value may decrease. The Board of Directors intends to take certain steps to reduce the risk of the Fund's shares trading at a discount including a quarterly dividend policy, a 10% payout policy and/or a buy back of Fund shares in the market. The Fund cannot predict whether its shares will trade at, below or above net asset value. See "Investment Objectives and Policies -- Market Value and Net Asset Value." Dividends and Reinvestment: Each dividend and capital gains distribution, if any, declared by the Fund on its outstanding shares in either cash or shares will, unless the shareholder elects to receive cash, be paid on the payment date in additional shares of the Fund. Whenever the market price of the Fund's shares 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 are issued shares 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 Fund's shares. 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 shares at the time of valuation exceeds the market price, participants will receive shares from the Fund valued at market price. If the Fund should declare a dividend or capital gains distribution payable only in cash, the Fund's custodian will buy shares in the open market, on the New York Stock Exchange or elsewhere, for the participants' accounts, except that State Street Bank and Trust Company 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 the shares exceeds net asset value. An election to receive dividends and distributions equal to the cash amount of such distribution in cash or shares is made at the time shares are subscribed for and may be changed by notifying the Fund in writing at any time prior to the record date for a particular dividend or distribution. There are no sales or other charges in connection with the reinvestment of dividends and capital gains distributions. There is no fixed dividend rate, and there can be no assurance that the Fund will pay any dividends or realize any capital gains. However, the Fund currently intends to pay dividends and capital gains distributions, if any, on an annual basis, except that the Board of Directors has declared a distribution of twenty cents ($.20) per share payable June 27, 1995 to shareholders of record on June 9, 1995. See "Dividends, Distributions and Taxes." -------------------------------------------------------------------------------- 3 -------------------------------------------------------------------------------- TABLE OF FEES AND EXPENSES Annual Fund Operating Expenses (as a percentage of average net assets): Management Fees ....................................................... 1.00% Interest Payments on Borrowed Funds ................................... -- Other Expenses (a) .................................................... 0.40% ---- Total Operating Expenses .......................................... 1.40% ==== Example: 1 year 3 years 5 years 10 years -------- ------ ------- ------- -------- You would pay the following expenses on a $1,000 investment, assuming a 5% annual return ....... $14 $44 $77 $168 -------------------------------------------------------------------------------- The amounts listed in this example should not be considered as representative of future expenses and actual expenses may be greater or less than those indicated. Moreover, while the example assumes a 5% annual return, the Fund's actual performance will vary and may result in an actual return greater or less than 5%. -------------------------------------------------------------------------------- The foregoing table is to assist you in understanding the various direct and indirect costs and expenses that an investor in the Fund would bear. The expenses shown represent expenses incurred during the past year and those anticipated for the current year; however, other expenses may vary. ---------- (a) Such expenses may include the rental cost of office space for Fund personnel, the cost of net asset value calculations, custodian and transfer agency fees and other customary Fund expenses. -------------------------------------------------------------------------------- 4 -------------------------------------------------------------------------------- INVESTMENT OBJECTIVE AND POLICIES The Fund was incorporated in Maryland on December 19, 1988 as an open-end, diversified, management investment company, and converted to closed-end status after receiving shareholder approval of its Charter on February 21, 1995 and filing of the Charter in Maryland on March 31, 1995 (the "Conversion"). The investment objective of the Fund is to seek a high level of total return on its assets. The Fund seeks to achieve its investment objective through a combination of current income and capital appreciation. There is no assurance that this objective will be achieved. It is, however, a fundamental policy of the Fund and cannot be changed without shareholder approval. The Fund will normally invest at least 65% of its total assets (taken at current value) in "Convertible Securities," i.e., securities (bonds, debentures, corporate notes, preferred stocks and other similar securities) which are convertible into common stock or other equity securities. Securities received upon conversion of a Convertible Security will not be included in the calculation of the percentage of Fund assets invested in Convertible Securities. These securities may be retained in the Fund's portfolio to permit orderly disposition or to establish long-term holding periods for Federal income tax purposes. In the unlikely event that less than 65% of the Fund's total assets are invested in Convertible Securities due to the exercise of conversion rights, the Fund will invest available funds in additional Convertible Securities as soon as practicable. The Fund may invest up to 35% of its total assets (taken at current value and subject to any restrictions appearing elsewhere in this Registration Statement) in any combination and quantity of the following securities: common stock; nonconvertible preferred stock; nonconvertible corporate debt securities; options on debt and equity securities; and money market instruments. In selecting any of the foregoing securities for investment, the factors which will be considered by the Adviser include the Adviser's evaluation of the underlying value of the assets and business of the issuers of the securities, the potential for capital appreciation, the price of the securities, the issuer's balance sheet characteristics and the perceived skills of the issuer's management. During periods when it is deemed necessary for temporary defensive purposes, the Fund may invest without limit in high quality money market instruments, including commercial paper of domestic and foreign corporations, certificates of deposit, bankers' acceptances and other obligations of domestic and foreign banks and obligations issued or guaranteed by the United States Government, its instrumentalities or agencies and, subject to statutory limitations, unaffiliated money market mutual funds. The yield on these securities will, as a general matter, tend to be lower than the yield on other securities to be purchased by the Fund. Upon Conversion, shareholders who hold their shares in book entry form at the Fund's transfer agent may request the transfer agent to sell such shares at the current market value without incurring a commission through March 31, 1997. A shareholder who has invested in the Fund through an individual retirement account ("IRA") can continue to maintain such account after the Conversion. No additional contributions to this IRA will be accepted. If a shareholder makes a request to sell shares in this IRA or transfer such shares to an IRA of another custodian, State Street will sell shares in the open market and deliver the sale proceeds as instructed. Any shareholder selling shares of the Fund out of this IRA must invest the proceeds into another IRA within 60 days or be subject to a premature withdrawal penalty if such shareholder is under the age of fifty-nine and one-half (59 1/2). Market Value and Net Asset Value The Fund is a newly converted, 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 shares 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 shares will trade at, below or above net asset value. Shareholders desiring liquidity may, subject to applicable securities laws, trade their shares in the Fund on the -------------------------------------------------------------------------------- 5 -------------------------------------------------------------------------------- New York Stock Exchange or other markets on which such shares may trade at the then current market value, which may differ from the then current net asset value. Shareholders will incur brokerage or other transaction costs to sell shares. 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 which causes it to sell at a discount. In selecting Convertible Securities for the Fund, the following factors, among others, will be considered by the Adviser: (1) the Adviser's own evaluations of the basic underlying value of the assets and businesses of the issuers of the securities; (2) the interest or dividend income generated by the securities; (3) the potential for capital appreciation of the securities and the underlying common stocks; (4) the prices of the securities relative to the underlying common stocks; (5) the prices of the securities relative to other comparable securities; (6) whether the securities are entitled to the benefits of sinking funds or other protective conditions; (7) the existence of any anti-dilution protections of the security; and (8) the diversification of the Fund's portfolio as to issuers. The Fund may convert a Convertible Security which it holds; (1) when necessary to permit orderly disposition of the investment when a Convertible Security approaches maturity or has been called for redemption; (2) to facilitate a sale of the position; (3) if the dividend rate on the underlying common stock increases above the yield on the Convertible Security; or (4) whenever the Adviser believes it is otherwise in the best interests of the Fund. Convertible Securities are generally not investment grade, that is, not rated within the four highest categories by Standard & Poor's Ratings Group ("S&P") and Moody's Investor Service ("Moody's"). To the extent that such Convertible Securities and other non-convertible debt securities, which are acquired by the Fund consistent with the factors considered by the Adviser as described herein, are rated lower than investment grade or are not rated, there would be a greater risk as to the timely repayment of the principal of, and timely payment of interest or dividends on, those securities. It is expected that not more than 50% of the Fund's portfolio will consist of securities rated CCC or lower by S&P or Caa -------------------------------------------------------------------------------- 6 -------------------------------------------------------------------------------- or lower by Moody's or, if unrated, are of comparable quality as determined by the Adviser. These securities and securities rated BB or lower by S&P or Ba or lower by Moody's are often referred to in the financial press as "junk bonds" and may include securities of issuers in default. "Junk bonds" are considered by the rating agencies to be predominantly speculative and may involve major risk exposures such as: (i) vulnerability to economic downturns and changes in interest rates; (ii) sensitivity to adverse economic changes and corporate developments; (iii) redemption or call provisions which may be exercised at inopportune times; and (iv) difficulty in accurately valuing or disposing of such securities. The Fund's investments in securities of issuers in default will be limited to not more than 5% of the total assets of the Fund. Further, the Fund will invest in securities of issuers in default only when the Adviser believes that such issuers will emerge from bankruptcy and the value of such securities will appreciate. By investing in securities of issuers in default the Fund bears the risk that such issuers will not emerge from bankruptcy or that the value of such securities will not appreciate. Securities rated BBB by S&P or Baa by Moody's, in the opinion of the rating agencies, also have speculative characteristics. Securities need not meet a minimum rating standard in order to be acceptable for investment by the Fund. See Appendix A -- Description of Corporate Bond Ratings. In the absence of adequate anti-dilution provisions in a Convertible Security, dilution in the value of the Fund's holding may occur in the event the underlying stock is subdivided, additional securities are issued, a stock dividend is declared, or the issuer enters into another type of corporate transaction which increases its outstanding equity securities. Every Convertible Security may be valued, on a theoretical basis, as if it did not have a conversion privilege. This theoretical value is determined by the yield it provides in comparison with the yields of other securities of comparable character and quality which do not have a conversion privilege. This theoretical value, which may change with prevailing interest rates, the credit rating of the issuer and other pertinent factors, often referred to as the "investment value," represents the security's theoretical price support level. "Conversion value" is the amount a Convertible Security would be worth in market value if it were to be exchanged for the underlying equity security pursuant to its conversion privilege. Conversion value fluctuates directly with the price of the underlying equity security, usually common stock. If, because of low prices for the common stock, the conversion value is substantially below the investment value, the price of the Convertible Security is governed principally by the factors described in the preceding paragraph. If the conversion value rises near or above its investment value, the price of the Convertible Security generally will rise above its investment value and, in addition, will sell at some premium over its conversion value. This premium represents the price investors are willing to pay for the privilege of purchasing a fixed-income security with a possibility of capital appreciation due to the conversion privilege. If this appreciation potential is not realized, this premium may not be recovered. In its selection of Convertible Securities for the Fund, the Adviser will not emphasize either investment value or conversion value, but will consider both in light of the Fund's overall investment objective. See "Convertible Securities" in the Additional Statement. Illiquid Convertible Securities The Fund has no limit on the amount of its net assets it may invest in unregistered and otherwise illiquid Convertible Securities and other investments. The current intention of the Adviser is not to invest in excess of 15% of the Fund's net assets -------------------------------------------------------------------------------- 7 -------------------------------------------------------------------------------- in illiquid Convertible Securities. Shareholders will be notified if the Adviser changes such intention. Unregistered securities are securities that cannot be sold publicly in the United States without registration under the Securities Act of 1933, as amended (the "1933 Act"). Unregistered securities generally can be resold only in privately negotiated transactions with a limited number of purchasers or in a public offering registered under the 1933 Act. Considerable delay could be encountered in either event and, unless otherwise contractually provided for, the Fund's proceeds upon sale may be reduced by the costs of registration or underwriting discounts. The difficulties and delays associated with such transactions could result in the Fund's inability to realize a favorable price upon disposition of unregistered securities, and at times might make disposition of such securities impossible. When unregistered Convertible Securities are converted into common stock and the common stock is publicly traded (as is typically the case), the common stock normally may be resold publicly under certain volume and other restrictions beginning 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. Securities freely salable among qualified institutional investors under special rules adopted by the Securities and Exchange Commission (the "SEC") may be treated as liquid if they satisfy institutional liquidity standards established by the Board of Directors. The continued liquidity of such securities is not as well assured as that of publicly traded securities, and accordingly, the Board of Directors will monitor their liquidity. OTHER INVESTMENTS The Fund will normally invest at least 65% of its total assets (taken at current value) in Convertible Securities and up to 35% of the remaining assets in non-convertible securities and the investments described below. However, to the extent that any investments described below are Convertible Securities, they will be included when determining the Fund's holdings of Convertible Securities. Corporate Reorganizations The Fund may invest without limit in securities of companies for which a tender or exchange offer has been made or announced and in securities of companies for which a merger, consolidation, liquidation or similar reorganization proposal has been announced if, in the judgment of the Adviser, there is a reasonable prospect of capital appreciation significantly greater than the added portfolio turnover expenses inherent in the short term nature of such transactions. The principal risk is that such offers or proposals may not be consummated within the time and under the terms contemplated at the time of the investment, in which case, unless such offers or proposals are replaced by equivalent or increased offers or proposals which are consummated, the Fund may sustain a loss. For further information on such investments, see "Other Investments" in the Additional Statement. Warrants and Rights The Fund may invest without limit in warrants or rights (other than those acquired in units or attached to other securities) which entitle the holder to buy equity securities at a specific price for a specific period of time but will do so only if such equity securities are deemed appropriate by the Adviser for inclusion in the Fund's portfolio. Other Investment Companies The Fund may invest up to 5% of its total assets in no more than 3% of the securities of any one investment company including small business investment companies and may invest up to 10% of its total assets in the securities of 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 -------------------------------------------------------------------------------- 8 -------------------------------------------------------------------------------- will not purchase the securities of affiliated investment companies. Foreign Securities The Fund may invest up to 25% of its total assets in securities of foreign issuers which are generally denominated in foreign currencies. Investments in the securities of foreign issuers involve certain considerations and risks not ordinarily associated with investments in securities of domestic issuers. Foreign companies are not generally subject to uniform accounting, auditing and financial standards and requirements comparable to those applicable to U.S. companies. Foreign securities exchanges, brokers and listed companies may be subject to less government supervision and regulation than exists in the United States. Dividend and interest income may be subject to withholding and other foreign taxes which may adversely affect the net return on such investments. There may be difficulty in obtaining or enforcing a court judgment abroad. In addition, it may be difficult to effect repatriation of capital invested in certain countries. In addition, with respect to certain countries, there are risks of expropriation, confiscatory taxation, political or social instability or diplomatic developments which could 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 which could cause the Fund to encounter difficulties in purchasing and selling securities on such markets and may result in the Fund missing attractive investment opportunities or experiencing loss. In addition, a portfolio which includes foreign securities can expect to have a higher expense ratio because of the increased transaction costs on non-U.S. securities markets and the increased costs of maintaining the custody of foreign securities. The Fund may purchase sponsored American Depository Receipts ("ADRs") or U.S. denominated securities of foreign issuers which shall not be included in this foreign securities limitation. ADRs are receipts issued by United States banks or trust companies in respect of securities of foreign issuers held on deposit for use in the United States securities markets. While ADRs may not necessarily be denominated in the same currency as the securities into which they may be converted, many of the risks associated with foreign securities may also apply to ADRs. When Issued, Delayed Delivery Securities and Forward Commitments The Fund may enter into forward commitments for the purchase of securities. Such transactions may include purchases on a "when issued" or "delayed delivery" basis. In some cases, a forward commitment may be conditioned upon the occurrence of a subsequent event, such as approval and consummation of a merger, corporate reorganization or debt restructuring, i.e., a when, as and if issued security. When such transactions are negotiated, the price is fixed at the time of the commitment, with payment and delivery taking place in the future, generally a month or more after the date of the commitment. While the Fund will only enter into a forward commitment with the intention of actually acquiring the security, the Fund may sell the security before the settlement date if it is deemed advisable. Securities purchased under a forward commitment are subject to market fluctuation, and no interest (or dividends) accrues to the Fund prior to the settlement date. The Fund will maintain a segregated -------------------------------------------------------------------------------- 9 -------------------------------------------------------------------------------- account of cash or liquid high-grade debt securities with the Fund's custodian in an aggregate amount at least equal to the amount of its forward commitments as long as the obligation to purchase continues. See "Other Investments -- When Issued, Delayed Delivery Securities and Forward Commitments" in the Additional Statement. Risk Factors and Special Considerations There are a number of issues that an investor should consider in evaluating the Fund. The Fund may invest in securities of companies that are involved or may become involved in extraordinary transactions, including corporate reorganizations. See "Other Investments -- Corporate Reorganizations." Certain affiliates of the Adviser in the ordinary course of their business may acquire for their own account from time to time securities (including controlling positions) in companies that may also be suitable investments for the Fund. However, under certain circumstances the Fund may be precluded by Section 17(d) of the 1940 Act and Rule 17d-1 thereunder (which regulate joint transactions between an investment company and its affiliates) from investing in those securities absent exemptive relief from the SEC. However, while the securities in which the Fund may invest might therefore be limited to some extent, the Adviser does not believe that the investment activities of its affiliates will have a material adverse effect upon the Fund in seeking to achieve its investment objective. Many companies in the past several years have adopted so-called "poison pill" and other defensive measures that may have the effect of limiting the amount of securities in any one issuer that may be acquired by the Adviser and its affiliates for the account of the Fund and other investment management clients, discouraging or hindering non-negotiated offers for a company or possibly preventing the completion of any such offer. Moreover, the Fund may invest in lower rated securities, including securities of issuers that are in default. These securities carry a higher risk of failure to pay principal and interest when due and the market to sell such securities may be limited. See "Convertible Securities." The Adviser relies to a considerable extent on the expertise of Mario J. Gabelli, and there is no assurance that a suitable replacement could be found for him in the event of his death, disability or resignation. See "Management of the Fund." DERIVATIVE INSTRUMENTS Options On behalf of the Fund, the Adviser may, subject to guidelines of the Board of Directors, purchase or sell (i.e., write) options on securities, securities indices and foreign currencies which are listed on a national securities exchange or in the U.S. over-the-counter ("OTC") markets as a means of achieving additional return or of hedging the value of the Fund's portfolio. The Fund may write covered call options on common stocks that it owns or has an immediate right to acquire through conversion or exchange of other securities in an amount not to exceed 25% of total assets or invest up to 10% of its total assets in the purchase of put options on common stocks that the Fund owns or may acquire through the conversion or exchange of other securities that it owns. The Fund may not write covered call options in an amount exceeding 25% of the value of its total assets.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 to buy from the writer (seller) of the call option, in return for a premium paid, the security underlying the option at a speciified exercise price at any time during the term of the option. The writer of the call option has the obligation upon exercise of the option to deliver the underlying security upon payment of the exercise price during the option period. A put option is a contract that gives the holder of the option the right to sell to the writer (seller), in return for the premium, the underlying security at a specified price during the -------------------------------------------------------------------------------- 10 -------------------------------------------------------------------------------- term of the option. The writer of the put, who receives the premium, has the obligation to buy the underlying security upon exercise, at the exercise price during the option period. If the Fund has written an option, it may terminate its obligation by effecting a closing purchase transaction. This is accomplished by purchasing an option of the same series as the option previously written. There can be no assurance that a closing purchase transaction can be effected when the Fund so desires. An exchange traded option may be closed out only on an exchange which provides a secondary market for an option of the same series. Although the Fund will generally purchase or write only those options for which there appears to be an active secondary market, there is no assurance that a liquid secondary market on an exchange will exist for any particular option. The Fund will not purchase options if, as a result, the aggregate cost of all outstanding options exceeds 10% of the Fund's total assets. See "Special Investment Methods--Options" in the Additional Statement. Futures Contracts and Options Thereon On behalf of the Fund, the Adviser may, subject to guidelines of the Board of Directors, purchase and sell financial futures contracts and options thereon which are traded on a commodities exchange or board of trade for certain hedging, yield enhancement and risk management purposes, in accordance with regulations of the Commodity Futures Trading Commission ("CFTC"). These futures contracts and related options may be on debt securities, financial indices, securities indices, U.S. Government securities and foreign currencies. A financial futures contract is an agreement to purchase or sell an agreed amount of securities or currencies at a set price for delivery in the future. Under the CFTC regulations, the Adviser on behalf of the Fund (i) may purchase and sell futures contracts and options thereon for bona fide hedging purposes, as defined under CFTC regulations, without regard to the percentage of the Fund's assets committed to margin and option premiums, and (ii) may enter into 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. Special Risks of Derivative Transactions Participation in the options or futures markets and in currency exchange transactions involves investment risks and transaction costs to which the Fund would not be subject absent the use of these strategies. If the Adviser's prediction of movements in the direction of the securities, foreign currency and interest rate markets are inaccurate, the consequences to the Fund may leave the Fund in a worse position than if such strategies were not used. Risks inherent in the use of options, foreign currency, futures contracts and options on futures contracts, securities indices and foreign currencies include (1) dependence on the Adviser's ability to predict correctly movements in the direction of interest rates, securities -------------------------------------------------------------------------------- 11 -------------------------------------------------------------------------------- prices and currency markets; (2) imperfect correlation between the price of options and futures contracts and options thereon and movements in the prices of the securities or currencies being hedged; (3) the fact that skills needed to use these strategies are different from those needed to select portfolio securities; (4) the possible absence of a liquid secondary market for any particular instrument at any time; (5) the possible need to defer closing out certain hedged positions to avoid adverse tax consequences; and (6) the possible inability of the Fund to purchase or sell a security at a time that otherwise would be favorable for it to do so, or the possible need for the Fund to sell a security at a disadvantageous time due to a need for the Fund to maintain "cover" or to segregate securities in connection with the hedging techniques. Short Sales Against the Box The Fund may from time to time make short sales of securities it owns or has the right to acquire through conversion or exchange of other securities it owns. A short sale is "against the box" to the extent that the Fund contemporaneously owns or has the right to obtain at no added cost securities identical to those sold short. In a short sale, the Fund does not immediately deliver the securities sold or receive the proceeds from the sale. The Fund may not make short sales or maintain a short position if it would cause more than 25% of the Fund's total assets, taken at market value, to be held as collateral for such sales. To secure its obligations to deliver the securities sold short, the Fund will deposit in escrow in a separate account with its custodian an equal amount to the securities sold short or securities convertible into, or exchangeable for, such securities. The Fund may close out a short position by purchasing and delivering an equal amount of the securities sold short, rather than by delivering securities already held by the Fund, because the Fund may want to continue to receive interest and dividend payments on securities in its portfolio that are convertible into the securities sold short. The Fund may make a short sale in order to hedge against market risks when it believes that the price of a security may decline, causing a decline in the value of a security owned by the Fund or a security convertible into, or exchangeable for, such security, or when the Fund does not want to sell the security it owns, because, among other reasons, it wishes to defer recognition of gain or loss for U.S. Federal income tax purposes. Additionally, the Fund may use short sales in conjunction with the purchase of a Convertible Security when it is determined that a Convertible Security can be bought at a small conversion premium and has a yield advantage relative to the underlying common stock sold short. Repurchase Agreements The Fund may enter into repurchase agreements with primary government securities dealers recognized by the Federal Reserve Bank of New York and member banks of the Federal Reserve System which furnish collateral at least equal in value or market price to the amount of their repurchase obligation. In a repurchase agreement, the Fund purchases a debt security from a seller which undertakes to repurchase the security at a specified resale price on an agreed future date. Repurchase agreements are generally for one business day but may have a duration of up to a week. The SEC has taken the position that, in economic reality, a repurchase agreement is a loan by the Fund to the other party to the transaction secured by securities transferred to the Fund. The resale price generally exceeds the purchase price by an amount which reflects an agreed upon market interest rate for the term of the repurchase agreement. The principal risk is that, if the seller defaults, the Fund might suffer a loss to the extent that the proceeds from the sale of the underlying securities and other collateral held by the Fund are less than the repurchase price. In the event of a default or bankruptcy by a seller, the Fund will promptly seek to liquidate the collateral. The Board of Directors will monitor the -------------------------------------------------------------------------------- 12 creditworthiness of the contra party to the repurchase agreements. If the financial institution which is a party to the repurchase agreement petitions for bankruptcy or becomes subject to the United States Bankruptcy Code, the law regarding the rights of the Fund is unsettled. As a result, under extreme circumstances, there may be a restriction on the Fund's ability to sell the collateral and the Fund would suffer a loss. Except for repurchase agreements for a period of a week or less in respect of obligations issued or guaranteed by the U.S. Government, its agencies or instrumentalities, the Fund may not enter into repurchase agreements which would cause more than 5% of the value of its total assets to be so invested. The term of each of the Fund's repurchase agreements will always be less than one year and the Fund will not enter into repurchase agreements of a duration of more than seven days if, taken together with all other illiquid securities in the Fund's portfolio, more than 10% of its total assets would be so invested. Loans of Portfolio Securities To increase income, the Fund may lend its portfolio securities to securities broker-dealers or financial institutions if (1) the loan is collateralized in accordance with applicable regulatory requirements and (2) no loan will cause the value of all loaned securities to exceed 33% of the value of the Fund's total assets. If the borrower fails to maintain the requisite amount of collateral, the loan automatically terminates and the Fund could use the collateral to replace the securities while holding the borrower liable for any excess of replacement cost over the value of the collateral. As with any extention of credit, there are risks of delay in recovery and in some cases even loss of rights in collateral should the borrower of the securities fail financially. While these loans of portfolio securities will be made in accordance with guidelines approved by the Board of Directors, there can be no assurance that borrowers will not fail financially. On termination of the loan, the borrower is required to return the securities to the Fund, and any gain or loss in the market price during the loan would inure to the Fund. If the contra party to the loan petitions for bankruptcy or becomes subject to the United States Bankruptcy Code, the law regarding the rights of the Fund is unsettled. As a result, under 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 Additional Statement. Borrowing The Fund may, but does not currently intend to, issue debt or preferred stock so long as the Fund's net assets exceed 300% of the amount of the debt outstanding and exceed 200% of the amount of preferred stock outstanding. Such debt or preferred stock may be convertible in accordance with SEC staff guidelines which may permit the Fund to obtain leverage at attractive rates. Leverage entails two primary risks. The first risk is that the use of leverage magnifies the impact on the common shareholders of changes in net asset value. For example, a fund that use 33% leverage will show a 1.5% increase or decline in net asset value for each 1% increase or decline in the value of its total assets. The second risk is that the cost of leverage will exceed the return on the securities acquired with the proceeds of leverage, thereby diminishing rather than enhancing the return to common shareholders. These two risks would generally make the Fund's total return to common shareholders more volatile. A decline in net asset value could affect the ability of the Fund to make common stock dividend payments and such a failure to pay dividends or make distributions could result in the Fund ceasing to qualify as a regulated investment company under the Internal Revenue Code of 1986, as amended (the "Code"). See "Dividends, Distributions and Taxes." Finally, if the asset coverage for preferred stock or debt securities -------------------------------------------------------------------------------- 13 -------------------------------------------------------------------------------- declines to less than 200% or 300%, respectively (as a result of market fluctuations or otherwise), the Fund may be required to sell a portion of its investments when it may be disadvantagous to do so. Further information on the investment objective and policies of the Fund are set forth in the Additional Statement. 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. While it is impossible to predict with certainty the portfolio turnover, the Adviser expects that the annual turnover rate of the Fund will not exceed 300%. During the years ended December 31, 1994 and 1993, the portfolio turnover of the Fund was 67.09% and 45.47%, respectively. Portfolio turnover generally involves some expense to the Fund, including brokerage commissions or dealer mark-ups and other transaction costs on the sale of securities and reinvestment in other securities. A high portfolio turnover rate may make it more difficult to qualify as a regulated investment company, since, in order for the Fund to so qualify each taxable year less than 30% of its gross income must be derived from the sale or other disposition of stocks or securities held for less than three months. The portfolio turnover rate is computed by dividing the lesser of the amount of the securities purchased or securities sold by the average monthly value of securities owned during the year (excluding securities whose maturities at acquisition were one year or less). MANAGEMENT OF THE FUND The Corporation's Board of Directors (who, with its officers, are described in the Additional Statement) has overall responsibility for the management of the Fund. The Board of Directors decides upon matters of general policy and reviews the actions of the Adviser and the Administrator. Pursuant to an Investment Advisory Contract with the Fund, the Adviser, under the supervision of the Fund's Board of Directors, provides a continuous investment program for the Fund's portfolio; provides investment research and makes and executes recommendations for the purchase and sale of securities; provides all facilities and personnel, including officers required for its administrative management and pays the compensation of all officers and directors of the Fund who are its affiliates. As compensation for its services and the related expenses borne by the Adviser, the Fund pays the Adviser a fee, computed daily and payable monthly, equal, on an annual basis, to 1.00% of the Fund's average daily net assets, which is higher than that paid by most mutual funds. For the fiscal year ended December 31, 1994 the Fund paid a management fee of 1.00% of the Fund's average net assets. The Adviser was formed in 1980 and acts as investment adviser to other closed-end and open-end investment companies with total net assets in excess of $3.5 billion as of January 1, 1995. GAMCO Investors, Inc. ("GAMCO"), a subsidiary of Gabelli Funds, Inc., acts as investment adviser for individuals, pension trusts, profit sharing trusts and endowments. As of January 1, 1995, GAMCO had aggregate assets in excess of $4.3 billion under its management. Mr. Mario J. Gabelli may be deemed a "controlling person" of the Adviser on the basis of his ownership of stock of Gabelli Funds, Inc. In addition to the fees of the Adviser, the Fund is responsible for the payment of all its other expenses incurred in the operation of the Fund, which include, among other things, expenses for legal and independent accountant's services, stock exchange listing fees, costs of printing proxies, stock certificates, and shareholder reports, charges of State Street Bank and Trust Company ("State Street," the "Custodian," "Transfer Agent" or "Dividend -------------------------------------------------------------------------------- 14 Disbursing Agent"), SEC fees, fees and expenses of unaffiliated directors, accounting and printing costs, the Fund's pro rata portion of membership fees in trade organizations, fidelity bond coverage for the Fund's officers and employees, interest, brokerage costs, taxes, expenses of qualifying the Fund for sale in various states, expenses of personnel performing shareholder servicing functions, litigation and other extraordinary or non-recurring expenses and other expenses properly payable by the Fund. The Investment Advisory Contract contains provisions relating to the selection of securities brokers to effect the portfolio transactions of the Fund. Under those provisions, the Adviser may (1) direct Fund portfolio brokerage to Gabelli & Company, Inc. or other broker-dealer affiliates of the Adviser; and (2) pay commissions to brokers other than Gabelli & Company, Inc. which are higher than might be charged by another qualified broker to obtain brokerage and/or research services considered by the Adviser to be useful or desirable for its investment management of the Fund and/or its other advisory accounts or those of any investment adviser affiliated with it. The Additional Statement 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. Non-Resident Directors Karl Otto Pohl and Anthonie C. van Ekris, directors of the Fund, reside outside the United States and all or a significant portion of their assets are located outside the United States. They have no authorized agent in the United States to receive service of process. As a result, it may not be possible for investors to effect service of process within the United States or to enforce against them in United States courts judgments predicated upon civil liability provisions of United States securities laws. Administrator The Adviser has entered into an Administration Contract with Furman Selz pursuant to which the Administrator provides certain administrative services necessary for the Fund's operations which do not include the investment advisory and portfolio management services provided by the Adviser. For these services and the related expenses borne by Furman Selz, the Adviser pays a monthly fee atthe annual rate of .10% of the first $350 million of the aggregate average net assets of the Fund and other Funds advised by Gabelli Funds, Inc. and administered by Furman Selz and .075% of the aggregate average net assets exceeding $350 million and .06% of the aggregate average net assets in excess of $600 million (with a minimum annual fee of $40,000 per portfolio), which, together with the services to be rendered, is subject to negotiation between the parties and both parties retain the right unilaterally to terminate the arrangement on not less than 60 days' notice. Furman Selz has its principal office at 237 Park Avenue, New York, New York 10017. Furman Selz is primarily an institutional brokerage firm with membership on the New York, American, Boston, Philadelphia, Midwest and Pacific Stock Exchanges. DISTRIBUTION ARRANGEMENTS 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 shares are trading at a discount to their net asset value, the Board of Directors would consider quarterly distributions and/or adopting a policy of distributing at least 10% per share of its average net asset value per year. If, for any calendar year, -------------------------------------------------------------------------------- 15 -------------------------------------------------------------------------------- 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 shareholder's tax basis in his shares. The amount treated as a tax-free return of capital will reduce a shareholder's tax basis in his shares, thereby increasing his potential gain or reducing his potential loss on the sale of his shares. Any amounts distributed to a shareholder in excess of the basis in the shares will be taxable to the shareholder as capital gain. In the event the Fund distributes amounts in excess of its net investment income and net capital gain, such distributions will decrease the Fund's total assets and, therefore, have the likely effect of increasing the Fund's expense ratio. In addition, in order to make such distributions, the Fund may have to sell a portion of its investment portfolio at a time when independent investment judgment might not dictate such action. Such sales, if they involve assets held for less than three months, could also adversely affect the Fund's status as a regulated investment company since, in order for the Fund to so qualify, each taxable year, less than 30% of the Fund's gross income must be derived from gains realized on the sale or other disposition of stocks or securities held for less than three months. 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 shareholder whose shares are registered in his own name will have all distributions reinvested automatically by State Street as agent under the Plan, unless the shareholder 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 shareholder elects to receive distributions in cash. Investors who own shares 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 State Street as dividend disbursing agent. Under the Plan, whenever the market price of the Fund's shares 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 are issued shares 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 Fund's shares. 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 (the "Valuation Date"). If the net asset value of the shares at the time of valuation exceeds the market price, participants will receive shares from the Fund valued at market price. If the Fund should declare a dividend or capital gains distribution payable only in cash, State Street will buy shares in the open market, on the New York Stock Exchange or elsewhere, for the participants' accounts, except that State Street 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 the shares exceeds net asset value. Participants in the Plan have the option of making additional cash payments to State Street, semi-annually, for investment in the Fund's shares. Such payments may be made in any amount from $250 to $3,000. State Street will use all funds received from participants to purchase Fund shares in the open market on or about February 15 and August 15 of each year. Any voluntary -------------------------------------------------------------------------------- 16 -------------------------------------------------------------------------------- cash payments received more than 30 days prior to these dates will be returned by State Street, and interest will not be paid on any uninvested cash payments. To avoid unnecessary cash accumulations, and also to allow ample time for receipt and processing by State Street, it is suggested that participants send voluntary cash payments to State Street in a manner that ensures that State Street will receive these payments approximately 10 days before February 15 or August 15, as the case may be. A participant may without charge withdraw a voluntary cash payment by written notice, if the notice is received by State Street at least 48 hours before such payment is to be invested. State Street maintains all shareholder accounts in the Plan and furnishes written confirmations of all transactions in the account, including information needed by shareholders for personal and tax records. Shares in the account of each Plan participant will be held by State Street in non-certificated form in the name of the participant, and each shareholder's proxy will include those shares purchased pursuant to the Plan. In the case of shareholders such as banks, brokers or nominees, which hold shares for others who are the beneficial owners, State Street will administer the Plan on the basis of the number of shares certified from time to time by the shareholder as representing the total amount registered in the shareholder'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. State Street'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 shares 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 State Street's open market purchases in connection with the reinvestment of dividends or capital gains distributions. With respect to purchases from voluntary cash payments, State Street 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 State Street will be purchasing shares 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 which 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 the 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 the Plan at least 90 days before the record date for such dividend or distribution. The Plan also may be amended or terminated by State Street on at least 90 days' written notice to participants in the Plan. All correspondence concerning the Plan should be directed to State Street Bank and Trust Company at P.O. Box 8200, Boston, MA 02266-8200. DIVIDENDS, DISTRIBUTIONS AND TAXES Each dividend and capital gains distribution declared by the Fund on its outstanding shares will, at the election of each shareholder, be paid on the payment date fixed by the Board of Directors in additional shares of the Fund valued for purposes of determining the number of shares equivalent to the cash dividend or capital gains distribution, at the greater of (i) the net asset value as most recently determined or (ii) 95% of the then current market price of the Fund's shares, if the market price of the Fund's shares is equal to or exceeds net asset value or current market price if it is less than net asset value on the Valuation Date. An election to -------------------------------------------------------------------------------- 17 receive dividends and distributions equal to the cash amount of such distribution in cash or shares is made at the time shares are subscribed for and may be changed by notifying the Fund in writing at any time prior to the record date for a particular dividend or distribution. A shareholder with shares registered directly with the Fund is automatically included in the Plan unless such shareholder opts out in writing. There are no sales or other charges in connection with the reinvestment of dividends and capital gains distributions. There is no fixed dividend rate, and there can be no assurance that the Fund will pay any dividends or realize any capital gains. However, the Fund currently intends to pay dividends and capital gains distributions, if any, on an annual basis. The Fund has qualified and intends to continue to qualify as a "Regulated Investment Company" under Subchapter M of the Code. If the Fund qualifies as a Regulated Investment Company and complies with certain distribution requirements, the Fund will not be subject to Federal income tax on the portion of its net investment income and net capital gain that it distributes to its shareholders. To qualify, the Fund must meet certain relatively complex tests, including a requirement that less than 30% of its gross income from capital gains (exclusive of losses) and investment income may be derived from the sale or other disposition of securities held for less than three months. The Fund's maximum portfolio turnover rate of 300% may result in the Fund being unable to maintain its status in any given year as a Regulated Investment Company. The loss of such status would result in the Fund being subject to Federal income tax on its taxable income and gains without regard to dividends paid to shareholders. Dividends out of net investment income and distributions of net realized short-term capital gains are taxable to the recipient shareholders as ordinary income whether paid in cash or shares. In the case of corporate shareholders, such distributions are eligible for the 70% dividends received deduction, to the extent attributable to qualified dividends received by the Fund from U.S. corporations and designated as such in the Fund's written notice to shareholders. Distributions out of net capital gain, of which shareholders will be notified, are taxable to the recipient as long-term capital gains whether paid in cash or shares. The Fund will be required to back-up withhold an amount equal to 31% of a shareholder's dividend or capital gain distribution unless such shareholder furnishes the Fund with his taxpayer identification number (a social security number in the case of an individual) and certifies that the number is correct and that he has not been notified by the Internal Revenue Service that he is subject to back-up withholding. The foregoing is a general and abbreviated summary of the provisions of the Code applicable to a shareholder's investment in the Fund. Dividends and distributions declared by the Fund may also be subject to state and local taxes. Prior to investing in shares of the Fund, prospective shareholders are urged to consult their tax advisers concerning the Federal, state and local tax consequences of such investment. REPURCHASE OF SHARES The Fund is a closed-end, management investment company and as such its shareholders do not have the right to redeem their shares. The Fund, however, may repurchase its shares from time to time as and when it deems such a repurchase advisable. Such repurchases may be made when the Fund's shares are 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 the net asset value of the shares. Pursuant to the 1940 Act, the Fund may repurchase its shares on a securities exchange (provided that the Fund has informed its shareholders within the preceding six months -------------------------------------------------------------------------------- 18 -------------------------------------------------------------------------------- of its intention to repurchase such shares) 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, identity of the seller, price paid, brokerage commissions, prior notice to shareholders of an intention to purchase shares and purchasing in a manner and on a basis which does not discriminate unfairly against the other shareholders through their interest in the Fund. Shares repurchased by the Fund will constitute authorized and unissued shares of the Fund available for reissuance. The Fund may incur debt. See "Derivative Instruments." When the Fund repurchases its shares for a price below their net asset value, the net asset value of those shares that remain outstanding will be enhanced, but this does not necessarily mean that the market price of those outstanding shares will be affected, either positively or negatively. Further, interest on borrowings to finance share repurchase transactions will reduce the net income of the Fund. The Fund does not currently have an established tender offer program or established schedule for considering tender offers. No assurance can be given that the Board of Directors of the Fund will decide to undertake any such tender offers in the future, or, if undertaken, that they will reduce any market discount. DESCRIPTION OF COMMON STOCK On February 21, 1995, shareholders approved the Charter changing the status of the Fund to a closed-end fund. The Charter was filed on March 31, 1995, the date of the Fund's conversion from a closed-end to an open-end investment company. The authorized capital stock consists of one billion shares of stock having a par value of one tenth of one cent ($.001) per share, one hundred million of which have been initially classified as Fund shares. Shares of the Fund are listed on the New York Stock Exchange under the symbol GCV and began trading March 31, 1995. All shares of common stock have equal dividend, liquidation and voting rights and each fractional share has those rights in proportion to the percentage that the fractional share represents of a whole share. There are no conversion or preemptive rights in connection with any outstanding shares of the Fund. All shares, when issued in accordance with the terms of the offering, will be fully paid and nonassessable. The Fund's Board of Directors can reclassify unissued shares as preferred stock with such terms and conditions as determined by the Board of Directors. The Fund sends semi-annual and annual reports to all of its shareholders which include a list of portfolio securities and the Fund's financial statements which shall be audited annually. Unless it is clear that a shareholder holds as nominee for the account of an unrelated person or a shareholder otherwise specifically requests in writing, the Fund may send a single copy of semi-annual, annual and other reports to shareholders to all accounts at the same address and all accounts of any person at that address. The shares of the Fund have noncumulative voting rights which means that the holders of more than 50% of the shares can elect 100% of the Directors if the holders choose to do so, and, in that event, the holders of the remaining shares will not be able to elect any person or persons to the Board of Directors. Unless specifically requested by an investor who is a shareholder of record, the Fund does not issue certificates evidencing Fund shares. Certain Provisions of the Charter and Amended and Restated By-Laws of the Fund The Fund presently has provisions in its Charter and Amended and Restated By-Laws (together, its "Governing Documents") which -------------------------------------------------------------------------------- 19 could have the effect of limiting (i) the ability of other entities or persons to acquire control of the Fund, (ii) the Fund's freedom to engage in certain transactions, or (iii) the ability of the Fund's directors or shareholders 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 are divided into three classes, each having a term of three years (except, 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 an initial one-year term and three-year terms thereafter) and another class of its directors will serve an initial two-year term and three-year terms thereafter). 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 shareholders of the Fund to change the majority of directors. See "Management of the Fund." A director of the Fund may be removed with or without cause by a vote of a majority of the votes entitled to be cast for the election of directors of the Fund. 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. The affirmative vote of 66 2/3% of the Fund's outstanding shares is required generally to authorize any of the following transactions: (i) merger or consolidation of the Fund with or into any other corporation; (ii) issuance of any securities of the Fund to any person or entity for cash; (iii) sale, lease or exchange of all or any substantial part of the assets of the Fund to any entity or person (except assets having an aggregate fair market value of less than $1,000,000); or (iv) sale, lease or exchange to the Fund, in exchange for securities of the Fund, of any assets of any entity or person (except assets having an aggregate fair market value of less than $1,000,000); if such corporation, person or entity is directly, or indirectly through affiliates, the beneficial owner of more than 5% of the outstanding shares of the Fund. However, such vote would not be required when, under certain conditions, the Board of Directors approves the transaction. Reference is made to the Governing Documents of the Fund, on file with the SEC, for the full text of these provisions. The provisions of the Governing Documents described above could have the effect of depriving the owners of shares 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 shareholder. Custodian, Transfer Agent and Dividend Disbursing Agent State Street Bank and Trust Company is the Custodian for the Fund's cash and securities as well as the Transfer and Dividend Disbursing Agent for its shares. BFDS, an affiliate of State Street Bank and Trust Company, performs the shareholder services on behalf of State Street and is located at The BFDS Building, Two Heritage Drive, North Quincy, MA 02171. State Street Bank and Trust Company does not assist in and is not responsible for investment decisions involving assets of the Fund. -------------------------------------------------------------------------------- 20 -------------------------------------------------------------------------------- APPENDIX A DESCRIPTION OF CORPORATE BOND RATINGS MOODY'S INVESTOR SERVICE Aaa: Bonds which are rated Aaa are judged to be of the best quality. They carry the smallest degree of investment risk and are generally referred to as "gilt edge." Interest payments are protected by a large or by an exceptionally stable margin and principal is secure. While the various protective elements are likely to change, such changes as can be visualized are most unlikely to impair the fundamentally strong position of such issues. Aa: Bonds which are rated Aa are judged to be of high quality by all standards. Together with the Aaa group they comprise what are generally known as high-grade bonds. They are rated lower than the best bonds because margins of protection may not be as large as in Aaa securities or fluctuation of protective elements may be of greater amplitude or there may be other elements present which make the long-term risk appear somewhat greater than in Aaa securities. A: Bonds which are rated A possess many favorable investment attributes and are to be considered as upper medium grade obligations. Factors giving security to principal and interest are considered adequate, but elements may be present which suggest a susceptibility to impairment sometime in the future. Baa: Bonds which are rated Baa are considered as medium grade obligations, i.e., they are neither highly protected nor poorly secured. Interest payments and principal security appear adequate for the present but certain protective elements may be lacking or may be characteristically unreliable over any great length of time. Such bonds lack outstanding investment characteristics and in fact have speculative characteristics as well. Ba: Bonds which are rated Ba are judged to have speculative elements; their future cannot be considered as well assured. Often the protection of interest and principal payments may be very moderate and thereby not well safeguarded during both good and bad times over the future. Uncertainty of position characterizes bonds in this class. B: Bonds which are rated B generally lack characteristics of the desirable investment. Assurance of interest and principal payments or of maintenance of other terms of the contract over any long period of time may be small. Caa: Bonds which are rated Caa are of poor standing. Such issues may be in default or there may be present elements of danger with repsect to principal or interest. Caa: Bonds which are rated Caa are of poor standing. Such issues may be in default or there may be present elements of danger with respect to principal or interest. Ca: Bonds which are rated Ca represent obligations which are speculative in a high degree. Such issues are often in default or have other marked shortcomings. C: Bonds which are rated C are the lowest rated class of bonds, and issues so rated can be regarded as having extremely poor prospects of ever attaining any real investment standing. Unrated: Where no rating has been assigned or where a rating has been suspended or withdrawn, it may be for reasons unrelated to the quality of the issue. Should no rating be assigned, the reason may be one of the following: 1. An application for rating was not received or accepted. 2. The issue or issuer belongs to a group of securities that are not rated as a matter of policy. 3. There is a lack of essential data pertaining to the issue or issuer. 4. The issue was privately placed, in which case the rating is not published in Moody's publications. Suspension or withdrawal may occur if new and material circumstances arise, the effects of which preclude satisfactory analysis; if there is no longer available reasonable up-to-date data to permit a judgement to be formed; if a bond is called for redemption; or for other reasons. Note: Those bonds in the Aa, A, Baa, Ba and B groups which Moody's believe possess the strongest investment attributes are designated by the symbols AA 1, A-1, Baa 1, Ba 1 and B 1. -------------------------------------------------------------------------------- 21 -------------------------------------------------------------------------------- STANDARD & POOR'S RATINGS GROUP AAA: Bonds rated AAA have the highest rating assigned by Standard & Poor's. Capacity to pay interest and repay principal is extremely strong. AA: Bonds rated AA have a very strong capacity to pay interest and repay principal, and differ from the higher rated issues only in small degree. Bonds rated A have a very 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 bonds in the highest rated categories. BBB: Bonds rated BBB are regarded as having an adequate capacity to pay interest and repay principal. Whereas they normally exhibit 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 bonds in this category than in higher rated categories. BB, B, CCC, CC, C: Bonds rated BB, B, 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 bonds will likely have some quality and protective characteristics, they are outweighed by large uncertainties of major risk exposures to adverse conditions. C1: The rating C1 is reserved for income bonds on which no interest is paid. D: Bonds rated D are in default, and payment of interest and/or repayment of principal is in arrears. Plus (+) or Minus (-): The ratings from "AA" to "CCC" may be modified by the addition of a plus or minus sign to show relative standing within the major rating categories. NR: Indicates that no 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. -------------------------------------------------------------------------------- 22 -------------------------------------------------------------------------------- TABLE OF CONTENTS Page ---- Summary ......................................................... 2 Table of Fees and Expenses ...................................... 4 Investment Objective and Policies ............................... 5 Convertible Securities .......................................... 6 Other Investments ............................................... 8 Derivative Instruments .......................................... 10 Management of the Fund .......................................... 14 Distribution Arrangements ....................................... 16 Dividends, Distributions and Taxes .............................. 18 Repurchase of Shares ............................................ 18 Description of Common Stock ..................................... 19 Appendix A ...................................................... 21 -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- THE GABELLI CONVERTIBLE SECURITIES FUND, INC. One Corporate Center Rye, New York 10580-1434 Telephone 1-800-GABELLI (1-800-422-3554) STATEMENT OF ADDITIONAL INFORMATION March 31, 1995 This Statement of Additional Information (the "Additional Statement") relates to The Gabelli Convertible Securities Fund, Inc. (the "Fund"), and is not a prospectus. This Additional Statement contains additional and more detailed information and should be read in conjunction with the balance of the Fund's registration statement ("Part A"), additional copies of which may be obtained without charge by writing or telephoning the Fund at the address and telephone number set forth above. TABLE OF CONTENTS Page ---- Convertible Securities .......................... B-2 Other Investments ............................... B-2 Derivative Instruments .......................... B-5 The Adviser ..................................... B-15 Directors and Officers .......................... B-17 Investment Restrictions ......................... B-20 Portfolio Transactions and Brokerage ............ B-21 Determination of Net Asset Value ................ B-22 Dividends, Distributions and Taxes .............. B-23 General Information ............................. B-25 -------------------------------------------------------------------------------- B-1 -------------------------------------------------------------------------------- CONVERTIBLE SECURITIES A Convertible Security entitles the holder to exchange such security for a fixed number of shares of common stock or other equity security, usually of the same company, at fixed prices within a specified period of time. A Convertible Security entitles the holder to receive the fixed income of a bond or the dividend preference of a preferred stock until the holder elects to exercise the conversion privilege. A Convertible Security's position in a company's capital structure depends upon its particular provisions. In the case of subordinated convertible debentures, the holder's claims on assets and earnings are subordinated to the claims of others and are senior to the claims of common shareholders. To the degree that the price of a Convertible Security rises above its investment value because of a rise in price of the underlying common stock, it is influenced more by price fluctuations of the underlying common stock and less by its investment value. The price of a Convertible Security that is supported principally by its conversion value will rise along with any increase in the price of the common stock, and such price generally will decline along with any decline in the price of the common stock except that the security will receive additional support as its price approaches investment value. A Convertible Security purchased or held at a time when its price is influenced by its conversion value will produce a lower yield than nonconvertible senior securities with comparable investment values. Convertible Securities may be purchased by the Fund at varying price levels above their investment values and/or their conversion values in keeping with the Fund's investment objective. Many Convertible Securities in which the Fund will invest have call provisions entitling the issuer to redeem the security at a specified time and at a specified price. This is one of the features of a Convertible Security which affects valuation. Calls may vary from absolute calls to provisional calls. Convertible Securities with superior call protection usually trade at a higher premium. If long-term interest rates decline, the interest rates of new Convertible Securities will also decline. Therefore, in a falling interest rate environment companies may be expected to call Convertible Securities with high coupons and the Fund would have to invest the proceeds from such called issues in securities with lower coupons. Thus, Convertible Securities with superior call protection will permit the Fund to maintain a higher yield than issues without call protection. OTHER INVESTMENTS The Fund may without limit invest in securities of companies for which a tender or exchange offer has been made or announced and in securities of companies for which a merger, consolidation, liquidation or reorganization proposal has been announced if, in the judgement of Gabelli Funds, Inc. (the "Adviser"), there is a reasonable prospect of capital appreciation significantly greater than the brokerage and other transaction expenses involved. In general, securities which are the subject of such an offer or proposal sell at a premium to their historic market price immediately prior to the announcement of the offer or may also discount what the stated or appraised value of the security would be if the contemplated transaction were approved or consummated. Such investments may be advantageous when: the discount significantly overstates the risk of the contingencies involved; significantly undervalues the securities, assets or cash to be received by shareholders of the prospective portfolio company as a result of the contemplated transaction; or 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 -------------------------------------------------------------------------------- B-2 -------------------------------------------------------------------------------- and experience on the part of the Adviser which must appraise not only the value of the issuer and its component businesses as well as the assets or securities to be received as a result of the contemplated transaction but also the financial resources and business motivation of the offeror and the dynamics and business climate when the offer or proposal is in process. In making the investments, the Fund will not violate any of its investment restrictions (see below, "Investment Restrictions") including the requirement that, (a) as to 75% of its total assets, it will not invest more than 5% of its total assets in the securities of any one issuer and (b) it will not invest more than 25% of its total assets in any one industry. Since such investments are ordinarily short-term in nature, they will tend to increase the turnover ratio of the Fund thereby increasing its brokerage and other transaction expenses as well as make it more difficult for the Fund to meet the tests for favorable tax treatment as a "Regulated Investment Company" under the Internal Revenue Code of 1986, as amended (the "Code") (see "Dividends, Distributions and Taxes" in Part A). The Adviser intends to select investments of the type described which, in its view, have a reasonable prospect of capital appreciation which is significant in relation to both 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 Part A, the Fund may invest without limitation in unregistered Convertible Securities and other illiquid investments, including repurchase agreements having a maturity of longer than seven days. The staff of the Securities and Exchange Commission (the "SEC") has taken the position that purchased over-the-counter ("OTC") options and the assets used as "cover" for written OTC options are illiquid. The assets used as cover for OTC options written by the Fund will be considered illiquid unless the OTC options are sold to qualified dealers who agree that the Fund may repurchase any OTC option it writes at a maximum price to be calculated by a formula set forth in the option agreement. The cover for an OTC option written subject to this procedure will be considered illiquid only to the extent that the maximum repurchase price under the option formula exceeds the intrinsic value of the option. When Issued and Delayed Delivery Securities and Forward Commitments As discussed in Part A, 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 Part A, 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 -------------------------------------------------------------------------------- B-3 -------------------------------------------------------------------------------- transactions, making it difficult to conduct such transactions. Delays in settlements could result in temporary periods when assets of the Fund are uninvested and no return is earned thereon. The inability of the Fund to make intended security purchases due to settlement problems could cause the Fund to miss attractive investment opportunities. Inability to dispose of a portfolio security due to settlement problems could result either in losses to the Fund due to subsequent declines in the value of such portfolio security or, if the Fund has entered into a contract to sell the security, could result in possible liability to the purchaser. Risk Factors -- High Yield/High Risk Securities Subject to the limitations described in Part A, the Fund may invest in high yielding, lower rated bonds, commonly called "junk bonds." Bonds that are rated "Baa" or lower by Moody's Investors Service ("Moody's") or "BBB" or lower by Standard & Poor's Ratings Group ("S&P"), or unrated bonds of comparable quality, are generally considered to be high yield bonds. These high yield bonds are subject to greater risks than lower yielding, higher rated debt securities. Lower rated securities are subject to risk factors such as: (a) vulnerability to economic downturns and changes in interest rates; (b) sensitivity to adverse economic changes and corporate developments; (c) redemption or call provisions which may be exercised at inopportune times; (d) difficulty in accurately valuing or disposing of such securities; (e) federal legislation which could affect the market for such securities; and (f) special adverse tax consequences associated with investments in certain high yield, high risk bonds structured as zero coupon or pay-in-kind securities. High Yield bonds, like other bonds, may contain redemption or call provisions. If an issuer exercises these provisions in a declining interest rate market, the Fund would have to replace the security with a lower yielding security, resulting in lower return for investors. Conversely, a high yield bond's value will decrease in a rising interest rate market. There is a thinly traded market for high yield 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 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 safety of principal and interest payments on those bonds. However, such ratings do not assess the risk of a decline in the market value of those bonds. In addition, ratings may fail to reflect recent events in a timely manner and are subject to change. If a rating with respect to a portfolio security is changed, the Adviser will determine whether the security will be retained based upon the factors the Adviser considers in acquiring or holding other securities in the portfolio. Investment in high yield bonds may make achievement of the Fund's 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. In addition, recent legislation impacting high yield bonds may have a materially adverse effect on the market for such -------------------------------------------------------------------------------- B-4 -------------------------------------------------------------------------------- bonds. For example, federally insured savings and loan associations have been required to divest their investments in high yield bonds. The risk of default in payment of principal and interest on high yield bonds is significantly greater than with higher rated debt securities because high yield bonds are generally unsecured and are often subordinated to other obligations of the issuer, and because the issuers of high yield bonds usually have high levels of indebtedness and are more sensitive to adverse economic conditions, such as recession or increasing interest rates. Upon a default, bondholders may incur additional expenses in seeking recovery. As a result of all these factors, the net asset value of the Fund to the extent it invests in high yield bonds, is expected to be more volatile than the net asset value of funds which invest solely in higher rated debt securities. This volatility may result in an increased number of redemptions from time to time. High levels of redemptions in turn may cause the Fund to sell its portfolio securities at inopportune times and decrease the asset base upon which expenses can be spread. DERIVATIVE INSTRUMENTS Options The Fund may, from time to time, subject to guidelines of the Board of Directors and the limitations set forth in the Registration Statement, purchase or sell (i.e., write) options on securities, securities indices and foreign currencies which are listed on a national securities exchange or in the OTC market, as a means of achieving additional return or of hedging the value of the Fund's portfolio. A call option is a contract that gives the holder of the option the right to buy from the writer of the call option, in return for a premium, the security underlying the option at a specified exercise price at any time during the term of the option. The writer of the call option has the obligation, upon exercise of the option, to deliver the underlying security upon payment of the exercise price during the option period. A call option is "covered" if the Fund owns the underlying security covered by the call or has an absolute and immediate right to acquire that security without additional cash consideration (or for additional cash consideration held in a segregated account by its custodian) upon conversion or exchange of other securities held in its portfolio. A call option is also covered if the Fund holds a call on the same security as the call written where the exercise price of the call held is (1) equal to or less than the exercise price of the call written or (2) greater than the exercise price of the call written if the difference is maintained by the Fund in cash, U.S. Government securities or other high grade short-term obligations 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 security as the put written where the exercise price of the put held is equal to or greater than the exercise price of the put written. The Adviser, on behalf of the Fund, has no present intention to engage in uncovered option transactions. If the Fund has written an option, it may terminate its obligation by effecting a closing purchase transaction. This is accomplished by purchasing an option of the same series as the option previously written. However, once the Fund has been assigned an exercise notice, the Fund will be unable to effect a closing purchase transaction. Similarly, if the Fund is the holder of an option it may liquidate its position by effecting a closing sale transaction. This is accomplished by selling an option of the same series as the option previously purchased. There can be no assurance that either a closing purchase or sale transaction can be effected when the Fund so desires. -------------------------------------------------------------------------------- B-5 -------------------------------------------------------------------------------- The Fund will realize a profit from a closing transaction if the price of the transaction is less than the premium received from writing the option or is more than the premium paid to purchase the option; the Fund will realize a loss from a closing transaction if the price of the transaction is more than the premium received from writing the option or is less than the premium paid to purchase the option. Since call option prices generally reflect increases in the price of the underlying security, any loss resulting from the repurchase of a call option may also be wholly or partially offset by unrealized appreciation of the underlying security. Other principal factors affecting the market value of a put or a call option include supply and demand, interest rates, the current market price and price volatility of the underlying security and the time remaining until the expiration date. An option position may be closed out only on an exchange which provides a secondary market for an option of the same series. Although the Fund will generally purchase or write only those options for which there appears to be an active secondary market, there is no assurance that a liquid secondary market on an exchange will exist for any particular option. In such event it might not be possible to effect closing transactions in particular options, so that the Fund would have to exercise its options in order to realize any profit and would incur brokerage commissions upon the exercise of call options and upon the subsequent disposition of underlying securities for the exercise of put options. If the Fund, as a covered call option writer, is unable to effect a closing purchase transaction in a secondary market, it will not be able to sell the underlying security until the option expires or it delivers the underlying security upon exercise or otherwise covers the position. The Fund intends to qualify as a "regulated investment company" under the Code. One requirement for such qualification is that less than 30% of the Fund's gross income must be derived from the gains from the sale or other disposition of securities held for less than three months. Therefore, the Fund may be limited in its ability to engage in options transactions. Options on Securities Indices. The Fund may purchase and sell securities index options. One effect of such transactions is to hedge all or part of the Fund's securities holdings against a general decline in the securities market or a segment of the securities market. Options on securities indices are similar to options on stock except that, rather than the right to take or make delivery of stock at a specified price, an option on a securities index gives the holder the right to receive, upon exercise of the option, an amount of cash if the closing level of the securities index upon which the option is based is greater than, in the case of a call, or less than, in the case of a put, the exercise price of the option. The Fund's successful use of options on indices depends upon its ability to predict the direction of the market and is subject to various additional risks. The correlation between movements in the index and the price of the securities being hedged against is imperfect and the risk from imperfect correlation increases as the composition of the Fund diverges from the composition of the relevant index. Accordingly, a decrease in the value of the securities being hedged against may not be wholly offset by a gain on the exercise or sale of a securities index put option held by the Fund. Options on Foreign Currencies. Instead of purchasing or selling futures (as described below), the Fund may attempt to accomplish similar objectives by purchasing put or call options on currencies or by writing put options or call options on currencies either on exchanges or in OTC markets. A put option gives the Fund the right to sell a currency at the exercise price until the option expires. A call option gives the Fund the right to purchase a currency at the exercise price until the option expires. Both options serve to insure against -------------------------------------------------------------------------------- B-6 -------------------------------------------------------------------------------- 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 Part A. Currency options may be subject to position limits which may limit the ability of the Fund to fully hedge its positions by purchasing the options. As in the case of interest rate futures contracts and options thereon, described below, the Fund may hedge against the risk of a decrease or increase in the U.S. dollar value of a foreign currency denominated debt security which the Fund owns or intends to acquire by purchasing or selling options contracts, futures contracts or options thereon with respect to a foreign currency other than the foreign currency in which such debt security is denominated, where the values of such different currencies (vis-a-vis the U.S. dollar) historically have a high degree of positive correlation. Futures Contracts The Fund will enter into futures contracts only for certain hedging, yield enhancement and risk management purposes. The Fund may enter into futures contracts for the purchase or sale of debt securities, financial indices, and U.S. Government securities (collectively, "interest rate futures contracts"). It may also enter into futures contracts for the purchase or sale of foreign currencies in which securities held or to be acquired by the Fund are denominated, or the value of which have a high degree of positive correlation to the value of such currencies as to constitute an appropriate vehicle for hedging. The Fund may enter into such futures contracts both on U.S. and foreign exchanges. In addition, the Fund may enter into futures contracts on stock and bond indices (collectively, "securities indices"). A "sale" of a futures contract (or a "short" futures position) means the assumption of a contractual obligation to deliver the securities underlying the contract at a specified price at a specified future time. A "purchase" of a futures contract (or a "long" futures position) means the assumption of a contractual obligation to acquire the securities underlying the contract at a specified price at a specified future time. Certain futures contracts are settled on a net cash payment basis rather than by the sale and delivery of the securities underlying the futures contracts. U.S. futures contracts have been designed by exchanges that have been designated as "contract markets" by the Commodity Futures Trading Commission (the "CFTC"), an agency of the U.S. Government, and must be executed through a futures commission merchant (i.e., a brokerage firm) which is a member of the relevant contract market. Futures contracts trade on these contract markets and the exchange's affiliated clearing organization guarantees performance of the contracts as between the clearing members of the exchange. At the time a futures contract is purchased or sold, the Fund must allocate cash or securities as a deposit payment (initial margin). It is expected that the initial margin on U.S. exchanges will vary from one-half of 1% to 4% of the face value of the contract. Under certain circumstances, however, such as during periods of high volatility, the Fund may be required by an exchange to increase the level of its initial margin payment. Thereafter, the futures contract is valued daily and the payment in cash of "variation margin" may be required, a process known as "mark-to-the-market." Each day the Fund is required to provide or is entitled to receive variation margin in an amount equal to any change in the value of the contract since the preceding day. Although futures contracts by their terms may call for the actual delivery or acquisition of underlying assets, in most cases the contractual obligation is extinguished by offset before the expiration of the contract. The offsetting of a contractual obligation is accomplished by buying (to offset an earlier sale) or selling (to offset an earlier purchase) an identical futures contract calling for delivery in the same month. Such a transaction cancels the obligation to make or take delivery of the underlying commodity. When -------------------------------------------------------------------------------- B-7 -------------------------------------------------------------------------------- the Fund purchases or sells futures contracts, the Fund will incur brokerage fees and related transactions costs. In addition, futures contracts entail risks. The ordinary spreads between values in the cash and futures markets, due to differences in the characters of those markets, are subject to distortions. First, all participants in the futures market are subject to initial and variation margin requirements. Rather than meeting additional variation margin requirements, investors may close futures contracts through offsetting transactions which could distort the normal relationship between the cash and futures markets. Second, the liquidity of the futures market depends on participants entering into offsetting transactions rather than making or taking delivery. To the extent participants decide to make or take delivery, liquidity in the futures market could be reduced, thus producing price distortions. Third, from the point of view of speculators, the margin deposit requirements in the futures market are less onerous than margin requirements in the securities market. Increased participation by speculators in the futures market may cause temporary price distortions. Thus, a correct forecast of interest rate trends by the investment adviser may still not result in a successful transaction. If the Fund seeks to hedge against a decline in the value of its portfolio securities and sells futures contracts on other securities which historically have had a high degree of positive correlation to the value of the portfolio securities, the value of its portfolio securities might decline more rapidly than the value of a poorly correlated futures contract rises. In that case, the hedge will be less effective than if the correlation had been greater. In a similar but more extreme situation, the value of the futures position might in fact decline while the value of the portfolio securities holds steady or rises. This would result in a loss that would not have occurred but for the attempt to hedge. Options on Futures Contracts. The Fund will also enter into options on futures contracts for certain bona fide hedging, yield enhancement and risk management purposes. The Fund may purchase put and call options and write put and call options on futures contracts that are traded on U.S. and foreign exchanges. The Adviser, on behalf of the Fund, has no present intention to engage in uncovered option transactions. An option on a futures contract gives the purchaser the right, in return for the premium paid, to assume a position in a futures contract (a long position if the option is a call and a short position if the option is a put) at a specified exercise price at any time during the option exercise period. The writer of the option is required upon exercise to assume a short futures position (if the option is a call) or a long futures position (if the option is a put). Upon exercise of the option, the assumption of offsetting futures positions by the writer and holder of the option will be accompanied by delivery of the accumulated cash balance -------------------------------------------------------------------------------- B-8 -------------------------------------------------------------------------------- in the writer's futures margin account which represents the amount by which the market price of the futures contract at exercise, exceeds, in the case of a call, or is less than, in the case of a put, the exercise of the option on the futures contract. The Fund will be considered "covered" with respect to a call option it writes on a futures contract if the Fund owns the securities or currency which is deliverable under the futures contract or an option to purchase that futures contract having a strike price equal to or less than the strike price of the "covered" option and having an expiration date not earlier than the expiration date of the "covered" option, or if it segregates and maintains with its custodian for the term of the option, cash, U.S. Government securities or other liquid high-grade debt obligations equal to the fluctuating value of the optionedfutures. The Fund will be considered "covered" with respect to a put option it writes on a futures contract if it owns an option to sell that futures contract having a strike price equal to or greater than the strike price of the "covered" option and having an expiration date not earlier than the expiration date of the "covered" option, or if it segregates and maintains with its custodian for the term of the option, cash, U.S. Government securities or other liquid high-grade debt obligations at all times equal in value to the exercise price of the put (less any initial margin deposited by the Fund with its custodian with respect to such put option). There is no limitation on the amount of the Fund's assets which can be placed in the segregated account. Writing a put option on a futures contract serves as a partial hedge against an increase in the value of debt securities the Fund intends to acquire. If the futures price at expiration of the option is above the exercise price, the Fund will retain the full amount of the option premium which provides a partial hedge against any increase that may have occurred in the price of the debt securities the Fund intends to acquire. If the market price of the underlying futures contract is below the exercise price when the option is exercised, the Fund will incur a loss, which may be wholly or partially offset by the decrease in the value of the securities the Fund intends to acquire. Writing a call option on a futures contract serves as a partial hedge against a decrease in the value of the Fund's portfolio securities. If the market price of the underlying futures contract at expiration of a written call option is below the exercise price, the Fund will retain the full amount of the option premium, thereby partially hedging against any decline that may have occurred in the Fund's holding of debt securities. If the futures price when the option is exercised is above the exercise price, however, the Fund will incur a loss, which may be wholly or partially offset by the increase in the value of the securities in the Fund's portfolio which were being hedged. The Fund will purchase put options on futures contracts to hedge its portfolio against the risk of a decline in the value of the debt securities it owns as a result of rising interest rates or fluctuating currency exchange rates. The Fund will also purchase call options on futures contracts as a hedge against an increase in the value of securities the Fund intends to acquire as a result of declining interest rates or fluctuating currency exchange rates. Interest Rate Futures Contracts and Options Thereon. The Fund will purchase or sell interest rate futures contracts to take advantage of or to protect the Fund against fluctuations in interest rates affecting the value of debt securities which the Fund holds or intends to acquire. For example, if interest rates are expected to increase, the Fund might sell futures contracts on debt securities, the values of which historically have a high degree of positive correlation to the values of the Fund's portfolio securities. Such a sale would have an effect similar to selling an equivalent value of the Fund's portfolio securities. If interest rates increase, the value of the Fund's portfolio securities will decline, but the value of the futures contracts to the Fund will increase at approximately -------------------------------------------------------------------------------- B-9 -------------------------------------------------------------------------------- an equivalent rate thereby keeping the net asset value of the Fund from declining as much as it otherwise would have. The Fund could accomplish similar results by selling debt securities with longer maturities and investing in debt securities with shorter maturities when interest rates are expected to increase. However, since the futures market may be more liquid than the cash market, the use of futures contracts as a risk management technique allows the Fund to maintain a defensive position without having to sell its portfolio securities. Similarly, the Fund may purchase interest rate futures contracts when it is expected that interest rates may decline. The purchase of futures contracts for this purpose constitutes a hedge against increases in the price of debt securities (caused by declining interest rates) which the Fund intends to acquire. Since fluctuations in the value of appropriately selected futures contracts should approximate that of the debt securities that will be purchased, the Fund can take advantage of the anticipated rise in the cost of the debt securities without actually buying them. Subsequently, the Fund can make the 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, U.S. Government securities or other liquid high-grade debt obligations from its portfolio in an amount equal to the difference between the fluctuating market value of such futures contracts and the aggregate value of the initial margin deposited by the Fund with its custodian with respect to such futures contracts. The purchase of a call option on a futures contract is similar in some respects to the purchase of a call option on an individual security. Depending on the pricing of the option compared to either the price of the futures contract upon which it is based or the price of the underlying debt securities, it may or may not be less risky than ownership of the futures contract or underlying debt securities. As with the purchase of futures contracts, when the Fund is not fully invested it may purchase a call option on a futures contract to hedge against a market advance due to declining interest rates. The purchase of a put option on a futures contract is similar to the purchase of protective put options on portfolio securities. The Fund will purchase a put option on a futures contract to hedge the Fund's portfolio against the risk of rising interest rates and consequent reduction in the value of portfolio securities. The writing of a call option on a futures contract constitutes a partial hedge against declining prices of the securities which are deliverable upon exercise of the futures contract. If the futures price at expiration of the option is below the exercise price, the Fund will retain the full amount of the option premium which provides a partial hedge against any decline that may have occurred in the Fund's portfolio holdings. The writing of a put option on a futures contract constitutes a partial hedge against increasing prices of the securities which are deliverable upon exercise of the futures contract. If the futures price at expiration of the option is higher than the exercise price, the Fund will retain the full amount of the option premium which provides a partial hedge against any increase in the price of debt securities which the Fund intends to purchase. If a put or call option the Fund has written is exercised, the Fund will incur a loss which will be reduced by the amount of the premium it received. Depending on the degree of correlation between changes in the value of its portfolio securities and changes in the value of its futures positions, the Fund's losses from options on futures it has written may to some extent be reduced or increased by changes in the value of its portfolio securities. Currency Futures and Options Thereon. Generally, foreign currency futures contracts and options thereon are similar to the interest rate -------------------------------------------------------------------------------- B-10 -------------------------------------------------------------------------------- futures contracts and options thereon discussed previously. By entering into currency futures andoptions thereon on U.S. and foreign exchanges, the Fund will seek to establish the rate at which it will be entitled to exchange U.S. dollars for another currency at a future time. By selling currency futures, the Fund will seek to establish the number of dollars it will receive at delivery for a certain amount of a foreign currency. In this way, whenever the Fund anticipates a decline in the value of a foreign currency against the U.S. dollar, the Fund can attempt to "lock in" the U.S. dollar value of some or all of the securities held in its portfolio that are denominated in that currency. By purchasing currency futures, the Fund can establish the number of dollars it will be required to pay for a specified amount of a foreign currency in a future month. Thus, if the Fund intends to buy securities in the future and expects the U.S. dollar to decline against the relevant foreign currency during the period before the purchase is effected, the Fund can attempt to "lock in" the price in U.S. dollars of the securities it intends to acquire. The purchase of options on currency futures will allow the Fund, for the price of the premium and related transaction costs it must pay for the option, to decide whether or not to buy (in the case of a call option) or to sell (in the case of a put option) a futures contract at a specified price at any time during the period before the option expires. If the Adviser, in purchasing an option, has been correct in its judgment concerning the direction in which the price of a foreign currency would move as against the U.S. dollar, the Fund may exercise the option and thereby take a futures position to hedge against the risk it had correctly anticipated or close out the option position at a gain that will offset, to some extent, currency exchange losses otherwise suffered by the Fund. If exchange rates move in a way the Fund did not anticipate, however, the Fund will have incurred the expense of the option without obtaining the expected benefit; any such movement in exchange rates may also thereby reduce rather than enhance the Fund's profits on its underlying securities transactions. Securities Index Futures Contracts and Options Thereon. Purchases or sales of securities index futures contracts are used for hedging purposes to attempt to protect a Fund's current or intended investments from broad fluctuations in stock or bond prices. For example, a 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 a Fund is not fully invested in the securities market and anticipates a significant market advance, it may purchase securities index futures contracts in order to gain rapid market exposure that may, in part or entirely, offset increases in the cost of securities that the Fund intends to purchase. As such purchases are made, the corresponding positions in securities index futures contracts will be closed out. The Fund may write put and call options on securities index futures contracts for hedging purposes. Limitations on the Purchase and Sale of Futures Contracts and Options on Futures Contracts Subject to the guidelines of the Board of Directors, the Fund may engage in transactions in futures contracts and options hereon only for bona fide hedging, yield enhancement and risk management purposes, in each case in accordance with the rules and regulations of the CFTC, and not for speculation. Regulations of the CFTC applicable to the Fund permit the Fund's futures and options on futures transactions to include (i) bona fide hedging transactions without regard to the percentage of the Fund's assets committed to margin and option premiums, and (ii) non-hedging transactions, provided that the Fund not enter into such non-hedging transactions if, immediately thereafter, the sum of the amount of -------------------------------------------------------------------------------- B-11 -------------------------------------------------------------------------------- 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. Forward Currency Exchange Contracts The Fund may engage in currency transactions otherwise than on futures exchanges to protect against future changes in the level of future currency exchange rates. The Fund will conduct such currency exchange transactions either on a spot, i.e., cash, basis at the rate then prevailing in the currency exchange market or on a forward basis, by entering into forward contracts to purchase or sell currency. A forward contract on foreign currency involves an obligation to purchase or sell a specific currency at a future date, which may be any fixed number of days agreed upon by the parties from the date of the contract, at a price set on the date of the contract. The risk of shifting of a forward currency contract will be substantially the same as a futures contract having similar terms. The Fund's dealing in forward currency exchange will be limited to hedging involving either specific transactions or portfolio positions. Transaction edging 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 U.S. Government securities or other high-grade debt obligations 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 -------------------------------------------------------------------------------- B-12 -------------------------------------------------------------------------------- are involved. The use of foreign currency contracts does not eliminate fluctuations in the underlying prices of the securities, but it does establish a rate of exchange that can be achieved in the future. In addition, although forward currency contracts limit the risk of loss due to a decline in the value of the hedged currency, they also limit any potential gain that might result if the value of the currency increases. If a decline in any currency is generally anticipated by the Adviser, the Fund may not be able to contract to sell the currency at a price above the level to which the currency is anticipated to decline. Additional Risks of Options, Futures Contracts, Options on Futures Contracts and Forward Contracts Options, futures contracts, and options thereon and forward contracts on securities and currencies may be traded on foreign exchanges. Such transactions may not be regulated as effectively as similar transactions in the U.S., may not involve a clearing mechanism and related guarantees, and are subject to the risk of governmental actions affecting trading in, or the prices of, foreign securities. The value of such positions also could be adversely affected by (i) other complex foreign political, legal and economic factors, (ii) lesser availability than in the U.S. of data on which to make trading decisions, (iii) delays in the Fund's ability to act upon economic events occurring in the foreign markets during non-business hours in the U.S., (iv) the imposition of different exercise and settlement terms and procedures and margin requirements than in the U.S. and (v) lesser trading volume. Exchanges on which options, futures and options on futures are traded may impose limits on the positions that the Fund may take in certain circumstances. Special Risk Considerations Relating to Futures and Options Thereon The Fund's ability to establish and close out positions in futures contracts and options on futures contracts 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 on a futures contract 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 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 would 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 -------------------------------------------------------------------------------- B-13 -------------------------------------------------------------------------------- prices which reflect the rising market. The Fund may have to sell securities at a time when it is disadvantageous to do so. Repurchase Agreements The Fund may engage in repurchase agreements as set forth in the Prospectus. A repurchase agreement is an instrument under which the purchaser (i.e., the Fund) acquires a debt security and the seller agrees, at the time of the sale, to repurchase the obligation at a mutually agreed upon time and price, thereby determining the yield during the purchaser's holding period. This results in a fixed rate of return insulated from market fluctuations during such period. The underlying securities are ordinarily U.S. Treasury or other government obligations or high quality money market instruments. The Fund will require that the value of such underlying securities, together with any other collateral held by the Fund, always equals or exceeds the amount of the repurchase obligations of the contra party. The Fund's risk is primarily that, if the seller defaults, the proceeds from the disposition of the underlying securities and other collateral for the seller's obligation are less than the repurchase price. If the seller becomes insolvent, the Fund might be delayed in or prevented from selling the collateral. In the event of a default or bankruptcy by a seller, the Fund will promptly seek to liquidate the collateral. To the extent that the proceeds from any sale of such collateral upon a default in the obligation to repurchase are less than the repurchase price, the Fund will experience a loss. If the financial institution which is a party to the repurchase agreement petitions for bankruptcy or becomes subject to the United States Bankruptcy Code, the law regarding the rights of the Fund are 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 equal to at least the market value, determined daily, of the loaned securities. The advantage of such loans is that the Fund continues to receive the income on the loaned securities while at the same time earns interest on the cash amounts deposited as collateral, which will be invested in short-term obligations. The Fund will not lend its portfolio securities if such loans are not permitted by the laws or regulations of any state in which its shares are qualified for sale and will not lend more than 33% of the value of its total assets. A loan may generally be terminated by the borrower on one business day's notice, or by the Fund on five business days' notice. If the borrower fails to deliver the loaned securities within five days after receipt of notice, the Fund could use the collateral to replace the securities while holding the borrower liable for any excess of replacement cost over collateral. As with any extensions of credit, there are risks of delay in recovery and in some cases even loss of rights in the collateral should the borrower of the securities fail financially. However, these loans of portfolio securities will only be made to firms deemed by the Fund's management to be creditworthy and when the income which can be earned from such loans justifies the attendant risks. The Board of Directors will oversee the creditworthiness of the contracting parties on an ongoing basis. Upon termination of the loan, the borrower is required to return the securities to the Fund. Any gain or loss in the market price during the loan period would inure to the Fund. The risks associated with loans of portfolio securities are substantially similar to those associated -------------------------------------------------------------------------------- B-14 -------------------------------------------------------------------------------- with repurchase agreements. Thus, if the contra party to the loan petitions for bankruptcy or becomes subject to the United States Bankruptcy Code, the law regarding the rights of the Fund is unsettled. As a result, under extreme circumstances, there may be a restriction on the Fund's ability to sell the collateral and the Fund would suffer a loss. When voting or consent rights which accompany loaned securities pass to the borrower, the Fund will follow the policy of calling the loaned securities, to be delivered within one day after notice, to permit the exercise of such rights if the matters involved would have a material effect on the Fund's investment in such loaned securities. The Fund will pay reasonable finder's, administrative and custodial fees in connection with a loan of its securities. THE ADVISER The Adviser is a New York corporation with principal offices located at One Corporate Center, Rye, New York 10580-1434. The Adviser also serves as adviser to other closed-end and open end investment companies with net assets in excess of $3.5 billion as of January 31, 1995. Pursuant to an Investment Advisory Contract, the Adviser furnishes a continuous investment program for the Fund's portfolio, makes the day-to-day investment decisions for the Fund, arranges the portfolio transactions for the Fund and generally manages the Fund's investments in accordance with the stated policies of the Fund, subject to the general supervision of the Board of Directors of the Fund. Under the Investment Advisory Contract, the Adviser also (1) provides the Fund with the services of persons competent to perform such supervisory, administrative, and clerical functions as are necessary to provide efficient administration of the Fund, including maintaining certain books and records; (2) oversees the performance of administrative and professional services provided to the Fund by others, including the Fund's Custodian, Transfer Agent and Dividend Disbursing Agent, as well as legal, accounting, auditing and other services performed for the Fund; (3) provides the Fund, if requested, with adequate office space and facilities; (4) prepares, but does not pay for, periodic updating of the Fund's Registration Statement, Prospectus and Additional Statement, including the printing of such documents for the purpose of filings with the SEC; (5) supervises the calculation of the net asset value of shares of the Fund; (6) prepares, but does not pay for, all filings under state "Blue Sky" laws of such states or countries, which may be required to register or qualify, or continue the registration or qualification, of the Fund and/or its shares under such laws; and (7) prepares notices and agendas for meetings of the Fund's Board of Directors and minutes of such meetings in all matters required by the Investment Company Act of 1940 (the "1940 Act") to be acted upon by the Board. The Adviser has entered into an Administration Contract with Furman Selz Incorporated ("Furman Selz" or the "Administrator"), 237 Park Avenue, New York, New York 10017, pursuant to which the Administrator provides certain administrative services necessary for the Fund's operations but which do not concern the investment advisory and portfolio management services provided by the Adviser. For such services and the related expenses borne by Furman Selz, the Adviser pays a monthly fee of .10% of the first $350 million of the aggregate average net assets of the Fund and other funds administered by Furman Selz and advised by Gabelli Funds, Inc., .075% of the aggregate average net assets exceeding $350 million up to $600 million, and .06% in excess of $600 million (minimum annual fee of $40,000 per portfolio) which, together with the services to be rendered, is subject to negotiation between the parties and both parties retain the right unilaterally to terminate the arrangement on not less than sixty days' notice. The Investment Advisory Contract provides that absent willful misfeasance, bad faith, gross negligence -------------------------------------------------------------------------------- B-15 -------------------------------------------------------------------------------- or reckless disregard of its duty, the Adviser is not liable to the Fund or any of its investors for any act or omission by the Adviser or for any error of judgment or for losses sustained by the Fund. The Investment Advisory Contract in no way restricts the Adviser from acting as adviser to others. The Fund has agreed by the terms of the Investment Advisory Contract that the word "Gabelli" in its name is derived from the name of the Adviser which in turn is derived from the name of Mario J. Gabelli; that such name is the property of the Adviser for copyright and/or other purposes; and that, therefore, such name may freely be used by the Adviser for other investment companies, entities or products. The Fund has further agreed that, in the event that for any reason the Adviser ceases to be its investment adviser, the Fund will, unless the Adviser otherwise consents in writing, promptly take all steps necessary to change its name to one which does not include "Gabelli." The Investment Advisory Contract was approved by the Board of Directors on June 3, 1989 and by the Fund's shareholders at a meeting held on May 14, 1990 and was approved most recently by the Board of Directors on May 9, 1994. The Investment Advisory Contract is terminable without penalty by the Fund on not more than sixty days' written notice when authorized by the Board of Directors of the Fund, by the holders of a majority, as defined in the 1940 Act, of the outstanding shares of the Fund, or by the Adviser. The Investment Advisory Contract will automatically terminate in the event of its assignment, as defined in the 1940 Act. The Investment Advisory Contract provides that, unless terminated, it will remain in effect so long as continuance of the Investment Advisory Contract is approved annually by the Board of Directors of the Fund, or the shareholders of the Fund and in either case, by a majority vote of the Directors who are not parties to the Investment Advisory Contract or "interested persons" as defined in the 1940 Act of any such person cast in person at a meeting called specifically for the purpose of voting on the continuance of the Investment Advisory Contract. For the fiscal years ended December 31, 1994, December 31, 1993 and December 31, 1992, the Adviser received fees of $1,177,574, $1,014,395 and $889,389 respectively. -------------------------------------------------------------------------------- B-16 -------------------------------------------------------------------------------- DIRECTORS AND OFFICERS The Directors and Executive Officers of the Fund, their principal business occupations during the last five years and their affiliations, if any, with the Adviser or the Administrator, are shown below. Directors deemed to be "interested persons" of the Fund for purposes of the 1940 Act are indicated by an asterisk. Principal Occupations During Last Five Years; Name, Position with Fund Affiliations with the Adviser and Address or Administrator. ------------------------ --------------------------------------------- Mario J. Gabelli* Chairman, President, Chief Executive Officer President, Director and and a Director of Gabelli Funds, Inc.; One Corporate Center Inc., Chairman, Chief Executive Officer, Chief Rye, New York 10580 Investment Officer and Director of GAMCO Investors, Inc.; President and Chairman of The Gabelli Equity Trust, Inc.; President, Chief Chief Investment Officer Investment Officer and Director of Gabelli Equity Series Funds, Inc., The Gabelli Value Fund, Inc., Gabelli Global Series Funds, and Gabelli Investor Funds, Inc., and Trustee of The Gabelli Asset Fund, The Gabelli Growth Fund and The Gabelli Money Market Funds; Chairman and Director of Lynch Corporation; Director and Adviser of Gabelli International Ltd. Anthony J. Colavita President and Attorney at law in the law firm Director of Anthony J. Colavita, P.C.; Director of The 575 White Plains Rd. Gabelli Value Fund, Inc., Gabelli Global Eastchester, New York 10709 Series Funds, Inc., Gabelli Investor Funds, Inc. and Gabelli Equity Series Funds, Inc.; Trustee of The Gabelli Asset Fund and The Gabelli Growth Fund, The Gabelli Money Market Funds since 1992 and the Westwood Funds. E. Val Cerutti Chief Executive Officer of Cerutti Director Consultants, Inc.; Former President and Chief 227 McLain Street Operating Officer of Stella D'oro Biscuit Mount Kisco, New York 10549 Company (through 1992); Adviser, Iona College School of Business; Director of Lynch Corporation. Felix J. Christiana Formerly Senior Vice President of Dollar Dry Director Dock Savings Bank; Director, The Gabelli 45 Pondfield Parkway Equity Trust Inc., Gabelli Global Series Mt. Vernon, New York 10552 Funds, Inc., The Gabelli Value Fund, Inc., Gabelli Investor Funds, Inc., Gabelli Equity Series Funds, Inc., The Treasurer's Fund, Inc.; Trustee, The Gabelli Growth Fund and The Gabelli Asset Fund. Anthonie C. van Ekris Managing Director of BALMAC International, Director Inc.; Formerly Chairman and Chief Executive 11 Avenue Princess Grace Officer of Balfour MacLaine Corporation and Monaco, MC 98000 Kay Corporation (through 1990); Director of Stahel Hardmeyer A.Z., Gabelli Equity Series Funds, Inc. and Gabelli Global Series Funds, Inc.; Trustee of The Gabelli Asset Fund, The Gabelli Growth Fund and The Gabelli Money Market Funds. -------------------------------------------------------------------------------- B-17 -------------------------------------------------------------------------------- Principal Occupations During Last Five Years; Name, Position with Fund Affiliations with the Adviser and Address or Administrator. ------------------------ --------------------------------------------- Dugald A. Fletcher* President, Fletcher & Company, Inc.; Director Director (since 1989) and Chairman (since February of 28 Shelter Lane 1991) of Binnings Building Products, Inc.; Locust Valley, New York 11560 Trustee, The Gabelli Growth Fund; Member of Advisory Board of Gabelli & Rosenthal Limited Partners. Karl Otto Pohl* Partner of Sal Oppenheim Jr. & Cie. (private Director investment bank); Former President of the c/o Gabelli Funds, Inc. Deutsche Bundesbank (Germany's Central Bank) One Corporate Center and Chairman of its Central Bank Council Rye, New York 10580 (1980-1991); Currently board member of Zurich Versicherungs-Gesellschaft (insurance); the International Council for JP Morgan & Co.; the Board of Supervisory Directors of ROBECo/o Group; and the Supervisory Board of Royal Dutch (petroleum company); Advisory Director of Unilever N.V. and Unilever Deutschland; Director/Trustee of all Funds managed by the Adviser. Anthony R. Pustorino, CPA Professor of Accounting, Pace University Director since 1965; Director, President and 121 Arleigh Road shareholder of Pustorino, Puglisi & Co., Douglaston, New York 11363 P.C., certified public accountants from 1961 to 1990; Director, The Gabelli Equity Trust Inc., The Gabelli Value Fund Inc., Gabelli Equity Series Funds, Inc., The Treasurer's Fund, Inc.; Trustee, The Gabelli Growth Fund, The Gabelli Asset Fund and The Gabelli Global Multimedia Trust Inc. Salvatore J. Zizza President and Chief Executive Officer of The Director Lehigh Group, Inc.; Director of The Gabelli 810 Seventh Avenue Equity Trust Inc. and Debe Computer Systems New York, New York 10019 Corp.; Trustee, The Gabelli Asset Fund and The Gabelli Growth Fund. Bruce N. Alpert Vice President, Treasurer and Chief Financial Vice President and and Administrative Officer of the investment Treasurer advisory division of the Adviser; Treasurer One Corporate Center of The Gabelli Equity Trust, Inc.; Vice Rye, New York 10580 President and Treasurer of Gabelli Equity Series Funds, Inc.; Gabelli Global Series Funds, Inc.; The Gabelli Money Market Funds, The Gabelli Value Fund Inc. and Gabelli Investor Funds, Inc.; President and Treasurer of The Gabelli Asset Fund, The Gabelli Growth Fund; Manager of Teton Advisers LLC and Vice President of the Westwood Funds. J. Hamilton Crawford, Jr. Senior Vice President and General Counsel of Secretary the investment advisory division of Gabelli One Corporate Center Funds, Inc.; Secretary of all Funds advised Rye, New York 10580 by Gabelli Funds, Inc. since 1992 and Teton Advisers LLC. Attorney in private practice, 1990-1992. Executive Vice President and General Counsel of Prudential Mutual Fund Management, Inc., 1988-1990. -------------------------------------------------------------------------------- B-18 -------------------------------------------------------------------------------- The Fund pays each Director who is not an employee of the Adviser or an affiliated company an annual fee of $3,000 and $500 for each meeting of the Board of Directors attended by the Director, and reimburses Directors for certain travel and other out-of-pocket expenses incurred by them in connection with attending such meetings. Directors and officers of the Fund who are employed by the Adviser or an affiliated company receive no compensation or expense reimbursement from the Fund. Mr. Pohl receives fees from the Adviser but has no obligation to provide any services to the Adviser. Although this relationship does not appear to require designation of Mr. Pohl as an interested person, the Fund is currently making such designation in order to avoid the possibility that Mr. Pohl's independence would be questioned. Karl Otto Pohl and Anthonie C. van Ekris, Directors of the Fund, reside outside the United States and all or a significant portion of their assets are located outside the United States. They have no authorized agent in the United States to receive service of process. As a result, it may not be possible for investors to effect service of process within the United States or to enforce against them in United States courts judgments predicated upon civil liability provisions of United States securities laws. The following table sets forth certain information regarding the compensation of the Fund's Directors and Officers. Except as disclosed below, no Executive Officer or person affiliated with the Fund received compensation from the Fund for the calendar year ended December 31, 1994 in excess of $60,000. COMPENSATION TABLE
------------------------------------------------------------------------------------------------------------------ Name of Person, Aggregate Compensa- Pension or Retirement Estimated Annual Ben- Total Compensation Position tion from Registrant Benefits Accrued as efits Upon Retirement from Registrant and (fiscal year) Part of Fund Expenses Fund Complex Paid to Directors* ------------------------------------------------------------------------------------------------------------------ Mario J. Gabelli $ 0 N/A N/A $ 0 President, Director and Chief Investment Officer Anthony J. Colavita 5,000 N/A N/A 62,000 (10) Director E. Val Cerutti 5,000 N/A N/A 5,500 (2) Director Felix Christiana 5,000 N/A N/A 64,500 (9) Director Dugald Fletcher 5,000 N/A N/A 13,000 (2) Director Anthony R. Pustorino 5,000 N/A N/A 69,000 (8) Director Anthonie C. van Ekris 5,000 N/A N/A 40,000 (8) Director Karl Otto Pohl 4,500 N/A N/A 64,750 (12) Director Salvatore Zizza 5,000 N/A N/A 35,000 (5) Director
---------- * Represents the total compensation paid to such persons during the calendar year ending December 31, 1994 (and, with respect to the Fund, estimated to be paid during a full calendar year). The parenthetical number represents the number of investment companies (including the Fund) from which such person receives compensation that are considered part of the same fund complex as the Fund, because, among other things, they have a common investment adviser. -------------------------------------------------------------------------------- B-19 -------------------------------------------------------------------------------- INVESTMENT RESTRICTIONS The investment restrictions listed below have been adopted by the Fund as fundamental policies, except as otherwise indicated. Under the 1940 Act, a fundamental policy may not be changed without the vote of a majority of the outstanding voting securities of the Fund, as defined in the 1940 Act. Such a majority is defined as the lesser of (1) 67% or more of the shares present at a meeting of shareholders, if the holders of 50% of the outstanding shares of the Fund are present or represented by proxy or (2) more than 50% of the outstanding shares of the Fund. The Fund may not: 1. Purchase the securities of any one issuer, other than the United States Government or any of its agencies or instrumentalities, if immediately after such purchase more than 5% of the value of its total assets would be invested in such issuer or the Fund would own more than 10% of the outstanding voting securities of such issuer, except that up to 25% of the value of the Fund's total assets may be invested without regard to such 5% and 10% limitations. 2. Purchase or otherwise acquire real estate or interests therein, although the Fund may purchase securities of issuers which engage in real estate operations and securities secured by real estate or interests therein. 3. Purchase or otherwise acquire or sell commodities or commodity contracts except that the Fund may purchase or sell financial futures contracts and relation options thereon. 4. Purchase oil, gas or other mineral leases, rights or royalty contracts, or exploration or development programs, except that the Fund may invest in the securities of companies which operate, invest in, or sponsor such programs. 5. Purchase securities of other investment companies, except in connection with a merger, consolidation, reorganization or acquisition of assets, except that the Fund reserves the right to invest up to 5% of its total assets in not more than 3% of the securities of any one investment company including small business investment companies or invest up to 10% of its total assets in the securities of investment companies, nor make any such investments other than through purchases in the open market where to the best information of the Fund no commission or profit to a sponsor or dealer (other than the customary broker's commission) results from such purchase. 6. Pledge its assets or assign or otherwise encumber them except to secure permitted borrowings. For the purpose of this restriction, collateral arrangements with respect to the writing of options or entering into financial futures transactions or forward contracts, or when issued or delayed delivery securities are not deemed to be pledges of assets and such arrangements are not deemed to be the issuance of a senior security as set forth in restriction (7). 7. Issue senior securities except to the extent permitted by applicable law. 8. Make loans of money or securities, except: (a) that the Fund may engage in repurchase agreements as set forth in the Prospectus and (b) the Fund may lend its portfolio securities consistent with applicable regulatory requirements and as set forth in the Prospectus. 9. Make short sales of securities or maintain a short position, unless at all times when a short position is open, it either owns an equal amount of such securities or owns securities which, without payment of any further consideration, are convertible into or exchangeable for securities of the same issue as, and equal in amount to, the securities sold short. 10. Engage in the underwriting of securities, except insofar as the Fund may be deemed an underwriter under the Securities Act of 1933 in disposing of a portfolio security. -------------------------------------------------------------------------------- B-20 -------------------------------------------------------------------------------- 11. Invest for the purpose of exercising control or management of any other issuer. 12. Invest more than 25% of the value of its total assets in any one industry. If a percentage restriction is adhered to at the time of investment, a later increase or decrease in percentage resulting from a change in values of portfolio securities or amount of total or net assets will not be considered a violation of any of the foregoing restrictions. PORTFOLIO TRANSACTIONS AND BROKERAGE Under the Investment Advisory Contract, the Adviser is authorized on behalf of the Fund to employ brokers to effect the purchase or sale of portfolio securities with the objective of obtaining prompt, efficient and reliable execution and clearance of such transactions at the most favorable price obtainable ("best execution") at reasonable expense. Transactions in securities other than those for which a securities exchange is the principal market are generally done with a brokerage firm and a commission is paid whenever it appears that the broker can obtain a more favorable overall price. In general, there may be no stated commission in the case of securities traded on the over-the-counter markets, but the prices of those securities may include undisclosed commissions or markups. Options transactions will usually be effected through a broker and a commission will be charged. The Fund also expects that securities will be purchased at times in underwritten offerings where the price includes a fixed amount of compensation generally referred to as the underwriter's concession or discount. The Adviser currently serves as adviser to a number of investment company clients and may in the future act as adviser to others. It is the practice of the Adviser to cause purchase and sale transactions to be allocated among the Fund and others whose assets it manages in such manner as it deems equitable. In making such allocations among the Fund and other client accounts, the main factors considered are the respective investment objectives, the relative size of portfolio holdings of the same or comparable securities, the availability of cash for investment, the size of investment commitments generally held and the opinions of the persons responsible for managing the portfolios of the Fund and other client accounts. The policy of the Fund regarding purchases and sales of securities and options for its portfolio is that primary consideration will be given to obtaining the most favorable prices and efficient execution of transactions. In seeking to implement the Fund's policies, the Adviser effects transactions with those brokers and dealers who the Adviser believes provide the most favorable prices and are capable of providing efficient executions. If the Adviser believes such price and execution are obtainable from more than one broker or dealer, it may give consideration to placing portfolio transactions with those brokers and dealers who also furnish research and other services to the Fund or the Adviser of the type described in Section 28(e) of the Securities Exchange Act of 1934. In doing so, the Fund may also pay higher commission rates than the lowest available when the Adviser believes it is reasonable to do so in light of the value of the brokerage and research services provided by the broker effecting the transaction. Such services may include, but are not limited to, any one or more of the following: information as to the available ability of securities for purchase or sale; statistical or factual information or opinions pertaining to investment; wire services; and appraisals or evaluations of portfolio securities. The Adviser may also place orders for the purchase or sale of portfolio securities with Gabelli and Company, Inc. ("Gabelli"), a broker-dealer member of the National Association of Securities Dealers, Inc. and an affiliate of the Adviser, when it appears that, as an introducing broker or otherwise, Gabelli can obtain a price and execution which is at least as favorable as that obtainable by other qualified brokers. -------------------------------------------------------------------------------- B-21 -------------------------------------------------------------------------------- As required by Rule 17e-1 under the Act, the Board of Directors has adopted "Procedures" which provide that the commissions paid to Gabelli on stock exchange transactions may not exceed that which would have been charged by another qualified broker or member firm able to affect the same or a comparable transaction an at equally favorable price. Rule 17e-1 and the Procedures contain requirements that the Board, including its Independent Directors, conduct periodic compliance reviews of such brokerage allocations and review such schedule at least annually for its continuing compliance with the foregoing standard. The Adviser and Gabelli are also required to furnish reports and maintain records in connection with such reviews. For the fiscal years ended December 31, 1992, December 31, 1993 and December 31, 1994 the Fund paid a total of $41,539, $33,750 and $53,877, respectively, in brokerage commissions, of which Gabelli and its affiliates received $2,465, $4,763 and $9,631, respectively. To obtain the best execution of portfolio trades on the New York Stock Exchange ("Exchange"), Gabelli controls and monitors the execution of such transactions on the floor of the Exchange through independent "floor brokers" or through the Designated Order Turnaround ("DOT") System of the Exchange. Such transactions are then cleared, confirmed to the Fund for the account of Gabelli, and settled directly with the Custodian of the Fund by a clearing house member firm which remits the commission less its clearing charges to Gabelli. Pursuant to an agreement with the Fund, Gabelli pays all charges incurred for such services and reports at least quarterly to the Board the amount of such expenses and commissions; and the net compensation realized by Gabelli for its brokerage services is subject to the approval of the Board and the Independent Directors of the Fund who must approve the continuation of the arrangement at least annually. Commissions paid by the Fund pursuant to the arrangement may not exceed the commission level specified by the Procedures described above. Gabelli may also effect Fund portfolio transactions in the same manner and pursuant to the same arrangements on other national securities exchanges which adopt direct access rules similar to those of the Exchange. DETERMINATION OF NET ASSET VALUE Net asset value will normally be calculated daily (a) no less frequently than weekly, (b) on the last business day of each month and (c) at any other times determined by the Fund's Board of Directors. Net asset value is calculated by dividing the value of the Fund's net assets (the value of its assets less its liabilities) by the total number of shares of Common Stock outstanding. All securities for which market quotations are readily available, which include the options and futures in which the Fund may invest, are valued at the last sales price on the primary exchange on which they are traded prior to the time of determination, or, if no sales price is available at that time, at the closing price quoted for the securities (but if bid and asked quotations are available, at the mean between the last current bid and asked prices, rather than the quoted closing price). Securities that are traded in the unregulated market are valued, if bid and asked quotations are available, at the current bid price. If bid and asked quotations are not available, then such securities are valued as determined pursuant to procedures established in good faith by the Board of Directors of the Fund. Short-term debt securities with remaining maturities of sixty days or less at the time of purchase are varied at amortized cost, unless the Directors determine such does not reflect the securities' fair value, in which case these securities will be valued at their fair value as determined by the Directors. Other short-term debt securities will be valued on a marked-to-market basis until such time as they reach a maturity of sixty days, whereupon they will be valued at amortized value unless the Directors determine such does not reflect the securities' fair value, in which case these securities will be valued at -------------------------------------------------------------------------------- B-22 ------------------------------------------------------------------------------- their fair value as determined by the Directors. Options are valued at the last sale price on the exchange on which they are listed, unless no sales of such options have taken place that day, in which case they will be valued at the mean between their closing bid and asked prices. DIVIDENDS, DISTRIBUTIONS AND TAXES General The Fund has qualified and intends to continue to qualify as a regulated investment company under Subchapter M of the Code. If it so qualifies, the Fund will not be subject to Federal income tax on its net investment income and net short-term capital gain, if any, realized during any fiscal year to the extent that it distributes such income and capital gains to its shareholders. The Fund will determine either to distribute or to retain for reinvestmentall or part of its net long-term capital gain. If any such gains are retained, the Fund will be subject to a tax of 35% of such amount. In that event, the Fund expects to designate the retained amount as undistributed capital gains in a notice to its shareholders, each of whom (1) will be required to include in income for tax purposes as long-term capital gains its share of such undistributed amount, (2) will be entitled to credit its proportionate share of the tax paid by the Fund against its Federal income tax liability and to claim refunds to the extent that the credit exceeds such liability, and (3) will increase its basis in its shares of the Fund by an amount equal to 65% of the amount of undistributed capital gains included in such shareholder's gross income. Under the Code, amounts not distributed by a regulated investment company on a timely basis in accordance with a calendar year distribution requirement are subject to a 4% excise tax. To avoid the tax, the Fund must distribute during each calendar year, an amount equal to, at the minimum, the sum of (1) 98% of its ordinary income (not taking into account any capital gains or losses) for the calendar year, (2) 98% of its capital gains in excess of its capital losses for the twelve-month period 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 (3) all ordinary income and net capital gain for previous years that were not previously distributed. A distribution will be treated as paid during the calendar year if it is paid during the calendar year or declared by the Fund in October, November or December of the year, payable to shareholders of record on a date during such month and paid by the Fund during January of the following year. Any such distributions paid during January of the following year will be deemed to be received on December 31 of the year the distributions are declared, rather than when the distributions are received. Gains or losses on the sales of securities by the Fund will be long-term capital gains or losses if the securities have been held by the Fund for more than twelve months. Gains or losses on the sale of securities held for twelve months or less will be short-term capital gains or losses. Foreign currency gains or losses on non-U.S. dollar denominated bonds and other similar debt instruments and on any non-U.S. dollar denominated futures contracts, options and forward contracts that are not section 1256 contracts (as defined below) generally will be treated as ordinary income and loss. Hedging Transactions Certain options, futures contracts and options on futures contracts are "section 1256 contracts". Any gains or losses on section 1256 contracts are generally considered 60% long-term and 40% short-term capital gains or losses ("60/40"). Also, section 1256 contracts held by the Fund at the end of each -------------------------------------------------------------------------------- B- 23 -------------------------------------------------------------------------------- taxable year are "marked-to-the-market" with the result that unrealized gains or losses are treated as though they were realized and the resulting gain or loss is treated as 60/40 gain or loss. Hedging transactions undertaken by the Fund may result in "straddles" for U.S. Federal income tax purposes. The straddle rules may affect the character of gains (or losses) realized by the Fund. In addition, losses realized by the Fund on positions that are part of a straddle may be deferred under the straddle rules, rather than being taken into account in calculating the taxable income for the taxable year in which such losses are realized. Further, the Fund may be required to capitalize, rather than deduct currently, any interest expense on indebtedness incurred or continued to purchase or carry any positions that are part of a straddle. Because only a few regulations implementing the straddle rules have been promulgated, the tax consequences of hedging transactions to the Fund are not entirely clear. The Fund may make one or more of the elections available under the Code which are applicable to straddles. If the Fund makes any of the elections, the amount, character and timing of the recognition of gains or losses from the affected straddle positions will be determined under rules that vary according to the election(s) made. The rules applicable under certain of the elections accelerate the recognition of gains or losses from the affected straddle positions. Because application of the straddle rules may affect the character and timing of the Fund's gains, losses and deductions, the amount which must be distributed to shareholders, and which will be taxed to shareholders as ordinary income or long-term capital gain, may be increased or decreased substantially as compared to a fund that did not engage in such hedging transactions. The requirements of the Code applicable to regulated investment companies may limit the extent to which the Fund will be able to engage in transactions in options, futures contracts and options on futures contracts. Distributions Distributions of investment company taxable income (which includes taxable interest income, dividends and the excess of net short-term capital gains over long-term capital losses) are taxable to a U.S. shareholder as ordinary income, whether paid in cash or shares. Dividends paid by the Fund will qualify for the 70% deduction for dividends received by corporations to the extent that the Fund's income consists of qualified dividends received from U.S. corporations. Distributions of net capital gains (which consist of the excess of long-term capital gains over net short-term capital losses), if any, are taxable as long- term capital gains, whether paid in cash or in shares, regardless of how long the shareholder has held the Fund's shares, and are not eligible for the dividends received deduction. Shareholders receiving distributions in the form of newly issued shares will have a basis in such shares of the Fund equal to the fair market value of such shares on the distribution date. If the net asset value of shares is reduced below a shareholder's cost as a result of a distribution by the Fund, such distribution will be taxable even though it represents a return of invested capital. The price of shares purchased at any time may reflect the amount of a forthcoming distribution. Those purchasing shares just prior to a distribution will receive a distribution which will be taxable to them, even though it represents in part a return of invested capital. Sales of Shares Upon a sale or exchange of shares, a shareholder will realize a taxable gain or loss depending upon his or her basis in the shares. Such gain or loss will be treated as capital gain or loss if the shares have been held for more than one year. Any loss realized on a sale or exchange will be disallowed to the extent the shares isposed of are replaced within a 61 day period eginning 30 -------------------------------------------------------------------------------- B-24 -------------------------------------------------------------------------------- days before and ending 30 days after the day that the shares are disposed of. In such a case, the basis of the shares acquired will be adjusted to reflect the disallowed loss. Any loss realized by a shareholder on the sale of Fund shares held by the shareholder for six months or less will be treated for tax purposes as a long-term capital loss to the extent of any distributions of net capital gain received by the shareholder with respect to such shares. Backup Withholding The Fund may be required to withhold Federal income tax at a rate of 31% on all taxable distributions payable to shareholders who fail to provide the Fund with their correct taxpayer identification number or to make required certifications, or who have been notified by the Internal Revenue Service that they are subject to backup withholding. Backup withholding is not an additional tax. Any amounts withheld may be credited against the shareholder's Federal income tax liability. Foreign Withholding Taxes Income received by the Fund from sources within foreign countries may be subject to withholding and other taxes imposed by such countries. Tax conventions between certain countries and the United States may reduce or eliminate such taxes. It is impossible to determine the rate of foreign tax in advance since the amount of the Fund's assets to be invested in various countries is not known. Because the Fund will not have more than 50% of its total assets invested in securities of foreign governments or corporations, the Fund will not be entitled to "pass-through" to shareholders the amount of foreign taxes paid by the Fund. The foregoing is a general and abbreviated summary of the applicable provisions of the Code and Treasury Regulations presently in effect. For the complete provisions, reference should be made to the pertinent Code sections and the Treasury Regulations promulgated thereunder. The Code and the Treasury Regulations are subject to change by legislative or administrative action either prospectively or retroactively. Dividends and capital gains distributions also may be subject to state and local taxes. Shareholders are urged to consult their own tax advisers regarding specific questions as to Federal, state or local taxes. GENERAL INFORMATION Counsel and Independent Accountants Skadden, Arps, Slate, Meagher & Flom, 919 Third Avenue, New York, New York 10022 is counsel to the Fund. Price Waterhouse, 1177 Avenue of the Americas, New York, New York 10036, has been selected as independent accountants for the Fund. -------------------------------------------------------------------------------- B-25 PART C OTHER INFORMATION Item 24. Financial Statements and Exhibits (1) Financial Statements (1) (2) (a) Articles of Amendment and Restatement (3) (b) Amended and Restated By-Laws (3) (c) Not Applicable (d) Specimen Stock Certificate (3) (e) Automatic Dividend Reinvestment and Voluntary Cash Purchase Plan (3) (f) Not Applicable (g) Investment Advisory Agreement (2) (h) Not Applicable (i) Not Applicable (j) Custodian Agreement (2) (k) Not Applicable (l) Opinion and Consent of Counsel (2) (m) Not Applicable (n) Not Applicable (o) Not Applicable (p) Not Applicable (q) Not Applicable (r) Not Applicable (1) Incorporated by reference from the Registrant's Annual Report for the year ended December 31, 1994, as filed with the Securities and Exchange Commission on March 10, 1995. (2) Incorporated by reference from the Registrant's Registration Statement on Form N-1A, File Nos. 33-26644 and 811-05715, as filed with the Securities and Exchange Commission on January 17, 1989. (3) Filed herein. Item 25. Marketing Arrangements None. Item 26. Other Expenses of Issuance and Distribution Not Applicable. Item 27. Persons Controlled by or Under Common Control with Registrant Insofar as the following have substantially identical boards of directors or trustees they may be deemed with Registrant to be under common control: The Gabelli Asset Fund, The Gabelli Equity Trust Inc., The Gabelli Growth Fund, The Gabelli Value Fund, The Gabelli ABC Fund, The Gabelli Global Series Fund, The Gabelli Money Market Funds, The Gabelli Multimedia Trust, Inc., The Gabelli Gold Fund and The Gabelli Equity Series Funds, Inc. Item 28. Number of Holders of Securities as of March 28, 1995 Title of Class Number of Record Holders -------------- ------------------------ Capital Stock, par value $.001 per share 8,646 Item 29. Indemnification Under the Fund's Articles of Amendment and Restatement and Amended and Restated By-Laws, the directors and officers of the Company and the Fund will be indemnified to the fullest extent allowed and in the manner provided by Maryland law and applicable provisions of the Investment Company Act of 1940, including advancing of expenses incurred in connection therewith. Indemnification shall not be provided however to any officer or director against any liability to the Registrant or its security-holders to which he or she would otherwise be subject by reasons of willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his or her office. Insofar as indemnification for liabilities under the Securities Act of 1933 may be permitted to the directors and officers, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in such Act and is therefore unenforceable. If a claim for indemnification against such liabilities under the Securities Act of 1933 (other than for expenses incurred in a successful defense) is asserted against the Company by the directors or officers in connection with the Shares, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question of whether such indemnification by it is against public policy as expressed in such Act and will be governed by the final adjudication of such issue. Item 30. Business and other Connections of Investment Advisor For information as to the business, profession, vocation or employment of a substantial nature of each of the officers and partners of Gabelli Funds, Inc., reference is made to the Adviser's current Form ADV filed under the Investment Advisers Act of 1940, incorporated herein by reference. Item 31. Location of Accounts and Records The accounts and records of the Registrant are maintained in part at the office of the Advisor at One Corporate Center Rye, New York 10580-1434, in part at the offices of the Custodian, State Street Bank and Trust Company, with offices at 1776 Heritage Drive, North Quincy, MA 02171, at offices of the Fund's Administrator, Furman Selz Incorporated, 237 Park Avenue, New York, NY 10017, and in part at the offices of Boston Financial Data Services Inc., BFDS Building, 4th Floor, 2 Heritage Drive, Quincy, MA 02171. Item 32. Management Services Except as described above in Item 9, the Registrant is not a party to any management service related contract. Item 33. Undertakings Not applicable. SIGNATURES Pursuant to the requirements of the Investment Company Act of 1940, the Registrant has duly caused thisamendment to its Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York, State of New York, on this 31st day of March, 1995. THE GABELLI CONVERTIBLE SECURITIES FUND, INC. By /s/ Bruce N. Alpert --------------------- Bruce N. Alpert Vice President and Treasurer SCHEDULE OF EXHIBITS TO FORM N-2 Exhibit Page Number Exhibit Number ------- ------- ------ Exhibit A Articles of Amendment and Restatement ........... Exhibit B Amended and Restated By-Laws .................... Exhibit C Not Applicable .................................. Exhibit D Specimen Stock Certificate ...................... Exhibit E Automatic Dividend Reinvestment and Voluntary Cash Purchase Plan ................ Exhibit F Not Applicable .................................. Exhibit G Investment Advisory Agreement* .................. Exhibit H Not Applicable .................................. Exhibit I Not Applicable .................................. Exhibit J Custodian Agreement* ............................ Exhibit K Not Applicable .................................. Exhibit L Opinion and Consent of Counsel* ................. Exhibit M Not Applicable .................................. Exhibit N Not Applicable .................................. Exhibit O Not Applicable .................................. Exhibit P Not Applicable .................................. Exhibit Q Not Applicable .................................. Exhibit R Not Applicable .................................. ---------- * Previously filed. EX-99.2A 2 ARTICLES OF AMENDMENT AND RESTATEMENT Exhibit A ARTICLES OF AMENDMENT AND RESTATEMENT OF THE GABELLI SERIES FUNDS, INC. * * * * * The Gabelli Series Funds, Inc., a Maryland corporation (the "Corporation"), certifies that: FIRST: The Corporation desires to amend and restate its charter as currently in effect and as hereinafter amended; SECOND: The following are all of the provisions of the charter of the Corporation currently in effect and as amended hereby: ARTICLE I THE UNDERSIGNED, Bruce N. Alpert and J. Hamilton Crawford, Jr., certify that they are the Vice President and Treasurer, and Secretary, respectively, of The Gabelli Series Funds, Inc., a corporation organized and existing under and by virtue of the Maryland General Corporation Law. ARTICLE II NAME The name of the corporation (the "Corporation") hereafter shall be "The Gabelli Convertible Securities Fund, Inc." ARTICLE III PURPOSES AND POWERS The purposes for which the Corporation is formed are to act as an investment company under the United States Investment Company Act of 1940, as heretofore or hereafter amended (the "1940 Act"), and to exercise and enjoy all of the general powers, rights and privileges granted to, or conferred upon, corporations by the Maryland General Corporation Law now or hereafter in force. ARTICLE IV PRINCIPAL OFFICE AND RESIDENT AGENT The post office address of the principal office of the Corporation in the State of Maryland is c/o The Corporation Trust Incorporated, First Maryland Building, 32 South Street, Baltimore, Maryland 21202. The name of the resident agent of the Corporation in the State of Maryland is The Corporation Trust Incorporated, a corporation of the State of Maryland, and the post office address of the resident agent is First Maryland Building, 32 South Street, Baltimore, Maryland 21202. ARTICLE V CAPITAL STOCK (1) The total number of shares of capital stock of all classes which the Corporation shall have authority to issue is One Billion (1,000,000,000) shares, each of which shall have a par value of ($.001), and all of which shall have an aggregate par value of One Million Dollars ($1,000,000). (2) (a) The Board of Directors of the Corporation is authorized to classify or to reclassify, from time to time, any unissued shares of stock of the Corporation, whether now or hereafter authorized, by setting, changing or eliminating the preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends, qualifications, or terms and conditions of or rights to require redemption of the stock. (b) Without limiting the generality of the foregoing, the dividends and distributions or other payments with respect to the stock of the Corporation, and with respect to each class that hereafter may be created, shall be in such amount as may be declared from time to time by the Board of Directors, and such dividends and distributions may vary from class to class to such extent and for such purposes as the Board of Directors may deem appropriate, including, but not limited to, the purpose of complying with requirements of regulatory or legislative authorities. (c) Until such time as the Board of Directors shall provide otherwise pursuant to the authority granted in this section (2) of Article V, all of the authorized shares of the Capital Stock of the Corporation are designated as Common Stock. Shares of the Common Stock and the holders thereof, and shares of any class and the holders thereof, shall be subject to the following provisions, provided, however, that if no shares of any class other than Common Stock are outstanding, the shares of the Common Stock and the holders thereof shall nevertheless be subject to the following provisions except 2 to the extent that such provisions are by their terms applicable only when shares of two or more classes are outstanding. (3) The net asset value of each share of the Corporation's capital stock issued, sold or purchased at net asset value shall be the current net asset value per share as determined in accordance with procedures adopted from time to time by the Board of Directors which comply with the 1940 Act. (4) Shares of each class of stock shall be entitled to such dividends or distributions, in stock or in cash or both, as may be declared from time to time by the Board of Directors, acting in its sole discretion, with respect to such class. (5) In the event of the liquidation or dissolution of the Corporation, the holders of the Common Stock of the Corporation's stock shall be entitled to receive all the assets of the Corporation not attributable to other classes of stock through any preference. The assets so distributable to the stockholders shall be distributed among such stockholders in proportion to the number of shares of that class held by them and recorded on the books of the Corporation. (6) Unless otherwise now or hereafter expressly provided in the Charter of the Corporation, including, without limitation, in any Articles Supplementary creating any additional class of capital stock, on each matter submitted to a vote of stockholders, each holder of a share of capital stock of the Corporation shall be entitled to one vote for each share standing in such holder's name on the books of the Corporation, irrespective of the class thereof, and all shares of all classes of capital stock shall vote together as a single class; provided, however, that as to any matter with respect to which a separate vote of any class or series is required by the 1940 Act or any rules, regulations or orders issued thereunder, or the Maryland General Corporation Law, such requirement as to a separate vote by that class or series shall apply in lieu of a vote of all classes voting together as a single class as described above. (7) The Corporation shall be entitled to purchase shares of its capital stock, to the extent that the Corporation may lawfully effect such purchase under the laws of the State of Maryland, upon such terms and conditions and for such consideration as the Board of Directors shall deem advisable. (8) All shares purchased by the Corporation shall constitute authorized but unissued shares and the number of the authorized shares of stock of the Corporation shall not be reduced by the number of any shares purchased by it. Unless and until their classification is changed in accordance with section (2) of this Article V, all shares of capital stock so purchased shall continue 3 to belong to the same class to which they belong at the time of their purchase. (9) The Corporation may issue shares of stock in fractional denominations to the same extent as its whole shares, and shares in fractional denominations shall be shares of capital stock having proportionately to the respective fractions represented thereby all the rights of whole shares of the same class, including without limitation, the right to vote, the right to receive dividends and distributions, and the right to participate upon liquidation of the Corporation, but excluding the right to receive a stock certificate representing fractional shares. (10) All persons who shall acquire capital stock or other securities of the Corporation shall acquire the same subject to the provisions of the Charter of the Corporation, as now or hereafter constituted, and the By-Laws of the Corporation, as each may be amended from time to time. ARTICLE VI PROVISIONS FOR DEFINING, LIMITING AND REGULATING CERTAIN POWERS OF THE CORPORATION AND OF THE DIRECTORS AND STOCKHOLDERS (1) The number of directors of the Corporation shall be two (2), which number may be increased or thereafter decreased pursuant to the By-Laws of the Corporation, but shall never be less than the minimum number permitted by the General Laws of the State of Maryland now or hereafter in force. The names of the directors who shall serve until the first annual meeting of stockholders and until their successors are duly elected and qualify are: Mario J. Gabelli and Thomas J. LaBarbera. (2) The Board of Directors of the Corporation is hereby empowered to authorize the issuance from time to time of shares of capital stock, whether now or hereafter authorized, for such consideration as the Board of Directors may deem advisable, subject to such limitations as may be now or hereafter set forth in the Charter of the Corporation or in the By-Laws of the Corporation or in the Maryland General Corporation Law or the 1940 Act. (3) Each person who at any time is or was a director or officer of the Corporation shall be indemnified by the Corporation to the fullest extent permitted by the Maryland General Corporation Law as it may be amended or interpreted from time to time, including the advancing of expenses, subject to any limitations imposed by the 1940 Act and the Rules and Regulations promulgated thereunder. Furthermore, to the fullest extent permitted by Maryland law, as it may be amended or interpreted from time to time, subject to the limitations imposed by the 1940 Act and the Rules and Regulations promulgated 4 thereunder, no director or officer of the Corporation shall be personally liable to the Corporation or its stockholders. No amendment of the Charter of the Corporation or repeal of any of its provisions shall limit or eliminate any of the benefits provided to any person who at any time is or was a director or officer of the Corporation under this Section in respect of any act or omission that occurred prior to such amendment or repeal. (4) The Board of Directors of the Corporation shall have the exclusive authority to make, alter or repeal from time to time any of the By-Laws of the Corporation except any particular By-Law which is specified as not subject to alteration or repeal by the Board of Directors, subject to the requirements of the 1940 Act and the Rules and Regulations promulgated thereunder. (5) The directors shall be divided into three classes, designated Class I, Class II and Class III. Each class shall consist, as nearly as may be possible, of one-third of the total number of directors constituting the entire Board of Directors. At the first annual meeting of stockholders, Class I directors shall be elected for an initial term of one year, Class II directors for an initial term of two years and Class III directors for an initial term of three years. Upon the expiration of the initial term of each class, each succeeding class of directors shall be elected for a three-year term. A director elected at an annual meeting shall hold office until the annual meeting for the year in which his term expires and until his successor shall be elected and shall qualify, subject, however, to prior death, resignation, retirement, disqualification or removal from office. If the number of directors is changed, any increase or decrease shall be apportioned among the classes, as of the annual meeting of stockholders next succeeding any such change, so as to maintain a number of directors in each class as nearly equal as possible. In no case shall a decrease in the number of directors shorten the term of any incumbent director. ARTICLE VII DENIAL OF PREEMPTIVE RIGHTS No stockholder of the Corporation shall by reason of his holding shares of capital stock have any preemptive or preferential right to purchase or subscribe to any shares of capital stock of the Corporation, now or hereafter authorized, or any notes, debentures, bonds or other securities convertible into shares of capital stock, now or hereafter to be authorized, whether or not the issuance of any such shares of capital stock, or notes, debentures, bonds or other securities would adversely affect the dividend or voting rights of such stockholder; and the Board of Directors may issue shares of any class of capital stock of the Corporation, or any notes, debentures, 5 bonds, or other securities convertible into shares of any class of capital stock of the Corporation, either, whole or in part, to the existing stockholders. ARTICLE VIII CERTAIN VOTES OF STOCKHOLDERS (1) Except as otherwise now or hereafter provided in the Charter of the Corporation and notwithstanding any provision of the Maryland General Corporation Law (other than Sections 3-601 through 3-603 of the Maryland General Corporation Law or any successors thereto) requiring approval by the stockholders (or any class of stockholders) of any action by the affirmative vote of a greater proportion than a majority of the votes entitled to be cast on the matter, any such action may be taken or authorized upon the concurrence of a majority of the number of votes entitled to be cast thereon (or a majority of the votes entitled to be cast thereon as a separate class). (2) Notwithstanding the terms of Section 3-603(e)(1)(iv) of the Maryland General Corporation Law (or any successor thereto) and the provisions of Section (1) of this Article VIII, the Corporation hereby expressly elects to be subject to the provisions of Section 3-602 of the Maryland General Corporation Law. The amendment, alteration, modification, or repeal of this section (2) of Article VIII shall require the vote specified in Section 3-602 of the Maryland General Corporation Law. ARTICLE IX DETERMINATION BINDING Any determination made in good faith, so far as accounting matters are involved, in accordance with accepted accounting practice by or pursuant to the authority of the direction of the Board of Directors, as to the amount of assets, obligations or liabilities of the Corporation, as to the amount of net income of the Corporation from dividends and interest for any period or amounts at any time legally available for the payment of dividends, as to the amount of any reserves or charges set up and the propriety thereof, as to the time of or purpose for creating reserves or as to the use, alteration or cancellation of any reserves or charges (whether or not any obligation or liability for which such reserves or charges shall have been created, shall have been paid or discharged or shall be then or thereafter required to be paid or discharged), as to the value of any security or other instrument or asset owned by the Corporation or as to any matters relating to the issuance, sale, redemption or other acquisition or disposition of securities or shares of capital stock of the Corporation, and any reasonable determination made in good faith by the Board of Directors shall be final and conclusive, and shall be binding upon the Corporation and all holders of its capital stock, past, present 6 and future, and shares of capital stock of the Corporation are issued and sold on the condition and understanding, evidenced by the purchase of shares of capital stock or acceptance of share certificates or other evidence thereof, that any and all such determinations shall be binding as aforesaid. No provision of the Charter of the Corporation shall be effective to (a) require a waiver of compliance with any provision of the Securities Act of 1933, as amended, or the 1940 Act, or of any valid rule, regulation or order of the Securities and Exchange Commission thereunder or (b) protect or purport to protect any director or officer of the Corporation against any liability to the Corporation or its security holders to which he would otherwise be subject by reason of willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his office. ARTICLE X PRIVATE PROPERTY OF STOCKHOLDERS The private property of stockholders shall not be subject to the payment of corporate debts to any extent whatsoever. ARTICLE XI UNLIMITED TERM OF EXISTENCE The Corporation shall have an unlimited period of existence. ARTICLE XII CONVERSION TO OPEN-END COMPANY Notwithstanding any other provisions of the Charter of the Corporation or By-Laws of the Corporation, a favorable vote of a majority of the total number of directors of the Corporation established in accordance with the provisions of section (1) of Article VI hereof and the By-Laws of the Corporation and the favorable vote of the holders of at least seventy-five percent (75%) of the shares of capital stock of the Corporation entitled to be voted on the matter shall be required to approve, adopt or authorize an amendment to the Charter of the Corporation that makes the Common Stock or any other class of capital stock a "redeemable security" as that term is defined in the 1940 Act. The Corporation shall notify the holders of all capital securities of the approval, in accordance with the preceding paragraph of this Article XII, of the approval of any amendment to the Charter of the Corporation that makes the Common Stock or any other class of capital stock a "redeemable 7 security" (as that term is defined in the 1940 Act) no later than thirty (30) days prior to the date of filing of such amendment with the Department of Assessments and Taxation (or any successor agency) of the State of Maryland; such amendment may not be so filed, however, until the later of (a) ninety (90) days following the date of approval of such amendment by the holders of capital securities in accordance with the preceding paragraph of this Article XII and (b) the next January 1 or July 1, whichever is sooner, following the date of such approval by holders of capital securities. ARTICLE XIII AMENDMENT The Corporation reserves the right to amend, alter, change or repeal any provision contained in the Charter of the Corporation, in the manner now or hereafter prescribed by statute, and all rights conferred upon stockholders herein are granted subject to this reservation. Notwithstanding any other provisions contained herein or in the By-Laws of the Corporation (and notwithstanding the fact that a lesser percentage may be specified by law, these Articles or Amendment and Restatement or the Amended and Restated By-Laws of the Corporation), the amendment or repeal of Section (10) of Article V, Section (1), Section (3), or Section (4) of Article VI, Section (1) of Article VIII, Article X, Article XI, Article XII or this Article XIII of these Articles of Amendment and Restatement shall require the affirmative vote of the holders of at least seventy-five percent (75%) of the shares then entitled to be voted on the matter. THIRD: This amendment to and restatement of the Charter of the Corporation as hereinabove set forth was advised by the Board of Directors and approved by the stockholders of the Corporation. FOURTH: The current address of the principal office of the Corporation is as set forth in Article IV of the foregoing amendment and restatement of the Charter. FIFTH: The name and address of the Corporation's current resident agent is as set forth in Article IV of the foregoing amendment and restatement of the Charter. SIXTH: The number of directors of the Corporation shall currently be nine (9), which number may be increased or decreased by or pursuant to the By-Laws of the Corporation but shall never be less than the minimum number permitted by the Maryland General Corporation Law now or hereafter in force. The names of the persons who shall act as directors until the initial annual meeting and until their successors are duly elected and qualify are: Mario J. Gabelli, Anthony J. Colavita, Anthonie C. van Ekris, Karl Otto Pohl, 8 Dugald A. Fletcher, E. Val Cerutti, Felix J. Christiana, Anthony R. Pustorino and Salvatore J. Zizza. SEVENTH: The undersigned Vice President acknowledges these Articles of Amendment and Restatement to be the corporate act of the Corporation as to all matters of fact required to be verified under oath, the undersigned Vice President acknowledges that to the best of his knowledge, information and belief, these matters and facts are true in all material respects and that this statement is made under the penalties for perjury. EIGHTH: In accordance with Section 2-610.1 of Maryland General Corporation Law, these Articles of Amendment and Restatement shall become effective on March 31, 1995, at 9:00 a.m. 9 IN WITNESS WHEREOF, the undersigned hereby execute the foregoing Articles of Amendment and Restatement and acknowledge the same to be their acts and further acknowledge that, to the best of their knowledge, the matters and facts set forth herein are true in all material respects under the penalties of perjury. Dated the 30th day of March, 1995. /s/Bruce N. Alpert ---------------------------- Bruce N. Alpert, Vice President and Treasurer /s/J. Hamilton Crawford, Jr. ---------------------------- J. Hamilton Crawford, Jr., Secretary 10 EX-99.2B 3 AMENDED AND RESTATED BY-LAWS Exhibit B AMENDED AND RESTATED BY-LAWS OF THE GABELLI CONVERTIBLE SECURITIES FUND, INC. ARTICLE I. STOCKHOLDERS SECTION 1.1. Annual Meeting. An annual meeting of the stockholders of the Corporation for the election of directors and for the transaction of such other business as may properly be brought before the meeting shall be held in May of each year. SECTION 1.2. Special Meeting. At any time in the interval between annual meetings, a special meeting of the stockholders may be called by the Chairman of the Board or the President or by a majority of the Board of Directors by vote at a meeting or in writing (addressed to the Secretary of the Corporation) with or without a meeting. SECTION 1.3. Place of Meetings. Meetings of stockholders shall be held at such place in the United States as is set from time to time by the Board of Directors. SECTION 1.4. Notice of Meetings; Waiver of Notice. Not less than ten nor more than 90 days before each stockholders' meeting, the Secretary shall give written notice of the meeting to each stockholder entitled to vote at the meeting and each other stockholder entitled to notice of the meeting. The notice shall state the time and place of the meeting and, if the meeting is a special meeting or notice of the purpose is required by statute, the purpose of the meeting. Notice is given to a stockholder when it is personally delivered to him, left at his residence or usual place of business, or mailed to him at his address as it appears on the records of the Corporation. Notwithstanding the foregoing provisions, each person who is entitled to notice waives notice if he before or after the meeting signs a waiver of the notice which is filed with the records of stockholders' meetings, or is present at the meeting in person or by proxy. SECTION 1.5. Quorum; Voting. Unless statute or the Articles of Amendment and Restatement (the "Charter") provides otherwise, at a meeting of stockholders the presence in person or by proxy of stockholders entitled to cast a majority of all the votes entitled to be cast at the meeting constitutes a quorum, and a majority of all the votes cast at a meeting at which a quorum is present is sufficient to approve any matter which properly comes before the meeting, except that a plurality of all the votes cast at a meeting at which a quorum is present is sufficient to elect a director. SECTION 1.6. Adjournments. Whether or not a quorum is present, a meeting of stockholders convened on the date for which it was called may be adjourned from time to time by the stockholders present in person or by proxy by a majority vote. Any business which might have been transacted at the meeting as originally notified may be deferred and transacted at any such adjourned meeting at which a quorum shall be present. No further notice of an adjourned meeting other than by announcement shall be necessary if held on a date not more than 120 days after the original record date. SECTION 1.7. General Right to Vote; Proxies. Unless the Charter provides for a greater or lesser number of votes per share or limits or denies voting rights, each outstanding share of stock, regardless of class, is entitled to one vote on each matter submitted to a vote at a meeting of stockholders. In all elections for directors, each share of stock may be voted for as many individuals as there are directors to be elected and for whose election the share is entitled to be voted. A stockholder may vote the stock he owns of record either in person or by written proxy signed by the stockholder or by his duly authorized attorney in fact. Unless a proxy provides otherwise, it is not valid more than 11 months after its date. SECTION 1.8. List of Stockholders. At each meeting of stockholders, a full, true and complete list of all stockholders entitled to vote at such meeting, showing the number and class of shares held by each and certified by the transfer agent for such class or by the Secretary, shall be furnished by the Secretary. SECTION 1.9. Conduct of Voting. At all meeting of stockholders, unless the voting is conducted by inspectors, the proxies and ballots shall be received, and all questions touching the qualification of voters and the validity of proxies and the acceptance or rejection of votes shall be decided, by the chairman of the meeting. If demanded by stockholders, present in person or by proxy, entitled to cast 10% in number of votes entitled to be cast, or if ordered by the chairman, the vote upon any election or question shall be taken by ballot and, upon like demand or order, the voting shall be conducted by two inspectors, in which event the proxies and ballots shall be received, and all questions touching the qualification of voters and the validity of proxies and the acceptance or rejection of votes shall be decided, by such inspectors. Unless so demanded or ordered, no vote need be by ballot and voting need not be conducted by inspectors. The stockholders at any meeting may choose an inspector or inspectors to act at such meeting, and in default of such election the chairman of the meeting may appoint an inspector or inspectors. No candidate for election as a director at a meeting shall serve as an inspector thereat. 2 SECTION 1.10. Informal Action by Stockholders. Except as otherwise provided by statute or the Charter, any action required or permitted to be taken at a meeting of stockholders may be taken without a meeting if there is filed with the records of stockholders meetings a unanimous written consent which sets forth the action and is signed by each stockholder entitled to vote on the matter and a written waiver of any right to dissent signed by each stockholder entitled to notice of the meeting but not entitled to vote at it. ARTICLE II. BOARD OF DIRECTORS SECTION 2.1. Function of Directors. The business and affairs of the Corporation shall be managed under the direction of its Board of Directors. All powers of the Corporation may be exercised by or under authority of the Board of Directors, except as conferred on or reserved to the stockholders by statute or by the Charter or By-Laws. SECTION 2.2. Number of Directors. The Corporation shall have at least three directors; provided that, if there is no stock outstanding, the number of Directors may be less than three but no less than one, and, if there is stock outstanding and so long as there are less than three stockholders, the number of Directors may be less than three but not less than the number of stockholders. The Corporation shall have the number of directors provided in the Charter until changed as herein provided. A majority of the entire Board of Directors may alter the number of directors set by the Charter to not exceeding 25 nor less than the minimum number then permitted herein, but the action may not affect the tenure of office of any director. SECTION 2.3. Election and Tenure of Directors. At each annual meeting, the stockholders shall elect directors to hold office until the expiration of the term of his class or until the annual election of directors next succeeding his election and until his successor shall have been elected and shall have qualified, or until his death, or until he shall have resigned, or have been removed as hereinafter provided in these Amended and Restated By-Laws, or as otherwise provided by statute or the Charter. SECTION 2.4. Removal of Director. Unless statute or the Charter provides otherwise, the stockholders may remove any director, with or without cause, by the affirmative vote of a majority of all the votes entitled to be cast for the election of directors. SECTION 2.5. Vacancy on Board. The stockholders may elect a successor to fill a vacancy on the Board of Directors which results from the removal of a director. A director elected by the stockholders to fill a vacancy which results from the removal of a director serves for the balance of the term 3 of the removed director. A majority of the remaining directors, whether or not sufficient to constitute a quorum, may fill a vacancy on the Board of Directors which results from any cause except an increase in the number of directors and a majority of the entire Board of Directors may fill a vacancy which results from an increase in the number of directors. A director elected by the Board of Directors to fill a vacancy serves until the next annual meeting of stockholders and until his successor is elected and qualifies. SECTION 2.6. Regular Meetings. After each meeting of stockholders at which directors shall have been elected, the Board of Directors shall meet as soon as practicable for the purpose of organization and the transaction of other business; and in the event that no other time is designated by the stockholders, the Board of Directors shall meet one hour after the time for such stockholders meeting or immediately following the close of such meeting whichever is later, on the day of such meeting. Such first regular meeting shall be held at any place as may be designated by the stockholders, or in default of such designation at the place designated by the Board of Directors for such first regular meeting, or in default of such designation at the place of the holding of the immediately preceding meeting of stockholders. No notice of such first meeting shall be necessary if held as hereinabove provided. Any other regular meeting of the Board of Directors shall be held on such date and at any place as may be designated from time to time by the Board of Directors. SECTION 2.7. Special Meetings. Special meetings of the Board of Directors may be called at any time by the Chairman of the Board or the President or by a majority of the Board of Directors by vote at a meeting, or in writing with or without a meeting. A special meeting of the Board of Directors shall be held on such date and at any place as may be designated from time to time by the Board of Directors. In the absence of designation such meeting shall be held at such place as may be designated in the call. SECTION 2.8. Notice of Meeting. Except as provided in Section 2.6, the Secretary shall give notice to each director of each regular and special meeting of the Board of Directors. The notice shall state the time and place of the meeting. Notice is given to a director when it is delivered personally to him, left at his residence or usual place of business, or sent by telegraph or telephone, at least 24 hours before the time of the meeting or, in the alternative by mail to his address as it shall appear on the records of the Corporation, at least 72 hours before the time of the meeting. Unless the Amended and Restated By-Laws or a resolution of the Board of Directors provides otherwise, the notice need not state the business to be transacted at or the purposes of any regular or special meeting of the Board of Directors. No notice of any meeting of the Board of Directors need be given to any director who attends, or to any director who, in writing executed and filed with the records of the meeting either before or after the holding thereof, waives such notice. Any meeting of the Board of Directors, regular or special, may adjourn 4 from time to time to reconvene at the same or some other place, and no notice need be given of any such adjourned meeting other than by announcement. SECTION 2.9. Action by Directors. Unless statute or the Charter or the Amended and Restated By-Laws requires a greater proportion, the action of a majority of the directors present at a meeting at which a quorum is present is action of the Board of Directors. A majority of the entire Board of Directors shall constitute a quorum for the transaction of business. In the absence of a quorum, the directors present by majority vote and without notice other than by announcement may adjourn the meeting from time to time until a quorum shall attend. At any such adjourned meeting at which a quorum shall be present, any business may be transacted which might have been transacted at the meeting as originally notified. Any action required or permitted to be taken at a meeting of the Board of Directors may be taken without a meeting, if a unanimous written consent which sets forth the action is signed by each member of the Board and filed with the minutes of proceedings of the Board. SECTION 2.10. Meeting by Conference Telephone. Members of the Board of Directors may participate in a meeting by means of a conference telephone or similar communications equipment if all persons participating in the meeting can hear each other at the same time. Participation in a meeting by these means constitutes presence in person at a meeting. SECTION 2.11. Compensation. No director shall receive any stated salary or fees from the Corporation for services as such if such director is, other than by reason of being a director, an interested person (as that term is defined by the Investment Company Act of 1940, as amended (the "1940 Act")) of the Corporation or of its investment adviser or principal underwriter. Except as provided in the preceding sentence, directors shall be entitled to receive such compensation from the Corporation for their services as may from time to time be voted by the Board of Directors. ARTICLE III. COMMITTEES SECTION 3.1. Committees. The Board of Directors may appoint from among its members an Executive Committee and other committees composed of two or more directors and delegate to these committees any of the powers of the Board of Directors, except the power to declare dividends or other distributions on stock, elect directors, issue stock other than as provided in the next sentence, recommend to the stockholders any action which requires stockholder approval, amend the By-Laws, or approve any merger or share exchange which does not require stockholder approval. If the Board of Directors has given general authorization for the issuance of stock, a committee of the Board, in accordance with a general formula or method specified by the Board by resolution or by 5 adoption of a stock option or other plan, may fix the terms of stock subject to classification or reclassification and the terms on which any stock may be issued, including all terms and conditions required or permitted to be established or authorized by the Board of Directors. SECTION 3.2. Committee Procedure. Each committee may fix rules of procedure for its business. A majority of the members of a committee shall constitute a quorum for the transaction of business and the act of a majority of those present at a meeting at which a quorum is present shall be the act of the committee. The members of a committee present at any meeting, whether or not they constitute a quorum, may appoint a director to act in the place of an absent member. Any action required or permitted to be taken at a meeting of a committee may be taken without a meeting, if a unanimous written consent which sets forth the action is signed by each member of the committee and filed with the minutes of the committee. The members of a committee may conduct any meeting thereof by conference telephone in accordance with the provisions of Section 2.10. SECTION 3.3. Emergency. In the event of a state of disaster of sufficient severity to prevent the conduct and management of the affairs and business of the Corporation by its directors and officers as contemplated by the Charter and the Amended and Restated By-Laws, any two or more available members of the then incumbent Executive Committee shall constitute a quorum of that Committee for the full conduct and management of the affairs and business of the Corporation in accordance with the provisions of Section 3.1. In the event of the unavailability, at such time, of a minimum of two members of the then incumbent Executive Committee, the available directors shall elect an Executive Committee consisting of any two members of the Board of Directors, whether or not they be officers of the Corporation, which two members shall constitute the Executive Committee for the full conduct and management of the affairs of the Corporation in accordance with the foregoing provisions of this Section. This Section shall be subject to implementation by resolution of the Board of Directors passed from time to time for that purpose, and any provisions of the Amended and Restated By-Laws (other than this Section) and any resolutions which are contrary to the provisions of this Section or to the provisions of any such implementing resolutions shall be suspended until it shall be determined by any interim Executive Committee acting under this Section that it shall be to the advantage of the Corporation to resume the conduct and management of its affairs and business under all the other provisions of the Amended and Restated By-Laws. 6 ARTICLE IV. OFFICERS SECTION 4.1. Executive and Other Officers. The Corporation shall have a President, a Secretary, and a Treasurer, who shall be the executive officers of the Corporation. It may also have a Chairman of the Board, the Chairman of the Board shall be an executive officer if he is designated as the chief executive officer of the Corporation. The Board of Directors may designate who shall serve as chief executive officer, having general supervision of the business and affairs of the Corporation, or as chief operating officer, having supervision of the operations of the Corporation; in the absence of designation the President shall serve as chief executive officer and chief operating officer. It may also have one or more Vice-Presidents, assistant officers, and subordinate officers as may be established by the Board of Directors. A person may hold more than one office in the Corporation but may not serve concurrently as both President and Vice-President of the Corporation. The Chairman of the Board shall be a director; the other officers may be directors. SECTION 4.2. Chairman of the Board. The Chairman of the Board, if one be elected, shall preside at all meetings of the Board of Directors and of the stockholders at which he shall be present; and, in general, he shall perform all such duties as are from time to time assigned to him by the Board of Directors. SECTION 4.3. President. The President, in the absence of the Chairman of the Board, shall preside at all meetings of the Board of Directors and of the stockholders at which he shall be present; he may sign and execute, in the name of the Corporation, all authorized deeds, mortgages, bonds, contracts or other instruments, except in cases in which the signing and execution thereof shall have been expressly delegated to some other officer or agent of the Corporation; and, in general, he shall perform all duties usually performed by a president of a corporation and such other duties as are from time to time assigned to him by the Board of Directors or the chief executive officer of the Corporation. SECTION 4.4. Vice-Presidents. The Vice-President or Vice-Presidents, at the request of the chief executive officer or the President, or in the President's absence or during his inability to act, shall perform the duties and exercise the functions of the President, and when so acting shall have the powers of the President. If there be more than one Vice-President, the Board of Directors may determine which one or more of the Vice-Presidents shall perform any of such duties or exercise any of such functions, or if such determination is not made by the Board of Directors, the chief executive officer, or the President may make such determination; otherwise any of the Vice-Presidents may perform any of such duties or exercise any of such 7 functions. The Vice-President or Vice-Presidents shall have such other powers and perform such other duties, and have such additional descriptive designations in their titles (if any), as are from time to time assigned to them by the Board of Directors, the chief executive officer, or the President. SECTION 4.5. Secretary. The Secretary shall keep the minutes of the meetings of the stockholders, of the Board of Directors and of any committees, in books provided for the purpose; he shall see that all notices are duly given in accordance with the provisions of the Amended and Restated By-Laws or as required by law; he shall be custodian of the records of the Corporation; he may witness any document on behalf of the Corporation, the execution of which is duly authorized, see that the corporate seal is affixed where such document is required or desired to be under its seal, and, when so affixed, may attest the same; and, in general, he shall perform all duties incident to the office of a secretary of a corporation, and such other duties as are from time to time assigned to him by the Board of Directors, the chief executive officer, or the President. SECTION 4.6. Treasurer. The Treasurer shall have charge of and be responsible for all funds, securities, receipts and disbursements of the Corporation, and shall deposit, or cause to be deposited, in the name of the Corporation, all moneys or other valuable effects in such banks, trust companies or other depositories as shall, from time to time, be selected by the Board of Directors; he shall render to the President and to the Board of Directors, whenever requested, an account of the financial condition of the Corporation; and, in general, he shall perform all the duties incident to the office of a treasurer of a corporation, and such other duties as are from time to time assigned to him by the Board of Directors, the chief executive officer, or the President. SECTION 4.7. Assistant and Subordinate Officers. The assistant and subordinate officers of the Corporation are all officers below the office of VicePresident, Secretary, or Treasurer. The assistant or subordinate officers shall have such duties as are from time to time assigned to them by the Board of Directors, the chief executive officer, or the President. SECTION 4.8. Election, Tenure and Removal of Officers. The Board of Directors shall elect the officers. The Board of Directors may from time to time authorize any committee or officer to appoint assistant and subordinate officers. The President serves for one year. All other officers shall be appointed to hold their offices, respectively, during the pleasure of the Board. The Board of Directors (or, as to any assistant or subordinate officer, any committee or officer authorized by the Board) may remove an officer at any time. The removal of an officer does not prejudice any of his contract rights. The Board of Directors (or, as to any assistant or subordinate officer, any committee or officer authorized by the Board) may fill a vacancy which occurs in any office for the unexpired portion of the term. 8 SECTION 4.9. Compensation. The Board of Directors shall have power to fix the salaries and other compensation and remuneration, of whatever kind, of all officers of the Corporation. It may authorize any committee or officer, upon whom the power of appointing assistant and subordinate officers may have been conferred, to fix the salaries, compensation and remuneration of such assistant and subordinate officers. ARTICLE V. STOCK SECTION 5.1. Certificates for Stock. Upon written request therefor in accordance with such procedures as may be established by the Board of Directors from time to time, each stockholder is entitled to certificates which represent and certify the shares of stock he holds in the Corporation. Each stock certificate shall include on its face the name of the corporation that issues it, the name of the stockholder or other person to whom it is issued, and the class of stock and number of shares it represents. It shall be in such form, not inconsistent with law or with the Charter, as shall be approved by the Board of Directors or any officer or officers designated for such purpose by resolution of the Board of Directors. Each stock certificate shall be signed by the Chairman of the Board, the President, or a Vice-President, and countersigned by the Secretary, an Assistant Secretary, the Treasurer, or an Assistant Treasurer. Each certificate may be sealed with the actual corporate seal or a facsimile of it or in any other form and the signatures may be either manual or facsimile signatures. A certificate is valid and may be issued whether or not an officer who signed it is still an officer when it is issued. The Board of Directors of the Corporation may authorize the issue of some or all of the shares of any or all of its classes or series without certificates. The authorization does not affect shares already represented by certificates until they are surrendered to the Corporation. At the time of issue or transfer of shares without certificates, the Corporation shall send the stockholder a written statement of: (1) the designations and any preferences, conversion and other rights, voting powers, restrictions, limitations as to dividends, qualifications, and terms and conditions of redemption of the stock of each class which the Corporation is authorized to issue; (2) in the event the Board of Directors clas- sifies or there are issued any preferred on special class in series: (i) the differences in relative rights and preferences between the shares of each series to the extent they have been set; and 9 (ii) the authority of the Board of Directors to set the relative rights and preferences of subsequent series; and (3) if the Corporation imposes restrictions on the transferability of the stock, a full state- ment of the restrictions. SECTION 5.2. Transfers. The Board of Directors shall have power and authority to make such rules and regulations as it may deem expedient concerning the issue, transfer and registration of certificates of stock; and may appoint transfer agents and registrars thereof. The duties of transfer agent and registrar may be combined. SECTION 5.3. Record Date and Closing of Transfer Books. The Board of Directors may set a record date or direct that the stock transfer books be closed for a stated period for the purpose of making any proper determination with respect to stockholders, including which stockholders are entitled to notice of a meeting, vote at a meeting, receive a dividend, or be allotted other rights. The record date may not be prior to the close of business on the day the record date is fixed and may not be more than 90 days before the date on which the action requiring the determination will be taken; the transfer books may not be closed for a period longer than 20 days; and, in the case of a meeting of stockholders, the record date or the closing of the transfer books shall be at least ten days before the date of the meeting. SECTION 5.4. Stock Ledger. The Corporation shall maintain a stock ledger which contains the name and address of each stockholder and the number of shares of stock of each class which the stockholder holds. The stock ledger may be in written form or in any other form which can be converted within a reasonable time into written form for visual inspection. The original or a duplicate of the stock ledger shall be kept at the offices of a transfer agent for the particular class of stock, or, if none, at the principal office in the State of Maryland or the principal executive offices of the Corporation. SECTION 5.5. Certification of Beneficial Owners. The Board of Directors may adopt by resolution a procedure by which a stockholder of the Corporation may certify in writing to the Corporation that any shares of stock registered in the name of the stockholder are held for the account of a specified person other than the stockholder. The resolution shall set forth the class of stockholders who may certify; the purpose for which the certification may be made; the form of certification and the information to be contained in it; if the certification is with respect to a record date or closing of the stock transfer books, the time after the record date or closing of the stock transfer books within which the certification must be received by the Corporation; and any other provisions with respect to the procedure which the Board considers necessary or desirable. On receipt of a certification which complies with the procedure adopted by the Board in accordance with this Section, the person specified in the certification is, for the purpose set forth 10 in the certification, the holder of record of the specified stock in place of the stockholder who makes the certification. SECTION 5.6. Lost Stock Certificates. The Board of Directors of the Corporation may determine the conditions for issuing a new stock certificate in place of one which is alleged to have been lost, stolen, or destroyed, or the Board of Directors may delegate such power to any officer or officers of the Corporation. In their discretion, the Board of Directors or such officer or officers may refuse to issue such new certificate save upon the order of some court having jurisdiction in the premises. ARTICLE VI. FINANCE SECTION 6.1. Checks, Drafts, Etc. All checks, drafts and orders for the payment of money, notes and other evidences of indebtedness, issued in the name of the Corporation, shall, unless otherwise provided by resolution of the Board of Directors, be signed by the President, a Vice-President or an Assistant Vice-President and countersigned by the Treasurer, an Assistant Treasurer, the Secretary or an Assistant Secretary. SECTION 6.2. Annual Statement of Affairs. The President shall prepare annually a full and correct statement of the affairs of the Corporation, to include a balance sheet and a financial statement of operations for the preceding fiscal year. The statement of affairs shall be submitted at the annual meeting of the stockholders, if any, and, within 20 days after the meeting (or, in the absence of an annual meeting within 120 days after the end of the fiscal year), placed on file at the Corporation's principal office. SECTION 6.3. Fiscal Year. The fiscal year of the Corporation shall be the twelve calendar months period ending December 31 in each year, unless otherwise provided by the Board of Directors. SECTION 6.4. Dividends. If declared by the Board of Directors at any meeting thereof, the Corporation may pay dividends on its shares in cash, property, or in shares of the capital stock of the Corporation, unless such dividend is contrary to law or to a restriction contained in the Charter. 11 ARTICLE VII. SUNDRY PROVISIONS SECTION 7.1. Books and Records. The Corporation shall keep correct and complete books and records of its accounts and transactions and minutes of the proceedings of its stockholders and Board of Directors and of any executive or other committee when exercising any of the powers of the Board of Directors. The books and records of the Corporation may be in written form or in any other form which can be converted within a reasonable time into written form for visual inspection. Minutes shall be recorded in written form but may be maintained in the form of a reproduction. The original or a certified copy of the Amended and Restated By-Laws shall be kept at the principal office of the Corporation. SECTION 7.2. Corporate Seal. The Board of Directors shall provide a suitable seal, bearing the name of the Corporation, which shall be in the charge of the Secretary. The Board of Directors may authorize one or more duplicate seals and provide for the custody thereof. If the Corporation is required to place its corporate seal to a document, it is sufficient to meet the requirement of any law, rule, or regulation relating to a corporate seal to place the word "Seal" adjacent to the signature of the person authorized to sign the document on behalf of the Corporation. SECTION 7.3. Bonds. The Board of Directors may require any officer, agent or employee of the Corporation to give a bond to the Corporation, conditioned upon the faithful discharge of his duties, with one or more sureties and in such amount as may be satisfactory to the Board of Directors. SECTION 7.4. Voting Upon Shares in Other Corporations. Stock of other corporations or associations, registered in the name of the Corporation, may be voted by the President, a Vice-President, or a proxy appointed by either of them. The Board of Directors, however, may by resolution appoint some other person to vote such shares, in which case such person shall be entitled to vote such shares upon the production of a certified copy of such resolution. SECTION 7.5. Mail. Any notice or other document which is required by these Amended and Restated By-Laws to be mailed shall be deposited in the United States mails, postage prepaid. SECTION 7.6. Execution of Documents. A person who holds more than one office in the Corporation may not act in more than one capacity to execute, acknowledge, or verify an instrument required by law to be executed, acknowledged, or verified by more than one officer. SECTION 7.7. Amendments. Subject to the special provisions of Section 2.2, (a) any and all provisions of these Amended and Restated By-Laws 12 may be altered or repealed and new by-laws may be adopted at any annual meeting of the stockholders, or at any special meeting called for that purpose, and (b) the Board of Directors shall have the power, at any regular or special meeting thereof, to make and adopt new by-laws, or to amend, alter or repeal any of the By-Laws of the Corporation. ARTICLE VIII. CUSTODIAN SECTION 8.1. Employment of Custodian. All assets of the Corporation shall be held by one or more custodian banks or trust companies meeting the requirements of the 1940 Act, and having capital, surplus and undivided profits of at least $2,000,000 and may be registered in the name of the Corporation, including the designation of the particular class or series to which such assets belong, or any such custodian, or the nominee of either of them. The terms of any such custodian agreement shall be determined by the Board of Directors, which terms shall be in accordance with the provisions of the 1940 Act. If so directed by vote of the holders of a majority of the outstanding shares of a particular class or series or by vote of the Board of Directors, the custodian of the assets belonging to such class or series shall deliver and pay over such assets as specified in such vote. Subject to such rules, regulations and orders as the Securities and Exchange Commission (the "Commission") may adopt, the Corporation may direct a custodian to deposit all or any part of the securities owned by the Corporation in a system for the central handling of securities established by the Federal Reserve system or by a national securities exchange or a national securities association registered with the Commission, or otherwise in accordance with the 1940 Act, pursuant to which system, all securities of a particular class or issuer deposited within the system are treated as fungible and may be transferred or pledged by bookkeeping entry without the physical delivery of such securities, provided that all such deposits shall be subject to withdrawal only upon the order of the Corporation or a custodian. 13 EX-99.2E 4 AUTOMATIC DIVIDEND REINVESTMENT Exhibit E TERMS AND CONDITIONS OF AUTOMATIC DIVIDEND REINVESTMENT AND VOLUNTARY CASH PURCHASE PLAN 1. Each shareholder ("Shareholder") holding shares of common stock ("Shares") of The Gabelli Convertible Securities Fund, Inc. (the "Fund") will automatically be participants in the Dividend Reinvestment Plan (the "Plan"), unless the Shareholder specifically elects to receive all dividends and capital gains in cash paid by check mailed directly to the Shareholder by State Street Bank and Trust Company as agent under the Plan (the "Agent"). The Agent will open an account for each Shareholder under the Plan in the same name in which such Shareholder's shares of Common Stock are registered. 2. Whenever the Fund declares a capital gains distribution or an income dividend payable in Shares or cash, participating Shareholders will take the distribution or dividend entirely in Shares and the Agent will automatically receive the Shares, including fractions, for the Shareholder's account. The process is as follows: 3. Whenever the market price per Share is equal to or exceeds net asset value at the time Shares are valued for the purpose of determining the number of Shares equivalent to the cash dividend or capital gains distribution (the "Valuation Date"), participants will be issued Shares at the greater of (i) net asset value or (ii) 95% of the then current market price of the Shares. 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 trading day. If the net asset value of the Shares on the Valuation Date exceeds the market price of the Shares at that time, participants will receive shares from the Fund valued at market price. If the Fund should declare a dividend or capital gains distribution payable only in cash, the Agent will, as purchasing agent for the participants buy Shares in the open market, on the New York Stock Exchange (the "Exchange") or elsewhere, for the participants account after the payment date, except that the Agent will endeavor to terminate purchases in the open market and cause the Fund to issue the remaining Shares if, following the commencement of the purchases, the market value of the Shares exceeds net asset value. These remaining shares will be issued by the Fund at a price equal to the greater of (i) net asset value or (ii) 95% of then current market price. In a case where the Agent has terminated open market purchases and caused the issuance of remaining Shares by the Fund, the number of shares received by the participant in respect of the cash dividend or distribution will be based on the weighted average of prices paid for Shares purchased in the open marker and the price at which the Fund issues remaining Shares. To the extent that the Agent is unable to terminate purchases in the open market before the Agent has completed its purchases, or remaining Shares cannot be issued by the Fund because the Fund declared a dividend or distribution payable only in cash, and the market price exceeds the net asset value of the Shares, the average Share purchase price paid by the Agent may exceed the net asset value of the Shares, resulting in the acquisition of fewer Shares than if the dividend or capital gains distribution had been paid in Shares issued by the Fund. The Agent will apply all cash received as a dividend or capital gains distribution to purchase shares of common stock on the open market as soon as practicable after the payment date of the dividend or capital gains distribution, but in no event later than 45 days after that date, except when necessary to comply with applicable provisions of the federal securities laws. 4. For all purposes of the Plan: (a) the market price of Fund Shares on a particular date shall be the last sales price on the Exchange on that date or, if no sale occurred on the Exchange on that date, then the mean between the closing bid and asked quotations for the Shares on the Exchange on such date and (b) net asset value per share on a particular date shall be as determined by or on behalf of the Fund. 5. The open-market purchases provided for above may be made on any securities exchange on which the Shares of the Fund are traded, in the over-the-counter market or in negotiated transactions, and may be on such terms as to price, delivery and otherwise as the Agent shall determine. Funds held by the Agent uninvested will not bear interest, and it is understood that, in any event, the Agent shall have no liability in connection with any inability to purchase Shares within 45 days after the initial date of such purchase as herein provided, or with the timing of any purchases effected. The Agent shall have no responsibility as to the value of the Shares of the Fund acquired for the Shareholder's account. 6. The Agent will hold Shares acquired pursuant to the Plan in noncertificated form in the Agent's name or that of its nominee. At no additional cost, as a participant in the Plan you may send to the Agent for deposit into your Plan account those certificate shares of the Fund now in your possession. These shares will be combined with those unissued full and fractional shares acquired under the Plan and held by the Agent. Shortly thereafter, you will receive a statement showing your combined holdings. The Agent will forward to the Shareholder any proxy solicitation material and will vote any Shares so held for the Shareholder only in accordance with the proxy returned by her or him to the Fund. Upon the Shareholder's written request, the Agent will deliver to her or him, without charge, a certificate or certificates for the full Shares. 7. The Agent will confirm to the Shareholder each acquisition made for her or his account as soon as practicable but not later than 60 days alter the date thereof. Although the Shareholder may from time to time have an individual fractional interest (computed to four decimal places) in a Share of the Fund, no certificates for a fractional Share will be issued. However, dividends and distributions on fractional Shares will be credited to the Shareholder's account. In the event of a termination of a Shareholder's account under the Plan, the Agent will adjust for any such undivided fractional interest in cash at the opening market value of the Shares at the time of termination. 8. Any stock dividends or split Shares distributed by the Fund on Shares held by The Agent for the Shareholder will be credited to the Shareholder's account. In the event that the Fund makes available to the Shareholder rights to purchase additional Shares or other securities, the Shares held for a Shareholder under the Plan will be added to other shares held by the Shareholder in calculating the number of rights to be issued to such Shareholder. 9. The Agent's service fee for handling capital gains distributions or income dividends will be paid by the Fund. The Shareholder will be charged a pro rata share of brokerage commissions on all open market purchases. 10. The Shareholder may terminate her or his account under the Plan by notifying the Agent in writing. A termination will be effective immediately if notice is received by the Agent not less than 10 days prior to any dividend or distribution record date; otherwise such termination will be effective, with respect to any subsequent dividend or distribution, on the first trading day after a dividend paid for the record date has been credited to the Shareholder's account. Upon any termination the Agent will cause a certificate or certificates for the full Shares held for the Shareholder under the Plan and cash adjustment for any fraction to be delivered to her or him. If, the Shareholder elects by notice to the Agent in writing in advance of such termination to have the Agent sell part or all of her or his shares and remit the proceeds to her or him, the Agent is authorized to deduct $2.50 per transaction plus brokerage commissions for this transaction from the proceeds. 11. Shareholders have the option of sending additional funds, semi-annually, in any amount from $250 to $3,000, for the purchase on the open market of shares of the common stock of the Fund for Shareholder's accounts. Voluntary payments will be invested on or shortly after the 15th of February and August, and in no event more than 45 days after such dates except where temporary curtailment or suspension of purchases is necessary to comply with applicable provisions of federal securities law. Funds received more than 30 days prior to the 15th of February or August will be returned uninvested. Shareholders may withdraw their entire voluntary cash payment by written notice not less that 48 hours before such payment is to be invested. 12. Investments of voluntary cash payments and other open-market purchases provided for above may be made on any securities exchange where the Fund's common stock is traded, in the over-the-counter-market or in negotiated transactions and may be on such terms as to price, delivery and otherwise as the Agent shall determine. Funds held by the Agent uninvested will not bear interest, and it is understood that, in any event, the Agent shall have no liability in connection with any inability to purchase shares within 45 days after the initial date of such purchase as herein provided, or with the timing of any purchases effected. The Agent shall have no responsibility as to the value of the common stock of the Fund acquired for the Shareholders' account. For the purposes of cash investments the Agent may commingle Shareholder funds with those of other Shareholders of the Fund for whom the Agent also acts as Agent, and the average price (including brokerage commissions) of all shares purchased by the Agent shall be the price per share allocable to the Shareholder in connection therewith. The cost per transaction is $0.75. 13. The Agent may hold Shareholder's shares acquired pursuant to Shareholder authorization, together with the shares of other Shareholders of the Fund acquired pursuant to similar authorization, in noncertificated form in the name of the Agent or that of the Agent's nominee. The Agent will forward to each Shareholder any proxy solicitation material and will vote any shares held for the Shareholder only in accordance with the proxy returned by the Shareholder to the Fund. Upon written request, the Agent will deliver to the Shareholder, without charge, a certificate or certificates for the full shares. 14. These terms and conditions may be amended or supplemented by the Agent or the Fund at any time or times but, except when necessary or appropriate to comply with applicable law or the rules or policies of the Securities and Exchange Commission or any other regulatory authority, only by mailing to the Shareholder appropriate written notice at least 90 days prior to the effective date thereof. The amendment or supplement shall be deemed to be accepted by the Shareholder unless, prior to the effective date thereof, the Agent receives written notice of the termination of the Shareholder account under the Plan. Any such amendment may include an appointment by the Fund of a successor agent in its place and stead under these terms and conditions, with full power and authority to perform all or any of the acts to be performed by the Agent. Upon any such appointment of an Agent for the purpose of receiving dividends and distributions, the Fund will be authorized to pay to such successor Agent, for Shareholders' accounts, all dividends and distributions payable on Shares held in the Shareholder's name or under the Plan for retention or application by such successor Agent as provided in these terms and conditions. 15. In the case of Shareholders, such as banks, brokers or nominees, which hold Shares for others who are the beneficial owners, the Agent will administer the Plan on the basis of the number of Shares certified from time to time by the Shareholders as representing the total amount registered in the Shareholder's name and held for the account of beneficial owners who are to participate in the plan. 16. The Agent shall at all times act in good faith and agree to use its best efforts within reasonable limits to insure the accuracy of all services performed under this agreement and to comply with applicable law, but assumes no responsibility and shall not be liable for loss or damage due to errors unless the errors caused by its negligence, bad faith or willful misconduct or that of its employees. 10-94 EX-99.2D 5 STOCK CERTIFICATE Exhibit D TEMPORARY CERTIFICATE: EXCHANGEABLE FOR DEFINITIVE ENGRAVED CERTIFICATE WHEN READY FOR DELIVERY COMMON STOCK PAR VALUE $.001 PER SHARE T THE GABELLI CONVERTIBLE SECURITIES FUND, INC. INCORPORATED UNDER THE LAWS OF THE STATE OF MARYLAND THIS CERTIFICATE IS TRANSFERABLE IN BOSTON, MASSACHUSETTS AND NEW YORK, NEW YORK CUSIP 36240B 10 9 SEE REVERSE FOR CERTAIN DEFINITIONS THIS CERTIFIES that is the owner of FULLY PAID AND NONASSESSABLE SHARES OF THE COMMON STOCK OF THE GABELLI CONVERTIBLE SECURITIES FUND, INC. transferable on the books of the Corporation by the holder hereof in person or by duly authorized attorney upon surrender of this Certificate properly endorsed. This Certificate and the shares represented hereby are issued and shall be subject to all the provisions of the Articles of Incorporation and By-Laws of the Corporation, each as from time to time amended, copies of which are on file with the Transfer Agent, to all of which the holder by acceptance hereof assents. This Certificate is not valid until countersigned and registered by the Transfer Agent and Registrar. Witness the facsimile seal of the Corporation and the facsimile signatures of its duly authorized officers. DATED: COUNTERSIGNED AND REGISTERED: STATE STREET BANK AND TRUST COMPANY (BOSTON, MASS.) Chairman of the Board TRANSFER AGENT AND REGISTRAR BY AUTHORIZED SIGNATURE Vice President & Treasurer THE GABELLI CONVERTIBLE SECURITIES FUND, INC. The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to applicable laws or regulations: TEN COM - as tenants in common UNIF GIFT MIN ACT________Custodian______ (Cust) (Minor) TEN ENT - as tenants by the entireties under Uniform Gifts to Minors JT TEN - as joint tenants with right Act__________________________ of survivorship and not as (State) tenants in common Additional abbreviations may also be used though not in the above list. For value Received,_____________________hereby sell, assign and transfer unto NOTICE:THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT, OR ANY CHANGE WHATEVER. PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE ________________________________________________________________________________ PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ __________________________________________________________________________Shares of the capital stock represented by the within Certificate, and do hereby irrevocably constitute and appoint______________________________________________ _____________________________________________________________________ Attorney to transfer the said stock on the books of the within-named Corporation, with full power of substitution in the premises. Dated ________________________ _______________________________