AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 9, 1997
FORM N-2
[X] REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
[X] PRE-EFFECTIVE AMENDMENT NO. 2
[ ] POST-EFFECTIVE AMENDMENT NO.
AND/OR
[X]REGISTRATION STATEMENT UNDER THE INVESTMENT
COMPANY ACT OF 1940 AMENDMENT NO. 3
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (800) 422-3554
RICHARD T. PRINS, ESQ. JAMES E. MCKEE, ESQ. GARY S. SCHPERO, ESQ. SKADDEN, ARPS, SLATE, THE GABELLI CONVERTIBLE SIMPSON THACHER & MEAGHER & FLOM LLP SECURITIES FUND, INC. BARTLETT 919 THIRD AVENUE ONE CORPORATE CENTER 425 LEXINGTON AVENUE NEW YORK, NEW YORK 10022 RYE, NEW YORK 10580-1434 NEW YORK, NEW YORK 10017 (212) 735-3000 (914) 921-5100 (212) 455-2000 |
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
As soon as practicable after the effective date of this Registration Statement.
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
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PROPOSED MAXIMUM PROPOSED MAXIMUM AGGREGATE AMOUNT OF AMOUNT BEING OFFERING PRICE OFFERING REGISTRATION TITLE OF SECURITIES BEING REGISTERED REGISTERED PER SHARE PRICE(1) FEE - ------------------------------------------------------------------------------------------------------------ % Cumulative Preferred Stock....... 1,200,000 Shares $25 $30,000,000 $9,091(2) ============================================================================================================ |
(1) Estimated solely for the purpose of calculating the registration fee.
CROSS-REFERENCE SHEET
PURSUANT TO RULE 481(a)
N-2 ITEM NUMBER LOCATION IN PART A (CAPTION) - --------------------------------------------- --------------------------------------------- PART A 1. Outside Front Cover...................... Outside Front Cover Page 2. Inside Front and Outside Back Cover Page...................................... Outside Front Cover Page; Inside Front Cover Page 3. Fee Table and Synopsis................... Not Applicable 4. Financial Highlights..................... Financial Highlights 5. Plan of Distribution..................... Outside Front Cover Page; Prospectus Summary; Underwriting 6. Selling Shareholders..................... Not Applicable 7. Use of Proceeds.......................... Use of Proceeds; Investment Objective and Policies 8. General Description of the Registrant.... Outside Front Cover Page; Prospectus Summary; Investment Objective and Policies; Convertible Securities; Other Investments; Derivative Investments; Description of Cumulative Preferred Stock 9. Management............................... Outside Prospectus Summary; Management of the Fund; Custodian, Transfer Agent and Dividend-Disbursing Agent 10. Capital Stock, Long-Term Debt, and Other Securities............................. Outside Front Cover Page; Prospectus Summary; Capitalization; Investment Objective and Policies; Description of Cumulative Preferred Stock; Description of Capital Stock and Other Securities; Taxation 11. Defaults and Arrears on Senior Securities................................. Not Applicable 12. Legal Proceedings........................ Not Applicable 13. Table of Contents of the Statement of Additional Information................. Table of Contents of the Statement of Additional Information PART B LOCATION IN STATEMENT OF ADDITIONAL INFORMATION ----------------------------------------- 14. Cover Page............................... Outside Front Cover Page 15. Table of Contents........................ Outside Front Cover Page 16. General Information and History.......... The Fund 17. Investment Objective and Policies........ Convertible Securities; Other Investments; Derivative Investments; Special Investment Methods 18. Management............................... The Adviser; Directors and Officers 19. Control Persons and Principal Holders of Securities............................. The Adviser; Directors and Officers 20. Investment Advisory and Other Services... The Adviser; Directors and Officers 21. Brokerage Allocation and Other Practices.................................. Portfolio Transactions and Brokerage 22. Tax Status............................... Dividends; Distributions and Taxes 23. Financial Statements..................... Financial Statements; Dividends; Report of Independent Accountants |
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.
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED MAY 6, 1997
P R O S P E C T U S
1,200,000 SHARES
THE GABELLI CONVERTIBLE
SECURITIES FUND, INC.
% CUMULATIVE PREFERRED STOCK
(LIQUIDATION PREFERENCE $25 PER SHARE)
LOGO
The % Cumulative Preferred Stock, liquidation preference $25 per share (the "Cumulative Preferred Stock"), to be issued by The Gabelli Convertible Securities Fund, Inc. (the "Fund") will be senior securities of the Fund. Prior to this offering, there has been no public market for the Cumulative Preferred Stock. The Fund is a closed-end diversified management investment company. The Fund's investment objective is to seek a high level of total return on its assets. The Fund seeks to achieve its investment objective through a combination of current income and capital appreciation by investing primarily in "Convertible Securities." Gabelli Funds, Inc. is the Fund's investment adviser.
Dividends on the Cumulative Preferred Stock offered hereby, at the annual rate of % of the liquidation preference of $25 per share, are cumulative from the Date of Original Issue thereof and are payable quarterly on March 25, June 25, September 25 and December 25 in each year, commencing on December 25, 1997.
During the Fund's last four fiscal years, distributions paid by the Fund on its Common Stock have consisted of net investment income and net capital gain, and under current market conditions it is expected that dividends paid on the Cumulative Preferred Stock similarly will consist of net investment income and net capital gain. No assurance can be given, however, as to what percentage, if any, of the dividends paid on the Cumulative Preferred Stock will consist of net capital gain.
It is a condition to its issuance that the Cumulative Preferred Stock be rated 'AAA' by Standard & Poor's Ratings Group ("S&P"). In connection with the receipt of such rating, the composition of the Fund's portfolio must reflect guidelines established by the Rating Agency and the Fund will be required to maintain a minimum discounted asset coverage with respect to the Cumulative Preferred Stock. See "Description of Cumulative Preferred Stock -- Rating Agency Guidelines."
The Cumulative Preferred Stock is subject to mandatory redemption in whole or in part by the Fund for cash at a price equal to $25 per share plus accumulated but unpaid dividends (whether or not earned or declared) (the "Redemption Price") if the Fund fails to maintain either of the minimum asset coverages required by the Rating Agency and the Investment Company Act of 1940, as amended. Commencing May 15, 2002, and thereafter, the Fund at its option may redeem the Cumulative Preferred Stock in whole or in part for cash at a price equal to the Redemption Price. Prior to May 15, 2002, the Cumulative Preferred Stock will be redeemable, at the option of the Fund, for cash at a price equal to the Redemption Price, only to the extent necessary for the Fund to continue to qualify for tax treatment as a regulated investment company. See "Description of Cumulative Preferred Stock -- Redemption."
(Continued on next page)
APPLICATION HAS BEEN MADE TO LIST THE CUMULATIVE PREFERRED STOCK ON THE NEW YORK STOCK EXCHANGE (THE "NYSE"). TRADING OF THE CUMULATIVE PREFERRED STOCK ON THE NYSE IS EXPECTED TO COMMENCE WITHIN 30 DAYS OF THE DATE OF THIS PROSPECTUS. SEE
"UNDERWRITING."
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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UNDERWRITING DISCOUNTS PRICE TO OR PROCEEDS PUBLIC (1) COMMISSIONS(2) TO FUND(3) - ---------------------------------------------------------------------------------------------------------- Per Share $ $ - ---------------------------------------------------------------------------------------------------------- Total (3) $ $ ========================================================================================================== |
SMITH BARNEY INC. GABELLI & COMPANY, INC.
May , 1997
This Prospectus sets forth certain information an investor should know before investing and should be retained for future reference.
A Statement of Additional Information dated May , 1997 (the "SAI") has been filed with the Securities and Exchange Commission and is incorporated by reference in this Prospectus. The table of contents of the SAI appears on page 35 of this Prospectus. A copy of the SAI may be obtained without charge by writing to the Fund at its address at One Corporate Center, Rye, New York 10580-1434 or calling the Fund toll-free at (800) 422-3554.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE MARKET PRICE OF THE CUMULATIVE PREFERRED STOCK OF THE FUND, INCLUDING THE ENTRY OF STABILIZING BIDS, SYNDICATE COVERING TRANSACTIONS OR THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
PROSPECTUS SUMMARY
The following information is qualified in its entirety by reference to the more detailed information included elsewhere in this Prospectus and the SAI. Capitalized terms not defined in this Summary are defined in the Glossary that appears at the end of this Prospectus.
The Fund................... The Gabelli Convertible Securities Fund, Inc. is a closed-end diversified management investment company. Prior to March 31, 1995, the Fund operated as an open-end diversified management investment company since commencement of operations in July 3, 1989. Investment Objective....... The Fund's investment objective is to seek a high level of total return on its assets. The Fund will seek to achieve this objective through a combination of current income and capital appreciation by investing primarily in securities which are convertible into common stock or other equity securities ("Convertible Securities"). See "Investment Objective and Policies." Special Characteristics and Risks...................... Convertible Securities are not typically rated within the four highest categories by the rating agencies and are, therefore, not generally investment grade. There is no minimum rating which is acceptable for investment by the Fund; however, it is expected that not more than 50% of the Fund's portfolio will consist of securities rated CCC or lower by S&P or Caa or lower by Moody's Investor Services, Inc. or if unrated, of comparable quality as determined by the Fund's investment adviser. The Fund will, however, limit its investments in securities of issuers in default to not more than 5% of its total assets. The Fund may also invest in, among other things, unregistered Convertible Securities, securities of issuers involved in corporate reorganizations, warrants, rights, securities of foreign issuers and forward commitments for securities purchased on a "when issued" or "delayed delivery" basis. |
See "Other Investments." The Fund may also purchase or sell options, engage in transactions in financial futures and options thereon, engage in short sales of securities it owns or has the right to acquire, enter into repurchase agreements and forward foreign currency exchange contracts, lend its portfolio securities to securities broker-dealers or financial institutions and borrow money for short-term credits from banks as may be necessary for the clearance of portfolio transactions and for temporary or emergency purposes. These techniques may involve special risks. See "Special Investment Methods."
The market price for the Cumulative Preferred Stock will be influenced by changes in interest rates, the perceived credit quality of the Cumulative Preferred Stock and other factors. As indicated above, the Cumulative Preferred Stock is subject to redemption under specified circumstances. Subject to such circumstances, the Cumulative Preferred Stock is perpetual. The credit rating on the Cumulative Preferred Stock could be reduced or withdrawn while an investor holds shares, and the credit rating does not eliminate or mitigate the risks of investing in the Cumulative Preferred Stock. A reduction or withdrawal of the credit rating would likely have an adverse effect on the market value of the Cumulative Preferred Stock. The Cumulative Preferred Stock is not an obligation of the Fund. Although unlikely, precipitous declines in the value of the Fund's assets could
result in the Fund having insufficient assets to redeem all of the Cumulative Preferred Stock for the full Redemption Price.
The Offering............... The Fund is offering 1,200,000 shares of % Cumulative Preferred Stock, par value $.001 per share, liquidation preference $25 per share (the "Cumulative Preferred Stock"), at a purchase price of $25 per share.
Dividends.................. Dividends on the Cumulative Preferred Stock, at the annual rate of % of the liquidation preference, are cumulative from the Date of Original Issue and are payable, when, as and if declared by the Board of Directors of the Fund, out of funds legally available therefor, quarterly on March 25, June 25, September 25 and December 25 in each year, commencing, December 25 1997. See "Description of Cumulative Preferred Stock -- Dividends."
Potential Tax Benefit to
Certain Investors.......... The Fund intends to allocate net capital gain (the excess of its net long-term capital gain over its net short-term capital loss) income, as well as other types of income, proportionately among holders of shares of Common Stock and shares of Cumulative Preferred Stock in accordance with the current position of the Internal Revenue Service (the "IRS"). During the Fund's last four fiscal years, distributions paid by the Fund have consisted of net capital gain and net investment income, and it is expected that under current market conditions dividends paid on the Cumulative Preferred Stock will likewise consist of net capital gain and net investment income. Accordingly, certain investors in the Cumulative Preferred Stock may realize a tax benefit to the extent that dividends paid by the Fund on those shares are composed of net capital gain taxed at long-term capital gain rates. See "-- Ordinary Income Equivalent Yield Tables." Subject to statutory limitations, investors may also be entitled to offset the net capital gain portion of a Cumulative Preferred Stock dividend with capital losses incurred by such investors. See "Taxation." No assurance can be given, however, as to what percentage, if any, of the dividends paid on the Cumulative Preferred Stock will consist of net capital gain. To the extent that dividends on the shares of Cumulative Preferred Stock are not paid from net capital gain, they will be paid from net investment income (investment company taxable income as defined in the Internal Revenue Code, without regard for the deduction for dividends paid) and will be taxed at ordinary rates or treated as a return of capital. Rating..................... It is a condition to their issuance that the Cumulative Preferred Stock be issued with a rating of 'AAA' from S&P. The Articles Supplementary creating and fixing the rights and preferences of the Cumulative Preferred Stock (the "Articles Supplementary") contain certain provisions which reflect guidelines established by S&P (the "Rating Agency Guidelines") in order to obtain such rating on the Cumulative Preferred Stock on the Date of Original Issue. See "Description of Cumulative Preferred Stock -- Rating Agency Guidelines." Asset Coverage............. In order to maintain the 'AAA' rating on the Cumulative Preferred Stock, the Fund will be required to maintain Adjusted Assets greater than or equal to the Basic Maintenance Amount in accordance with 4 |
discount factors and guidelines established by S&P. See "Description of Cumulative Preferred Stock -- Rating Agency Guidelines." Voting Rights.............. At all times, holders of shares of Cumulative Preferred Stock or any other Preferred Stock, voting as a single class, will be entitled to elect two members of the Fund's Board of Directors, and holders of Cumulative Preferred Stock, any other Preferred Stock and Common Stock, voting as a single class, will elect the remaining directors. However, upon a failure by the Fund to pay dividends on the Cumulative Preferred Stock or any other Preferred Stock in an amount equal to two full years' dividends, holders of Cumulative Preferred Stock and any other Preferred Stock, voting as a single class, will have the right to elect the smallest number of directors that would constitute a majority of the directors until all cumulative dividends have been paid or provided for. Holders of Cumulative Preferred Stock and any other Preferred Stock will vote separately as a class on certain other matters, as required under the Articles Supplementary, the 1940 Act and Maryland law. Except as otherwise indicated in this Prospectus and as otherwise required by applicable law, holders of Cumulative Preferred Stock will be entitled to one vote per share on each matter submitted to a vote of shareholders and will vote together with holders of shares of Common Stock and any other Preferred Stock as a single class. See "Description of Cumulative Preferred Stock -- Voting Rights." Mandatory Redemption....... The Cumulative Preferred Stock is subject to mandatory redemption in whole or in part by the Fund in the event that the Fund fails to maintain Adjusted Assets equal to or greater than the Basic Maintenance Amount or fails to maintain Asset Coverage and does not cure such failure by the applicable cure date. Any such redemption will be made for cash at a price equal to $25 per share plus accumulated and unpaid dividends (whether or not earned or declared) to the redemption date (the "Redemption Price"). The Fund may redeem a sufficient number of shares of Cumulative Preferred Stock so that the Adjusted Assets of the remaining outstanding shares of Cumulative Preferred Stock and any other Preferred Stock after redemption is as high as 110% of the Base Amount and the asset coverage, as defined in the 1940 Act, of the remaining outstanding shares of Cumulative Preferred Stock and any other Preferred Stock is as high as 220%. See "Description of Cumulative Preferred Stock -- Redemption -- Mandatory Redemption." Optional Redemption........ Commencing May 15, 2002 and thereafter, the Fund at its option may redeem the Cumulative Preferred Stock, in whole or in part, for cash at a price per share equal to the Redemption Price. Prior to May 15, 2002, the Cumulative Preferred Stock will be redeemable at the option of the Fund at the Redemption Price only to the extent necessary for the Fund to continue to qualify for tax treatment as a regulated investment company. See "Description of Cumulative Preferred Stock -- Redemption -- Optional Redemption." Liquidation Preference..... The liquidation preference of each share of Cumulative Preferred Stock is $25 plus an amount equal to accumulated and unpaid dividends (whether or not earned or declared) to the date of distribution. See "Description of Cumulative Preferred Stock -- Liquidation Rights." 5 |
Use of Proceeds............ The Fund will use the net proceeds from the offering of the Cumulative Preferred Stock to purchase additional portfolio securities in accordance with its investment objective and policies. See "Use of Proceeds." Listing.................... Prior to the Offering, there has been no public market for the Cumulative Preferred Stock. Application has been made to list the shares of Cumulative Preferred Stock on the NYSE. However, during an initial period which is not expected to exceed 30 days after the date of this Prospectus, the Cumulative Preferred Stock will not be listed on any securities exchange. During such period, the Underwriters intend to make a market in the Cumulative Preferred Stock; however, they have no obligation to do so. Consequently, an investment in the Cumulative Preferred Stock may be illiquid during such period. Federal Income Tax Considerations........... The Fund has qualified and intends to remain qualified for Federal income tax purposes as a regulated investment company. Qualification requires, among other things, compliance by the Fund with certain distribution requirements. Statutory limitations on distributions on the Common Stock if the Fund fails to satisfy the 1940 Act's asset coverage requirements could jeopardize the Fund's ability to meet the distribution requirements. The Fund presently intends, however, to purchase or redeem the Cumulative Preferred Stock to the extent necessary in order to maintain compliance with such asset coverage requirements. See "Taxation" for a more complete discussion of these and other Federal income tax considerations. Management and Fees........ Gabelli Funds, Inc. serves as the Fund's investment adviser (the "Adviser") and is compensated for its services and its related expenses at an annual rate of 1.00% of the Fund's average daily net assets. This fee is higher than that paid by most mutual funds. The Adviser is responsible for administration of the Fund and currently utilizes and pays the fees of a third party administrator. Notwithstanding the foregoing, the Adviser will waive the portion of its investment advisory fee attributable to an amount of assets of the Fund equal to the aggregate stated value of the Cumulative Preferred Stock for any calendar year in which the total return of the Fund, including distributions and the advisory fee subject to potential waiver, allocable to common stock is less than the stated dividend rate of the Cumulative Preferred Stock. Repurchase of Common Stock and Anti-takeover Provisions............... The Fund is authorized, subject to maintaining required asset coverage on the Cumulative Preferred Stock, to repurchase its Common Stock on the open market when such shares are trading at a discount of 10% or more (or such other percentage as its Board of Directors may determine from time to time) from their net asset value. In addition, certain provisions of the Fund's Articles of Incorporation (the "Charter") and By-Laws may be regarded as "anti-takeover" provisions. Pursuant to these provisions, only one of three classes of directors is elected each year, and the affirmative vote of the holders of 75% of the outstanding shares of the Fund and a majority of the shares of Cumulative Preferred Stock is necessary to authorize the conversion of the Fund from a closed-end to an open-end investment company 6 |
and an affirmative vote of 66 2/3% of the outstanding shares of the Fund may be necessary to authorize certain business transactions with any beneficial owner of more than 5% of the outstanding shares of the Fund. The overall effect of these provisions is to render more difficult the accomplishment of a merger with, or the assumption of control by, a principal shareholder. These provisions may have the effect of depriving Fund shareholders of an opportunity to sell their shares at a premium to the prevailing market price. Custodian, Transfer and Dividend-Disbursing Agent and Registrar............ State Street Bank and Trust Company serves as the Fund's custodian and, with respect to the Cumulative Preferred Stock, as transfer and dividend-disbursing agent and registrar and as agent to provide notice of redemption and certain voting rights. See "Custodian, Transfer and Dividend-Disbursing Agent and Registrar." |
ORDINARY INCOME EQUIVALENT YIELD TABLES
Over the Fund's last four fiscal years, distributions paid by the Fund on
its Common Stock have consisted, on average, of 29% net capital gain ("L/T
Capital Gain") which is taxed at long-term capital gain rates, and 71% net
investment income ("Ordinary Income") which is taxed at ordinary income rates.
(1) Cumulative Preferred Stock investors who are in a Federal marginal income
tax bracket higher than the current 28.0% maximum Federal tax rate on long-term
capital gains would realize a tax advantage on their investment to the extent
that distributions by the Fund to its shareholders continue to be partially
composed of the more favorably taxed L/T Capital Gains.
The following table shows examples of the pure ordinary income equivalent yield that would be generated by the indicated dividend rates on the Cumulative Preferred Stock, assuming distributions consisting of four different proportions of L/T Capital Gain and Ordinary Income for an investor in the 39.6% Federal marginal tax bracket and assuming no change in the current maximum Federal long-term capital gains tax rate of 28.0%.
A CUMULATIVE PREFERRED STOCK PERCENTAGE OF CUMULATIVE PREFERRED STOCK DIVIDEND RATE OF DIVIDEND COMPOSED OF* ------------------------------ ------------------------------------------------ ORDINARY 7.50% 7.75% 8.00% IS EQUIVALENT TO AN L/T CAPITAL GAIN ORDINARY INCOME YIELD OF -------------------------------- INCOME ------------------------------ -------------- 15%............................. 85% 7.72% 7.97% 8.23% 25%............................. 75% 7.86% 8.12% 8.38% 35%............................. 65% 8.00% 8.27% 8.54% 45%............................. 55% 8.15% 8.42% 8.69% |
PERCENTAGE COMPOSITION OF COMMON STOCK DISTRIBUTION ------------------------------------------------------------------------------------- L/T CAPITAL ORDINARY RETURN OF YEAR GAIN INCOME CAPITAL -------------------------------------------- ----------- -------- ---------- 1993........................................ 47% 53% -- 1994........................................ 24% 76% -- 1995........................................ 31% 66% 3% 1996........................................ 14% 86% -- |
* A number of factors could affect the composition of the Fund's distributions to investors of the Cumulative Preferred Stock. Such factors include (i) active management of the Fund's assets may result in varying proportions of L/T Capital Gain, Ordinary Income and/or return of capital in Fund distributions; and (ii) the continued effectiveness of an IRS revenue ruling requiring the proportionate allocation of L/T Capital Gain among holders of various classes of capital stock.
As illustrated in the table below, the yield advantage of the lower Federal long-term capital gains tax rate would be diminished for investors in tax brackets below the 39.6% rate assumed in the table above, and there would be no effect on the yield for an investor in a Federal marginal income tax bracket of 28.0% or lower. Assuming a Cumulative Preferred Stock dividend composed of 25% L/T Capital Gain and 75% Ordinary Income, the following table shows the ordinary income equivalent yields that would be generated at the indicated dividend rates for taxpayers in the indicated tax brackets.
A CUMULATIVE PREFERRED STOCK DIVIDEND RATE OF -------------------------- 7.50% 7.75% 8.00% IS EQUIVALENT TO AN 1996 FEDERAL TAX BRACKET(1) ORDINARY INCOME YIELD OF ------------------------------------------------- -------------------------- 39.6%............................................ 7.86% 8.12% 8.38% 36.0%............................................ 7.73% 7.99% 8.25% 31.0%............................................ 7.58% 7.83% 8.09% 28.0%............................................ 7.50% 7.75% 8.00% |
39.6%........ over $263,750 for both single and joint returns $121,301-$263,750 for single returns, $147,701-$263,750 for 36.0%........ joint returns $58,151-$121,300 for single returns, $96,901-$147,700 for 31.0%........ joint returns $24,001-$58,150 for single returns, $40,101-$96,900 for joint 28.0%........ returns |
The tax characteristics of the Fund are described more fully under "Taxation." Consult your tax adviser for further details.
The charts above are for illustrative purposes only and cannot be taken as an indication of an anticipated dividend rate on the Cumulative Preferred Stock or of the composition of future distributions by the Fund.
FINANCIAL HIGHLIGHTS
The selected data set forth below is for a share of Common Stock outstanding for the periods presented. The financial information was derived from and should be read in conjunction with the Financial Statements of the Fund incorporated by reference into this Prospectus and the SAI. The financial information for each of the five years ended December 31, 1996 has been audited by Price Waterhouse LLP, independent accountants whose unqualified report on such financial statements is incorporated by reference into this Prospectus and the SAI.
YEAR ENDED DECEMBER 31, -------------------------------------------------------------------------------------- 1996 1995 1994 1993 1992 1991 1990 1989* ------- ------- -------- -------- ------- ------- ------- ------- OPERATING PERFORMANCE: Net Asset Value, Beginning of Period............................. $ 11.01 $ 10.60 $ 11.52 $ 11.45 $ 10.91 $ 10.47 $ 10.51 $ 10.00 Net investment income.............. 0.49 0.53 0.69 0.76 0.65 0.71 0.69 0.12 Net realized and unrealized gains (loss) on securities............. .31 1.03 (0.71) 0.74 0.76 0.60 (0.04) 0.51 ------ ------ ------ ------ ------ ------ ------ ------ Total from Investment Operations..................... .80 1.56 (0.02) 1.50 1.41 1.31 0.65 0.63 ------ ------ ------ ------ ------ ------ ------ ------ LESS DISTRIBUTIONS: Dividends from net investment income........................... (.49) (0.53) (0.69) (0.76) (0.65) (0.71) (0.69) (0.12) Distributions from net realized gain on investments.............. (.24) (0.56) (0.21) (0.67) (0.22) (0.16) -- -- Distributions in excess of net investment income................ -- (0.02) -- -- -- -- -- -- Distributions in excess of net realized gains................... -- (0.01) -- -- -- -- -- -- Distributions from paid-in capital.......................... -- (0.03) -- -- -- -- -- -- ------ ------ ------ ------ ------ ------ ------ ------ Total Distributions.............. (.73) $ (1.15) (0.90) (1.43) (0.87) (0.87) (0.69) (0.12) ------ ------ ------ ------ ------ ------ ------ ------ Net Asset Value, End of Period..... $ 11.08 $ 11.01 $ 10.60 $ 11.52 $ 11.45 $ 10.91 $ 10.47 $ 10.51 ====== ====== ====== ====== ====== ====== ====== ====== Market Value, End of Period........ $ 9.25 $ 10.75 -- -- -- -- -- -- ====== ====== ====== ====== ====== ====== ====== ====== Total Net Asset Value Return +(a)............................. 8.40% 15.00% (0.20)% 13.10% 13.00% 12.50% 6.30% 6.30% Total Investment Return+(b)........ (7.30)% 12.30% -- -- -- -- -- -- RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA: Net Assets, end of period (in thousands)....................... $89,659 $89,137 $112,090 $108,674 $92,541 $92,565 $81,868 $52,105 Ratio of Operating Expenses to Average Net Assets(c)............ 1.45% 1.56% 1.31% 1.38% 1.40% 1.45% 1.52% 2.50% Ratio of Net Investment Income to Average Net Assets............... 4.33% 4.60% 4.77% 4.58% 5.53% 5.50% 6.85% 5.74% Portfolio Turnover Rate............ 114.00% 140.00% 67.00% 45.00% 32.00% 51.00% 282.00% 83.00% Average Commission Rate Paid(d).... $0.0423 -- -- -- -- -- -- -- |
* The Fund commenced operations on July 3, 1989. + Total return is calculated assuming a purchase of shares on the first day and a sale on the last day of each period reported and includes reinvestment of distributions. (a) Based on net asset value per share, adjusted for reinvestment of all distributions. (b) Based on net asset value per share through March 31, 1995, the date of conversion of the Fund to closed-end status, and market value thereafter, adjusted for reinvestment of all distributions. (c) Includes, for 1995, a current period expense associated with the conversion of the Fund to closed-end status. Without the conversion expense, this ratio would have been 1.28% in 1995. (d) For fiscal years beginning on or after September 1, 1995, a fund is required to disclose its average commission rate paid per share for purchases and sales of investment securities. |
USE OF PROCEEDS
The net proceeds of the offering are estimated at $28,543,000, after deduction of the underwriting discounts and estimated offering expenses payable by the Fund. The Fund's investment adviser expects to invest such proceeds in accordance with the Fund's investment objective and policies within six months after the completion of the offering, depending on market conditions for the types of securities in which the Fund principally invests. Pending such investment, the proceeds will be held in high quality short-term debt securities and instruments.
CAPITALIZATION
The following table sets forth the capitalization of the Fund as of December 31, 1996, and as adjusted to give effect to this offering.
ACTUAL AS ADJUSTED(a) ----------- -------------- Shareholders' equity: Preferred Stock, $.001 par value: Authorized 2,000,000 shares; issued and outstanding 0 shares; as adjusted, 1,200,000 shares of --% Cumulative Preferred Stock issued and outstanding............................. $ 0 $ 30,000,000 Common Stock, $.001 par value: Authorized 1,000,000,000 shares; as adjusted, 998,000,000 shares authorized; issued and outstanding 8,092,945 shares.................................. 8,093 8,093 Additional paid-in capital................ 85,233,814 83,776,814 Distributions in excess of net investment income.................................. (241,821) (241,821) Distributions in excess of net realized gains on investments.................... (64,030) (64,030) Net unrealized appreciation on investments............................. 4,723,235 4,723,235 ------------ ------------- Net assets........................... 89,659,291 118,202,291 Net assets applicable to outstanding Common Stock....................... 89,659,291 88,202,291 |
INVESTMENT OBJECTIVE AND POLICIES
The Fund was incorporated in Maryland on December 19, 1988 as an open-end diversified management investment company, and converted to closed-end status after receiving shareholder approval of its Charter on February 21, 1995 and filing the Charter in Maryland on March 31, 1995 (the "Conversion").
The investment objective of the Fund is to seek a high level of total return on its assets. The Fund seeks to achieve its investment objective through a combination of current income and capital appreciation. There is no assurance that this objective will be achieved. The Fund's investment objective is, however, a fundamental policy of the Fund and cannot be changed without shareholder approval. The Fund will normally invest at least 65% of its total assets (taken at current value) in "Convertible Securities," i.e., securities (bonds, debentures, corporate notes, preferred stocks and other similar securities) which are convertible into or exchangeable for common stock or other equity securities. Securities received upon conversion of a Convertible Security will be included in the calculation of the percentage of Fund assets invested in Convertible Securities until the Fund has held such securities for twelve months. These securities may be retained in the Fund's portfolio to permit orderly disposition or to establish long-term holding periods for Federal income tax purposes.
The Fund may invest up to 35% of its total assets (taken at current value and subject to any restrictions appearing elsewhere in this Registration Statement) in any combination and quantity of the following securities: common stock; non-convertible preferred stock; non-convertible corporate debt securities; options on debt and equity securities; and money market instruments. In selecting any of the foregoing securities for investment, the factors which will be considered by the Adviser include the Adviser's evaluation of the underlying value of the assets and business of the issuer of the securities, the potential for capital appreciation, the price of the securities, the issuer's balance sheet characteristics and the perceived skills of the issuer's management.
During periods when it is deemed necessary for temporary defensive purposes, the Fund may invest without limit in high quality money market instruments, including commercial paper of domestic and foreign corporations, certificates of deposit, bankers' acceptances and other obligations of domestic and foreign banks and obligations issued or guaranteed by the United States Government, its instrumentalities or agencies and, subject to statutory limitations, unaffiliated money market mutual funds. The yield on these securities will, as a general matter, tend to be lower than the yield on other securities to be purchased by the Fund.
CONVERTIBLE SECURITIES
A Convertible Security is a bond, debenture, corporate note, preferred stock or other similar security that may be converted into or exchangeable for a prescribed amount of common stock or other equity security of the same or a different issuer within a particular period of time at a specified price or formula. Before conversion, Convertible Securities have characteristics similar to nonconvertible debt securities in that they ordinarily provide a stream of income with generally higher yields than those of common stock of the same or similar issuers. Convertible Securities are senior in rank to common stock in a corporation's capital structure and, therefore, generally entail less risk than the corporation's common stock, although the extent to which such risk is reduced depends in large measure upon the degree to which the Convertible Security sells above its value as a fixed income security.
The Fund believes that the characteristics of Convertible Securities make them appropriate investments for an investment company seeking a high level of total return on its assets. These characteristics include the potential for capital appreciation if the value of the underlying common stock increases, the relatively high yield received from preferred dividend or interest payments as compared to common stock dividends and decreased risks of decline in value, relative to the underlying common stock due to their fixed income nature. As a result of the conversion feature, however, the interest rate or dividend preference on a Convertible Security is generally less than would be the case if the securities were not convertible. During periods of rising interest rates, it is possible that the potential for capital gain on a Convertible Security may be less than that of a common stock equivalent if the yield on the Convertible Security is at a level which causes it to sell at a discount.
In selecting Convertible Securities for the Fund, the following factors, among others, will be considered by the Adviser: (1) the Adviser's own evaluations of the basic underlying value of the assets and businesses of the issuers of the securities; (2) the interest or dividend income generated by the securities; (3) the potential for capital appreciation of the securities and the underlying common stocks; (4) the prices of the securities relative to the underlying common stocks; (5) the prices of the securities relative to other comparable securities; (6) whether the securities are entitled to the benefits of sinking funds or other protective conditions; (7) the existence of any anti-dilution protections of the securities; and (8) the diversification of the Fund's portfolio as to issuers. The Fund may convert a Convertible Security which it holds: (1) when necessary to permit orderly disposition of the investment when a Convertible Security approaches maturity or has been called for redemption; (2) to facilitate a sale of the position; (3) if the dividend rate on the underlying common stock increases above the yield on the Convertible Security; or (4) whenever the Adviser believes it is otherwise in the best interests of the Fund.
Convertible Securities are generally not investment grade, that is, not rated within the four highest categories by S&P and Moody's Investor Services, Inc. ("Moody's"). To the extent that such Convertible Securities and other non-convertible debt securities, which are acquired by the Fund consistent with the factors considered by the Adviser as described herein, are rated lower than investment grade or are not rated, there would be a greater risk as to the timely repayment of the principal of, and timely payment of interest or dividends on, those securities. It is expected that not more than 50% of the Fund's portfolio will consist of securities rated CCC or lower by S&P or Caa or lower by Moody's or, if unrated, are of comparable quality as determined by the Adviser. These securities and securities rated BB or lower by S&P or Ba or lower by Moody's are often referred to in the financial press as "junk bonds" and may include securities of issuers in default. "Junk bonds" are considered by the rating agencies to be predominantly speculative and may involve major risk exposures such as: (i) vulnerability to economic downturns and changes in interest rates; (ii) sensitivity to adverse economic changes and corporate developments; (iii) redemption or call provisions which may be exercised at inopportune times; (iv) difficulty in accurately valuing or disposing of such securities; (v) subordination to other debt of the issuer; and (vi) junk bonds are generally unsecured.
The Fund's investments in securities of issuers in default will be limited to not more than 5% of the total assets of the Fund. Further, the Fund will invest in securities of issuers in default only when the Adviser believes that such issuers will emerge from bankruptcy and the value of such securities will appreciate. By investing in securities of issuers in default the Fund bears the risk that such issuers will not emerge from bankruptcy or that the value of such securities will not appreciate. Securities rated BBB by S&P or Baa by Moody's, in the opinion of the rating agencies, also have speculative characteristics. Securities need not meet a minimum rating standard in order to be acceptable for investment by the Fund.
In the absence of adequate anti-dilution provisions in a Convertible Security, dilution in the value of the Fund's holding may occur in the event the underlying stock is subdivided, additional securities are issued for below market value, a stock dividend is declared, or the issuer enters into another type of corporate transaction which has a similar effect. Every Convertible Security may be valued, on a theoretical basis, as if it did not have a conversion privilege. This theoretical value is determined by the yield it provides in comparison with the yields of other securities of comparable character and quality which do not have a conversion privilege. This theoretical value, which may change with prevailing interest rates, the credit rating of the issuer and other pertinent factors, often referred to as the "investment value," represents the security's theoretical price support level.
"Conversion value" is the amount a Convertible Security would be worth in market value if it were to be exchanged for the underlying equity security pursuant to its conversion privilege. Conversion value fluctuates directly with the price of the underlying equity security, usually common stock. If, because of low prices for the common stock, the conversion value is substantially below the investment value, the price of the Convertible Security is governed principally by the factors described in the preceding paragraph. If the conversion value rises near or above its investment value, the price of the Convertible Security generally will rise above its investment value and, in addition, will sell at some premium over its conversion value. This premium represents the price investors are willing to pay for the privilege of purchasing a fixed-income
security with a possibility of capital appreciation due to the conversion privilege. If this appreciation potential is not realized, this premium may not be recovered. In its selection of Convertible Securities for the Fund, the Adviser will not emphasize either investment value or conversion value, but will consider both in light of the Fund's overall investment objective. See "Convertible Securities" in the SAI.
ILLIQUID CONVERTIBLE SECURITIES
The Fund has no limit on the amount of its assets it may invest in unregistered and otherwise illiquid Convertible Securities and other investments. The current intention of the Adviser is not to invest in excess of 15% of the Funds's net assets in illiquid Convertible Securities. Shareholders will be notified if the Adviser changes such intention. Unregistered securities are securities that cannot be sold publicly in the United States without registration under the Securities Act of 1933, as amended (the "1933 Act"). Unregistered securities generally can be resold only in privately negotiated transactions with a limited number of purchasers or in a public offering registered under the 1933 Act. Considerable delay could be encountered in either event and, unless otherwise contractually provided for, the Fund's proceeds upon sale may be reduced by the costs of registration or underwriting discounts. The difficulties and delays associated with such transactions could result in the Fund's inability to realize a favorable price upon disposition of unregistered securities, and at times might make disposition of such securities impossible. When unregistered Convertible Securities are converted into common stock and the common stock is publicly traded (as is typically the case), the common stock normally may be resold publicly under certain volume and other restrictions beginning one year following the acquisition of the unregistered Convertible Securities and without any restrictions beginning two years after the acquisition of the unregistered Convertible Securities. Securities freely salable among qualified institutional investors under special rules adopted by the Securities and Exchange Commission (the "SEC") may be treated as liquid if they satisfy institutional liquidity standards established by the Board of Directors. The continued liquidity of such securities is not as well assured as that of publicly traded securities, and accordingly, the Board of Directors will monitor their liquidity.
OTHER INVESTMENTS
The Fund will normally invest at least 65% of its total assets (taken at current value) in Convertible Securities and up to 35% of the remaining assets in non-convertible securities and the investments described below. However, to the extent that any investments described below are Convertible Securities, they will be included when determining the Fund's holdings of Convertible Securities.
CORPORATE REORGANIZATIONS
The Fund may invest without limit in securities of companies for which a tender or exchange offer has been made or announced and in securities of companies for which a merger, consolidation, liquidation or similar reorganization proposal has been announced if, in the judgment of the Adviser, there is a reasonable prospect of capital appreciation significantly greater than the added portfolio turnover expenses inherent in the short term nature of such transactions. The principal risk is that such offers or proposals may not be consummated within the time and under the terms contemplated at the time of the investment, in which case the Fund may sustain a loss. For further information on such investments, see "Other Investments" in the SAI.
WARRANTS AND RIGHTS
The Fund may invest without limit in warrants or rights which entitle the holder to buy equity securities at a specific price for a specific period of time but will do so only if such equity securities are deemed appropriate by the Adviser for inclusion in the Fund's portfolio.
OTHER INVESTMENT COMPANIES
The Fund may invest up to 5% of its total assets in no more than 3% of the securities of any one investment company including small business investment companies and may invest up to 10% of its total
assets in the securities of all investment companies in the aggregate. The purchase of securities in investment companies will result indirectly in the payment of duplicative management fees by the Fund. The Fund will not purchase the securities of affiliated investment companies.
FOREIGN SECURITIES
The Fund may invest up to 25% of its total assets in securities of foreign issuers which are generally denominated in foreign currencies. Investments in the securities of foreign issuers involve certain considerations and risks not ordinarily associated with investments in securities of domestic issuers. Foreign companies are not generally subject to uniform accounting, auditing and financial standards and requirements comparable to those applicable to U.S. companies. Foreign securities exchanges, brokers and listed companies may be subject to less government supervision and regulation than exists in the United States. Dividend and interest income may be subject to withholding and other foreign taxes which may adversely affect the net return on such investments. There may be difficulty in obtaining or enforcing a court judgment abroad. In addition, it may be difficult to effect repatriation of capital invested in certain countries. In addition, with respect to certain countries, there are risks of expropriation, confiscatory taxation, political or social instability or diplomatic developments which could affects assets of the Fund held in foreign countries.
There may be less publicly available information about a foreign company than a U.S. company. Foreign securities markets may have substantially less volume than U.S. securities markets and some foreign company securities are less liquid than securities of otherwise comparable U.S. companies. A portfolio of foreign securities may also be adversely affected by fluctuations in the rates of exchange between the currencies of different nations and by exchange control regulations. Foreign markets also have different clearance and settlement procedures which could cause the Fund to encounter difficulties in purchasing and selling securities on such markets and may result in the Fund missing attractive investment opportunities or experiencing loss. In addition, a portfolio which includes foreign securities can expect to have a higher expense ratio because of the increased transaction costs on non-U.S. securities markets and the increased costs of maintaining the custody of foreign securities.
The Fund may purchase sponsored American Depository Receipts ("ADRs") or U.S. denominated securities of foreign issuers which shall not be included in this foreign securities limitation. ADRs are receipts issued by United States banks or trust companies in respect of securities of foreign issuers held on deposit for use in the United States securities markets. While ADRs may not necessarily be denominated in the same currency as the securities into which they may be converted, many of the risks associated with foreign securities may also apply to ADRs.
WHEN ISSUED, DELAYED DELIVERY SECURITIES AND FORWARD COMMITMENTS
The Fund may enter into forward commitments for the purchase of securities. Such transactions may include purchases on a "when issued" or "delayed delivery" basis. In some cases, a forward commitment may be conditioned upon the occurrence of a subsequent event, such as approval and consummation of a merger, corporate reorganization or debt restructuring, i.e., a when, as and if issued security. When such transactions are negotiated, the price is fixed at the time of the commitment, with payment and delivery taking place in the future, generally a month or more after the date of the commitment. While the Fund will only enter into a forward commitment with the intention of actually acquiring the security, the Fund may sell the security before the settlement date if it is deemed advisable.
Securities purchased under a forward commitment are subject to market fluctuation, and no interest (or dividends) accrues to the Fund prior to the settlement date. The Fund will maintain a segregated account of cash or liquid high-grade debt securities with the Fund's custodian in an aggregate amount at least equal to the amount of its forward commitments as long as the obligation to purchase continues. See "Other Investments -- When Issued and Delayed Delivery Securities and Forward Commitments" in the SAI.
SPECIAL CHARACTERISTICS AND RISKS
There are a number of issues that an investor should consider in evaluating the Fund. The Fund invests primarily in lower rated securities, including securities of issuers that are in default. These securities carry a higher risk of failure to pay principal and interest when due and the market to sell such securities may be limited. See "Convertible Securities." The Fund may invest in securities of companies that are involved or may become involved in extraordinary transactions, including corporate reorganizations. See "Other Investments -- Corporate Reorganizations." Many companies in the past several years have adopted so-called "poison pill" and other defensive measures that may have the effect of limiting the amount of securities in any one issuer that may be acquired by the Adviser and its affiliates for the account of the Fund and other investment management clients, discouraging or hindering non-negotiated offers for a company or possibly preventing the completion of any such offer. Since its inception, the Fund has held U.S. Treasury Securities, which may provide lower returns relative to Convertible Securities but whose value tends to be more stable in periods of market volatility. Over the past three years, U.S. Treasury Securities have ranged from approximately 25% to approximately 45% of the Fund's total assets. The Investment Adviser is dependent upon the expertise of Mr. Mario J. Gabelli in providing advisory services with respect to the Fund's investments. There is no contract of employment between the Investment Adviser and Mr. Gabelli. If the Investment Adviser were to lose the services of Mr. Gabelli, its ability to service the Fund could be adversely affected. There can be no assurance that a suitable replacement could be found for Mr. Gabelli in the event of his death, resignation, retirement or inability to act on behalf of the Investment Adviser.
In addition, there are a number of risks associated with an investment in Cumulative Preferred Stock. The market price for the Cumulative Preferred Stock will be influenced by changes in interest rates, the perceived credit quality of the Cumulative Preferred Stock and other factors. The Cumulative Preferred Stock is subject to redemption under specified circumstances. Subject to such circumstances, the Cumulative Preferred Stock is perpetual. The credit rating on the Cumulative Preferred Stock could be reduced or withdrawn while an investor holds shares, and the credit rating does not eliminate or mitigate the risks of investing in the Cumulative Preferred Stock. A reduction or withdrawal of the credit rating would likely have an adverse effect on the market value of the Cumulative Preferred Stock. The Cumulative Preferred Stock is not an obligation of the Fund. Although unlikely, precipitous declines in the value of the Fund's assets could result in the Fund having insufficient assets to redeem all of the Cumulative Preferred Stock for the full Redemption Price.
SPECIAL INVESTMENT METHODS
OPTIONS
On behalf of the Fund, the Adviser may, subject to guidelines of the Board of Directors, purchase or sell, i.e., write, options on securities, securities indices and foreign currencies which are listed on a national securities exchange or in the U.S. over-the-counter ("OTC") markets as a means of achieving additional return or of hedging the value of the Fund's portfolio. The Fund may write covered call options on common stocks that it owns or has an immediate right to acquire through conversion or exchange of other securities in an amount not to exceed 25% of total assets or invest up to 10% of its total assets in the purchase of put options on common stocks that the Fund owns or may acquire through the conversion or exchange of other securities that it owns.
A call option is a contract that gives the holder of the option the right to buy from the writer (seller) of the call option, in return for a premium paid, the security underlying the option at a specified exercise price at any time during the term of the option. The writer of the call option has the obligation upon exercise of the option to deliver the underlying security upon payment of the exercise price during the option period.
A put option is a contract that gives the holder of the option the right to sell to the writer (seller), in return for the premium, the underlying security at a specified price during the term of the option. The writer of the put, who receives the premium, has the obligation to buy the underlying security upon exercise, at the exercise price during the option period.
If the Fund has written an option, it may terminate its obligation by effecting a closing purchase transaction. This is accomplished by purchasing an option of the same series as the option previously written. There can be no assurance that a closing purchase transaction can be effected when the Fund so desires.
An exchange traded option may be closed out only on an exchange which provides a secondary market for an option of the same series. Although the Fund will generally purchase or write only those options for which there appears to be an active secondary market, there is no assurance that a liquid secondary market on an exchange will exist for any particular option.
The Fund will not purchase options if, as a result, the aggregate cost of all outstanding options exceeds 10% of the Fund's total assets. See "Special Investment Methods -- Options" in the SAI. In addition, investments in options will be limited by the applicable Rating Agency Guidelines. See "Description of Cumulative Preferred Stock -- Rating Agency Guidelines."
FUTURES CONTRACTS AND OPTIONS THEREON
On behalf of the Fund, the Adviser may, subject to guidelines of the Board of Directors, purchase and sell financial futures contracts and options thereon which are traded on a commodities exchange or board of trade for certain hedging, yield enhancement and risk management purposes, in accordance with regulations of the Commodity Futures Trading Commission ("CFTC"). These futures contracts and related options may be on debt securities, financial indices, securities indices, U.S. Government securities and foreign currencies. A financial futures contract is an agreement to purchase or sell an agreed amount of securities or currencies at a set price for delivery in the future.
Under CFTC regulations, the Adviser on behalf of the Fund (i) may purchase and sell futures contracts and options thereon for bona fide hedging purposes, as defined under CFTC regulations, without regard to the percentage of the Fund's assets committed to margin and option premiums, and (ii) may enter into nonhedging transactions, provided that, immediately thereafter, the sum of the amount of the initial margin deposits on the Fund's existing futures positions and option premiums does not exceed 5% of the market value of the Fund's total assets. In addition, investments in futures contracts and related options may be limited by the applicable Rating Agency Guidelines. See "Description of Cumulative Preferred Stock -- Rating Agency Guidelines."
FORWARD CURRENCY EXCHANGE CONTRACTS
Subject to guidelines of the Board of Directors, the Fund may enter into forward foreign currency exchange contracts to protect the value of its portfolio against future changes in the level of currency exchange rates. The Fund may enter into such contracts on a spot, i.e., cash, basis at the rate then prevailing in the currency exchange market or on a forward basis, by entering into a forward contract to purchase or sell currency. A forward contract on foreign currency is an obligation to purchase or sell a specific currency at a future date, which may be any fixed number of days agreed upon by the parties from the date of the contract at a price set on the date of the contract. The Fund's dealings in forward contracts will be limited to hedging involving either specific transactions or portfolio positions.
SPECIAL RISKS OF DERIVATIVE TRANSACTIONS
Participation in the options or futures markets and in currency exchange
transactions involves investment risks and transaction costs to which the Fund
would not be subject absent the use of these strategies. If the Adviser's
prediction of movements in the direction of the securities, foreign currency and
interest rate markets are inaccurate, the consequences to the Fund may leave the
Fund in a worse position than if such strategies were not used. Risks inherent
in the use of options, foreign currency, futures contracts and options on
futures contracts, securities indices and foreign currencies include (1)
dependence on the Adviser's ability to predict correctly movements in the
direction of interest rates, securities prices and currency markets; (2)
imperfect correlation between the price of options and futures contracts and
options thereon and movements in the prices of the securities or currencies
being hedged; (3) the fact that skills needed to use these strategies are
different from those needed to select portfolio securities; (4) the possible
absence of a liquid secondary market for any particular instrument at any time;
(5) the possible need to defer closing out certain hedged positions to avoid
adverse tax consequences; (6) the possible inability of the Fund to purchase or
sell a security at a time that otherwise would be favorable for it to do so, or
the possible need for the Fund to sell a security at a
disadvantageous time due to a need for the Fund to maintain "cover" or to segregate securities in connection with the hedging techniques; and (7) the creditworthiness of counterparties.
SHORT SALES AGAINST THE BOX
The Fund may from time to time make short sales of securities it owns or has the right to acquire through conversion or exchange of other securities it owns. A short sale is "against the box" to the extent that the Fund contemporaneously owns or has the right to obtain at no added cost securities identical to those sold short. In a short sale, the Fund does not immediately deliver the securities sold or receive the proceeds from the sale. The Fund may not make short sales or maintain a short position if it would cause more than 25% of the Fund's total assets, taken at market value, to be held as collateral for such sales.
To secure its obligations to deliver the securities sold short, the Fund will deposit in escrow in a separate account with its custodian an equal amount to the securities sold short or securities convertible into, or exchangeable for, such securities. The Fund may close out a short position by purchasing and delivering an equal amount of the securities sold short, rather than by delivering securities already held by the Fund, because the Fund may want to continue to receive interest and dividend payments on securities in its portfolio that are convertible into the securities sold short.
The Fund may make a short sale in order to hedge against market risks when it believes that the price of a security may decline, causing a decline in the value of a security owned by the Fund or a security convertible into, or exchangeable for, such security, or when the Fund does not want to sell the security it owns, because, among other reasons, it wishes to defer recognition of gain or loss for U.S. Federal income tax purposes. Additionally, the Fund may use short sales in conjunction with the purchase of a Convertible Security when it is determined that a Convertible Security can be bought at a small conversion premium and has a yield advantage relative to the underlying common stock sold short.
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements with primary government securities dealers recognized by the Federal Reserve Bank of New York and member banks of the Federal Reserve System which furnish collateral at least equal in value or market price to the amount of their repurchase obligation. In a repurchase agreement, the Fund purchases a debt security from a seller which undertakes to repurchase the security at a specified resale price on an agreed future date. Repurchase agreements are generally for one business day but may have longer durations. The SEC has taken the position that, in economic reality, a repurchase agreement is a loan by the Fund to the other party to the transaction secured by securities transferred to the Fund. The resale price generally exceeds the purchase price by an amount which reflects an agreed upon market interest rate for the term of the repurchase agreement. The principal risk is that, if the seller defaults, the Fund might suffer a loss to the extent that the proceeds from the sale of the underlying securities and other collateral held by the Fund are less than the repurchase price. In the event of a default or bankruptcy by a seller, the Fund will promptly seek to liquidate the collateral. The Board of Directors will monitor the creditworthiness of the contra party to the repurchase agreements.
If the financial institution which is a party to the repurchase agreement petitions for bankruptcy or becomes subject to the United States Bankruptcy Code, the law regarding the rights of the Fund is unsettled. As a result, under these circumstances, there may be a restriction on the Fund's ability to sell the collateral and the Fund would suffer a loss.
LOANS OF PORTFOLIO SECURITIES
To increase income, the Fund may lend its portfolio securities to securities broker-dealers or financial institutions if (1) the loan is collateralized in accordance with applicable regulatory requirements and (2) no loan will cause the value of all loaned securities to exceed 33% of the value of the Fund's total assets.
If the borrower fails to maintain the requisite amount of collateral, the loan automatically terminates and the Fund could use the collateral to replace the securities while holding the borrower liable for any excess of replacement cost over the value of the collateral. As with any extension of credit, there are risks of delay in recovery and in some cases even loss of rights in collateral should the borrower of the securities fail financially. While these loans of portfolio securities will be made in accordance with guidelines approved by the Board of
Directors, there can be no assurance that borrowers will not fail financially. On termination of the loan, the borrower is required to return the securities to the Fund, and any gain or loss in the market price during the loan would inure to the Fund. If the contra party to the loan petitions for bankruptcy or becomes subject to the United States Bankruptcy Code, the law regarding the rights of the Fund is unsettled. As a result, under these circumstances, there may be a restriction on the Fund's ability to sell the collateral and the Fund would suffer a loss. See "Special Investment Methods -- Loans of Portfolio Securities" in the SAI. In addition, loans of portfolio securities will be limited by the Applicable Rating Agency Guidelines. See "Description of Cumulative Preferred Stock -- Rating Agency Guidelines."
BORROWING
As provided in the 1940 Act, the Fund may issue debt or preferred stock so long as the Fund's net assets exceed 300% of the amount of the debt outstanding and exceed 200% of the amount of preferred stock outstanding. Such debt or preferred stock may be convertible in accordance with SEC staff guidelines which may permit the Fund to obtain leverage at attractive rates. Leverage entails two primary risks. The first risk is that the use of leverage magnifies the impact on the common shareholders of changes in net asset value. For example, a fund that uses 33% leverage will show a 1.5% increase or decline in net asset value for each 1% increase or decline in the value of its total assets. The second risk is that the cost of leverage may exceed the return on the securities acquired with the proceeds of leverage, thereby diminishing rather than enhancing the return to common shareholders. These two risks would generally make the Fund's total return to common shareholders more volatile. In addition, the Fund may be required to sell investments in order to meet dividend payments on the Cumulative Preferred Stock when it may be disadvantageous to do so.
A decline in net asset value could affect the ability of the Fund to make common stock dividend payments and such a failure to pay dividends or make distributions could result in the Fund ceasing to qualify as a regulated investment company under the Internal Revenue Code of 1986, as amended ("the Code"). See "Dividends, Distributions and Taxes". Finally, if the asset coverage for preferred stock or debt securities declines to less than 200% or 300%, respectively (as a result of market fluctuations or otherwise), the Fund may be required to sell a portion of its investments to redeem the preferred stock or repay the debt when it may be disadvantageous to do so.
Further information on the investment objective and policies of the Fund is set forth in the SAI.
PORTFOLIO TURNOVER
The Fund buys and sells securities to accomplish its investment objective. The investment policies of the Fund may lead to frequent changes in investments, particularly in periods of rapidly fluctuating interest or currency exchange rates. The portfolio turnover may be higher than that of other investment companies. While it is impossible to predict with certainty the portfolio turnover, the Adviser expects that the annual turnover rate of the Fund will not exceed 200%. During the years ended December 31, 1996 and 1995, the portfolio turnover of the Fund was 114% and 140%, respectively.
Portfolio turnover generally involves some expense to the Fund, including brokerage commissions or dealer mark-ups and other transaction costs on the sale of securities and reinvestment in other securities. A high portfolio turnover rate may make it more difficult to qualify as a regulated investment company, since, in order for the Fund to so qualify each taxable year, less than 30% of its gross income must be derived from the sale or other disposition of stocks or securities held for less than three months. See "Dividends, Distributions and Taxes" in the SAI for a more complete discussion of this requirement. The portfolio turnover rate is computed by dividing the lesser of the amount of the long-term securities purchased or securities sold by the average monthly value of securities owned during the year (excluding securities whose maturities at acquisition were one year or less).
INVESTMENT RESTRICTIONS
The Fund has adopted various investment restrictions as fundamental policies requiring certification, limiting industry concentration, prohibiting investing for control purposes and limiting certain other policies as described in greater detail in the SAI.
MANAGEMENT OF THE FUND
The Fund's Board of Directors (who, with its officers, are described in the SAI) has overall responsibility for the management of the Fund. The Board of Directors decides upon matters of general policy and reviews the actions of the Adviser and the Administrator (as defined below). Pursuant to an Investment Advisory Contract with the Fund, the Adviser, under the supervision of the Fund's Board of Directors, provides a continuous investment program for the Fund's portfolio; provides investment research and makes and executes recommendations for the purchase and sale of securities; provides all facilities and personnel, including officers required for its administrative management and pays the compensation of all officers and directors of the Fund who are its affiliates. As compensation for its services and the related expenses borne by the Adviser, the Fund pays the Adviser a fee, computed daily and payable monthly, equal, on an annual basis, to 1.00% of the Fund's average daily net assets, which is higher than that paid by most mutual funds. For the fiscal years ended December 31, 1994, 1995 and 1996 the Fund paid a management fee of $1,177,574, $969,629 and $912,913, respectively. Notwithstanding the foregoing, the Adviser will waive the portion of its investment advisory fee attributable to an amount of assets of the Fund equal to the aggregate stated value of the Cumulative Preferred Stock for any calendar year in which the total return of the Fund, including distributions and the advisory fee subject to potential waiver, allocable to common stock is less than the stated dividend rate of the Cumulative Preferred Stock.
The Adviser was formed in 1980 and acts as investment adviser to other closed-end and open-end investment companies with total net assets in excess of $4.2 billion as of January 1, 1997. GAMCO Investors, Inc. ("GAMCO"), a subsidiary of the Adviser, acts as investment adviser for individuals, pension trusts, profit sharing trusts and endowments. As of January 1, 1997, GAMCO had aggregate assets in excess of $5.2 billion under its management. Mr. Mario J. Gabelli may be deemed a "controlling person" of the Adviser on the basis of his ownership of stock of the Adviser.
In addition to the fees of the Adviser, the Fund is responsible for the payment of all its other expenses incurred in the operation of the Fund, which include, among other things, expenses for legal and independent accountant's services, stock exchange listing fees, expenses relating to the offering of Cumulative Preferred Stock, costs of printing proxies, stock certificates, and shareholder reports, charges of State Street Bank and Trust Company ("State Street", the "Custodian," "Transfer Agent" or "Dividend-Disbursing Agent"), SEC fees, fees and expenses of unaffiliated directors, accounting and printing costs, the Fund's pro rata portion of membership fees in trade organizations, fidelity bond coverage for the Fund's officers and employees, interest brokerage costs, taxes, expenses of qualifying the Fund for sale in various states, expenses of personnel performing shareholder servicing functions, litigation and other extraordinary or non-recurring expenses and other expenses properly payable by the Fund.
The Investment Advisory Contract contains provisions relating to the selection of securities brokers to effect the portfolio transactions of the Fund. Under those provisions, the Adviser may (1) direct Fund portfolio brokerage to Gabelli & Company, Inc. or other broker-dealer affiliates of the Adviser; and (2) pay commissions to brokers other than Gabelli & Company, Inc. which are higher than might be charged by another qualified broker to obtain brokerage and/or research services considered by the Adviser to be useful or desirable for its investment management of the Fund and/or its other advisory accounts or those of any investment adviser affiliated with it. The SAI contains further information about the Investment Advisory Contract including a more complete description of the advisory and expense arrangements, exculpatory and brokerage provisions, as well as information on the brokerage practices of the Fund.
PORTFOLIO MANAGER
Mario J. Gabelli serves as Portfolio Manager and is primarily responsible for the day-to-day management of the Fund. Mr. Gabelli has served as the Fund's Portfolio Manager since its inception and has served as Chairman, President and Chief Executive Officer of the Adviser since 1980. Because of the diverse nature of Mr. Gabelli's responsibilities, he will devote less than all of his time to the day-to-day management of the Fund.
NON-RESIDENT DIRECTORS
Karl Otto Pohl and Anthonie C. van Ekris, directors of the Fund, reside outside the United States and all or a significant portion of their assets are located outside the United States. They have no authorized agent in the United States to receive service of process. As a result, it may not be possible for investors to effect service of process within the United States or to enforce against them in United States courts judgments predicated upon civil liability provisions of United States securities laws. It may also not be possible to enforce against them in foreign courts judgments of United States courts or liabilities in original actions predicated upon civil liability provisions of the United States securities laws.
ADMINISTRATOR
The Adviser has entered into an Administration Contract with BISYS Fund Services Limited Partnership ("BISYS" or the "Administrator") pursuant to which the Administrator provides certain administrative services necessary for the Fund's operations which do not include the investment advisory and portfolio management services provided by the Adviser. For these services and the related expenses borne by BISYS, the Adviser pays a monthly fee at the annual rate of .10% of the first $350 million of the aggregate average net assets of the Fund and other Funds advised by Gabelli Funds, Inc. and Teton Advisers LLC and administered by BISYS and .075% of the aggregate average net assets exceeding $350 million and .06% of the aggregate average net assets in excess of $600 million (with a minimum annual fee of $40,000 per portfolio), which, together with the services to be rendered, is subject to negotiation between the parties.
BISYS has its principal office at 3435 Stetzer Road, Columbus, Ohio 43219.
DIVIDEND AND DISTRIBUTION POLICY
The Fund intends to distribute its net capital gain each year but may retain for reinvestment and pay Federal income taxes on its net capital gain, if any. In the event the Fund's shares of Common Stock are trading at a discount to their net asset value, the Board of Directors may consider quarterly distributions and/or adopting a policy of distributing at least 10% per common share of its average net asset value per year. Any such policy would be subject to limitations on distribution and on repurchase of common stock of the Fund while any preferred stock is outstanding. If, for any calendar year, the total distributions by the Fund on its Common Stock and Preferred Stock exceed net investment income and net capital gain, the excess will generally be treated as a tax-free return of capital up to the amount of the shareholder's tax basis in his shares. The amount treated as a tax-free return of capital will reduce a shareholder's tax basis in his shares, thereby increasing his potential gain or reducing his potential loss on the sale of his shares. Any amounts distributed to a shareholder in excess of the basis in the shares will be taxable to the shareholder as capital gain.
In the event the Fund distributes amounts in excess of its net investment income and net capital gain, such distributions will decrease the Fund's total assets and, therefore, have the likely effect of increasing the Fund's expense ratio. In addition, in order to make such distributions, the Fund may have to sell a portion of its investment portfolio at a time when independent investment judgment might not dictate such action, thus could result in a reduction of the Shareholders' principal investment. Such sales, if they involve assets held for less than three months, could also adversely affect the Fund's status as a regulated investment company since, in order for the Fund to so qualify, each taxable year, less than 30% of the Fund's gross income must be derived from gains realized on the sale or other disposition of stocks or securities held for less than three months.
Over the past few months the Fund's shares have traded at an average discount of approximately 15% to the net asset value. Within this framework, the Adviser and its affiliates have announced their intention to buy up to one million shares in the open market (535,664 of which have been acquired as of March 31, 1997.)
DESCRIPTION OF CUMULATIVE PREFERRED STOCK
The following is a brief description of the terms of the Cumulative Preferred Stock. This description does not purport to be complete and is qualified by reference to the Articles Supplementary, the form of which is filed as an exhibit to the Fund's Registration Statement. Certain of the capitalized terms used herein are defined in the Glossary that appears at the end of this Prospectus.
GENERAL
Under the Articles Supplementary, the Fund will be authorized to issue up to 1,200,000 shares of Cumulative Preferred Stock. No fractional shares of Cumulative Preferred Stock will be issued. As of the date of this Prospectus, there were no shares of Cumulative Preferred Stock or any other Preferred Stock of the Fund outstanding. The Board of Directors reserves the right to issue additional shares of Preferred Stock, including Cumulative Preferred Stock, from time to time, subject to the restrictions in the Articles Supplementary and the 1940 Act. The shares of Cumulative Preferred Stock will, upon issuance, be fully paid and nonassessable and will have no preemptive, exchange or conversion rights. Any shares of Cumulative Preferred Stock repurchased or redeemed by the Fund will be classified as authorized but unissued Preferred Stock. The Board of Directors may by resolution classify or reclassify any authorized but unissued Preferred Stock from time to time by setting or changing the preferences, rights, voting powers, restrictions, limitations or terms of redemption. The Fund will not issue any class of stock senior to the shares of Cumulative Preferred Stock.
RATING AGENCY GUIDELINES
S&P has established guidelines in connection with the Fund's receipt of a rating for the Cumulative Preferred Stock on the date of original issue of 'AAA' by S&P. S&P, a nationally-recognized securities rating organization, issues ratings for various securities reflecting the perceived creditworthiness of such securities. The guidelines utilized for the Cumulative Preferred Stock have been developed by S&P in connection with issuances of asset-backed and similar securities, including debt obligations and various types of preferred stocks, generally on a case-by-case basis through discussions with the issuers of these securities. The guidelines are designed to ensure that assets underlying outstanding debt or preferred stock will be sufficiently varied and will be of sufficient quality and amount to justify investment-grade ratings. The guidelines do not have the force of law but are being adopted by the Fund in order to satisfy current requirements necessary for S&P to issue the above-described rating for the Cumulative Preferred Stock, which rating is generally relied upon by investors in purchasing such securities. The guidelines provide a set of tests for portfolio composition and discounted asset coverage that supplement (and in some cases are more restrictive than) the applicable requirements of Section 18 of the 1940 Act. The Rating Agency guidelines are included in the Articles Supplementary and are referred to in this Prospectus as the "Rating Agency Guidelines."
The Rating Agency Guidelines require that the Fund maintain Adjusted Assets greater than or equal to the Basic Maintenance Amount. If the Fund fails to meet such requirement and such failure is not cured by the applicable cure date, the Fund will be required to redeem some or all of the Cumulative Preferred Stock. See "Description of Cumulative Preferred Stock -- Redemption -- Mandatory Redemption." The Rating Agency Guidelines also exclude from the S&P Eligible Assets and, therefore, from Adjusted Assets, certain types of securities in which the Fund may invest and also limit the Fund's acquisition of futures contracts or options on futures contracts, prohibit reverse repurchase agreements, limit the writing of options on portfolio securities and limit the lending of portfolio securities to 5% of the Fund's total assets. The Adviser does not believe that compliance with the Rating Agency Guidelines will have an adverse effect on its management of the Fund's portfolio or on the achievement of the Fund's investment objective. It is the Fund's present intention to continue to comply with the Rating Agency Guidelines.
The Fund may, but is not required to, adopt any modifications to the Rating Agency Guidelines that may hereafter be established by the Rating Agency. Failure to adopt such modifications, however, may result in a
change in the Rating Agency's rating or a withdrawal of a rating altogether. In addition, the Rating Agency may, at any time, change or withdraw such rating. However, failure to comply with the Rating Agency Guidelines would require the Fund to redeem all or part of the Cumulative Preferred Stock.
An S&P preferred stock rating is an assessment of the capacity and willingness of an issuer to pay preferred stock obligations. The rating on the Cumulative Preferred Stock is not a recommendation to purchase, hold or sell such shares, inasmuch as the rating does not comment as to market price or suitability for a particular investor. Nor do the S&P requirements address the likelihood that a holder of Cumulative Preferred Stock will be able to sell such shares. The rating is based on current information furnished to S&P by the Fund and the Adviser and information obtained from other sources. The rating may be changed, suspended or withdrawn as a result of changes in, or the unavailability of, such information.
DIVIDENDS
Holders of shares of Cumulative Preferred Stock will be entitled to receive, when, as and if declared by the Board of Directors of the Fund out of funds legally available therefor, cumulative cash dividends, at the annual rate of % of the liquidation preference of $25 per share, payable quarterly on the 25th day of the last month of each calendar quarter (the "Dividend Payment Date"), commencing on December 25, 1997, to the persons in whose names the shares of Cumulative Preferred Stock are registered at the close of business on the 5th business day preceding the payable date.
Dividends on the shares of Cumulative Preferred Stock will accumulate from the date on which such shares are originally issued (the "Date of Original Issue").
No dividends will be declared or paid or set apart for payment on shares of Cumulative Preferred Stock for any dividend period or part thereof unless full cumulative dividends have been or contemporaneously are declared and paid on all outstanding shares of Cumulative Preferred Stock through the most recent Dividend Payment Date thereof. If full cumulative dividends are not paid on the Cumulative Preferred Stock, all dividends on the shares of Cumulative Preferred Stock will be paid pro rata to the holders of the shares of Cumulative Preferred Stock. Holders of Cumulative Preferred Stock will not be entitled to any dividends, whether payable in cash, property or stock, in excess of full cumulative dividends. No interest, or sum of money in lieu of interest, will be payable in respect of any dividend payment that may be in arrears.
For so long as any shares of Cumulative Preferred Stock are outstanding, the Fund will not declare, pay or set apart for payment any dividend or other distribution (other than a dividend or distribution paid in shares of, or options, warrants or rights to subscribe for or purchase, shares of Common Stock or other stock, if any, ranking junior to the Cumulative Preferred Stock as to dividends or upon liquidation) in respect of the Common Stock or any other stock of the Fund ranking junior to or on a parity with the Cumulative Preferred Stock as to dividends or upon liquidation, or call for redemption, redeem, purchase or otherwise acquire for consideration any shares of its Common Stock or any other junior stock (except by conversion into or exchange for stock of the Fund ranking junior to or on a parity with the Cumulative Preferred Stock as to dividends and upon liquidation), unless, in each case, (A) immediately after such transaction, the Fund will have Adjusted Assets greater than or equal to the Basic Maintenance Amount and will have the required Asset Coverage (see "-- Asset Maintenance" and "-- Redemption" below), (B) full cumulative dividends on shares of Cumulative Preferred Stock due on or prior to the date of the transactions have been declared and paid (or sufficient Deposit Assets to cover such payment have been deposited with the Paying Agent) and (C) the Fund has redeemed the full number of shares of Cumulative Preferred Stock required to be redeemed by any provision for mandatory redemption contained in the Articles Supplementary.
ASSET MAINTENANCE
The Fund will be required to satisfy two separate asset maintenance requirements under the terms of the Articles Supplementary. These requirements are summarized below.
Asset Coverage. The Fund will be required under the Articles Supplementary to maintain as of the last Business Day of each March, June, September and December of each year, an "asset coverage" (as defined
by the 1940 Act) of at least 200% (or such higher or lower percentage as may be required at the time under the 1940 Act) with respect to all outstanding senior securities of the Fund which are stock, including the Cumulative Preferred Stock (the "Asset Coverage"). If the Fund fails to maintain the Asset Coverage on such dates and such failure is not cured within 60 days, the Fund will be required to redeem certain of the shares of Cumulative Preferred Stock. See "Redemption" below.
If the shares of Cumulative Preferred Stock offered hereby had been issued and sold as of March 31, 1997, the asset coverage immediately following such issuance and sale (after giving effect to the deduction of the underwriting discounts and estimated offering expenses for such shares of $1,457,000), would have been computed as follows:
Value of Fund assets less liabilities not constituting senior securities $118,610,554 = 395% ----------------- ------------- Senior securities representing indebtedness plus liquidation preference of the Cumulative Preferred Stock $ 30,000,000 |
Basic Maintenance Amount. The Fund will be required under the Articles Supplementary to maintain, as of each Valuation Date, portfolio holdings ("Adjusted Assets") meeting specified guidelines of the Rating Agency, as described under "Description of Cumulative Preferred Stock -- Rating Agency Guidelines", having an aggregate discounted value greater than or equal to the Basic Maintenance Amount, which is in general the sum of the aggregate liquidation preference of the Cumulative Preferred Stock, any indebtedness for borrowed money and current liabilities and dividends. If the Fund fails to meet such requirement as to any Valuation Date and such failure is not cured within 14 days after such Valuation Date, the Fund will be required to redeem certain of the shares of Cumulative Preferred Stock. See "-- Redemption" below.
Any security not in compliance with the Rating Agency Guidelines will be excluded from the calculation of Adjusted Assets.
The S&P Discount Factors and guidelines for determining the market value of the Fund's portfolio holdings have been based on criteria established in connection with the rating of the Cumulative Preferred Stock. These factors include, but are not limited to, the sensitivity of the market value of the relevant asset to changes in interest rates, the liquidity and depth of the market for the relevant asset, the credit quality of the relevant asset (for example, the lower the rating of a corporate debt obligation, the higher the related discount factor) and the frequency with which the relevant asset is marked to market. The S&P Discount Factor relating to any asset of the Fund and the Basic Maintenance Amount, the assets eligible for inclusion in the calculation of the discounted value of the Fund's portfolio and certain definitions and methods of calculation relating thereto may be changed from time to time by the Board of Directors, provided that, among other things, such changes will not impair the rating then assigned to the Cumulative Preferred Stock by S&P.
So long as S&P is rating the Preferred Stock and except to the extent
waived by S&P, as of each Business Day and each Cure Date, the Fund shall
determine the aggregate Adjusted Value of all S&P Eligible Assets on that day
and whether such aggregate Adjusted Value on such date equals or exceeds the
Basic Maintenance Amount on such date which shall be set forth in a certificate
(a "Certificate of Basic Maintenance Amount"), dated as of each such Business
Day and Cure Date and signed by an Authorized Officer. With respect to the
Certificate of S&P Required Asset Coverage relating to (1) the first Business
Day in the months of January, April, July and October of each year, and (2)
another day during each calendar quarter, which day shall be selected at random
by the independent accountants, the Fund shall deliver to S&P, within three
Business Days of each such date, an Accountant's Certificate certifying as to
(i) the mathematical accuracy of the calculations reflected in the related
Certificate of S&P Required Asset Coverage, including the calculation of the
Adjusted Value of the S&P Eligible Assets referred to therein and confirming
that the S&P Eligible Assets referred to therein conform to the definition of
S&P Eligible Assets herein, (ii) that the methodology used in determining
whether the Adjusted Value of S&P Eligible Assets equals or exceeds the Basic
Maintenance Amount is in accordance with the applicable requirements of the
Articles Supplementary, and (iii) that the written or published price quotations
used in such determination conform to such written or published quotations and
that the S&P Eligible Assets listed in such Certificate of
Basic Maintenance Amount constitute S&P Eligible Assets. If the Accountant's Certificate differs from the Fund's calculations, then the Accountant's Certificate shall control unless any such difference results from an error in calculation by the preparers of the Accountant's Certificate.
REDEMPTION
Mandatory Redemption. The Fund will be required to redeem, at a redemption price equal to $25 per share plus accumulated and unpaid dividends through the date of redemption (whether or not earned or declared) (the "Redemption Price"), certain of the shares of Cumulative Preferred Stock (to the extent permitted under the 1940 Act and Maryland law) in the event that:
(i) the Fund fails to maintain the Asset Coverage and such failure is not cured on or before 60 days following such failure (a "Cure Date"); or
(ii) the Fund fails to maintain Adjusted Assets greater than or equal to the Base Amount as of any Valuation Date, and such failure is not cured on or before the 14th day after such Valuation Date (also, a "Cure Date").
The amount of such mandatory redemption will equal the minimum number of outstanding shares of Cumulative Preferred Stock the redemption of which, if such redemption had occurred immediately prior to the opening of business on a Cure Date, would have resulted in the Asset Coverage having been satisfied or the Fund having Adjusted Assets for S&P equal to or greater than the Basic Maintenance Amount on such Cure Date or, if the Asset Coverage or Adjusted Assets for S&P equal to or greater than the Basic Maintenance Amount, as the case may be, cannot be so restored, all of the shares of Cumulative Preferred Stock, at the Redemption Price. In the event that shares of Cumulative Preferred Stock are redeemed due to the occurrence of (i) above, the Fund may, but is not required to, redeem a sufficient number of shares of Cumulative Preferred Stock so that the asset coverage (as defined in the 1940 Act) of the remaining outstanding shares of Cumulative Preferred Stock and any other Preferred Stock remaining after redemption is up to 220%. In the event that shares of Cumulative Preferred Stock are redeemed due to the occurrence of (ii) above, the Fund may, but is not required to, redeem a sufficient number of shares of Cumulative Preferred Stock so that the Adjusted Assets of the remaining outstanding shares of Cumulative Preferred Stock and any other Preferred Stock remaining after redemptions up to 110% of the Basic Maintenance Amount.
If the Fund does not have funds legally available for the redemption of, or is otherwise unable to redeem, all the shares of Cumulative Preferred Stock to be redeemed on any redemption date, the Fund will redeem on such redemption date that number of shares for which it has legally available funds, or is otherwise able, to redeem ratably from each holder whose shares are to be redeemed, and the remainder of the shares required to be redeemed will be redeemed on the earliest practicable date on which the Fund will have funds legally available for the redemption of, or is otherwise able to redeem, such shares upon written notice of redemption ("Notice of Redemption").
If fewer than all shares of Cumulative Preferred Stock are to be redeemed, such redemption will be made pro rata from each holder of shares in accordance with the respective number of shares held by each such holder on the record date for such redemption. If fewer than all shares of Cumulative Preferred Stock held by any holder are to be redeemed, the Notice of Redemption mailed to such holder will specify the number of shares to be redeemed from such holder. Unless all accumulated and unpaid dividends for all past dividend periods will have been or are contemporaneously paid or declared and Deposit Securities for the payment thereof deposited with the Paying Agent, no redemptions of Cumulative Preferred Stock may be made.
Optional Redemption. Prior to May 15, 2002, the shares of Cumulative Preferred Stock are not subject to any optional redemption by the Fund unless such redemption is necessary, in the judgment of the Fund, to maintain the Fund's status as a regulated investment company ("RIC") under the Code. Commencing May 15, 2002 and thereafter, the Fund may at any time redeem shares of Cumulative Preferred Stock in whole or in part at the Redemption Price. Such redemptions are subject to the limitations of the 1940 Act and Maryland law.
Redemption Procedures. A Notice of Redemption will be given to the holders of record of Cumulative Preferred Stock selected for redemption not less than 30 or more than 45 days prior to the date fixed for the redemption. Each Notice of Redemption will state (i) the redemption date, (ii) the number of shares of Cumulative Preferred Stock to be redeemed, (iii) the CUSIP number(s) of such shares, (iv) the Redemption Price, (v) the place or places where such shares are to be redeemed, (vi) that dividends on the shares to be redeemed will cease to accrue on such redemption date, and (vii) the provision of the Articles Supplementary under which the redemption is being made. No defect in the Notice of Redemption or in the mailing thereof will affect the validity of the redemption proceedings, except as required by applicable law.
LIQUIDATION RIGHTS
Upon a liquidation, dissolution or winding up of the affairs of the Fund (whether voluntary or involuntary), holders of shares of Cumulative Preferred Stock then outstanding will be entitled to receive out of the assets of the Fund available for distribution to shareholders, after satisfying claims of creditors but before any distribution or payment of assets is made to holders of the Common Stock or any other class of stock of the Fund ranking junior to the Cumulative Preferred Stock as to liquidation payments, a liquidation distribution in the amount of $25 per share, plus an amount equal to all unpaid dividends accrued to and including the date fixed for such distribution or payment (whether or not earned or declared by the Fund but excluding interest thereon) (the "Liquidation Payment"), and such holders will be entitled to no further participation in any distribution payment in connection with any such liquidation, dissolution or winding up. If, upon any liquidation, dissolution or winding up of the affairs of the Fund, whether voluntary or involuntary, the assets of the Fund available for distribution among the holders of all outstanding shares of Cumulative Preferred Stock and any other outstanding class or series of Preferred Stock of the Fund ranking on a parity with the Cumulative Preferred Stock as to payment upon liquidation, will be insufficient to permit the payment in full to such holders of Cumulative Preferred Stock of the Liquidation Payment and the amounts due upon liquidation with respect to such other Preferred Stock, then such available assets will be distributed among the holders of Cumulative Preferred Stock and such other Preferred Stock ratably in proportion to the respective preferential amounts to which they are entitled. Unless and until the Liquidation Payment has been paid in full to the holders of Cumulative Preferred Stock, no dividends or distributions will be made to holders of the Common Stock or any other stock of the Fund ranking junior to the Cumulative Preferred Stock as to liquidation.
VOTING RIGHTS
Except as otherwise stated in this Prospectus and as otherwise required by applicable law, holders of shares of Cumulative Preferred Stock will be entitled to one vote per share on each matter submitted to a vote of shareholders and will vote together with holders of shares of Common Stock and of any other Preferred Stock then outstanding as a single class.
In connection with the election of the Fund's directors, holders of shares of Cumulative Preferred Stock and any other Preferred Stock, voting as a single class, will be entitled at all times to elect two of the Fund's directors, and the remaining directors will be elected by holders of shares of Common Stock and holders of shares of Cumulative Preferred Stock and any other Preferred Stock, voting together as a single class. In addition, if at any time dividends on outstanding shares of Cumulative Preferred Stock and/or any other Preferred Stock are unpaid in an amount equal to at least two full years' dividends thereon or if at any time holders of any shares of Preferred Stock are entitled, together with the holders of shares of Cumulative Preferred Stock, to elect a majority of the directors of the Fund under the 1940 Act, then the number of directors constituting the Board of Directors automatically will be increased by the smallest number that, when added to the two directors elected exclusively by the holders of shares of Cumulative Preferred Stock and any other Preferred Stock as described above, would constitute a majority of the Board of Directors as so increased by such smallest number. Such additional directors will be elected by the holders of Cumulative Preferred Stock and any other Preferred Stock, voting as a separate class, at a special meeting of shareholders which will be called and held as soon as practicable, and at all subsequent meetings at which directors are to be elected the holders of shares of Cumulative Preferred Stock and any other Preferred Stock, voting as a
single class, will be entitled to elect the smallest number of additional directors that, together with the two directors which such holders in any event will be entitled to elect, constitutes a majority of the total number of directors of the Fund as so increased. The terms of office of the persons who are directors at the time of that election will continue. If the Fund thereafter pays, or declares and sets apart for payment in full, all dividends payable on all outstanding shares of Cumulative Preferred Stock and any other Preferred Stock for all past Dividend Periods, the additional voting rights of the holders of shares of Cumulative Preferred Stock and any other Preferred Stock as described above will cease, and the terms of office of all of the additional directors elected by the holders of shares of Cumulative Preferred Stock and any other Preferred Stock (but not of the directors with respect to whose election the holders of shares of Common Stock were entitled to vote or the two directors the holders of shares of Cumulative Preferred Stock and any other Preferred Stock have the right to elect as a separate class in any event) will terminate automatically.
So long as shares of the Cumulative Preferred Stock are outstanding, the Fund will not, without the affirmative vote of the holders of a majority of the shares of Preferred Stock outstanding at the time, voting separately as one class, amend, alter or repeal the provisions of the Charter, whether by merger, consolidation or otherwise, so as to materially adversely affect any of the contract rights expressly set forth in the Charter of holders of shares of the Cumulative Preferred Stock or any other Preferred Stock. To the extent permitted under the 1940 Act, in the event shares of more than one series of Preferred Stock are outstanding, the Fund will not approve any of the actions set forth in the preceding sentence which materially adversely affects the contract rights expressly set forth in the Charter of a holder of shares of a series of Preferred Stock differently than those of a holder of shares of any other series of Preferred Stock without the affirmative vote of at least a majority of votes entitled to be cast by holders of the Preferred Stock of each series materially adversely affected and outstanding at such time (each such materially adversely affected series voting separately as a class). The Board of Directors, however, without shareholder approval, may amend, alter or repeal the Rating Agency Guidelines in the event the Fund receives confirmation from S&P that any such amendment, alteration or repeal would not impair the rating then assigned to the Cumulative Preferred Stock. The affirmative vote of a majority of the votes entitled to be cast by holders of outstanding shares of the Cumulative Preferred Stock and any other Preferred Stock, voting as a separate class, will be required to approve any plan of reorganization adversely affecting such shares or any action requiring a vote of security holders under Section 13(a) of the 1940 Act, including, among other things, changes in the Fund's investment objective or changes in the investment restrictions described as fundamental policies under "Investment Objective and Policies." The class vote of holders of shares of the Cumulative Preferred Stock and any other Preferred Stock described above in each case will be in addition to a separate vote of the requisite percentage of shares of Common Stock and Cumulative Preferred Stock and any other Preferred Stock, voting together as a single class, necessary to authorize the action in question.
The foregoing voting provisions will not apply to any shares of Cumulative Preferred Stock if, at or prior to the time when the act with respect to which such vote otherwise would be required will be effected, such shares will have been (i) redeemed or (ii) called for redemption and sufficient Deposit Securities provided to the Dividend-Disbursing Agent to effect such redemption.
LIMITATION ON INCURRENCE OF ADDITIONAL INDEBTEDNESS AND ISSUANCE OF ADDITIONAL PREFERRED STOCK
So long as any shares of Cumulative Preferred Stock are outstanding, the Fund may issue and sell one or more series of a class of senior securities of the Fund representing indebtedness under the 1940 Act and/or otherwise create or incur indebtedness, provided that the Fund will, immediately after giving effect to the incurrence of such indebtedness and to its receipt and application of the proceeds thereof, have an "asset coverage" for all senior securities of the Fund representing indebtedness, as defined in the 1940 Act, of at least 300% of the amount of all indebtedness of the Fund then outstanding and no such additional indebtedness will have any preference or priority over any other indebtedness of the Fund upon the distribution of the assets of the Fund or in respect of the payment of interest. Any possible liability resulting from lending and/or borrowing portfolio securities, entering into reverse repurchase agreements, entering into futures contracts and writing options, to the extent such transactions are made in accordance with the investment restrictions of the Fund then in effect, will not be considered to be indebtedness limited by the Articles Supplementary.
So long as any shares of Cumulative Preferred Stock are outstanding, the Fund may issue and sell shares of one of more other series of Preferred Stock constituting a series of a class of senior securities of the Fund representing stock under the 1940 Act in addition to the shares of Cumulative Preferred Stock, provided that the Fund will, immediately after giving effect to the issuance of such additional Preferred Stock and to its receipt and application of the proceeds thereof, have an "asset coverage" for all senior securities of the Fund which are stock, as defined in the 1940 Act, of at least 200% of the liquidation preference of the shares of Cumulative Preferred Stock and all other Preferred Stock of the Fund then outstanding and no such additional Preferred Stock will have any preference or priority over any other Preferred Stock of the Fund upon the distribution of the assets of the Fund or in respect of the payment of dividends.
REPURCHASE OF CUMULATIVE PREFERRED STOCK
The Fund is a closed-end investment company and, as such, holders of Cumulative Preferred Stock do not, and will not, have the right to redeem their shares of the Fund. The Fund, however, may repurchase shares of the Cumulative Preferred Stock when it is deemed advisable by the Board of Directors in compliance with the requirements of the 1940 Act and the rules and regulations thereunder and other applicable requirements.
DESCRIPTION OF CAPITAL STOCK AND OTHER SECURITIES
Common Stock. On February 21, 1995, shareholders approved the Charter changing the status of the Fund to a closed-end fund. The Charter was filed on March 31, 1995, the date of the Fund's conversion from an open-end to a closed-end investment company. The authorized capital stock consists of one billion shares of stock having a par value of one tenth of one cent ($.001) per share, 998 million of which are currently classified as Common Stock. Shares of Common Stock of the Fund are listed on the NYSE under the symbol GCV and began trading March 31, 1995. All shares of Common Stock have equal dividend, liquidation and voting rights and each fractional share has those rights in proportion to the percentage that the fractional share represents of a whole share.
There are no conversion or preemptive rights in connection with any outstanding shares of the Common Stock. All issued and outstanding shares of the Fund are fully paid and nonassessable.
The Fund's Board of Directors can reclassify unissued shares as preferred stock with such terms and conditions as determined by the Board of Directors.
As a NYSE-listed company, the Fund is required to hold annual meetings of its shareholders.
Preferred Stock. The Fund's Board of Directors has authorized the Fund to reclassify up to 2,000,000 shares as Preferred Stock, par value $.001 per share. The terms of such Preferred Stock will be fixed by the Board of Directors and will materially limit and/or qualify the rights of the holders of the Fund's Common Stock. The Board of Directors has designated 1,200,000 shares of Preferred Stock as the Cumulative Preferred Stock offered hereby. All shares of Cumulative Preferred Stock, when issued in accordance with the terms of the offering, will be fully paid and nonassessable. See "Description of Cumulative Preferred Stock."
The following table shows the number of shares of (i) capital stock authorized, (ii) capital stock held by the Fund for its own account and (iii) capital stock outstanding for each class of authorized securities of the Fund as of March 31, 1997 as if the Offering had been completed by such date.
AMOUNT HELD BY FUND AMOUNT FOR ITS OWN AMOUNT TITLE OF CLASS AUTHORIZED ACCOUNT OUTSTANDING ----------------------------------------------- ----------- ------------ ----------- Common Stock................................... 998,000,000 0 8,092,945 Preferred Stock................................ 2,000,000 0 1,200,000 |
TAXATION
The following is a description of certain Federal income tax consequences to a shareholder of acquiring, holding and disposing of Preferred and Common Shares of the Fund. The discussion reflects applicable tax laws of the United States as of the date of this Prospectus, which tax laws may be changed or subject to new interpretations by the courts or the Internal Revenue Service retroactively or prospectively.
No attempt is made to present a detailed explanation of all U.S. Federal, state, local and foreign tax concerns affecting the Fund and its shareholders, and the discussions set forth here do not constitute tax advice. Investors are urged to consult their own tax advisers to determine the tax consequences to them of investing in the Fund.
TAXATION OF THE FUND
The Fund has qualified as and intends to continue to qualify as and elect to be a RIC under Subchapter M of the Code. If it so qualifies, the Fund will not be subject to U.S. Federal income tax on the portion of its net investment income (its investment company taxable income as defined in the Code without regard for the deduction for dividends paid) and its net capital gain (the excess of its net realized long-term capital gain over its net realized short-term capital loss) which it distributes to its shareholders in each taxable year, provided that it distributes to its shareholders at least 90% of its net investment income for such taxable year.
Qualification as a RIC requires, among other things, that the Fund: (a)
derive at least 90% of its gross income in each taxable year from dividends,
interest, payments with respect to securities loans, gains from the sale or
other disposition of stock or securities, foreign currencies or other income
(including gains from options, futures or forward contracts) derived with
respect to its business of investing in stock, securities or currencies; (b)
derive less than 30% of its gross income in each taxable year from the sale or
other disposition of any of the following held for less than three months:
stock, securities, options, futures, certain forward contracts, or foreign
currencies (or any options, futures or forward contracts on foreign currencies)
but only if such currencies are not directly related to the Fund's principal
business of investing in stock or securities (the "30% limitation"); and (c)
diversify its holdings so that, at the end of each quarter of each taxable year,
(i) at least 50% of the market value of the Fund's assets is represented by
cash, cash items, U.S. government securities, securities of other RICs and other
securities with such other securities limited, in respect of any one issuer, to
an amount not greater than 5% of the value of the Fund's assets and 10% of the
outstanding voting securities of such issuer, and (ii) not more than 25% of the
value of its assets is invested in the securities of any one issuer (other than
U.S. government securities or the securities of other RICs).
If the Fund were unable to satisfy the 90% distribution requirement or otherwise were to fail to qualify to be taxed as a RIC in any year, it would be subject to tax in such year on all of its taxable income, whether or not the Fund made any distributions. To qualify again to be taxed as a RIC in a subsequent year, the Fund would be required to distribute to Cumulative Preferred Shareholders and Common Shareholders as an ordinary income dividend, its earnings and profits attributable to non-RIC years reduced by an interest charge on 50% of such earnings and profits payable by the Fund to the IRS. In addition, if the Fund failed to qualify as a RIC for a period greater than one taxable year, then the Fund would be required to recognize and pay tax on any net built-in gains (the excess of aggregate gains, including items of income, over aggregate losses that would have been realized if the Fund had been liquidated) in order to qualify as a RIC in a subsequent year. To the extent possible, the Fund intends to make sufficient distributions to avoid application of the corporate income tax.
Under the Code, amounts not distributed by a RIC on a timely basis in
accordance with a calendar year distribution requirement are subject to a 4%
excise tax. To avoid the tax, the Fund must distribute during each calendar
year, an amount equal to, at the minimum, the sum of (1) 98% of its ordinary
income for the calendar year, (2) 98% of its capital gain net income for the one
year period ending on October 31 of such year (unless an election is made by a
fund with a November or December year-end to use the fund's fiscal year), and
(3) all ordinary income and capital gain net income for previous years that were
not previously distributed. While the Fund intends to distribute its ordinary
income and capital gain net income in the manner necessary to minimize
imposition of the 4% excise tax, there can be no assurance that sufficient
amounts of the Fund's ordinary income and capital gain net income will be distributed to avoid entirely the imposition of the tax. In such event, the Fund will be liable for the tax only on the amount by which it does not meet the foregoing distribution requirements.
If the Fund does not meet the asset coverage requirements of the 1940 Act and the Articles Supplementary, the Fund will be required to suspend distributions to the holders of the common stock until the asset coverage is restored. See "Description of Cumulative Preferred Stock -- Dividends" and "Description of Capital Stock and Other Securities." Such a suspension of distributions might prevent the Fund from distributing 90% of its net investment income, as is required in order to avoid Fund-level taxation on the Fund's distributions, or might prevent it from distributing enough income and capital gain to avoid completely the imposition of the excise tax. Upon any failure to meet the asset coverage requirements of the 1940 Act or the Articles Supplementary, the Fund may, and in certain circumstances will, be required to partially redeem the shares of Cumulative Preferred Stock in order to restore the requisite asset coverage and avoid the adverse consequences to the Fund and its shareholders of failing to qualify as a RIC. If asset coverage were restored, the Fund would again be able to pay dividends and might be able to avoid Fund-level taxation on the Fund's undistributed income.
TAXATION OF SHAREHOLDERS
Distributions by the Fund from its net investment income (referred to hereafter as "ordinary income dividends") are taxable to shareholders as ordinary income. A portion of the Fund's ordinary income dividends may qualify for the dividends received deduction available to corporations.
At the time of a shareholder's purchase, the market price of the Fund's Common Stock or Cumulative Preferred Stock may reflect undistributed net investment income or net capital gains. A subsequent distribution of these amounts by the Fund will be taxable to the shareholder even though the distribution economically is a return of part of the shareholder's investment. Investors should carefully consider the tax implications of acquiring shares just prior to a distribution, as they will receive a distribution that would be taxable to them.
Distributions made from net capital gains which are designated by the Fund as capital gain dividends are taxable to shareholders as long-term capital gain, regardless of the length of time the shareholder has owned Fund shares. In general, the maximum Federal income tax rate imposed on individuals with respect to capital gain is 28%, whereas the maximum federal income tax rate imposed on individuals with respect to ordinary income (and short-term capital gains, which currently are taxed at the same rates as ordinary income) is 39.6%. With respect to corporate taxpayers, long-term capital gains currently are taxed at the same Federal income tax rates as ordinary income and short-term capital gains.
In recent years, a number of legislative proposals concerning the tax treatment of capital gains have been introduced in Congress. The proposals have ranged from eliminating the preferential treatment of capital gains to eliminating tax on capital gains. It cannot be predicted whether any of these proposals may ultimately become law, nor can the effective date of any legislation be anticipated. Any change in the tax treatment of capital gains, however, would have an effect on the tax consequences of an investment in Cumulative Preferred Stock. Shareholders may be entitled to offset their capital gain dividends with capital losses. There are a number of statutory provisions affecting when capital losses may be offset against capital gains and limiting the use of losses from certain investments and activities. Accordingly, shareholders with capital losses are urged to consult their tax advisers.
Dividends are taxable to shareholders whether they are paid in cash or paid in additional shares of stock under the Fund's plan for the automatic reinvestment of dividends. Generally, shareholders will be taxed on dividends in the year of receipt, however, if the Fund declares a dividend in October, November or December to shareholders of record on a specified date in such a month which is actually paid during the following January, the dividend will be deemed to have been paid by the Fund (and received by the shareholders) on December 31 of the year in which the dividend is declared. Not later than 60 days after the close of its taxable year, the Fund will provide its shareholders with a written notice designating the amounts of any ordinary income dividends or capital gain dividends.
The sale, redemption or other disposition of Fund shares is a taxable event and may result in a gain or loss. Such gain or loss will generally be a capital gain or loss if the shares are capital assets in the hands of the shareholder and will be long-term capital gain or loss if the shares have been held for more than one year. Any loss upon the sale or exchange of Fund shares held for six months or less, however, will be treated as long-term capital loss to the extent of any capital gain dividends received by the shareholder. A loss realized on a sale or exchange of shares of the Fund will be disallowed if other Fund shares of the same class are acquired within a 61-day period beginning 30 days before and ending 30 days after the date on which the shares are disposed. In such a case, the basis of the shares acquired will be adjusted to reflect the disallowed loss.
Designation of Capital Gain Dividends to Cumulative Preferred Stock. The IRS has taken the position in Revenue Ruling 89-81 that if a RIC has two classes of shares, it may designate distributions made to each class in any year as consisting of no more than such class's proportionate share of particular types of income, such as long-term capital gain. A class's proportionate share of a particular type of income is determined according to the percentage of total dividends paid by the RIC during such year that was paid to such class. Consequently, the Fund will designate distributions made to the Common Stock and Cumulative Preferred Stock and any other Preferred Stock series as consisting of particular types of income in accordance with the classes' proportionate shares of such income. Because of this rule, the Fund is required to allocate a portion of its net capital gains to holders of Common Stock, holders of Cumulative Preferred Stock and any other Preferred Stock. The amount of net capital gains and other types of income allocable among holders of the Common Stock, the Cumulative Preferred Stock and any other Preferred Stock will depend upon the amount of such gains and other income realized by the Fund and the total dividends paid by the Fund on shares of Common Stock and Cumulative Preferred Stock and any other Preferred Stock during a taxable year.
The Fund believes that under current law the manner in which the Fund intends to allocate net capital gains and other taxable income between shares of Common Stock and Cumulative Preferred Stock will be respected for Federal income tax purposes. However, the Fund has not requested and will not request direct guidance from the IRS specifically addressing whether the Fund's method of allocation will be respected for Federal income tax purposes, and it is possible that the IRS could disagree with the Fund and attempt to reallocate the Fund's net capital gains or other taxable income.
WITHHOLDING AND OTHER TAXES
Ordinary income dividends (but not capital gain dividends) paid to shareholders who are nonresident aliens or foreign entities will be subject to a 30% United States withholding tax under existing provisions of the Code applicable to foreign individuals and entities unless a reduced rate of withholding or a withholding exemption is provided under applicable treaty law. Nonresident shareholders are urged to consult their own tax advisers concerning the applicability of the United States withholding tax.
Under certain provisions of the Code, some shareholders may be subject to a 31% withholding tax on ordinary income dividends, capital gain dividends and redemption payments ("backup withholding"). A shareholder, however, may generally avoid becoming subject to this requirement by filing an appropriate form with the payor 'i.e., the financial institution or brokerage firm where the shareholder maintains his or her account', certifying under penalties of perjury that such shareholder's taxpayer identification number is correct and that such shareholder has never been notified by the IRS that he or she is subject to backup withholding, has been notified by the IRS that he or she is no longer subject to backup withholding, or is exempt from backup withholding. Corporate shareholders and certain other shareholders are exempt from backup withholding. Backup withholding is not an additional tax. Any amounts withheld under the backup withholding rules from payments made to a shareholder may be credited against such shareholder's Federal income tax liability.
Distributions may also be subject to additional state, local and foreign taxes, depending on each shareholder's particular situation. Shareholders are advised to consult their own tax advisers with respect to the particular tax consequences to them of an investment in the Cumulative Preferred Stock.
THE FOREGOING IS A GENERAL AND ABBREVIATED SUMMARY OF THE APPLICABLE PROVISIONS OF THE CODE AND TREASURY REGULATIONS PRESENTLY IN EFFECT. A MORE COMPLETE DISCUSSION OF THE TAX RULES APPLICABLE TO THE FUND
CAN BE FOUND IN THE SAI WHICH IS INCORPORATED BY REFERENCE INTO THIS PROSPECTUS. FOR THE COMPLETE PROVISIONS APPLICABLE TO BOTH SHAREHOLDERS AND THE FUND, REFERENCE SHOULD BE MADE TO THE PERTINENT CODE SECTIONS AND THE TREASURY REGULATIONS PROMULGATED THEREUNDER. THE CODE AND THE TREASURY REGULATIONS ARE SUBJECT TO CHANGE BY LEGISLATIVE, JUDICIAL OR ADMINISTRATIVE ACTION, EITHER PROSPECTIVELY OR RETROACTIVELY.
CERTAIN PROVISIONS OF THE ARTICLES OF INCORPORATION AND BY-LAWS
Certain provisions of the Fund's Articles of Incorporation (the "Charter") and By-Laws may be regarded as "anti-takeover" provisions. Pursuant to these provisions, only one of three classes of directors is elected each year, and the affirmative vote of the holders of 75% of the outstanding shares of the Fund and a majority of the shares of Cumulative Preferred Stock is necessary to authorize the conversion of the Fund from a closed-end to an open-end investment company and an affirmative vote of 66 2/3% of the outstanding shares of the Fund may be necessary to authorize certain business transactions with any beneficial owner of more than 5% of the outstanding shares of the Fund. The overall effect of these provisions is to render more difficult the accomplishment of a merger with, or the assumption of control, by a principal shareholder. These provisions may have the effect of depriving Fund shareholders of an opportunity to sell their shares at a premium to the prevailing market price.
CUSTODIAN, TRANSFER AGENT AND DIVIDEND-DISBURSING AGENT
State Street Bank and Trust Company serves as Custodian for the Fund's cash and securities as well as the Transfer Agent and Dividend-Disbursing Agent for its shares. Boston EquiServe LP, an affiliate of State Street, performs the shareholder services on behalf of State Street and is located at 150 Royall Street, Canton, MA 02021. State Street does not assist in and is not responsible for investment decisions involving assets of the Fund.
UNDERWRITING
Upon the terms and subject to the conditions in the Underwriting Agreement dated the date hereof, each Underwriter named below for whom Smith Barney Inc. and Gabelli and Company, Inc. are acting as the Representatives (the "Representatives") has severally agreed to purchase, and the Fund has agreed to sell to such Underwriter, the number of Shares of Cumulative Preferred Stock set forth opposite the name of such Underwriter.
NUMBER OF NAME SHARES - -------------------------------------------------------------------------------- ---------- Smith Barney Inc................................................................ Gabelli & Company, Inc. ........................................................ ---------- Total......................................................................... |
The Underwriting Agreement provides that the obligations of the Underwriters to pay for and accept delivery of the shares of Cumulative Preferred Stock offered hereby are subject to the approval of certain legal matters by counsel and to certain other conditions. The Underwriters are obligated to take and pay for all shares of Cumulative Preferred Stock offered hereby if any are taken.
The Underwriters propose to offer part of the shares of Cumulative Preferred Stock offered hereby directly to the public at the public offering price set forth on the cover page of this Prospectus and part of the shares to certain dealers at a price which represents a concession not in excess of $ per share under the public offering price. The Underwriters may allow, and such dealers may reallow, a concession not in excess of $ per share to certain other dealers. After the initial offering of the shares of Cumulative Preferred Stock to the public, the public offering price and such concessions may be changed by the Underwriters. The Underwriting discount of $ per share is equal to % of the initial offering price. Investors must pay for any shares of Cumulative Preferred Stock purchased on or before May, 1997.
The Fund and the Adviser have agreed to indemnify the Underwriters against certain liabilities, including liabilities under the 1933 Act.
The Underwriters have advised the Fund that, pursuant to Regulation M under the 1933 Act, certain persons participating in the Offering may engage in transactions, including stabilizing bids, syndicate covering transactions or the imposition of penalty bids, which may have the effect of stabilizing or maintaining the market price of the Cumulative Preferred Stock at a level above that which might otherwise prevail in the open market. A "stabilizing bid" is a bid for or the purchase of the Cumulative Preferred Stock on behalf of the Underwriters for the purpose of fixing or maintaining the price of the Cumulative Preferred Stock. A "syndicate covering transaction" is a bid for or purchase of the Cumulative Preferred Stock on behalf of the Underwriters to reduce a short position incurred by the Underwriters in connection with the Offering. A "penalty bid" is an arrangement permitting the Underwriters to reclaim the selling concession otherwise accruing to an Underwriter or selling group member in connection with the Offering if any of the Cumulative Preferred Stock originally sold by such Underwriter or selling group member is purchased in a syndicate covering transaction and has therefore not been effectively placed by such Underwriter or selling group member. The Underwriters have advised the Company that such transactions may be effected on the NYSE or otherwise and, if commenced, may be discontinued at any time.
The Underwriters have acted in the past and may continue to act, from time to time, during and subsequent to the completion of the offering of Cumulative Preferred Stock as a broker or dealer in connection with the execution of portfolio transactions for the Fund. See "Portfolio Transactions and Other Practices" in the SAI.
Prior to this offering, there has been no public market for the Cumulative Preferred Stock. Application has been made to list the Cumulative Preferred Stock on the NYSE. However, during an initial period which is not expected to exceed 30 days after the date of this Prospectus, the Cumulative Preferred Stock will not be listed on any securities exchange. During such period, the Underwriters intend to make a market in the Cumulative Preferred Stock; however, they have no obligation to do so. Consequently, an investment in the Cumulative Preferred Stock may be illiquid during such period.
Gabelli & Company, Inc. is a wholly-owned subsidiary of Gabelli Securities, Inc., which is a majority-owned subsidiary of the Adviser which is, in turn, controlled by Mario J. Gabelli. As a result of these relationships, Mr. Gabelli, the Fund's President and Chief Investment Officer, may be deemed a "controlling person" of Gabelli & Company, Inc. For additional Information regarding these affiliations, see "Management of the Funds". The Underwriters have retained Financial Products Group, Inc. to provide certain services in connection with the Offering.
Smith Barney Inc. and Gabelli & Company, Inc. have provided investment banking and financial advisory services to the Fund.
LEGAL MATTERS
Certain matters concerning the legality under Maryland law of the Cumulative Preferred Stock will be passed on by Miles & Stockbridge, Baltimore, Maryland. Certain legal matters will be passed on by Skadden, Arps, Slate, Meagher & Flom LLP, New York, New York, special counsel to the Fund, and by Simpson Thacher & Bartlett (a partnership which includes professional corporations), New York, New York, counsel to the Underwriters. Skadden, Arps, Slate, Meagher & Flom LLP and Simpson Thacher & Bartlett will each rely as to matters of Maryland law on the opinion of Miles & Stockbridge.
EXPERTS
Price Waterhouse LLP, independent accountants, are the independent accountants of the Fund. The audited financial statements of the Fund and certain of the information appearing under the caption "Financial Highlights" included in this Prospectus have been audited by Price Waterhouse LLP for the periods indicated in its report with respect thereto, and are included in reliance upon such report and upon the
authority of such firm as experts in accounting and auditing. Price Waterhouse LLP has an office at 1177 Avenue of the Americas, New York, New York 10036, and also performs tax and other professional services for the Fund.
ADDITIONAL INFORMATION
The Fund is subject to the informational requirements of the Securities Exchange Act of 1934, as amended, and the 1940 Act and in accordance therewith files reports and other information with the SEC. Reports, proxy statements and other information filed by the Fund with the SEC pursuant to the informational requirements of such Acts can be inspected and copied at the public reference facilities maintained by the SEC at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the following Regional Offices of the SEC: Northeast Regional Office, Seven World Trade Center, Suite 1300, New York, New York 10048; Pacific Regional Office, 5670 Wilshire Boulevard, 11th Floor, Los Angeles, California 90036-3648; and Midwest Regional Office, Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511; and copies of such material can be obtained from the Public Reference Section of the SEC, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. The SEC maintains a Web site at http://www.sec.gov containing reports, proxy and information statements and other information regarding registrants, including the Fund, that file electronically with the SEC.
The Common Stock is listed on the NYSE, and reports, proxy statements and other information concerning the Fund and filed with the SEC by the Fund can be inspected at the offices of the New York Stock Exchange, Inc., 20 Broad Street, New York, New York 10005.
This Prospectus constitutes part of a Registration Statement filed by the Fund with the SEC under the 1933 Act and the 1940 Act. This Prospectus omits certain of the information contained in the Registration Statement, and reference is hereby made to the Registration Statement and related exhibits for further information with respect to the Fund and the Cumulative Preferred Stock offered hereby. Any statements contained herein concerning the provisions of any document are not necessarily complete, and, in each instance, reference is made to the copy of such document filed as an exhibit to the Registration Statement or otherwise filed with the SEC. Each such statement is qualified in its entirety by such reference. The complete Registration Statement may be obtained from the SEC upon payment of the fee prescribed by its rules and regulations.
TABLE OF CONTENTS OF SAI
An SAI dated May , 1997 has been filed with the SEC and is incorporated by reference in this Prospectus. An SAI may be obtained without charge by writing to the Fund at its address at One Corporate Center, Rye, New York 10580-1434 or by calling the Fund toll-free at (800) GABELLI (422-3554). The Table of Contents of the SAI is as follows:
TABLE OF CONTENTS
PAGE ----- THE FUND............................................................................. B-1 CONVERTIBLE SECURITIES............................................................... B-1 OTHER INVESTMENTS.................................................................... B-2 DERIVATIVE INSTRUMENTS............................................................... B-4 THE ADVISER.......................................................................... B-13 INVESTMENT RESTRICTIONS.............................................................. B-14 DIRECTORS AND OFFICERS............................................................... B-15 PORTFOLIO TRANSACTIONS AND BROKERAGE................................................. B-18 DETERMINATION OF NET ASSET VALUE..................................................... B-19 DIVIDENDS, DISTRIBUTIONS AND TAXES................................................... B-20 S&P DISCOUNT FACTORS................................................................. B-24 GENERAL INFORMATION.................................................................. B-25 BENEFICIAL OWNER..................................................................... B-25 FINANCIAL STATEMENTS................................................................. B-25 |
GLOSSARY
"Accountant's Certificate" shall mean a letter or certificate signed by or on behalf of a nationally recognized independent public accounting firm.
"Adjusted Assets" means the aggregate Discounted Value of all the S&P Eligible Assets.
"Articles Supplementary" means the Fund's Articles Supplementary creating and fixing the rights of the Cumulative Preferred Stock.
"Asset Coverage" has the meaning set forth on page 24 of this Prospectus.
"Basic Maintenance Amount" means, as of any Valuation Date, the dollar amount equal to (i) the sum of (A) the product, calculated separately for each series of Cumulative Preferred Stock, of the number of shares of each series of Cumulative Preferred Stock Outstanding on such Valuation Date multiplied by the Liquidation Preference per share; (B) the aggregate amount of cash dividends (whether or not earned or declared) that will have accumulated for each outstanding share of Cumulative Preferred Stock from the most recent Dividend Payment Date to which dividends have been paid or duly provided for (or, in the event the Basic Maintenance Amount is calculated on a date prior to the initial Dividend Payment Date with respect to a series of the Cumulative Preferred Stock, then from the Date of Original Issue) through the Valuation Date plus all dividends to accumulate on the Preferred Stock then Outstanding during the 70 days following such Valuation Date or, if less, during the number of days following such Valuation Date that shares of Preferred Stock called for redemption are scheduled to remain Outstanding; (C) the Fund's other liabilities due and payable as of such Valuation Date (except that dividends and other distributions payable by the Fund by the issuance of Common Stock shall not be included as a liability) and such liabilities projected to become due and payable by the Fund during the 90 days following such Valuation Date (excluding liabilities for investments to be purchased and for dividends and other distributions not declared as of such Valuation Date); (D) any current liabilities of the Fund as of such Valuation Date to the extent not reflected in any of (i)(A) through (i)(C) (including, without limitation, and immediately upon determination, any amounts due and payable by the Fund pursuant to reverse repurchase agreements and any payables for assets purchased as of such Valuation Date) less (ii) (A) the Adjusted Value of any of the Fund's assets if such assets are either cash or evidences of indebtedness which mature prior to or on the date of redemption or repurchase of shares of Preferred Stock or payment of another liability and are either U.S. Government Obligations or evidences of indebtedness which have a rating assigned by Moody's of at least Aaa, P-1, VMIG-1 or MIG-1 or by S&P of at least AAA, SP-1+ or A-1+, and are irrevocably held by the Fund's custodian bank in a segregated account or deposited by the Fund with the Paying Agent for the payment of the amounts needed to redeem or repurchase Preferred Stock subject to redemption or repurchase or any of (i)(B) through (i)(E) and provided that in the event the Fund has repurchased Cumulative Preferred Stock at a price of less than the Liquidation Payment thereof and irrevocably segregated or deposited assets as described above with its custodian bank or the Paying Agent for the payment of the repurchase price the Fund may deduct 100% of the Liquidation Payment of such Cumulative Preferred Securities to be repurchased from (i) above.
"Business Day" means a day on which the NYSE is open for trading and that is neither a Saturday, Sunday nor any other day on which banks in the City of New York are authorized by law to close.
"Certificate of Basic Maintenance Amount" shall have the meaning set forth on pp. 24-25 of this Prospectus.
"Charter" means the Articles of Incorporation, as amended and supplemented (including the Articles Supplementary), of the Fund on file in the State Department of Assessments and Taxation of Maryland.
"Common Stock" means the Common Stock, par value $.001 per share, of the Fund.
"Cumulative Preferred Stock" means the ____ % Cumulative Preferred Stock, par value $.001 per share, of the Fund.
"Cure Date" has the meaning set forth on page 25 of this Prospectus.
"Date of Original Issue" has the meaning set forth on page 23 of this Prospectus.
"Deposit Assets" means cash, Short-Term Money Market Instruments and U.S. Government Obligations. Except for determining whether the Fund has Adjusted Assets equal to or greater than the Base Amount, each Deposit Security will be deemed to have a value equal to its principal or face amount payable at maturity plus any interest payable thereon after delivery of such Deposit Security but only if payable on or prior to the applicable payment date in advance of which the relevant deposit is made.
"Discounted Value" means, with respect to an S&P Eligible Asset, the quotient of (A) in the case of non-convertible fixed income securities, the lower of the principal amount and the market value thereof or (B) in the case of any other S&P Eligible Assets, the market value thereof, divided by the applicable Discount Factor.
"Dividend Payment Date" has the meaning set forth on page 23 of this Prospectus.
"Dividend-Disbursing Agent" means State Street Bank and Trust Company and its successors or any other paying agent appointed by the Fund.
"Fund" means The Gabelli Convertible Securities Fund, Inc., a Maryland corporation.
"Liquidation Payment" has the meaning set forth on page 26 of this Prospectus.
"Moody's" means Moody's Investor Services, Inc.
"1933 Act" means The Securities Act of 1933, as amended. "1940 Act" means the Investment Company Act of 1940, as amended.
"Notice of Redemption" has the meaning set forth on page 25 of this Prospectus.
"Preferred Stock" means the preferred stock, par value $.001 per share, of the Fund, and includes the Cumulative Preferred Stock.
"S&P Discount Factor" means, with respect to S&P Eligible Asset specified below, the numbers set forth in the SAI under the heading "S&P Discount Factors."
"Redemption Price" has the meaning set forth on page of this Prospectus.
"SEC" means the Securities and Exchange Commission.
"S&P" means Standard & Poor's Ratings Group.
"S&P Eligible Assets" shall mean the sum of S&P Seasoned Eligible Assets and S&P Unseasoned Eligible Assets.
"S&P Seasoned Eligible Assets" shall mean any of the following held by the Fund:
(a) Deposit Assets;
(b) U.S. Government Obligations;
(c) evidence of indebtedness other than Deposit Assets and U.S. Government Obligations that are not convertible into or exchangeable or exercisable for stock of a corporation and that satisfy certain S&P criteria described in the Articles Supplementary.
(d) evidence of indebtedness other than Deposit Assets and U.S. Government Obligations that are convertible into or exchangeable or exercisable for stock of a corporation and that satisfy all of the following conditions: (i) such evidence of indebtedness is rated at least CCC by S&P; and (ii) if such evidence of indebtedness is rated BB+ to CCC by S&P, the market capitalization of the issuer of such evidence of indebtedness is at least $120 million; provided, however, that the Fund's holdings of such evidences of indebtedness of any single issuer that satisfies the conditions set forth in clauses (i) and (ii) above shall be included in S&P Eligible Assets only to the extent that if such evidence of indebtedness is rated AAA to A-, BBB+ to BBB-, BB+ to BB- or B+ to CCC by S&P, the aggregate market value of such evidences of indebtedness of such issuer held by the Fund do not exceed 10%, 5%,
4% or 3%, respectively, of the market value of the Fund's S&P Eligible Assets and the aggregate market value of such eligible holdings, when added to the aggregate market value of the Fund's holdings of other similarly eligible evidences of indebtedness of issuers in the same Industry Classification, does not exceed the applicable Convertible Diversification Percentage (as defined in the Articles Supplementary) of the aggregate market value of the Fund's S&P Eligible Assets;
(e) preferred stocks that satisfy certain S&P criteria described in the Articles Supplementary; and
(f) common stocks that satisfy all of the following conditions: (i) such common stock (including the common stock of any predecessor or constituent issuer) has been traded on a recognized national securities exchange or quoted on the National Market System (or any equivalent or successor thereto) of Nasdaq for at least 450 days, (ii) the market capitalization of such issuer of common stock exceeds $100 million, (iii) the issuer of such common stock is not an entity that elects to be taxed under Section 856 of the Code or that is treated as a partnership for federal income taxes, (iv) if such issuer is organized under the laws of any jurisdiction other than the United States, any state thereof, any possession or territory thereof or the District of Columbia, the common stock of such issuer held by the Fund is traded on a recognized national securities exchange or quoted on the National Market System of Nasdaq either directly or in the form of depository receipts and (v) if such issuer is registered as an investment company under the 1940 Act, such issuer does not invest more than 25% of the value of its gross assets in securities that are not S&P Eligible Assets by reason of clause (iv) above.
Notwithstanding the foregoing, an asset will not be considered an S&P Seasoned Eligible Asset if it (A) is held in a margin account, (B) is subject to any material lien, mortgage, pledge, security interest or security agreement of any kind or (C) has been deposited irrevocably for the payment of dividends, redemption payments or any other payment or obligation hereunder.
"S&P Unseasoned Eligible Assets" shall mean any common stock that would be
an S&P Seasoned Eligible Asset but for the fact that the 450 trading day
requirement of clause (i) of the definition thereof is not satisfied; provided,
however, that the Fund's holdings of the common stock of any single issuer that
satisfies the conditions set forth in clauses (ii) through (v) above shall be
included in S&P Unseasoned Eligible Assets only to the extent that (1) such
holdings may be sold publicly by the Fund at any time without registration, (2)
to the extent remaining eligible after the operation of item (1) above, the
aggregate market value of such holdings does not exceed 5% of the market
capitalization of such issuer of common stock, (3) to the extent remaining
eligible after the operation of items (1) and (2) above, such holdings do not
exceed a number of shares representing 5% of (x) the market capitalization of
such issuer of common stock, less (y) the number of outstanding shares of such
common stock held by directors and executive officers of the issuer of such
common stock (such number to be computed solely by reference to information on
file with the Commission on the last day of the preceding calendar month), (4)
to the extent remaining eligible after the operation of items (1) through (3)
above, such holdings do not exceed a number of shares representing the average
weekly trading volume of such common stock during the preceding 30 day period,
(5) to the extent remaining eligible after the operation of items (1) through
(4) above, the aggregate market value of such holdings, when added to the
aggregate market value of the Fund's holdings of all other similarly eligible
shares of common stock of issuers in the same Industry Classification (other
than Utilities, as to which this item (5) shall not apply), does not exceed 25%
of the aggregate market value of the Fund's S&P Eligible Assets and (6) to the
extent remaining eligible after the operation of items (1) through (5) above,
the aggregate market value of such holdings in excess of 5% of the aggregate
market value of the Fund's S&P Eligible Assets, when added to the aggregate
market value of the Fund's holdings of all other similarly eligible shares of
each other issuer in excess of 5% of the aggregate market value of the Fund's
S&P Eligible Assets, does not exceed 30% of the aggregate market value of the
Fund's S&P Eligible Assets.
"U.S. Government Obligations" means direct non-callable obligations of the United States, provided that such direct obligations are entitled to the full faith and credit of the United States and that any such obligations, other than United States Treasury Bills and U.S. Treasury Securities Strips, provide for the periodic payment of interest and the full payment of principal at maturity.
"Valuation Date" means every Friday or, if such day is not a Business Day, the immediately preceding Business Day.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFER CONTAINED HEREIN, AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUND, THE ADVISER OR THE UNDERWRITERS. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE FUND SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO WHICH IT RELATES. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY SUCH SECURITIES IN ANY CIRCUMSTANCE IN WHICH SUCH AN OFFER OR SOLICITATION IS UNLAWFUL.
TABLE OF CONTENTS
PAGE ---- Prospectus Summary.................... 3 Financial Highlights.................. 10 Use of Proceeds....................... 11 Capitalization........................ 11 Investment Objective and Policies..... 12 Convertible Securities................ 12 Other Investments..................... 14 Special Characteristics and Risks..... 16 Special Investment Methods............ 16 Management of the Fund................ 20 Dividend and Distribution Policy...... 21 Description of Cumulative Preferred Stock............................... 22 Description of Capital Stock and Other Securities.......................... 28 Taxation.............................. 29 Certain Provisions of the Articles of Incorporation and By-Laws........... 32 Custodian, Transfer Agent and Dividend Disbursing Agent.................... 32 Underwriting.......................... 32 Legal Matters......................... 33 Experts............................... 33 Additional Information................ 34 Table of Contents of SAI.............. 35 |
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED MAY 6, 1997
THE GABELLI CONVERTIBLE SECURITIES FUND, INC.
ONE CORPORATE CENTER
RYE, NEW YORK 10580-1434
TELEPHONE 1-800-GABELLI (1-800-422-3554)
STATEMENT OF ADDITIONAL INFORMATION
MAY , 1997
This Statement of Additional Information (the "SAI") relates to The Gabelli Convertible Securities Fund, Inc. (the "Fund"), and is not a prospectus. This SAI contains additional and more detailed information and should be read in conjunction with the balance of the Fund's prospectus dated May , 1997 (the "Prospectus"). Additional copies of the SAI may be obtained without charge by writing or telephoning the Fund at the address and telephone number set forth above.
TABLE OF CONTENTS
PAGE ---- THE FUND.............................................................................. B-1 CONVERTIBLE SECURITIES................................................................ B-1 OTHER INVESTMENTS..................................................................... B-2 DERIVATIVE INSTRUMENTS................................................................ B-4 THE ADVISER........................................................................... B-13 INVESTMENT RESTRICTIONS............................................................... B-14 DIRECTORS AND OFFICERS................................................................ B-15 PORTFOLIO TRANSACTIONS AND BROKERAGE.................................................. B-18 DETERMINATION OF NET ASSET VALUE...................................................... B-19 DIVIDENDS, DISTRIBUTIONS AND TAXES.................................................... B-19 S&P DISCOUNT FACTORS.................................................................. B-23 GENERAL INFORMATION................................................................... B-24 BENEFICIAL OWNER...................................................................... B-24 FINANCIAL STATEMENTS.................................................................. B-24 |
THE FUND
The Fund commenced operations on July 3, 1989 as The Gabelli Convertible Securities Fund, a series of The Gabelli Series Fund, Inc., an open-end diversified management investment company. On March 31, 1995, the Fund converted to a closed-end diversified management investment company and changed its name to The Gabelli Convertible Securities Fund, Inc.
CONVERTIBLE SECURITIES
A Convertible Security entitles the holder to exchange such security for a fixed number of shares of common stock or other equity security, usually of the same company, at fixed prices within a specified period of time. A Convertible Security entitles the holder to receive the fixed income of a bond or the dividend preference of a preferred stock until the holder elects to exercise the conversion privilege.
A Convertible Security's position in a company's capital structure depends upon its particular provisions. In the case of subordinated convertible debentures, the holder's claims on assets and earnings are subordinated to the claims of others and are senior to the claims of common shareholders.
To the degree that the price of a Convertible Security rises above its investment value because of a rise in price of the underlying common stock, the value of such security is influenced more by price fluctuations of the underlying common stock and less by its investment value. The price of a Convertible Security that is supported principally by its conversion value will rise along with any increase in the price of the common stock, and such price generally will decline along with any decline in the price of the common stock except that the security will receive additional support as its price approaches investment value. A Convertible Security purchased or held at a time when its price is influenced by its conversion value will produce a lower yield than nonconvertible senior securities with comparable investment values. Convertible Securities may be purchased by the Fund at varying price levels above their investment values and/or their conversion values in keeping with the Fund's investment objective.
Many Convertible Securities in which the Fund will invest have call provisions entitling the issuer to redeem the security at a specified time and at a specified price. This is one of the features of a Convertible Security which affects valuation. Calls may vary from absolute calls to provisional calls. Convertible Securities with superior call protection usually trade at a higher premium. If long-term interest rates decline, the interest rates of new Convertible Securities will also decline. Therefore, in a falling interest rate environment companies may be expected to call Convertible Securities with high coupons and the Fund would have to invest the proceeds from such called issues in securities with lower coupons. Thus, Convertible Securities with superior call protection will permit the Fund to maintain a higher yield than with issues without call protection.
OTHER INVESTMENTS
The Fund may without limit invest in securities of companies for which a tender or exchange offer has been made or announced and in securities of companies for which a merger, consolidation, liquidation or reorganization proposal has been announced if, in the judgement of Gabelli Funds, Inc. (the "Adviser"), there is a reasonable prospect of capital appreciation significantly greater than the brokerage and other transaction expenses involved.
In general, securities which are the subject of such an offer or proposal sell at a premium to their historic market price immediately prior to the announcement of the offer or may also discount what the stated or appraised value of the security would be if the contemplated transaction were approved or consummated. Such investments may be advantageous when: the discount significantly overstates the risk of the contingencies involved; the market significantly undervalues the securities, assets or cash to be received by shareholders of the prospective portfolio company as a result of the contemplated transaction; or the market fails adequately to recognize the possibility that the offer or proposal may be replaced or superseded by an offer or proposal of greater value. The evaluation of such contingencies requires unusually broad knowledge and experience on the part of the Adviser which must appraise not only the value of the issuer and its component businesses as well as the assets or securities to be received as a result of the contemplated transaction but also the financial resources and business motivation of the offeror and the dynamics and business climate when the offer or proposal is in process.
In making the investments, the Fund will not violate any of its investment restrictions (see below, "Investment Restrictions") including the requirement that, (a) as to 75% of its total assets, it will not invest more than 5% of its total assets in the securities of any one issuer and (b) it will not invest more than 25% of its total assets in any one industry. Certain investments are short-term in nature and will tend to increase the turnover ratio of the Fund thereby increasing its brokerage and other transaction expenses as well as make it more difficult for the Fund to meet the tests for favorable tax treatment as a regulated investment company (a "RIC") under the Internal Revenue Code of 1986, as amended (the "Code") (see "Dividends, Distributions and Taxes"). The Adviser intends to select investments of the type described which, in its view, have a reasonable prospect of capital appreciation which is significant in relation to both the risk involved and the potential of available alternate investments as well as to monitor the effect of such investments on the tax qualification tests of the Code.
UNREGISTERED CONVERTIBLE SECURITIES AND OTHER ILLIQUID INVESTMENTS
As set forth in the Prospectus, the Fund may invest without limitation in unregistered Convertible Securities and other illiquid investments, including repurchase agreements having a maturity of longer than seven days.
The staff of the Securities and Exchange Commission (the "SEC") has taken the position that purchased over-the-counter ("OTC") options and the assets used as "cover" for written OTC options are illiquid. The assets used as cover for OTC options written by the Fund will be considered illiquid unless the OTC options are sold to qualified dealers who agree that the Fund may repurchase any OTC option it writes at a maximum price to be calculated by a formula set forth in the option agreement. The cover for an OTC option written subject to this procedure will be considered illiquid only to the extent that the maximum repurchase price under the option formula exceeds the intrinsic value of the option.
WHEN ISSUED AND DELAYED DELIVERY SECURITIES AND FORWARD COMMITMENTS
As discussed in the Prospectus, the Fund may purchase securities on a "when, as and if issued" basis under which the issuance of the security depends upon the occurrence of a subsequent event, such as approval of a merger, corporate reorganization or debt restructuring. The commitment for the purchase of any such security will not be recognized in the portfolio of the Fund until the Adviser determines that issuance of the security is probable. At such time, the Fund will record the transaction and, in determining its net asset value, will reflect the value of the security daily. At such time, the Fund will also establish a segregated account with its custodian bank in which it will maintain cash or liquid high-grade debt securities at least equal in value to the amount of its commitments. The Adviser does not believe that the net asset value of the Fund will be adversely affected by its purchase of securities on this basis.
FOREIGN SECURITIES
Subject to the limitations described in the Prospectus, the Fund may invest in foreign securities which involve certain risks not associated with domestic investments.
Among other risks, foreign markets have different clearance and settlement procedures, and in certain markets there have been times when settlements have failed to keep pace with the volume of securities transactions, making it difficult to conduct such transactions. Delays in settlements could result in temporary periods when assets of the Fund are uninvested and no return is earned thereon. The inability of the Fund to make intended security purchases due to settlement problems could cause the Fund to miss attractive investment opportunities. Inability to dispose of a portfolio security due to settlement problems could result either in losses to the Fund due to subsequent declines in the value of such portfolio security or, if the Fund has entered into a contract to sell the security, could result in possible liability to the purchaser.
HIGH YIELD/HIGH RISK SECURITIES
Subject to the limitations described in the Prospectus, the Fund may invest in high yielding, lower rated bonds, commonly called "junk bonds." Bonds that are rated Ba or lower by Moody's Investors Services, Inc. ("Moody's") or BB or lower by Standard & Poor's Ratings Group ("S&P"), or unrated bonds of comparable quality, are generally considered to be high yield bonds. These high yield bonds are subject to greater risks than lower yielding, higher rated debt securities.
Lower rated securities are subject to risk factors such as: (a) vulnerability to economic downturns and changes in interest rates; (b) sensitivity to adverse economic changes and corporate developments; (c) redemption or call provisions which may be exercised at inopportune times; (d) difficulty in accurately valuing or disposing of such securities; (e) federal legislation which could affect the market for such securities; and (f) special adverse tax consequences associated with investments in certain high yield, high risk bonds structured as zero coupon or pay-in-kind securities.
High yield bonds, like other bonds, may contain redemption or call provisions. If an issuer exercises these provisions in a declining interest rate market, the Fund would have to replace the security with a lower yielding
security, resulting in lower return for investors. Conversely, a high yield bond's value will decrease in a rising interest rate market.
The market for high yield bonds is in some cases more thinly traded than the market for investment grade bonds, and recent market quotations may not be available for some of these bonds. Market quotations are generally available only from a limited number of dealers and may not represent firm bids from such dealers or prices for actual sales. As a result, the Fund may have greater difficulty valuing the high yield bonds in its portfolio accurately and disposing of these bonds at the time or price desired.
Ratings assigned by Moody's and S&P to high yield bonds, like other bonds, attempt to evaluate the timeliness of principal and interest payments on those bonds. However, such ratings do not assess the risk of a decline in the market value of those bonds. In addition, ratings may fail to reflect recent events in a timely manner and are subject to change. If a rating with respect to a portfolio security is changed, the Adviser will determine whether the security will be retained based upon the factors the Adviser considers in acquiring or holding other securities in the portfolio. Investment in high yield bonds may make achievement of the Fund's investment objective more dependent on the Adviser's own credit analysis than is the case for higher rated bonds.
Market prices for high yield bonds tend to be more sensitive than those for higher rated securities due to many of the factors described above, including the creditworthiness of the issuer, redemption or call provisions, the liquidity of the secondary trading market and changes in credit ratings, as well as interest rate movements and general economic conditions. In addition, yields on such bonds will fluctuate over time. An economic downturn could severely disrupt the market for high yield bonds.
The risk of default in payment of principal and interest on high yield bonds is significantly greater than with higher rated debt securities because high yield bonds are generally unsecured and are often subordinated to other obligations of the issuer, and because the issuers of high yield bonds usually have high levels of indebtedness and are more sensitive to adverse economic conditions, such as recession or increasing interest rates. Upon a default, bondholders may incur additional expenses in seeking recovery.
As a result of all these factors, the net asset value of the Fund to the extent it invests in high yield bonds, is expected to be more volatile than the net asset value of funds which invest solely in higher rated debt securities.
DERIVATIVE INSTRUMENTS
OPTIONS
The Fund may, from time to time, subject to guidelines of the Board of Directors and the limitations set forth in the Prospectus and applicable rating agency guidelines, purchase or sell, i.e., write, options on securities, securities indices and foreign currencies which are listed on a national securities exchange or in the OTC market, as a means of achieving additional return or of hedging the value of the Fund's portfolio.
A call option is a contract that gives the holder of the option the right to buy from the writer of the call option, in return for a premium, the security or currency underlying the option at a specified exercise price at any time during the term of the option. The writer of the call option has the obligation, upon exercise of the option, to deliver the underlying security or currency upon payment of the exercise price during the option period.
A put option is a contract that gives the holder of the option the right, in return for a premium, to sell to the seller the underlying security at a specified price. The seller of the put option has the obligation to buy the underlying security upon exercise at the exercise price.
A call option is "covered" if the Fund owns the underlying instrument covered by the call or has an absolute and immediate right to acquire that instrument without additional cash consideration (or for additional cash consideration held in a segregated account by its custodian) upon conversion or exchange of other instruments held in its portfolio. A call option is also covered if the Fund holds a call on the same
instrument as the call written where the exercise price of the call held is (1) equal to or less than the exercise price of the call written or (2) greater than the exercise price of the call written if the difference is maintained by the Fund in cash, U.S. Government securities or other liquid securities in a segregated account with its custodian. A put option is "covered" if the Fund maintains cash or other high grade short-term obligations with a value equal to the exercise price in a segregated account with its custodian, or else holds a put on the same instrument as the put written where the exercise price of the put held is equal to or greater than the exercise price of the put written. The Adviser, on behalf of the Fund, has no present intention to engage in uncovered option transactions. If the Fund has written an option, it may terminate its obligation by effecting a closing purchase transaction. This is accomplished by purchasing an option of the same series as the option previously written. However, once the Fund has been assigned an exercise notice, the Fund will be unable to effect a closing purchase transaction. Similarly, if the Fund is the holder of an option it may liquidate its position by effecting a closing sale transaction. This is accomplished by selling an option of the same series as the option previously purchased. There can be no assurance that either a closing purchase or sale transaction can be effected when the Fund so desires.
The Fund will realize a profit from a closing transaction if the price of the transaction is less than the premium received from writing the option or is more than the premium paid to purchase the option; the Fund will realize a loss from a closing transaction if the price of the transaction is more than the premium received from writing the option or is less than the premium paid to purchase the option. Since call option prices generally reflect increases in the price of the underlying security, any loss resulting from the repurchase of a call option may also be wholly or partially offset by unrealized appreciation of the underlying security. Other principal factors affecting the market value of a put or a call option include supply and demand, interest rates, the current market price and price volatility of the underlying security and the time remaining until the expiration date.
An option position may be closed out only on an exchange which provides a secondary market for an option of the same series. Although the Fund will generally purchase or write only those options for which there appears to be an active secondary market, there is no assurance that a liquid secondary market on an exchange will exist for any particular option. In such event it might not be possible to effect closing transactions in particular options, so that the Fund would have to exercise its options in order to realize any profit and would incur brokerage commissions upon the exercise of call options and upon the subsequent disposition of underlying securities for the exercise of put options. If the Fund, as a covered call option writer, is unable to effect a closing purchase transaction in a secondary market, it will not be able to sell the underlying security until the option expires or it delivers the underlying security upon exercise or otherwise covers the position.
The Fund intends to qualify as a RIC under the Code. One requirement for such qualification is that less than 30% of the Fund's gross income must be derived from the gains from the sale or other disposition of securities held for less than three months. Therefore, the Fund may be limited in its ability to engage in options transactions. In addition, investments in options may be limited or prohibited by the applicable S&P Guidelines.
Options on Securities Indices.
The Fund may purchase and sell securities index options. One effect of such transactions may be to hedge all or part of the Fund's securities holdings against a general decline in the securities market or a segment of the securities market. Options on securities indices are similar to options on stocks except that, rather than the right to take or make delivery of stock at a specified price, an option on a securities index gives the holder the right to receive, upon exercise of the option, an amount of cash if the closing level of the securities index upon which the option is based is greater than, in the case of a call, or less than, in the case of a put, the exercise price of the option.
The Fund's successful use of options on indices depends upon its ability to predict the direction of the market and is subject to various additional risks. The correlation between movements in the index and the price of the securities being hedged against is imperfect and the risk from imperfect correlation increases as
the composition of the Fund diverges from the composition of the relevant index. Accordingly, a decrease in the value of the securities being hedged against may not be wholly offset by a gain on the exercise or sale of a securities index put option held by the Fund.
Options on Foreign Currencies.
Instead of purchasing or selling currency futures (as described below), the Fund may attempt to accomplish similar objectives by purchasing put or call options on currencies or by writing put options or call options on currencies either on exchanges or in OTC markets. A put option gives the Fund the right to sell a currency at the exercise price until the option expires. A call option gives the Fund the right to purchase a currency at the exercise price until the option expires. Both types of options serve to insure against adverse currency price movements in the underlying portfolio assets designated in a given currency. The Fund's use of options on currencies will be subject to the same limitations as its use of options on securities, described above and in the Prospectus. Currency options may be subject to position limits which may limit the ability of the Fund to fully hedge its positions by purchasing the options.
As in the case of interest rate futures contracts and options thereon, described below, the Fund may hedge against the risk of a decrease or increase in the U.S. dollar value of a foreign currency denominated debt security which the Fund owns or intends to acquire by purchasing or selling options contracts, futures contracts or options thereon with respect to a foreign currency other than the foreign currency in which such debt security is denominated, where the values of such different currencies (vis-a-vis the U.S. dollar) historically have a high degree of positive correlation.
FUTURES CONTRACTS
The Fund will enter into futures contracts only for certain bona fide hedging, yield enhancement and risk management purposes. The Fund may enter into futures contracts for the purchase or sale of debt securities, financial indices, and U.S. Government securities (collectively, "interest rate futures contracts"). It may also enter into futures contracts for the purchase or sale of foreign currencies in which securities held or to be acquired by the Fund are denominated, or the value of which have a high degree of positive correlation to the value of such currencies as to constitute an appropriate vehicle for hedging. In addition, the Fund may enter into futures contracts on stock and bond indices (collectively, "securities indices"). The Fund may enter into such futures contracts both on U.S. and foreign exchanges.
A "sale" of a futures contract (or a "short" futures position) means the assumption of a contractual obligation to deliver the assets underlying the contract at a specified price at a specified future time. A "purchase" of a futures contract (or a "long" futures position) means the assumption of a contractual obligation to acquire the assets underlying the contract at a specified price at a specified future time. Certain futures contracts are settled on a net cash payment basis rather than by the sale and delivery of the assets underlying the futures contracts. U.S. futures contracts have been designed by exchanges that have been designated as "contract markets" by the Commodity Futures Trading Commission (the "CFTC"), an agency of the U.S. Government, and must be executed through a futures commission merchant, i.e., a brokerage firm, which is a member of the relevant contract market. Futures contracts trade on these contract markets and their affiliated clearing organizations guarantee performance of the contracts as between the clearing members of the exchange.
At the time a futures contract is purchased or sold, the Fund must allocate cash or securities as a deposit payment (initial margin). It is expected that the initial margin on U.S. exchanges will vary from one-half of 1% to 4% of the face value of the contract. Under certain circumstances, however, such as during periods of high volatility, the Fund may be required by an exchange to increase the level of its initial margin payment. Thereafter, the futures contract is valued daily and the payment in cash of "variation margin" may be required, a process known as "mark-to-the-market." Each day the Fund is required to provide or is entitled to receive variation margin in an amount equal to any change in the value of the contract since the preceding day.
Although futures contracts by their terms may call for the actual delivery or acquisition of underlying assets, in most cases the contractual obligation is extinguished by offset before the expiration of the contract.
The offsetting of a contractual obligation is accomplished by buying (to offset an earlier sale) or selling (to offset an earlier purchase) an identical futures contract calling for delivery in the same month. Such a transaction cancels the obligation to make or take delivery of the underlying commodity. When the Fund purchases or sells futures contracts, the Fund will incur brokerage fees and related transactions costs.
In addition, futures contracts entail risks. The ordinary spreads between values in the cash and futures markets, due to differences in the characters of those markets, are subject to distortions. First, all participants in the futures market are subject to initial and variation margin requirements. Rather than meeting additional variation margin requirements, investors may close futures contracts through offsetting transactions which could distort the normal relationship between the cash and futures markets. Second, the liquidity of the futures market depends on participants entering into offsetting transactions rather than making or taking delivery. To the extent participants decide to make or take delivery, liquidity in the futures market could be reduced, thus producing price distortions. Third, from the point of view of speculators, the margin deposit requirements in the futures market are less onerous than margin requirements in the securities market. Increased participation by speculators in the futures market may cause temporary price distortions. Thus, a correct forecast of interest rate trends by the investment adviser may still not result in a successful transaction.
If the Fund seeks to hedge against a decline in the value of its portfolio securities and sells futures contracts on other securities which historically have had a high degree of positive correlation to the value of the portfolio securities, the value of its portfolio securities might decline more rapidly than the value of a poorly correlated futures contract rises. In that case, the hedge will be less effective than if the correlation had been greater. In a similar but more extreme situation, the value of the futures position might in fact decline while the value of the portfolio securities holds steady or rises. This would result in a loss that would not have occurred but for the attempt to hedge.
Options on Futures Contracts.
The Fund may also enter into options on futures contracts for certain bona fide hedging, yield enhancement and risk management purposes. The Fund may purchase put and call options and write put and call options on futures contracts that are traded on U.S. and foreign exchanges. The Adviser, on behalf of the Fund, has no present intention to engage in uncovered option transactions. An option on a futures contract gives the purchaser the right, in return for the premium paid, to assume a position in a futures contract (a long position if the option is a call and a short position if the option is a put) at a specified exercise price at any time during the option exercise period. The writer of the option is required upon exercise to assume a short futures position (if the option is a call) or a long futures position (if the option is a put). Upon exercise of the option, the assumption of offsetting futures positions by the writer and holder of the option will be accompanied by delivery of the accumulated cash balance in the writer's futures margin account which represents the amount by which the market price of the futures contract at exercise, exceeds, in the case of a call, or is less than, in the case of a put, the exercise of the option on the futures contract.
The Fund will be considered "covered" with respect to a call option it writes on a futures contract if the Fund owns the asset which is deliverable under the futures contract or an option to purchase that futures contract having a strike price equal to or less than the strike price of the "covered" option and having an expiration date not earlier than the expiration date of the "covered" option, or if it segregates and maintains with its custodian for the term of the option, cash or liquid securities equal to the fluctuating value of the optioned futures. The Fund will be considered "covered" with respect to a put option it writes on a futures contract if it owns an option to sell that futures contract having a strike price equal to or greater than the strike price of the "covered" option and having an expiration date not earlier than the expiration date of the "covered" option, or if it segregates and maintains with its custodian for the term of the option, cash or liquid securities at all times equal in value to the exercise price of the put (less any initial margin deposited by the Fund with its custodian with respect to such put option). There is no limitation on the amount of the Fund's assets which can be placed in the segregated account.
Writing a put option on a futures contract serves as a partial hedge against an increase in the value of debt securities the Fund intends to acquire. If the futures price at expiration of the option is above the exercise
price, the Fund will retain the full amount of the option premium which provides a partial hedge against any increase that may have occurred in the price of the debt securities the Fund intends to acquire. If the market price of the underlying futures contract is below the exercise price when the option is exercised, the Fund will incur a loss, which may be wholly or partially offset by the decrease in the value of the securities the Fund intends to acquire.
Writing a call option on a futures contract serves as a partial hedge against a decrease in the value of the Fund's portfolio securities. If the market price of the underlying futures contract at expiration of a written call option is below the exercise price, the Fund will retain the full amount of the option premium, thereby partially hedging against any decline that may have occurred in the Fund's holding of debt securities. If the futures price when the option is exercised is above the exercise price, however, the Fund will incur a loss, which may be wholly or partially offset by the increase in the value of the securities in the Fund's portfolio which were being hedged.
The Fund may purchase put options on futures contracts to hedge its portfolio against the risk of a decline in the value of the debt securities it owns as a result of rising interest rates or fluctuating currency exchange rates. The Fund may also purchase call options on futures contracts as a hedge against an increase in the value of securities the Fund intends to acquire as a result of declining interest rates or fluctuating currency exchange rates.
Interest Rate Futures Contracts and Options Thereon.
The Fund may purchase or sell interest rate futures contracts to take advantage of or to protect the Fund against fluctuations in interest rates affecting the value of debt securities which the Fund holds or intends to acquire. For example, if interest rates are expected to increase, the Fund might sell futures contracts on debt securities, the values of which historically have a high degree of positive correlation to the values of the Fund's portfolio securities. Such a sale would have an effect similar to selling an equivalent value of the Fund's portfolio securities. If interest rates increase, the value of the Fund's portfolio securities will decline, but the value of the futures contracts to the Fund will increase at approximately an equivalent rate thereby keeping the net asset value of the Fund from declining as much as it otherwise would have. The Fund could accomplish similar results by selling debt securities with longer maturities and investing in debt securities with shorter maturities when interest rates are expected to increase. However, since the futures market may be more liquid than the cash market, the use of futures contracts as a risk management technique allows the Fund to maintain a defensive position without having to sell its portfolio securities.
Similarly, the Fund may purchase interest rate futures contracts when it is expected that interest rates may decline. The purchase of futures contracts for this purpose constitutes a hedge against increases in the price of debt securities (caused by declining interest rates) which the Fund intends to acquire. Since fluctuations in the value of appropriately selected futures contracts should approximate that of the debt securities that will be purchased, the Fund can take advantage of the anticipated rise in the cost of the debt securities without actually buying them. Subsequently, the Fund can make its intended purchase of the debt securities in the cash market and currently liquidate its futures position. To the extent the Fund enters into futures contracts for this purpose, it will maintain in a segregated asset account with the Fund's custodian, assets sufficient to cover the Fund's obligations with respect to such futures contracts, which will consist of cash or other liquid securities from its portfolio in an amount equal to the difference between the fluctuating market value of such futures contracts and the aggregate value of the initial margin deposited by the Fund with its custodian with respect to such futures contracts.
The purchase of a call option on a futures contract is similar in some respects to the purchase of a call option on an individual security. Depending on the pricing of the option compared to either the price of the futures contract upon which it is based or the price of the underlying debt securities, it may or may not be less risky than ownership of the futures contract or underlying debt securities. As with the purchase of futures contracts, when the Fund is not fully invested it may purchase a call option on a futures contract to hedge against a market advance due to declining interest rates.
The purchase of a put option on a futures contract is similar to the purchase of protective put options on portfolio securities. The Fund will purchase a put option on a futures contract to hedge the Fund's portfolio against the risk of rising interest rates and consequent reduction in the value of portfolio securities.
The writing of a call option on a futures contract constitutes a partial hedge against declining prices of the securities which are deliverable upon exercise of the futures contract. If the futures price at expiration of the option is below the exercise price, the Fund will retain the full amount of the option premium which provides a partial hedge against any decline that may have occurred in the Fund's portfolio holdings. The writing of a put option on a futures contract constitutes a partial hedge against increasing prices of the securities which are deliverable upon exercise of the futures contract. If the futures price at expiration of the option is higher than the exercise price, the Fund will retain the full amount of the option premium which provides a partial hedge against any increase in the price of debt securities which the Fund intends to purchase. If a put or call option the Fund has written is exercised, the Fund will incur a loss which will be reduced by the amount of the premium it received. Depending on the degree of correlation between changes in the value of its portfolio securities and changes in the value of its futures positions, the Fund's losses from options on futures it has written may to some extent be reduced or increased by changes in the value of its portfolio securities.
Currency Futures and Options Thereon.
Generally, foreign currency futures contracts and options thereon are similar to the interest rate futures contracts and options thereon discussed previously. By entering into currency futures and options thereon, the Fund will seek to establish the rate at which it will be entitled to exchange U.S. dollars for another currency at a future time. By selling currency futures, the Fund will seek to establish the number of dollars it will receive at delivery for a certain amount of a foreign currency. In this way, whenever the Fund anticipates a decline in the value of a foreign currency against the U.S. dollar, the Fund can attempt to "lock in" the U.S. dollar value of some or all of the securities held in its portfolio that are denominated in that currency. By purchasing currency futures, the Fund can establish the number of dollars it will be required to pay for a specified amount of a foreign currency in a future month. Thus, if the Fund intends to buy securities in the future and expects the U.S. dollar to decline against the relevant foreign currency during the period before the purchase is effected, the Fund can attempt to "lock in" the price in U.S. dollars of the securities it intends to acquire.
The purchase of options on currency futures will allow the Fund, for the price of the premium and related transaction costs it must pay for the option, to decide whether or not to buy (in the case of a call option) or to sell (in the case of a put option) a futures contract at a specified price at any time during the period before the option expires. If the Adviser, in purchasing an option, has been correct in its judgment concerning the direction in which the price of a foreign currency would move as against the U.S. dollar, the Fund may exercise the option and thereby take a futures position to hedge against the risk it had correctly anticipated or close out the option position at a gain that will offset, to some extent, currency exchange losses otherwise suffered by the Fund. If exchange rates move in a way the Fund did not anticipate, however, the Fund will have incurred the expense of the option without obtaining the expected benefit; any such movement in exchange rates may also thereby reduce rather than enhance the Fund's profits on its underlying securities transactions.
Securities Index Futures Contracts and Options Thereon.
Purchases or sales of securities index futures contracts are used for hedging purposes to attempt to protect the Fund's current or intended investments from broad fluctuations in stock or bond prices. For example, the Fund may sell securities index futures contracts in anticipation of or during a market decline to attempt to offset the decrease in market value of the Fund's securities portfolio that might otherwise result. If such decline occurs, the loss in value of portfolio securities may be offset, in whole or part, by gains on the futures position. When the Fund is not fully invested in the securities market and anticipates a significant market advance, it may purchase securities index futures contracts in order to gain rapid market exposure that may, in part or entirely, offset increases in the cost of securities that the Fund intends to purchase. As such purchases are made, the corresponding positions in securities index futures contracts will be closed out. The Fund may write put and call options on securities index futures contracts for hedging purposes.
LIMITATIONS ON THE PURCHASE AND SALE OF FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
Subject to the guidelines of the Board of Directors, the Fund may engage in transactions in futures contracts and options hereon only for bona fide hedging, yield enhancement and risk management purposes, in each case in accordance with the rules and regulations of the CFTC.
Regulations of the CFTC applicable to the Fund permit the Fund's futures and options on futures transactions to include (i) bona fide hedging transactions without regard to the percentage of the Fund's assets committed to margin and option premiums, and (ii) non-hedging transactions, provided that the Fund not enter into such non-hedging transactions if, immediately thereafter, the sum of the amount of initial margin deposits on the Fund's existing futures positions and option premiums would exceed 5% of the market value of the Fund's liquidating value, after taking into account unrealized profits and unrealized losses on any such transactions.
In addition, investment in future contracts and related options will be limited by the applicable S&P Guidelines (as defined in the Prospectus).
FORWARD CURRENCY EXCHANGE CONTRACTS
The Fund may engage in currency transactions otherwise than on futures exchanges to protect against future changes in the level of future currency exchange rates. The Fund will conduct such currency exchange transactions either on a spot, i.e., cash, basis at the rate then prevailing in the currency exchange market or on a forward basis, by entering into forward contracts to purchase or sell currency. A forward contract on foreign currency involves an obligation to purchase or sell a specific currency at a future date, which may be any fixed number of days agreed upon by the parties from the date of the contract, at a price set on the date of the contract. The risk of shifting of a forward currency contract will be substantially the same as a futures contract having similar terms. The Fund's dealing in forward currency exchange will be limited to hedging involving either specific transactions or portfolio positions. Transaction hedging is the purchase or sale of forward currency with respect to specific receivables or payables of the Fund generally arising in connection with the purchase or sale of its portfolio securities and accruals of interest receivable and Fund expenses. Position hedging is the forward sale of currency with respect to portfolio security positions denominated or quoted in that currency or in a currency bearing a high degree of positive correlation to the value of that currency.
The Fund may not position hedge with respect to a particular currency for an amount greater than the aggregate market value (determined at the time of making any sale of forward currency) of the securities held in its portfolio denominated or quoted in, or currently convertible into, such currency. If the Fund enters into a position hedging transaction, the Fund's custodian or subcustodian will place cash or other liquid securities in a segregated account of the Fund in an amount equal to the value of the Fund's total assets committed to the consummation of the given forward contract. If the value of the securities placed in the segregated account declines, additional cash or securities will be placed in the account so that the value of the account will, at all times, equal the amount of the Fund's commitment with respect to the forward contract.
At or before the maturity of a forward sale contract, the Fund may either sell a portfolio security and make delivery of the currency, or retain the security and offset its contractual obligations to deliver the currency by purchasing a second contract pursuant to which the Fund will obtain, on the same maturity date, the same amount of the currency which it is obligated to delivery. If the Fund retains the portfolio security and engages in an offsetting transaction, the Fund, at the time of execution of the offsetting transaction, will incur a gain or a loss to the extent that movement has occurred in forward contract prices. Should forward prices decline during the period between the Fund's entering into a forward contract for the sale of a currency and the date it enters into an offsetting contract for the purchase of the currency, the Fund will realize a gain to the extent the price of the currency it has agreed to purchase is less than the price of the currency it has agreed to sell. Should forward prices increase, the Fund will suffer a loss to the extent the price of the currency it has agreed to purchase exceeds the price of the currency it has agreed to sell. Closing out forward purchase contracts involves similar offsetting transactions.
The cost to the Fund of engaging in currency transactions varies with factors such as the currency involved, the length of the contract period and the market conditions then prevailing. Because forward transactions in currency exchange are usually conducted on a principal basis, no fees or commissions are involved. The use of foreign currency contracts does not eliminate fluctuations in the underlying prices of the securities, but it does establish a rate of exchange that can be achieved in the future. In addition, although forward currency contracts limit the risk of loss due to a decline in the value of the hedged currency, they also limit any potential gain that might result if the value of the currency increases.
If a decline in any currency is generally anticipated by the Adviser, the Fund may not be able to contract to sell the currency at a price above the level to which the currency is anticipated to decline.
SPECIAL RISK CONSIDERATIONS RELATING TO FUTURES AND OPTIONS THEREON
The Fund's ability to establish and close out positions in futures contracts and options thereon will be subject to the development and maintenance of liquid markets. Although the Fund generally will purchase or sell only those futures contracts and options thereon for which there appears to be a liquid market, there is no assurance that a liquid market on an exchange will exist for any particular futures contract or option thereon at any particular time. In the event no liquid market exists for a particular futures contract or option thereon in which the Fund maintains a position, it will not be possible to effect a closing transaction in that contract or to do so at a satisfactory price and the Fund would have to either make or take delivery under the futures contract or, in the case of a written option, wait to sell the underlying securities until the option expires or is exercised or, in the case of a purchased option, exercise the option. In the case of a futures contract or an option thereon which the Fund has written and which the Fund is unable to close, the Fund would be required to maintain margin deposits on the futures contract or option thereon and to make variation margin payments until the contract is closed.
Successful use of futures contracts and options thereon and forward contracts by the Fund is subject to the ability of the Adviser to predict correctly movements in the direction of interest and foreign currency rates. If the Adviser's expectations are not met, the Fund will be in a worse position than if a hedging strategy had not been pursued. For example, if the Fund has hedged against the possibility of an increase in interest rates which would adversely affect the price of securities in its portfolio and the price of such securities increases instead, the Fund will lose part or all of the benefit of the increased value of its securities because it will have offsetting losses in its futures positions. In addition, in such situations, if the Fund has insufficient cash to meet daily variation margin requirements, it may have to sell securities to meet the requirements. These sales may be, but will not necessarily be, at increased prices which reflect the rising market. The Fund may have to sell securities at a time when it is disadvantageous to do so.
ADDITIONAL RISKS OF FOREIGN OPTIONS, FUTURES CONTRACTS, OPTIONS ON FUTURES CONTRACTS AND FORWARD CONTRACTS
Options, futures contracts and options thereon and forward contracts on securities and currencies may be traded on foreign exchanges. Such transactions may not be regulated as effectively as similar transactions in the U.S., may not involve a clearing mechanism and related guarantees, and are subject to the risk of governmental actions affecting trading in, or the prices of, foreign securities. The value of such positions also could be adversely affected by (i) other complex foreign political, legal and economic factors, (ii) lesser availability than in the U.S. of data on which to make trading decisions, (iii) delays in the Fund's ability to act upon economic events occurring in the foreign markets during non-business hours in the U.S., (iv) the imposition of different exercise and settlement terms and procedures and margin requirements than in the U.S. and (v) lesser trading volume.
Exchanges on which options, futures and options on futures are traded may impose limits on the positions that the Fund may take in certain circumstances.
RISKS OF CURRENCY TRANSACTIONS
Currency transactions are also subject to risks different from those of other portfolio transactions. Because currency control is of great importance to the issuing governments and influences economic planning and policy, purchases and sales of currency and related instruments can be adversely affected by government exchange controls, limitations or restrictions on repatriation of currency, and manipulation, or exchange restrictions imposed by governments. These forms of governmental action can result in losses to the Fund if it is unable to deliver or receive currency or monies in settlement of obligations and could also cause hedges it has entered into to be rendered useless, resulting in full currency exposure as well as incurring transaction costs.
REPURCHASE AGREEMENTS
The Fund may engage in repurchase agreements as set forth in the
Prospectus. A repurchase agreement is an instrument under which the purchaser,
i.e., the Fund, acquires a debt security and the seller agrees, at the time of
the sale, to repurchase the obligation at a mutually agreed upon time and price,
thereby determining the yield during the purchaser's holding period. This
results in a fixed rate of return insulated from market fluctuations during such
period. The underlying securities are ordinarily U.S. Treasury or other
government obligations or high quality money market instruments. The Fund will
require that the value of such underlying securities, together with any other
collateral held by the Fund, always equals or exceeds the amount of the
repurchase obligations of the contra party. The Fund's risk is primarily that,
if the seller defaults, the proceeds from the disposition of the underlying
securities and other collateral for the seller's obligation are less than the
repurchase price. If the seller becomes insolvent, the Fund might be delayed in
or prevented from selling the collateral. In the event of a default or
bankruptcy by a seller, the Fund will promptly seek to liquidate the collateral.
To the extent that the proceeds from any sale of such collateral upon a default
in the obligation to repurchase are less than the repurchase price, the Fund
will experience a loss.
If the financial institution which is a party to the repurchase agreement petitions for bankruptcy or becomes subject to the United States Bankruptcy Code, the law regarding the rights of the Fund is unsettled. As a result, under extreme circumstances, there may be a restriction on the Fund's ability to sell the collateral and the Fund would suffer a loss.
LOANS OF PORTFOLIO SECURITIES
Consistent with applicable regulatory requirements, the Fund may lend its portfolio securities to securities broker-dealers or financial institutions, provided that such loans are callable at any time by the Fund (subject to notice provisions described below), and are at all times secured by cash or cash equivalents, which are maintained in a segregated account pursuant to applicable regulations and that are at least equal to the market value, determined daily, of the loaned securities. The advantage of such loans is that the Fund continues to receive the income on the loaned securities while at the same time earns interest on the cash amounts deposited as collateral, which will be invested in short-term obligations. The Fund will not lend its portfolio securities if such loans are not permitted by the laws or regulations of any state in which its shares are qualified for sale and will not lend more than 33% of the value of its total assets. The Fund's ability to lend portfolio securities will be limited by the applicable Rating Agency Guidelines.
A loan may generally be terminated by the borrower on one business day's notice, or by the Fund on five business days' notice. If the borrower fails to deliver the loaned securities within five days after receipt of notice, the Fund could use the collateral to replace the securities while holding the borrower liable for any excess of replacement cost over collateral. As with any extensions of credit, there are risks of delay in recovery and in some cases even loss of rights in the collateral should the borrower of the securities fail financially. However, these loans of portfolio securities will only be made to firms deemed by the Fund's management to be creditworthy and when the income which can be earned from such loans justifies the attendant risks. The Board of Directors will oversee the creditworthiness of the contracting parties on an ongoing basis. Upon termination of the loan, the borrower is required to return the securities to the Fund. Any gain or loss in the market price during the loan period would inure to the Fund. The risks associated with loans of portfolio
securities are substantially similar to those associated with repurchase agreements. Thus, if the contra party to the loan petitions for bankruptcy or becomes subject to the United States Bankruptcy Code, the law regarding the rights of the Fund is unsettled. As a result, under extreme circumstances, there may be a restriction on the Fund's ability to sell the collateral and the Fund would suffer a loss. When voting or consent rights which accompany loaned securities pass to the borrower, the Fund will follow the policy of calling the loaned securities, to be delivered within one day after notice, to permit the exercise of such rights if the matters involved would have a material effect on the Fund's investment in such loaned securities. The Fund will pay reasonable finder's, administrative and custodial fees in connection with a loan of its securities.
THE ADVISER
The Adviser is a New York corporation with principal offices located at One Corporate Center, Rye, New York 10580-1434. The Adviser also serves as adviser to other closed-end and open-end investment companies with net assets in excess of $4.2 billion as of January 1, 1997.
Pursuant to an investment advisory contract (the "Investment Advisory Contract"), the Adviser furnishes a continuous investment program for the Fund's portfolio, makes the day-to-day investment decisions for the Fund, arranges the portfolio transactions for the Fund and generally manages the Fund's investments in accordance with the stated policies of the Fund, subject to the general supervision of the Board of Directors of the Fund.
Under the Investment Advisory Contract, the Adviser also (1) provides the Fund with the services of persons competent to perform such supervisory, administrative and clerical functions as are necessary to provide efficient administration of the Fund, including maintaining certain books and records; (2) oversees the performance of administrative and professional services provided to the Fund by others, including the Fund's Custodian, Transfer Agent and Dividend-Disbursing Agent, as well as legal, accounting, auditing and other services performed for the Fund; (3) provides the Fund, if requested, with adequate office space and facilities; (4) prepares, but does not pay for, periodic updating of the Fund's Registration Statement, Prospectus and SAI, including the printing of such documents for the purpose of filings with the SEC; (5) supervises the calculation of the net asset value of shares of the Fund; and (6) prepares notices and agendas for meetings of the Fund's Board of Directors and minutes of such meetings in all matters required by the Investment Company Act of 1940, as amended (the "1940 Act") to be acted upon by the Board.
The Adviser has entered into an Administration Contract with BISYS Fund Services Limited Partnership ("BISYS" or the "Administrator"), 3435 Stetzer Road, Columbus, Ohio 43219, pursuant to which the Administrator provides certain administrative services necessary for the Fund's operations but which do not concern the investment advisory and portfolio management services provided by the Adviser. For such services and the related expenses borne by BISYS, the Adviser pays a monthly fee at the annual rate of .10% of the first $350 million of the aggregate average net assets of the Fund and other funds administered by BISYS and advised by the Adviser, .075% of the aggregate average net assets exceeding $350 million up to $600 million, and .06% in excess of $600 million (with a minimum annual fee of $40,000 per portfolio) which, together with the services to be rendered, is subject to negotiation between the parties and both parties retain the right unilaterally to terminate the arrangement on not less than sixty days' notice.
The Investment Advisory Contract provides that absent willful misfeasance, bad faith, gross negligence or reckless disregard of its duty, the Adviser is not liable to the Fund or any of its investors for any act or omission by the Adviser or for any error of judgment or for losses sustained by the Fund. The Investment Advisory Contract permits the Adviser from acting as adviser to others. The Fund has agreed by the terms of the Investment Advisory Contract that the word "Gabelli" in its name is derived from the name of the Adviser which in turn is derived from the name of Mario J. Gabelli; that such name is the property of the Adviser for copyright and/or other purposes; and that, therefore, such name may freely be used by the Adviser for other investment companies, entities or products. The Fund has further agreed that, in the event that for any reason the Adviser ceases to be its investment adviser, the Fund will, unless the Adviser otherwise consents in writing, promptly take all steps necessary to change its name to one which does not include "Gabelli."
The Investment Advisory Contract was approved by the Board of Directors on June 5, 1989 and by the Fund's shareholders at a meeting held on May 14, 1990 and was approved most recently by the Board of Directors on May 15, 1996. The Investment Advisory Contract is terminable without penalty by the Fund on not more than sixty days' written notice when authorized by the Board of Directors of the Fund, by the holders of a majority of the outstanding voting securities of the Fund, as defined in the 1940 Act, or by the Adviser. The Investment Advisory Contract will automatically terminate in the event of its assignment, as defined in the 1940 Act. The Investment Advisory Contract provides that, unless terminated, it will remain in effect so long as continuance of the Investment Advisory Contract is approved annually by the Board of Directors of the Fund, or the shareholders of the Fund and in either case, by a majority vote of the Directors who are not parties to the Investment Advisory Contract or "interested persons" as defined in the 1940 Act of any such person cast in person at a meeting called specifically for the purpose of voting on the continuance of the Investment Advisory Contract. For the fiscal years ended December 31, 1996, December 31, 1995 and December 31, 1994, the Adviser earned fees of $912,913, $969,629, and $1,177,574 respectively.
INVESTMENT RESTRICTIONS
The investment restrictions listed below have been adopted by the Fund as fundamental policies, except as otherwise indicated. Under the 1940 Act, a fundamental policy may not be changed without the vote of a majority of the outstanding voting securities of the Fund, as defined in the 1940 Act. Such a majority is defined as the lesser of (1) 67% or more of the shares present at a meeting of shareholders, if the holders of 50% of the outstanding shares of the Fund are present or represented by proxy or (2) more than 50% of the outstanding shares of the Fund.
The Fund may not:
1. Purchase the securities of any one issuer, other than the United States Government or any of its agencies or instrumentalities, if immediately after such purchase more than 5% of the value of its total assets would be invested in such issuer or the Fund would own more than 10% of the outstanding voting securities of such issuer, except that up to 25% of the value of the Fund's total assets may be invested without regard to such 5% and 10% limitations.
2. Purchase or otherwise acquire real estate or interests therein, although the Fund may purchase securities of issuers which engage in real estate operations and securities secured by real estate or interests therein.
3. Purchase or otherwise acquire or sell commodities or commodity contracts except that the Fund may purchase or sell financial futures contracts and related options thereon.
4. Purchase oil, gas or other mineral leases, rights or royalty contracts, or exploration or development programs, except that the Fund may invest in the securities of companies which operate, invest in, or sponsor such programs.
5. Purchase securities of other investment companies, except in connection with a merger, consolidation, reorganization or acquisition of assets, except that the Fund reserves the right to invest up to 5% of its total assets in not more than 3% of the securities of any one investment company including small business investment companies or invest up to 10% of its total assets in the securities of investment companies, nor make any such investments other than through purchases in the open market where to the best information of the Fund no commission or profit to a sponsor or dealer (other than the customary broker's commission) results from such purchase.
6. Pledge its assets or assign or otherwise encumber them except to secure permitted borrowings. For the purpose of this restriction, collateral arrangements with respect to the writing of options or entering into financial futures transactions or forward contracts, or when issued or delayed delivery securities are not deemed to be pledges of assets and such arrangements are not deemed to be the issuance of a senior security as set forth in restriction (7).
7. Issue senior securities except to the extent permitted by applicable law.
8. Make loans of money or securities, except: (a) that the Fund may engage in repurchase agreements as set forth in the Prospectus and (b) the Fund may lend its portfolio securities consistent with applicable regulatory requirements and as set forth in the Prospectus.
9. Make short sales of securities or maintain a short position, unless at all times when a short position is open, it either owns an equal amount of such securities or owns securities which, without payment of any further consideration, are convertible into or exchangeable for securities of the same issue as, and equal in amount to, the securities sold short.
10. Engage in the underwriting of securities, except insofar as the Fund may be deemed an underwriter under the Securities Act of 1933, as amended, in disposing of a portfolio security.
11. Invest for the purpose of exercising control or management of any other issuer.
12. Invest more than 25% of the value of its total assets in any one industry.
If a percentage restriction is adhered to at the time of investment, a later increase or decrease in percentage resulting from a change in values of portfolio securities or amount of total or net assets will not be considered a violation of any of the foregoing restrictions.
DIRECTORS AND OFFICERS
The Directors and Officers of the Fund, their principal business occupations during the last five years and their affiliations, if any, with the Adviser or the Administrator, are shown below. Directors deemed to be "interested persons" of the Fund for purposes of the 1940 Act are indicated by an asterisk.
As of April 30, 1997 the Directors and Officers of the Fund as a group beneficially owned 1,178,375 shares of the Fund equaling 14.60% of the Fund's outstanding shares. Of that 14.60%, Mario J. Gabelli and companies controlled by him beneficially owned approximately 13.70% of the Fund's outstanding shares.
PRINCIPAL OCCUPATIONS DURING LAST NAME, POSITION WITH FUND FIVE YEARS; AFFILIATIONS WITH AND ADDRESS THE ADVISER OR ADMINISTRATOR; AGE - --------------------------- --------------------------------------------------------------- Mario J. Gabelli*.......... Chairman, President, Chief Executive Officer and a Director of President, and Chief Gabelli Funds, Inc. since 1980; Chairman, Chief Executive Investment Officer Officer, Chief Investment Officer and Director of GAMCO One Corporate Center Investors, Inc.; President and Chairman of The Gabelli Equity Rye, New York 10580-1434 Trust, Inc. and The Gabelli Global Multimedia Trust Inc.; President, Chief Investment Officer and Director of Gabelli Equity Series Funds, Inc., The Gabelli Value Fund, Inc., Gabelli Global Series Funds, Inc., and Gabelli Investor Funds, Inc., and Trustee of The Gabelli Asset Fund, The Gabelli Growth Fund and The Gabelli Money Market Funds; Chairman and Director of Lynch Corporation; Mr. Gabelli is 54 years old. Anthony J. Colavita........ President and Attorney at law in the law firm of Anthony J. Director Colavita, P.C.; Director of The Gabelli Value Fund Inc., c/o Gabelli Funds, Inc. Gabelli Global Series Funds, Inc., Gabelli Investor Funds, Inc. One Corporate Center and Gabelli Equity Series Funds, Inc.; Trustee of The Gabelli Rye, New York 10580-1434 Asset Fund and The Gabelli Growth Fund, The Gabelli Money Market Funds since 1992 and The Westwood Funds. Mr. Colavita is 62 years old. E. Val Cerutti............. Chief Executive Officer of Cerutti Consultants, Inc.; Former Director President and Chief Operating Officer of Stella D'oro Biscuit c/o Gabelli Funds, Inc. Company (through 1992); Adviser, Iona College School of One Corporate Center Business; Director of Lynch Corporation and Gabelli Gold Fund, Rye, New York 10580-1434 Inc. Mr. Cerutti is 58 years old. Felix J. Christiana........ Formerly Senior Vice President of Dollar Dry Dock Savings Bank; Director Director, The Gabelli Equity Trust Inc., The Gabelli Multimedia c/o Gabelli Funds, Inc. Trust Inc., Gabelli Global Series Funds, Inc., The Gabelli One Corporate Center Value Fund Inc., Gabelli Investor Funds, Inc., Gabelli Equity Rye, New York 10580-1434 Series Funds, Inc., The Treasurer's Fund, Inc.; Trustee, The Gabelli Growth Fund and The Gabelli Asset Fund. Mr. Christiana is 71 years old. |
PRINCIPAL OCCUPATIONS DURING LAST NAME, POSITION WITH FUND FIVE YEARS; AFFILIATIONS WITH AND ADDRESS THE ADVISER OR ADMINISTRATOR; AGE - --------------------------- --------------------------------------------------------------- Anthonie C. van Ekris...... Managing Director of BALMAC International, Inc.; Formerly Director Chairman and Chief Executive Officer of Balfour MacLaine c/o Gabelli Funds, Inc. Corporation and Kay Corporation (through 1990); Director of One Corporate Center Spinnaker Industries, Inc.; Director of Stahel Hardmeyer A.Z., Rye, New York 10580-1434 Gabelli Equity Series Funds, Inc. and Gabelli Global Series Funds, Inc.; Trustee of The Gabelli Asset Fund, The Gabelli Growth Fund and The Gabelli Money Market Funds. Mr. van Ekris is 63 years old. Dugald A. Fletcher*........ President, Fletcher & Company, Inc.; Director (since 1989) and Director Chairman (since February of 1991) of Binnings Building c/o Gabelli Funds, Inc. Products, Inc.; Trustee. Mr. Fletcher is 68 years old. One Corporate Center Rye, New York 10580-1434 Karl Otto Pohl*............ Partner of Sal Oppenheim Jr. & Cie. (private investment bank); Director Former President of the Deutsche Bundesbank (Germany's Central c/o Gabelli Funds, Inc. Bank) and Chairman of its Central Bank Council (1980-1991); One Corporate Center Current board member of Zurich Versicherungs-Gesellschaft Rye, New York 10580-1434 (insurance); the International Council for JP Morgan & Co.; the Board of Supervisory Directors of ROBECo/o Group; and the Supervisory Board of Royal Dutch (petroleum company); Advisory Director of Unilever N.V. and Unilever Deutschland; Director/Trustee of all Funds managed by the Adviser. Mr. Pohl is 67 years old. Anthony R. Pustorino, CPA.. Professor of Accounting, Pace University since 1965; Director, Director President and shareholder of Pustorino, Puglisi & Co., RC., c/o Gabelli Funds, Inc. certified public accountants from 1961 to 1990; Director, The One Corporate Center Gabelli Equity Trust Inc., The Gabelli Value Fund Inc., Gabelli Rye, New York 10580-1434 Equity Series Funds, Inc., The Treasurer's Fund, Inc., Trustee, The Gabelli Growth Fund, The Gabelli Asset Fund and The Gabelli Global Multimedia Trust Inc. Mr. Pustorino is 71 years old. Salvatore J. Zizza*........ Director and Chief Executive Officer of The Lehigh Group, Inc.; Director Chairman of the Executive Committee and a Director of Binnings c/o Gabelli Funds, Inc. Building Products, Inc.; Director of The Gabelli Equity Trust One Corporate Center Inc. and Debe Computer Systems Corp.; Trustee, The Gabelli Rye, New York 10580-1434 Asset Fund and The Gabelli Growth Fund. Mr. Zizza is 51 years old. Bruce N. Alpert............ Vice President, Chief Operating Officer of the investment Vice President and advisory division of the Adviser; Vice President and Treasurer Treasurer of Gabelli Equity Series Funds, Inc., The Gabelli Equity Trust One Corporate Center Inc., The Gabelli Global Multimedia Trust Inc., Gabelli Global Rye, New York 10580-1434 Series Funds, Inc., The Gabelli Money Market Funds, The Gabelli Value Fund Inc. and Gabelli Investor Funds, Inc.; President and Treasurer of The Gabelli Asset Fund, The Gabelli Growth Fund; Manager of Teton Advisers LLC and Vice President of The Westwood Funds. Mr. Alpert is 45 years old. Douglas P. Neviera......... Assistant Vice President of The Gabelli Global Multimedia Trust Assistant Vice President Inc.; Client Services Representative of Gabelli & Company, Inc. One Corporate Center until 1995. Senior Analyst for Putnam Investments from 1991 to Rye, New York 10580-1434 1994. Master of Science in Finance student at Boston College from 1993 to 1994. Mr. Neviera is 27 years old. James E. McKee............. Vice President, General Counsel and Secretary of Gabelli Funds, Secretary Inc.; General Counsel of GAMCO Investors, Inc.; Secretary of One Corporate Center all Funds advised by Gabelli Funds, Inc. and Teton Advisers Rye, New York 10580-1434 LLC; Branch Chief U.S. Securities and Exchange Commission -- Northeast Regional Office, 1992-1993; Staff Attorney, U.S. Securities and Exchange Commission -- Northeast Regional Office, 1989-1992. Mr. McKee is 34 years old. |
The Fund pays each Director who is not an employee of the Adviser or an affiliated company an annual fee of $5,000 and $750 for each meeting of the Board of Directors attended by the Director, and reimburses Directors for certain travel and other out-of-pocket expenses incurred by them in connection with attending
such meetings. Directors and officers of the Fund who are employed by the Adviser or an affiliated company receive no compensation or expense reimbursement from the Fund.
Mr. Gabelli is an "interested person" as a result of his employment as an officer of the Fund and the Adviser. Mr. Gabelli is a registered representative of an affiliated broker-dealer. Mr. Pohl receives fees from the Adviser but has no obligation to provide any services to the Adviser. Although this relationship does not appear to require designation of Mr. Pohl as an "interested person," the Fund has made such designation in order to avoid the possibility that Mr. Pohl's independence would be questioned. Mr. Fletcher and Mr. Zizza may be "interested persons" as a result of their association with Binnings Building Products, Inc., an entity controlled by GLI, Inc., an indirect subsidiary of the Adviser.
Karl Otto Pohl and Anthonie C. van Ekris, Directors of the Fund, reside outside the United States and all or a significant portion of their assets are located outside the United States. They have no authorized agent in the United States to receive service of process. As a result, it may not be possible for investors to effect service of process within the United States or to enforce against them in United States courts judgments predicated upon civil liability provisions of United States securities laws. It may also not be possible to enforce against them in foreign courts judgments of United States courts or liabilities in original actions predicated upon civil liability provisions of the United States securities laws.
The following table sets forth certain information regarding the compensation of the Fund's Directors and Executive Officers. Except as disclosed below, no Executive Officer or person affiliated with the Fund received compensation from the Fund for the calendar year ended December 31, 1996 in excess of $60,000.
COMPENSATION TABLE
AGGREGATE COMPENSATION TOTAL COMPENSATION FROM FROM REGISTRANT REGISTRANT AND FUND COMPLEX (FISCAL PAID POSITION YEAR) TO DIRECTORS - --------------------------------------------------------- ------------ ------------------ Mario J. Gabelli......................................... $ 0 $ 0 President, and Chief Investment Officer E. Val Cerutti........................................... $6,000 $ 8,000(2) Director Felix Christiana......................................... $6,000 $ 74,000(11) Director Anthony J. Colavita...................................... $6,000 $ 70,000(15) Director Dugald Fletcher.......................................... $6,000 $ 14,000(2) Director Karl Otto Pohl........................................... $5,500 $ 77,750(16) Director Anthony R. Pustorino..................................... $6,000 $ 84,500(9) Director Anthonie C. van Ekris.................................... $6,000 $ 49,000(12) Director Salvatore Zizza.......................................... $6,000 $ 42,500(5) Director |
PORTFOLIO TRANSACTIONS AND BROKERAGE
Under the Investment Advisory Contract, the Adviser is authorized on behalf of the Fund to employ brokers to effect the purchase or sale of portfolio securities with the objective of obtaining prompt, efficient and reliable execution and clearance of such transactions at the most favorable price obtainable ("best execution") at reasonable expense. Transactions in securities other than those for which a securities exchange is the principal market are generally done with a brokerage firm and a commission is paid whenever it appears that the broker can obtain a more favorable overall price. In general, there may be no stated commission in the case of certain debt securities and securities traded on the over-the-counter markets, but the prices of those securities may include undisclosed commissions or markups. Options transactions will usually be effected through a broker and a commission will be charged. The Fund also expects that securities will be purchased at times in underwritten offerings where the price includes a fixed amount of compensation generally referred to as the underwriter's concession or discount.
The Adviser currently serves as adviser to a number of investment company clients and may in the future act as adviser to others. It is the practice of the Adviser to cause purchase and sale transactions to be allocated among the Fund and others whose assets it manages in such manner as it deems equitable. In making such allocations among the Fund and other client accounts, the main factors considered are the respective investment objectives, the relative size of portfolio holdings of the same or comparable securities, the availability of cash for investment, the size of investment commitments generally held and the opinions of the persons responsible for managing the portfolios of the Fund and other client accounts.
The policy of the Fund regarding purchases and sales of securities and options for its portfolio is that primary consideration will be given to obtaining the most favorable prices and efficient execution of transactions. In seeking to implement the Fund's policies, the Adviser effects transactions with those brokers and dealers who the Adviser believes provide the most favorable prices and are capable of providing efficient executions. If the Adviser believes such price and executions are obtainable from more than one broker or dealer, it may give consideration to placing portfolio transactions with those brokers and dealers who also furnish research and other services to the Fund or the Adviser of the type described in Section 28(e) of the Securities Exchange Act of 1934, as amended. In doing so, the Fund may also pay higher commission rates than the lowest available when the Adviser believes it is reasonable to do so in light of the value of the brokerage and research services provided by the broker effecting the transaction. Such services may include, but are not limited to, any one or more of the following: information as to the available ability of securities for purchase or sale; statistical or factual information or opinions pertaining to investment; wire services; and appraisals or evaluations of portfolio securities.
The Adviser may also place orders for the purchase or sale of portfolio securities with Gabelli & Company, Inc., a broker-dealer member of the National Association of Securities Dealers, Inc. and an affiliate of the Adviser, when it appears that, as an introducing broker or otherwise, Gabelli & Company, Inc. can obtain a price and execution which is at least as favorable as that obtainable by other qualified brokers.
As required by Rule 17e-1 under the 1940 Act, the Board of Directors has adopted "Procedures" which provide that the commissions paid to Gabelli or other affiliates on stock exchange transactions may not exceed that which would have been charged by another qualified broker or member firm able to affect the same or a comparable transaction an at equally favorable price. Rule 17e-1 and the Procedures contain requirements that the Board, including its Independent Directors, conduct periodic compliance reviews of such brokerage allocations and review such schedule at least annually for its continuing compliance with the foregoing standard. The Adviser and Gabelli & Company, Inc. are also required to furnish reports and maintain records in connection with such reviews. For the fiscal years ended December 31, 1994, December 31, 1995 and December 31, 1996 the Fund paid a total of $53,877, $98,896 and $69,058, respectively, in brokerage commissions, of which Gabelli & Company, Inc. received $9,261, $17,775 and $7,212, respectively. The amounts received by Gabelli & Company, Inc. from the Fund in respect of brokerage commissions for the fiscal year ended December 31, 1996 represented 10.4% of the aggregate dollar amount of brokerage commissions paid by the Fund for such period. In addition, for the fiscal year ended December 31, 1996, the
Fund paid brokerage commissions to Gabelli & Company, Inc. with respect to 9.34% of the aggregate dollar amount of transactions by the Fund.
To obtain the best execution of portfolio trades on the New York Stock Exchange (the "NYSE"), Gabelli & Company, Inc. controls and monitors the execution of such transactions on the floor of the NYSE through independent "floor brokers" or through the Designated Order Turnaround ("DOT") System of the NYSE. Such transactions are then cleared, confirmed to the Fund for the account of Gabelli & Company, Inc., and settled directly with the Custodian of the Fund by a clearing house member firm which remits the commission less its clearing charges to Gabelli & Company, Inc.
Pursuant to an agreement with the Fund, Gabelli & Company, Inc. pays all charges incurred for such services and reports at least quarterly to the Board the amount of such expenses and commissions; and the net compensation realized by Gabelli & Company, Inc. for its brokerage services is subject to the approval of the Board and the "non interested" Directors of the Fund who must approve the continuation of the arrangement at least annually. Commissions paid by the Fund pursuant to the arrangement may not exceed the commission level specified by the Procedures described above. Gabelli & Company, Inc. may also effect Fund portfolio transactions in the same manner and pursuant to the same arrangements on other national securities exchanges which adopt direct access rules similar to those of the NYSE.
DETERMINATION OF NET ASSET VALUE
Net asset value will normally be calculated (a) no less frequently than weekly, (b) on the last business day of each month and (c) at any other times determined by the Fund's Board of Directors. Net asset value is calculated by dividing the value of the Fund's net assets (the value of its assets less its liabilities, exclusive of capital stock and surplus, and less the liquidation value of any outstanding shares of preferred stock) by the total number of shares of common stock outstanding. All securities for which market quotations are readily available, which include the options and futures in which the Fund may invest, are valued at the last sales price on the primary exchange on which they are traded prior to the time of determination, or, if no sales price is available at that time, at the closing price quoted for the securities (but if bid and asked quotations are available, at the mean between the last current bid and asked prices, rather than the quoted closing price). Securities that are traded in the unregulated market are valued at the mean between the bid and the asked quotations, if bid and asked quotations are available, at the current bid price. If bid and asked quotations are not available, then such securities are valued as determined pursuant to procedures established in good faith by the Board of Directors of the Fund.
Short-term debt securities with remaining maturities of sixty days or less at the time of purchase are varied at amortized cost, unless the Directors determine such does not reflect the securities' fair value, in which case these securities will be valued at their fair value as determined by the Directors. Other debt securities will be valued on a marked-to-market basis until such time as they reach a remaining maturity of sixty days, whereupon they will be valued at amortized value unless the Directors determine such does not reflect the securities' fair value, in which case these securities will be valued at their fair value as determined by the Directors.
The offering costs of the Cumulative Preferred Stock (including the underwriting discount) will be charged to the additional paid-in capital.
DIVIDENDS, DISTRIBUTIONS AND TAXES
The following is a brief description of certain additional tax considerations affecting the Fund and its shareholders. No attempt is made to present a detailed explanation of all U.S. Federal, state, local and foreign tax concerns, and the discussions set forth here and in the Prospectus do not constitute tax advice. Investors are urged to consult their own tax advisers with any specific questions relating to federal, state, local and foreign taxes. The discussion reflects applicable tax laws of the United States as of the date of this Statement of Additional Information, which tax laws may be changed or subject to new interpretations by the courts or the Internal Revenue Service retroactively or prospectively.
GENERAL
The Fund has qualified as and intends to continue to qualify as and elect to be a RIC under Subchapter M of the Code. If it so qualifies, the Fund will not be subject to U.S. Federal income tax on the portion of its net investment income (its investment company taxable income as defined in the Code without regard to the deduction for dividends paid) and its net capital gain (the excess of its net realized long-term capital gain over its net realized short-term capital loss), which it distributes to its shareholders in each taxable year, provided that it distributes to its shareholders at least 90% of its net investment income for such taxable year.
Qualification as a RIC requires, among other things, that the Fund: (a)
derive at least 90% of its gross income in each taxable year from dividends,
interest, payments with respect to securities loans, gains from the sale or
other disposition of stock or securities, foreign currencies or other income
(including gains from options, futures or forward contracts) derived with
respect to its business of investing in stock, securities or currencies; (b)
derive less than 30% of its gross income in each taxable year from the sale or
other disposition of any of the following held for less than three months:
stock, securities, options, futures, certain forward contracts, or foreign
currencies (or any options, futures or forward contracts on foreign currencies)
but only if such currencies are not directly related to the Fund's principal
business of investing in stock or securities (the "30% limitation"); and (c)
diversify its holdings so that, at the end of each quarter of each taxable year,
(i) at least 50% of the market value of the Fund's assets is represented by
cash, cash items, U.S. government securities, securities of other RICs and other
securities with such other securities limited, in respect of any one issuer, to
an amount not greater than 5% of the value of the Fund's assets and 10% of the
outstanding voting securities of such issuer, and (ii) not more than 25% of the
value of its assets is invested in the securities of any one issuer (other than
U.S. government securities or the securities of other RICs).
TAXATION OF THE FUND
If the Fund were unable to satisfy the 90% distribution requirement or otherwise were to fail to qualify to be taxed as a RIC in any year, it would be subject to tax in such year on all of its taxable income, whether or not the Fund made any distributions. To qualify again to be taxed as a RIC in a subsequent year, the Fund would be required to distribute to Cumulative Preferred Shareholders and Common Shareholders as an net investment income dividend, its earnings and profits attributable to non-RIC years reduced by an interest charge on 50% of such earnings and profits payable by the Fund to the IRS. In addition, if the Fund failed to qualify as a RIC for a period greater than one taxable year, then the Fund would be required to recognize and pay tax on any net built-in gains (the excess of aggregate gains, including items of income, over aggregate losses that would have been realized if the Fund had been liquidated) in order to qualify as a RIC in a subsequent year.
Under the Code, amounts not distributed by a RIC on a timely basis in
accordance with a calendar year distribution requirement are subject to a 4%
excise tax. To avoid the tax, the Fund must distribute during each calendar
year, an amount equal to, at the minimum, the sum of (1) 98% of its ordinary
income for the calendar year, (2) 98% of its capital gain net income for the one
year period ending on October 31 of such year (unless an election is made by a
fund with a November or December year-end to use the fund's fiscal year), and
(3) all ordinary income and capital gain net income for previous years that were
not previously distributed. A distribution will be treated as paid during the
calendar year if it is paid during the calendar year or declared by the Fund in
October, November or December of the year, payable to shareholders of record on
a date during such month and paid by the Fund during January of the following
year. Any such distributions paid during January of the following year will be
deemed to be received on December 31 of the year the distributions are declared,
rather than when the distributions are received. While the Fund intends to
distribute its ordinary income and capital gain net income in the manner
necessary to minimize imposition of the 4% excise tax, there can be no assurance
that sufficient amounts of the Fund's ordinary income and capital gain net
income will be distributed to avoid entirely the imposition of the tax. In such
event, the Fund will be liable for the tax only on the amount by which it does
not meet the foregoing distribution requirements.
Gains or losses on the sales of securities by the Fund will be long-term capital gains or losses if the securities have been held by the Fund for more than twelve months. Gains or losses on the sale of securities held for twelve months or less will be short-term capital gains or losses.
Foreign currency gains or losses on non-U.S. dollar denominated bonds and other similar debt instruments and on any non-U.S. dollar denominated futures contracts, options and forward contracts that are not section 1256 contracts (as defined below) generally will be treated as ordinary income and loss.
If the Fund invests in stock of a passive foreign investment company ("PFIC"), the Fund may be subject to Federal income tax on a portion of any "excess distribution" with respect to, or gain from the disposition of, such stock. The tax would be determined by allocating such distribution or gain ratably to each day of the Fund's holding period for the stock. The amount so allocated to any taxable year of the Fund prior to the taxable year in which the excess distribution or disposition occurs would be taxed to the Fund at the highest marginal income tax rate in effect for the year to which it was allocated, and the tax would be further increased by an interest charge. The amount allocated to the taxable year of the distribution or disposition would be included in the Fund's net investment income and, accordingly, would not be taxable to the Fund to the extent distributed by the Fund as a dividend to shareholders.
If the Fund invests in stock of a PFIC, the Fund may be able to elect to be a "qualified electing fund," in lieu of being taxable in the manner described in the above paragraph and to include annually in income its pro rata share of the ordinary earnings and net capital gain (whether or not distributed) of the PFIC. In order to make this election, the Fund would be required to obtain annual information from the PFICs in which it invests, which may be difficult to obtain. Alternatively, under proposed regulations not currently in effect, the Fund would be able to elect to mark to market its PFIC stock, resulting in the stock being treated as sold at fair market value on the last business day of each taxable year. Any resulting gain would be reported as ordinary income, and any resulting loss would not be recognized.
The Fund may invest in securities purchased at a discount and may therefore cause the Fund to accrue income before amounts due under the obligation are paid. The Fund may invest in securities rated in the medium to lower rating categories of nationally recognized rating organizations, and in unrated securities. A portion of the interest payments on such high yield bonds may be treated as dividends for Federal income tax purposes.
As a result of investing in stock of PFICs or securities purchased at a discount or any other investment that produces income that is not matched by a corresponding cash distribution to the Fund, the Fund could be required to include in current income, income it has not yet received. Any such income would be treated as income earned by the Fund and therefore would be subject to the distribution requirements of the Code. This might prevent the Fund from distributing 90% of its net investment income, as is required in order to avoid Fund-level taxation on the Fund's distributions, or might prevent it from distributing enough income and capital gain to avoid completely the imposition of the excise tax. To avoid this result, the Fund may be required to borrow money or dispose of other securities to be able to make distributions to its investors. The extent to which the Fund may liquidate securities at a gain may be limited by the 30% limitation (discussed above).
If the Fund does not meet the asset coverage requirements of the 1940 Act and the Articles Supplementary, the Fund will be required to suspend distributions to the holders of the common stock until the asset coverage is restored. See "Description of Cumulative Preferred Stock -- Dividends" and "Description of Capital Stock and Other Securities." Such a suspension of distributions might prevent the Fund from distributing 90% of its net investment income, as is required in order to avoid Fund-level taxation on the Fund's distributions, or might prevent it from distributing enough income and capital gain to avoid completely imposition of the excise tax. Upon any failure to meet the asset coverage requirements of the 1940 Act or the Articles Supplementary, the Fund may, and in certain circumstances will, be required to partially redeem the shares of Cumulative Preferred Stock in order to restore the requisite asset coverage and avoid the adverse consequences to the Fund and its shareholders of failing to qualify as a RIC. If asset coverage were restored, the Fund would again be able to pay dividends and might be able to avoid Fund-level taxation on the Fund's undistributed income.
HEDGING TRANSACTIONS
Certain options, futures contracts and options on futures contracts are "section 1256 contracts". Any gains or losses on section 1256 contracts are generally considered 60% long-term and 40% short-term capital
gains or losses ("60/40"). Also, section 1256 contracts held by the Fund at the end of each taxable year are "marked-to-the-market" with the result that unrealized gains or losses are treated as though they were realized and the resulting gain or loss is treated as 60/40 gain or loss.
Hedging transactions undertaken by the Fund may result in "straddles" for U.S. Federal income tax purposes. The straddle rules may affect the character of gains (or losses) realized by the Fund. In addition, losses realized by the Fund on positions that are part of a straddle may be deferred under the straddle rules, rather than being taken into account in calculating the taxable income for the taxable year in which such losses are realized. Further, the Fund may be required to capitalize, rather than deduct currently, any interest expense on indebtedness incurred or continued to purchase or carry any positions that are part of a straddle.
The Fund may make one or more of the elections available under the Code which are applicable to straddles. If the Fund makes any of the elections, the amount, character and timing of the recognition of gains or losses from the affected straddle positions will be determined under rules that vary according to the election(s) made. The rules applicable under certain of the elections accelerate the recognition of gains or losses from the affected straddle positions.
Because application of the straddle rules may affect the character and timing of the Fund's gains, losses and deductions, the amount which must be distributed to shareholders, and which will be taxed to shareholders as net investment income or net capital gain, may be increased or decreased substantially as compared to a fund that did not engage in such hedging transactions.
The 30% limitation (discussed above) may limit the Fund's ability to engage in transactions in options, spreads, straddles, hedging transactions, forward or futures contracts and options on any of these positions because these transactions (1) are often consummated in less than three months, (2) may require the sale of portfolio securities held less than three months, and (3) may reduce the holding periods of certain securities within the Fund.
FOREIGN WITHHOLDING TAXES
Income received by the Fund from sources within foreign countries may be subject to withholding and other taxes imposed by such countries. Tax conventions between certain countries and the United States may reduce or eliminate such taxes. It is impossible to determine the rate of foreign tax in advance since the amount of the Fund's assets to be invested in various countries is not known. Because the Fund will not have more than 50% of its total assets invested in securities of foreign governments or corporations, the Fund will not be entitled to "pass-through" to shareholders the amount of foreign taxes paid by the Fund.
TAXATION OF SHAREHOLDERS
The Fund will determine either to distribute or to retain for reinvestment all or part of its net capital gain. If any such gains are retained, the Fund will be subject to a tax of 35% of such amount. In that event, the Fund expects to designate the retained amount as undistributed capital gains in a notice to its shareholders, each of whom (1) will be required to include in income for tax purposes as long-term capital gains its share of such undistributed amount, (2) will be entitled to credit its proportionate share of the tax paid by the Fund against its Federal income tax liability and to claim refunds to the extent that the credit exceeds such liability, and (3) will increase its basis in its shares of the Fund by an amount equal to 65% of the amount of undistributed capital gains included in such shareholder's gross income.
Distributions of net investment income as ordinary income dividends are taxable to a U.S. shareholder as net investment income, whether paid in cash or shares. Ordinary income dividends paid by the Fund may qualify for the dividends received deduction available to corporations, but only to the extent that the Fund's income consists of qualified dividends received from U.S. corporations. The amount of any dividend distribution eligible for the dividends received deduction will be designated by the Fund in a written notice to shareholders within 60 days of the close of the taxable year. Distributions of net capital gain as designated capital gain dividends, if any, are taxable as long-term capital gains, whether paid in cash or in shares,
regardless of how long the shareholder has held the Fund's shares, and are not eligible for the dividends received deduction.
Shareholders receiving distributions in the form of newly issued shares will have a basis in such shares of the Fund equal to the fair market value of such shares on the distribution date. If the net asset value of shares is reduced below a shareholder's cost as a result of a distribution by the Fund, such distribution will be taxable even though it represents a return of invested capital. The price of shares purchased at any time may reflect the amount of a forthcoming distribution. Those purchasing shares just prior to a distribution will receive a distribution which will be taxable to them, even though it represents in part a return of invested capital.
Upon a sale or exchange of shares, a shareholder will realize a taxable gain or loss depending upon his or her basis in the shares. Such gain or loss will be treated as capital gain or loss if the shares have been held for more than one year. Any loss realized on a sale or exchange will be disallowed to the extent the shares disposed of are replaced within a 61-day period beginning 30 days before and ending 30 days after the day that the shares are disposed of. In such a case, the basis of the shares acquired will be adjusted to reflect the disallowed loss.
Any loss realized by a shareholder on the sale of Fund shares held by the shareholder for six months or less will be treated for tax purposes as a long-term capital loss to the extent of any capital gain dividends received by the shareholder with respect to such shares.
Dividends and capital gains distributions also may be subject to state and local taxes. Shareholders are urged to consult their own tax advisers regarding specific questions about the U.S. Federal, state, local or foreign tax consequences to them of investing in the Fund.
BACKUP WITHHOLDING
The Fund may be required to withhold Federal income tax at a rate of 31% on all taxable distributions payable to shareholders who fail to provide the Fund with their correct taxpayer identification number or to make required certifications, or who have been notified by the Internal Revenue Service that they are subject to backup withholding. Backup withholding is not an additional tax. Any amounts withheld may be credited against the shareholder's Federal income tax liability.
THE FOREGOING IS A GENERAL AND ABBREVIATED SUMMARY OF THE APPLICABLE PROVISIONS OF THE CODE AND TREASURY REGULATIONS PRESENTLY IN EFFECT. FOR THE COMPLETE PROVISIONS, REFERENCE SHOULD BE MADE TO THE PERTINENT CODE SECTIONS AND THE TREASURY REGULATIONS PROMULGATED THEREUNDER. THE CODE AND THE TREASURY REGULATIONS ARE SUBJECT TO CHANGE BY LEGISLATIVE, JUDICIAL OR ADMINISTRATIVE ACTION, EITHER PROSPECTIVELY OR RETROACTIVELY.
S&P DISCOUNT FACTORS
The following table identifies the S&P Discount Factors used to discount particular S&P Eligible Assets, as defined in the Prospectus.
DISCOUNT FACTOR ----------------------- FOR S&P FOR S&P SEASONED UNSEASONED ELIGIBLE ELIGIBLE TYPE OF S&P ELIGIBLE ASSET ASSETS ASSETS - ----------------------------------------------------------------------- -------- ---------- Common stocks.......................................................... 1.85 2.44 Preferred stocks rated AAA to BBB- or issued by Issuers having senior debt rated at least BBB-............................................. 2.40 -- Convertible bonds rated AAA to AAA-.................................... 1.65 -- Convertible bonds rated AA+ to AA-..................................... 1.70 -- Convertible bonds rated A+ to A-....................................... 1.75 -- Convertible bonds rated BBB+ to BBB-................................... 1.80 -- Convertible bonds rated BB+ to BB-..................................... 1.85 -- |
DISCOUNT FACTOR ----------------------- FOR S&P UNSEASONED ELIGIBLE TYPE OF S&P ELIGIBLE ASSET ASSETS - ----------------------------------------------------------------------- ---------- FOR S&P SEASONED ELIGIBLE ASSETS -------- Convertible bonds rated B+ to B-....................................... 1.90 -- Convertible bonds rated CCC+........................................... 2.05 -- Convertible bonds rated CCC............................................ 2.20 -- U.S. Short-Term Money Market Investments............................... 1.00 -- U.S. Government Obligations maturing between 90 days and one year...... 1.05 -- U.S. Government Obligations maturing between 1 year and 5 years........ 1.15 -- U.S. Government Obligations maturing between 5 years and 10 years...... 1.18 -- U.S. Government Obligations maturing between 10 years and 15 years..... 1.20 -- U.S. Government Obligations maturing between 15 years and 30 years..... 1.30 -- Unsecured U.S. Government Agency obligations (add .10 to corresponding maturity for U.S. Government Obligations)............................ Other Indebtedness rated AAA to AAA-................................... 1.50 -- Other Indebtedness rated AA+ to AA-.................................... 1.55 -- Other Indebtedness rated A+ to A-...................................... 1.60 -- Other Indebtedness rated BBB+ to BBB-.................................. 1.65 -- Other Indebtedness rated BB+ to BB-.................................... 1.70 -- Other Indebtedness rated B+ to B....................................... 1.80 -- Other Indebtedness rated B-............................................ 1.90 -- Other Indebtedness rated CCC+.......................................... 2.05 -- Other Indebtedness rated CCC........................................... 2.20 -- |
GENERAL INFORMATION
COUNSEL AND INDEPENDENT ACCOUNTANTS
Skadden, Arps, Slate, Meagher & Flom LLP, 919 Third Avenue, New York, New York 10022 is counsel to the Fund.
Price Waterhouse LLP, 1177 Avenue of the Americas, New York, New York 10036, has been selected as independent accountants for the Fund.
BENEFICIAL OWNER
Other than Mario J. Gabelli, there are no persons known to the Fund who may be deemed beneficial owners of 5% or more of shares of the Fund's Common Stock because they possessed or shared voting or investment power with respect to shares of the Fund's Common Stock. As of April 30, 1997, the Directors and Officers of the Fund as a group beneficially owned approximately 14.60% of the outstanding shares of the Fund's Common Stock.
FINANCIAL STATEMENTS
The audited financial statements included in the Annual Report to the Fund's Shareholders for the fiscal year ended December 31, 1996, together with the report of Price Waterhouse LLP thereon, are incorporated herein by reference from the Fund's Annual Report to Shareholders filed with the Securities and Exchange Commission on March 19, 1997. All other portions of the Annual Report to Shareholders are not incorporated herein by reference and are not part of the Registration Statement. A copy of the Annual Report to Shareholders may be obtained without charge by writing to the Fund at its address at One Corporate Center, Rye, New York 10580-1434 or by calling the Fund toll-free at 800-GABELLI (422-3554).
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(1) Financial Statements (1) (2) (a) (1) Articles of Amendment and Restatement (2) (2) Articles Supplementary (5) (b) Amended and Restated By-Laws (2) (c) Not Applicable (d) Specimen Stock Certificate (3) (e) Automatic Dividend Reinvestment and Voluntary Cash Purchase Plan (2) (f) Not Applicable (g) Investment Advisory Agreement (5) (h) (1) Form of Underwriting Agreement (5) (2) Form of Master Agreement Among Underwriters (5) (i) Not Applicable (j) Custodian Agreement (5) (k) Not Applicable (l) Opinion and Consent of Counsel (5) (m) Not Applicable (n) Consent of Price Waterhouse LLP (4) (o) Not Applicable (p) Not Applicable (q) Not Applicable (r) Financial Data Schedule (3) |
(2) Incorporated by reference from the Registrant's Registration Statement on Form N-2, File No. 811-05715, as filed with the Securities and Exchange Commission on March 31, 1995.
(3) Incorporated by reference from the Registrant's Registration Statement on Form N-2, File No. 333-24541 and 811-05115, as filed with the Securities and Exchange Commission on April 4, 1997.
(4) Incorporated by reference from Amendment No. 1 to the Registrant's Registration Statement on Form N-2, File No. 33-24541 and 814-05115, as filed with the Securities and Exchange Commission on May 6, 1997.
(5) Filed herein.
ITEM 25. MARKETING ARRANGEMENTS
See Exhibit 2(h) to this Registration Statement.
ITEM 26. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the estimated expenses to be incurred in connection with the offering described in this Registration Statement:
SEC Registration fees............................................................. $ 9,091 New York Stock Exchange listing fee............................................... 17,700 Rating Agency fee................................................................. 18,000 Printing and engraving expenses................................................... 100,000 Auditing fees and expenses........................................................ 50,000 Legal fees and expenses........................................................... 135,000 Blue Sky fees and expenses........................................................ 20,000 Consulting fees................................................................... 150,000 Miscellaneous..................................................................... 12,209 -------- Total........................................................................... $512,000 ======== |
ITEM 27. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
Insofar as the following have substantially identical boards of directors
or trustees they may be deemed to be under common control with the Registrant:
The Gabelli Asset Fund, The Gabelli Growth Fund and The Westwood Funds, each a
Massachusetts Business Trust, The Gabelli Equity Trust Inc., The Gabelli Value
Fund Inc., The Gabelli ABC Fund, Gabelli Capital Series Funds, Inc., The Gabelli
Global Series Funds, Inc., The Gabelli Money Market Funds, The Gabelli Global
Multimedia Trust Inc., Gabelli International Growth Fund, Inc., Gabelli Gold
Funds Inc. and Gabelli Equity Series Funds, Inc., each a Maryland corporation.
ITEM 28. NUMBER OF HOLDERS OF SECURITIES AS OF MARCH 31, 1997
TITLE OF CLASS NUMBER OF RECORD HOLDERS --------------------------------------------------------------- ------------------------ Capital Stock, par value $.001 per share....................... 6,710 |
ITEM 29. INDEMNIFICATION
Under the Fund's Articles of Amendment and Restatement and Amended and
Restated By-Laws, the directors and officers of the Company and Fund will be
indemnified to the fullest extent allowed and in the manner provided by Maryland
law and applicable provisions of the Investment Company Act of 1940, as amended
including advancing of expenses incurred in connection therewith.
Indemnification shall not be provided however to any officer or director against
any liability to the Registrant or its security-holders to which he or she would
otherwise be subject by reasons of willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of his or
her office.
Insofar as indemnification for liabilities under the Securities Act of 1933, as amended (the "Securities Act") may be permitted to the directors and officers, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable. If a claim for indemnification against such liabilities under the Securities Act (other than for expenses incurred in a successful defense) is asserted against the Company by the directors or officers in connection with the Shares, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question of whether such indemnification by it is against public policy as expressed in the Securities such Act and will be governed by the final adjudication of such issue.
ITEM 30. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
For information as to the business, profession, vocation or employment of a substantial nature of each of the officers and partners of Gabelli Funds, Inc., reference is made to the Adviser's current Form ADV filed under the Investment Advisers Act of 1940, as amended, incorporated herein by reference.
ITEM 31. LOCATION OF ACCOUNTS AND RECORDS
The accounts and records of the Registrant are maintained in part at the office of the Advisor at One Corporate Center, Rye, New York 10580-1434, in part at the offices of the Custodian, State Street Bank & Trust Company, with offices at 1776 Heritage Drive, North Quincy, MA 02171, at the offices of the Fund's Administrator, BISYS Fund Series, 3435 Stetzer Road, Columbus, Ohio 43219, and in part at the offices of Boston EquiServe, 150 Royall Street, Canton, MA 02021.
ITEM 32. MANAGEMENT SERVICES
Not applicable.
ITEM 33. UNDERTAKINGS
1. Registrant undertakes to suspend the offering of shares until the prospectus is amended, if subsequent to the effective date of this registration statement, its net asset value declines more than ten percent from its net asset value, as of the effective date of the registration statement or its net asset value increases to an amount greater than its net proceeds as stated in the prospectus.
2. Not applicable.
3. Not applicable.
4. Not applicable.
5. Registrant undertakes that, for the purpose of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of the Registration Statement in reliance upon Rule 430A and contained in the form of prospectus filed by the Registrant pursuant to Rule 497(h) will be deemed to be a part of the Registration Statement as of the time it was declared effective.
Registrant undertakes that, for the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus will be deemed to be a new Registration Statement relating to the securities offered therein, and the offering of such securities at that time will be deemed to be the initial bona fide offering thereof.
6. Registrant undertakes to send by first class mail or other means designed to ensure equally prompt delivery, within two business days of receipt of a written or oral request, any SAI constituting Part B of this Registration Statement.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and Investment Company Act of 1940, the Registrant has duly caused this amendment to its Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Rye, State of New York, on the 9th day of May 1997.
THE GABELLI CONVERTIBLE SECURITIES
FUND, INC.
By: /s/ BRUCE N. ALPERT ------------------------------------ Bruce N. Alpert Vice President and Treasurer |
Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed below by the following persons in the capacities and on the dates indicated:
NAME TITLE DATE - ------------------------------------------ ------------------------------------ ------------ /s/ MARIO J. GABELLI President and Chief Investment May 9, 1997 - ------------------------------------------ Officer Mario J. Gabelli /s/ E. VAL CERUTTI Director May 9, 1997 - ------------------------------------------ E. Val Cerutti /s/ FELIX J. CHRISTIANA Director May 9, 1997 - ------------------------------------------ Felix J. Christiana /s/ ANTHONY J. COLAVITA Director May 9, 1997 - ------------------------------------------ Anthony J. Colivita /s/ DUGALD A. FLETCHER Director May 9, 1997 - ------------------------------------------ Dugald A. Fletcher /s/ KARL OTTO POHL Director May 9, 1997 - ------------------------------------------ Karl Otto Pohl /s/ ANTHONY R. PUSTORINO Director May 9, 1997 - ------------------------------------------ Anthony R. Pustorino /s/ ANTHONIE C. VAN EKRIS Director May 9, 1997 - ------------------------------------------ Anthonie C. Van Ekris /s/ SALVATORE J. ZIZZA Director May 9, 1997 - ------------------------------------------ Salvatore J. Zizza |
SCHEDULE OF EXHIBITS TO FORM N-2
EXHIBIT PAGE NUMBER EXHIBIT NUMBER - ---------- ------------------------------------------------------------------------- ------ Exhibit A (1) Articles of Amendment and Restatement*............................... (2) Articles Supplementary............................................... 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 (1) Form of Master Underwriting Agreement................................ (2) Form of Agreement Among Underwriters................................. 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 Consent of Price Waterhouse LLP*......................................... Exhibit O Not Applicable........................................................... Exhibit P Not Applicable........................................................... Exhibit Q Not Applicable........................................................... Exhibit R Financial Data Schedule*................................................. |
EXHIBIT(a)(2)
ARTICLES SUPPLEMENTARY
CREATING AND FIXING THE RIGHTS OF
______% CUMULATIVE PREFERRED STOCK OF
THE GABELLI CONVERTIBLE SECURITIES FUND, INC.
The Gabelli Convertible Securities Fund, Inc., a Maryland corporation, having its principal office in Baltimore City, Maryland (hereinafter called the "Corporation"), hereby certifies to the State Department of Assessments and Taxation of Maryland that:
FIRST: Pursuant to authority expressly vested in the Board of Directors of the Corporation by Article FIFTH of the Charter of the Corporation, the Board of Directors has authorized the issuance of a series of ______ shares of preferred stock, par value $.001 per share, of the Corporation designated as the "____% Cumulative Preferred Stock" (the "Cumulative Preferred Stock") and has provided for the issuance of shares of such class.
SECOND: The preferences, voting powers, rights, restrictions, limitations as to dividends, qualifications and terms and conditions of redemption of shares of the Cumulative Preferred Stock of the Corporation as set by the Board of Directors are as follows:
ARTICLE I
DEFINITIONS
Unless the context or use indicates another or different meaning or intent, the following terms when used in these Articles Supplementary shall have the meanings set forth below, whether such terms are used in the singular or plural and regardless of their tense:
"Accountant's Certificate" shall mean a letter or certificate signed by or on behalf of a nationally recognized independent public accounting firm.
"Adjusted Value" of each S&P Eligible Asset shall be computed as follows:
(i) Cash shall be valued at 100% of the face value thereof; and
(ii) all other S&P Eligible Assets shall be valued at the Discounted Value thereof; and
(iii) each asset that is not a S&P Eligible Asset shall be valued at zero.
"Administrator" shall mean the other party to the Administration Agreement with the Corporation and which shall initially be BISYS Fund Services Limited Partnership.
"Adviser" means Gabelli Funds, Inc., a New York corporation, or such other person as shall be serving as the investment adviser of the Corporation.
"Asset Coverage" means, asset coverage, as defined in Section 18(h) of the 1940 Act, of at least 200%, or such other percentage as may be required under the 1940 Act, with respect to all outstanding senior securities of the Corporation constituting stock, including all outstanding shares of Cumulative Preferred Stock.
"Basic Maintenance Amount" means, as of any Valuation Date, the dollar amount equal to (i) the sum of (A) the product, calculated separately for each series of Cumulative Preferred Stock, of the number of shares of each series of Cumulative Preferred Stock Outstanding on such Valuation Date multiplied by the Liquidation Preference per share; (B) the aggregate amount of cash dividends (whether or not earned or declared) that will have accumulated for each outstanding share of Cumulative Preferred Stock from the most recent Dividend Payment Date to which dividends have been paid or duly provided for (or, in the event the Basic Maintenance Amount is calculated on a date prior to the initial Dividend Payment Date with respect to a series of the Cumulative Preferred Stock, then from the Date of Original Issue) through the Valuation Date plus all dividends to accumulate on the Preferred Stock then Outstanding during the [70] days following such Valuation Date or, if less, during the number of days following such Valuation Date that shares of Preferred Stock called for redemption are scheduled to remain Outstanding; (C) the Corporation's other liabilities due and payable as of such Valuation Date (except that dividends and other distributions payable by the Corporation by the issuance of Common Stock shall not be included as a liability) and such liabilities projected
to become due and payable by the Corporation during the 90 days following such Valuation Date (excluding liabilities for investments to be purchased and for dividends and other distributions not declared as of such Valuation Date); (D) any current liabilities of the Corporation as of such Valuation Date to the extent not reflected in any of (i)(A) through (i)(C) (including, without limitation, and immediately upon determination, any amounts due and payable by the Corporation pursuant to reverse repurchase agreements and any payables for assets purchased as of such Valuation Date) less (ii) (A) the Adjusted Value of any of the Corporation's assets if such assets are either cash or evidences of indebtedness which mature prior to or on the date of redemption or repurchase of shares of Preferred Stock or payment of another liability and are either U.S. Government Obligations or evidences of indebtedness which have a rating assigned by Moody's of at least Aaa, P-1, VMIG-1 or MIG-1 or by S&P of at least AAA, SP-1+ or A-1+, and are irrevocably held by the Corporation's custodian bank in a segregated account or deposited by the Corporation with the Paying Agent for the payment of the amounts needed to redeem or repurchase Preferred Stock subject to redemption or repurchase or any of (i)(B) through (i)(E) and provided that in the event the Corporation has repurchased Cumulative Preferred Stock at a price of less than the Liquidation Preference thereof and irrevocably segregated or deposited assets as described above with its custodian bank or the Paying Agent for the payment of the repurchase price the Corporation may deduct 100% of the Liquidation Preference of such Cumulative Preferred Securities to be repurchased from (i) above.
"Basic Maintenance Cure Date" means [14] calendar days following a Valuation Date, such date being the last day upon which the Corporation's failure to comply with paragraph 5(a)(ii)(A) of Article II hereof could be cured.
"Board of Directors" means the Board of Directors of the Corporation.
"Business Day" means a day on which the New York Stock Exchange is open for trading and that is neither a Saturday, Sunday nor any other day on which banks in the City of New York are authorized by law to close.
"Certificate of Basic Maintenance Amount" shall have the meaning set forth in Section 5(a)(iii) of these Articles Supplementary.
"Charter" means the Articles of Incorporation, as amended and supplemented (including these Articles Supplementary), of the Corporation on file in the State Department of Assessments and Taxation of Maryland.
"Common Stock" means the Common Stock, par value $.001 per share, of the Corporation.
"Convertible Diversification Percentage" means the sum, expressed as a percentage, of (i) the product of (A) a fraction the numerator of which is the Market Value of evidences of indebtedness held by the Corporation and qualifying as S&P Eligible Assets pursuant to clause (e) thereof prior to application of the proviso thereto ("Eligible Convertibles") that are rated AAA to AAA- by S&P and the denominator of which is the Market Value of Eligible Convertibles multiplied times (B) .50; (ii) the product of (A) a fraction the numerator of which is the Market Value of Eligible Convertibles that are rated AA+ to A- by S&P and the denominator of which is the Market Value of Eligible Convertibles multiplied times (B) .333; and (iii) the product of (A) a fraction the numerator of which is the Market Value of all other Eligible Convertibles and the denominator of which is the Market Value of Eligible Convertibles multiplied times (B) .25.
"Corporation" means The Gabelli Convertible Securities Fund, Inc., a Maryland corporation.
"Cumulative Preferred Stock" means the ____% Cumulative Preferred Stock, par value $.001 per share, of the Corporation.
"Cure Date" shall mean the second Business Day after each Business Day as of which the aggregate Adjusted Value of all S&P Eligible Assets is less than the Basic Maintenance Amount or the Corporation fails to have Asset Coverage [or as of which the aggregate Fair Market Value of the Securities and other assets of the Corporation is less than 130% of the sum of the aggregate Preferred Stock Redemption Amount for all shares of Preferred Stock then Outstanding and the aggregate Preferred Stock Redemption Amount (as defined in the applicable articles
supplementary relating to any other Preferred Stock issued by the Corporation and rated by the Rating Agencies) applicable to any other Preferred Stock of the Corporation outstanding on such date].
"Date of Original Issue" shall have the meaning set forth in paragraph 1(a) of Article II hereof.
"Deposit Assets" means cash, Short-Term Money Market Instruments and U.S. Government Obligations. Except for determining whether the Corporation has S&P Eligible Assets with an Adjusted Value equal to or greater than the Basic Maintenance Amount, each Deposit Security shall be deemed to have a value equal to its principal or face amount payable at maturity plus any interest payable thereon after delivery of such Deposit Security but only if payable on or prior to the applicable payment date in advance of which the relevant deposit is made.
"Discount Factor" shall mean, with respect to any asset specified below, the following applicable number:
Type of S&P Eligible Asset Discount Factor - -------------------------- ------------------------------ For S&P For S&P Seasoned Unseasoned Eligible Eligible Assets Assets -------- ---------- Common stocks............................................... 1.85 2.44 Preferred stocks rated AAA to BBB- or issued by Issuers hav- ing senior debt rated at least BBB-.................................................... 2.40 -- Convertible bonds rated AAA to AAA-.................................................... 1.65 -- Convertible bonds rated AA+ to AA-..................................................... 1.70 -- Convertible bonds rated A+ to A-...................................................... 1.75 -- Convertible bonds rated BBB+ to BBB-.................................................... 1.80 -- Convertible bonds rated BB+ to BB-..................................................... 1.85 -- Convertible bonds rated B+ to B-...................................................... 1.90 -- Convertible bonds rated CCC+................................ 2.05 -- Convertible bonds rated CCC................................. 2.20 -- |
Type of S&P Eligible Asset Discount Factor - -------------------------- ------------------------------ For S&P For S&P Seasoned Unseasoned Eligible Eligible Assets Assets -------- ---------- U.S. Short-Term Money Market Investments............................................. 1.00 -- U.S. Government Obligations ma- turing between 90 days and one year.................................................... 1.05 -- U.S. Government Obligations ma- turing between 1 year and 5 years................................................... 1.15 -- U.S. Government Obligations ma- turing between 5 years and 10 years................................................... 1.18 -- U.S. Government Obligations ma- turing between 10 years and 15 years................................................... 1.20 -- U.S. Government Obligations ma- turing between 15 years and 30 years 1.30 -- Unsecured U.S. Government Agency obligations (add .10 to corre- sponding maturity for U.S. Gov- ernment Obligations).................................... Other Indebtedness rated AAA to AAA-.................................................... 1.50 -- Other Indebtedness rated AA+ to AA-..................................................... 1.55 -- Other Indebtedness rated A+ to A-...................................................... 1.60 -- Other Indebtedness rated BBB+ to BBB-.................................................... 1.65 -- Other Indebtedness rated BB+ to BB-..................................................... 1.70 -- Other Indebtedness rated B+ to B............................ 1.80 -- Other Indebtedness rated B-................................. 1.90 Other Indebtedness rated CCC+............................... 2.05 -- Other Indebtedness rated CCC................................ 2.20 -- |
"Discounted Value" means, with respect to a S&P Eligible Asset, the quotient of (A) in the case of non-convertible fixed income instrument, the lower of the principal amount (accreted principal to the extent such instrument accretes interest) or liquidation preference
and the Market Value thereof or (B) in the case of any other S&P Eligible Assets, the Market Value thereof, divided by the applicable Discount Factor.
"Dividend Payment Date" means, with respect to the Preferred Stock, any date on which dividends declared by the Board of Directors thereon are payable pursuant to the provisions of paragraph 1(a) of Article II hereof and shall have a correlative meaning with respect to any other class or series of Preferred Stock.
"Dividend Period" shall have the meaning set forth in paragraph 1(a) of Article II hereof.
"Independent Accountant" means a nationally recognized accountant, or firm of accountants, that is with respect to the company an independent public accountant or firm of independent public accountants under the Securities Act of 1933, as amended.
"Industry Classification" means a six-digit industry classification in the Standard Industry Classification system published by the United States.
"Liquidation Preference" shall, with respect to the Cumulative Preferred Stock, have the meaning set forth in paragraph 2(a) of Article II hereof and shall have a correlative meaning with respect to any other class or series of Preferred Stock.
"Market Capitalization" shall mean, with respect to any issue of common stock, as of any date, the product of (a) the number of shares of such common stock issued and outstanding as of the close of business on the date of determination thereof and (b) the Market Value per share of such common stock as of the close of business on the date of determination thereof.
"Market Value" means the amount determined by State Street Bank and Trust Company (so long as prices are provided to it by Telekurs N.A., Inc. or another pricing service approved by S&P in writing), or, if S&P agrees in writing, the then bank custodian of the Corporation's assets or such other party approved by S&P in writing, with respect to specific S&P Eligible Assets of the Corporation as follows: (i) Securities listed on an exchange or on the NASDAQ National Market System shall be
valued on the basis of the last reported sale on the Valuation Date or, if no sale is reported for such Valuation Date, then at their last reported bid price for such day for exchange-listed securities and at the average of their last reported bid and asked prices for such Valuation Date for NASDAQ National Market System securities; and (ii) bonds, notes, debentures, preferred stocks and other fixed income instruments not included in (i) above may be valued by reference to other securities with comparable ratings, interest rates and maturities, using established independent pricing services.
Notwithstanding the foregoing, "Market Value" may, at the option of the Corporation with respect to any of its assets, mean the amount determined with respect to specific S&P Eligible Assets of the Corporation in the manner set forth below:
(a) as to any common or preferred stock which is a S&P Eligible Asset, (i) if the stock is traded on a national securities exchange or quoted on the NASDAQ System, the last sales price reported on the Valuation Date or (ii) if there was no reported sales price on the Valuation Date, the lower of two bid prices for such stock provided by two recognized securities dealers with a minimum capitalization of $25,000,000 (or otherwise approved for such purpose by S&P) or by one such securities dealer and any other source (provided that the utilization of such source would not adversely affect S&P then-current rating of the Cumulative Preferred Stock) to the custodian of the Corporation's assets, at least one of which shall be provided in writing or by telecopy, telex, other electronic transcription, computer obtained quotation reducible to written form or similar means, and in turn provided to the Corporation by any such means by such custodian, or, if two bid prices cannot be obtained, such S&P Eligible Asset shall have a Market Value of zero;
(b) as to any U.S. Government Obligation, Short Term Money Market Instrument (other than demand deposits, federal funds, bankers' acceptances and next Business Day's repurchase agreements) and commercial paper, the product of (i) the principal amount (accreted principal to the extent such instrument accretes interest) of such instrument, and (ii) the lower of the bid prices for the same kind of instruments having, as nearly
as practicable, comparable interest rates and maturities provided by two recognized dealers having minimum capitalization of $25,000,000 (or otherwise approved for such purpose by S&P) or by one such dealer and any other source (provided that the utilization of such source would not adversely affect S&P's then-current rating of the Cumulative Preferred Stock) to the custodian of the Corporation's assets, at least one of which shall be provided in writing or by telecopy, telex, other electronic transcription, computer obtained quotation reducible to written form or similar means, and in turn provided to the Corporation by any such means by such custodian, or, if two bid prices cannot be obtained, such S&P Eligible Asset will have a Market Value of zero;
(c) as to cash, demand deposits, federal funds, bankers' acceptances and next Business Day's repurchase agreements included in Short Term Money Market Instruments, the face value thereof;
(d) as to any other evidence of indebtedness which is a S&P Eligible Asset, (i) the product of (A) the unpaid principal balance of such indebtedness as of the Valuation Date and (B)(1) if such indebtedness is traded on a national securities exchange or quoted on the NASDAQ System, the last sales price reported on the Valuation Date or (2) if there was no reported sales price on the Valuation Date or if such indebtedness is not traded on a national securities exchange or quoted on the NASDAQ System, the lower of the bid prices for such indebtedness provided by two recognized dealers with a minimum capitalization of $25,000,000 (or otherwise approved for such purpose by S&P's) or by one such dealer and any other source (provided that the utilization of such source would not adversely affect S&P's then-current rating of the Cumulative Preferred Stock) to the custodian of the Corporation's assets, at least one of which shall be provided in writing or by telecopy, telex, other electronic transcription, computer obtained quotation reducible to written form or similar means, and in turn provided to the Corporation by any such means by such custodian, plus (ii) accrued interest on such indebtedness or, if two bid prices cannot be obtained, such S&P Eligible Asset shall have a Market Value of zero.
"1940 Act" means the Investment Company Act of 1940, as amended.
"Notice of Redemption" shall have the meaning set forth in paragraph 3(c)(i) of Article II hereof.
"Officers' Certificate" means a certificate signed by any two of the President, a Vice President, the Treasurer or the Secretary of the Corporation or by any one of the foregoing and an Assistant Treasurer or Assistant Secretary of the Corporation.
"Other Indebtedness Diversification Percentage" means the sum, expressed as a percentage, of (i) the product of (A) a fraction the numerator of which is the Market Value of evidences of indebtedness held by the Corporation and qualifying as S&P Eligible Assets pursuant to clause (d) thereof prior to the application of the proviso thereto ("Eligible Debt") that are rated AAA to AAA- by S&P and the denominator of which is the Market Value of Eligible Debt times (B) .50; (ii) the product of (A) a fraction the numerator of which is the Market Value of Eligible Debt rated AA+ to A- by S&P and the denominator of which is the Market Value of Eligible Debt times (B) .333; (iii) the product of (A) a fraction the numerator of which is the Market Value of Eligible Debt rated BBB+ to BBB- by S&P and the denominator of which is the Market Value of Eligible Debt times (B) .20; (iv) the product of (A) a fraction the numerator of which is the Market Value of Eligible Debt rated BB+ to BB- by S&P and the denominator of which is the Market Value of Eligible Debt times (B) .12; and (v) the product of (A) a fraction the numerator of which is the Market Value of Eligible Debt rated B+ to CCC by S&P and the denominator of which is the Market Value of Eligible Debt times (B) .08.
"Outstanding," when used with respect to Preferred Stock, shall mean, as of a particular date, all Preferred Stock theretofore issued and delivered by the Corporation, except:
(1) any such share of Preferred Stock thereto- fore cancelled by the Corporation or delivered to the Corporation for cancellation;
(2) any such share of Preferred Stock as to which a Redemption Notice shall have been given and for whose payment at the redemption thereof Deposit Assets in the necessary amount are held by the Corporation in trust for or was paid by
the Corporation to the holder of such share pursuant to these Articles Supplementary; and
(3) any such share in exchange for or in lieu of which other shares have been issued and delivered pursuant to these Articles Supplementary.
"Paying Agent" means State Street Bank and Trust Company and its successors or any other paying agent appointed by the Corporation.
"Preferred Stock" means the preferred stock, par value $.001 per share, of the Corporation, and includes the Cumulative Preferred Stock.
"Quarterly Valuation Date" means the last Valuation Date in March, June, September and December of each year, commencing ________, 1997.
"Redemption Price" has the meaning set forth in paragraph 3(a) of Article II hereof.
"Short-Term Money Market Instruments" means the following types of instruments if, on the date of purchase or other acquisition thereof by the Corporation (or, in the case of an instrument specified by clauses (i) and (ii) below, on the Valuation Date), the remaining terms to maturity thereof are not in excess of 90 days:
(i) U.S. Government Obligations;
(ii) commercial paper that is rated at the time of purchase or acquisition and the Valuation Date at least A-1+ by S&P and is issued by an issuer (or guaranteed or supported by a person or entity other than the issuer) whose long-term unsecured debt obligations are rated at least AA- by S&P;
(iii) demand or time deposits in, or certificates of deposit of, or banker's acceptances issued by (A) a depository institution or trust company incorporated under the laws of the United States of America or any state thereof or the District of Columbia or (B) a United States branch office or agency of a foreign depository institution (provided that such branch office or agency is subject to banking regulation under the laws of
the United States, any state thereof or the District of Columbia) if, in each case, the commercial paper, if any, and the long-term unsecured debt obligations (other than such obligations the ratings of which are based on the credit of a person or entity other than such depository institution or trust company) of such depository institution or trust company at the time of purchase or acquisition and the Valuation Date, have (1) credit ratings from S&P of at least A-1+ in the case of commercial paper and (2) credit ratings from S&P of at least AA- in the case of long-term unsecured debt obligations; provided, however, that in the case of any such investment that matures in no more than one Business Day from the date of purchase or other acquisition by the Corporation, all of the foregoing requirements shall be applicable except that the required long-term unsecured debt credit rating of such depository institution or trust company from Moody's shall be at least A-; and provided, further, however, that the foregoing credit rating requirements shall be deemed to be met with respect to a depository institution or trust company if (1) such depository institution or trust company is the principal depository institution in a holding company system, (2) the commercial paper, if any, of such depository institution or trust company is not rated below A-1 by S&P and (3) the holding company shall meet all of the foregoing credit rating requirements (including the preceding proviso in the case of instruments that mature in no more than one Business Day from the date of purchase or other acquisition by the Corporation);
(iv) repurchase obligations with respect to any U.S. Government Obligation entered into with a depository institution, trust company or securities dealer (acting as principal) which is rated (A) at least AA- by S&P if the maturity is three months or less, (B) at least A+ by S&P if the maturity is two months or less and (C) at least A by S&P if the maturity is one month or less; and
(v) Eurodollar demand or time deposits in, or certificates of
deposit of, the head office or the London branch office of a depository
institution or trust company meeting the credit rating requirements of
commercial paper and long-term unsecured debt obligations specified in clause
(iii) above, provided that the interest receivable by the Corporation shall be
payable in U.S. dollars
and shall not be subject to any withholding or similar taxes.
"S&P" shall mean Standard & Poor's Ratings Services, a division of The McGraw-Hill Companies, Inc., a corporation organized and existing under the laws of the State of Delaware, its successors and their assigns, and if such corporation shall be dissolved or liquidated or shall no longer perform the functions of a securities rating agency, "S&P" shall be deemed to refer to any other nationally recognized securities rating agency designated by the Corporation.
"S&P Eligible Assets" shall mean the sum of S&P Seasoned Eligible Assets and S&P Unseasoned Eligible Assets.
"S&P Seasoned Eligible Assets" shall mean any of the following held by the Corporation:
(a) Deposit Assets;
(b) U.S. Government Obligations;
(c) Unsecured evidences of indebtedness of U.S. Government Agencies;
(d) evidences of indebtedness other than Deposit Assets and
U.S. Government Obligations that are not convertible into or exchangeable or
exercisable for stock of a corporation and that satisfy all of the following
conditions: (i) such evidence of indebtedness is rated at least CCC by S&P; (ii)
if such evidence of indebtedness is rated BB+ to CCC by S&P, the original issue
size thereof is at least $100 million as to 80% of such evidences of
indebtedness and at least $50 million to 20% of such evidences of indebtedness;
(iii) the issuer of such evidences of indebtedness files periodic financial
statements with the U.S. Securities and Exchange Commission; provided, however,
that the Corporation's holdings of such evidences of indebtedness of any single
issuer that satisfies the conditions set forth in clauses (i), (ii) and (iii)
above shall be included in S&P Eligible Assets only to the extent that if such
evidence of indebtedness is rated AAA to A-, BBB+ to BBB-, BB+ to BB- or B+ to
CCC by S&P, the aggregate Market Value of such evidences of indebtedness of such
issuer
held by the Corporation do not exceed 10%, 5%, 4% or 3%, respectively, of the Market Value of the Corporation's S&P Eligible Assets and the aggregate Market Value of the Corporation's holdings of all other similarly eligible evidence of indebtedness of issues in the same Industry Classification, does not exceed the applicable "Other Indebtedness Diversification Percentage" of the aggregate Market Value of the Corporation's S&P Eligible Assets.
(e) evidences of indebtedness other than Deposit Assets and
U.S. Government Obligations that are convertible into or exchangeable or
exercisable for stock of a corporation and that satisfy all of the following
conditions: (i) such evidence of indebtedness is rated at least CCC by S&P; and
(ii) if such evidence of indebtedness is rated BB+ to CCC by S&P, the Market
Capitalization of the issuer of such evidence of indebtedness is at least $100
million; provided, however, that the Corporation's holdings of such evidences of
indebtedness of any single issuer that satisfies the conditions set forth in
clauses (i) and (ii) above shall be included in S&P Eligible Assets only to the
extent that if such evidence of indebtedness is rated AAA to A-, BBB+ to BBB-,
BB+ to BB- or B+ to CCC by S&P, the aggregate Market Value of such evidences of
indebtedness of such issuer held by the Corporation do not exceed 10%, 5%, 4% or
3%, respectively, of the Market Value of the Corporation's S&P Eligible Assets
and the aggregate Market Value of such S&P Eligible Assets, when added to the
aggregate Market Value of the Corporation's holdings of all other similarly
eligible evidences of indebtedness of issuers in the same Industry
Classification, does not exceed the applicable Convertible Diversification
Percentage of the aggregate Market Value of the Corporation's S&P Eligible
Assets;
(f) preferred stocks that satisfy all of the following
conditions: (i) such preferred stock is rated at least BBB- or the senior debt
of the issuer of such preferred stock is rated at least BBB-; (ii) the Market
Capitalization of the issuer of such preferred stock is at least $100 million;
(iii) such preferred stock is traded on a recognized national securities
exchange or quoted on the National Market System (or any equivalent or successor
thereto) of Nasdaq; (iv) dividends on such preferred stock are cumulative; and
(iv) the original issue size of such preferred stock is at least $50 million;
and
(g) common stocks that satisfy all of the following
conditions: (i) such common stock (including the common stock of any predecessor
or constituent issuer) has been traded on a recognized national securities
exchange or quoted on the National Market System (or any equivalent or successor
thereto) of Nasdaq for at least 450 days, (ii) the Market Capitalization of such
issuer of common stock exceeds $100 million, (iii) the issuer of such common
stock is not an entity that elects to be taxed under Section 856 of the Code or
that is treated as a partnership for federal income taxes, (iv) if such issuer
is organized under the laws of any jurisdiction other than the United States,
any state thereof, any possession or territory thereof or the District of
Columbia, the common stock of such issuer held by the Corporation is traded on a
recognized national securities exchange or quoted on the National Market System
of Nasdaq either directly or in the form of depository receipts and (v) if such
issuer is registered as an investment company under the 1940 Act, such issuer
does not invest more than 25% of the value of its gross assets in securities
that are not S&P Eligible Assets by reason of clause (iv) above; provided,
however, that the Corporation's holdings of the common stock of any single
issuer that satisfies the conditions set forth in clauses (i) through (v) above
shall be included in S&P Seasoned Eligible Assets only to the extent that (1)
such holdings may be sold publicly by the Corporation at any time without
registration, (2) to the extent remaining eligible after the operation of item
(1) above, the aggregate Market Value of such holdings does not exceed 5% of the
Market Capitalization of such issuer of common stock, (3) to the extent
remaining eligible after the operation of items (1) and (2) above, such holdings
do not exceed a number of shares representing 5% of (x) the Market
Capitalization of such issuer of common stock, less (y) the number of
outstanding shares of such common stock held by directors and executive officers
of the issuer of such common stock (such number to be computed solely by
reference to information on file with the Commission on the last day of the
preceding calendar month), (4) to the extent remaining eligible after the
operation of items (1) through (3) above, such holdings do not exceed a number
of shares representing the average weekly trading volume of such common stock
during the preceding 30 day period, (5) to the extent remaining eligible after
the operation of items (1) through (4) above, the aggregate Market Value
of such holdings, when added to the aggregate Market Value of the Corporation's
holdings of all other similarly eligible shares of common stock of issuers in
the same Industry Classification (other than Utilities, as to which this item
(5) shall not apply), does not exceed 25% of the aggregate Market Value of the
Corporation's S&P Eligible Assets and (6) to the extent remaining eligible after
the operation of items (1) through (5) above, the aggregate Market Value of such
holdings in excess of 5% of the aggregate Market Value of the Corporation's S&P
Eligible Assets, when added to the aggregate Market Value of the Corporation's
holdings of all other similarly eligible shares of each other issuer in excess
of 5% of the aggregate Market Value of the Corporation's S&P Eligible Assets,
does not exceed 30% of the aggregate Market Value of the Corporation's S&P
Eligible Assets.
Notwithstanding the foregoing, an asset will not be considered an S&P Seasoned Eligible Asset if it (A) is held in a margin account, (B) is subject to any material lien, mortgage, pledge, security interest or security agreement of any kind or (C) has been deposited irrevocably for the payment of dividends, redemption payments or any other payment or obligation hereunder.
"S&P Unseasoned Eligible Assets" shall mean any common stock that would be an S&P Seasoned Eligible Asset but for the fact that the 450 trading day requirement of clause (i) of the definition thereof is not satisfied.
"U.S. Government Agencies" means Government National Mortgage Association, Federal Home Loan Mortgage Corporation, Federal National Mortgage Association and the Farm Credit System.
"U.S. Government Obligations" means direct non-callable obligations of the United States, provided that such direct obligations are entitled to the full faith and credit of the United States and that any such obligations, other than United States Treasury Bills and U.S. Treasury Securities Strips, provide for the periodic payment of interest and the full payment of principal at maturity.
"Valuation Date" means the day specified by the Board of Directors for the weekly determination of net asset value of the Corporation.
"Voting Period" shall have the meaning set forth in paragraph 4(b) of Article II hereof.
ARTICLE I
CUMULATIVE PREFERRED STOCK
1. Dividends.
(a) Holders of shares of Cumulative Preferred Stock shall be entitled to receive, when, as and if declared by the Board of Directors, out of funds legally available therefor, cumulative cash dividends at the rate of ____% per annum (computed on the basis of a 360-day year consisting of twelve 30-day months) of the Liquidation Preference on the Cumulative Preferred Stock and no more, payable quarterly on the 25th day of the last month of each calendar quarter(each a "Dividend Payment Date") commencing December 25, 1997 (or, if any such day is not a Business Day, then on the next succeeding Business Day) to holders of record of Cumulative Preferred Stock as they appear on the stock register of the Corporation at the close of business on the preceding 23rd day of the last month of each calendar quarter (or, if any such day is not a Business Day, then on the next succeeding Business Day), as the case may be, in preference to dividends on shares of Common Stock and any other capital stock of the Corporation ranking junior to the Cumulative Preferred Stock in payment of dividends. Dividends on shares of Cumulative Preferred Stock shall accumulate from the date on which such shares are originally issued ("Date of Original Issue"). Each period beginning on and including a Dividend Payment Date (or the Date of Original Issue, in the case of the first dividend period after issuance of such shares) and ending on but excluding the next succeeding Dividend Payment Date is referred to herein as a "Dividend Period." Dividends on account of arrears for any past Dividend Period may be declared and paid at any time, without reference to any Dividend Payment Date, to holders of record on such date, not exceeding 30 days preceding the payment date thereof, as shall be fixed by the Board of Directors.
(b)(i) No dividends shall be declared or paid or set apart for payment on shares of Cumulative Preferred Stock for any Dividend Period or part thereof unless full
cumulative dividends have been or contemporaneously are declared and paid on all outstanding shares of Cumulative Preferred Stock through the most recent Dividend Payment Dates therefor. If full cumulative dividends are not paid on the shares of Cumulative Preferred Stock, any dividends on the shares of Cumulative Preferred Stock shall be paid pro rata on all outstanding shares of Cumulative Preferred Stock. No holders of shares of Cumulative Preferred Stock shall be entitled to any dividends, whether payable in cash, property or stock, in excess of full cumulative dividends as provided in this paragraph 1(b)(i) on shares of Cumulative Preferred Stock. No interest or sum of money in lieu of interest shall be payable in respect of any dividend payments on any shares of Cumulative Preferred Stock that may be in arrears.
(ii) For so long as shares of Cumulative Preferred Stock are Outstanding, the Corporation shall not declare, pay or set apart for payment any dividend or other distribution (other than a dividend or distribution paid in shares of, or options, warrants or rights to subscribe for or purchase, Common Stock or other stock, if any, ranking junior to the Cumulative Preferred Stock as to dividends or upon liquidation) in respect of the Common Stock or any other stock of the Corporation ranking junior to or on parity with the Cumulative Preferred Stock as to dividends or upon liquidation, or call for redemption, redeem, purchase or otherwise acquire for consideration any shares of Common Stock or any other stock of the Corporation ranking junior to or on parity with the Cumulative Preferred Stock as to dividends or upon liquidation (except by conversion into or exchange for stock of the Corporation ranking junior to or on parity with the Cumulative Preferred Stock as to dividends and upon liquidation), unless, in each case, (A) immediately thereafter, the aggregate Adjusted Value of the Corporation's S&P Eligible Assets shall equal or exceed the Basic Maintenance Amount and the Corporation shall have Asset Coverage, (B) full cumulative dividends on all shares of Cumulative Preferred Stock due on or prior to the date of the transaction have been declared and paid (or shall have been declared and sufficient funds for the payment thereof deposited with the Paying Agent) and (C) the Corporation has redeemed the full number of shares of Cumulative Preferred Stock required
to be redeemed by any provision contained herein for mandatory redemption.
(iii) Any dividend payment made on the shares of Cumulative Preferred Stock shall first be credited against the dividends accumulated with respect to the earliest Dividend Period for which dividends have not been paid.
(c) Not later than the Business Day next preceding each Dividend Payment Date, the Corporation shall deposit with the Paying Agent Deposit Assets having an initial combined value sufficient to pay the dividends that are payable on such Dividend Payment Date, which Deposit Assets shall mature on or prior to such Dividend Payment Date. The Corporation may direct the Paying Agent with respect to the investment of any such Deposit Assets, provided that such investment consists exclusively of Deposit Assets and provided further that the proceeds of any such investment will be available at the opening of business on such Dividend Payment Date.
2. Liquidation Rights.
(a) In the event of any liquidation, dissolution or winding up of the affairs of the Corporation, whether voluntary or involuntary, the holders of shares of Cumulative Preferred Stock shall be entitled to receive out of the assets of the Corporation available for distribution to stockholders, after claims of creditors but before any distribution or payment shall be made in respect of the Common Stock or any other stock of the Corporation ranking junior to the Cumulative Preferred Stock as to liquidation payments, a liquidation distribution in the amount of $25.00 per share (the "Liquidation Preference"), plus an amount equal to all unpaid dividends accumulated to and including the date fixed for such distribution or payment (whether or not earned or declared by the Corporation, but excluding interest thereon), and such holders shall be entitled to no further participation in any distribution or payment in connection with any such liquidation, dissolution or winding up.
(b) If, upon any liquidation, dissolution or winding up of the affairs of the Corporation, whether voluntary or involuntary, the assets of the Corporation avail-
able for distribution among the holders of all outstanding shares of Cumulative Preferred Stock, and any other outstanding class or series of Preferred Stock of the Corporation ranking on a parity with the Cumulative Preferred Stock as to payment upon liquidation, shall be insufficient to permit the payment in full to such holders of Cumulative Preferred Stock of the Liquidation Preference plus accumulated and unpaid dividends and the amounts due upon liquidation with respect to such other Preferred Stock, then such available assets shall be distributed among the holders of shares of Cumulative Preferred Stock and such other Preferred Stock ratably in proportion to the respective preferential amounts to which they are entitled. Unless and until the Liquidation Preference plus accumulated and unpaid dividends has been paid in full to the holders of shares of Cumulative Preferred Stock, no dividends or distributions will be made to holders of the Common Stock or any other stock of the Corporation ranking junior to the Cumulative Preferred Stock as to liquidation.
3. Redemption.
Shares of the Cumulative Preferred Stock shall be redeemed by the Corporation as provided below:
(a) Mandatory Redemptions.
If the Corporation is required to redeem any shares of Cumulative Preferred Stock pursuant to paragraphs 5(b) or 5(c) of Article II hereof, then the Corporation shall, to the extent permitted by the 1940 Act and Maryland law, by the close of business on such Cure Date, give a Notice of Redemption (which shall specify a redemption date that is not fewer than 30 days nor more than 45 days after the date of such notice) with respect to the redemption of Cumulative Preferred Stock on such redemption date. On such redemption date, the Corporation shall redeem, out of funds legally available therefor, the number of shares of Cumulative Preferred Stock equal to the minimum number of shares the redemption of which, if such redemption had occurred immediately prior to the opening of business on such Cure Date, would have resulted in the Corporation having Asset Coverage or an Adjusted Value of its S&P Eligible Assets equal to or greater than the Basic Maintenance Amount, as the case may be, on such Cure Date or, if the Asset Coverage or an Adjusted Value of its S&P
Eligible Assets equal to or greater than the Basic Maintenance Amount, as the case may be, cannot be so restored, all of the shares of Cumulative Preferred Stock, at a price equal to $25.00 per share plus accumulated but unpaid dividends (whether or not earned or declared by the Corporation) through the date of redemption (the "Redemption Price"). In the event that shares of Cumulative Preferred Stock are redeemed pursuant to paragraph 5(b) of Article II hereof, the Corporation may, but is not required to, redeem a sufficient number of shares of Cumulative Preferred Stock pursuant to this paragraph 3(a) in order that the Corporation have Asset Coverage with respect to the remaining shares of Cumulative Preferred Stock and any other Preferred Stock remaining Outstanding after such redemption is as great as [275%].
(b) Optional Redemptions.
Prior to May 15, 2002, the Corporation may not redeem Cumulative Preferred Stock at its option unless such redemption is necessary, in the judgment of the Board of Directors, to maintain the Corporation's status as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended. Commencing May 15, 2002 and thereafter, and prior thereto to the extent necessary to maintain the Corporation's status as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended, to the extent permitted by the 1940 Act and Maryland law, the Corporation may at any time upon Notice of Redemption redeem the Cumulative Preferred Stock in whole or in part at the Redemption Price per share, which notice shall specify a redemption date of not fewer than 30 days nor more than 45 days after the date of such notice.
(c) Procedures for Redemption.
(i) If the Corporation shall determine or be required to redeem shares of Cumulative Preferred Stock pursuant to this paragraph 3, it shall mail a written notice of redemption ("Notice of Redemption") with respect to such redemption by first class mail, postage prepaid, to each holder of the shares to be redeemed at such holder's address as the same appears on the stock books of the Corporation on the record date in respect of such redemption established by the Board of Directors. Each such Notice of Redemption shall state: (A) the
redemption date; (B) the number of shares of Cumulative Preferred Stock to be redeemed; (C) the CUSIP number(s) of such shares; (D) the Redemption Price; (E) the place or places where the certificate(s) for such shares (properly endorsed or assigned for transfer, if the Board of Directors shall so require and the Notice of Redemption shall so state) are to be surrendered for payment in respect of such redemption; (F) that dividends on the shares to be redeemed will cease to accrue on such redemption date; and (G) the provisions of this paragraph 3 under which such redemption is made. If fewer than all shares of Cumulative Preferred Stock held by any holder are to be redeemed, the Notice of Redemption mailed to such holder also shall specify the number of shares to be redeemed from such holder. No defect in the Notice of Redemption or the mailing thereof shall affect the validity of the redemption proceedings, except as required by applicable law.
(ii) If the Corporation shall give a Notice of Redemption, then by the close of business on the Business Day preceding the redemption date specified in the Notice of Redemption the Corporation shall (A) deposit with the Paying Agent Deposit Securities having an initial combined value sufficient to effect the redemption of the shares of Cumulative Preferred Stock to be redeemed which Deposit Securities shall mature on or prior to such redemption date and (B) give the Paying Agent irrevocable instructions and authority to pay the Redemption Price to the holders of the shares of Cumulative Preferred Stock called for redemption on the redemption date. The Corporation may direct the Paying Agent with respect to the investment of any Deposit Securities so deposited provided that the proceeds of any such investment will be available at the opening of business on such redemption date. Upon the date of such deposit (unless the Corporation shall default in making payment of the Redemption Price), all rights of the holders of the shares of Cumulative Preferred Stock so called for redemption shall cease and terminate except the right of the holders thereof to receive the Redemption Price thereof and such shares shall no longer be deemed outstanding for any purpose. The Corporation shall be entitled to receive, promptly after the date fixed for redemption any cash in excess of the aggregate Redemption Price of the shares of Cumulative Preferred Stock called for redemption on such date and any remaining Deposit Securities. Any assets so
deposited that are unclaimed at the end of two years from such redemption date shall, to the extent permitted by law, be repaid to the Corporation, after which the holders of the shares of Cumulative Preferred Stock so called for redemption shall look only to the Corporation for payment thereof. The Corporation shall be entitled to receive, from time to time after the date fixed for redemption, any interest on the Deposit Securities so deposited.
(iii) On or after the redemption date, each holder of shares of Cumulative Preferred Stock that are subject to redemption shall surrender the certificate evidencing such shares to the Corporation at the place designated in the Notice of Redemption and shall then be entitled to receive the cash Redemption Price, without interest.
(iv) In the case of any redemption of less than all of the shares of Cumulative Preferred Stock pursuant to these Articles Supplementary, such redemption shall be made pro rata from each holder of shares of Cumulative Preferred Stock in accordance with the respective number of shares held by each such holder on the record date for such redemption.
(v) Notwithstanding the other provisions of this paragraph 3, the Corporation shall not redeem shares of Cumulative Preferred Stock unless all accumulated and unpaid dividends on all outstanding shares of Cumulative Preferred Stock for all applicable past Dividend Periods (whether or not earned or declared by the Corporation) shall have been or are contemporaneously paid or declared and Deposit Assets for the payment of such dividends shall have been deposited with the Paying Agent as set forth in paragraph 1(c) of Article II hereof.
(vi) If the Corporation shall not have funds legally available for the redemption of, or is otherwise unable to redeem, all the shares of the Cumulative Preferred Stock to be redeemed on any redemption date, the Corporation shall redeem on such redemption date the number of shares of Cumulative Preferred Stock as it shall have legally available funds, or is otherwise able, to redeem ratably from each holder whose shares are to be redeemed and the remainder of the shares of the Cumulative Preferred Stock required to be redeemed shall be
redeemed on the earliest practicable date on which the Corporation shall have funds legally available for the redemption of, or is otherwise able to redeem, such shares upon Notice of Redemption.
4. Voting Rights.
(a) General.
Except as otherwise provided by law or as specified in the Charter or By-Laws, each holder of shares of Cumulative Preferred Stock shall be entitled to one vote for each share held on each matter submitted to a vote of shareholders of the Corporation, and the holders of outstanding shares of Preferred Stock, including Cumulative Preferred Stock, and of shares of Common Stock shall vote together as a single class; provided that, at any meeting of the shareholders of the Corporation held for the election of directors, the holders of outstanding shares of Preferred Stock, including Cumulative Preferred Stock, shall be entitled, as a class, to the exclusion of the holders of all other securities and classes of capital stock of the Corporation, to elect such number of directors or, when added to any other director or directors subject to election from time to time by holders of the Corporation's Preferred Stock, shall equal two. Subject to paragraph 4(b) of Article II hereof, the holders of outstanding shares of capital stock of the Corporation, including the holders of outstanding shares of Preferred Stock, including the Cumulative Preferred Stock, voting as a single class, shall elect the balance of the directors.
(b) Right to Elect Majority of Board of Directors.
During any period in which any one or more of the conditions described below shall exist (such period being referred to herein as a "Voting Period"), the number of directors constituting the Board of Directors shall be automatically increased by the smallest number that, when added to the two directors elected exclusively by the holders of shares of Preferred Stock, would constitute a majority of the Board of Directors as so increased by such smallest number; and the holders of shares of Preferred Stock shall be entitled, voting separately as one class (to the exclusion of the holders of all other securities and classes of capital stock of the Corpora-
tion), to elect such smallest number of additional directors, together with the two directors that such holders are in any event entitled to elect. A Voting Period shall commence:
(i) if at any time accumulated dividends (whether or not earned or declared, and whether or not funds are then legally available in an amount sufficient therefor) on the outstanding shares of Cumulative Preferred Stock equal to at least two full years' dividends shall be due and unpaid and sufficient cash or specified securities shall not have been deposited with the Paying Agent for the payment of such accumulated dividends; or
(ii) if at any time holders of any other shares of Preferred Stock are entitled to elect a majority of the directors of the Corporation under the 1940 Act.
Upon the termination of a Voting Period, the voting rights described in this paragraph 4(b) shall cease, subject always, however, to the reverting of such voting rights in the holders of Preferred Stock upon the further occurrence of any of the events described in this paragraph 4(b).
(c) Right to Vote with Respect to Certain Other Matters.
So long as any shares of Cumulative Preferred Stock are outstanding, the Corporation shall not, without the affirmative vote of the holders of a majority of the shares of Preferred Stock outstanding at the time, voting separately as one class, amend, alter or repeal the provisions of the Charter, whether by merger, consolidation or otherwise, so as to materially adversely affect any of the contract rights expressly set forth in the Charter of holders of shares of Cumulative Preferred Stock or any other Preferred Stock. To the extent permitted under the 1940 Act, in the event shares of more than one series of Preferred Stock are outstanding, the Corporation shall not approve any of the actions set forth in the preceding sentence which materially adversely affects the contract rights expressly set forth in the Charter of a holder of shares of a series of Preferred Stock differently than those of a holder of shares of any other series of Preferred Stock without the affirmative
vote of the holders of at least a majority of the shares of Preferred Stock of
each series materially adversely affected and outstanding at such time (each
such materially adversely affected series voting separately as a class). The
Corporation shall notify S&P at least ten Business Days prior to any such vote
described above. Unless a higher percentage is provided for under the Charter,
the affirmative vote of the holders of a majority of the outstanding shares of
Preferred Stock, including Cumulative Preferred Stock, voting together as a
single class, will be required to approve any plan of reorganization adversely
affecting such shares or any action requiring a vote of security holders under
Section 13(a) of the 1940 Act. For purposes of the preceding sentence, the
phrase "vote of the holders of a majority of the outstanding shares of Preferred
Stock" shall have the meaning set forth in the 1940 Act. The class vote of
holders of shares of Preferred Stock, including Cumulative Preferred Stock,
described above will in each case be in addition to a separate vote of the
requisite percentage of shares of Common Stock and shares of Preferred Stock,
including Cumulative Preferred Stock, voting together as a single class,
necessary to authorize the action in question.
(d) Modification of Certain Provisions Without Vote.
The calculation of Adjusted Value, Basic Maintenance Amount and the elements of each of them and the definitions of such terms and elements may be modified by action of the Board of Directors without further action by the Stockholders if the Board of Directors determines that such modification is necessary to prevent a reduction in rating of the shares of Preferred Stock by the Rating Agency or is in the best interests of the holders of shares of Common Stock and is not adverse to the holders of Preferred Stock in view of advice to the Corporation in writing by the Rating Agency that such modification would not adversely affect its then-current rating of the shares of Cumulative Preferred Stock.
To the extent the Corporation is unable to obtain an opinion of counsel to the effect that operation of the foregoing sentence is enforceable in the circumstances then obtaining, the calculation of Adjusted Value, Basic Maintenance Amount and the elements of each of them and
the definitions of such terms and the elements thereof shall be adjusted from
time to time without further action by the Board of Directors and the
Stockholders only to reflect changes made thereto independently by the Rating
Agency if the Rating Agency has advised the Corporation in writing separately
(a) of such adjustments and (b) that the revised calculation definition would
not cause such Rating Agency to reduce or withdraw its then-current rating of
the shares of Preferred Stock. The adjustments contemplated by the preceding
sentence shall be made effective upon the time the Corporation receives the
written notice from the Rating Agency to the effect specified in clause (b) of
the preceding sentence. Any such modification may be rescinded or further
modified by action of the Board of Directors and Stockholders.
(e) Voting Procedures.
(i) As soon as practicable after the accrual of any right of the holders of shares of Preferred Stock to elect additional directors as described in paragraph 4(b) above, the Corporation shall call a special meeting of such holders and instruct the Paying Agent to mail a notice of such special meeting to such holders, such meeting to be held not less than 10 nor more than 20 days after the date of mailing of such notice. If the Corporation fails to send such notice to the Paying Agent or if the Corporation does not call such a special meeting, it may be called by any such holder on like notice. The record date for determining the holders entitled to notice of and to vote at such special meeting shall be the close of business on the fifth Business Day preceding the day on which such notice is mailed. At any such special meeting and at each meeting held during a Voting Period, such holders of Preferred Stock, voting together as a class (to the exclusion of the holders of all other securities and classes of capital stock of the Corporation), shall be entitled to elect the number of directors prescribed in paragraph 4(b) above. At any such meeting or adjournment thereof in the absence of a quorum, a majority of such holders present in person or by proxy shall have the power to adjourn the meeting without notice, other than by an announcement at the meeting, to a date not more than 120 days after the original record date.
(ii) For purposes of determining any rights of the holders of Cumulative Preferred Stock to vote on any matter or the number of shares required to constitute a quorum, whether such right is created by these Articles Supplementary, by the other provisions of the Charter, by statute or otherwise, a share of Cumulative Preferred Stock which is not Outstanding shall not be counted.
(iii) The terms of office of all persons who are directors of the Corporation at the time of a special meeting of holders of Preferred Stock, including Cumulative Preferred Stock, to elect directors shall continue, notwithstanding the election at such meeting by such holders of the number of directors that they are entitled to elect, and the persons so elected by such holders, together with the two incumbent directors elected by the holders of Preferred Stock, including Cumulative Preferred Stock, and the remaining incumbent directors elected by the holders of the Common Stock and Preferred Stock, shall constitute the duly elected directors of the Corporation.
(iv) Simultaneously with the expiration of a Voting Period, the terms of office of the additional directors elected by the holders of Preferred Stock, including Cumulative Preferred Stock, pursuant to paragraph 4(b) above shall terminate, the remaining directors shall constitute the directors of the Corporation and the voting rights of such holders of Preferred Stock, including Cumulative Preferred Stock, to elect additional directors pursuant to paragraph 4(b) above shall cease, subject to the provisions of the last sentence of paragraph 4(b).
(f) Exclusive Remedy.
Unless otherwise required by law, the holders of shares of Cumulative Preferred Stock shall not have any rights or preferences other than those specifically set forth herein. The holders of shares of Cumulative Preferred Stock shall have no preemptive rights or rights to cumulative voting. In the event that the Corporation fails to pay any dividends on the shares of Cumulative Preferred Stock, the exclusive remedy of the holders shall be the right to vote for directors pursuant to the provisions of this paragraph 4.
5. Coverage Tests.
(a) Determination of Compliance.
For so long as any shares of Cumulative Preferred Stock are Outstanding, the Corporation shall make the following determinations:
(i) Asset Coverage. The Corporation shall have Asset Coverage as of the last Business Day of each March, June, September and December of each year in which any share of Cumulative Preferred Stock is Outstanding.
(ii) Basic Maintenance Amount Requirement.
(A) For so long as any shares of Cumulative Preferred Stock are outstanding, the Corporation shall maintain, on each Valuation Date, S&P Eligible Assets having an Adjusted Value at least equal to the Basic Maintenance Amount, each as of such Valuation Date. Upon any failure to maintain S&P Eligible Assets having an Adjusted Value at least equal to the Basic Maintenance Amount, the Corporation shall use all commercially reasonable efforts to reattain S&P Eligible Assets having an Adjusted Value at least equal to the Basic Maintenance Amount on or prior to the Basic Maintenance Amount Cure Date, by altering the composition of its portfolio or otherwise.
(iii) Certificate of Basic Maintenance Amount.
So long as S&P is rating the Preferred Stock at the request of the Corporation and except to the extent waived by S&P, as of each Business Day and each Cure Date, the Corporation shall cause the Administrator to determine the aggregate Adjusted Value of all S&P Eligible Assets on that day and whether such aggregate Adjusted Value on such date equals or exceeds the Basic Maintenance Amount on such date. The calculations of the Adjusted Value of all S&P Eligible Assets and Basic Maintenance Amount, and whether the aggregate Adjusted Value of S&P Eligible Assets equals or exceeds the Basic Maintenance Amount shall be set forth in a certificate (a "Certificate of Basic Maintenance Amount"), dated as of each such Business Day and Cure Date and signed by an Authorized Officer. The Corporation shall cause the Administrator to deliver (by facsimile or otherwise) a Certif-
icate of Basic Maintenance Amount to the Corporation by 11:00 a.m. New York time on the Business Day to which such certificate relates. With respect to the Certificate of S&P Required Asset Coverage relating to (1) each Business Day which is the first Business Day in the months of January, April, July and October of each year, and (2) another day during each calendar quarter, which day shall be selected at random by the independent accountants signing the Accountant's Certificate referred to below, the Corporation shall cause the Administrator to deliver to the Corporation, within three Business Days of each such date, an Accountant's Certificate (in substantially such form as may be agreed upon by the Company and the Administrator with the consent of S&P) certifying as to (i) the mathematical accuracy of the calculations reflected in the related Certificate of S&P Required Asset Coverage, including the calculation of the Adjusted Value of the S&P Eligible Assets referred to therein and confirming that the S&P Eligible Assets referred to therein conform to the definition of S&P Eligible Assets herein, (ii) that the methodology used by the Administrator in determining whether the Adjusted Value of S&P Eligible Assets equals or exceeds the Basic Maintenance Amount is in accordance with the applicable requirements of these Articles Supplementary, and (iii) that the written or published price quotations used in such determination conform to such written or published quotations and that the S&P Eligible Assets listed in such Certificate of Basic Maintenance Amount constitute S&P Eligible Assets as defined herein. In the event that a Certificate of Basic Maintenance Amount is not delivered to the Corporation when required, the S&P Required Asset Coverage will be deemed not to have been met as of the applicable date. If such Accountant's Certificate shall differ from the Administrator's calculations, then the Accountant's Certificate shall control unless any such difference results from an error in calculation by the preparers of the Accountant's Certificate.
(iv) Notice of Basic Maintenance Amount.
The Corporation shall cause to be delivered to S&P, promptly after receipt thereof by the Corporation (but in no event later than the close of business on the second Business Day next succeeding the following dates) the Certificate of Basic Maintenance Amount with respect to each of the following dates: (a) the Date of
Original Issue for the Cumulative Preferred Stock, (b) each date as of which the Adjusted Value of all S&P Eligible Assets is less than the Basic Maintenance Amount, (c) each Cure Date, (d) each date as of which the Adjusted Value of all S&P Eligible Assets is less than or equal to 105% of the Basic Maintenance Amount, (e) each Business Day which is the first Business Day in the months of January, April, July and October, (f) the date on which any Common Stock is repurchased redeemed by the Corporation and (g) whenever requested by S&P.
(v) Delivery of Accountant's Certificate to S&P.
The Corporation shall cause to be delivered to S&P as soon as practicable after receipt thereof (but in no event later than 5 business days after the Corporation's receipt thereof) the Accountant's Certificate relating to the Certificate of Basic Maintenance Amount with respect to each of the following dates: (a) the Date of Original Issue for the Preferred Stock; (b) each Cure Date; (c)(1) each Business Day which is the first Business Day in the months of January, April, July and October and (2) another day during each calendar quarter, which day shall be selected at random by the independent accountants signing the Accountant's Certificate.
(b) Failure to Meet Asset Coverage.
If the Corporation fails to have Asset Coverage as provided in paragraph 5(a)(i) hereof and such failure is not cured as of the related Cure Date, the Corporation shall give a Notice of Redemption as described in paragraph 3 of Article II hereof with respect to the redemption of a sufficient number of shares of Cumulative Preferred Stock or other Preferred Stock to enable it to meet the requirements of paragraph 5(a)(i) above, and, at the Corporation's discretion, such additional number of shares of Cumulative Preferred Stock or other Preferred Stock in order that the Corporation have Asset Coverage with respect to the shares of Cumulative Preferred Stock and any other Preferred Stock remaining Outstanding after such redemption is as great as 275%, and deposit with the Paying Agent Deposit Securities having an initial combined value sufficient to effect the redemption of the shares of Cumulative Preferred Stock or other Preferred
Stock to be redeemed, as contemplated by paragraph 3(a) of Article II hereof.
(c) Failure to Maintain S&P Eligible Assets having an Adjusted Value At Least Equal to the Basic Maintenance Amount.
If the Corporation fails to have S&P Eligible Assets having an Adjusted Value at least equal to the Basic Maintenance Amount as provided in paragraph 5(a)(ii)(A) above and such failure is not cured by the related Cure Date, the Corporation shall give a Notice of Redemption as described in paragraph 3 of Article II hereof with respect to the redemption of a sufficient number of shares of Cumulative Preferred Stock or other Preferred Stock to enable it to meet the requirements of paragraph 5(a)(ii)(A) above, and deposit with the Paying Agent Deposit Securities having an initial combined value sufficient to effect the redemption of the shares of Cumulative Preferred Stock or other Preferred Stock to be redeemed, as contemplated by paragraph 3(a) of Article II hereof.
(d) Status of Shares Called for Redemption.
For purposes of determining whether the requirements of paragraphs 5(a)(i) and 5(a)(ii)(A) hereof are satisfied, (i) no share of the Cumulative Preferred Stock shall be deemed to be Outstanding for purposes of any computation if, prior to or concurrently with such determination, sufficient Deposit Securities to pay the full Redemption Price for such share shall have been deposited in trust with the Paying Agent and the requisite Notice of Redemption shall have been given, and (ii) such Deposit Securities deposited with the Paying Agent shall not be included in determining whether the requirements of paragraphs 5(a)(i) and 5(a)(ii)(A) hereof are satisfied.
6. Certain Other Restrictions.
(a) For so long as the Cumulative Preferred Stock is rated by S&P, the Corporation will not, and will cause the Adviser not to, (i) knowingly and willfully purchase or sell any asset for the specific purpose of causing, and with the actual knowledge that the effect of such purchase or sale will be to cause, the Corporation to have S&P Eligible Assets having an Adjusted Value as of
the date of such purchase or sale to be less than the Basic Maintenance Amount as of such date, (ii) in the event that, as of the immediately preceding Valuation Date, the Adjusted Value of the Corporation's S&P Eligible Assets exceeded the Basic Maintenance Amount by 5% or less, alter the composition of the Corporation's assets in a manner reasonably expected to reduce the Adjusted Value of the Corporation's S&P Eligible Assets, unless the Corporation shall have confirmed that, after giving effect to such alteration, the Adjusted Value of the Corporation's S&P Eligible Assets exceeded the Basic Maintenance Amount or (iii) declare or pay any dividend or other distribution on any shares of Common Stock or repurchase any shares of Common Stock, unless the Corporation shall have confirmed that, after giving effect to such declaration, other distribution or repurchase, the Corporation continued to satisfy the requirements of paragraph 5(a)(ii)(A) of Article II hereof.
For so long as the Cumulative Preferred Stock is rated by S&P, unless the Corporation shall have received written confirmation from S&P, the Corporation may engage in the lending of its portfolio securities only in an amount of up to [5%] of the Corporation's total assets, provided that the Corporation receives cash collateral for such loaned securities which is maintained at all times in an amount equal to at least 100% of the current market value of the loaned securities and, if invested, is invested only in Short-Term Money Market Investments or in money market mutual funds meeting the requirements of Rule 2a-7 under the 1940 Act that maintain a constant $1.00 per share net asset value and treat the loaned securities rather than the collateral as the assets of the Corporation for purposes of determining compliance with Article 5 hereof.
(c) For so long as the Cumulative Preferred Stock is rated by S&P, the Corporation shall not consolidate the Corporation with, merge the Corporation into, sell or otherwise transfer all or substantially all of the Corporation's assets to another entity or adopt a plan of liquidation of the Corporation, in each case without providing prior written notification to S&P.
7. Limitation on Incurrence of Additional Indebted- ness and Issuance of Additional Preferred Stock
(a) So long as any shares of Cumulative Preferred Stock are Outstanding, the Corporation may issue and sell one or more series of a class of senior securities of the Corporation representing indebtedness under Section 18 of the 1940 Act and/or otherwise create or incur indebtedness, provided that (i) if the Corporation is using the proceeds (net of all offering expenses payable by the Corporation) of such additional indebtedness to purchase all or a portion of any shares of the Cumulative Preferred Stock or to repay, redeem or otherwise refinance all or a portion of any shares of the Cumulative Preferred Stock and/or any other indebtedness or Preferred Stock of the Corporation then outstanding or if such indebtedness constitutes a temporary bank borrowing (not in excess of 5% of the value of the Corporation's total assets) for emergency or extraordinary purposes, then the Corporation shall, immediately after giving effect to the incurrence of such indebtedness and to its receipt and application of the proceeds thereof, have an "asset coverage" for all senior securities representing indebtedness, as defined in Section 18(h) of the 1940 Act, of at least 300% of the amount of all indebtedness of the Corporation then outstanding, or (ii) if the Corporation is using the proceeds (net of all offering expenses payable by the Corporation) of such additional indebtedness for any other purpose, then the Corporation shall, immediately after giving effect to the incurrence of such indebtedness and to its receipt and application of the proceeds thereof, have an "asset coverage" for all senior securities representing indebtedness, as defined in Section 18(h) of the 1940 Act, of at least 300% of the amount of all indebtedness of the Corporation then outstanding, and, (iii), in the case of either (i) or (ii) above, no such additional indebtedness shall have any preference or priority over any other indebtedness of the Corporation upon the distribution of the assets of the Corporation or in respect of the payment of interest. Any possible liability resulting from lending and/or borrowing portfolio securities, entering into reverse repurchase agreements, entering into futures contracts and writing options, to the extent such transactions are made in accordance with the investment restrictions of the Corporation then in effect, shall not be considered to be indebtedness limited by this paragraph 7(a).
(b) So long as any shares of Cumulative Preferred Stock are Outstanding, the Corporation may issue and sell shares of one or more other series of Preferred Stock constituting a series of a class of senior securities of the Corporation representing stock under Section 18 of the 1940 Act in addition to the shares of Cumulative Preferred Stock, provided that (i) the Corporation shall, immediately after giving effect to the issuance of such additional Preferred Stock and to its receipt and application of the proceeds thereof, have an "asset coverage" for all senior securities which are stock, as defined in Section 18(h) of the 1940 Act, of at least 200% of the shares of Cumulative Preferred Stock and all other Preferred Stock of the Corporation then outstanding, and (ii) no such additional Preferred Stock shall have any preference or priority over any other Preferred Stock of the Corporation upon the distribution of the assets of the Corporation or in respect of the payment of dividends.
IN WITNESS WHEREOF, The Gabelli Convertible Securities Fund, Inc. has caused these presents to be signed in its name and on its behalf by a duly authorized officer, and its corporate seal to be hereunto affixed and attested by its Secretary, and the said officers of the Corporation further acknowledge said instrument to be the corporate act of the Corporation, and state that to the best of their knowledge, information and belief the matters and facts herein set forth with respect to approval are true in all material respects, all on _____________, 1997.
THE GABELLI CONVERTIBLE
SECURITIES FUND, INC.
By ___________________________
Name:
Title:
Attest:
EXHIBIT(G)
THE GABELLI SERIES FUNDS, INC.
THE GABELLI CONVERTIBLE SECURITIES FUND
655 Third Avenue
New York, New York 10017
Investment Advisory Contract
June 29, 1989
Gabelli Funds, Inc.
655 Third Avenue
New York, New York 10017
Dear Sirs:
We herewith confirm our agreement with you as follows:
1. The Gabelli Series Funds, Inc., a Maryland corporation (the "Corporation") proposes to engage in the business of investing and reinvesting its assets in securities of the type and in accordance with the limitations specified in its Articles of Incorporation, as amended, its By-laws and Registration Statement filed with the Securities and Exchange Commission under the Investment Company Act of 1940, as amended (the "1940 Act") and the Securities Act of 1933, including any representations made in the Prospectus and Statement of Additional Information contained therein, all in such manner and to such extent as may from time to time be authorized by the Board of Directors of the Corporation. Copies of the documents listed above are furnished herewith and any amendments will, from time to time, be furnished to you.
2. The Corporation hereby employs you to manage, subject to the general supervision of the Corporation's Board of Directors, the investment and reinvestment of the assets of The Gabelli Convertible Securities Fund (the "Fund") and, without limiting the generality of the foregoing, to provide the management and related services specified below:
(a) You will provide a continuous program for the investment of the Fund's assets; provide investment research and make all decisions with respect to the investment of the Fund's assets; make the day-to-day investment decisions for the Fund; arrange the portfolio transactions for the Fund and manage the Fund's investments in accordance with the stated policies of the Fund subject to the general supervision of the Corporation's Board of Directors. In all purchases, sales and other transactions relating to the investment management of the Fund's assets you are authorized to exercise full discretion and act for the Fund in the same manner and with the same force and effect as the Fund itself as necessary or incidental to the furtherance or conduct of such purchases, sales or other transactions. In making such purchases, sales and other transactions, you will comply with the policies set from time to time by the Corporation's Board of Directors; the limitations imposed by the Corporation's Articles of Incorporation, as amended, its By-laws and the Registration Statement; and the requirements of the 1940 Act and all applicable laws.
(b) You will report to the Corporation's Board of Directors, and shall prepare and furnish to the Fund such reports, statistical data and other information in such form and at such intervals as the Fund may reasonably request.
(c) Subject to the overall supervision and general control of the Corporation's Board of Directors, you shall oversee the administration of all aspects of the Fund's business and affairs and provide such services required for effective administration of the Fund. In connection therewith, you shall:
(i) provide the services of persons competent to perform such supervisory, administrative and clerical functions as are necessary to provide the Fund with effective administration, including (A) maintaining the Fund's books and records, such as journals, ledger accounts and other records in accordance with applicable laws and regulations, and overseeing the activities of the Corporation's Custodian and Transfer Agent, (B) transmitting purchase and redemption orders for Fund shares, (C) initiating all money transfers to the Fund's Custodian and from the Fund's Custodian for the payment of the Fund's expenses, investments, dividends and share
redemptions, and (D) reconciling account information and balances among the Fund's Custodian, Transfer Agent and you;
(ii) Oversee the performance of administrative and professional services rendered to the Fund of the Corporation by others including the Administrator, Custodian, Transfer Agent and Dividend Disbursing Agent, as well as legal, accounting and auditing services;
(iii) Provide the Fund, as requested, office space and facilities, utilities and office equipment as are adequate for the Fund's needs;
(iv) Prepare, but not pay for, all reports by the Corporation on behalf of the Fund, to its shareholders and all reports and filings required to maintain the registration and qualification of the Corporation's shares under federal and state law including periodic updating of the Fund's registration statement, Prospectus and Statement of Additional Information, including the printing of such documents for the purpose of filings with the Securities and Exchange Commission;
(v) Supervise the calculation of the net asset value of the Fund's shares; and
(vi) Prepare notices and agendas for meetings of the Fund's shareholders and Board of Directors as well as minutes of such meetings in all matters required by applicable law to be acted upon by the Board of Directors.
(d) It is understood that you will from time to time employ or associate with yourselves such persons as you believe to be particularly fitted to assist you in the execution of your duties hereunder, the cost of performance of such duties shall be borne and paid by you. No obligation may be incurred on the Corporation's behalf in any such respect. During the continuance of this agreement you will provide to the Fund persons satisfactory to the Corporation's Board of Directors to serve as officers and employees of the Fund. Nothing contained herein shall be construed to restrict the Corporation's right to hire its own employees or to contract for services to be performed by third parties,
including but not limited to, the calculation of the net asset value of the Fund's shares.
3. It is further agreed that if, in any fiscal year (or portion
thereof that this agreement is in effect), the Fund's aggregate expenses
including fees paid pursuant to this agreement (but excluding interest, taxes,
brokerage commissions and extraordinary expenses) exceed the most restrictive
expense limitation imposed by the securities law of any state in which the
shares of the Fund are registered or qualified for sale, you will reimburse the
Fund for the amount of such excess. It is further agreed that, subject to the
foregoing, the Fund shall be responsible for the payment of all the Fund's other
expenses, including: (a) payment of the fees payable to you under paragraph 5
hereof; (b) organizational expenses; (c) brokerage fees and commissions; (d)
taxes; (e) interest charges on borrowings; (f) the costs of liability insurance
or fidelity bond coverage for the Fund's officers and employees, and directors'
and officers' errors and omissions insurance coverage; (g) legal, auditing and
accounting fees and expenses; (h) charges of the Fund's Custodian, Transfer
Agent and dividend disbursing agent; (i) the Fund's pro rata portion of dues,
fees and charges of any trade association of which the Corporation is a member;
(j) the expenses of printing, preparing and mailing proxies, stock certificates
and reports, including the Fund's prospectuses and statements of additional
information, and notices to shareholders; (k) filing fees for the registration
or qualification of the Fund and its shares under federal or state securities
laws; (l) the fees and expenses involved in registering and maintaining
registration of the Fund's shares with the Securities and Exchange Commission;
(m) the expenses of holding shareholder meetings; (n) the compensation,
including fees, or any of the Fund's unaffiliated directors, officers or
employees; (o) all expenses of computing the Fund's net asset value per share,
including any equipment or services obtained solely for the purpose of pricing
shares or valuing the Fund's investment portfolio; (p) expenses of personnel
performing shareholder servicing functions; and (q) litigation and other
extraordinary or non-recurring expenses and other expenses properly payable by
the Fund.
4. We shall expect of you, and you will give us the benefit of, your best judgment and efforts in
rendering these services to us, and we agree as an inducement to your undertaking these services that you shall not be liable for any act or omission by you or for error of judgment or mistake of law or for any loss suffered by the Corporation in connection with any matter to which this Agreement relates; provided, that nothing herein contained shall be construed (i) to protect you against any liability to the Corporation or its shareholders to which you would otherwise be subject by reason of willful misfeasance, bad faith, or gross negligence in the performance of your duties, or by reason of the reckless disregard of your obligations and duties under this Agreement, or (ii) to protect any of your directors, officers or employees who are or were Directors or officers of the Corporation against any liability to the Corporation or its shareholders to which such person would otherwise by subject by reason of willful malfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of such person's office with the Corporation.
5. In consideration of the foregoing, the Fund will pay you a fee at the annual rate of 1.0% of the Fund's average daily net assets. This fee shall be computed daily and shall be payable in arrears on the last day of each calendar month for services performed hereunder during such month. Fund expenses are accrued monthly and your fee will be reduced to the extent that Fund expenses exceed the amount of the limitation set forth in paragraph 3 and, to the extent such excess is greater than your monthly fee, the amount of such excess will be reimbursed by you to the Fund.
6. It is agreed that you shall employ securities brokers which, in your judgment, will implement the policy of the Fund to seek the best execution of its portfolio transactions at reasonable expenses. For purposes of this agreement, "best execution" shall mean prompt, efficient and reliable execution at the most favorable price obtainable. Under such conditions as may be specified by the Corporation's Board of Directors in the interest of its shareholders and to ensure compliance with applicable law and regulations, you may (a) place orders for the purchase or sale of the Fund's portfolio securities with you affiliate, Gabelli & Company, Inc.; (b) pay commissions to brokers other than your affiliate which are higher than might be charged by another quali-
fied broker to obtain brokerage and/or research services considered by you to be useful or desirable in the performance of your duties hereunder and for the investment management of other advisory accounts over which you or your affiliates exercise investment discretion; and (c) consider sales by brokers (other than your affiliated Distributor) of shares of the Fund and any other mutual fund for which you or your affiliates act as investment adviser, as a factor in your selection of brokers for Fund portfolio transactions.
7. It is understood and agreed that the word "Gabelli" is your property for copyright and other purposes. The Fund further agrees that the word "Gabelli" in its name is derived from the name of Mario J. Gabelli and such name may freely be used by you for other investment companies, entities or products. The Fund further agrees that, in the event that you shall cease to act as investment adviser to the Fund, the Fund shall promptly take all necessary and appropriate action to change its name to one which does not include the word "Gabelli"; provided, however, that the Fund may continue to use such name if you consent in writing to such use.
8. This agreement shall become effective on the date hereof and shall remain in effect until June 29, 1991 and shall continue in effect thereafter, only so long as such continuance is specifically approved annually by the Corporation's Board of Directors or by vote of a majority (as defined in the 1940 Act), of the outstanding voting securities of the Corporation and, in either case, by a majority of the Corporation's Directors who are not parties to this agreement or interested persons (as defined in the 1940 Act) of any such party by vote cast in person at a meeting called for the purpose of voting on such approval. Upon the effectiveness of this agreement, it shall supersede all previous agreements between us covering the subject matter hereof. This agreement may be terminated at any time, without the payment of any penalty, by the Board of Directors of the Corporation or by vote of a majority of the outstanding voting securities of the Corporation on not more than sixty days' written notice to you, or by you upon not more than sixty days' written notice to the Corporation.
9. This agreement shall automatically terminate in the event of its "assignment" as that term is defined in the 1940 Act.
10. Except to the extent necessary to perform your obligations hereunder, nothing herein shall be deemed to limit or restrict your right, or the right of any of your officers, directors or employees who may also be a director, officer or employee of the Corporation, or persons otherwise affiliated with the Corporation (within the meaning of the 1940 Act) to engage in any other business or to devote time and attention to the management or other aspects of any other business, whether of a similar or dissimilar nature, or to render services of any kind to any other corporation, firm, individual or association.
If the foregoing is in accordance with your understanding, will you kindly so indicate by signing and returning to us the enclosed copy hereof.
Very truly yours,
THE GABELLI SERIES FUNDS, INC.
By:_____________________________
Agreed to and Accepted
GABELLI FUNDS, INC.
By:______________________
Exhibit (h)(1)
ST&B DRAFT
04/21/97
[1,200,000] Shares
THE GABELLI CONVERTIBLE SECURITIES FUND, INC.
___% Cumulative Preferred Stock
Liquidation Preference $25 Per Share
UNDERWRITING AGREEMENT
May __, 1997
SMITH BARNEY INC.
GABELLI & COMPANY, INC.
As Representatives of the Several Underwriters
c/o SMITH BARNEY INC.
388 Greenwich Street
New York, New York 10013
Dear Sirs:
The Gabelli Convertible Securities Fund, Inc., a Maryland corporation (the "Fund"), proposes, upon the terms and conditions set forth herein, to issue and sell an aggregate of [1,200,000] shares (the "Shares") of its ___% cumulative preferred stock, liquidation preference $25 per share, $0.001 par value per share (the "Cumulative Preferred Stock"), to the several Underwriters named in Schedule I hereto. The Cumulative Preferred Stock will be authorized by, and subject to the terms and conditions of, the Articles Supplementary to be adopted in connection with the issuance of the Cumulative Preferred Stock (the "Articles Supplementary").
The Fund and its investment adviser, Gabelli Funds, Inc., a New York corporation (the "Adviser"), wish to confirm as follows their agreement with you (the "Representatives") and the other several Underwriters on whose behalf you are acting, in connection with the several purchases of the Shares by the Underwriters.
The Fund has entered into an investment advisory agreement dated ____________ with the Adviser, a custodian agreement dated _______________ with State Street Bank and Trust Company, a Massachusetts corporation, and a transfer agency agreement dated _______________ with State Street Bank and Trust Company. Such agreements are hereinafter referred to as the "Investment Advisory Agreement", the "Custodian Agreement" and the "Transfer Agency Agreement", respectively. Collectively, the Investment Advisory Agreement, the Custodian Agreement and the Transfer Agency Agreement are hereinafter referred to as the "Fund Agreements". This Underwriting Agreement is hereinafter referred to as the "Agreement".
1. Registration Statement and Prospectus. The Fund has prepared in conformity with the provisions of the Securities Act of 1933, as amended (the "1933 Act"), the Investment Company Act of 1940, as amended (the "1940 Act") and the rules and regulations of the Securities and Exchange Commission (the "Commission") promulgated under the 1933 Act (the "1933 Act Rules and Regulations") and the 1940 Act (the "1940 Act Rules and Regulations" and, together with the 1933 Act Rules and Regulations, the "Rules and Regulations") a registration statement on Form N-2 (File No. 333-______) under the 1933 Act and the 1940 Act (the "registration statement"), including a prospectus relating to the Shares, and has filed the registration statement and prospectus in accordance with the 1933 Act and 1940 Act. The Fund also has filed a notification of registration of the Fund as an investment company under the 1940 Act on Form N-8A (the "1940 Act Notification"). The term "Registration Statement" as used in this Agreement means the registration statement (including all financial schedules and exhibits), as amended at the time it becomes effective under the 1933 Act or, if the registration statement became effective under the 1933 Act prior to the execution of this Agreement, as amended or supplemented at the time it became effective, prior to the execution of this Agreement. If it is contemplated, at the time this Agreement is executed, that a post-effective amendment to the registration statement will be filed under the 1933 Act and must be declared effective before the offering of the Shares may commence, the term "Registration Statement" as used in this Agreement means the registration statement as amended by said post-effective amendment. If the Fund has filed an abbreviated registration statement to register an additional amount of Shares pursuant to Rule 462(b) under the 1933 Act (the "Rule 462 Registration Statement"), then any reference herein to the term "Registration Statement" shall include such Rule 462 Registrations Statement. The term "Prospectus" as used in this Agreement means the prospectus and statement of additional information in the forms included in the Registration Statement or, if the prospectus and statement of additional information included in the Registration Statement omit information in reliance on Rule 430A under the 1933 Act Rules and Regulations and such information is included in a prospectus and statement of additional information filed with the Commission pursuant to Rule 497(h) under the 1933 Act, the term "Prospectus" as used in this Agreement means the prospectus and statement of additional information in the forms included in the Registration Statement as supplemented by the addition of the information contained in the prospectus filed with the Commission pursuant to Rule 497(h). The term "Prepricing Prospectus" as used in this Agreement means the prospectus and statement of additional information subject to completion in the forms included in the registration statement at the time of filing of amendment No. 1 to the registration statement with the Commission on May ___, 1997 and as such prospectus and statement of additional information shall have been amended form time to time prior to the date of the Prospectus, together with any other prospectus and statement of
additional information relating to the Fund other than the Prospectus, approved in writing by or directly or indirectly prepared by the Fund or the Adviser. It being understood that the definition of Prepricing Prospectus above shall not include any Prepricing Prospectus prepared by any Underwriter unless approved in writing by the Fund or Adviser. The terms "Registration Statement", "Prospectus" and "Prepricing Prospectus" shall also include any financial statements incorporated by reference therein.
The Fund has furnished the Representatives with copies of such registration statement, each amendment to such registration statement filed with the Commission and each Prepricing Prospectus.
2. Agreements to Sell and Purchase. The Fund hereby agrees, subject to all the terms and conditions set forth herein, to issue and sell to each Underwriter and, upon the basis of the representations, warranties and agreements of the Fund and the Adviser herein contained and subject to all the terms and conditions set forth herein, each Underwriter agrees, severally and not jointly, to purchase from the Fund, at a purchase price of $_____ per Share, the number of Shares set forth opposite the name of such Underwriter in Schedule I hereto (or such number of Shares increased as set forth in Section 11 hereof).
3. Terms of Public Offering. The Fund and the Adviser have been advised by you that the Underwriters propose to make a public offering of their respective portions of the Shares as soon after the Registration Statement and this Agreement have become effective as in your judgment is advisable and initially to offer the Shares upon the terms set forth in the Prospectus.
4. Delivery of the Shares and Payment Therefor. Delivery to the Underwriters of and payment for the Shares shall be made at the office of Smith Barney Inc., 388 Greenwich Street, New York, NY 10013, at 10:00 A.M., New York City time, on May __, 1997 (the "Closing Date"). The place of closing for the Shares and the Closing Date may be varied by agreement between you and the Fund.
Certificates for the Shares shall be registered in such names and in such denominations as you shall request prior to 9:30 A.M., New York City time, on the second business day preceding the Closing Date. Such certificates shall be made available to you in New York City for inspection and packaging not later than 9:30 A.M., New York City time, on the business day next preceding the Closing Date. The certificates evidencing the Shares shall be delivered to you on the Closing Date against payment of the purchase price therefor in immediately available funds.
5. Agreements of the Fund and the Adviser. The Fund and the Adviser, jointly and severally, agree with the several Underwriters as follows:
(a) If, at the time this Agreement is executed and delivered, it is necessary for the Registration Statement or a post-effective amendment thereto to be declared effective under the 1933 Act before the offering of the Shares may commence, the Fund will endeavor to cause the Registration Statement or such post-effective amendment to become effective under the 1933 Act as soon as possible and will advise you promptly and, if requested by you, will confirm such advice in writing (i) when the Registration Statement or such post-effective amendment has become effective.
(b) The Fund will advise you promptly and, if requested by
you, will confirm such advice in writing: (i) of any request made by the
Commission for amendment of or a supplement to the Registration Statement, any
Prepricing Prospectus or the Prospectus (or any amendment or supplement to any
of the foregoing) or for additional information, (ii) of the issuance by the
Commission, the National Association of Securities Dealers, Inc. (the "NASD"),
any state securities commission, any national securities exchange, any
arbitrator, any court or any other governmental, regulatory, self-regulatory or
administrative agency or any official of any order suspending the effectiveness
of the Registration Statement, prohibiting or suspending the use of the
Prospectus, any Prepricing Prospectus or any sales material (as hereinafter
defined), of any notice pursuant to Section 8(e) of the 1940 Act, of the
suspension of qualification of the Shares for offering or sale in any
jurisdiction, or the initiation of any proceeding for any such purposes, (iii)
of receipt by the Fund, the Adviser, any affiliate of the Fund or the Adviser or
any representative or attorney of the Fund or the Adviser of any other material
communication from the Commission, the NASD, any state securities commission,
any national securities exchange, any arbitrator, any court or any other
governmental, regulatory, self-regulatory or administrative agency or any
official relating to the Fund (if such communication relating to the Fund is
received by such person within three years after the date of this Agreement),
the Registration Statement, the 1940 Act Notification, the Prospectus, any
Prepricing Prospectus, any sales material (as hereinafter defined) (or any
amendment or supplement to any of the of foregoing), this Agreement or any of
the Fund Agreements and (iv) within the period of time referred to in paragraph
(f) below, of any material adverse change in the condition (financial or other),
business, prospects, properties, net assets or results of operations of the Fund
or the Adviser or of the happening of any event which makes any statement of a
material fact made in the Registration Statement, the Prospectus or any sales
material (as herein defined) (or any amendment or supplement to any of the
foregoing) untrue or which requires the making of any additions to or changes in
the Registration Statement, the Prospectus, any
Prepricing Prospectus or any sales materials (as herein defined) (or any amendment or supplement to any of the foregoing) in order to state a material fact required by the 1933 Act, the 1940 Act or the Rules and Regulations to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading or of the necessity to amend or supplement the Registration Statement, the Prospectus, any Prepricing Prospectus or any sales material (as herein defined) (or any amendment or supplement to any of the foregoing) to comply with the 1933 Act, the 1940 Act, the Rules and Regulations or any other law or order of any court or regulatory body. If at any time the Commission, the NASD, any state securities commission, any national securities exchange, any arbitrator, any court or any other governmental, regulatory, self-regularity or administrative agency or any official shall issue any order suspending the effectiveness of the Registration Statement, prohibiting or suspending the use of the Prospectus or any sales material (as hereinafter defined) (or any amendment or supplement to any of the foregoing) or suspending the qualification of the Shares for offering or sale in any jurisdiction, the Fund will make every reasonable effort to obtain the withdrawal of such order at the earliest possible time.
(c) The Fund will furnish to you, without charge, three signed copies of the registration statement and the 1940 Act Notification as originally filed with the Commission and of each amendment thereto, including financial statements and all exhibits thereto, and will also furnish to you, without charge, such number of conformed copies of the registration statement as originally filed and of each amendment thereto, but without exhibits, as you may request.
(d) The Fund will not (i) (A) file any amendment to the Registration Statement or make any amendment or supplement to the Prospectus, or any sales material (as hereinafter defined) of which you shall not previously have been advised or to which you shall object after being so advised or (ii) so long as, in the opinion of counsel for the Underwriters, a Prospectus is required by the 1933 Act to be delivered in connection with sales by any Underwriter or dealer, file any information, documents or reports pursuant to the Securities Exchange Act of 1934, as amended (the "1934 Act"), without delivering a copy of such information, documents or reports to you, as Representatives of the Underwriters, prior to or concurrently with such filing.
(e) Prior to the execution and delivery of this Agreement, the Fund has delivered to you, without charge, in such quantities as you have requested, copies of each form of the Prepricing Prospectus. The Fund consents to the use, in accordance with the provisions of the 1933 Act and with the state securities or blue sky laws of the jurisdictions in which the Shares are offered by the several Underwriters and by dealers,
prior to the date of the Prospectus, of each Prepricing Prospectus so furnished by the Fund.
(f) As soon after the execution and delivery of this Agreement as possible and thereafter from time to time for such period as in the opinion of counsel for the Underwriters a prospectus is required by the 1933 Act to be delivered in connection with sales by any Underwriter or dealer, the Fund will expeditiously deliver to each Underwriter and each dealer, without charge, as many copies of the Prospectus (and of any amendment or supplement thereto) as you may request. The Fund consents to the use of the Prospectus (and of any amendment or supplement thereto) in accordance with the provisions of the 1933 Act and with the state securities or blue sky laws of the jurisdictions in which the Shares are offered by the several Underwriters and by all dealers to whom Shares may be sold, both in connection with the offering and sale of the Shares and for such period of time thereafter as the Prospectus is required by the 1933 Act to be delivered in connection with sales by any Underwriter or dealer. If during such period of time any event shall occur that in the judgment of the Fund or in the opinion of counsel for the Underwriters is required to be set forth in the Registration Statement or the Prospectus (as then amended or supplemented) or should be set forth therein in order to make the statements therein, in the light of the circumstances under which they were made, not misleading, or if it is necessary to supplement or amend the Registration Statement or the Prospectus to comply with the 1933 Act, the 1940 Act, the Rules and Regulations or any other federal law, rule or regulation, or any state securities or blue sky disclosure laws, rules or regulations, the Fund will forthwith prepare and, subject to the provisions of paragraph (d) above, promptly file with the Commission an appropriate supplement or amendment thereto, and will expeditiously furnish to the Underwriters and dealers, without charge, a reasonable number of copies thereof. In the event that the Fund and you, as Representatives of the several Underwriters, agree that the Registration Statement or the Prospectus should be amended or supplemented, the Fund, if requested by you, will promptly issue a press release announcing or disclosing the matters to be covered by the proposed amendment or supplement.
(g) The Fund will cooperate with you and with counsel for the Underwriters in connection with the registration or qualification of the Shares for offering and sale by the several Underwriters and by dealers under the state securities or blue sky laws of such jurisdictions as you may designate and will file such consents to service of process or other documents necessary or appropriate in order to effect such registration or qualification; provided that in no event shall the Fund be obligated to qualify to do business in any jurisdiction where it is not now so qualified or to take any action which would subject it to service of process in suits, other than those arising out
of the offering or sale of the Shares, in any jurisdiction where it is not now so subject.
(h) The Fund will make generally available to its security holders an earnings statement, which need not be audited, covering a twelve-month period commencing after the effective date of the Registration Statement and ending not later than 15 months thereafter, as soon as practicable after the end of such period, which consolidated earnings statement shall satisfy the provisions of Section 11(a) of the Act and Rule 158 of the 1933 Act Rules and Regulations.
(i) During the period of five years hereafter, the Fund will furnish to you (i) as soon as available, a copy of each report of the Fund mailed to stockholders or filed with the Commission or furnished to the New York Stock Exchange (the "NYSE"), and (ii) from time to time such other information concerning the Fund as you may request.
(j) If this Agreement shall terminate or shall be terminated after execution pursuant to any provisions hereof (otherwise than pursuant to the second paragraph of Section 11 hereof or by notice given by you terminating this Agreement pursuant to Section 11 or Section 12 hereof) or if this Agreement shall be terminated by the Underwriters because of any failure or refusal on the part of the Fund or the Adviser to comply with the terms or fulfill any of the conditions of this Agreement, the Fund and the Adviser, jointly and severally, agree to reimburse the Representatives for all out-of-pocket expenses (including fees and expenses of (i) counsel for the Underwriters and (ii) Financial Products Group, Inc.) incurred by you in connection herewith.
(k) The Fund will apply the net proceeds from the sale of the Shares substantially in accordance with the description set forth in the Prospectus and in such a manner as to comply with the investment objective, policies and restrictions of the Fund as described in the Prospectus.
(l) The Fund will timely file the requisite copies of the Prospectus with the Commission pursuant to Rule 497(c) or Rule 497(h) of the 1933 Act Rules and Regulations, whichever is applicable or, if applicable, will timely file the certification permitted by Rule 497(j) of the 1933 Act Rules and Regulations and will advise you of the time and manner of such filing.
(m) Except as provided in this Agreement, the Fund will not sell, contract to sell, or otherwise dispose of any senior securities of the Fund, or grant any options or warrants to purchase senior securities of the Fund, for a period of 180 days after the date of the Prospectus, without the prior written consent of Smith Barney Inc.
(n) Except as stated in this Agreement and in the Prepricing Prospectus and Prospectus, neither the Fund nor the Adviser has taken, nor will it take, directly or indirectly, any action designed to or that might reasonably be expected to cause or result in stabilization or manipulation of the price of any securities issued by the Fund to facilitate the sale or resale of the Shares; it being understood that the Underwriters include certain affiliates of the Adviser and that stabilization or other activity by the Representatives on behalf of the Underwriters shall not be deemed to be violative of this representation.
(o) The Fund will use its best efforts to have the Shares listed, subject to notice of issuance, on the NYSE concurrently with the effectiveness of the registration statement and to comply with the rules and regulations of such exchange.
(p) The Fund will use its best efforts to cause the Cumulative
Preferred Stock, prior to the Closing Date, to be assigned a rating of "AAA" by
[Standard & Poor's Ratings Group] (the "Rating Agency").
(q) The Fund and the Adviser will use their best efforts to perform all of the agreements required of them and discharge all conditions to closing as set forth in this Agreement.
6. Representations and Warranties of the Fund and the Adviser. The Fund and the Adviser, jointly and severally, represent and warrant to each Underwriter that:
(a) Each Prepricing Prospectus included as part of the registration statement as originally filed or as part of any amendment or supplement thereto, or filed pursuant to Rule 497 of the 1933 Act Rules and Regulations, complied when so filed in all material respects with the provisions of the 1933 Act, the 1940 Act and the Rules and Regulations. The Commission has not issued any order preventing or suspending the use of any Prepricing Prospectus.
(b) The registration statement in the form in which it became or becomes effective and also in such form as it may be when any post-effective amendment thereto shall become effective and the Prospectus and any supplement or amendment thereto when filed with the Commission under Rule 497 of the 1933 Act Rules and Regulations and the 1940 Act Notification when originally filed with the Commission and any amendment or supplement thereto when filed with the Commission, complied or will comply in all material respects with the provisions of the 1933 Act, the 1940 Act and the Rules and Regulations and did not or will not at any such times contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading, except that this representation and warranty does not apply to statements in or omissions from the registration statement or the
Prospectus made in reliance upon and in conformity with information relating to any Underwriter furnished to the Fund in writing by or on behalf of any Underwriter through you expressly for use therein.
(c) All the outstanding shares of Common Stock of the Fund have been duly authorized and validly issued, are fully paid and nonassessable and are free of any preemptive or similar rights; the Shares have been duly authorized and, when issued and delivered to the Underwriters against payment therefor in accordance with the terms hereof, will be validly issued, fully paid and nonassessable and free of any preemptive or similar rights and will conform to the description thereof in the Registration Statement and the Prospectus (and any amendment or supplement to either of them); and the capital stock of the Fund conforms to the description thereof in the Registration Statement and the Prospectus (and any amendment or supplement to either of them).
(d) The Fund is a corporation duly organized and validly existing in good standing under the laws of the State of Maryland with full corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Registration Statement and the Prospectus (and any amendment or supplement to either of them), and is duly registered and qualified to conduct its business and is in good standing in each jurisdiction or place where the nature of its properties or the conduct of its business requires such registration or qualification, except where the failure so to register or qualify does not have a material adverse effect on the condition (financial or other), business, prospects, properties, net assets or results of operations of the Fund; and the Fund has no subsidiaries.
(e) There are no legal or governmental proceedings pending or, to the knowledge of the Fund, threatened, against the Fund, or to which the Fund or any of its properties is subject, that are required to be described in the Registration Statement or the Prospectus (and any amendment or supplement to either of them) but are not described as required, and there are no agreements, contracts, indentures, leases or other instruments that are required to be described in the Registration Statement or the Prospectus (and any amendment or supplement to either of them) or to be filed as an exhibit to the Registration Statement that are not described or filed as required by the 1933 Act, the 1940 Act or the Rules and Regulations.
(f) The Fund is not in violation of its articles of incorporation or by-laws, or other organizational documents, or of any law, ordinance, administrative or governmental rule or regulation applicable to the Fund or of any decree of the Commission, the NASD, any state securities commission, any national securities exchange, any arbitrator, any court or governmental agency, body or official having jurisdiction over
the Fund, or in default in any material respect in the performance of any obligation, agreement or condition contained in any bond, debenture, note or any other evidence of indebtedness or in any material agreement, indenture, lease or other instrument to which the Fund is a party or by which it or any of its properties may be bound.
(g) Neither the issuance and sale of the Shares, the execution, delivery or performance of this Agreement or any of the Fund Agreements by the Fund, nor the consummation by the Fund of the transactions contemplated hereby or thereby (A) requires any consent, approval, authorization or other order of or registration or filing with, the Commission, the NASD, any state securities commission, any national securities exchange, any arbitrator, any court, regulatory body, administrative agency or other governmental body, agency or official (except such as may have been obtained prior to the date hereof and such as may be required for compliance with the state securities or blue sky laws of various jurisdictions which have been or will be effected in accordance with this Agreement) or conflicts or will conflict with or constitutes or will constitute a breach of, or a default under, the articles of incorporation, including the Articles Supplementary, or bylaws, or other organizational documents, of the Fund or (B) conflicts or will conflict with or constitutes or will constitute a breach of, or a default under, any agreement, indenture, lease or other instrument to which the Fund is a party or by which it or any of its properties may be bound, or violates or will violate any statute, law, regulation or filing or judgment, injunction, order or decree applicable to the Fund or any of its properties, or will result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Fund pursuant to the terms of any agreement or instrument to which it is a party or by which it may be bound or to which any of its property or assets is subject. The Fund is not subject to any order of any court or of any arbitrator, governmental authority or administrative agency.
(h) The accountants, Price Waterhouse LLP, who have certified or shall certify the financial statements included in the Registration Statement and the Prospectus (or any amendment or supplement to either of them) are independent public accountants as required by the 1933 Act, the 1940 Act and the Rules and Regulations.
(i) The financial statements, together with related schedules and notes, included or incorporated by reference in the Registration Statement and the Prospectus (and any amendment or supplement to either of them), present fairly the financial position, results of operations and changes in financial position of the Fund on the basis stated or incorporated by reference in the Registration Statement at the respective dates or for the respective periods to which they apply; such statements and related schedules and notes have been prepared in accordance with generally accepted accounting principles consistently applied
throughout the periods involved, except as disclosed therein; and the other financial and statistical information and data included in the Registration Statement and the Prospectus (and any amendment or supplement to either of them) are accurately presented and prepared on a basis consistent with such financial statements and the books and records of the Fund.
(j) The execution and delivery of, and the performance by the Fund of its obligations under, this Agreement and the Fund Agreements have been duly and validly authorized by the Fund, and this Agreement and the Fund Agreements have been duly executed and delivered by the Fund and constitute the valid and legally binding agreements of the Fund, enforceable against the Fund in accordance with their terms, except as rights to indemnity and contribution hereunder may be limited by federal or state securities laws.
(k) Except as disclosed in the Registration Statement and the Prospectus (or any amendment or supplement to either of them), subsequent to the respective dates as of which such information is given in the Registration Statement and the Prospectus (or any amendment or supplement to either of them), the Fund has not incurred any liability or obligation, direct or contingent, or entered into any transaction, not in the ordinary course of business, that is material to the Fund, and there has not been any change in the capital stock, or material increase in the short-term debt or long-term debt, of the Fund, or any material adverse change, or any development involving or which may reasonably be expected to involve, a prospective material adverse change, in the condition (financial or other), business, prospects, properties, net assets or results of operations of the Fund, whether or not arising in the ordinary course of business.
(l) The Fund has not distributed and, prior to the later to occur of (i) the Closing Date and (ii) completion of the distribution of the Shares, will not distribute any offering material in connection with the offering and sale of the Shares other than the Registration Statement, the Prepricing Prospectus, the Prospectus or other materials, if any, permitted by the 1933 Act, the 1940 Act or the Rules and Regulations.
(m) The Fund has such permits, licenses, franchises and authorizations of governmental or regulatory authorities ("permits") as are necessary to own its properties and to conduct its business in the manner described in the Prospectus (and any amendment or supplement thereto), subject to such qualifications as may be set forth in the Prospectus; the Fund has fulfilled and performed all its material obligations with respect to such permits and no event has occurred which allows, or after notice or lapse of time would allow, revocation or termination thereof or results in any other material impairment of the rights of the Fund under any such permit, subject in each case to such qualification as may be set forth in the Prospectus (and any amendment or supplement thereto); and, except as described in the
Prospectus (and any amendment or supplement thereto), none of such permits contains any restriction that is materially burdensome to the Fund.
(n) The Fund maintains a system of internal accounting
controls sufficient to provide reasonable assurances that (i) transactions are
executed in accordance with management's general or specific authorization and
with the applicable requirements of the 1940 Act, the 1940 Act Rules and
Regulations and the Internal Revenue Code of 1986, as amended (the "Code"); (ii)
transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles and to
maintain accountability for assets and to maintain compliance with the books and
records requirements under the 1940 Act and the 1940 Act Rules and Regulations;
(iii) access to assets is permitted only in accordance with management's general
or specific authorization; and (iv) the recorded accountability for assets is
compared with existing assets at reasonable intervals and appropriate action is
taken with respect to any differences.
(o) To the Fund's knowledge, neither the Fund nor any employee or agent of the Fund has made any payment of funds of the Fund or received or retained any funds in violation of any law, rule or regulation, which payment, receipt or retention of funds is of a character required to be disclosed in the Prospectus.
(p) The Fund has filed all tax returns required to be filed, which returns are complete and correct, and the Fund is not in default in the payment of any taxes which were payable pursuant to said returns or any assessments with respect thereto.
(q) No holder of any security of the Fund has any right to require registration of shares of common stock, Cumulative Preferred Stock or any other security of the Fund because of the filing of the registration statement or consummation of the transactions contemplated by this Agreement.
(r) The Fund, subject to the registration statement having been declared effective and the filing of the Prospectus under Rule 497 under the Rules and Regulations, has taken all required action under the 1933 Act, the 1940 Act and the Rules and Regulations to make the public offering and consummate the sale of the Shares as contemplated by this Agreement.
(s) The conduct by the Fund of its business (as described in the Prospectus) does not require it to be the owner, possessor or licensee of any patents, patent licenses, trademarks, service marks or trade names which it does not own, possess or license.
(t) The Fund is registered under the 1940 Act as a closed-end diversified management investment company and the 1940
Act Notification has been duly filed with the Commission and, at the time of filing thereof and any amendment or supplement thereto, conformed in all material respects with all applicable provisions of the 1940 Act and the Rules and Regulations. The Fund is, and at all times through the completion of the transactions contemplated hereby, will be, in compliance in all material respects with the terms and conditions of the 1933 Act and the 1940 Act. No person is serving or acting as an officer, director or investment adviser of the Fund except in accordance with the provisions of the 1940 Act and the 1940 Act Rules and Regulations and the Investment Advisers Act of 1940, as amended (the "Advisers Act"), and the rules and regulations of the Commission promulgated under the Advisers Act (the "Advisers Act Rules and Regulations").
(u) Except as stated in this Agreement and in the Prospectus (and any amendment or supplement thereto), the Fund has not taken, nor will it take, directly or indirectly, any action designed to or which might reasonably be expected to cause or result in stabilization or manipulation of the price of any securities issued by the Fund to facilitate the sale or resale of the Shares, and the Fund is not aware of any such action taken or to be taken by any affiliates of the Fund.
(v) The Fund has filed in a timely manner each document or report required to be filed by it pursuant to the 1934 Act and the rules and regulations of Commission promulgated thereunder (the "1934 Act Rules and Regulations"); each such document or report at the time it was filed conformed to the requirements of the 1934 Act and the 1934 Act Rules and Regulations; and none of such documents or reports contained an untrue statement of any material fact or omitted to state any material fact required to be stated therein or necessary to make the statements therein not misleading.
(w) All advertising, sales literature or other promotional material (including "prospectus wrappers," "broker kits," "road show slides" and "road show scripts") authorized in writing by or directly or indirectly prepared by the Fund or the Adviser for use in connection with the offering and sale of the Shares (collectively, "sales material") complied and comply in all material respects with the applicable requirements of the 1933 Act, the 1940 Act, the Rules and Regulations and the rules and interpretations of the NASD and no such sales material contained or contains an untrue statement of a material fact or omitted or omits to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading.
(x) This Agreement and each of the Fund Agreements complies in all material respects with all applicable provisions of the 1940 Act, the 1940 Act Rules and Regulations, the Advisers Act the Advisers Act Rules and Regulations.
(y) The Shares have been duly approved for listing upon notice of issuance on the NYSE and the Fund's registration statement on Form 8-A under the 1934 Act has become effective.
(z) The Shares have been, or prior to the Closing Date will be, assigned a rating of "AAA" by the Rating Agency.
(ab) At all times since its inception, as required by Subchapter M of the Code, the Fund has complied with the requirements to qualify as a regulated investment company under the Code.
7. Representations and Warranties of the Adviser. The Adviser represents and warrants to each Underwriter as follows:
(a) The Adviser is a corporation duly organized and validly existing in good standing under the laws of the State of New York, with full corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Registration Statement and the Prospectus (and any amendment or supplement to either of them), and is duly registered and qualified to conduct its business and is in good standing in each jurisdiction or place where the nature of its properties or the conduct of its business requires such registration or qualification, except where the failure so to register or to qualify does not have a material adverse effect on the condition (financial or other), business, prospects, properties, net assets or results of operations of the Adviser and its subsidiaries, taken as a whole, or on the ability of the Adviser to perform its obligations under this Agreement and the Investment Advisory Agreement.
(b) The Adviser is duly registered with the Commission as an investment adviser under the Advisers Act and is not prohibited by the Advisers Act, the Advisers Act Rules and Regulations, the 1940 Act or the 1940 Act Rules and Regulations from acting under the Investment Advisory Agreement for the Fund as contemplated by the Prospectus (or any amendment or supplement thereto). There does not exist any proceeding or any facts or circumstances the existence of which could lead to any proceeding which might adversely affect the registration of the Adviser with the Commission.
(c) There are no legal or governmental proceedings pending or, to the knowledge of the Adviser, threatened against the Adviser, or to which the Adviser or any of its properties is subject, that are required to be described in the Registration Statement or the Prospectus (or any amendment or supplement to either of them) but are not described as required or that may reasonably be expected to involve a prospective material adverse change, in the condition (financial or other), business, prospects, properties, net assets or results of operations of the Adviser and its subsidiaries, taken as a whole, or on the ability
of the Adviser to perform its obligations under this Agreement and the Investment Advisory Agreement.
(d) Neither the execution, delivery or performance of this Agreement or the Investment Advisory Agreement by the Adviser, nor the consummation by the Adviser of the transactions contemplated hereby or thereby (A) requires the Adviser to obtain any consent, approval, authorization or other order of or registration or filing with, the Commission, the NASD, any state securities commission, any national securities exchange, any arbitrator, any court, regulatory body, administrative agency or other governmental body, agency or official or conflicts or will conflict with or constitutes or will constitute a breach of or a default under, the certificate of incorporation or by-laws, or other organizational documents, of the Adviser or (B) conflicts or will conflict with or constitutes or will constitute a breach of or a default under, any agreement, indenture, lease or other instrument to which the Adviser is a party or by which it or any of its properties may be bound, or violates or will violate any statute, law, regulation or filing or judgment, injunction, order or decree applicable to the Adviser or any of its properties or will result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Adviser pursuant to the terms of any agreement or instrument to which it is a party or by which it may be bound or to which any of the property or assets of the Adviser is subject. The Adviser is not subject to any order of any court or of any arbitrator, governmental authority or administrative agency.
(e) The execution and delivery of, and the performance by the Adviser of its obligations under, this Agreement and the Investment Advisory Agreement have been duly and validly authorized by the Adviser, and this Agreement and the Investment Advisory Agreement have been duly executed and delivered by the Adviser and each constitutes the valid and legally binding agreement of the Adviser, enforceable against the Adviser in accordance with its terms except as rights to indemnity and contribution hereunder may be limited by federal or state securities laws.
(f) The Adviser has the financial resources available to it necessary for the performance of its services and obligations as contemplated in the Prospectus (or any amendment or supplement thereto) and under this Agreement and the Investment Advisory Agreement.
(g) The description of the Adviser in the Registration Statement and the Prospectus (and any amendment or supplement thereto) complied and comply in all material respects with the provisions the 1933 Act, the 1940 Act, the Advisers Act, the Rules and Regulations and the Advisers Act Rules and Regulations and did not and will not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading.
(h) Except as disclosed in the Registration Statement and the Prospectus (or any amendment or supplement to either of them), subsequent to the respective dates as of which such information is given in the Registration Statement and the Prospectus (or any amendment or supplement to either of them), the Adviser has not incurred any liability or obligation, direct or contingent, or entered into any transaction, not in the ordinary course of business, that is material to the Adviser and its subsidiaries, taken as a whole, and there has not been any material adverse change, or any development involving or which may reasonably be expected to involve, a prospective material adverse change, in the condition (financial or other), business, prospects, properties, net assets or results of operations of the Adviser and its subsidiaries, taken as a whole, whether or not arising in the ordinary course of business, or which, in each case, could have a material adverse effect on the ability of the Adviser to perform its obligations under this Agreement and the Investment Advisory Agreement.
(i) The Adviser has such permits, licenses, franchises and authorizations of governmental or regulatory authorities ("permits") as are necessary to own its properties and to conduct its business in the manner described in the Prospectus (and any amendment thereto); the Adviser has fulfilled and performed all its material obligations with respect to such permits and no event has occurred which allows, or after notice or lapse of time would allow, revocation or termination thereof or results in any other material impairment of the rights of the Adviser under any such permit; and, except as described in the Prospectus (and any amendment or supplement thereto), none of such permits contains any restriction that is materially burdensome to the Adviser.
(j) Except as stated in this Agreement and in the Prospectus (and in any amendment or supplement thereto), the Adviser has not taken, nor will it take, directly or indirectly, any action designed to or which might reasonably be expected to cause or result in, stabilization or manipulation of the price of any securities issued by the Fund to facilitate the sale or resale of the Shares, and the Adviser is not aware of any such action taken or to be taken by any affiliates of the Adviser; it being understood that the Underwriters include certain affiliates of the Adviser and that stabilization or other activity by the Representatives on behalf of the Underwriters shall not be deemed to be violative of this representation.
(k) This Agreement and the Investment Advisory Agreement comply in all material respects with all applicable provisions of the 1940 Act, the 1940 Act Rules and Regulations, the Advisers Act and the Advisers Act Rules and Regulations.
(l) Mario J. Gabelli is the validly appointed Chairman, President, Chief Executive Officer and Director of the Adviser and the portfolio manager of the Fund; Mr. Gabelli has not given notice nor made known an intention to give notice of termination of his employment and the Adviser knows of no reason why Mr. Gabelli should be unable to serve as portfolio manager to the Fund.
8. Indemnification and Contribution. (a) The Fund and the Adviser, jointly and severally, agree to indemnify and hold harmless each of you and each other Underwriter and each person, if any, who controls any Underwriter within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act from and against any and all losses, claims, damages, liabilities and expenses, joint and several (including reasonable costs of investigation) arising out of or based upon any untrue statement or alleged untrue statement of a material fact contained in any Prepricing Prospectus or in the Registration Statement or the Prospectus or in any amendment or supplement thereto, or arising out of or based upon any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, except insofar as such losses, claims, damages, liabilities or expenses arise out of or are based upon any untrue statement or omission or alleged untrue statement or omission which has been made therein or omitted therefrom in reliance upon and in conformity with the information relating to such Underwriter furnished in writing to the Fund by or on behalf of any Underwriter through you expressly for use in connection therewith; provided, however, that the indemnification contained in this paragraph (a) with respect to any Prepricing Prospectus shall not inure to the benefit of any Underwriter (or to the benefit of any person controlling such Underwriter) on account of any such loss, claim, damage, liability or expense arising from the sale of the Shares by such Underwriter to any person if a copy of the Prospectus shall not have been delivered or sent to such person within the time required by the 1933 Act and the 1933 Act Rules and Regulations, and the untrue statement or alleged untrue statement or omission or alleged omission of a material fact contained in such Prepricing Prospectus was corrected in the Prospectus, provided that the Fund has delivered the Prospectus to the several Underwriters in requisite quantity on a timely basis to permit such delivery or sending. The foregoing indemnity agreement shall be in addition to any liability which the Fund or the Adviser may otherwise have.
(b) If any action, suit or proceeding shall be brought against any Underwriter or any person controlling any Underwriter in respect of which indemnity may be sought against the Fund or the Adviser, such Underwriter or such controlling person shall promptly notify the Fund or the Adviser, and the Fund or the Adviser shall assume the defense thereof, including the employment of counsel and payment of all fees and expenses. Such Underwriter or any such controlling person shall have the right
to employ separate counsel in any such action, suit or proceeding and to
participate in the defense thereof, but the fees and expenses of such counsel
shall be at the expense of such Underwriter or such controlling person unless
(i) the Fund or the Adviser has agreed in writing to pay such fees and expenses,
(ii) the Fund and the Adviser have failed to assume the defense and employ
counsel, or (iii) the named parties to any such action, suit or proceeding
(including any impleaded parties) include both such Underwriter or such
controlling person and the Fund or the Adviser and such Underwriter or such
controlling person shall have been advised by its counsel that representation of
such indemnified party and the Fund or the Adviser by the same counsel would be
inappropriate under applicable standards of professional conduct (whether or not
such representation by the same counsel has been proposed) due to actual or
potential differing interests between them (in which case the Fund and the
Adviser shall not have the right to assume the defense of such action, suit or
proceeding on behalf of such Underwriter or such controlling person). It is
understood, however, that the Fund and the Adviser shall, in connection with any
one such action, suit or proceeding or separate but substantially similar or
related actions, suits or proceedings in the same jurisdiction arising out of
the same general allegations or circumstances, be liable for the reasonable fees
and expenses of only one separate firm of attorneys (in addition to any local
counsel) at any time for all such Underwriters and controlling persons not
having actual or potential differing interests with you or among themselves,
which firm shall be designated in writing by Smith Barney Inc., and that all
such fees and expenses shall be reimbursed as they are incurred. The Fund and
the Adviser shall not be liable for any settlement of any such action, suit or
proceeding effected without its written consent, but if settled with such
written consent, or if there be a final judgment for the plaintiff in any such
action, suit or proceeding, the Fund and the Adviser agree to indemnify and hold
harmless any Underwriter, to the extent provided in the preceding paragraph, and
any such controlling person from and against any loss, claim, damage, liability
or expense by reason of such settlement or judgment.
(c) Each Underwriter agrees, severally and not jointly, to indemnify and hold harmless the Fund and the Adviser, their directors, any officers who sign the Registration Statement, and any person who controls the Fund or the Adviser within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act, to the same extent as the foregoing indemnity from the Fund and the Adviser to each Underwriter, but only with respect to information relating to such Underwriter furnished in writing by or on behalf of such Underwriter through you expressly for use in the Registration Statement, the Prospectus or any Prepricing Prospectus, or any amendment or supplement thereto. If any action, suit or proceeding shall be brought against the Fund or the Adviser, any of their directors, any such officer, or any such controlling person based on the Registration Statement, the Prospectus or any Prepricing Prospectus, or any amendment or
supplement thereto, and in respect of which indemnity may be sought against any Underwriter pursuant to this paragraph (c), such Underwriter shall have the rights and duties given to the Fund and the Adviser by paragraph (b) above (except that if the Fund or the Adviser shall have assumed the defense thereof such Underwriter shall not be required to do so, but may employ separate counsel therein and participate in the defense thereof, but the fees and expenses of such counsel shall be at such Underwriter's expense), and the Fund and the Adviser, their directors, any such officer, and any such controlling person shall have the rights and duties given to the Underwriters by paragraph (b) above. The foregoing indemnity agreement shall be in addition to any liability which the Underwriters may otherwise have.
(d) If the indemnification provided for in this Section 8 is unavailable to an indemnified party under paragraphs (a) or (c) hereof in respect of any losses, claims, damages, liabilities or expenses referred to therein, then an indemnifying party, in lieu of indemnifying such indemnified party, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages, liabilities or expenses (i) in such proportion as is appropriate to reflect the relative benefits received by the Fund and the Adviser on the one hand (treated jointly for this purpose as one person) and the Underwriters on the other hand from the offering of the Shares, or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Fund and the Adviser on the one hand (treated jointly for this purpose as one person) and the Underwriters on the other in connection with the statements or omissions that resulted in such losses, claims, damages, liabilities or expenses, as well as any other relevant equitable considerations. The relative benefits received by the Fund and the Adviser on the one hand (treated jointly for this purpose as one person) and the Underwriters on the other shall be deemed to be in the same proportion as the total net proceeds from the offering (before deducting expenses) received by the Fund bear to the total underwriting discounts and commissions received by the Underwriters, in each case as set forth in the table on the cover page of the Prospectus. The relative fault of the Fund and the Adviser on the one hand (treated jointly for this purpose as one person) and the Underwriters on the other hand shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Fund and the Adviser on the one hand (treated jointly for this purpose as one person) or by the Underwriters on the other hand and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission.
(e) The Fund, the Adviser and the Underwriters agree that it
would not be just and equitable if contribution pursuant to this Section 8 were
determined by a pro rata allocation (even if the Underwriters were treated as
one entity for such purpose) or by any other method of allocation that does not
take account of the equitable considerations referred to in paragraph (d) above.
The amount paid or payable by an indemnified party as a result of the losses,
claims, damages, liabilities and expenses referred to in paragraph (d) above
shall be deemed to include, subject to the limitations set forth above, any
legal or other expenses reasonably incurred by such indemnified party in
connection with investigating any claim or defending any such action, suit or
proceeding. Notwithstanding the provisions of this Section 8, no Underwriter
shall be required to contribute any amount in excess of the amount by which the
total price of the Shares underwritten by it and distributed to the public
exceeds the amount of any damages which such Underwriter has otherwise been
required to pay by reason of such untrue or alleged untrue statement or omission
or alleged omission. No person guilty of fraudulent misrepresentation (within
the meaning of Section 11(f) of the 1933 Act) shall be entitled to contribution
from any person who was not guilty of such fraudulent misrepresentation. The
Underwriters' obligations to contribute pursuant to this Section 8 are several
in proportion to the respective numbers of Shares set forth opposite their names
in Schedule I hereto (or such numbers of Shares increased as set forth in
Section 11 hereof) and not joint.
(f) No indemnifying party shall, without the prior written consent of the indemnified party, effect any settlement of any pending or threatened action, suit or proceeding in respect of which any indemnified party is or could have been a party and indemnity could have been sought hereunder by such indemnified party, unless such settlement includes an unconditional release of such indemnified party from all liability on claims that are the subject matter of such action, suit or proceeding.
(g) Any losses, claims, damages, liabilities or expenses for which an indemnified party is entitled to indemnification or contribution under this Section 8 shall be paid by the indemnifying party to the indemnified party as such losses, claims, damages, liabilities or expenses are incurred. The indemnity and contribution agreements contained in this Section 8 and the representations and warranties of the Fund and the Adviser set forth in this Agreement shall remain operative and in full force and effect, regardless of (i) any investigation made by or on behalf of any Underwriter or any person controlling any Underwriter, the Fund, the Adviser, their directors or officers, or any person controlling the Fund or the Adviser, (ii) acceptance of any Shares and payment therefor hereunder, and (iii) any termination of this Agreement. A successor to any Underwriter or any person controlling any Underwriter, or to the Fund, the Adviser, their directors or officers, or any person
controlling the Fund or the Adviser, shall be entitled to the benefits of the indemnity, contribution, and reimbursement agreements contained in this Section 8.
9. Conditions of Underwriters' Obligations. The several obligations of the Underwriters to purchase the Shares hereunder are subject to the following conditions:
(a) If, at the time this Agreement is executed and delivered, it is necessary for the registration statement or a post-effective amendment thereto to be declared effective before the offering of the Shares may commence, the registration statement or such post-effective amendment shall have become effective not later than 5:30 P.M., New York City time, on the date hereof, or at such later date and time as shall be consented to in writing by you, and all filings, if any, required by Rules 497 and 430A under the 1933 Act and the 1933 Act Rules and Regulations shall have been timely made; no stop order suspending the effectiveness of the Registration Statement or order pursuant to Section 8(e) of the 1940 Act shall have been issued and no proceeding for those purposes shall have been instituted or, to the knowledge of the Fund, the Adviser or any Underwriter, threatened by the Commission, and any request of the Commission for additional information (to be included in the registration statement or the prospectus or otherwise) shall have been complied with to your satisfaction.
(b) Subsequent to the effective date of this Agreement, there
shall not have occurred (i) any change, or any development involving a
prospective change, in or affecting the condition (financial or other),
business, prospects, properties, net assets, or results of operations of the
Fund or the Adviser and its subsidiaries, taken as a whole, not contemplated by
the Prospectus, which in your opinion, as Representatives of the several
Underwriters, would materially, adversely affect the market for the Shares, or
(ii) any event or development relating to or involving the Fund or the Adviser
or any officer or director of the Fund or the Adviser which makes any statement
made in the Prospectus untrue or which, in the opinion of the Fund and its
counsel or the Underwriters and their counsel, requires the making of any
addition to or change in the Prospectus in order to state a material fact
required by the 1933 Act, the 1940 Act or the Rules and Regulations or any other
law to be stated therein or necessary in order to make the statements therein
not misleading, if amending or supplementing the Prospectus to reflect such
event or development would, in your opinion, as Representatives of the several
Underwriters, materially adversely affect the market for the Shares.
(c) The Fund shall have furnished to you and to the Rating Agency, a report showing compliance with the asset coverage requirements of the 1940 Act, a Base Amount Report (as defined in the Prospectus) and a letter from Price Waterhouse LLP regarding the accuracy of the calculations made by the Fund in
such reports, each dated the Closing Date and in form and substance satisfactory to the Rating Agency and to you.
(d) You shall have received on the Closing Date, an opinion of Skadden, Arps, Slate, Meagher & Flom LLP, counsel for the Fund, dated the Closing Date and addressed to you, as Representatives of the several Underwriters, to the effect that:
(i) The Fund is a corporation duly incorporated and validly existing in good standing under the laws of the State of Maryland with full corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Registration Statement and the Prospectus (and any amendment or supplement to either of them), and is duly registered and qualified to conduct its business and is in good standing in each jurisdiction or place where the nature of its properties or the conduct of its business requires such registration or qualification, except where the failure so to register or qualify does not have a material adverse effect on the condition (financial or other), business, prospects, properties, net assets or results of operations of the Fund; and the Fund has no subsidiaries;
(ii) The authorized and outstanding capital stock of the Fund is as set forth under the caption "Capitalization" in the Prospectus; and the authorized capital stock of the Fund conforms in all material respects as to legal matters to the description thereof contained in the Prospectus under the caption "Description of Capital Stock and Other Securities";
(iii) All the shares of capital stock of the Fund outstanding prior to the issuance of the Shares have been duly authorized and validly issued, and are fully paid and nonassessable;
(iv) The Shares have been duly authorized and, when issued and delivered to the Underwriters against payment therefor in accordance with the terms hereof, will be validly issued, fully paid and nonassessable and free of any preemptive, or to the best knowledge of such counsel after reasonable inquiry, similar rights that entitle or will entitle any person to acquire any Shares upon the issuance thereof by the Fund, and will conform to the description thereof contained in the Prospectus under the caption "Description of Cumulative Preferred Stock";
(v) The form of certificates for the Shares conforms to the requirements of the General Corporation Law of Maryland;
(vi) The Registration Statement and all
post-effective amendments, if any, have become effective under the 1933 Act and,
to the best knowledge of such counsel after reasonable inquiry, no stop order
suspending the effectiveness of the Registration Statement or order pursuant to
Section 8(e) of the 1940 Act has been issued and no proceedings for that purpose
are pending before or contemplated by the Commission; and any required filing of the Prospectus pursuant to Rule 497 has been made in accordance with Rule 497;
(vii) The Fund has corporate power and authority to enter into this Agreement and each of the Fund Agreements and to issue, sell and deliver the Shares to the Underwriters as provided herein, and this Agreement and each of the Fund Agreements have been duly authorized, executed and delivered by the Fund and each is a valid, legal and binding agreement of the Fund, enforceable against the Fund in accordance with its terms, except as enforcement of rights to indemnity and contribution hereunder may be limited by Federal or state securities laws or principles of public policy and subject to the qualification that the enforceability of the Fund's obligations hereunder may be limited by bankruptcy, fraudulent conveyance, insolvency, reorganization, moratorium, and other laws relating to or affecting creditors' rights generally and by general equitable principles;
(viii) The Fund is not in violation of its articles of incorporation, including the Articles Supplementary, or bylaws, or other organizational documents, and to the best knowledge of such counsel after reasonable inquiry, is not in default in the performance of any material obligation, agreement or condition contained in any bond, debenture, note or other evidence of indebtedness, except as may be disclosed in the Prospectus;
(ix) Neither the offer, sale or delivery of the Shares, the execution, delivery or performance of this Agreement and the Fund Agreements by the Fund, compliance by the Fund with the provisions hereof or thereof nor consummation by the Fund of the transactions contemplated hereby and the Fund Agreements conflicts or will conflict with or constitutes or will constitute a breach of, or a default under, the articles of incorporation, including the Articles Supplementary, or bylaws, or other organizational documents, of the Fund or any agreement, indenture, lease or other instrument to which the Fund is a party or by which it or any of its properties is bound that is an exhibit to the Registration Statement, or is known to such counsel after reasonable inquiry, or will result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Fund, nor will any such action result in any violation of any existing law, regulation, ruling (assuming compliance with all applicable state securities or blue sky laws), judgment, injunction, order or decree known to such counsel after reasonable inquiry, applicable to the Fund or any of its properties;
(x) No consent, approval, authorization or other order of, or registration or filing with, the Commission, the NASD, any state securities commission, any national securities exchange, any arbitrator, any court, regulatory body, administrative agency or other governmental body, agency, or
official is required on the part of the Fund (except such as may have been obtained prior to the date hereof and such as may be required for compliance with the state securities or blue sky laws of various jurisdictions which have been or will be effected in accordance with this Agreement) for the valid issuance and sale of the Shares to the Underwriters as contemplated by this Agreement, the execution, delivery and performance of this Agreement and the Fund Agreements or the consummation of the transactions contemplated hereby and thereby;
(xi) The 1940 Act Notification, the Registration Statement, the Prospectus and the Fund's Registration Statement on Form 8-A under the 1934 Act and any supplements or amendments thereto (except for the financial statements and the notes thereto and the schedules and other financial and statistical data included therein, as to which such counsel need not express any opinion) comply as to form in all material respects with the requirements of the 1933 Act, the 1940 Act, the Rules and Regulations, the 1934 Act and the rules and regulations promulgated thereunder;
(xii) To the best knowledge of such counsel after reasonable inquiry, (A) other than as described or contemplated in the Registration Statement or Prospectus (or any supplement thereto), there are no legal or governmental proceedings pending or threatened against the Fund, or to which the Fund or any of its properties is subject, which are required to be described in the Registration Statement or Prospectus (or any amendment or supplement to either of them) and (B) there are no agreements, contracts, indentures, leases or other instruments, that are required to be described in the Registration Statement or the Prospectus (or any amendment or supplement thereto) or to be filed as an exhibit to the Registration Statement that are not described or filed as required, as the case may be;
(xiii) To the best knowledge of such counsel after reasonable inquiry, the Fund is not in violation of any law, ordinance, administrative or governmental rule or regulation applicable to the Fund or of any decree of any court or governmental agency or body having jurisdiction over the Fund;
(xiv) The statements in the Registration Statement and Prospectus, insofar as they are descriptions of contracts, agreements or other legal documents, or refer to statements of law or legal conclusions, are accurate and present fairly the information required to be shown;
(xv) Each of this Agreement and the Fund Agreements complies as to form in all material respects with all applicable provisions of the 1933 Act, the 1940 Act, the Advisers Act, the Rules and Regulations and the Advisers Act Rules and Regulations;
(xvi) The Fund is duly registered with the Commission under the 1940 Act as a closed-end diversified management
investment company; the provisions of the Fund's articles of incorporation, including the Articles Supplementary, and by-laws comply as to form in all material respects with the applicable provisions of the 1940 Act and the 1940 Act Rules and Regulations, the provisions of the Fund's articles of incorporation, including the Articles Supplementary, and by-laws and the investment policies and restrictions described in the Registration Statement and the Prospectus under the captions "Investment Objective and Policies" and "Investment Restrictions" (in both the Prospectus and the statement of additional information) comply in all material respects with the requirements of the 1940 Act, and all action has been taken by the Fund as is required of the Fund by the 1933 Act and the 1940 Act and the Rules and Regulations in connection with the issuance and sale of the Shares to make the public offering and consummate the sale of the Shares as contemplated by this Agreement;
(xvii) The Shares are duly authorized for listing, subject to official notice of issuance, on the NYSE and the Fund's registration statement on Form 8-A under the 1934 Act is effective;
(xviii) The Fund has full corporate power and authority, and all necessary governmental authorizations, approvals, orders, licenses, certificates, franchises and permits of and from all governmental regulatory officials and bodies (except where the failure so to have any such authorizations, approvals, orders, licenses, certificates, franchises or permits, individually or in the aggregate, would not have a material adverse effect on the business, properties, operations or financial condition of the Fund), to own its properties and to conduct business as now being conducted, as described in the Prospectus;
(xix) Except as described in the Prospectus, there are no outstanding options, warrants or other rights calling for the issuance of, and such counsel does not know of any commitment, plan or arrangement to issue, any shares of capital stock of the Fund or any security convertible into or exchangeable or exercisable for capital stock of the Fund;
(xx) Except as described in the Prospectus, there is no holder of any security of the Fund or any other person who has the right, contractual or otherwise, to cause the Fund to sell or otherwise issue to them, or to permit them to underwrite the sale of, the Shares or the right to have any securities of the Fund included in the registration statement or the right, as a result of the filing of the registration statement, to require registration under the 1933 Act of any securities of the Fund;
(xxi) All sales material complied and comply in all material respects with the applicable requirements of the 1933 Act, the 1940 Act, the Rules and Regulations and the rules and interpretations of the NASD;
(xxii) At all times since its inception, as required by Subchapter M of the Code, the Fund has complied with the requirements to qualify as a regulated investment company under the Code; and
(xxiii) Although counsel has not undertaken, except as otherwise indicated in their opinion, to determine independently, and does not assume any responsibility for, the accuracy or completeness of the statements in the Registration Statement, such counsel has participated in the preparation of the Registration Statement and the Prospectus, including review and discussion of the contents thereof, and nothing has come to the attention of such counsel that has caused it to believe that the Registration Statement at the time the Registration Statement became effective, or the Prospectus, as of its date and as of the Closing Date, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading or that any amendment or supplement to the Prospectus, as of its respective date, and as of the Closing Date, contained any untrue statement of a material fact or omitted to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading (it being understood that such counsel need express no opinion with respect to the financial statements and the notes thereto and the schedules and other financial and statistical data included in the Registration Statement or the Prospectus).
In rendering their opinion as aforesaid, counsel may rely upon an opinion or opinions, each dated the Closing Date, of other counsel retained by them or the Fund as to laws of any jurisdiction other than the United States or the State of New York, provided that (1) each such local counsel is acceptable to the Representatives, (2) such reliance is expressly authorized by each opinion so relied upon and a copy of each such opinion is delivered to the Representatives and is, in form and substance satisfactory to them and their counsel, and (3) counsel shall state in their opinion that they believe that they and the Underwriters are justified in relying thereon.
(e) You shall have received on the Closing Date an opinion of Skadden, Arps, Slate, Meagher & Flom LLP, special counsel for the Adviser, dated the Closing Date and addressed to you, as Representatives of the several Underwriters, to the effect that:
(i) The Adviser is a corporation duly incorporated and validly existing in good standing under the laws of the State of New York with full corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Registration Statement and the Prospectus (and any amendment or supplement to either of them), and is duly registered and qualified to conduct its business and is in good standing in each jurisdiction or place where the nature of its
properties or the conduct of its business requires such registration or qualification, except where the failure to so register or qualify does not have a material adverse effect on the condition (financial or other), business, prospects, properties, net assets or results of operations of the Adviser and its subsidiaries, taken as a whole, or on the ability of the Adviser to perform its obligations under this Agreement and the Investment Advisory Agreement;
(ii) The Adviser is duly registered with the Commission as an investment adviser under the Advisers Act and is not prohibited by the Advisers Act, the Advisers Act Rules and Regulations, the 1940 Act or the 1940 Act Rules and Regulations from acting under the Investment Advisory Agreement for the Fund as contemplated by the Prospectus (or any amendment or supplement thereto);
(iii) The Adviser has corporate power and authority to enter into this Agreement and the Investment Advisory Agreement, and this Agreement and the Investment Advisory Agreement have been duly authorized, executed and delivered by the Adviser and each is a valid, legal and binding agreement of the Adviser, enforceable against the Adviser in accordance with its terms except as enforcement of rights to indemnity and contribution hereunder may be limited by Federal or state securities laws or principles of public policy and subject to the qualification that the enforceability of the Adviser's obligations hereunder may be limited by bankruptcy, fraudulent conveyance, insolvency, reorganization, moratorium, and other laws relating to or affecting creditors' rights generally and by general equitable principles;
(iv) Neither the execution, delivery or performance of this Agreement or the Investment Advisory Agreement by the Adviser, compliance by the Adviser with the provisions hereof or thereof nor consummation by the Adviser of the transactions contemplated hereby and the Investment Advisory Agreement conflicts or will conflict with, or constitutes or will constitute a breach of or default under, the articles of incorporation or by-laws, or other organizational documents, of the Adviser or any agreement, indenture, lease or other instrument to which the Adviser is a party or by which it or any of its properties is bound that is known to such counsel after reasonable inquiry, or will result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Adviser, nor will any such action result in any violation of any existing law, regulation, ruling, judgment, injunction, order or decree known to such counsel after reasonable inquiry, applicable to the Adviser or any of its properties;
(v) No consent, approval, authorization or other order of, or registration or filing with, the Commission, the NASD, any state securities commission, any national securities exchange, any arbitrator, any court, regulatory body,
administrative agency or other governmental body, agency, or official is required on the part of the Adviser for the execution, delivery and performance of this Agreement and the Fund Agreements or the consummation of the transactions contemplated hereby and thereby;
(vi) To the best knowledge of such counsel after reasonable inquiry, there are no legal or governmental proceedings pending or threatened against the Adviser or to which the Adviser or any of its properties is subject, which are required to be described in the Registration Statement or the Prospectus (or any amendment or supplement to either of them) but are not described as required or may reasonably be expected to include a prospective material adverse change, in the condition (financial or other), business, prospects, properties, net assets or results of operations of the Adviser and its subsidiaries, taken as a whole, or on the ability of the Adviser to perform its obligations under this Agreement and the Investment Advisory Agreement;
(vii) Each of this Agreement and the Investment Advisory Agreement complies in all material respects with all applicable provisions of the 1940 Act, the 1940 Act Rules and Regulations, the Advisers Act and the Advisers Act Rules and Regulations.
(viii) The Adviser has full corporate power and authority, and all necessary governmental authorizations, approvals, orders, licenses, certificates, franchises and permits of and from all governmental regulatory officials and bodies (except where the failure so to have any such authorizations, approvals, orders, licenses, certificates, franchises or permits, individually or in the aggregate, would not have a material adverse effect on the business, properties, operations or financial condition of the Adviser and its subsidiaries, taken as a whole), to own its properties and to conduct business as now being conducted, as described in the Prospectus, and to perform its obligations under the Investment Advisory Agreement; and
(ix) Although counsel has not undertaken, except as otherwise indicated in their opinion, to determine independently, and does not assume any responsibility for, the accuracy or completeness of the statements in the Registration Statement, such counsel has participated in the preparation of the Registration Statement and the Prospectus, including review and discussion of the contents thereof, and nothing has come to the attention of such counsel that has caused it to believe that the Registration Statement at the time the Registration Statement became effective, or the Prospectus, as of its date and as of the Closing Date, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading or that any amendment or supplement to the Prospectus, as of its respective date, and as of the Closing Date, contained any untrue
statement of a material fact or omitted to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading (it being understood that such counsel need express no opinion with respect to the financial statements and the notes thereto and the schedules and other financial and statistical data included in the Registration Statement or the Prospectus).
In rendering their opinion as aforesaid, counsel may rely upon an opinion or opinions, each dated the Closing Date, of other counsel retained by them or the Fund as to laws of any jurisdiction other than the United States or the State of New York, provided that (1) each such local counsel is acceptable to the Representatives, (2) such reliance is expressly authorized by each opinion so relied upon and a copy of each such opinion is delivered to the Representatives and is, in form and substance satisfactory to them and their counsel, and (3) counsel shall state in their opinion that they believe that they and the Underwriters are justified in relying thereon.
(f) You shall have received on the Closing Date an opinion of Simpson Thacher & Bartlett, counsel for the Underwriters, dated the Closing Date and addressed to you, as Representatives of the several Underwriters, with respect to such matters as the Underwriters may reasonably request.
(g) You shall have received letters addressed to you, as Representatives of the several Underwriters, and dated the date hereof and the Closing Date from Price Waterhouse LLP, independent certified public accountants, substantially in the forms heretofore approved by you.
(h) (i) No order suspending the effectiveness of the registration statement or the Registration Statement or prohibiting or suspending the use of the Prospectus (or any amendment or supplement thereto) or any Prepricing Prospectus or any sales material shall have been issued and no proceedings for such purpose or for the purpose of commencing an enforcement action against the Fund, the Adviser or, with respect to the transactions contemplated by the Prospectus (or any amendment or supplement thereto) and this Agreement, any Underwriter, may be pending before or, to the knowledge of the Fund, the Adviser or any Underwriter or in the reasonable view of counsel to the Underwriters, shall be threatened or contemplated by the Commission at or prior to the Closing Date and that any request for additional information on the part of the Commission (to be included in the Registration Statement, the Prospectus or otherwise) be complied with to the satisfaction of the Representatives; (ii) there shall not have been any change in the capital stock of the Fund nor any material increase in the short-term or long-term debt of the Fund (other than in the ordinary course of business) from that set forth or contemplated in the Registration Statement or the Prospectus (or any amendment or Supplement thereto); (iii) there shall not have been,
subsequent to the respective dates as of which information is given in the
Registration Statement and the Prospectus (or any amendment or supplement
thereto), except as may otherwise be stated in the Registration Statement and
Prospectus (or any amendment or supplement thereto), any material adverse change
in the condition (financial or other), business, prospects, properties, net
assets or results of operations of the Fund or the Adviser; (iv) the Fund shall
not have any liabilities or obligations, direct or contingent (whether or not in
the ordinary course of business), that are material to the Fund, other than
those reflected in the Registration Statement or the Prospectus (or any
amendment or supplement to either of them); and (v) all the representations and
warranties of the Fund and the Adviser contained in this Agreement shall be true
and correct on and as of the date hereof and on and as of the Closing Date as if
made on and as of the Closing Date, and you shall have received a certificate,
dated the Closing Date and signed by the chief executive officer and the chief
financial officer of each of the Fund and the Adviser (or such other officers as
are acceptable to you), to the effect set forth in this Section 9(h) and in
Section 9(i) hereof.
(i) That neither the Fund nor the Adviser shall have failed at or prior to the Closing Date to have performed or complied with any of its agreements herein contained and required to be performed or complied with by it hereunder at or prior to the Closing Date.
(j) The Fund shall have delivered and you shall have received evidence satisfactory to you that the shares of Cumulative Preferred Stock are rated at least "AAA" by the Rating Agency as of the Closing Date, and there shall not have been given any notice of any intended or potential downgrading, or of any review for a potential downgrading, in the rating accorded to the shares of Cumulative Preferred Stock by the Rating Agency.
(k) The Shares shall have been listed or approved for listing upon notice of issuance on the NYSE.
(l) The Fund and the Adviser shall have furnished or caused to be furnished to you such further certificates and documents as you shall have requested.
All such opinions, certificates, letters and other documents will be in compliance with the provisions hereof only if they are satisfactory in form and substance to you and your counsel.
Any certificate or document signed by any officer of the Fund or the Adviser and delivered to you, as Representatives of the Underwriters, or to counsel for the Underwriters, shall be deemed a representation and warranty by the Fund or the Adviser to each Underwriter as to the statements made therein.
10. Expenses. The Fund agrees to pay the following costs and
expenses and all other costs and expenses incident to the performance by it of
its obligations hereunder: (i) the preparation, printing or reproduction, and
filing with the Commission of the registration statement (including financial
statements and exhibits thereto), each Prepricing Prospectus, the 1940 Act
Notification, the Prospectus and each amendment or supplement to any of them
(including, without limitation, the filing fees prescribed by the 1933 Act, the
1940 Act and the Rules and Regulations); (ii) the printing (or reproduction) and
delivery (including postage, air freight charges and charges for counting and
packaging) of such copies of the Registration Statement, each Prepricing
Prospectus, the Prospectus, any sales material and all amendments or supplements
to any of them as may be reasonably requested for use in connection with the
offering and sale of the Shares; (iii) the preparation, printing,
authentication, issuance and delivery of certificates for the Shares, including
any stamp taxes in connection with the original issuance and sale of the Shares;
(iv) the printing (or reproduction) and delivery of this Agreement, any dealer
agreements, the preliminary and supplemental blue sky memoranda and all other
agreements or documents printed (or reproduced) and delivered in connection with
the offering of the Shares; (v) the registration of the Shares under the
Exchange Act and the listing of the Shares on the New York Stock Exchange; (vi)
the registration or qualification of the Shares for offer and sale under the
state securities or blue sky laws of the several states as provided in Section
5(g) hereof (including the reasonable fees, expenses and disbursements of
counsel for the Underwriters relating to the preparation, printing or
reproduction, and delivery of the preliminary and supplemental blue sky
memoranda and such registration and qualification); (vii) fees paid to the
Rating Agency; (viii) the transportation and other expenses incurred by or on
behalf of Fund representatives in connection with presentations to prospective
purchasers of the Shares; and (ix) the fees and expenses of the Fund's
accountants and the fees and expenses of counsel (including local and special
counsel) for the Fund and of the transfer agent.
Except as provided in this Section 10, the Underwriters agree to pay their own costs and expenses of the underwriting, including the fees and expenses of (i) their counsel and (ii) Financial Products Group, Inc.
11. Effective Date of Agreement. This Agreement shall become
effective: (i) upon the execution and delivery hereof by the parties hereto; or
(ii) if, at the time this Agreement is executed and delivered, it is necessary
for the registration statement or a post-effective amendment thereto to be
declared effective before the offering of the Shares may commence, when
notification of the effectiveness of the registration statement or such
post-effective amendment has been released by the Commission. Until such time as
this Agreement shall have become effective, it may be terminated by the Fund, by
notifying you, or
by you, as Representatives of the several Underwriters, by notifying the Fund.
If any one or more of the Underwriters shall fail or refuse to purchase Shares which it or they are obligated to purchase hereunder on the Closing Date, and the aggregate number of Shares which such defaulting Underwriter or Underwriters are obligated but fail or refuse to purchase is not more than one-tenth of the aggregate number of Shares which the Underwriters are obligated to purchase on the Closing Date, each non-defaulting Underwriter shall be obligated, severally, in the proportion which the number of Shares set forth opposite its name in Schedule I hereto bears to the aggregate number of Shares set forth opposite the names of all non-defaulting Underwriters or in such other proportion as you may specify in accordance with Section 20 of the Master Agreement Among Underwriters of Smith Barney Inc., to purchase the Shares which such defaulting Underwriter or Underwriters are obligated, but fail or refuse, to purchase. If any one or more of the Underwriters shall fail or refuse to purchase Shares which it or they are obligated to purchase on the Closing Date and the aggregate number of Shares with respect to which such default occurs is more than one-tenth of the aggregate number of Shares which the Underwriters are obligated to purchase on the Closing Date and arrangements satisfactory to you and the Fund for the purchase of such Shares by one or more non-defaulting Underwriters or other party or parties approved by you and the Fund are not made within 36 hours after such default, this Agreement will terminate without liability on the part of any non-defaulting Underwriter or the Fund. In any such case which does not result in termination of this Agreement, either you or the Fund shall have the right to postpone the Closing Date, but in no event for longer than seven days, in order that the required changes, if any, in the Registration Statement and the Prospectus or any other documents or arrangements may be effected. Any action taken under this paragraph shall not relieve any defaulting Underwriter from liability in respect of any such default of any such Underwriter under this Agreement. The term "Underwriter" as used in this Agreement includes, for all purposes of this Agreement, any party not listed in Schedule I hereto who, with your approval and the approval of the Fund, purchases Shares which a defaulting Underwriter is obligated, but fails or refuses, to purchase.
Any notice under this Section 11 may be given by telegram, telecopy or telephone but shall be subsequently confirmed by letter.
12. Termination of Agreement. This Agreement shall be subject to termination in your absolute discretion, without liability on the part of any Underwriter to the Fund or the Adviser, by notice to the Fund or the Adviser, if prior to the Closing Date (i) trading in securities generally on the New York Stock Exchange, the American Stock Exchange or the Nasdaq National Market shall have been suspended or materially limited,
(ii) a general moratorium on commercial banking activities in New York shall have been declared by either federal or state authorities, or (iii) there shall have occurred any outbreak or escalation of hostilities or other international or domestic calamity, crisis or change in political, financial or economic conditions, the effect of which on the financial markets of the United States is such as to make it, in your judgment, impracticable or inadvisable to commence or continue the offering of the Shares at the offering price to the public set forth on the cover page of the Prospectus or to enforce contracts for the resale of the Shares by the Underwriters. Notice of such termination may be given to the Fund by telegram, telecopy or telephone and shall be subsequently confirmed by letter.
13. Information Furnished by the Underwriters. The statements set forth in the last paragraph on the cover page, the stabilization legend on the inside cover page, and the statements in the first, third and fifth paragraphs under the caption "Underwriting" in any Prepricing Prospectus and in the Prospectus, constitute the only information furnished by or on behalf of the Underwriters through you as such information is referred to in Sections 6(b) and 8 hereof.
14. Miscellaneous. Except as otherwise provided in Sections 5,
11 and 12 hereof, notice given pursuant to any provision of this Agreement shall
be in writing and shall be delivered (i) if to the Fund or the Adviser, at the
office of the Fund at One Corporate Center, Rye, New York 10580-1434, Attention:
[insert name and title]; or (ii) if to you, as Representatives of the several
Underwriters, care of Smith Barney Inc., 388 Greenwich Street, New York, New
York 10013, Attention: Adviser, Investment Banking Division.
This Agreement has been and is made solely for the benefit of the several Underwriters, the Fund, the Adviser, their directors and officers, and the other controlling persons referred to in Section 8 hereof and their respective successors and assigns, to the extent provided herein, and no other person shall acquire or have any right under or by virtue of this Agreement. Neither the term "successor" nor the term "successors and assigns" as used in this Agreement shall include a purchaser from any Underwriter of any of the Shares in his status as such purchaser.
15. Applicable Law; Counterparts. This Agreement shall be governed by and construed in accordance with the laws of the State of New York applicable to contracts made and to be performed within the State of New York.
This Agreement may be signed in various counterparts which together constitute one and the same instrument. If signed in counterparts, this Agreement shall not become effective unless at least one counterpart hereof shall have been executed and delivered on behalf of each party hereto.
Please confirm that the foregoing correctly sets forth the agreement between the Fund and the several Underwriters.
Very truly yours,
THE GABELLI CONVERTIBLE
SECURITIES FUND, INC.
GABELLI FUNDS, INC.
Confirmed as of the date first above
mentioned on behalf of themselves and the
other several Underwriters named in Schedule
I hereto.
SMITH BARNEY INC.
GABELLI & COMPANY, INC.
As Representatives of the Several Underwriters
By SMITH BARNEY INC.
SCHEDULE I
THE GABELLI CONVERTIBLE SECURITIES FUND, INC.
Number of Underwriter Shares ----------- ------ Smith Barney Inc................................................. Gabelli & Company, Inc........................................... ----------- Total............................................................ [1,200,000] ----------- |
EXHIBIT (h)(2)
MASTER AGREEMENT AMONG UNDERWRITERS
July 18, 1985
Smith Barney Inc.
388 Greenwich Street
New York, New York
Dear Sirs:
We understand that from time to time you may act as Representative or as one of the Representatives of several underwriters of offerings of various issuers. This Agreement shall apply to any offering of securities handled by your Corporate Syndicate Department in which we elect to act as an underwriter after receipt of an invitation from your Corporate Syndicate Department which shall identify issuer, contain information regarding certain terms of the securities to be offered and specify the amount of our proposed participation and the names of the other Representatives, if any, and that our participation as an underwriter in the offering shall be subject to the provisions of this Agreement. Your invitation will include instructions for our acceptance of such invitation. At or prior to the time of an offering, you will advise us, to the extent applicable, as to the expected offering date, the expected closing date, the initial public offering price, the interest or dividend rate (or the method by which such rate is to be determined), the conversion price, the underwriting discount, the management fee, the selling concession and the reallowance, except that if the public offering price of the securities is to be determined by a formula based upon the market price of certain securities (such procedure being hereinafter referred to as "Formula Pricing"), you shall specify the maximum underwriting discount, management fee and selling concession. Such information may be conveyed by you in one or more communications (such communications received by us with respect to the offering are hereinafter collectively referred to as the "Invitation"). If the Underwriting Agreement (as hereinafter defined) provides for the granting of an option to
purchase additional securities to cover over-allotments, you will notify us, in the Invitation, of such option.
This Agreement, as amended or supplemented by the Invitation, shall become effective with respect to our participation in an offering of securities if your Corporation Syndicate Department receives our oral or written acceptance and does not subsequently receive a written communication revoking our acceptance prior to the time and date specified in the Invitation (our unrevoked acceptance after expiration of such time and date being hereinafter referred to as our "Acceptance"). Our Acceptance will constitute our confirmation that, except as otherwise stated in such Acceptance, each statement included in the Master Underwriters' Questionnaire set forth as Exhibit A hereto (or otherwise furnished to us) is correct. The issuer of the securities in any offering of securities made pursuant to this Agreement is hereinafter referred to as the "Issuer." If the Underwriting Agreement does not provide for an over-allotment option, the securities to be purchased are hereinafter to as the "Securities," if the Underwriting Agreement provides for an over-allotment option, the securities the Underwriters (as hereinafter defined) are initially obligated to purchase pursuant to the Underwriting Agreement are hereinafter called the "Firm Securities" and any additional securities which may be purchased upon exercise of the over-allotment option are hereinafter called the "Additional Securities," with the Firm Securities and all or any part of the Additional Securities being hereinafter collectively referred to as the "Securities." Any underwriters of Securities under this Agreement, including the Representatives (as hereinafter defined), are hereinafter collectively referred to as the "Underwriters." All references herein to "you" or to this "Representatives" shall mean Smith Barney, Harris Upham & Co. Incorporated and the other firms, if any, which are named as Representatives in the Invitation. The Securities to be offered may, but need not, be registered for a delayed or continuous offering pursuant to Rule 415 under the Securities Act of 1933 (the "1933 Act").
The following provisions of this Agreement shall apply separately to each individual offering of Securities. This Agreement may be supplemented or amended by you by written notice to us and, except for supplements or amendments set forth in an Invitation relating
to a particular offering of Securities, any such supplement or amendment to this Agreement shall be effective with respect to any offering of Securities to which this Agreement applies after this Agreement is so amended or supplemented.
1. UNDERWRITING AGREEMENT; AUTHORITY OF REPRESENTATIVES. We authorize you to execute and deliver an underwriting of purchase agreement and any amendment or supplement thereto and any associated Terms Agreement or other similar agreement (collectively, the "Underwriting Agreement") on our behalf with the Issuer and/or any selling securityholder with respect to the Securities in such form as you determine. We will be bound by all terms of the Underwriting Agreement as executed. We understand that changes may be made in those who are to be Underwriters and in the amount of Securities to be purchased by them, but the amount of Securities to be purchased by us in accordance with the terms of this Agreement and the Underwriting Agreement, including the amount of Additional Securities, if any, which we may become obligated to purchase by reason of the exercise of any over-allotment option provided in the Underwriting Agreement, shall not be changed without our consent.
As Representatives of the Underwriters, you are authorized to take such action as you deem necessary or advisable to carry out this Agreement, the Underwriting Agreement, and the purchase, sale and distribution of the Securities, and to agree to any waiver or modification of any provision of the Underwriting Agreement. The extent applicable, you are also authorized to determine (i) the amount of Additional Securities, if any, to be purchased by the Underwriters pursuant to any over-allotment option and (ii) with respect to offerings using Formula Pricing, the initial public offering price and the price at which the Securities are to be purchased in accordance with the Underwriting Agreement. It is understood and agreed that Smith Barney, Harris Upham & Co. Incorporated may act on behalf of all Representatives.
It is understood that, if so specified in the Invitation, arrangements may be made for the sale of Securities by the Issuer pursuant to delayed delivery contracts (hereinafter referred to as "Delayed Delivery Contract"). References herein to delayed delivery and Delayed Delivery Contracts apply only to offerings to
which delayed delivery is applicable. The term "underwriting obligation," as used in this Agreement with respect to any Underwriting, shall refer to the amount of Securities, including any Additional Securities (plus such additional Securities as may be required by the Underwriting Agreement in the event of a default by one or more of the Underwriters) which such Underwriter is obligated to purchase pursuant to the provisions of the Underwriting Agreement, without regard to any reduction in such obligation as a result of Delayed Delivery Contracts which may be entered into by the Issuer.
If the Securities consist in whole or in part of debt obligations maturing serially, the serial Securities being purchased by each Underwriter pursuant to the Underwriting Agreement will consist, subject to adjustment as provided in the Underwriting Agreement, of serial Securities of each maturity in a principal amount which bears the same proportion to the aggregate principal amount of the serial Securities of such maturity to be purchased by all the Underwriters as the principal amount of serial Securities set forth opposite such Underwriter's name in the Underwriting Agreement bears to the aggregate principal amount of the serial Securities to be purchased by all the Underwriters.
2. REGISTRATION STATEMENT AND PROSPECTUS; OFFERING CIRCULAR. In the case of an Invitation regarding an offer of Securities registered under the 1933 Act (a "Registered Offering"), you will furnish to us, to the extent made available to you and the Issuer, copies of any registration statement or registration statements relating to the Securities which may be filed with the Securities and Exchange Commission) the "Commission") pursuant to the 1933 Act and each amendment thereto (excluding exhibits but including any documents incorporated by reference therein). Such registration statement(s) as amended, and the prospectus(es) relating to the sale of Securities by the Issuer constituting a part thereof, including all documents incorporated therein by reference, as from time to time amended or supplemented by the filing of documents pursuant to the Securities Exchange Act of 1934 (the "1934 Act"), the 1933 Act or otherwise, are referred to herein as the "Registration Statement" and the "Prospectus," respectively, provided however, that a supplement to the Prospectus filed with the Commission pursuant to Rule 424 under the 1933 Act
with respect to an offering of Securities (a "Prospectus Supplement") shall be deemed to have supplemented the Prospectus only with respect to the offering of Securities to which it relates.
With respect to Securities for which no Registration Statement if filed with the Commission, you will furnish to us, to the extent made available to you by the Issuer, copies of any offering circular or other offering materials to be used in connection with the offering of the Securities and of each amendment thereto (the "Offering Circular").
3. PUBLIC OFFERING. The sale of the Securities shall commence as soon as you deem advisable. We will not sell any Securities until they are released by you for that purpose. When notified by you that the Securities are released for sale, we will offer to the public in conformity with the terms of offering set forth in the Prospectus or Offering Circular, such of the Securities to be purchased by us ("our Securities") as are not reserved for our account for sale to Selected Dealers and others pursuant to Section 5. After the initial public offering, the public offering price and the concession and discount therefrom may be changed by you by notice to the Underwriters, and we agree to be bound by any such change.
If, in accordance with the terms of offering set forth in the Prospectus or Offering Circular, the offering of the Securities is not at a fixed price but at varying prices set by individual Underwriters based on market prices or at negotiated prices, the provisions above relating to your right to change the public offering price and concession and discount to dealers shall not apply, and other references in this Section and elsewhere in this Agreement to the public offering price or Selected Dealers' concession shall be deemed to mean the prices and concessions determined by you from time to time in your discretion.
If so directed in the Invitation, we will not sell any Securities to any account over which we have discretionary authority. We will also comply with any other restrictions which may be set forth in the Invitation.
The initial public advertisement with respect to the Securities shall appear on such date, and shall include the names of such of the Underwriters, as you may determine. Thereafter, any Underwriter may advertise at its own expense.
4. DELAYED DELIVERY ARRANGEMENTS. We authorize you to act on our behalf in making all arrangements for the solicitation of offers to purchase Securities from the Issuer pursuant to Delayed Delivery Contracts, and we agree that all such arrangements will be made only through you (directly or through Underwriters or Selected Dealers). You may allow to Selected Dealers in respect of such Securities a commission equal to the concession allowed to Selected Dealers pursuant to Section 5.
The obligations of the Underwriters shall be reduced in the aggregate by the principal amount of Securities covered by Delayed Delivery Contracts made by the Issuer, the obligations of each Underwriter to be reduced by the principal amount of such Securities, if any, allocated by you to such Underwriter. Your determination of the allocation of Securities covered by Delayed Delivery Contracts among the several Underwriters shall be final and conclusive, and we agree to be bound by any notice delivered by you to the Issuer setting forth the amount of the reduction in our obligation as a result of Delayed Delivery Contracts.
Upon receiving payment from the fee for arranging Delayed Delivery Contracts, you will credit our account with the portion of such fee applicable to the Securities covered by Delayed Delivery Contracts allocated to us. You will charge our account with any commission allocated to Selected Dealers in respect of Securities covered by Delayed Delivery Contracts allocated to us.
5. OFFERING TO SELECTED DEALERS AND OTHERS; MANAGEMENT OF OFFERING. We authorize you, for our account, to reserve for sale and to sell to dealers ("Selected Dealers"), among whom any of the Underwriters may be included, such amount of our Securities as you shall determine. Reservations for sales to Selected Dealers for our account need not be in proportion to our under-writing obligation, but sales of Securities reserved for our account for sale to Selected Dealers shall be made as
nearly as practicable in the ratio which the amount of Securities reserved for
our account bears to the aggregate amount of Securities reserved for the account
of all Underwriters, as calculated from day to day. The price to Selected
Dealers initially shall be the public offering price less a concession not in
excess of the Selected Dealers concession set forth in the Invitation. Selected
Dealers shall be actually engaged in the investment banking or securities
business and shall be either members in good standing of the National
Association of Securities Dealers, Inc. (the "NASD") or dealers with their
principal place of business located outside the United States, its territories
and its possessions and not registered under the 1934 Act who agree to make no
sales within the United States, its territories or its possessions or to persons
who are nationals thereof or residents therein. Each Selected Dealer shall agree
to comply with the provisions of Section 24 of Article III of the Rules of Fair
Practice of the NASD, and each foreign Selected Dealer who is not a member of
the NASD also shall agree to comply with the NASD's interpretation with respect
to free-riding and withholding, to comply, as though it were a member of the
NASD, with the provisions of Section 8 and 36 of Article III of such Rules of
Fair Practice, and to comply with Section 25 of Article III thereof as that
Section applies to a non-member foreign dealer.
With your consent, the Underwriters may allow, and Selected Dealers may reallow, a discount on sales to any dealer who meets the above NASD requirements in an amount not in excess of the amount set forth in the Invitation. Upon your request, we will advise you of the identity of any dealer to whom we allow such a discount and any Underwriter or Selected Dealer from whom we receive such a discount.
We also authorize you, for our account, to reserve for sale and to sell our Securities at the public offering price to others, including institutions and retail purchasers. Except for such sales which are designated by a purchaser to be for the account of a particular Underwriter, such reservations and sales shall be made as nearly as practicable in proportion to our underwriting obligations, unless you agree to smaller proportion at our request.
At or before the time the Securities are released for sale, you shall notify us of the amount of our Securities which have not been reserved for our account for sale to Selected Dealers and others and which is to be retained by us for direct sale.
We will from time to time, upon your request, report to you the amount of securities retained by us for direct sale which remains unsold and, upon your request, deliver to you for our account, or sell to you for the account of one or more of the Underwriters, such amount of our unsold Securities as you may designate at the public offering price less an amount determined by you not in excess of the concession to Selected Dealers. You may also repurchase Securities from other Underwriters and Selected Dealers, for the account of one or more of the Underwriters, at prices determined by you not in excess of the public offering price less the concession to Selected Dealers.
You may from time to time deliver to any Underwriter, for carrying purposes or for sale by such Underwriter, any of the securities then reserved for sale to, but not purchased and paid for by, Selected Dealers or others as above provided, but to the extent that Securities are so delivered for sale by such Underwriter, the amount of Securities then reserved for the account of such Underwriter shall be correspondingly reduced. Securities delivered for carrying purposes only shall be redelivered to you upon demand.
The Underwriters and Selected Dealers may, with your consent, purchase Securities from and sell Securities to each other at the public offering price less a concession not in excess of the concession to Selected Dealers.
6. REPURCHASE OF SECURITIES NOT EFFECTIVELY PLACED. In recognition of the importance of distributing the Securities to bona fide investors, we agree to repurchase on demand any Securities sold by us, except through you, which are purchased by you in the open market or otherwise during a period terminating as provided in Section 16, at a price equal to the cost of such purchase, including accrued interest, amortization of original issue discount or dividends, commissions and transfer and other taxes, if any, on redelivery. The certificates
delivered to us need not be the identical certificates delivered to you in respect of the Securities purchased. In lieu of requiring repurchase, you may, in your discretion, sell such Securities for our account at such prices, upon such terms and to such persons, including any of the other Underwriters, as you may determine, charging the amount of any loss and expense, or crediting the amount of any net profit, resulting from such sale, to our account, or you may charge our account with an amount determined by you not in excess of the concession to Selected Dealers.
7. STABILIZATION AND OVER-ALLOTMENT. In order to facilitate the distribution of the Securities, we authorize you, in your discretion, to purchase and sell Securities, any securities into which the Securities are convertible or for which the securities are exchangeable, and any other securities of the Issuer or any guarantor of the Securities specified in the Invitation, in the open market or otherwise, for long or short account, at such prices as you may determine, and, in the arranging for sales to Selected Dealers or others, to over-allot. You may liquidate any long position or cover any short position incurred pursuant to this Section as such prices as you may determine. You shall make such purchases and sales (including over-allotments) for the accounts of the Underwriters as nearly as practicable in proportion to their respective underwriting obligations. It is understood that, in connection with any particular offering of Securities to which this Agreement applies, you may have made purchases of any such securities for stabilizing purposes prior to the time when we became one of the Underwriters, and we agree that any such securities so purchased shall be treated as having been purchased for the respective accounts of the Underwriters pursuant to the foregoing authorization. At the close of business on any day our net commitment, either for long or short account, resulting from such purchases or sales (including over-allotments) shall not exceed 15% (or such other amount as may be specified in the Invitation) of our underwriting obligation, except that such percentage may be increased with the approval of a majority in interest of the Underwriters. We will take up at cost on demand any Securities or any such other securities so sold or over-allotted for our account, including accrued interest, amortization of original issue discount or dividend, and we will pay to you on demand the amount of any losses
or expenses incurred for our account pursuant to this Section. In the event of default by any Underwriter in respect of its obligations under this section, each non-defaulting Underwriter shall assume its share of the obligations of such defaulting Underwriter in the proportion that its underwriting obligation bears to the underwriting obligations of all non-defaulting Underwriters without relieving such defaulting Underwriter of its liability thereunder.
If you effect any stabilizing purchase pursuant to this Section, you shall promptly notify us of the date and time of the first stabilizing purchase and the date and time when stabilizing was terminated. You shall prepare and maintain such records as are required to be maintained by you as manager pursuant to Rule 17a-2 under the 1934 Act.
8. RULE 10B-6. We represent and agree that in connection with the offering of Securities we have complied and will comply with the provisions of Rule 10b-6 under the 1934 Act as they apply to the offering of the Securities.
9. PAYMENT AND DELIVERY. As or before such time, on such dates and at such places as you may specify in the Invitation, we will deliver to you a certified or official bank check in such funds as are specified in the Invitation, payable to the order of Smith Barney, Harris Upham & Co. Incorporated (unless otherwise specified in the Invitation) in an amount equal to, as you direct, either (i) the public offering price or prices plus accrued interest, amortization of original issue discount or dividends, if any, set forth in the Prospectus or Offering Circular less the concession to Selected Dealers in respect of the amount of Securities to be purchased by us in accordance with the terms of this Agreement, or (ii) the amount set forth in the Invitation with respect to the Securities to be purchased by us. We authorize you to make payment for our account of the purchase price for the Securities to be purchased by us against delivery to you of such Securities (which, in the case of Securities which are debt obligations, may be in temporary form), and the difference between such purchase price of the securities and the amount of our funds delivered to you therefor shall be credited to our account.
Delivery to us of Securities retained by us for direct sale
shall be made by you as soon as practicable after your receipt of the
Securities. Upon termination of the provisions of this Agreement as provided in
Section 16, you shall deliver to us any Securities reserved for our account for
sale to Selected Dealers and others which remain unsold at that time. If, upon
termination of the provisions of this Agreement specified in Section 16 hereof,
an aggregate of not more than 10% of the Securities remains unsold, you may, in
your discretion, sell such Securities at such prices as you may determine.
If we are a member of The Depository Trust Company or any other depository or similar facility, you are authorized to make appropriate arrangements for payment for and/or delivery through its facilities of the Securities to be purchased by us, or, if we are not a member, settlement may be made through a correspondent that is a member pursuant to our timely instructions to you.
Upon receiving payment for Securities sold for our account to Selected Dealers and others, you shall remit to us an amount equal to the amount paid by us to you in respect of such Securities and credit or charge our account with the difference, if any, between such amount and the price at which such Securities were sold.
In the event that the Underwriting Agreement for an offering provides for the payment of a commission or other compensation to the Underwriters, we authorize you to receive such commission or other compensation for our account.
10. MANAGEMENT COMPENSATION. As compensation for your services in the management of the offering, we will pay you an amount equal to the management fee specified in the Invitation in respect of the Securities to be purchased by us pursuant to the Underwriting Agreement, and we authorize you to charge our account with such amount. If there is more than one Representative, such compensation shall be divided among the Representatives in such proportion as they may determine.
11. AUTHORITY TO BORROW. We authorize you to advance your own funds for our account, charging current interest rates, or to arrange loans for our account or
the account of the Underwriters, as you may deem necessary or advisable for the purchase, carrying, sale and distribution of the Securities. You may execute and deliver any notes or other instruments required in connection therewith and may hold or pledge as security therefor all or any part of the Securities which we or such Underwriters have agreed to purchase. The obligations of the Underwriters under loans arranged on their behalf shall be several in proportion to their respective participations in such loans, and not joint. Any lender is authorized to accept you instruction as to the disposition of the proceeds of any such loans. You shall credit each Underwriter with the proceeds of any loans made for its account.
12. BLUE SKY QUALIFICATION. You shall inform us, upon request, of the states and other jurisdictions of the United States in which it is believed that the Securities are qualified for sale under, or are exempt from the requirements of, their respective securities laws, but you assume no responsibility with respect to our right to sell Securities in any jurisdiction. You are authorized to file with the Department of State of the State of New York a further State Notice with respect to the Securities, if necessary.
If we propose to offer Securities outside the United States, its territories or its possessions, we will take, at our own expense, such action, if any, as may be necessary to comply with the laws of each foreign jurisdiction in which we propose to offer Securities.
13. MEMBERSHIP IN NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC.:
FOREIGN UNDERWRITERS: We understand that you are a member in good standing of
the NASD. We confirm that we are actually engaged in the investment banking or
securities business and are either (i) a member in good standing of the NASD or
(ii) a dealer with its principal place of business located outside the United
States, its territories and its possessions and not registered under the 1934
Act who hereby agrees to make no sales within the United States, its territories
or its possessions or to persons who are nationals thereof or residents therein
(except that we may participate in sales to Selected Dealers and others under
Section 5 of this Agreement). We hereby agree to comply with Section 24 of
Article III of the Rules of fair Practice
of the NASD, and if we are a foreign dealer and not a member of the NASD we also hereby agree to comply with the NASD's interpretation with respect to free-riding and withholding, to comply, as though we were a member of the NASD, with the provisions of Sections 5 and 36 of Article III of such Rules of Fair Practice, and to comply with Section 25 of Article III thereof as that Section applies to a non-member foreign dealer.
14. DISTRIBUTION OF PROSPECTUSES; OFFERING CIRCULARS. We are familiar with Securities Act of 1933 Release No. 4968 and Rule 15c2-8 under the 1934 Act, relating to the distribution of preliminary and final prospectuses, and we confirm that we will comply therewith, to the extent applicable, in connection with any sales of Securities. You shall cause to be made available to us, to the extent made available to you by the Issuer, such number of copies of the Prospectus as we may reasonably request for purposes contemplated by the 1933 Act, the 1934 Act and the rules and regulations thereunder.
If an Invitation states that the offering is subject to the 48-hour prospectus delivery requirement set forth in Rule 15c2-8(b), our Acceptance of the Invitation shall be deemed to constitute confirmation that we have delivered (or we will deliver) a copy of the preliminary prospectus to all persons to whom we expect to confirm a sale of Securities and that such delivery was affected (or will be affected) at least 48 hours prior to the mailing of such confirmation of sale.
Our Acceptance of an Invitation relating to an offering made pursuant to an Offering Circular shall constitute our agreement that, if requested by you, we will furnish a copy of any amendment to a preliminary or final Offering Circular to each person to whom we shall have furnished a previous preliminary of final Offering Circular. Our Acceptance shall constitute our confirmation that we have delivered and our agreement that we will deliver all preliminary and final Offering Circulars required for compliance with the applicable federal and state laws and the applicable rules and regulations of any regulatory body promulgated thereunder governing the use and distribution of offering circulars by underwriters and, to the extent consistent with such laws, rules and regulations, our Acceptance shall constitute our
confirmation that we have delivered and our agreement that we will deliver all preliminary and final Offering circulars which would be required if the provisions of Rule 15c2-8 (or any successor provision) under the 1934 Act applied to such offering.
15. NET CAPITAL. The incurrence by us of our obligations hereunder and under the Underwriting Agreement in connection with the offering of the Securities will not place us in violation of the capital requirements of Rule 15c3-1 under the 1934 Act.
16. TERMINATION. With respect to each offering of Securities to which this Agreement applies, all limitations in this Agreement on the price at which the Securities may be sold, the period of time referred to in Section 6, the authority granted by the first sentence of Section 7, and the restrictions contained in Section B shall terminate at the close of business on the 45th day after the commencement of the offering of such Securities. You may terminate any or all of such provisions at any time prior thereto by notice to the Underwriters. All other provisions of this Agreement shall remain operative and in full force and effect with respect to such offering.
17. EXPENSES AND SETTLEMENT. You may charge our account with any transfer taxes on sales of Securities made for our account and with our proportionate share (based upon our underwriting obligation) of all other expenses incurred by you under this Agreement or otherwise in connection with the purchase, carrying, sale or distribution of the Securities. With respect to each offering of Securities to which this Agreement applies, the respective accounts of the Underwriters shall be settled as promptly as practicable after the termination of all the provisions of this Agreement as provided in Section 16, but you may reserve such amount as you may deem advisable for additional expenses. Your determination of the amount to be paid to or by us shall be conclusive. You may at any time make partial distributions of credit balances or call for payment of debit balances. Any of our funds in your hands may beheld with your general funds without accountability for interest. Notwithstanding any settlement, we will remain liable for any taxes on transfers for our account and for our proportionate share (based upon our underwriting obligation)
of all expenses and liabilities which may be incurred by or for the accounts of the Underwriters with respect to each offering of Securities to which this Agreement applies.
18. INDEMNIFICATION. With respect to each offering of Securities pursuant to this Agreement, we will indemnify and hold harmless each other Underwriter and each person, if any, who controls each other Underwriter within the meaning of Section 15 of the 1933 Act, to the extent that and on the terms upon which we agree to indemnify and hold harmless the Issuer and other specified persons as set forth in the Underwriting Agreement.
19. CLAIMS AGAINST UNDERWRITERS. With respect to each offering of Securities to which this Agreement applies, if at any time any person other than an Underwriter asserts a claim (including any commenced or threatened investigation or proceeding by any government agency or body) against on or more of the Underwriters or against you as Representative(s) of the Underwriters arising out of an alleged untrue statement or omission in the Registration Statement (or any amendment thereto) or in any preliminary prospectus or the Prospectus or any amendment or supplement thereto, or in any preliminary or final Offering Circular, or relating to any transaction contemplated by this Agreement, we authorize you to make such investigation, to retain such counsel for the Underwriters and to take such action in the defense of such claim as you may deem necessary or advisable. You may settle such claim with the approval of a majority in interest of the Underwriters. We will pay our proportionate share (based upon our underwriting obligations of all expenses incurred by you (including the fees and expenses of counsel for the Underwriters) in investigating and defending against such claim and our proportionate share of the aggregate liability incurred by all Underwriters in respect of such claim (after deducting any contribution or indemnification obtained pursuant to the Underwriting Agreement, or otherwise, from persons other than Underwrites), whether such liability is the result of a judgment against one or more of the Underwriters or the result of any settlement. Any Underwriter may retain separate counsel at its own expense. A claim against or liability incurred by a person who controls an Underwriter shall be deemed to have been made against or incurred by such Underwriter. In the event of default by
any Underwriter in respect of its obligations under this Section, the non-defaulting Underwriters shall be obligated to pay the full amount thereof in the proportions that their respective underwriting obligations bear to the underwriting obligations of all non-defaulting Underwriters without relieving such defaulting Underwriter of its liability hereunder.
20. DEFAULT BY UNDERWRITERS. Default by any Underwriter in respect of its obligations hereunder or under the Underwriting Agreement shall not release us from any of our obligations or in any way affect the liability of such defaulting Underwriter to the other Underwriters for damages resulting from such default. If one or more Underwriters default under the Underwriting Agreement, if provided in the Underwriting Agreement you may (but shall not be obligated to) arrange for the purchase by others, which may include yourselves or other non-defaulting Underwriters, of all or a portion of the Securities no taken up by the defaulting Underwriters.
In the event that such arrangements are made, the respective underwriting obligations of the non-defaulting Underwriters and the amounts of the Securities to be purchased by others, if any, shall be taken as the basis for all rights and obligations hereunder, but this shall not in any way affect the liability of any defaulting Underwriter to the other Underwriters for damage resulting from its default, nor shall any such default relieve any other Underwriter of any of its obligations hereunder or under the Underwriting Agreement except as herein or therein provided. In addition, in the event of default by one or more Underwriters in respect of their obligations under the Underwriting Agreement to purchase the Securities agreed to be purchased by them thereunder and, to the extent that arrangements shall not have been made by you for any person to assume the obligations of such defaulting Underwriter or Underwriters, we agree, if provided in the Underwriting Agreement, to assume our proportionate share, based upon our underwriting obligation, of the obligations of each defaulting Underwriter without relieving any such defaulting Underwriter of its liability therefor.
21. LEGAL RESPONSIBILITY. As Representative(s) of the Underwriters, you shall have no liability to us, except for your lack of good faith and for obligations
assumed by you in this Agreement and except that we do not waive any rights that we may have under the 1933 or the 1934 Act or the rules and regulations thereunder. No obligations not expressly assumed by you in this Agreement shall be implied herefrom.
Nothing herein contained shall constitute the Underwriters an association, or partners, with you, or with each other, or, except as otherwise provided herein or in the Underwriting Agreement, render any Underwriter liable for the obligations of any other Underwriter, and the rights, obligations and liabilities of the Underwriters are several in accordance with their respective underwriting obligations, and not joint.
If the Underwriters are deemed to constitute a partnership for federal income tax purposes, we elect to be excluded from the application of Subchapter K, Chapter 1, Subtitle A, of the Internal Revenue Code of 1954, as amended, and agrees not to take any position inconsistent with such election, and you, as Representative(s), are authorized, in your discretion, to execute on behalf of the Underwriters such evidence of such election as may be required by the Internal Revenue Service.
Unless we have promptly notified you in writing otherwise, our name as it should appear in the Prospectus or Offering circular and our address are set forth below.
22. NOTICES. Any notices from you shall be deemed to have been duly given if mailed or transmitted to us at our address appearing below.
23. GOVERNING LAW. This Agreement shall be governed by the laws of the State of New York applicable to agreements made and to be performed in said State.
Please confirm this Agreement and deliver a copy to us.
Very truly yours,
Name of Firm:
By:__________________________
Authorized Officer or Partner
Address:
Confirmed as of the date first above written.
Smith Barney Inc.
By:___________________________
Managing Director
EXHIBIT A
MASTER UNDERWRITERS' QUESTIONNAIRE
In connection with each offering of Securities pursuant to the Smithy Barney, Harris Upham & Co. Incorporated Master Agreement Among Underwriters, dated July 18, 1985 (the "Agreement"), each Underwriter confirms the following information, except as indicated in such Underwriter's Acceptance or other written communication furnished to Smith Barney, Harris Upham & Co. Incorporated. Defined terms used herein have the same meaning as defined terms in the Master Agreement Among Underwriters.
(a) Neither such Underwriter nor any of its directors, officers or partners have any material (as defined in Regulation C under the 1933 Act) relationship with the Issuer, its parent (if any), any other seller of the Securities or any guarantor of the Securities.
(b) Except as described or to be described in the Agreement, the
Underwriting Agreement or the Invitation, such Underwriter does not know: (i) of
any discounts or commissions to be allowed or paid to dealers, including all
cash, securities, contracts, or other consideration to be received by any dealer
in connection with the sale of the Securities, or of any other discounts or
commissions to be allowed or paid to the Underwriters or of any other items that
would be deemed by the NASD to constitute underwriting compensation for purposes
of the NASD's Rules of Fair Practice, (ii) of any intention to over-allot, or
(iii) that the price of any security may be stabilized to facilitate the
offering of the Securities.
(c) No report or memorandum has been prepared for external use (i.e., outside such Underwriter's organization) by such Underwriter in connection with the proposed offering of Securities and, in the case of a Registered Offering, where the Registration Statement is on Form S-1, such Underwriter has not prepared or had prepared for it any engineering, management or similar report or memorandum relating to the broad aspects of the business, operations or products of the Issuer, its parent (if any) or any guarantor of the Securities within the past twelve months. If any such report or memorandum has been pre-
pared, furnish to Smith Barney, Harris Upham & Co. Incorporated three copies thereof, together with a statement as to the distribution of the report or memorandum, identifying each class of persons to whom the report or memorandum was distributed, the number of copies distributed to each class and the period of distribution.
(d) If the Securities are debt securities to be issued under an indenture to be qualified under the Trust Indenture Act of 1939, neither such Underwriter nor any of its directors, officers or partners is an "affiliate", as that term is defined under the Trust Indenture Act of 1939, of the Trustee for the Securities as specified in the Invitation, or its parent (if any); neither the Trustee nor its parent (if any) nor any of their directors or executive officers is a director, officer, partner, employee, appointee or representative of such Underwriter as those terms are defined in the Trust Indenture Act of 1939 or in the relevant instruction to Form T-1; neither such Underwriter nor any of its directors, partners or executive officers, separate or as a group, owns beneficially 1% or more of the shares of any class of voting securities of the Trustee or of its parent (if any); and if such Underwriter is a corporation, it does not have outstanding nor has it assumed or guaranteed any securities issued otherwise than in its present corporate name, and neither the Trustee nor its parent (if any) is a holder of any such securities.
(e) If the Issuer is a public utility, such Underwriter is not a "holding company" or a "subsidiary company" or an "affiliate" of a "holding company" or of a "public utility company", each as defined in the Public Utility Holding Company Act of 1935.
(f) Neither such Underwriter nor any "group" (as that term is defined in Section 13(d)(3) of the 1934 Act) of which it is a member is the beneficial owner (determined in accordance with Rule 13d-3 under the 1934 Act) of more than 5% of any class of voting securities of the Issuer, its parent (if any), any other seller of the Securities or any guarantor of the Securities nor does it have any knowledge that more than 5% of any class of voting securities of the Issuer is held or to be held subject to any voting trust or other similar agreement.
EXHIBIT (j)
CUSTODIAN CONTRACT
Between
THE GABELLI CONVERTIBLE SECURITIES FUND
AND
STATE STREET BANK AND TRUST COMPANY
TABLE OF CONTENTS
Page ---- 1. Employment of Custodian and Property to be Held By It. 1 2. Duties of the Custodian with Respect to Property of the Fund Held by the Custodian in the United States. 2 2.1 Holding Securities 2 2.2 Delivery of Securities 2 2.3 Registration of Securities 4 2.4 Bank Accounts 4 2.5 Availability of Federal Funds 5 2.6 Collection of Income 5 2.7 Payment of Fund Monies 5 2.8 Liability for Payment in Advance of Receipt of Securities Purchased 7 2.9 Appointment of Agents 7 2.10 Deposit of Fund Assets in Securities System 7 2.11 Fund Assets Held in the Custodian's Direct Paper System 8 2.12 Segregated Account 9 2.13 Ownership Certificates for Tax Purposes 10 2.14 Proxies 10 2.15 Communications Relating to Portfolio Securities 10 2.16 Reports to Fund by Independent Public Accountants 10 3. Duties of the Custodian with Respect to Property of the Fund Held Outside of the United States 11 3.1 Appointment of Foreign Sub-Custodians 11 3.2 Assets to be Held 11 3.3 Foreign Securities Depositories 11 3.4 Agreements with Foreign Banking Institutions 11 3.5 Access of Independent Accountants of the Fund 12 3.6 Reports by Custodian 12 3.7 Transactions in Foreign Custody Account 12 3.8 Liability of Foreign Sub-Custodians 13 3.9 Liability of Custodian 13 |
3.10 Reimbursement for Advances 13 3.11 Monitoring Responsibilities 14 3.12 Branches of U.S. Banks 14 3.13 Tax Law 14 4. Proper Instructions 15 5. Actions Permitted Without Express Authority 15 6. Evidence of Authority 16 7. Duties of Custodian With Respect to the Books of Account and Calculation of Net Asset Value and Net Income 16 8. Records 16 9. Opinion of Fund's Independent Accountants 17 10. Compensation of Custodian 17 11. Responsibility of Custodian 17 12. Effective Period, Termination and Amendment 18 13. Successor Custodian 19 14. Interpretive and Additional Provisions 19 15. Massachusetts Law to Apply 20 16. Prior Contracts 20 17. Shareholder Communications Election 20 |
CUSTODIAN CONTRACT
This Contract between The Gabelli Convertible Securities Fund, a corporation organized and existing under the laws of Maryland, having its principal place of business at One Corporate Center, Rye, New York 10580-1434 hereinafter called the "Fund", and State Street Bank and Trust Company, a Massachusetts trust company, having its principal place of business at 225 Franklin Street, Boston, Massachusetts, 02110, hereinafter called the "Custodian",
WITNESSETH: That in consideration of the mutual covenants and agreements hereinafter contained, the parties hereto agree as follows:
1. Employment of Custodian and Property to be Held by It
The Fund hereby employs the Custodian as the custodian of its assets, including securities which it desires to be held in places within the United States ("domestic securities") and securities it desires to be held outside the United States ("foreign securities") pursuant to the provisions of the Articles of Incorporation. The Fund agrees to deliver to the Custodian all securities and cash owned by it, and all payments of income, payments of principal or capital distributions received by it with respect to all securities owned by the Fund from time to time, and the cash consideration received by it for such new or treasury shares of capital stock, $ par value, ("Shares") of the Fund as may be issued or sold from time to time. The Custodian shall not be responsible for any property of the Fund held or received by the Fund and not delivered to the Custodian.
Upon receipt of "Proper Instructions" (within the meaning of Article
4), the Custodian shall from time to time employ one or more sub-custodians
located in the United States, but only in accordance with an applicable vote by
the Board of Directors of the Fund, and provided that the Custodian shall have
no more or less responsibility or liability to the Fund on account of any
actions or omissions of any sub-custodian so employed than any such
sub-custodian has to the Custodian. The Custodian may employ as sub-custodian
for the Fund's foreign securities and other assets the foreign banking
institutions and foreign securities depositories designated in Schedule A hereto
but only in accordance with the provisions of Article 3.
2. Duties of the Custodian with Respect to Property of the Fund Held By the Custodian in the United States
2.1 Holding Securities. The Custodian shall hold and physically segregate for the account of the Fund all non-cash property, to be held by it in the United States including all domestic securities owned by the Fund, other than (a) securities which are maintained pursuant to Section 2.10 in a clearing agency which acts as a securities depository or in a book-entry system authorized by the U.S. Department of the Treasury, collectively referred to herein as "Securities System" and (b) commercial paper of an issuer for which State Street Bank and Trust Company acts as issuing and paying agent ("Direct Paper") which is deposited and/or maintained in the Direct Paper System of the Custodian pursuant to Section 2.11.
2.2 Delivery of Securities. The Custodian shall release and deliver domestic securities owned by the Fund held by the Custodian or in a Securities System account of the Custodian or in the Custodian's Direct Paper book entry system account ("Direct Paper System Account") only upon receipt of Proper Instructions, which may be continuing instructions when deemed appropriate by the parties, and only in the following cases:
1) Upon sale of such securities for the account of the Fund and receipt of payment therefor;
2) Upon the receipt of payment in connection with any repurchase agreement related to such securities entered into by the Fund;
3) In the case of a sale effected through a Securities System, in accordance with the provisions of Section 2.10 hereof;
4) To the depository agent in connection with tender or other similar offers for securities of the Fund;
5) To the issuer thereof or its agent when such securities are called, redeemed, retired or otherwise become payable; provided that, in any such case, the cash or other consideration is to be delivered to the Custodian;
6) To the issuer thereof, or its agent, for transfer into the name of the Fund or into the name of any nominee or nominees of the Custodian or into the name or nominee name of any agent appointed pursuant to Section 2.9 or into the name or nominee
name of any sub-custodian appointed pursuant to Article 1; or for exchange for a different number of bonds, certificates or other evidence representing the same aggregate face amount or number of units; provided that, in any such case, the new securities are to be delivered to the Custodian;
7) Upon the sale of such securities for the account of the Fund, to the broker or its clearing agent, against a receipt, for examination in accordance with "street delivery" custom; provided that in any such case, the Custodian shall have no responsibility or liability for any loss arising from the delivery of such securities prior to receiving payment for such securities except as may arise from the Custodian's own negligence or willful misconduct;
8) For exchange or conversion pursuant to any plan of merger, consolidation, recapitalization, reorganization or readjustment of the securities of the issuer of such securities, or pursuant to provisions for conversion contained in such securities, or pursuant to any deposit agreement; provided that, in any such case, the new securities and cash, if any, are to be delivered to the Custodian;
9) In the case of warrants, rights or similar securities, the surrender thereof in the exercise of such warrants, rights or similar securities or the surrender of interim receipts or temporary securities for definitive securities; provided that, in any such case, the new securities and cash, if any, are to be delivered to the Custodian;
10) For delivery in connection with any loans of securities made by the Fund, but only against receipt of adequate collateral as agreed upon from time to time by the Custodian and the Fund, which may be in the form of cash or obligations issued by the United States government, its agencies or instrumentalities, except that in connection with any loans for which collateral is to be credited to the Custodian's account in the book-entry system authorized by the U.S. Department of the Treasury, the Custodian will not be held liable or responsible for the delivery of securities owned by the Fund prior to the receipt of such collateral;
11) For delivery as security in connection with any borrowings by the Fund requiring a pledge of assets by the Fund, but only against receipt of amounts borrowed;
12) For delivery in accordance with the provisions of any agreement among the Fund, the Custodian and a broker-dealer registered under the Securities Exchange Act of 1934 (the "Exchange Act") and a member of The National Association of Securities Dealers, Inc. ("NASD"), relating to compliance with the rules of The Options
Clearing Corporation and of any registered national securities exchange, or of any similar organization or organizations, regarding escrow or other arrangements in connection with transactions by the Fund;
13) For delivery in accordance with the provisions of any agreement among the Fund, the Custodian, and a Futures Commission Merchant registered under the Commodity Exchange Act, relating to compliance with the rules of the Commodity Futures Trading Commission and/or any Contract Market, or any similar organization or organizations, regarding account deposits in connection with transactions by the Fund;
14) For any other proper corporate purpose, but only upon receipt of, in addition to Proper Instructions, a certified copy of a resolution of the Board of Directors or of the Executive Committee signed by an officer and certified by the Secretary or an Assistant Secretary, specifying the securities of the Fund to be delivered, setting forth the purpose for which such delivery is to be made, declaring such purpose to be a proper corporate purpose, and naming the person or persons to whom delivery of such securities shall be made.
2.3 Registration of Securities. Domestic securities held by the Custodian (other than bearer securities) shall be registered in the name of the Fund or in the name of any nominee of the Fund or of any nominee of the Custodian which nominee shall be assigned exclusively to the Fund, unless the Fund has authorized in writing the appointment of a nominee to be used in common with other registered investment companies having the same investment adviser as the Fund, or in the name or nominee name of any agent appointed pursuant to Section 2.9 or in the name or nominee name of any sub-custodian appointed pursuant to Article 1. All securities accepted by the Custodian on behalf of the Fund under the terms of this Contract shall be in "street name" or other good delivery form. If, however, the Fund directs the Custodian to maintain securities in "street name", the Custodian shall utilize its best efforts only to timely collect income due the Fund on such securities and to notify the Fund on a best efforts basis only of relevant corporate actions including, without limitation, pendency of calls, maturities, tender or exchange offers.
2.4 Bank Accounts. The Custodian shall open and maintain a separate bank account or accounts in the United States in the name of the Fund, subject only to draft or order by the Custodian acting pursuant to the terms of this Contract, and shall hold in such account or accounts, subject to the provisions hereof, all cash received by it from or for the account of the Fund, other than cash maintained by the Fund in a bank account established and used in accordance with Rule 17f-3 under the Investment Company Act of 1940. Funds held by the
Custodian for the Fund may be deposited by it to its credit as Custodian in the Banking Department of the Custodian or in such other banks or trust companies as it may in its discretion deem necessary or desirable; provided, however, that every such bank or trust company shall be qualified to act as a custodian under the Investment Company Act of 1940 and that each such bank or trust company and the funds to be deposited with each such bank or trust company shall be approved by vote of a majority of the Board of Directors of the Fund. Such funds shall be deposited by the Custodian in its capacity as Custodian and shall be withdrawable by the Custodian only in that capacity.
2.5 Availability of Federal Funds. Upon mutual agreement between the Fund and the Custodian, the Custodian shall, upon the receipt of Proper Instructions, make federal funds available to the Fund as of specified times agreed upon from time to time by the Fund and the Custodian in the amount of checks received in payment for Shares of the Fund which are deposited into the Fund's account.
2.6 Collection of Income. Subject to the provisions of Section 2.3, the Custodian shall collect on a timely basis all income and other payments with respect to United States registered securities held hereunder to which the Fund shall be entitled either by law or pursuant to custom in the securities business, and shall collect on a timely basis all income and other payments with respect to United States bearer domestic securities if, on the date of payment by the issuer, such securities are held by the Custodian or its agent thereof and shall credit such income, as collected, to the Fund's custodian account. Without limiting the generality of the foregoing, the Custodian shall detach and present for payment all coupons and other income items requiring presentation as and when they become due and shall collect interest when due on securities held hereunder. Income due the Fund on United States securities loaned pursuant to the provisions of Section 2.2 (10) shall be the responsibility of the Fund. The Custodian will have no duty or responsibility in connection therewith, other than to provide the Fund with such information or data as may be necessary to assist the Fund in arranging for the timely delivery to the Custodian of the income to which the Fund is properly entitled.
2.7 Payment of Fund Monies. Upon receipt of Proper Instructions, which may be continuing instructions when deemed appropriate by the parties, the Custodian shall pay out monies of the Fund in the following cases only:
1) Upon the purchase of domestic securities, options, futures contracts or options on futures contracts for the account of the Fund but only (a) against the delivery of such securities or evidence of title to such options, futures contracts or options on futures contracts to the Custodian (or any bank, banking firm or trust company doing
business in the United States or abroad which is qualified
under the Investment Company Act of 1940, as amended, to act
as a custodian and has been designated by the Custodian as its
agent for this purpose) registered in the name of the Fund or
in the name of a nominee of the Custodian referred to in
Section 2.3 hereof or in proper form for transfer; (b) in the
case of a purchase effected through a Securities System, in
accordance with the conditions set forth in Section 2.10
hereof; (c) in the case of a purchase involving the Direct
Paper System, in accordance with the conditions set forth in
Section 2.11; (d) in the case of repurchase agreements entered
into between the Fund and the Custodian, or another bank, or a
broker-dealer which is a member of NASD, (i) against delivery
of the securities either in certificate form or through an
entry crediting the Custodian's account at the Federal Reserve
Bank with such securities or (ii) against delivery of the
receipt evidencing purchase by the Fund of securities owned by
the Custodian along with written evidence of the agreement by
the Custodian to repurchase such securities from the Fund or
(e) for transfer to a time deposit account of the Fund in any
bank, whether domestic or foreign; such transfer may be
effected prior to receipt of a confirmation from a broker
and/or the applicable bank pursuant to Proper Instructions as
defined in Article 4;
2) In connection with conversion, exchange or surrender of securities owned by the Fund as set forth in Section 2.2 hereof;
3) For the payment of any expense or liability incurred by the Fund, including but not limited to the following payments for the account of the Fund: interest, taxes, management, accounting, transfer agent and legal fees, and operating expenses of the Fund whether or not such expenses are to be in whole or part capitalized or treated as deferred expenses;
4) For the payment of any dividends declared pursuant to the governing documents of the Fund;
5) For payment of the amount of dividends received in respect of securities sold short;
6) For any other proper purpose, but only upon receipt of, in addition to Proper Instructions, a certified copy of a resolution of the Board of Directors or of the Executive Committee of the Fund signed by an officer of the Fund and certified by its Secretary or an Assistant Secretary, specifying the amount of such payment, setting forth the purpose for which such payment is to be made, declaring such
purpose to be a proper purpose, and naming the person or persons to whom such payment is to be made. 2.8 Liability for Payment in Advance of Receipt of Securities Purchased. Except as specifically stated otherwise in this Contract, in any and every case where payment for purchase of domestic securities for the account of the Fund is made by the Custodian in advance of receipt of the securities purchased in the absence of specific written instructions from the Fund to so pay in advance, the Custodian shall be absolutely liable to the Fund for such securities to the same extent as if the securities had been received by the Custodian. 2.9 Appointment of Agents. The Custodian may at any time or times in its discretion appoint (and may at any time remove) any other bank or trust company which is itself qualified under the Investment Company Act of 1940, as amended, to act as a custodian, as its agent to carry out such of the provisions of this Article 2 as the Custodian may from time to time direct; provided, however, that the appointment of any agent shall not relieve the Custodian of its responsibilities or liabilities hereunder. 2.10 Deposit of Fund Assets in Securities Systems. The Custodian may deposit and/or maintain domestic securities owned by the Fund in a clearing agency registered with the Securities and Exchange Commission under Section 17A of the Securities Exchange Act of 1934, which acts as a securities depository, or in the book-entry system authorized by the U.S. Department of the Treasury and certain federal agencies, collectively referred to herein as "Securities System" in accordance with applicable Federal Reserve Board and Securities and Exchange Commission rules and regulations, if any, and subject to the following provisions: 1) The Custodian may keep domestic securities of the Fund in a Securities System provided that such securities are represented in an account ("Account") of the Custodian in the Securities System which shall not include any assets of the Custodian other than assets held as a fiduciary, custodian or otherwise for customers; 2) The records of the Custodian with respect to domestic securities of the Fund which are maintained in a Securities System shall identify by book-entry those securities belonging to the Fund; 3) The Custodian shall pay for domestic securities purchased for the account of the Fund upon (i) receipt of advice from the Securities System that such securities have been transferred to the Account, and (ii) the making of an entry on the records of the |
Custodian to reflect such payment and transfer for the account of the Fund. The Custodian shall transfer domestic securities sold for the account of the Fund upon (i) receipt of advice from the Securities System that payment for such securities has been transferred to the Account, and (ii) the making of an entry on the records of the Custodian to reflect such transfer and payment for the account of the Fund. Copies of all advices from the Securities System of transfers of domestic securities for the account of the Fund shall identify the Fund, be maintained for the Fund by the Custodian and be provided to the Fund at its request. Upon request, the Custodian shall furnish the Fund confirmation of each transfer to or from the account of the Fund in the form of a written advice or notice and shall furnish to the Fund copies of daily transaction sheets reflecting each day's transactions in the Securities System for the account of the Fund; 4) The Custodian shall provide the Fund with any report obtained by the Custodian on the Securities System's accounting system, internal accounting control and procedures for safeguarding domestic securities deposited in the Securities System; 5) The Custodian shall have received the initial certificate required by Article 12 hereof; 6) Anything to the contrary in this Contract notwithstanding, the Custodian shall be liable to the Fund for any loss or damage to the Fund resulting from use of the Securities System by reason of any negligence, misfeasance or misconduct of the Custodian or any of its agents or of any of its or their employees or from failure of the Custodian or any such agent to enforce effectively such rights as it may have against the Securities System; at the election of the Fund, it shall be entitled to be subrogated to the rights of the Custodian with respect to any claim against the Securities System or any other person which the Custodian may have as a consequence of any such loss or damage if and to the extent that the Fund has not been made whole for any such loss or damage. 2.11 Fund Assets Held in the Custodian's Direct Paper System. The Custodian may deposit and/or maintain securities owned by the Fund in the Direct Paper System of the Custodian subject to the following provisions: 1) No transaction relating to securities in the Direct Paper System will be effected in the absence of Proper Instructions; |
2) The Custodian may keep securities of the Fund in the Direct Paper System only if such securities are represented in an account ("Account") of the Custodian in the Direct Paper System which shall not include any assets of the Custodian other than assets held as a fiduciary, custodian or otherwise for customers; 3) The records of the Custodian with respect to securities of the Fund which are maintained in the Direct Paper System shall identify by book-entry those securities belonging to the Fund; 4) The Custodian shall pay for securities purchased for the account of the Fund upon the making of an entry on the records of the Custodian to reflect such payment and transfer of securities to the account of the Fund. The Custodian shall transfer securities sold for the account of the Fund upon the making of an entry on the records of the Custodian to reflect such transfer and receipt of payment for the account of the Fund; 5) The Custodian shall furnish the Fund confirmation of each transfer to or from the account of the Fund, in the form of a written advice or notice, of Direct Paper on the next business day following such transfer and shall furnish to the Fund copies of daily transaction sheets reflecting each day's transaction in the Securities System for the account of the Fund; 6) The Custodian shall provide the Fund with any report on its system of internal accounting control as the Fund may reasonably request from time to time. 2.12 Segregated Account. The Custodian shall upon receipt of Proper Instructions establish and maintain a segregated account or accounts for and on behalf of the Fund, into which account or accounts may be transferred cash and/or securities, including securities maintained in an account by the Custodian pursuant to Section 2.10 hereof, (i) in accordance with the provisions of any agreement among the Fund, the Custodian and a broker-dealer registered under the Exchange Act and a member of the NASD (or any futures commission merchant registered under the Commodity Exchange Act), relating to compliance with the rules of The Options Clearing Corporation and of any registered national securities exchange (or the Commodity Futures Trading Commission or any registered contract market), or of any similar organization or organizations, regarding escrow or other arrangements in connection with transactions by the Fund, (ii) for purposes of segregating cash or government securities in connection with options purchased, sold or written by the Fund or commodity futures contracts or options thereon purchased or sold by the Fund, (iii) for the purposes of compliance by the Fund with the procedures required by |
Investment Company Act Release No. 10666, or any subsequent release or releases of the Securities and Exchange Commission relating to the maintenance of segregated accounts by registered investment companies and (iv) for other proper corporate purposes, but only, in the case of clause (iv), upon receipt of, in addition to Proper Instructions, a certified copy of a resolution of the Board of Directors or of the Executive Committee signed by an officer of the Fund and certified by the Secretary or an Assistant Secretary, setting forth the purpose or purposes of such segregated account and declaring such purposes to be proper corporate purposes. 2.13 Ownership Certificates for Tax Purposes. The Custodian shall execute ownership and other certificates and affidavits for all federal and state tax purposes in connection with receipt of income or other payments with respect to domestic securities of the Fund held by it and in connection with transfers of such securities. 2.14 Proxies. The Custodian shall, with respect to the domestic securities held hereunder, cause to be promptly executed by the registered holder of such securities, if the securities are registered otherwise than in the name of the Fund or a nominee of the Fund, all proxies, without indication of the manner in which such proxies are to be voted, and shall promptly deliver to the Fund such proxies, all proxy soliciting materials and all notices relating to such securities. 2.15 Communications Relating to Fund Securities. Subject to the provisions of Section 2.3, the Custodian shall transmit promptly to the Fund all written information (including, without limitation, pendency of calls and maturities of domestic securities and expirations of rights in connection therewith and notices of exercise of call and put options written by the Fund and the maturity of futures contracts purchased or sold by the Fund) received by the Custodian from issuers of the domestic securities being held for the Fund. With respect to tender or exchange offers, the Custodian shall transmit promptly to the Fund all written information received by the Custodian from issuers of the domestic securities whose tender or exchange is sought and from the party (or his agents) making the tender or exchange offer. If the Fund desires to take action with respect to any tender offer, exchange offer or any other similar transaction, the Fund shall notify the Custodian at least three business days prior to the date on which the Custodian is to take such action. 2.16 Reports to Fund by Independent Public Accountants The Custodian shall provide the Fund, at such times as the Fund may reasonably require, with reports by independent public accountants on the accounting system, internal accounting control and procedures for safeguarding securities, futures contracts and options |
on futures contracts, including domestic securities deposited and/or maintained in a Securities System, relating to the services provided by the Custodian under this Contract; such reports, shall be of sufficient scope and in sufficient detail, as may reasonably be required by the Fund, to provide reasonable assurance that any material inadequacies would be disclosed by such examination, and, if there are no such inadequacies, the reports shall so state.
3. Duties of the Custodian with Respect to Property of the Fund Held Outside of the United States
3.1 Appointment of Foreign Sub-Custodians. The Fund hereby authorizes and instructs the Custodian to employ as sub-custodians for the Fund's securities and other assets maintained outside the United States the foreign banking institutions and foreign securities depositories designated on Schedule A hereto ("foreign sub-custodians"). Upon receipt of "Proper Instructions", as defined in Section 4 of this Contract, together with a certified resolution of the Fund's Board of Directors, the Custodian and the Fund may agree to amend Schedule A hereto from time to time to designate additional foreign banking institutions and foreign securities depositories to act as sub-custodian. Upon receipt of Proper Instructions, the Fund may instruct the Custodian to cease the employment of any one or more such sub-custodians for maintaining custody of the Fund's assets.
3.2 Assets to be Held. The Custodian shall limit the securities and other assets maintained in the custody of the foreign sub-custodians to: (a) "foreign securities", as defined in paragraph (c)(1) of Rule 17f-5 under the Investment Company Act of 1940, and (b) cash and cash equivalents in such amounts as the Custodian or the Fund may determine to be reasonably necessary to effect the Fund's foreign securities transactions. The Custodian shall identify on its books as belonging to the Fund, the foreign securities of the Fund held by each foreign sub-custodian.
3.3 Foreign Securities Depositories. Except as may otherwise be agreed upon in writing by the Custodian and the Fund, assets of the Funds shall be maintained in foreign securities depositories only through arrangements implemented by the foreign banking institutions serving as sub-custodians pursuant to the terms hereof. Where possible, such arrangements shall include entry into agreements containing the provisions set forth in Section 3.4 hereof.
3.4 Agreements with Foreign Banking Institutions. Each agreement with a foreign banking institution shall be substantially in the form set forth in Exhibit 1 hereto and shall provide that: (a) the Fund's assets will not be subject to any right, charge, security interest, lien or claim of any kind in favor of the foreign banking institution or its creditors or agent, except
a claim of payment for their safe custody or administration; (b) beneficial ownership of the Fund's assets will be freely transferable without the payment of money or value other than for custody or administration; (c) adequate records will be maintained identifying the assets as belonging to the Fund; (d) officers of or auditors employed by, or other representatives of the Custodian, including to the extent permitted under applicable law the independent public accountants for the Fund, will be given access to the books and records of the foreign banking institution relating to its actions under its agreement with the Custodian; and (e) assets of the Fund held by the foreign sub-custodian will be subject only to the instructions of the Custodian or its agents.
3.5 Access of Independent Accountants of the Fund. Upon request of the Fund, the Custodian will use its best efforts to arrange for the independent accountants of the Fund to be afforded access to the books and records of any foreign banking institution employed as a foreign sub-custodian insofar as such books and records relate to the performance of such foreign banking institution under its agreement with the Custodian.
3.6 Reports by Custodian. The Custodian will supply to the Fund from time to time, as mutually agreed upon, statements in respect of the securities and other assets of the Fund held by foreign sub-custodians, including but not limited to an identification of entities having possession of the Fund's securities and other assets and advices or notifications of any transfers of securities to or from each custodial account maintained by a foreign banking institution for the Custodian on behalf of the Fund indicating, as to securities acquired for the Fund, the identity of the entity having physical possession of such securities.
3.7 Transactions in Foreign Custody Account. (a) Except as otherwise provided in paragraph (b) of this Section 3.7, the provision of Sections 2.2 and 2.7 of this Contract shall apply, mutatis mutandis to the foreign securities of the Fund held outside the United States by foreign sub-custodians.
(b) Notwithstanding any provision of this Contract to the contrary, settlement and payment for securities received for the account of the Fund and delivery of securities maintained for the account of the Fund may be effected in accordance with the customary established securities trading or securities processing practices and procedures in the jurisdiction or market in which the transaction occurs, including, without limitation, delivering securities to the purchaser thereof or to a dealer therefor (or an agent for such purchaser or dealer) against a receipt with the expectation of receiving later payment for such securities from such purchaser or dealer.
(c) Securities maintained in the custody of a foreign sub-custodian may be maintained in the name of such entity's nominee to the same extent as set forth in Section 2.3 of this Contract, and the Fund agrees to hold any such nominee harmless from any liability as a holder of record of such securities. 3.8 Liability of Foreign Sub-Custodians. Each agreement pursuant to which the Custodian employs a foreign banking institution as a foreign sub-custodian shall require the institution to exercise reasonable care in the performance of its duties and to indemnify, and hold harmless, the Custodian and each Fund from and against any loss, damage, cost, expense, liability or claim arising out of or in connection with the institution's performance of such obligations. At the election of the Fund, it shall be entitled to be subrogated to the rights of the Custodian with respect to any claims against a foreign banking institution as a consequence of any such loss, damage, cost, expense, liability or claim if and to the extent that the Fund has not been made whole for any such loss, damage, cost, expense, liability or claim. 3.9 Liability of Custodian. The Custodian shall be liable for the acts or omissions of a foreign banking institution to the same extent as set forth with respect to sub-custodians generally in this Contract and, regardless of whether assets are maintained in the custody of a foreign banking institution, a foreign securities depository or a branch of a U.S. bank as contemplated by paragraph 3.12 hereof, the Custodian shall not be liable for any loss, damage, cost, expense, liability or claim resulting from nationalization, expropriation, currency restrictions, or acts of war or terrorism or any loss where the sub-custodian has otherwise exercised reasonable care. Notwithstanding the foregoing provisions of this paragraph 3.9, in delegating custody duties to State Street London Ltd., the Custodian shall not be relieved of any responsibility to the Fund for any loss due to such delegation, except such loss as may result from (a) political risk (including, but not limited to, exchange control restrictions, confiscation, expropriation, nationalization, insurrection, civil strife or armed hostilities) or (b) other losses (excluding a bankruptcy or insolvency of State Street London Ltd. not caused by political risk) due to Acts of God, nuclear incident or other losses under circumstances where the Custodian and State Street London Ltd. have exercised reasonable care. 3.10 Reimbursement for Advances. If the Fund requires the Custodian to advance cash or securities for any purpose including the purchase or sale of foreign exchange or of contracts for foreign exchange, or in the event that the Custodian or its nominee shall incur or be assessed any taxes, charges, expenses, assessments, claims or liabilities in connection with the performance of this Contract, except such as may arise from its or its nominee's own negligent action, negligent failure to act or willful misconduct, any property at any time |
held for the account of the Fund shall be security therefor and should the Fund fail to repay the Custodian promptly, the Custodian shall be entitled to utilize available cash and to dispose of such Funds assets to the extent necessary to obtain reimbursement. 3.11 Monitoring Responsibilities. The Custodian shall furnish annually to the Fund, during the month of June, information concerning the foreign sub-custodians employed by the Custodian. Such information shall be similar in kind and scope to that furnished to the Fund in connection with the initial approval of this Contract. In addition, the Custodian will promptly inform the Fund in the event that the Custodian learns of a material adverse change in the financial condition of a foreign sub-custodian or any material loss of the assets of the Fund or in the case of any foreign sub-custodian not the subject of an exemptive order from the Securities and Exchange Commission is notified by such foreign sub-custodian that there appears to be a substantial likelihood that its shareholders' equity will decline below $200 million (U.S. dollars or the equivalent thereof) or that its shareholders' equity has declined below $200 million (in each case computed in accordance with generally accepted U.S. accounting principles). 3.12 Branches of U.S. Banks. (a) Except as otherwise set forth in this Contract, the provisions hereof shall not apply where the custody of the Funds assets are maintained in a foreign branch of a banking institution which is a "bank" as defined by Section 2(a)(5) of the Investment Company Act of 1940 meeting the qualification set forth in Section 26(a) of said Act. The appointment of any such branch as a sub-custodian shall be governed by paragraph 1 of this Contract. (b) Cash held for the Fund in the United Kingdom shall be maintained in an interest bearing account established for the Fund with the Custodian's London branch, which account shall be subject to the direction of the Custodian, State Street London Ltd. or both. 3.13 Tax Law. The Custodian shall have no responsibility or liability for any obligations now or hereafter imposed on the Fund or the Custodian as custodian of the Fund by the tax law of the United States of America or any state or political subdivision thereof. It shall be the responsibility of the Fund to notify the Custodian of the obligations imposed on the Fund or the Custodian as custodian of the Fund by the tax law of jurisdictions other than those mentioned in the above sentence, including responsibility for withholding and other taxes, assessments or other governmental charges, certifications and governmental reporting. The sole responsibility of the Custodian with regard to such tax law shall be to use reasonable efforts to assist the Fund with respect to any claim for exemption or refund under the tax law of jurisdictions for which the Fund has provided such information. |
4. Proper Instructions
Proper Instructions as used herein means a writing signed or initialled by one or more person or persons as the Board of Directors shall have from time to time authorized. Each such writing shall set forth the specific transaction or type of transaction involved, including a specific statement of the purpose for which such action is requested. Oral instructions will be considered Proper Instructions if the Custodian reasonably believes them to have been given by a person authorized to give such instructions with respect to the transaction involved. The Fund shall cause all oral instructions to be confirmed in writing. Upon receipt of a certificate of the Secretary or an Assistant Secretary as to the authorization by the Board of Directors of the Fund accompanied by a detailed description of procedures approved by the Board of Directors, Proper Instructions may include communications effected directly between electro-mechanical or electronic devices provided that the Board of Directors and the Custodian are satisfied that such procedures afford adequate safeguards for the Fund's assets. For purposes of this Section, Proper Instructions shall include instructions received by the Custodian pursuant to any three-party agreement which requires a segregated asset account in accordance with Section 2.12.
5. Actions Permitted without Express Authority
The Custodian may in its discretion, without express authority from the Fund:
1) make payments to itself or others for minor expenses of handling securities or other similar items relating to its duties under this Contract, provided that all such payments shall be accounted for to the Fund;
2) surrender securities in temporary form for securities in definitive form;
3) endorse for collection, in the name of the Fund, checks, drafts and other negotiable instruments; and
4) in general, attend to all non-discretionary details in connection with the sale, exchange, substitution, purchase, transfer and other dealings with the securities and property of the Fund except as otherwise directed by the Board of Directors of the Fund.
6. Evidence of Authority
The Custodian shall be protected in acting upon any instructions, notice, request, consent, certificate or other instrument or paper believed by it to be genuine and to have been properly executed by or on behalf of the Fund. The Custodian may receive and accept a certified copy of a vote of the Board of Directors of the Fund as conclusive evidence (a) of the authority of any person to act in accordance with such vote or (b) of any determination or of any action by the Board of Directors pursuant to the Articles of Incorporation as described in such vote, and such vote may be considered as in full force and effect until receipt by the Custodian of written notice to the contrary.
7. Duties of Custodian with Respect to the Books of Account and Calculation of Net Asset Value and Net Income
The Custodian shall cooperate with and supply necessary information to the entity or entities appointed by the Board of Directors of the Fund to keep the books of account of the Fund and/or compute the net asset value per share of the outstanding shares of the Fund or, if directed in writing to do so by the Fund, shall itself keep such books of account and/or compute such net asset value per share. If so directed, the Custodian shall also calculate weekly the net income of the Fund as described in the Fund's currently effective prospectus and shall advise the Fund and the Transfer Agent weekly of the total amounts of such net income and, if instructed in writing by an officer of the Fund to do so, shall advise the Transfer Agent periodically of the division of such net income among its various components. The calculations of the net asset value per share and the weekly income of the Fund shall be made at the time or times described from time to time in the Fund's currently effective prospectus.
8. Records
The Custodian shall create and maintain all records relating to its activities and obligations under this Contract in such manner as will meet the obligations of the Fund under the Investment Company Act of 1940, with particular attention to Section 31 thereof and Rules 31a-1 and 31a-2 thereunder. All such records shall be the property of the Fund and shall at all times during the regular business hours of the Custodian be open for inspection by duly authorized officers, employees or agents of the Fund and employees and agents of the Securities and Exchange Commission. The Custodian shall, at the Fund's request, supply the Fund with a tabulation of securities owned by the Fund and held by the Custodian and shall, when requested to do so by the Fund and for such compensation as shall be agreed upon between the Fund and the Custodian, include certificate numbers in such tabulations.
9. Opinion of Fund's Independent Accountant
The Custodian shall take all reasonable action, as the Fund may from time to time request, to obtain from year to year favorable opinions from the Fund's independent accountants with respect to its activities hereunder in connection with the preparation of the Fund's Form N-2, and Form N-SAR or other annual reports to the Securities and Exchange Commission and with respect to any other requirements of such Commission.
10. Compensation of Custodian
The Custodian shall be entitled to reasonable compensation for its services and expenses as Custodian, as agreed upon from time to time between the Fund and the Custodian.
11. Responsibility of Custodian
So long as and to the extent that it is in the exercise of reasonable care, the Custodian shall not be responsible for the title, validity or genuineness of any property or evidence of title thereto received by it or delivered by it pursuant to this Contract and shall be held harmless in acting upon any notice, request, consent, certificate or other instrument reasonably believed by it to be genuine and to be signed by the proper party or parties, including any futures commission merchant acting pursuant to the terms of a three-party futures or options agreement. The Custodian shall be held to the exercise of reasonable care in carrying out the provisions of this Contract, but shall be kept indemnified by and shall be without liability to the Fund for any action taken or omitted by it in good faith without negligence. It shall be entitled to rely on and may act upon advice of counsel (who may be counsel for the Fund) on all matters, and shall be without liability for any action reasonably taken or omitted pursuant to such advice.
The Custodian shall be liable for the acts or omissions of a foreign banking institution appointed pursuant to the provisions of Article 3 to the same extent as set forth in Article 1 hereof with respect to sub-custodians located in the United States and, regardless of whether assets are maintained in the custody of a foreign banking institution, a foreign securities depository or a branch of a U.S. bank as contemplated by paragraph 3.12 hereof, the Custodian shall not be liable for any loss, damage, cost, expense, liability or claim resulting from, or caused by, the direction of or authorization by the Fund to maintain custody or any securities or cash of the Fund in a foreign country including, but not limited to, losses resulting from nationalization, expropriation, currency restrictions, or acts of war or terrorism.
If the Fund requires the Custodian to take any action with respect to securities, which action involves the payment of money or which action may, in the opinion of the Custodian, result in the Custodian or its nominee assigned to the Fund being liable for the payment of money or incurring liability of some other form, the Fund, as a prerequisite to requiring the Custodian to take such action, shall provide indemnity to the Custodian in an amount and form satisfactory to it.
If the Fund requires the Custodian, its affiliates, subsidiaries or agents, to advance cash or securities for any purpose (including but not limited to securities settlements, foreign exchange contracts and assumed settlement) or in the event that the Custodian or its nominee shall incur or be assessed any taxes, charges, expenses, assessments, claims or liabilities in connection with the performance of this Contract, except such as may arise from its or its nominee's own negligent action, negligent failure to act or willful misconduct, any property at any time held for the account of the Fund shall be security therefor and should the Fund fail to repay the Custodian promptly, the Custodian shall be entitled to utilize available cash and to dispose of the Fund's assets to the extent necessary to obtain reimbursement.
12. Effective Period, Termination and Amendment
This Contract shall become effective as of its execution, shall continue in full force and effect until terminated as hereinafter provided, may be amended at any time by mutual agreement of the parties hereto and may be terminated by either party by an instrument in writing delivered or mailed, postage prepaid to the other party, such termination to take effect not sooner than thirty (30) days after the date of such delivery or mailing; provided, however that the Custodian shall not act under Section 2.10 hereof in the absence of receipt of an initial certificate of the Secretary or an Assistant Secretary that the Board of Directors of the Fund has approved the initial use of a particular Securities System, as required by Rule 17f-4 under the Investment Company Act of 1940, as amended and that the Custodian shall not act under Section 2.11 hereof in the absence of receipt of an initial certificate of the Secretary or an Assistant Secretary that the Board of Directors has approved the initial use of the Direct Paper System; provided further, however, that the Fund shall not amend or terminate this Contract in contravention of any applicable federal or state regulations, or any provision of the Articles of Incorporation, and further provided, that the Fund may at any time by action of its Board of Directors (i) substitute another bank or trust company for the Custodian by giving notice as described above to the Custodian, or (ii) immediately terminate this Contract in the event of the appointment of a conservator or receiver for the Custodian by the Comptroller of the Currency or upon the happening of a like event at the direction of an appropriate regulatory agency or court of competent jurisdiction.
Upon termination of the Contract, the Fund shall pay to the Custodian such compensation as may be due as of the date of such termination and shall likewise reimburse the Custodian for its costs, expenses and disbursements.
13. Successor Custodian
If a successor custodian shall be appointed by the Board of Directors of the Fund, the Custodian shall, upon termination, deliver to such successor custodian at the office of the Custodian, duly endorsed and in the form for transfer, all securities then held by it hereunder and shall transfer to an account of the successor custodian all of the Fund's securities held in a Securities System.
If no such successor custodian shall be appointed, the Custodian shall, in like manner, upon receipt of a certified copy of a vote of the Board of Directors of the Fund, deliver at the office of the Custodian and transfer such securities, funds and other properties in accordance with such vote.
In the event that no written order designating a successor custodian or certified copy of a vote of the Board of Directors shall have been delivered to the Custodian on or before the date when such termination shall become effective, then the Custodian shall have the right to deliver to a bank or trust company, which is a "bank" as defined in the Investment Company Act of 1940, doing business in Boston, Massachusetts, of its own selection, having an aggregate capital, surplus, and undivided profits, as shown by its last published report, of not less than $25,000,000, all securities, funds and other properties held by the Custodian and all instruments held by the Custodian relative thereto and all other property held by it under this Contract and to transfer to an account of such successor custodian all of the Fund's securities held in any Securities System. Thereafter, such bank or trust company shall be the successor of the Custodian under this Contract.
In the event that securities, funds and other properties remain in the possession of the Custodian after the date of termination hereof owing to failure of the Fund to procure the certified copy of the vote referred to or of the Board of Directors to appoint a successor custodian, the Custodian shall be entitled to fair compensation for its services during such period as the Custodian retains possession of such securities, funds and other properties and the provisions of this Contract relating to the duties and obligations of the Custodian shall remain in full force and effect.
14. Interpretive and Additional Provisions
In connection with the operation of this Contract, the Custodian and the Fund, may from time to time agree on such provisions interpretive of or in addition to the provisions of this Contract
as may in their joint opinion be consistent with the general tenor of this Contract. Any such interpretive or additional provisions shall be in a writing signed by both parties and shall be annexed hereto, provided that no such interpretive or additional provisions shall contravene any applicable federal or state regulations or any provision of the Articles of Incorporation of the Fund. No interpretive or additional provisions made as provided in the preceding sentence shall be deemed to be an amendment of this Contract.
15. Massachusetts Law to Apply
This Contract shall be construed and the provisions thereof interpreted under and in accordance with laws of The Commonwealth of Massachusetts.
16. Prior Contracts
This Contract supersedes and terminates, as of the date hereof, all prior contracts between the Fund and the Custodian relating to the custody of the Fund's assets.
17. Shareholder Communications Election
Securities and Exchange Commission Rule 14b-2 requires banks which hold securities for the account of customers to respond to requests by issuers of securities for the names, addresses and holdings of beneficial owners of securities of that issuer held by the bank unless the beneficial owner has expressly objected to disclosure of this information. In order to comply with the rule, the Custodian needs the Fund to indicate whether it authorizes the Custodian to provide the Fund's name, address, and share position to requesting companies whose securities the Fund owns. If the Fund tells the Custodian "no", the Custodian will not provide this information to requesting companies. If the Fund tells the Custodian "yes" or does not check either "yes" or "no" below, the Custodian is required by the rule to treat the Fund as consenting to disclosure of this information for all securities owned by the Fund or any funds or accounts established by the Fund. For the Fund's protection, the Rule prohibits the requesting company from using the Fund's name and address for any purpose other than corporate communications. Please indicate below whether the Fund consents or objects by checking one of the alternatives below.
YES [ ] The Custodian is authorized to release the Fund's name, address, and share positions. NO [ ] The Custodian is not authorized to release the Fund's name, address, and share positions. |
IN WITNESS WHEREOF, each of the parties has caused this instrument to be executed in its name and behalf by its duly authorized representative and its seal to be hereunder affixed as of the day of , 1995.
ATTEST THE GABELLI CONVERTIBLE SECURITIES FUND
____________________ By____________________________________
ATTEST STATE STREET BANK AND TRUST COMPANY
____________________ By____________________________________
Executive Vice President
Schedule A
The following foreign banking institutions and foreign securities depositories have been approved by the Board of Directors of the Gabelli Convertible Securities Fund for use as sub-custodians for the Fund's securities and other assets:
(Insert banks and securities depositories)
Certified:
Date: ___________________
Exhibit (1)
[Letterhead of Miles & Breckbridge, a Professional Corporation]
May 8, 1997
The Gabelli Convertible Securities Fund, Inc.
One Corporate Center
Rye, New York 10580
Ladies and Gentlemen:
We have acted as special Maryland counsel to the Gabelli Convertible Securities Fund, Inc. (the "Fund"), in connection with the registration by the Fund of 1,200,000 shares of its __% Cumulative Preferred Stock, liquidation preference $25 per share (the "Preferred Shares") pursuant to a Registration Statement filed on Form N-2 with the Securities and Exchange Commission under the Securities Act of 1933, as amended (the "Registration Statement") and the proposed issuance and sale of the Preferred Shares.
You have requested our opinion concerning certain matters involving the law of the State of Maryland in connection with the registration of the Shares. We have prepared this opinion letter as attorneys admitted to practice law in the State of Maryland, and our opinion is limited to the laws of the State of Maryland in effect as of the date hereof. We express no opinion herein as to any matters of federal law or the laws of any other state or jurisdiction.
In our capacity as special Maryland counsel to the Fund and for the purpose of rendering the opinion expressed herein, we have examined originals or copies of the following documents:
1. The Charter of the Fund as on file with the Maryland State Department of Assessments and Taxation ("SDAT") as of May 2, 1997; and
2. Certificates of the Corporate Secretary and Treasurer of the Fund dated as of the date of this letter, including all exhibits attached thereto (which exhibits include a copy of the bylaws of the Fund, as amended and restated as of the date of this letter, and certain resolutions adopted by the Board of Directors of the Fund); and
The Board of Directors
The Gabelli Convertible Securities Fund, Inc.
May 8, 1996
3. A form of the Articles Supplementary of the Fund which establish the rights, preferences, voting powers, limitations, restrictions, qualifications and terms and conditions of redemption of the Preferred Shares (the "Articles Supplementary"); and
5. Such other documents, instruments and certificates as we have determined to be reasonably necessary in order to render the opinion expressed herein.
In rendering the opinion expressed in this letter, we have assumed that all documents submitted to us as originals are authentic, all documents submitted as certified or photostatic copies conform to the original documents, all signatures on all documents submitted to us for examination are genuine, all natural persons who executed any of the documents or certificates that we have reviewed or relied upon had, at the time of such execution, legal capacity, and all public records reviewed by us are accurate and complete.
In rendering the opinion expressed herein, we have relied as to the factual matters contained therein on the Certificates of Corporate Secretary and Treasurer and have made no independent investigation or inquiry as to such matters.
Based upon the foregoing, and subject to the foregoing assumptions and the other assumptions and qualifications set forth herein, it is our opinion that, if the Articles Supplementary shall be duly executed and acknowledged and filed with the SDAT in accordance with the Maryland General Corporation Law prior to the issuance of any of the Preferred Shares and each of the Preferred Shares shall have been issued and sold against payment and receipt of a purchase price equal to at least its par value or its net asset value, whichever is greater, and in accordance with the resolutions of the Board of Directors of the Fund which authorize the issuance and sale thereof, each of the Preferred Shares shall be legally issued, fully paid and nonassessable.
For purposes of our opinion set forth above, we have assumed that (a) there will be no amendment to Charter or bylaws of the Fund subsequent to the date of this letter and prior to the
The Board of Directors
The Gabelli Convertible Securities Fund, Inc.
May 8, 1996
issuance of any of the Preferred Shares other than the filing of the Articles Supplementary with the SDAT, (b) the Fund shall not engage in a merger or consolidation with any other entity subsequent to the date of this letter and prior to the date of the issuance of any of the Preferred Shares in which the Fund would not be the successor entity or which would result in any change to the Charter of the Fund, and (c) no proceeding for the dissolution or liquidation of the Fund shall be commenced by or against the Fund or authorized by the Board of Directors of the Fund subsequent to the date of this letter and prior to the issuance of the Preferred Shares.
We hereby consent to be named in the Registration Statement as the attorneys who will pass upon certain matters relating to the laws of the State of Maryland, to the reference to us under the heading "Legal Matters" in the Amendment and to the filing of this opinion as an exhibit to the Registration Statement. Notwithstanding the foregoing, in giving our consent, we do not hereby admit that we are in the category of persons whose consent is required under Section 7 of the Act or the rules and regulation of the Commission thereunder.
Very truly yours,
MILES & STOCKBRIDGE,
a Professional Corporation
By /s/ John B. Frisch -------------------------- Principal |