Opinion on the Financial Statements
We have audited the accompanying statement
of assets and liabilities, including the schedule of investments, of The Gabelli Convertible and Income Securities Fund Inc. (the
“Fund”) as of December 31, 2020, the related statements of operations and cash flows for the year ended December 31,
2020, the statement of changes in net assets attributable to common stockholders for each of the two years in the period ended
December 31, 2020, including the related notes, and the financial highlights for each of the five years in the period ended December
31, 2020 (collectively referred to as the “financial statements”). In our opinion, the financial statements present
fairly, in all material respects, the financial position of the Fund as of December 31, 2020, the results of its operations and
its cash flows for the year then ended, the changes in its net assets attributable to common stockholders for each of the two years
in the period ended December 31, 2020 and the financial highlights for each of the five years in the period ended December 31,
2020 in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility
of the Fund’s management. Our responsibility is to express an opinion on the Fund’s financial statements based on our
audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and
are required to be independent with respect to the Fund in accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits of these financial
statements in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.
Our audits included performing procedures
to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures
that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures
in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made
by management, as well as evaluating the overall presentation of the financial statements. Our procedures included confirmation
of securities owned as of December 31, 2020 by correspondence with the custodian. We believe that our audits provide a reasonable
basis for our opinion.
/s/PricewaterhouseCoopers LLP
New York, New York
February 26, 2021
We have served as the auditor of one or
more investment companies in the Gabelli/GAMCO Fund Complex since 1986.
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The
Gabelli Convertible and Income Securities Fund Inc.
Additional
Fund Information (Unaudited)
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Summary of Updated Information Regarding
the Fund
The following information in this annual
report is a summary of certain information about the Fund and changes since the Fund’s last annual report to shareholders
as of December 31, 2019, for the fiscal year ended December 31, 2020. This information may not reflect all of the changes that
have occurred since you invested in the Fund.
INVESTMENT OBJECTIVE AND
POLICIES
Investment Objective
The investment objective of the Fund is
to seek a high level of total return on its assets. The Fund seeks to achieve its investment objective through a combination of
current income and capital appreciation. There is no assurance that this objective will be achieved. It is, however, a fundamental
policy of the Fund and cannot be changed without stockholder approval.
Under normal circumstances the Fund will
invest at least 80% of the value of its total assets (taken at current value) in “convertible securities,” i.e., securities
(bonds, debentures, notes, stocks and other similar securities) that are convertible into common stock or other equity securities,
and “income securities,” i.e., nonconvertible debt or equity securities having a history of regular payments or accrual
of income to holders. Securities received upon conversion of a convertible security will not be included in the calculation of
the percentage of Fund assets invested in convertible securities but may be retained in the Fund’s portfolio to permit orderly
disposition or to establish long-term holding periods for federal income tax purposes. The Fund expects to continue its practice
of focusing on convertible securities to the extent attractive opportunities are available. We cannot assure you that the Fund
will achieve its investment objective.
The Fund may invest without limit in securities
rated below investment grade by recognized statistical rating agencies or unrated securities of comparable quality, including securities
of issuers in default, which are likely to have the lowest rating; provided, however, that not more than 50% of the Fund’s
portfolio will consist of securities rated CCC or lower by S&P or Caa or lower by Moody’s or, if unrated, are of comparable
quality as determined by the Investment Adviser, and 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. Securities rated below investment grade, which may be preferred shares or
debt, are predominantly speculative and involve major risk exposure to adverse conditions. Securities that are rated lower than
“BBB” by S&P, or lower than “Baa” by Moody’s or unrated securities considered by the Investment
Adviser to be of comparable quality, are commonly referred to as “junk bonds” or “high yield” securities.
The Fund may invest up to 25% of its total
assets in securities of non-U.S. issuers, which are generally denominated in foreign currencies. The Fund may also purchase sponsored
American Depository Receipts (“ADRs”) or U.S. denominated securities of foreign issuers, which will not be included
in the Fund’s 25% foreign securities limitation.
The Fund has no limit on the amount of its
net assets it may invest in unregistered and otherwise illiquid investments; however, the Fund currently does not intend to invest
more than 15% of its total net assets in illiquid convertible securities or income securities.
The Fund may invest up to 20% of its total
assets (taken at current value and subject to any restrictions appearing elsewhere in this Registration Statement) in any combination
and quantity of securities that do not generate any income, such as common stocks that do not pay dividends. In selecting any of
the foregoing securities for investment, the factors that will be considered by the Investment Adviser include the Investment Adviser’s
evaluation of the underlying value of the assets and business of the issuers of the securities, the potential for capital appreciation,
the price of the securities, the issuer’s balance sheet characteristics and the perceived skills and integrity of the issuer’s
management.
During periods when it is deemed necessary
for temporary defensive purposes, the Fund may invest without limit in high quality money market instruments, including commercial
paper of domestic and foreign corporations, certificates of deposit, bankers’ acceptances and other obligations of domestic
and foreign banks and obligations issued or guaranteed by the United States government, its instrumentalities or agencies and,
subject to statutory limitations, unaffiliated money market mutual funds, unless an exemptive order permits the Fund to invest
in affiliated money market funds. The yield on these securities will, as a general matter, tend to be lower than the yield on other
securities to be purchased by the Fund. See “ — Investment Practices — Temporary Defensive Investments.”
Investment Methodology of the Fund
In selecting securities for the Fund, the
Investment Adviser normally considers the following factors, among others:
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the Investment Adviser’s own evaluations of the private market value (as defined below),
cash flow, earnings per share and other fundamental aspects of the underlying assets and business of the company;
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the interest or dividend income generated by the securities;
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the potential for capital appreciation of the securities and any underlying common stocks;
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The Gabelli Convertible
and Income Securities Fund Inc.
Additional Fund Information (Continued) (Unaudited)
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the prices of the securities relative to comparable securities;
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whether the securities are entitled to the benefits of call protection or other protective covenants;
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the existence of any anti-dilution protections or guarantees of the security; and
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the diversification of the Fund’s portfolio as to issuers.
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The Investment Adviser’s investment
philosophy with respect to debt and equity securities is to identify assets that are selling in the public market at a discount
to their private market value. The Investment Adviser defines private market value as the value informed purchasers are willing
to pay to acquire assets with similar characteristics. The Investment Adviser also normally evaluates an issuer’s free cash
flow and long-term earnings trends. Finally, the Investment Adviser looks for a catalyst, something indigenous to the company,
its industry or country that will surface additional value.
Certain Investment Practices
Convertible Securities. A
convertible security is a bond, debenture, note, stock or other similar security that may be converted into or exchanged for a
prescribed amount of common stock or other equity security of the same or a different issuer within a particular period of time
at a specified price or formula. A convertible security may also be structured so that it is convertible at the option of the holder
or the issuer, or subject to mandatory conversion. Before conversion, convertible securities have characteristics similar to nonconvertible
debt securities in that they ordinarily provide a stream of income with generally higher yields than those of common stock of the
same or similar issuers. Convertible securities are senior in rank to common stock in a corporation’s capital structure and,
therefore, generally entail less risk than the corporation’s common stock, although the extent to which such risk is reduced
depends in large measure upon the degree to which the convertible security sells above its value as a fixed income security.
The Fund believes that the characteristics
of convertible securities make them appropriate investments for an investment company seeking a high level of total return on its
assets. These characteristics include the potential for capital appreciation if the value of the underlying common stock increases,
the relatively high yield received from dividend or interest payments as compared to common stock dividends and decreased risks
of decline in value, relative to the underlying common stock due to their fixed income nature. As a result of the conversion feature,
however, the interest rate or dividend preference on a convertible security is generally less than would be the case if the securities
were not convertible. During periods of rising interest rates, it is possible that the potential for capital gain on a convertible
security may be less than that of a common stock equivalent if the yield on the convertible security is at a level that causes
it to sell at a discount.
Every convertible security may be valued,
on a theoretical basis, as if it did not have a conversion privilege. This theoretical value is determined by the yield it provides
in comparison with the yields of other securities of comparable character and quality that do not have a conversion privilege.
This theoretical value, which may change with prevailing interest rates, the credit rating of the issuer and other pertinent factors,
often referred to as the “investment value,” represents the security’s theoretical price support level.
“Conversion value” is the amount
a convertible security would be worth in market value if it were to be exchanged for the underlying equity security pursuant to
its conversion privilege. Conversion value fluctuates directly with the price of the underlying equity security, usually common
stock. If, because of low prices for the common stock, the conversion value is substantially below the investment value, the price
of the convertible security is governed principally by the factors described in the preceding paragraph. If the conversion value
rises near or above its investment value, the price of the convertible security generally will rise above its investment value
and, in addition, will sell at some premium over its conversion value. This premium represents the price investors are willing
to pay for the privilege of purchasing a fixed-income security with a possibility of capital appreciation due to the conversion
privilege. Accordingly, the conversion value of a convertible security is subject to equity risk, that is, the risk that the price
of an equity security will fall due to general market and economic conditions, perceptions regarding the industry in which the
issuer participates or the issuing company’s particular circumstances. If the appreciation potential of a convertible security
is not realized, its conversion value premium may not be recovered.
In its selection of convertible securities
for the Fund, the Investment Adviser will not emphasize either investment value or conversion value, but will consider both in
light of the Fund’s overall investment objective. See “Convertible Securities” in the Statement of Additional
Information. The Fund may convert a convertible security that it holds:
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when necessary to permit orderly disposition of the investment when a convertible security approaches
maturity or has been called for redemption;
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to facilitate a sale of the position;
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if the dividend rate on the underlying common stock increases above the yield on the convertible
security; or
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whenever the Investment Adviser believes it is otherwise in the best interests of the Fund.
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The Gabelli Convertible
and Income Securities Fund Inc.
Additional Fund aInformation (Continued) (Unaudited)
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Convertible securities are generally not
investment grade, that is, not rated within the four highest categories by S&P and Moody’s. To the extent that such convertible
securities and other nonconvertible debt securities, which are acquired by the Fund consistent with the factors considered by the
Investment Adviser as described in the prospectus, are rated lower than investment grade or are not rated, there would be a greater
risk as to the timely repayment of the principal of, and timely payment of interest or dividends on, those securities. It is expected
that not more than 50% of the Fund’s portfolio will consist of securities rated CCC or lower by S&P or Caa or lower by
Moody’s or, if unrated, are of comparable quality as determined by the Investment Adviser. Those securities and securities
rated BB or lower by S&P or Ba or lower by Moody’s are often referred to in the financial press as “junk bonds”
and may include securities of issuers in default. “Junk bonds” are considered by the rating agencies to be predominantly
speculative and may involve major risk exposure to adverse conditions. See “Risk Factors and Special Considerations- Convertible
Securities-Credit Risk.” 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.
The Fund’s investments in securities
of issuers in default will be limited to not more than 5% of the total assets of the Fund. Further, the Fund will invest in securities
of issuers in default only when the Investment Adviser believes that such issuers will emerge from bankruptcy and the value of
such securities will appreciate. By investing in securities of issuers in default the Fund bears the risk that such issuers will
not emerge from bankruptcy or that the value of such securities will not appreciate.
The Fund has no independent limit on the
amount of its net assets it may invest in unregistered and otherwise illiquid securities and other investments. The current intention
of the Investment Adviser is not to invest in excess of 15% of the Fund’s net assets in illiquid convertible securities or
income securities. Common stockholders will be notified if the Investment Adviser changes its intention. Investments in unregistered
or otherwise illiquid securities entail certain risks related to the fact that they cannot be sold publicly in the United States
without registration under the Securities Act. See “Risk Factors and Special Considerations — Asset Class Risks.”
Synthetic Convertible Securities.
The Fund may also invest in “synthetic” convertible securities, which, for purposes of its investment policies, the
Fund considers to be convertible securities. A “synthetic” convertible security may be created by the Fund or by a
third party by combining separate securities that possess the two principal characteristics of a traditional convertible security:
an income producing component and a convertible component. Synthetic convertible securities differ from convertible securities
whose conversion privilege may be evidenced by warrants attached to the security or acquired as part of a unit with the security.
The income-producing component is achieved by investing in non-convertible, income-producing securities such as bonds, preferred
stocks and money market instruments. The convertible component is achieved by investing in securities or instruments such as warrants
or options to buy common stock at a certain exercise price, or options on a stock index. Unlike a traditional convertible security,
which is a single security having a single market value, a synthetic convertible comprises two or more separate securities, each
with its own market value. Because the “market value” of a synthetic convertible security is the sum of the values
of its income producing component and its convertible component, the value of a synthetic convertible security may respond differently
to market fluctuations than a traditional convertible security. The Fund also may purchase synthetic convertible securities created
by other parties, including convertible structured notes. Convertible structured notes are income-producing debentures linked to
equity. Convertible structured notes have the attributes of a convertible security; however, the issuer of the convertible note
(typically an investment bank), rather than the issuer of the underlying common stock into which the note is convertible, assumes
credit risk associated with the underlying investment and the Fund in turn assumes credit risk associated with the issuer of the
convertible note.
Foreign Securities. The Fund
may invest up to 25% of its total assets in securities of non-U.S. issuers, which are generally denominated in foreign currencies.
The Investment Adviser believes that investing
in foreign securities offers both enhanced investment opportunities and additional risks beyond those present in U.S. securities.
Investing in foreign securities may provide increased diversification by adding securities from various foreign countries (i) that
offer different investment opportunities, (ii) that generally are affected by different economic trends and (iii) whose stock markets
may not be correlated with U.S. markets. At the same time, these opportunities and trends involve risks that may not be encountered
in U.S. investments.
The following considerations comprise both
risks and opportunities not typically associated with investing in U.S. securities: fluctuations in exchange rates of foreign currencies;
possible imposition of exchange control regulations or currency restrictions that would prevent cash from being brought back to
the United States; less public information with respect to issuers of securities; less government supervision of stock exchanges,
securities brokers and issuers of securities; lack of uniform accounting, auditing and financial reporting standards; lack of uniform
settlement periods and trading practices; less liquidity and frequently greater price volatility in foreign markets than in the
United States; possible imposition of foreign taxes; the possibility of expropriation or confiscatory taxation, seizure or nationalization
of foreign bank deposits or other assets; the adoption of foreign government restrictions and other adverse political, social or
diplomatic developments that could affect investment; difficulty in obtaining or enforcing a court judgment abroad; sometimes less
advantageous legal, operational and financial protections applicable to foreign sub-custodial arrangements; and the historically
lower level of responsiveness of foreign management to shareholder concerns (such as dividends and return on investment).
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The Gabelli Convertible
and Income Securities Fund Inc.
Additional Fund Information (Continued) (Unaudited)
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The Fund may purchase sponsored American
Depository Receipts (“ADRs”) or U.S. dollar denominated securities of foreign issuers, which will not be considered
foreign securities for purposes of the Fund’s investment policies. ADRs are receipts issued by U.S. banks or trust companies
in respect of securities of foreign issuers held on deposit for use in the U.S. securities markets. See “Risk Factors and
Special Considerations — Foreign Securities.”
Emerging Market Countries.
The risks described above for foreign securities, including the risks of nationalization and expropriation of assets, are typically
increased to the extent that the Fund invests in companies headquartered in developing, or emerging market, countries. Investments
in securities of companies headquartered in such countries may be considered speculative and subject to certain special risks.
The political and economic structures in many of these countries may be in their infancy and developing rapidly, and such countries
may lack the social, political and economic characteristics of more developed countries. Certain of these countries have in the
past failed to recognize private property rights and have at times nationalized and expropriated the assets of private companies.
Some countries have inhibited the conversion of their currency to another. The currencies of certain emerging market countries
have experienced devaluation relative to the U.S. dollar, and future devaluations may adversely affect the value of the Fund’s
assets denominated in such currencies. Some emerging market countries have experienced substantial rates of inflation for many
years. Continued inflation may adversely affect the economies and securities markets of such countries. In addition, unanticipated
political or social developments may affect the value of the Fund’s investments in these countries and the availability of
the Fund of additional investments in these countries. The small size, limited trading volume and relative inexperience of the
securities markets in these countries may make the Fund’s investments in such countries illiquid and more volatile than investments
in more developed countries, and the Fund may be required to establish special custodial or other arrangements before making investments
in these countries. There may be little financial or accounting information available with respect to companies located in these
countries, and it may be difficult as a result to assess the value or prospects of an investment in such companies.
Income Securities. Although
it is the Fund’s policy to invest in convertible securities to the extent attractive opportunities are available, the Fund
may also invest in income securities other than convertible securities that are expected to periodically accrue or generate income
for their holders. Such income securities include (i) fixed income securities such as bonds, debentures, notes, preferred stock,
short-term discounted Treasury Bills or certain securities of the U.S. government sponsored instrumentalities, as well as money
market mutual funds that invest in those securities, which, in the absence of an applicable exemptive order, will not be affiliated
with the Investment Adviser, and (ii) common and preferred stocks of issuers that have historically paid periodic dividends. Fixed
income securities obligate the issuer to pay to the holder of the security a specified return, which may be either fixed or reset
periodically in accordance with the terms of the security. Fixed income securities generally are senior to an issuer’s common
stock and their holders generally are entitled to receive amounts due before any distributions are made to common stockholders.
Common stocks, on the other hand, generally do not obligate an issuer to make periodic distributions to holders.
The market value of fixed income securities,
especially those that provide a fixed rate of return, may be expected to rise and fall inversely with interest rates and in general
is affected by the credit rating of the issuer, the issuer’s performance and perceptions of the issuer in the market place.
The market value of callable or redeemable fixed income securities may also be affected by the issuer’s call and redemption
rights. In addition, it is possible that the issuer of fixed income securities may not be able to meet its interest or principal
obligations to holders. Further, holders of non-convertible fixed income securities do not participate in any capital appreciation
of the issuer.
The Fund may also invest in obligations
of government sponsored instrumentalities. Unlike non-U.S. government securities, obligations of certain agencies and instrumentalities
of the U.S. government, such as the Government National Mortgage Association, are supported by the “full faith and credit”
of the U.S. government; others, such as those of the Export-Import Bank of the U.S., are supported by the right of the issuer to
borrow from the U.S. Treasury; others, such as those of the Federal National Mortgage Association, are supported by the discretionary
authority of the U.S. government to purchase the agency’s obligations; and still others, such as those of the Student Loan
Marketing Association, are supported only by the credit of the instrumentality. No assurance can be given that the U.S. government
would provide financial support to U.S. government sponsored instrumentalities if it is not obligated to do so by law. Although
the Fund may invest in all types of obligations of agencies and instrumentalities of the U.S. government, the Fund currently intends
to invest only in obligations that are supported by the “full faith and credit” of the U.S. government.
The Fund also may invest in common stock
of issuers that have historically paid periodic dividends or otherwise made distributions to common stockholders. Unlike fixed
income securities, dividend payments generally are not guaranteed and so may be discontinued by the issuer at its discretion or
because of the issuer’s inability to satisfy its liabilities. Further, an issuer’s history of paying dividends does
not guarantee that it will continue to pay dividends in the future. In addition to dividends, under certain circumstances the holders
of common stock may benefit from the capital appreciation of the issuer.
Common stocks represent the residual ownership
interest in the issuer and holders of common stock are entitled to the income and increase in the value of the assets and business
of the issuer after all of its debt obligations and obligations to preferred shareholders
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The Gabelli Convertible and Income Securities Fund Inc.
Additional Fund Information (Continued) (Unaudited)
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are satisfied. Common stocks generally have
voting rights. Common stocks fluctuate in price in response to many factors including historical and prospective earnings of the
issuer, the value of its assets, general economic conditions, interest rates, investor perceptions and market liquidity.
Non-Investment Grade Securities.
The Fund may invest in securities rated below investment grade by recognized statistical rating agencies or unrated securities
of comparable quality. The prices of these lower grade securities are more sensitive to negative developments, such as a decline
in the issuer’s revenues or a general economic downturn, than are the prices of higher grade securities. Securities of below
investment grade quality — those securities rated below “Baa” by Moody’s or below “BBB” by
S&P (or unrated securities of comparable quality) — are predominantly speculative with respect to the issuer’s
capacity to pay interest and repay principal when due and therefore involve a greater risk of default. Securities rated below investment
grade commonly are referred to as “junk bonds” or “high yield” securities and generally pay a premium above
the yields of U.S. government securities or securities of investment grade issuers because they are subject to greater risks than
these securities. These risks, which reflect their speculative character, include the following:
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greater credit risk and risk of default;
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potentially greater sensitivity to general economic or industry conditions;
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potential lack of attractive resale opportunities (illiquidity); and
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additional expenses to seek recovery from issuers who default.
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In addition, the prices of these non-investment
grade securities are more sensitive to negative developments, such as a decline in the issuer’s revenues or a general economic
downturn, than are the prices of higher grade securities. Non-investment grade securities tend to be less liquid than investment
grade securities. The market value of non-investment grade securities may be more volatile than the market value of investment
grade securities and generally tends to reflect the market’s perception of the creditworthiness of the issuer and short term
market developments to a greater extent than investment grade securities, which primarily reflect fluctuations in general levels
of interest rates.
Ratings are relative and subjective, and
not absolute standards of quality. Securities ratings are based largely on the issuer’s historical financial condition and
the rating agencies’ analysis at the time of rating. Consequently, the rating assigned to any particular security is not
necessarily a reflection of the issuer’s current financial condition.
The Fund may purchase securities of companies
that are experiencing significant financial or business difficulties, including companies involved in bankruptcy or other reorganization
and liquidation proceedings. Although such investments may result in significant financial returns to the Fund, they involve a
substantial degree of risk. The level of analytical sophistication, both financial and legal, necessary for successful investments
in issuers experiencing significant business and financial difficulties is unusually high. There can be no assurance that the Fund
will correctly evaluate the value of the assets collateralizing its investments or the prospects for a successful reorganization
or similar action. In any reorganization or liquidation proceeding relating to a portfolio investment, the Fund may lose all or
part of its investment or may be required to accept collateral with a value less than the amount of the Fund’s initial investment.
As a part of its investments in non-investment
grade securities, the Fund may invest in the securities of issuers in default. The Fund invests in securities of issuers in default
only when the Investment Adviser believes that such issuers will honor their obligations and emerge from bankruptcy protection
and that the value of such issuers’ securities will appreciate. By investing in the securities of issuers in default, the
Fund bears the risk that these issuers will not continue to honor their obligations or emerge from bankruptcy protection or that
the value of these securities will not otherwise appreciate.
In addition to using statistical rating
agencies and other sources, the Investment Adviser will also perform its own analysis of issuers in seeking investments that it
believes to be underrated (and thus higher yielding) in light of the financial condition of the issuer. Its analysis of issuers
may include, among other things, current and anticipated cash flow and borrowing requirements, value of assets in relation to historical
cost, strength of management, responsiveness to business conditions, credit standing and current anticipated results of operations.
In selecting investments for the Fund, the Investment Adviser may also consider general business conditions, anticipated changes
in interest rates and the outlook for specific industries.
Subsequent to its purchase by the Fund,
an issue of securities may cease to be rated or its rating may be reduced. In addition, it is possible that statistical rating
agencies might change their ratings of a particular issue to reflect subsequent events on a timely basis. Moreover, such ratings
do not assess the risk of a decline in market value. None of these events will require the sale of the securities by the Fund,
although the Investment Adviser will consider these events in determining whether the Fund should continue to hold the securities.
Income securities, including non-investment
grade securities and comparable unrated securities, frequently have call or buy-back features
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The Gabelli Convertible
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Additional Fund Information (Continued) (Unaudited)
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that permit their issuers to call or repurchase
the securities from their holders, such as the Fund. If an issuer exercises these rights during periods of declining interest rates,
the Fund may have to replace the security with a lower yielding security, thus resulting in a decreased return for the Fund.
The market for non-investment grade and
comparable unrated securities has at various times, particularly during times of economic recession, experienced substantial reductions
in market value and liquidity. Past recessions have adversely affected the value of such securities as well as the ability of certain
issuers of such securities to repay principal and pay interest thereon or to refinance such securities. The market for those securities
could react in a similar fashion in the event of any future economic recession.
Value Investing. The Fund’s
portfolio manager will use various value methods in managing its assets. In selecting securities for the Fund, he evaluates the
quality of a company’s balance sheet, the level of its cash flows and other measures of a company’s financial condition
and profitability. The portfolio manager may also consider other factors, such as a company’s unrecognized asset values,
its future growth prospects or its turnaround potential following an earnings disappointment or other business difficulties. The
portfolio manager then uses these factors to assess the company’s current worth, basing this assessment on either what he
believes a knowledgeable buyer might pay to acquire the entire company or what he thinks the value of the company should be in
the stock market.
The Fund’s portfolio manager generally
invests in securities of companies that are trading significantly below his estimate of the company’s current worth in an
attempt to reduce the risk of overpaying for such companies. Seeking long term growth of capital, he also evaluates the prospects
for the market price of the company’s securities to increase over a two- to five-year period toward this estimate.
The Investment Adviser’s value approach
strives to reduce some of the other risks of investing in the securities of smaller companies (for the Fund’s portfolio taken
as a whole) by evaluating other risk factors. For example, its portfolio manager generally attempts to lessen financial risk by
buying companies with strong balance sheets and low leverage.
While there can be no assurance that this
risk-averse value approach will be successful, the Investment Adviser believes that it can reduce some of the risks of investing.
Although the Investment Adviser’s
approach to security selection seeks to reduce downside risk to the Fund’s portfolio, especially during periods of broad
stock market declines, it may also potentially have the effect of limiting gains in strong up markets.
Risk Arbitrage. Subject to
the requirement of investing at least 80% of its assets in convertible or income securities, the Fund may invest without limitation
in securities pursuant to “risk arbitrage” strategies or in other investment funds managed pursuant to such strategies.
Risk arbitrage investments are made 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 judgment of the Investment Adviser, there is a reasonable prospect of total return significantly greater than the brokerage
and other transaction expenses involved. Risk arbitrage strategies attempt to exploit merger activity to capture the spread between
current market values of securities and their values after successful completion of a merger, restructuring or similar corporate
transaction. Transactions associated with risk arbitrage strategies typically involve the purchases or sales of securities in connection
with announced corporate actions which may include, but are not limited to, mergers, consolidations, acquisitions, transfers of
assets, tender offers, exchange offers, re-capitalizations, liquidations, divestitures, spin-offs and similar transactions. However,
a merger or other restructuring or tender or exchange offer anticipated by the Fund and in which it holds an arbitrage position
may not be completed on the terms contemplated or within the time frame anticipated, resulting in losses to the Fund.
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
but may trade at a discount or premium to what the stated or appraised value of the security would be if the contemplated transaction
were approved or consummated.
Such investments may be advantageous when
the discount significantly overstates the risk of the contingencies involved; significantly undervalues the securities, assets
or cash to be received by shareholders as a result of the contemplated transaction; or fails adequately to recognize the possibility
that the offer or proposal may be replaced or superseded by an offer or proposal of greater value. The evaluation of such contingencies
requires unusually broad knowledge and experience on the part of the Investment Adviser which must appraise not only the value
of the issuer and its component businesses as well as the assets or securities to be received as a result of the contemplated transaction
but also the financial resources and business motivation behind the offer and/or the dynamics and business climate when the offer
or proposal is in process. Since such investments are ordinarily short term in nature, they will tend to increase the turnover
ratio of the Fund, thereby increasing its brokerage and other transaction expenses. Risk arbitrage strategies may also involve
short selling, options hedging and other arbitrage techniques to capture price differentials.
Forward Foreign Currency Exchange
Contracts. Subject to guidelines of our Board of Directors, the Fund may enter into forward foreign currency exchange contracts
to protect the value of its portfolio against uncertainty in the level of future currency exchange rates between a particular foreign
currency and the U.S. dollar or between foreign currencies in which its securities are or may be denominated. 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
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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. Forward currency contracts (i) are traded in a market conducted directly between currency traders (typically,
commercial banks or other financial institutions) and their customers, (ii) generally have no deposit requirements and (iii) are
typically consummated without payment of any commissions. The Fund, however, may enter into forward currency contracts requiring
deposits or involving the payment of commissions. The Fund expects to invest in forward currency contracts for hedging or currency
risk management purposes and not in order to speculate on currency exchange rate movements. The Fund will only enter into forward
currency contracts with parties which it believes to be creditworthy.
In hedging a specific transaction, the Fund
may enter into a forward contract with respect to either the currency in which the transaction is denominated or another currency
deemed appropriate by the Investment Adviser. The amount the Fund may invest in forward currency contracts is limited to the amount
of its aggregate investments in foreign currencies. The use of forward currency contracts may involve certain risks, including
the failure of the counterparty to perform its obligations under the contract, and such use may not serve as a complete hedge because
of an imperfect correlation between movements in the prices of the contracts and the prices of the currencies hedged or used for
cover. The Fund will only enter into forward currency contracts with parties that the Investment Adviser believes to be creditworthy
institutions.
Under current interpretations of the SEC
and its staff under the 1940 Act, the Fund must segregate with its custodian liquid assets, or engage in other SEC or staff approved
measures, to “cover” open positions in certain types of derivative instruments. The purpose of these requirements is
to prevent the Fund from incurring excessive leverage through such instruments. In the case of futures and forward contracts, for
example, that are not required as a result of one or more contractual arrangements to settle for cash only in an amount equal to
the change in value of the contract over its term but rather are, per the terms of the contract, stated to settle through physical
delivery, the Fund must segregate liquid assets equal to such contract’s full notional value while it has an open long position,
or is equal to the market value of the deliverable in the case of an open short position. For this purpose, the “full notional
value” of the contract means the purchase price for the assets underlying the contract (i.e., in the case of a forward currency
contract, the aggregate amount one would pay for the underlying currency). With respect to contracts that the Fund is contractually
obligated to settle for cash in an amount equal to the change in value of the contract, the Fund needs to segregate liquid assets
only in an amount equal to the Fund’s unpaid mark to market obligation rather than the entire notional amount. This is because
the Fund’s maximum potential obligation at that point in time is its net unpaid mark to market obligation rather than the
full notional amount.
Restricted and Illiquid Securities.
The Fund may invest without limit in securities for which there is no readily available trading market or are otherwise illiquid;
however, the Fund currently does not intend to invest more than 15% of its total net assets in illiquid convertible securities
or income securities. Illiquid securities include securities legally restricted as to resale, such as commercial paper issued pursuant
to Section 4(a)(2) of the Securities Act and securities eligible for resale pursuant to Rule 144A thereunder. Section 4(a)(2) and
Rule 144A securities may, however, be treated as liquid by the Investment Adviser pursuant to procedures adopted by the Board,
which require consideration of factors such as trading activity, availability of market quotations and number of dealers willing
to purchase the security. If the Fund invests in Rule 144A securities, the level of portfolio illiquidity may be increased to the
extent that eligible buyers become uninterested in purchasing such securities.
It may be difficult to sell such securities
at a price representing the fair value until such time as such securities may be sold publicly. Where registration is required,
a considerable period may elapse between a decision to sell the securities and the time when it would be permitted to sell. Thus,
the Fund may not be able to obtain as favorable a price as that prevailing at the time of the decision to sell. The Fund may also
acquire securities through private placements under which it may agree to contractual restrictions on the resale of such securities.
Such restrictions might prevent their sale at a time when such sale would otherwise be desirable.
Leverage. As provided in the
1940 Act and subject to certain exceptions, the Fund may issue senior securities (which may be additional classes of stock, such
as preferred shares, or securities representing debt) so long as its total assets, less certain ordinary course liabilities, exceed
300% of the amount of the debt outstanding and exceed 200% of the amount of preferred shares and debt outstanding. The Fund may
also participate in certain derivative transactions that have economic leverage embedded in them, as described below, and participation
in these transactions may, like the issuance of senior securities, leverage the common shares.
The use of leverage magnifies the impact
of changes in net asset value, which means that, all else being equal, the use of leverage results in outperformance on the upside
and underperformance on the downside. In addition, if the cost of leverage exceeds the return on the securities acquired with the
proceeds of leverage, the use of leverage will diminish rather than enhance the return to the Fund. The use of leverage generally
increases the volatility of returns to the Fund. Such volatility may increase the likelihood of the Fund having to sell investments
in order to meet its obligations to make distributions on the preferred shares or principal or interest payments on debt securities,
or to redeem preferred shares or repay debt, when it may be disadvantageous to do so. The Fund’s use of leverage may require
it to sell portfolio investments at inopportune times in order to raise cash to redeem preferred shares or otherwise de-leverage
so
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as to maintain required asset coverage amounts
or comply with any mandatory redemption terms of any outstanding preferred shares. See “Risk Factors and Special Considerations
— Leverage Risk.”
In the event the Fund had both outstanding
preferred shares and senior securities representing debt at the same time, the Fund’s obligations to pay dividends or distributions
and, upon liquidation of the Fund, liquidation payments in respect of its preferred shares would be subordinate to the Fund’s
obligations to make any principal and/or interest payments due and owing with respect to its outstanding senior debt securities.
Accordingly, the Fund’s issuance of senior securities representing debt would have the effect of creating special risks for
the Fund’s preferred shareholders that would not be present in a capital structure that did not include such securities.
See “Risk Factors and Special Considerations — Special Risks Related to Preferred Securities.”
Additionally, the Fund may enter into derivative
transactions that have economic leverage embedded in them. Derivative transactions that the Fund may enter into and the risks associated
with them are described elsewhere in the Prospectus and in the SAI. The Fund cannot assure you that investments in derivative transactions
that have economic leverage embedded in them will result in a higher return on its common shares.
To the extent the terms of such transactions
obligate the Fund to make payments, the Fund may earmark or segregate cash or liquid assets in an amount at least equal to the
current value of the amount then payable by the Fund under the terms of such transactions or otherwise cover such transactions
in accordance with applicable interpretations of the staff of the SEC. If the current value of the amount then payable by the Fund
under the terms of such transactions is represented by the notional amounts of such investments, the Fund would segregate or earmark
cash or liquid assets having a market value at least equal to such notional amounts, and if the current value of the amount then
payable by the Fund under the terms of such transactions is represented by the market value of the Fund’s current obligations,
the Fund would segregate or earmark cash or liquid assets having a market value at least equal to such current obligations. To
the extent the terms of such transactions obligate the Fund to deliver particular securities to extinguish the Fund’s obligations
under such transactions the Fund may “cover” its obligations under such transactions by either (i) owning the securities
or collateral underlying such transactions or (ii) having an absolute and immediate right to acquire such securities or collateral
without additional cash consideration (or, if additional cash consideration is required, having earmarked or segregated an appropriate
amount of cash or liquid assets). Such earmarking, segregation or cover is intended to provide the Fund with available assets to
satisfy its obligations under such transactions. As a result of such earmarking, segregation or cover, the Fund’s obligations
under such transactions will not be considered senior securities representing indebtedness for purposes of the 1940 Act, or considered
borrowings, but may create leverage for the Fund. To the extent that the Fund’s obligations under such transactions are not
so earmarked, segregated or covered, such obligations may be considered “senior securities representing indebtedness”
under the 1940 Act and therefore subject to the 300% asset coverage requirement.
These earmarking, segregation or cover requirements
can result in the Fund maintaining securities positions it would otherwise liquidate, segregating or earmarking assets at a time
when it might be disadvantageous to do so or otherwise restrict portfolio management.
Options. The Fund may 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, in return for a premium, gives the holder of the option the right to buy from the writer of the
call option 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 the reverse of a call option, giving the holder of the
option the right, in return for a premium, to sell the underlying security to the writer, at a specified price, and obligating
the writer to purchase the underlying security from the holder upon exercise of the exercise price.
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, with respect to exchange-traded options, 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 on an exchange. 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, prevailing interest rates, the current market price and price
volatility of the underlying security, and the time remaining until the expiration date of the option. Gains and losses on investments
in options depend, in part, on
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the ability of the Investment Adviser to
predict correctly the effect of these factors. The use of options cannot serve as a complete hedge since the price movement of
securities underlying the options will not necessarily follow the price movements of the portfolio securities subject to the hedge.
An option position may be closed out only
on an exchange which provides a secondary market for an option of the same series or in a private transaction. 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 persist 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.
Although the Investment Adviser will attempt
to take appropriate measures to minimize the risks relating to the Fund’s writing of put and call options, there can be no
assurance that the Fund will succeed in any option-writing program it undertakes.
The Fund will not purchase options if, as
a result, the aggregate cost of all outstanding options exceed 10% of the Fund’s total assets.
Futures Contracts and Options on Futures.
The Fund may purchase and sell financial futures contracts and options thereon which are traded on a commodities exchange or board
of trade for certain hedging, yield enhancement and risk management purposes. 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. These futures contracts and related
options may be on debt securities, financial indices, securities indices, U.S. government securities and foreign currencies. The
Investment Adviser has claimed an exclusion from the definition of the term “commodity pool operator” under the Commodity
Exchange Act.
When Issued, Delayed Delivery Securities
and Forward Commitments. The Fund may enter into forward commitments for the purchase or sale of securities, including
on a “when issued” or “delayed delivery” basis, in excess of customary settlement periods for the type
of security involved. 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 it 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
by the Investment Adviser.
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
segregate with its custodian cash or other liquid assets in an aggregate amount at least equal to the amount of its outstanding
forward commitments.
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. Such short sale transactions may be subject to special tax rules, one of the effects of which may be to accelerate
income to the Fund. 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.
Other Derivative Instruments.
The Fund may also utilize other types of derivative instruments, primarily for hedging or risk management purposes. These instruments
include futures, forward contracts, options on such contracts and interest rate, total return and other kinds of swaps. These investment
management techniques generally will not be considered senior securities if the Fund establishes in a segregated account cash or
other liquid securities or sets aside assets on the accounting records equal to the Fund’s obligations in respect of such
techniques. For a further description of such derivative instruments, see “Investment Objective and Policies — Additional
Investment Policies” in the SAI.
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Limitations on the Purchase and Sale
of Futures Contracts, Certain Options, and Swaps. Subject to the guidelines of the Board, the Fund may engage in “commodity
interest” transactions (generally, transactions in futures, certain options, certain currency transactions, and certain types
of swaps) only for bona fide hedging or other permissible transactions in accordance with the rules and regulations of the Commodity
Futures Trading Commission (“CFTC”). Pursuant to amendments by the CFTC to Rule 4.5 under the Commodity Exchange Act
(“CEA”), the Investment Adviser has filed a notice of exemption from registration as a “commodity pool operator”
with respect to the Fund. The Fund and the Investment Adviser are therefore not subject to registration or regulation as a commodity
pool operator under the CEA. In addition, certain trading restrictions are applicable to the Fund as a result of this status. These
trading restrictions permit the Fund to engage in commodity interest transactions that include (i) “bona fide hedging”
transactions, as that term is defined and interpreted by the CFTC and its staff, without regard to the percentage of the Fund’s
assets committed to margin and options premiums and (ii) non-bona fide hedging transactions, provided that the Fund does not enter
into such non-bona fide hedging transactions if, immediately thereafter, either (a) the sum of the amount of initial margin deposits
on the Fund’s existing futures positions or swaps positions and option or swaption 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,
or (b) the aggregate net notional value of the Fund’s commodity interest transactions would not exceed 100% 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 to meeting one of the foregoing trading limitations, the Fund may not market itself as a commodity pool or otherwise
as a vehicle for trading in the futures, options or swaps markets. Therefore, in order to claim the Rule 4.5 exemption, the Fund
is limited in its ability to invest in commodity futures, options, and certain types of swaps (including securities futures, broad
based stock index futures, and financial futures contracts). As a result, the Fund is more limited in its ability to use these
instruments than in the past, and these limitations may have a negative impact on the ability of the Investment Adviser to manage
the Fund, and on the Fund’s performance. If the Investment Adviser was required to register as a commodity pool operator
with respect to the Fund, compliance with additional registration and regulatory requirements would increase Fund expenses. Other
potentially adverse regulatory initiatives could also develop.
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 and incurring transaction costs.
Repurchase Agreements. Repurchase
agreements may be seen as loans by the Fund collateralized by underlying debt securities. Under the terms of a typical repurchase
agreement, the Fund would acquire an underlying debt obligation for a relatively short period (usually not more than one week)
subject to an obligation of the seller to repurchase, and the Fund to resell, the obligation at an agreed price and time. This
arrangement results in a fixed rate of return to the Fund that is not subject to market fluctuations during the holding period.
The Fund bears a risk of loss in the event that the other party to a repurchase agreement defaults on its obligations and the Fund
is delayed in or prevented from exercising its rights to dispose of the collateral securities, including the risk of a possible
decline in the value of the underlying securities during the period in which it seeks to assert these rights. The Investment Adviser,
acting under the supervision of the Board of Directors, reviews the creditworthiness of those banks and dealers with which the
Fund enters into repurchase agreements to evaluate these risks, and monitors on an ongoing basis the value of the securities subject
to repurchase agreements to ensure that the value is maintained at the required level. The Fund will not enter into repurchase
agreements with the Investment Adviser or any of its affiliates.
Swaps. The Fund may enter
into total rate of return, credit default or other types of swaps and related derivatives for various purposes, including to gain
economic exposure to an asset or group of assets that may be difficult or impractical to acquire or for hedging and risk management.
These transactions generally provide for the transfer from one counterparty to another of certain risks inherent in the ownership
of a financial asset such as a common stock or debt instrument. Such risks include, among other things, the risk of default and
insolvency of the obligor of such asset, the risk that the credit of the obligor or the underlying collateral will decline or the
risk that the common stock of the underlying issuer will decline in value. The transfer of risk pursuant to a derivative of this
type may be complete or partial, and may be for the life of the related asset or for a shorter period. These derivatives may be
used as a risk management tool for a pool of financial assets, providing the Fund with the opportunity to gain or reduce exposure
to one or more reference securities or other financial assets (each, a “Reference Asset”) without actually owning or
selling such assets in order, for example, to increase or reduce a concentration risk or to diversify a portfolio. Conversely,
these derivatives may be used by the Fund to reduce exposure to an owned asset without selling it.
Because the Fund would not own the Reference
Assets, the Fund may not have any voting rights with respect to the Reference Assets, and in such cases all decisions related to
the obligors or issuers of the Reference Assets, including whether to exercise certain remedies, will be controlled by the swap
counterparties.
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Total rate of return swap agreements are
contracts in which one party agrees to make periodic payments to another party based on the change in market value of the assets
underlying the contract, which may include a specified security, basket of securities or securities indices during the specified
period, in return for periodic payments based on a fixed or variable interest rate or the total return from other underlying assets.
A credit default swap consists of an agreement
between two parties in which the “buyer” agrees to pay to the “seller” a periodic stream of payments over
the term of the contract and the seller agrees to pay the buyer the par value (or other agreed-upon value) of a referenced debt
obligation upon the occurrence of a credit event with respect to the issuer of the referenced debt obligation. Generally, a credit
event means bankruptcy, failure to pay, obligation acceleration or modified restructuring. The Fund may be either the buyer or
seller in a credit default swap. As the buyer in a credit default swap, the Fund would pay to the counterparty the periodic stream
of payments. If no default occurs, the Fund would receive no benefit from the contract. As the seller in a credit default swap,
the Fund would receive the stream of payments but would be subject to exposure on the notional amount of the swap, which it would
be required to pay in the event of a credit event with respect to the issuer of the referenced debt obligation. Accordingly, if
the Fund sells a credit default swap (or a credit default index swap), it intends at all times to segregate or designate on its
books and records liquid assets in an amount at least equal to the notional amount of the swap (i.e., the cost of payment to the
buyer if a credit event occurs).
The Fund may also enter into equity contract
for difference swap transactions. In an equity contract for difference swap, a set of future cash flows is exchanged between two
counterparties. One of these cash flow streams will typically be based on a reference interest rate combined with the performance
of a notional value of shares of a stock. The other will be based on the performance of the shares of a stock. Depending on the
general state of short term interest rates and the returns on the Fund’s portfolio securities at the time an equity contract
for difference swap transaction reaches its scheduled termination date, there is a risk that the Fund will not be able to obtain
a replacement transaction or that the terms of the replacement will not be as favorable as on the expiring transaction.
Total rate of return swaps and similar derivatives
are subject to many risks, including the possibility that the market will move in a manner or direction that would have resulted
in gain for the Fund had the swap or other derivative not been utilized (in which case it would have been better had the Fund not
engaged in the hedging transactions), the risk of imperfect correlation between the risk sought to be hedged and the derivative
transactions utilized, the possible inability of the counterparty to fulfill its obligations under the swap and potential illiquidity
of the hedging instrument utilized, which may make it difficult for the Fund to close out or unwind one or more hedging transactions.
Total rate of return swaps and related derivatives
are a relatively recent development in the financial markets. Consequently, there are certain legal, tax and market uncertainties
that present risks in entering into such arrangements.
There is currently little or no case law
or litigation characterizing total rate of return swaps or related derivatives, interpreting their provisions, or characterizing
their tax treatment. In addition, additional regulations and laws may apply to these types of derivatives that have not previously
been applied. There can be no assurance that future decisions construing similar provisions to those in any swap agreement or other
related documents or additional regulations and laws will not have an adverse effect on the Fund that utilizes these instruments.
The Fund will monitor these risks and seek to utilize these instruments in a manner that does not lead to undue risk regarding
the tax or other structural elements of the Fund. The Fund will not invest in these types of instruments if the Reference Assets
are commodities except for bona fide hedging or risk management purposes.
Significant Holdings. The
Fund may invest up to 25% of its total assets in securities of issuers in a single industry; however, the Fund does not currently
focus and has no current intent to focus on any particular industry or sector. See “Risk Factors and Special Considerations
—General Risks — Significant Holdings Risk.”
Investment Restrictions. The
Fund has adopted certain investment restrictions as fundamental policies of the Fund. Under the 1940 Act, a fundamental policy
may not be changed without the vote of a majority, as defined in the 1940 Act, of the outstanding voting securities of the Fund
(voting together as a single class). In addition, pursuant to the Fund’s Series B Articles Supplementary, a majority, as
defined in the 1940 Act, of the outstanding preferred shares of the Fund (voting separately as a single class) is also required
to change a fundamental policy. See “Investment Restrictions” in the SAI. The Fund may become subject to rating agency
guidelines that are more limiting than its current investment restrictions in order to obtain and maintain a desired rating on
its preferred shares, if any.
The Fund’s investment objective is
a fundamental policy. Except as expressly listed under “Investment Restrictions” in the SAI, none of the Fund’s
other policies is fundamental, and each may be modified by the Board without shareholder approval.
Temporary Defensive Investments.
Under normal market conditions at least 80% of the value of the Fund’s total assets (taken at current value) will be invested
in “convertible securities,” i.e., securities (bonds, debentures, notes, stocks and other similar securities) that
are convertible into common stock or other equity securities, and “income securities,” i.e., nonconvertible debt or
equity securities having a history of regular payments or accrual of income to holders. However, when a temporary defensive posture
is believed by the Investment Adviser to be warranted (“temporary defensive periods”), the Fund may invest more heavily
in securities of U.S. government sponsored instrumentalities and in money market mutual funds that invest in those securities,
which, in the absence of an exemptive order, are not
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affiliated with the Investment Adviser.
Obligations of certain agencies and instrumentalities of the U.S. government, such as the Government National Mortgage Association,
are supported by the “full faith and credit” of the U.S. government; others, such as those of the Export-Import Bank
of the U.S., are supported by the right of the issuer to borrow from the U.S. Treasury; others, such as those of the Federal National
Mortgage Association, are supported by the discretionary authority of the U.S. government to purchase the agency’s obligations;
and still others, such as those of the Student Loan Marketing Association, are supported only by the credit of the instrumentality.
No assurance can be given that the U.S. government would provide financial support to U.S. government sponsored instrumentalities
if it is not obligated to do so by law. During temporary defensive periods, the Fund may be less likely to achieve its investment
objective. See “Management of the Fund — General.”
Loans of Portfolio Securities.
To increase income, the Fund may lend its portfolio securities to securities broker-dealers or financial institutions if the loan
is collateralized in accordance with applicable regulatory requirements.
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 violate
the terms of the loan or fail financially. There can be no assurance that borrowers will not fail financially. On termination of
the loan, the borrower is required to return the securities to the Fund, and any gain or loss in the market price during the loan
would inure to the Fund. If the other party to the loan petitions for bankruptcy or becomes subject to the United States Bankruptcy
Code, the law regarding the rights of the Fund is unsettled. As a result, under extreme circumstances, there may be a restriction
on the Fund’s ability to sell the collateral and the Fund would suffer a loss. See “Investment Objective and Policies
— Loans of Portfolio Securities” in the SAI.
Warrants and Rights. The Fund
may invest without limit in warrants or rights (other than those acquired in units or attached to other securities) that entitle
the holder to buy equity securities at a specific price for a specific period of time but will do so only if such equity securities
are deemed appropriate by the Investment Adviser for inclusion in the Fund’s portfolio.
Portfolio Turnover. The Fund
will buy and sell securities to accomplish its investment objective. The investment policies of the Fund may lead to frequent changes
in investments, particularly in periods of rapidly fluctuating interest or currency exchange rates.
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. The portfolio turnover rate is computed by dividing the lesser of the amount of the securities
purchased or securities sold by the average monthly value of securities owned during the year (excluding securities whose maturities
at acquisition were one year or less). Higher portfolio turnover may decrease the after-tax return to individual investors in the
Fund to the extent it results in a decrease of the long term capital gains portion of distributions to shareholders.
RISK FACTORS AND SPECIAL
CONSIDERATIONS
Investors should consider the following
risk factors and special considerations associated with investing in the Fund:
General Risks
Convertible Securities Risk.
Convertible securities generally offer lower interest or dividend yields than non-convertible securities of similar quality. The
market values of convertible securities tend to decline as interest rates increase and, conversely, to increase as interest rates
decline. In the absence of adequate anti-dilution provisions in a convertible security, dilution in the value of the Fund’s
holding may occur in the event the underlying stock is subdivided, additional equity securities are issued for below market value,
a stock dividend is declared or the issuer enters into another type of corporate transaction that has a similar effect.
The value of a convertible security is influenced
by the value of the underlying equity security. Convertible debt securities and preferred stocks may depreciate in value if the
market value of the underlying equity security declines or if rates of interest increase. In addition, although debt securities
are liabilities of a corporation which the corporation is generally obligated to repay at a specified time, debt securities, particularly
convertible debt securities, are often subordinated to the claims of some or all of the other creditors of the corporation.
Mandatory conversion securities (securities
that automatically convert into equity securities at a future date) may limit the potential for capital appreciation and, in some
instances, are subject to complete loss of invested capital. Other innovative convertibles include “equity-linked”
securities, which are securities or derivatives that may have fixed, variable, or no interest payments prior to maturity, may convert
(at the option of the holder or on a mandatory basis) into cash or a combination of cash and common stock, and may be structured
to limit the potential for capital appreciation. Equity-linked securities may be illiquid and difficult to value and may be subject
to greater credit risk than that of other convertibles. Moreover, mandatory conversion securities and equity-linked securities
have increased the sensitivity of the convertible securities market to the volatility of the equity markets and to the special
risks of those innovations, which may include risks different from, and possibly greater than, those associated with traditional
convertible securities.
Preferred stocks are equity securities in
the sense that they do not represent a liability of the corporation. In the event of liquidation of the corporation, and after
its creditors have been paid or provided for, holders of preferred stock are generally entitled to a preference as
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The Gabelli Convertible
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Additional Fund Information (Continued) (Unaudited)
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to the assets of the corporation before
any distribution may be made to the holders of common stock. Debt securities normally do not have voting rights. Preferred stocks
may have no voting rights or may have voting rights only under certain circumstances.
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Credit Risk. Credit risk is the
risk that an issuer will fail to pay interest or dividends and principal in a timely manner. Companies that issue convertible securities
may be small to medium-size, and they often have low credit ratings. In addition, the credit rating of a company’s convertible
securities is generally lower than that of its conventional debt securities. Convertible securities are normally considered “junior”
securities — that is, the company usually must pay interest on its conventional debt before it can make payments on its convertible
securities. Credit risk could be high for the Fund, because it could invest in securities with low credit quality. The lower a
debt security is rated, the greater its default risk. As a result, the Fund may incur cost and delays in enforcing its rights against
the issuer.
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Market Risk. Although convertible
securities do derive part of their value from that of the securities into which they are convertible, they are not considered derivative
financial instruments. However, the Fund’s mandatory convertible securities include features which render them more sensitive
to price changes of their underlying securities. Thus they expose the Fund to greater downside risk than traditional convertible
securities, but generally less than that of the underlying common stock.
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Interest Rate Risk for Convertible Securities.
Market interest rates are currently significantly below historical average rates, and the Federal Reserve has begun to raise the
Federal Funds rate, each of which results in more pronounced interest rate risk in the current market environment. These factors
increase the risk that the market interest rates will rise or continue to rise in the future, with a corresponding decline in the
value of convertible securities held by the Fund. Convertible securities are particularly sensitive to interest rate changes when
their predetermined conversion price is much higher than the issuing company’s common stock.
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Sector Risk. Sector risk is the
risk that returns from the economic sectors in which convertible securities are concentrated will trail returns from other economic
sectors. As a group, sectors tend to go through cycles of doing better-or-worse-than the convertible securities market in general.
These periods have, in the past, lasted for as long as several years. Moreover, the sectors that dominate this market change over
time.
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Dilution Risk. In the absence of
adequate anti-dilution provisions in a convertible security, dilution in the value of the Fund’s holding may occur in the
event the underlying stock is subdivided, additional equity securities are issued for below market value, a stock dividend is declared,
or the issuer enters into another type of corporate transaction that has a similar effect.
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Coronavirus (“COVID-19”)
and Global Health Event Risk (Principal). As of the filing date of this report, there is an outbreak of a highly contagious
form of a novel coronavirus known as “COVID-19,” which the World Health Organization has declared a global pandemic.
The United States has declared a national emergency, and for the first time in its history, every state in the United States is
under a federal disaster declaration. Many states, including those in which we and our portfolio companies operate, have issued
orders requiring the closure of non-essential businesses and/or requiring residents to stay at home. The COVID-19 pandemic and
preventative measures taken to contain or mitigate its spread have caused, and are continuing to cause, business shutdowns, cancellations
of events and travel, significant reductions in demand for certain goods and services, reductions in business activity and financial
transactions, supply chain interruptions and overall economic and financial market instability both globally and in the United
States. Such effects will likely continue for the duration of the pandemic, which is uncertain, and for some period thereafter.
While several countries, as well as certain states, counties and cities in the United States, began to relax the early public health
restrictions with a view to partially or fully reopening their economies, many cities, both globally and in the United States,
have since experienced a surge in the reported number of cases and hospitalizations related to the COVID-19 pandemic. This increase
in cases has led to the re-introduction of restrictions and business shutdowns in certain states, counties and cities in the United
States and globally and could continue to lead to the re-introduction of such restrictions elsewhere. Additionally, in December
2020, the U.S. Food and Drug Administration authorized vaccines produced by Pfizer-BioNTech and Moderna for emergency use. However,
it remains unclear how quickly the vaccines will be distributed nationwide and globally or when “herd immunity” will
be achieved and the restrictions that were imposed to slow the spread of the virus will be lifted entirely. The delay in distributing
the vaccines could lead people to continue to self-isolate and not participate in the economy at pre-pandemic levels for a prolonged
period of time. Even after the COVID-19 pandemic subsides, the U.S. economy and most other major global economies may continue
to experience a recession, and our business and operations, as well as the business and operations of our portfolio companies,
could be materially adversely affected by a prolonged recession in the United States and other major markets. Potential consequences
of the current unprecedented measures taken in response to the spread of COVID-19, and current market disruptions and volatility
that may impact our business include, but are not limited to:
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sudden, unexpected and/or severe declines in the market
price of our securities or net asset value;
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inability of the Fund to accurately or reliably value its
portfolio;
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inability of the Fund to comply with certain asset coverage
ratios that would prevent the Fund from paying dividends to our common stockholders;
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The Gabelli Convertible
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Additional Fund Information (Continued) (Unaudited)
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inability of the Fund to pay any dividends and distributions to any class
of equity holders;
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inability of the Fund to service debt to the extent it has any notes or
credit facilities outstanding;
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inability of the Fund to maintain its status as a RIC under the Code;
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potentially severe, sudden and unexpected declines in the value of our investments;
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increased risk of default or bankruptcy by the companies in which we invest;
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increased risk of companies in which we invest being unable to weather an extended cessation of
normal economic activity and thereby impairing their ability to continue functioning as a going concern;
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inability of the companies in which we invest to complete announced transactions;
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reduced economic demand resulting from mass employee layoffs or furloughs in response to governmental
action taken to slow the spread of COVID-19, which could impact the continued viability of the companies in which we invest;
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companies in which we invest being disproportionally impacted by governmental action aimed at slowing
the spread of COVID-19;
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limited availability of new investment opportunities; and
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general threats to the Fund’s ability to continue investment operations and to operate successfully
as a diversified, closed-end investment company.
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Despite actions of the U.S. federal government
and foreign governments, the uncertainty surrounding the COVID-19 pandemic and other factors has contributed to significant volatility
and declines in the global public equity markets and global debt capital markets, including the market price of our common and
preferred shares.
It is virtually impossible to determine
the ultimate impact of COVID-19 at this time. Accordingly, an investment in the Fund is subject to an elevated degree of risk as
compared to other market environments.
Fixed Income Securities Risks.
Fixed income securities in which the Fund may invest are generally subject to the following risks:
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Interest Rate Risk. The market value
of bonds and other fixed-income or dividend paying securities changes in response to interest rate changes and other factors. Interest
rate risk is the risk that prices of bonds and other income or dividend paying securities will increase as interest rates fall
and decrease as interest rates rise.
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The risks associated with rising
interest rates are heightened given the historically low interest rate environment as of the date of this report. The Federal Reserve
has begun to raise the Federal Funds rate, and each increase results in more pronounced interest rate risk in the current market
environment. The magnitude of these fluctuations in the market price of bonds and other income or dividend paying securities is
generally greater for those securities with longer maturities. Fluctuations in the market price of the Fund’s investments
will not affect interest income derived from instruments already owned by the Fund, but will be reflected in the Fund’s net
asset value. The Fund may lose money if short term or long term interest rates rise sharply in a manner not anticipated by Fund
management. To the extent the Fund invests in debt securities that may be prepaid at the option of the obligor (such as mortgage-related
securities), the sensitivity of such securities to changes in interest rates may increase (to the detriment of the Fund) when interest
rates rise. Moreover, because rates on certain floating rate debt securities typically reset only periodically, changes in prevailing
interest rates (and particularly sudden and significant changes) can be expected to cause some fluctuations in the net asset value
of the Fund to the extent that it invests in floating rate debt securities. These basic principles of bond prices also apply to
U.S. government securities. A security backed by the “full faith and credit” of the U.S. government is guaranteed only
as to its stated interest rate and face value at maturity, not its current market price. Just like other income or dividend paying
securities, government-guaranteed securities will fluctuate in value when interest rates change.
The Fund’s use of leverage
will tend to increase the Fund’s interest rate risk. The Fund may utilize certain strategies, including taking positions
in futures or interest rate swaps, for the purpose of reducing the interest rate sensitivity of income or dividend paying securities
held by the Fund and decreasing the Fund’s exposure to interest rate risk. The Fund is not required to hedge its exposure
to interest rate risk and may choose not to do so. In addition, there is no assurance that any attempts by the Fund to reduce interest
rate risk will be successful or that any hedges that the Fund may establish will perfectly correlate with movements in interest
rates.
The Fund may invest in variable
and floating rate debt instruments, which generally are less sensitive to interest rate changes than longer duration fixed rate
instruments, but may decline in value in response to rising interest rates if, for example, the rates at which they pay interest
do not rise as much, or as quickly, as market interest rates in general. Conversely, variable and floating rate instruments generally
will not increase in value if interest rates decline. The Fund also may invest in inverse floating rate debt
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The Gabelli Convertible
and Income Securities Fund Inc.
Additional Fund Information (Continued) (Unaudited)
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securities,
which may decrease in value if interest rates increase, and which also may exhibit greater price volatility than fixed rate debt
obligations with similar credit quality. To the extent the Fund holds variable or floating rate instruments, a decrease (or, in
the case of inverse floating rate securities, an increase) in market interest rates will adversely affect the income received from
such securities, which may adversely affect the net asset value of the Fund’s common shares.
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Issuer Risk. Issuer risk is the
risk that the value of an income or dividend paying security may decline for a number of reasons which directly relate to the issuer,
such as management performance, financial leverage, reduced demand for the issuer’s goods and services, historical and prospective
earnings of the issuer and the value of the assets of the issuer.
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Credit Risk. Credit risk is
the risk that one or more income or dividend paying securities in the Fund’s portfolio will decline in price or fail to
pay interest/distributions or principal when due because the issuer of the security experiences a decline in its financial
status. Credit risk is increased when a portfolio security is downgraded or the perceived creditworthiness of the issuer
deteriorates. To the extent the Fund invests in below investment grade securities, it will be exposed to a greater amount of
credit risk than a fund which only invests in investment grade securities. See “Risk Factors and Special Considerations
— General Risks — Non-Investment Grade Securities.” In addition, to the extent the Fund uses credit
derivatives, such use will expose it to additional risk in the event that the bonds underlying the derivatives default. The
degree of credit risk depends on the issuer’s financial condition and on the terms of the securities.
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Prepayment Risk. Prepayment risk
is the risk that during periods of declining interest rates, borrowers may exercise their option to prepay principal earlier than
scheduled. For income or dividend paying securities, such payments often occur during periods of declining interest rates, forcing
the Fund to reinvest in lower yielding securities, resulting in a possible decline in the Fund’s income and distributions
to shareholders. This is known as prepayment or “call” risk. Below investment grade securities frequently have call
features that allow the issuer to redeem the security at dates prior to its stated maturity at a specified price (typically greater
than par) only if certain prescribed conditions are met (“call protection”). For premium bonds (bonds acquired at prices
that exceed their par or principal value) purchased by the Fund, prepayment risk may be enhanced.
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Reinvestment Risk. Reinvestment
risk is the risk that income from the Fund’s portfolio will decline if the Fund invests the proceeds from matured, traded
or called fixed income securities at market interest rates that are below the Fund portfolio’s current earnings rate.
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Duration and Maturity Risk. The
Fund has no set policy regarding portfolio maturity or duration of the fixed-income securities it may hold. The Investment Adviser
may seek to adjust the duration or maturity of the Fund’s fixed-income holdings based on its assessment of current and projected
market conditions and all other factors that the Investment Adviser deems relevant. In comparison to maturity (which is the date
on which the issuer of a debt instrument is obligated to repay the principal amount), duration is a measure of the price volatility
of a debt instrument as a result in changes in market rates of interest, based on the weighted average timing of the instrument’s
expected principal and interest payments. Specifically, duration measures the anticipated percentage change in NAV that is expected
for every percentage point change in interest rates. The two have an inverse relationship. Duration can be a useful tool to estimate
anticipated price changes to a fixed pool of income securities associated with changes in interest rates. For example, a duration
of five years means that a 1% decrease in interest rates will increase the NAV of the portfolio by approximately 5%; if interest
rates increase by 1%, the NAV will decrease by 5%. However, in a managed portfolio of fixed income securities having differing
interest or dividend rates or payment schedules, maturities, redemption provisions, call or prepayment provisions and credit qualities,
actual price changes in response to changes in interest rates may differ significantly from a duration-based estimate at any given
time. Actual price movements experienced by a portfolio of fixed income securities will be affected by how interest rates move
(i.e., changes in the relationship of long term interest rates to short term interest rates), the magnitude of any move in interest
rates, actual and anticipated prepayments of principal through call or redemption features, the extension of maturities through
restructuring, the sale of securities for portfolio management purposes, the reinvestment of proceeds from prepayments on and from
sales of securities, and credit quality-related considerations whether associated with financing costs to lower credit quality
borrowers or otherwise, as well as other factors. Accordingly, while duration maybe a useful tool to estimate potential price movements
in relation to changes in interest rates, investors are cautioned that duration alone will not predict actual changes in the net
asset or market value of the Fund’s shares and that actual price movements in the Fund’s portfolio may differ significantly
from duration-based estimates. Duration differs from maturity in that it takes into account a security’s yield, coupon payments
and its principal payments in addition to the amount of time until the security matures. As the value of a security changes over
time, so will its duration. Prices of securities with longer durations tend to be more sensitive to interest rate changes than
securities with shorter durations. In general, a portfolio of securities with a longer duration can be expected to be more sensitive
to interest rate changes than a portfolio with a shorter duration. Any decisions as to the targeted duration or maturity of any
particular category of investments will be made based on all pertinent market factors at any given time. The Fund may incur costs
in seeking to adjust the portfolio average duration or maturity. There can be no assurance that the Investment Adviser’s
assessment of current and projected market conditions will be correct or that any strategy to adjust duration or maturity will
be successful at any given time.
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The Gabelli Convertible and Income Securities Fund Inc.
Additional Fund Information (Continued) (Unaudited)
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Corporate Bonds Risk. The
market value of a corporate bond generally may be expected to rise and fall inversely with interest rates. The market value of
intermediate and longer term corporate bonds is generally more sensitive to changes in interest rates than is the market value
of shorter term corporate bonds. The market value of a corporate bond also may be affected by factors directly related to the issuer,
such as investors’ perceptions of the creditworthiness of the issuer, the issuer’s financial performance, perceptions
of the issuer in the market place, performance of management of the issuer, the issuer’s capital structure and use of financial
leverage and demand for the issuer’s goods and services. Certain risks associated with investments in corporate bonds are
described elsewhere in the prospectus in further detail, including under “Risk Factors and Special Considerations —
General Risks — Fixed Income Securities Risks —Credit Risk,” “ — Fixed Income Securities Risks —
Interest Rate Risk” and “ — Fixed Income Securities Risks — Prepayment Risk.” There is a risk that
the issuers of corporate bonds may not be able to meet their obligations on interest or principal payments at the time called for
by an instrument. Corporate bonds of below investment grade quality are often high risk and have speculative characteristics and
may be particularly susceptible to adverse issuer-specific developments. Corporate bonds of below investment grade quality are
subject to the risks described herein under “ — Non-Investment Grade Securities Risk.”
Non-Investment Grade Securities Risk.
The Fund may invest in securities rated below investment grade by recognized statistical rating agencies or unrated securities
of comparable quality. The prices of these lower grade securities are more sensitive to negative developments, such as a decline
in the issuer’s revenues or a general economic downturn, than are the prices of higher grade securities. Securities of below
investment grade quality — those securities rated below “Baa” by Moody’s or below “BBB” by
S&P (or unrated securities of comparable quality) — are predominantly speculative with respect to the issuer’s
capacity to pay interest and repay principal when due and therefore involve a greater risk of default. Securities rated below investment
grade commonly are referred to as “junk bonds” or “high yield” securities and generally pay a premium above
the yields of U.S. government securities or securities of investment grade issuers because they are subject to greater risks than
these securities. These risks, which reflect their speculative character, include the following:
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greater credit risk and risk of default;
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potentially greater sensitivity to general economic or industry conditions;
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potential lack of attractive resale opportunities (illiquidity); and
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additional expenses to seek recovery from issuers who default.
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In addition, the prices of these non-investment
grade securities are more sensitive to negative developments, such as a decline in the issuer’s revenues or a general economic
downturn, than are the prices of higher grade securities. Non-investment grade securities tend to be less liquid than investment
grade securities. The market value of non-investment grade securities may be more volatile than the market value of investment
grade securities and generally tends to reflect the market’s perception of the creditworthiness of the issuer and short term
market developments to a greater extent than investment grade securities, which primarily reflect fluctuations in general levels
of interest rates.
Ratings are relative and subjective and
not absolute standards of quality. Securities ratings are based largely on the issuer’s historical financial condition and
the rating agencies’ analysis at the time of rating. Consequently, the rating assigned to any particular security is not
necessarily a reflection of the issuer’s current financial condition.
The Fund may purchase securities of companies
that are experiencing significant financial or business difficulties, including companies involved in bankruptcy or other reorganization
and liquidation proceedings. Although such investments may result in significant financial returns to the Fund, they involve a
substantial degree of risk. The level of analytical sophistication, both financial and legal, necessary for successful investments
in issuers experiencing significant business and financial difficulties is unusually high. There can be no assurance that the Fund
will correctly evaluate the value of the assets collateralizing its investments or the prospects for a successful reorganization
or similar action. In any reorganization or liquidation proceeding relating to a portfolio investment, the Fund may lose all or
part of its investment or may be required to accept collateral with a value less than the amount of the Fund’s initial investment.
As a part of its investments in non-investment
grade securities, the Fund may invest in the securities of issuers in default. The Fund invests in securities of issuers in default
only when the Investment Adviser believes that such issuers will honor their obligations and emerge from bankruptcy protection
and that the value of such issuers’ securities will appreciate. By investing in the securities of issuers in default, the
Fund bears the risk that these issuers will not continue to honor their obligations or emerge from bankruptcy protection or that
the value of these securities will not otherwise appreciate.
In addition to using statistical rating
agencies and other sources, the Investment Adviser will also perform its own analysis of issuers in seeking investments that it
believes to be underrated (and thus higher yielding) in light of the financial condition of the issuer. Its analysis of issuers
may include, among other things, current and anticipated cash flow and borrowing requirements, value of assets in relation to historical
cost, strength of management, responsiveness to business conditions, credit standing and current anticipated results of operations.
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The Gabelli Convertible
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Additional Fund Information (Continued) (Unaudited)
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In selecting investments for the Fund, the
Investment Adviser may also consider general business conditions, anticipated changes in interest rates and the outlook for specific
industries.
Subsequent to its purchase by the Fund,
an issue of securities may cease to be rated or its rating may be reduced. In addition, it is possible that statistical rating
agencies might change their ratings of a particular issue to reflect subsequent events on a timely basis. Moreover, such ratings
do not assess the risk of a decline in market value. None of these events will require the sale of the securities by the Fund,
although the Investment Adviser will consider these events in determining whether the Fund should continue to hold the securities.
Income securities, including non-investment
grade securities and comparable unrated securities, frequently have call or buy-back features that permit their issuers to call
or repurchase the securities from their holders, such as the Fund. If an issuer exercises these rights during periods of declining
interest rates, the Fund may have to replace the security with a lower yielding security, thus resulting in a decreased return
for the Fund.
The market for non-investment grade and
comparable unrated securities has at various times, particularly during times of economic recession, experienced substantial reductions
in market value and liquidity. Past recessions have adversely affected the value of such securities as well as the ability of certain
issuers of such securities to repay principal and pay interest thereon or to refinance such securities. The market for those securities
could react in a similar fashion in the event of any future economic recession.
Equity Risk. The principal
risk of investing in equity securities is equity risk. Equity risk is the risk that the price of an equity security will fall due
to general market and economic conditions, perceptions regarding the industry in which the issuer participates or the issuing company’s
particular circumstances. Common stock in which the Fund will invest or receive upon conversion of convertible securities is subject
to such equity risk. In the case of convertible securities, it is the conversion value of a convertible security that is subject
to the equity risk; that is, if the appreciation potential of a convertible security is not realized, the premium paid for its
conversion value may not be recovered. See “Investment Objective and Policies — Investment Practices — Convertible
Securities.”
Common Stock Risk. Common
stock of an issuer in the Fund’s portfolio may decline in price for a variety of reasons, including if the issuer fails to
make anticipated dividend payments because the issuer of the security experiences a decline in its financial condition. Common
stock in which the Fund invests is structurally subordinated as to income and residual value to preferred stock, bonds and other
debt instruments in a company’s capital structure, in terms of priority to corporate income, and therefore will be subject
to greater dividend risk than preferred stock or debt instruments of such issuers. In addition, while common stock has historically
generated higher average returns than fixed income securities, common stock has also experienced significantly more volatility
in generating those returns.
Distribution Risk for Equity Income
Securities. In selecting equity income securities in which the Fund will invest, the Investment Adviser will consider the
issuer’s history of making regular periodic distributions (i.e., dividends) to its equity holders. An issuer’s history
of paying dividends, however, does not guarantee that the issuer will continue to pay dividends in the future. The dividend income
stream associated with equity income securities generally is not guaranteed and will be subordinate to payment obligations of the
issuer on its debt and other liabilities. Accordingly, in the event the issuer does not realize sufficient income in a particular
period both to service its liabilities and to pay dividends on its equity securities, it may forgo paying dividends on its equity
securities. In addition, because in most instances issuers are not obligated to make periodic distributions to the holders of their
equity securities, such distributions or dividends generally may be discontinued at the issuer’s discretion.
Dividend-producing equity income securities,
in particular those whose market price is closely related to their yield, may exhibit greater sensitivity to interest rate changes.
See “ — Fixed Income Securities Risks — Interest Rate Risk.” The Fund’s investments in dividend-producing
equity income securities may also limit its potential for appreciation during a broad market advance.
The prices of dividend-producing equity
income securities can be highly volatile. Investors should not assume that the Fund’s investments in these securities will
necessarily reduce the volatility of the Fund’s net asset value or provide “protection,” compared to other types
of equity income securities, when markets perform poorly.
Preferred Stock Risk. There
are special risks associated with the Fund investing in preferred securities, including:
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Deferral. Preferred securities may
include provisions that permit the issuer, at its discretion, to defer distributions for a stated period without any adverse consequences
to the issuer. If the Fund owns a preferred security on which distributions are being deferred by the issuer, the Fund may be required
to report income for tax purposes although it has not yet received such deferred distributions.
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Non-Cumulative Dividends. Some preferred
stocks are non-cumulative, meaning that the dividends do not accumulate and need not ever be paid. A portion of the portfolio may
include investments in non-cumulative preferred securities, whereby the issuer does not have an obligation to make up any arrearages
to its shareholders. Should an issuer of a non-cumulative preferred stock held by the Fund determine not to pay dividends on such
stock, the Fund’s return from that security may be adversely affected. There is no assurance that dividends or distributions
on non-cumulative preferred stocks in which the Fund invests will be declared or otherwise made payable.
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The Gabelli Convertible
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Additional Fund Information (Continued) (Unaudited)
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Subordination. Preferred securities
are subordinated to bonds and other debt instruments in a company’s capital structure in terms of priority to corporate income
and liquidation payments, and therefore will be subject to greater credit risk than more senior debt security instruments.
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Liquidity. Preferred securities
may be substantially less liquid than many other securities, such as common stocks or U.S. Government securities.
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Limited Voting Rights. Generally,
preferred security holders (such as the Fund) have no voting rights with respect to the issuing company unless preferred dividends
have been in arrears for a specified number of periods, at which time the preferred security holders may be entitled to elect a
number of directors to the issuer’s board. Generally, once all the arrearages have been paid, the preferred security holders
no longer have voting rights.
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Special Redemption Rights. In certain
varying circumstances, an issuer of preferred securities may redeem the securities prior to a specified date. For instance, for
certain types of preferred securities, a redemption may be triggered by a change in federal income tax or securities laws. As with
call provisions, a redemption by the issuer may negatively impact the return of the security held by the Fund.
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U.S. Government Securities and Credit
Rating Downgrade Risk. The Fund may invest in direct obligations of the government of the United States or its agencies.
Obligations issued or guaranteed by the U.S. government, its agencies, authorities and instrumentalities and backed by the full
faith and credit of the U.S. guarantee only that principal and interest will be timely paid to holders of the securities. These
entities do not guarantee that the value of such obligations will increase, and, in fact, the market values of such obligations
may fluctuate. In addition, not all U.S. government securities are backed by the full faith and credit of the United States; some
are the obligation solely of the entity through which they are issued. There is no guarantee that the U.S. government would provide
financial support to its agencies and instrumentalities if not required to do so by law.
The events surrounding negotiations regarding
the U.S. federal government debt ceiling and deficit reduction could adversely affect the Fund’s ability to achieve its investment
objective. In 2011, S&P lowered its long term sovereign credit rating on the U.S. to “AA+” from “AAA.”
The downgrade by S&P increased volatility in both stock and bond markets, resulting in higher interest rates and higher Treasury
yields, and increased the costs of all kinds of debt. Repeat occurrences of similar events could have significant adverse effects
on the U.S. economy generally and could result in significant adverse impacts on issuers of securities held by the Fund itself.
The Investment Adviser cannot predict the effects of similar events in the future on the U.S. economy and securities markets or
on the Fund’s portfolio. The Investment Adviser monitors developments and seeks to manage the Fund’s portfolio in a
manner consistent with achieving the Fund’s investment objective, but there can be no assurance that it will be successful
in doing so and the Investment Adviser may not timely anticipate or manage existing, new or additional risks, contingencies or
developments.
Significant Holdings Risk.
The Fund may invest up to 25% of its total assets in securities of a single industry; however, the Fund does not currently focus
and has no current intent to focus on any particular industry or sector. In the event the Fund should choose to take significant
positions in any particular industry or sector, the net asset value of the Fund will be more susceptible to factors affecting those
particular types of companies, which, depending on the particular industry, may include, among others: governmental regulation;
inflation; cost increases in raw materials, fuel and other operating expenses; technological innovations that may render existing
products and equipment obsolete; and increasing interest rates resulting in high interest costs on borrowings needed for capital
investment, including costs associated with compliance with environmental and other regulations. In such circumstances the Fund’s
investments may be subject to greater risk and market fluctuation than a fund that had securities representing a broader range
of industries.
Value Investing Risk. The
Fund focuses its investments on the securities of companies that the Investment Adviser believes are undervalued or inexpensive
relative to other investments. These types of securities may present risks in addition to the general risks associated with investing
in common and preferred stocks. These securities generally are selected on the basis of an issuer’s fundamentals relative
to current market price. Such securities are subject to the risk of mis-estimation of certain fundamental factors. In addition,
during certain time periods market dynamics may strongly favor “growth” stocks of issuers that do not display strong
fundamentals relative to market price based upon positive price momentum and other factors. Disciplined adherence to a “value”
investment mandate during such periods can result in significant underperformance relative to overall market indices and other
managed investment vehicles that pursue growth style investments and/or flexible equity style mandates.
Selection Risk. Different
types of stocks tend to shift into and out of favor with stock market investors, depending on market and economic conditions. The
performance of funds that invest in value-style stocks may at times be better or worse than the performance of stock funds that
focus on other types of stocks or that have a broader investment style.
Merger Arbitrage Risk. The
Fund may 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. The principal risk of such
investments is that certain of such proposed transactions may be renegotiated, terminated or involve a longer time frame
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The
Gabelli Convertible and Income Securities Fund Inc.
Additional
Fund Information (Continued) (Unaudited)
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than originally contemplated, in which case
the Fund may realize losses. Such risk is sometimes referred to as “merger arbitrage risk.” Among the factors that
affect the level of risk with respect to the completion of the transaction are the deal spread and number of bidders, the friendliness
of the buyer and seller, the strategic rationale behind the transaction, the existence of regulatory hurdles, the level of due
diligence completed on the target company and the ability of the buyer to finance the transaction. If the spread between the purchase
price and the current price of the seller’s stock is small, the risk that the transaction will not be completed may outweigh
the potential return. If there is very little interest by other potential buyers in the target company, the risk of loss may be
higher than where there are back-up buyers that would allow the arbitrageur to realize a similar return if the current deal falls
through. Unfriendly management of the target company or change in friendly management in the middle of a deal increases the risk
that the deal will not be completed even if the target company’s board has approved the transaction and may involve the risk
of litigation expense if the target company pursues litigation in an attempt to prevent the deal from occurring. The underlying
strategy behind the deal is also a risk consideration because the less a target company will benefit from a merger or acquisition,
the greater the risk. There is also a risk that an acquiring company may back out of an announced deal if, in the process of completing
its due diligence of the target company, it discovers something undesirable about such company. In addition, merger transactions
are also subject to regulatory risk because a merger transaction often must be approved by a regulatory body or pass governmental
antitrust review. All of these factors affect the timing and likelihood that the transaction will close. Even if the Investment
Adviser selects announced deals with the goal of mitigating the risks that the transaction will fail to close, such risks may still
delay the closing of such transaction to a date later than the Fund originally anticipated, reducing the level of desired return
to the Fund.
Merger arbitrage positions are also subject
to the risk of overall market movements. To the extent that a general increase or decline in equity values affects the stocks involved
in a merger arbitrage position differently, the position may be exposed to loss.
Finally, merger arbitrage strategies depend
for success on the overall volume of global merger activity, which has historically been cyclical in nature. During periods when
merger activity is low, it may be difficult or impossible to identify opportunities for profit or to identify a sufficient number
of such opportunities to provide balance among potential merger transactions. To the extent that the number of announced deals
and corporate reorganizations decreases or the number of investors in such transactions increases, it is possible that merger arbitrage
spreads will tighten, causing the profitability of investing in such transactions to diminish, which will in turn decrease the
returns to the Fund from such investment activity.
Foreign Securities Risk. Investments
in the securities of foreign issuers involve certain considerations and risks not ordinarily associated with investments in securities
of domestic issuers and such securities may be more volatile than those of issuers located in the United States. Foreign companies
are not generally subject to uniform accounting, auditing and financial standards and requirements comparable to those applicable
to U.S. companies. Foreign securities exchanges, brokers and listed companies may be subject to less government supervision and
regulation than exists in the United States. Dividend and interest income may be subject to withholding and other foreign taxes,
which may adversely affect the net return on such investments. There may be difficulty in obtaining or enforcing a court judgment
abroad. In addition, it may be difficult to effect repatriation of capital invested in certain countries. In addition, with respect
to certain countries, there are risks of expropriation, confiscatory taxation, political or social instability or diplomatic developments
that could affect assets of the Fund held in foreign countries. Dividend income the Fund receives from foreign securities may not
be eligible for the special tax treatment applicable to qualified dividend income. Moreover, certain equity investments in foreign
issuers classified as passive foreign investment companies may be subject to additional taxation risk.
There may be less publicly available information
about a foreign company than a U.S. company. Foreign securities markets may have substantially less volume than U.S. securities
markets and some foreign company securities are less liquid than securities of otherwise comparable U.S. companies. A portfolio
of foreign securities may also be adversely affected by fluctuations in the rates of exchange between the currencies of different
nations and by exchange control regulations. Foreign markets also have different clearance and settlement procedures that could
cause the Fund to encounter difficulties in purchasing and selling securities on such markets and may result in the Fund missing
attractive investment opportunities or experiencing loss. In addition, a portfolio that includes foreign securities can expect
to have a higher expense ratio because of the increased transaction costs on non-U.S. securities markets and the increased costs
of maintaining the custody of foreign securities.
The Fund also may purchase ADRs or U.S.
dollar-denominated securities of foreign issuers. ADRs are receipts issued by U.S. banks or trust companies in respect of securities
of foreign issuers held on deposit for use in the U.S. 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. In addition, the underlying issuers of certain depositary receipts, particularly unsponsored or unregistered depositary
receipts, are under no obligation to distribute shareholder communications to the holders of such receipts, or to pass through
to them any voting rights with respect to the deposited securities.
The following provides more detail on certain
pronounced risks with foreign investing:
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Foreign Currency Risk. The Fund may invest in companies whose securities are denominated
or quoted in currencies other than U.S. dollars or have significant operations or markets outside of the United States. In such
instances, the Fund will be exposed to
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The Gabelli Convertible
and Income Securities Fund Inc.
Additional Fund Information (Continued) (Unaudited)
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currency risk,
including the risk of fluctuations in the exchange rate between U.S. dollars (in which the Fund’s shares are denominated)
and such foreign currencies, the risk of currency devaluations and the risks of non-exchangeability and blockage. As non-U.S. securities
may be purchased with and payable in currencies of countries other than the U.S. dollar, the value of these assets measured in
U.S. dollars may be affected favorably or unfavorably by changes in currency rates and exchange control regulations. Fluctuations
in currency rates may adversely affect the ability of the Investment Adviser to acquire such securities at advantageous prices
and may also adversely affect the performance of such assets.
Certain non-U.S.
currencies, primarily in developing countries, have been devalued in the past and might face devaluation in the future. Currency
devaluations generally have a significant and adverse impact on the devaluing country’s economy in the short and intermediate
term and on the financial condition and results of companies’ operations in that country. Currency devaluations may also
be accompanied by significant declines in the values and liquidity of equity and debt securities of affected governmental and private
sector entities generally. To the extent that affected companies have obligations denominated in currencies other than the devalued
currency, those companies may also have difficulty in meeting those obligations under such circumstances, which in turn could have
an adverse effect upon the value of the Fund’s investments in such companies. There can be no assurance that current or future
developments with respect to foreign currency devaluations will not impair the Fund’s investment flexibility, its ability
to achieve its investment objective or the value of certain of its foreign currency-denominated investments.
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Tax Consequences of Foreign Investing.
The Fund’s transactions in foreign currencies, foreign currency-denominated debt obligations and certain foreign currency
options, futures contracts and forward contracts (and similar instruments) may give rise to ordinary income or loss to the extent
such income or loss results from fluctuations in the value of the foreign currency concerned. This treatment could increase or
decrease the Fund’s ordinary income distributions to you, and may cause some or all of the Fund’s previously distributed
income to be classified as a return of capital. In certain cases, the Fund may make an election to treat gain or loss attributable
to certain investments as capital gain or loss.
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EMU and Redenomination Risk. As
the European debt crisis progressed, the possibility of one or more Eurozone countries exiting the European Monetary Union (“EMU”),
or even the collapse of the Euro as a common currency arose, creating significant volatility at times in currency and financial
markets. The effects of the collapse of the Euro or of the exit of one or more countries from the EMU, on the U.S. and global economies
and securities markets are impossible to predict, and any such events could have a significant adverse impact on the value and
risk profile of the Fund’s portfolio. Any partial or complete dissolution of the EMU could have significant adverse effects
on currency and financial markets, and on the values of the Fund’s portfolio investments. If one or more EMU countries were
to stop using the Euro as its primary currency, the Fund’s investments in such countries may be redenominated into a different
or newly adopted currency. As a result, the value of those investments could decline significantly and unpredictably. In addition,
securities or other investments that are redenominated may be subject to foreign currency risk, liquidity risk and valuation risk
to a greater extent than similar investments currently denominated in Euros. To the extent a currency used for redenomination purposes
is not specified in respect of certain EMU-related investments, or should the Euro cease to be used entirely, the currency in which
such investments are denominated may be unclear, making such investments particularly difficult to value or dispose of. The Fund
may incur additional expenses to the extent it is required to seek judicial or other clarification of the denomination or value
of such securities.
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Emerging Markets Risk. The considerations
noted above in “Foreign Securities Risk” are generally intensified for investments in emerging market countries. Emerging
market countries typically have economic and political systems that are less fully developed, and can be expected to be less stable
than those of more developed countries. Investing in securities of companies in emerging markets may entail special risks relating
to potential political and economic instability and the risks of expropriation, nationalization, confiscation or the imposition
of restrictions on foreign investment, the lack of hedging instruments and restrictions on repatriation of capital invested. Economies
of such countries can be subject to rapid and unpredictable rates of inflation or deflation. Emerging securities markets are substantially
smaller, less developed, less liquid and more volatile than the major securities markets. The limited size of emerging securities
markets and limited trading volume compared to the volume of trading in U.S. securities could cause prices to be erratic for reasons
apart from factors that affect the quality of the securities. For example, limited market size may cause prices to be unduly influenced
by traders who control large positions. Adverse publicity and investors’ perceptions, whether or not based on fundamental
analysis, may decrease the value and liquidity of portfolio securities, especially in these markets. Other risks include high concentration
of market capitalization and trading volume in a small number of issuers representing a limited number of industries, as well as
a high concentration of investors and financial intermediaries; overdependence on exports, including gold and natural resources
exports, making these economies vulnerable to changes in commodity prices; overburdened infrastructure and obsolete or unseasoned
financial systems; environmental problems; less developed legal systems; and less reliable securities custodial services and settlement
practices. Certain emerging markets may also face other significant internal or external risks, including the risk of war and civil
unrest. For all of these reasons, investments in emerging markets may be considered speculative.
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Eurozone Risk. A number of countries
in the EU have experienced, and may continue to experience, severe economic and financial
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The Gabelli Convertible
and Income Securities Fund Inc.
Additional Fund Information (Continued) (Unaudited)
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difficulties. In particular,
many EU nations are susceptible to economic risks associated with high levels of debt, notably due to investments in sovereign
debt of countries such as Greece, Italy, Spain, Portugal, and Ireland. As a result, financial markets in the EU have been subject
to increased volatility and declines in asset values and liquidity. Responses to these financial problems by European governments,
central banks, and others, including austerity measures and reforms, may not work, may result in social unrest, and may limit future
growth and economic recovery or have other unintended consequences. Further defaults or restructurings by governments and others
of their debt could have additional adverse effects on economies, financial markets, and asset valuations around the world. Greece,
Ireland, and Portugal have already received one or more “bailouts” from other Eurozone member states, and it is unclear
how much additional funding they will require or if additional Eurozone member states will require bailouts in the future. One
or more other countries may also abandon the euro and/or withdraw from the EU, placing its currency and banking system in jeopardy.
The impact of these actions, especially if they occur in a disorderly fashion, is not clear but could be significant and far-reaching.
On March 29, 2017, the United
Kingdom (the “UK”) notified the European Council, in accordance with Article 50(2) of the Treaty on European Union
(“Article 50”), of the UK’s intention to withdraw from the European Union (the “EU”). In issuing
the notice, the UK has begun the two year process set out in Article 50 for the UK and the EU to negotiate the terms of the UK’s
withdrawal from the EU, taking into account the framework for the UK’s future relationship with the EU (“BREXIT”).
In accordance with Article 50 the UK will cease to be a member of the EU from March 30, 2019, absent any agreement between the
UK and the EU which results in a change to this date. This historic event is widely expected to have consequences that are both
profound and uncertain for the economic and political future of the United Kingdom and the EU, and those consequences include significant
legal and business uncertainties pertaining to an investment in the Fund. Due to the very recent occurrence of these events, the
full scope and nature of the consequences are not at this time known and are unlikely to be known for a significant period of time.
At the same time, it is reasonable to assume that the significant uncertainty in the business, legal and political environment
engendered by these events has resulted in immediate and longer term risks that would not have been applicable had the UK not sought
to withdraw from the EU (“BREXIT Risks”).
BREXIT Risks include short and
long term market volatility and currency volatility, macroeconomic risk to the UK and European economies, impetus for further disintegration
of the EU and related political stresses (including those related to sentiment against cross border capital movements and activities
of investors like the Fund), prejudice to financial services businesses that are conducting business in the EU and which are based
in the UK, disruption to regulatory regimes related to the operations of the Fund and the Investment Adviser, legal uncertainty
regarding achievement of compliance with applicable financial and commercial laws and regulations in view of the expected steps
to be taken pursuant to or in contemplation of Article 50 and negotiations undertaken under Article 218 of the Treaty on the Functioning
of the European Union, and the unavailability of timely information as to expected legal, tax and other regimes.
In view of these risks and their
application to the Investment Adviser and the Fund’s portfolio, prospective investors should take into account the significance
of the BREXIT Risks, including the wide ranging and serious nature of these risks, and retain advice as needed, for purposes of
evaluating an investment in the Fund. There can be no assurance that the BREXIT Risks will not alter, and alter significantly,
the attractiveness of an investment in the Fund by, among other things, giving risk to impediments to the intended implementation
of the business strategy of the Fund that would have material effects on performance, including the potential for capital losses,
delays, legal and regulatory risk and general uncertainty.
Smaller Companies Investment Risk.
The Fund may invest in the securities of smaller, less seasoned companies. Smaller companies offer investment opportunities and
additional risks. They may not be well known to the investing public, may not be significantly owned by institutional investors
and may not have steady earnings growth. These companies may have limited product lines and markets, as well as shorter operating
histories, less experienced management and more limited financial resources than larger companies. In addition, the securities
of such companies may be more vulnerable to adverse general market or economic developments, more volatile in price, have wider
spreads between their bid and ask prices and have significantly lower trading volumes than the securities of larger capitalization
companies. As such, securities of these smaller companies may be less liquid than those of larger companies, and may experience
greater price fluctuations than larger companies. In addition, small-cap or mid-cap company securities may not be widely followed
by investors, which may result in reduced demand.
As a result, the purchase or sale of more
than a limited number of shares of the securities of a smaller company may affect its market price. The Investment Adviser may
need a considerable amount of time to purchase or sell its positions in these securities, particularly when other Investment Adviser-managed
accounts or other investors are also seeking to purchase or sell them.
The securities of smaller capitalization
companies generally trade in lower volumes and are subject to greater and more unpredictable price changes than larger capitalization
securities or the market as a whole. In addition, smaller capitalization securities may be particularly sensitive to changes in
interest rates, borrowing costs and earnings. Investing in smaller capitalization securities requires a longer-term view.
The Gabelli Convertible
and Income Securities Fund Inc.
Additional Fund Information (Continued) (Unaudited)
Securities of emerging companies may lack
an active secondary market and may be subject to more abrupt or erratic price movements than securities of larger, more established
companies or stock market averages in general. Competitors of certain companies, which may or may not be in the same industry,
may have substantially greater financial resources than the companies in which the Fund may invest.
Investment Companies. The
Fund may invest in the securities of other investment companies to the extent permitted by law. To the extent the Fund invests
in the common equity of investment companies, the Fund will bear its ratable share of any such investment company’s expenses,
including management fees. The Fund will also remain obligated to pay management fees to the Investment Adviser with respect to
the assets invested in the securities of other investment companies. In these circumstances holders of the Fund’s common
shares will be subject to duplicative investment expenses. The Fund will not purchase the securities of affiliated investment companies.
Prepayment Risks on Government Sponsored
Mortgage-Backed Securities. The yield and maturity characteristics of government sponsored mortgage-backed securities differ
from traditional debt securities. A major difference is that the principal amount of the obligations may generally be prepaid at
any time because the underlying assets (i.e., loans) generally may be prepaid at any time. Prepayment risks include the following:
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mortgage-backed securities less potential for growth in value than conventional bonds with comparable maturities;
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in addition, when interest rates fall, the rate of prepayments tends to increase. During such periods, the reinvestment of prepayment proceeds by the Fund will generally be at lower rates than the rates that were carried by the obligations that have been prepaid;
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because of these and other reasons, a government sponsored mortgage-backed security’s total return and maturity may be difficult to predict; and
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to the extent that the Fund purchases government sponsored mortgage-backed securities at a premium, prepayments may result in loss of the Fund’s principal investment to the extent of premium paid.
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Restricted and Illiquid Securities.
Unregistered securities are securities that cannot be sold publicly in the United States without registration under the Securities
Act. An illiquid investment is a security or other investment that cannot be disposed of within seven days in the ordinary course
of business at approximately the value at which the Fund has valued the investment. Unregistered securities often can be resold
only in privately negotiated transactions with a limited number of purchasers or in a public offering registered under the Securities
Act. Considerable delay could be encountered in either event and, unless otherwise contractually provided for, the Fund’s
proceeds upon sale may be reduced by the costs of registration or underwriting discounts. The difficulties and delays associated
with such transactions could result in the Fund’s inability to realize a favorable price upon disposition of unregistered
securities, and at times might make disposition of such securities impossible. The Fund may be unable to sell illiquid investments
when it desires to do so, resulting in the Fund obtaining a lower price or being required to retain the investment. Illiquid investments
generally must be valued at fair value, which is inherently less precise than utilizing market values for liquid investments, and
may lead to differences between the price at which a security is valued for determining the Fund’s net asset value and the
price the Fund actually receives upon sale.
Long-Term Objective; Not a Complete
Investment Program. The Fund is intended for investors seeking a high level of total return over the long-term. The Fund
is not meant to provide a vehicle for those who wish to play short-term swings in the stock market. An investment in shares of
the Fund should not be considered a complete investment program. Each shareholder should take into account the Fund’s investment
objective as well as the shareholder’s other investments when considering an investment in the Fund.
Management Risk. The Fund
is subject to management risk because it is an actively managed portfolio. The Investment Adviser will apply investment techniques
and risk analyses in making investment decisions for the Fund, but there can be no guarantee that these will produce the desired
results.
Dependence on Key Personnel.
The Investment Adviser is dependent upon the expertise of Mr. Mario J. Gabelli in providing advisory services with respect to the
Fund’s investments. If the Investment Adviser were to lose the services of Mr. Gabelli, its ability to service the Fund could
be adversely affected. There can be no assurance that a suitable replacement could be found for Mr. Gabelli in the event of his
death, resignation, retirement or inability to act on behalf of the Investment Adviser.
Market Disruption and Geopolitical
Risk. Events of recent years, such as the aftermath of the war in Iraq, instability in Afghanistan, Pakistan, Egypt, Libya,
Syria, Russia, Ukraine and the Middle East, ongoing epidemics of infectious diseases in certain parts of the world, terrorist attacks
in the U.S. and around the world, social and political discord, debt crises (such as the Greek crisis), sovereign debt downgrades,
continued tensions between North Korea and the United States and the international community generally, new and continued political
unrest in various countries, such as Venezuela, the exit or potential exit of one or more countries from the European Union (“EU”)
or the European Monetary Union (“EMU”), the change in the U.S. president and the new administration, among others,
may result in market volatility, may have long term effects on the United States and worldwide financial markets, and may cause
further economic uncertainties in the United States and worldwide.
The Gabelli Convertible
and Income Securities Fund Inc.
Additional Fund Information (Continued) (Unaudited)
As a consequence of the United Kingdom’s
vote to withdraw from the EU, the government of the United Kingdom gave notice of its withdrawal from the EU. As a result of this
decision, the financial markets experienced high levels of volatility and it is likely that, in the near term, BREXIT will continue
to bring about higher levels of uncertainty and volatility. During this period of uncertainty, the negative impact on not only
the United Kingdom and European economies, but the broader global economy, could be significant, potentially resulting in increased
volatility and illiquidity and lower economic growth for companies that rely significantly on Europe for their business activities
and revenues. It is possible that certain economic activity will be curtailed until some signs of clarity begin to emerge, including
negotiations around the terms for United Kingdom’s exit out of the EU. Any further exits from the EU, or the possibility
of such exits, would likely cause additional market disruption globally and introduce new legal and regulatory uncertainties.
The value and risk profile of the Fund’s
portfolio could be adversely impacted by the events above. The Fund does not know how long the securities markets may be affected
by similar events and cannot predict the effects of similar events in the future on the U.S. economy and securities markets. There
can be no assurance that similar events and other market disruptions will not have other material and adverse implications.
Economic Events and Market Risk.
Periods of market volatility remain, and may continue to occur in the future, in response to various political, social and economic
events both within and outside of the United States. These conditions have resulted in, and in many cases continue to result in,
greater price volatility, less liquidity, widening credit spreads and a lack of price transparency, with many securities remaining
illiquid and of uncertain value. Such market conditions may adversely affect the Fund, including by making valuation of some of
the Fund’s securities uncertain and/or result in sudden and significant valuation increases or declines in the Fund’s
holdings. If there is a significant decline in the value of the Fund’s portfolio, this may impact the asset coverage levels
for the Fund’s outstanding leverage.
Risks resulting from any future debt or
other economic crisis could also have a detrimental impact on the global economic recovery, the financial condition of financial
institutions and our business, financial condition and results of operation. Market and economic disruptions have affected, and
may in the future affect, consumer confidence levels and spending, personal bankruptcy rates, levels of incurrence and default
on consumer debt and home prices, among other factors. To the extent uncertainty regarding the U.S. or global economy negatively
impacts consumer confidence and consumer credit factors, our business, financial condition and results of operations could be significantly
and adversely affected. Downgrades to the credit ratings of major banks could result in increased borrowing costs for such banks
and negatively affect the broader economy. Moreover, Federal Reserve policy, including with respect to certain interest rates,
may also adversely affect the value, volatility and liquidity of dividend- and interest-paying securities. Market volatility, rising
interest rates and/or a return to unfavorable economic conditions could impair the Fund’s ability to achieve its investment
objective.
Government Intervention in Financial
Markets Risk. Past instability in the financial markets has led the U.S. government and certain foreign governments to
take a number of unprecedented actions designed to support certain financial institutions and segments of the financial markets
that have experienced extreme volatility, and in some cases a lack of liquidity, including through direct purchases of equity and
debt securities. The U.S. government and certain foreign governments and their regulatory agencies or self-regulatory organizations
have in the past taken, and may in the future take, legislative and regulatory actions that may affect the Fund, its securities
and/or the Fund’s investments in ways that are unforeseeable. Such legislation or regulation may change the way in which
the Fund is regulated and could limit or preclude the Fund’s ability to achieve its investment objective.
The Dodd-Frank Act, signed into law by President
Obama on July 21, 2010, contains sweeping financial legislation regarding the operation of banks, private fund managers and other
financial institutions. The Dodd-Frank Act includes provisions regarding, among other things, the regulation of derivatives (see
“ — Dodd-Frank Act Risk” above), the identification, monitoring and prophylactic regulation of systemic risks
to financial markets, and the regulation of proprietary trading and investment activity of banking institutions. The continuing
implementation of the Dodd-Frank Act and any other regulations could adversely affect the Investment Adviser and the Fund.
The Investment Adviser may attempt to take
certain actions to lessen the impact of the Dodd-Frank Act and any other legislation or regulation affecting the Fund, although
no assurance can be given that such actions would be successful and no assurance can be given that such actions would not have
a significant negative impact on the Fund. The ultimate impact of the Dodd-Frank Act, and any additional future legislation or
regulation, is not yet certain and the Investment Adviser and the Fund may be affected by governmental action in ways that are
unforeseeable.
Additionally, the SEC and its staff are
also reportedly engaged in various initiatives and reviews that seek to improve and modernize the regulatory structure governing
investment companies. These efforts appear to be focused on risk identification and controls in various areas, including imbedded
leverage through the use of derivatives and other trading practices, cybersecurity, liquidity, enhanced regulatory and public reporting
requirements and the evaluation of systemic risks. Any new rules, guidance or regulatory initiatives resulting from these efforts
could increase the Fund’s expenses and impact its returns to shareholders or, in the extreme case, impact or limit the Fund’s
use of various portfolio management strategies or techniques and adversely impact the Fund.
In the aftermath of the recent financial
crisis, there appears to be a renewed popular, political and judicial focus on finance related consumer protection. Financial institution
practices are also subject to greater scrutiny and criticism generally. In the case of transactions between
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and Income Securities Fund Inc.
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financial institutions and the general public,
there may be a greater tendency toward strict interpretation of terms and legal rights in favor of the consuming public, particularly
where there is a real or perceived disparity in risk allocation and/or where consumers are perceived as not having had an opportunity
to exercise informed consent to the transaction. In the event of conflicting interests between retail investors holding shares
of common stock of a closed-end investment company such as the Fund and a large financial institution, a court may similarly seek
to strictly interpret terms and legal rights in favor of retail investors.
The Trump administration has called for
substantial changes to U.S. fiscal and tax policies. In addition, the Trump administration has called for significant changes to
U.S. trade, healthcare, immigration, foreign, and government regulatory policy. In this regard, there is significant uncertainty
with respect to legislation, regulation and government policy at the federal level, as well as the state and local levels. Recent
events have created a climate of heightened uncertainty and introduced new and difficult-to-quantify macroeconomic and political
risks with potentially far reaching implications. There has been a corresponding meaningful increase in the uncertainty surrounding
interest rates, inflation, foreign exchange rates, trade volumes and fiscal and monetary policy. To the extent the U.S. Congress
or Trump administration implements changes to U.S. policy, those changes may impact, among other things, the U.S. and global economy,
international trade and relations, unemployment, immigration, corporate taxes, healthcare, the U.S. regulatory environment, inflation
and other areas. Some particular areas identified as subject to potential change, amendment or repeal include the Dodd-Frank Act,
including the Volcker Rule and various swaps and derivatives regulations, credit risk retention requirements and the authorities
of the Federal Reserve, the Financial Stability Oversight Council and the SEC. Although we cannot predict the impact, if any, of
these changes to our business, they could adversely affect our business, financial condition, operating results and cash flows.
Until we know what policy changes are made and how those changes impact our business and the business of our competitors over the
long term, we will not know if, overall, we will benefit from them or be negatively affected by them.
In addition, the recently enacted Tax Cuts
and Jobs Act (the ‘‘Act’’) makes substantial changes to the Code. Among those changes are a significant
permanent reduction in the generally applicable corporate tax rate, changes in the taxation of individuals and other non-corporate
taxpayers that generally but not universally reduce their taxes on a temporary basis subject to ‘‘sunset’’
provisions, the elimination or modification of various previously allowed deductions (including substantial limitations on the
deductibility of interest and, in the case of individuals, the deduction for personal state and local taxes), certain additional
limitations on the deduction of net operating losses, certain preferential rates of taxation on certain dividends and certain business
income derived by non-corporate taxpayers in comparison to other ordinary income recognized by such taxpayers, and significant
changes to the international tax rules. The effect of these, and the many other, changes made in the Act is highly uncertain, both
in terms of their direct effect on the taxation of an investment in our common or preferred shares and their indirect effect on
the value of our assets, our common or preferred shares or market conditions generally. Furthermore, many of the provisions of
the Act will require guidance through the issuance of Treasury regulations in order to assess their effect. There may be a substantial
delay before such regulations are promulgated, increasing the uncertainty as to the ultimate effect of the statutory amendments
on us. It is also likely that there will be technical corrections legislation proposed with respect to the Act, the effect of which
cannot be predicted and may be adverse to us or our shareholders.
Inflation Risk. Inflation
risk is the risk that the value of assets or income from investments will be worth less in the future as inflation decreases the
value of money. As inflation increases, the real value of the Fund’s shares and distributions therefore may decline. In addition,
during any periods of rising inflation, dividend rates of any debt securities issued by the Fund would likely increase, which would
tend to further reduce returns to common shareholders.
Deflation Risk. Deflation
risk is the risk that prices throughout the economy decline over time, which may have an adverse effect on the market valuation
of companies, their assets and their revenues. In addition, deflation may have an adverse effect on the creditworthiness of issuers
and may make issuer default more likely, which may result in a decline in the value of the Fund’s portfolio.
Loans of Portfolio Securities.
Consistent with applicable regulatory requirements and the Fund’s investment restrictions, 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 in the SAI), and are at all times collateralized in accordance with applicable regulatory
requirements. The advantage of such loans is that the Fund continues to receive the income on the loaned securities while at the
same time earning 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.
Portfolio Turnover Risk. The
Fund’s annual portfolio turnover rate may vary greatly from year to year, as well as within a given year. Portfolio turnover
rate is not considered a limiting factor in the execution of investment decisions for the Fund. A higher portfolio turnover rate
results in correspondingly greater brokerage commissions and other transactional expenses that are borne by the Fund. High portfolio
turnover may result in an increased realization of net short term capital gains by the Fund which, when distributed to common shareholders,
will be taxable as ordinary income. Additionally, in a declining market, portfolio turnover may create realized capital losses.
Tax Risk. We cannot assure
you what percentage of the distributions paid on the Fund’s shares, if any, will consist of tax-advantaged qualified dividend
income or long term capital gains or what the tax rates on various types of income will be in future years.
The Gabelli Convertible
and Income Securities Fund Inc.
Additional Fund Information (Continued) (Unaudited)
Status as a Regulated Investment Company.
The Fund has elected to qualify as a RIC under Subchapter M of the Code. Qualification requires, among other things, compliance
by the Fund with certain distribution requirements. Statutory limitations on distributions on the common shares if the Fund fails
to satisfy the 1940 Act’s asset coverage requirements could jeopardize the Fund’s ability to meet such distribution
requirements. To qualify and maintain its status as a RIC, the Fund must, among other things, derive in each taxable year at least
90% of its gross income from certain prescribed sources and distribute for each taxable year at least 90% of its “investment
company taxable income” (generally, ordinary income plus excess, if any, of net short term capital gain over net long term
capital loss). While the Fund presently intends to purchase or redeem notes or preferred shares, if any, to the extent necessary
in order to maintain compliance with such asset coverage requirements, there can be no assurance that such actions can be effected
in time to meet the Code requirements. If the Fund fails to qualify as a RIC for any reason, it will be subject to U.S. federal
income tax at regular corporate rates on all of its taxable income and gains. The resulting corporate taxes would materially reduce
the Fund’s net assets and the amount of cash available for distribution to holders of the Units. For a more complete discussion
of these and other U.S. federal income tax considerations, see “Taxation” below.
1940 Act Regulation. The Fund
is a registered closed-end investment company and as such is subject to regulations under the 1940 Act. Generally speaking, any
contract or provision thereof that is made or where performance involves a violation of the 1940 Act or any rule or regulation
thereunder is unenforceable by either party unless a court finds otherwise.
Legislation Risk. At any time
after the date of this report, legislation may be enacted that could negatively affect the assets of the Fund. Legislation or regulation
may change the way in which the Fund itself is regulated. The Investment Adviser cannot predict the effects of any new governmental
regulation that may be implemented and there can be no assurance that any new governmental regulation will not adversely affect
the Fund’s ability to achieve its investment objective.
Reliance on Service Providers Risk.
The Fund must rely upon the performance of service providers to perform certain functions, which may include functions that are
integral to the Fund’s operations and financial performance. Failure by any service provider to carry out its obligations
to the Fund in accordance with the terms of its appointment, to exercise due care and skill or to perform its obligations to the
Fund at all as a result of insolvency, bankruptcy or other causes could have a material adverse effect on the Fund’s performance
and returns to shareholders. The termination of the Fund’s relationship with any service provider, or any delay in appointing
a replacement for such service provider, could materially disrupt the business of the Fund and could have a material adverse effect
on the Fund’s performance and returns to shareholders.
Cyber Security Risk. The Fund
and its service providers are susceptible to cyber security risks that include, among other things, theft, unauthorized monitoring,
release, misuse, loss, destruction or corruption of confidential and highly restricted data; denial of service attacks; unauthorized
access to relevant systems, compromises to networks or devices that the Fund and its service providers use to service the Fund’s
operations; or operational disruption or failures in the physical infrastructure or operating systems that support the Fund and
its service providers. Cyber attacks against or security breakdowns of the Fund or its service providers may adversely impact the
Fund and its stockholders, potentially resulting in, among other things, financial losses; the inability of Fund stockholders to
transact business and the Fund to process transactions; inability to calculate the Fund’s NAV; violations of applicable privacy
and other laws; regulatory fines, penalties, reputational damage, reimbursement or other compensation costs; and/or additional
compliance costs. The Fund may incur additional costs for cyber security risk management and remediation purposes. In addition,
cyber security risks may also impact issuers of securities in which the Fund invests, which may cause the Fund’s investment
in such issuers to lose value. There can be no assurance that the Fund or its service providers will not suffer losses relating
to cyber attacks or other information security breaches in the future.
Misconduct of Employees and of Service
Providers Risk. Misconduct or misrepresentations by employees of the Investment Adviser or the Fund’s service providers
could cause significant losses to the Fund. Employee misconduct may include binding the Fund to transactions that exceed authorized
limits or present unacceptable risks and unauthorized trading activities, concealing unsuccessful trading activities (which, in
any case, may result in unknown and unmanaged risks or losses) or making misrepresentations regarding any of the foregoing. Losses
could also result from actions by the Fund’s service providers, including, without limitation, failing to recognize trades
and misappropriating assets. In addition, employees and service providers may improperly use or disclose confidential information,
which could result in litigation or serious financial harm, including limiting the Fund’s business prospects or future marketing
activities. Despite the Investment Adviser’s due diligence efforts, misconduct and intentional misrepresentations may be
undetected or not fully comprehended, thereby potentially undermining the Investment Adviser’s due diligence efforts. As
a result, no assurances can be given that the due diligence performed by the Investment Adviser will identify or prevent any such
misconduct.
Anti-Takeover Provisions.
The Charter and Bylaws of the Fund include provisions that could limit the ability of other entities or persons to acquire control
of the Fund or convert the Fund to an open-end fund. See “Certain Provisions of the Maryland General Corporation Law and
Our Charter and Bylaws.”
Special Risks Related to Investment
in Derivative Transactions. The Fund may participate in derivative transactions. Such transactions entail certain execution,
market, liquidity, counterparty, correlation, volatility, hedging and tax risks. Participation in the options or futures
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and Income Securities Fund Inc.
Additional Fund Information (Continued) (Unaudited)
markets, in currency exchange transactions
and in other derivatives transactions involves investment risks and transaction costs to which the Fund would not be subject absent
the use of these strategies. If the Investment Adviser’s prediction of movements in the direction of the securities, foreign
currency, interest rate or other referenced instruments or markets is inaccurate, the consequences to the Fund may leave the Fund
in a worse position than if it had not used such strategies. Risks inherent in the use of options, swaps, foreign currency, futures
contracts and options on futures contracts, securities indices and foreign currencies include:
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dependence on the Investment Adviser’s ability to predict correctly movements in the direction of the relevant measure;
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imperfect correlation between the price of the derivative instrument and movements in the prices of the referenced assets;
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the fact that skills needed to use these strategies are different from those needed to select portfolio securities;
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the possible absence of a liquid secondary market for any particular instrument at any time;
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the possible need to defer closing out certain hedged positions to avoid adverse tax consequences;
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the possible inability of the Fund to purchase or sell a security or instrument at a time that otherwise would be favorable for it to do so, or the possible need for the Fund to sell a security or instrument 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
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the creditworthiness of counterparties.
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Options, futures contracts, swaps 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 United States, 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 United States of data on which to make trading decisions, (iii) delays in the ability of the Fund
to act upon economic events occurring in the foreign markets during non-business hours in the United States, (iv) the imposition
of different exercise and settlement terms and procedures and margin requirements than in the United States, and (v) less trading
volume. Exchanges on which options, futures, swaps and options on futures or swaps are traded may impose limits on the positions
that the Fund may take in certain circumstances.
Many OTC derivatives are valued on the basis
of dealers’ pricing of these instruments. However, the price at which dealers value a particular derivative and the price
which the same dealers would actually be willing to pay for such derivative should the Fund wish or be forced to sell such position
may be materially different. Such differences can result in an overstatement of the Fund’s net asset value and may materially
adversely affect the Fund in situations in which the Fund is required to sell derivative instruments. Exchange-traded derivatives
and OTC derivative transactions submitted for clearing through a central counterparty have become subject to minimum initial and
variation margin requirements set by the relevant clearinghouse, as well as possible margin requirements mandated by the SEC or
the CFTC. These regulators also have broad discretion to impose margin requirements on non-cleared OTC derivatives. These margin
requirements will increase the overall costs for the Fund.
While hedging can reduce or eliminate losses, it can also reduce
or eliminate gains. Hedges are sometimes subject to imperfect matching between the derivative and the underlying security, and
there can be no assurance that the Fund’s hedging transactions will be effective.
Derivatives may give rise to a form of leverage
and may expose the Fund to greater risk and increase its costs. Recent legislation calls for new regulation of the derivatives
markets. The extent and impact of the regulation is not yet known and may not be known for some time. New regulation may make derivatives
more costly, may limit the availability of derivatives, or may otherwise adversely affect the value or performance of derivatives.
Counterparty Risk. The Fund
will be subject to credit risk with respect to the counterparties to the derivative contracts purchased by the Fund. If a counterparty
becomes bankrupt or otherwise fails to perform its obligations under a derivative contract due to financial difficulties, the Fund
may experience significant delays in obtaining any recovery under the derivative contract in bankruptcy or other reorganization
proceeding. The Fund may obtain only a limited recovery or may obtain no recovery in such circumstances.
The counterparty risk for cleared derivatives
is generally lower than for uncleared OTC derivative transactions since generally a clearing organization becomes substituted for
each counterparty to a cleared derivative contract and, in effect, guarantees the parties’ performance under the contract
as each party to a trade looks only to the clearing organization for performance of financial obligations under the derivative
contract. However, there can be no assurance that a clearing organization, or its members, will satisfy its obligations to the
Fund, or that the Fund would be able to recover the full amount of assets deposited on its behalf with the clearing organization
in the event of the default by the clearing organization or the Fund’s clearing broker. In addition, cleared derivative transactions
benefit from daily marking-to-market and settlement, and segregation and minimum capital requirements applicable to intermediaries.
Uncleared OTC derivative transactions generally do not benefit from such protections. This exposes the Fund to the risk that a
counterparty will not settle a transaction in accordance with its terms and conditions because of a dispute over the terms of the
contract (whether or not bona fide)
The Gabelli Convertible
and Income Securities Fund Inc.
Additional Fund Information (Continued) (Unaudited)
or because of a credit or liquidity problem,
thus causing the Fund to suffer a loss. Such “counterparty risk” is accentuated for contracts with longer maturities
where events may intervene to prevent settlement, or where the Fund has concentrated its transactions with a single or small group
of counterparties.
Failure of Futures Commission Merchants
and Clearing Organizations Risk. The Fund may deposit funds required to margin open positions in the derivative instruments
subject to the CEA with a clearing broker registered as a “futures commission merchant” (“FCM”). The CEA
requires an FCM to segregate all funds received from customers with respect to any orders for the purchase or sale of U.S. domestic
futures contracts and cleared swaps from the FCM’s proprietary assets. Similarly, the CEA requires each FCM to hold in a
separate secure account all funds received from customers with respect to any orders for the purchase or sale of foreign futures
contracts and segregate any such funds from the funds received with respect to domestic futures contracts. However, all funds and
other property received by a clearing broker from its customers are held by the clearing broker on a commingled basis in an omnibus
account and may be invested by the clearing broker in certain instruments permitted under the applicable regulation. There is a
risk that assets deposited by the Fund with any swaps or futures clearing broker as margin for futures contracts may, in certain
circumstances, be used to satisfy losses of other clients of the Fund’s clearing broker. In addition, the assets of the Fund
may not be fully protected in the event of the clearing broker’s bankruptcy, as the Fund would be limited to recovering only
a pro rata share of all available funds segregated on behalf of the clearing broker’s combined domestic customer accounts.
Similarly, the CEA requires a clearing organization
approved by the CFTC as a derivatives clearing organization to segregate all funds and other property received from a clearing
member’s clients in connection with domestic futures, swaps and options contracts from any funds held at the clearing organization
to support the clearing member’s proprietary trading. Nevertheless, with respect to futures contracts and options on futures,
a clearing organization may use assets of a non-defaulting customer held in an omnibus account at the clearing organization to
satisfy losses in that account resulting from the default by another customer on its payment obligations that leads to the clearing
member’s default to the clearing organization. As a result, in the situation of a double default by a customer of the Fund’s
clearing member and the clearing member itself with respect to payment obligations on the customer’s futures or options on
futures, there is a risk that the Fund’s assets in an omnibus account with the clearing organization may be used to satisfy
losses from the double default and that the Fund may not recover the full amount of any such assets.
Swaps Risk. Swap agreements
are two-party contracts entered into primarily by institutional investors for periods ranging from a few weeks to more than one
year. In a standard “swap” transaction, two parties agree to exchange the returns (or differentials in rates of return)
earned or realized on particular predetermined investments or instruments. The gross returns to be exchanged or “swapped”
between the parties are calculated with respect to a “notional amount,” i.e., the return on or increase in value of
a particular dollar amount invested at a particular interest rate, in a particular foreign currency, or in a “basket”
of securities representing a particular index. The “notional amount” of the swap agreement is only a fictive basis
on which to calculate the obligations that the parties to a swap agreement have agreed to exchange.
Historically, swap transactions have been
individually negotiated non-standardized transactions entered into in OTC markets and have not been subject to the same type of
government regulation as exchange-traded instruments. However, the OTC derivatives markets have recently become subject to comprehensive
statutes and regulations. In particular, in the U.S., the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the
“Dodd-Frank Act”) requires that certain derivatives with U.S. persons must be executed on a regulated market and a
substantial portion of OTC derivatives must be submitted for clearing to regulated clearinghouses. As a result, swap transactions
entered into by the Fund may become subject to various requirements applicable to swaps under the Dodd-Frank Act, including clearing,
exchange-execution, reporting and recordkeeping requirements, which may make it more difficult and costly for the Fund to enter
into swap transactions and may also render certain strategies in which the Fund might otherwise engage impossible or so costly
that they will no longer be economical to implement. Furthermore, the number of counterparties that may be willing to enter into
swap transactions with the Fund may also be limited if the swap transactions with the Fund are subject to the swap regulation under
the Dodd-Frank Act.
Swap agreements will tend to shift the Fund’s
investment exposure from one type of investment to another. For example, if the Fund agreed to pay fixed rates in exchange for
floating rates while holding fixed-rate bonds, the swap would tend to decrease the Fund’s exposure to long term interest
rates. Caps and floors have an effect similar to buying or writing options. Depending on how they are used, swap agreements may
increase or decrease the overall volatility of the Fund’s investments and its share price and yield. The most significant
factor in the performance of swap agreements is the change in the specific interest rate, currency, or other factors that determine
the amounts of payments due to and from the Fund. If a swap agreement calls for payments by the Fund, the Fund must be prepared
to make such payments when due.
The Fund may enter into swap agreements
that would calculate the obligations of the parties to the agreements on a “net” basis. Consequently, the Fund’s
obligations (or rights) under a swap agreement will generally be equal only to the net amount to be paid or received under the
agreement based on the relative values of the positions held by each party to the agreement (the “net amount”). The
Fund’s obligations under a swap agreement will be accrued daily (offset against any amounts owing to the Fund) and any accrued
but unpaid net amounts owed to a swap counterparty will be covered by the maintenance of liquid assets in accordance with SEC staff
positions on the subject.
The Gabelli Convertible
and Income Securities Fund Inc.
Additional Fund Information (Continued) (Unaudited)
The Fund’s use of swap agreements
may not be successful in furthering its investment objective, as the Investment Adviser may not accurately predict whether certain
types of investments are likely to produce greater returns than other investments. Moreover, swap agreements involve the risk that
the party with whom a Fund has entered into the swap will default on its obligation to pay a Fund and the risk that a Fund will
not be able to meet its obligations to pay the other party to the agreement. The Fund may be able to eliminate its exposure under
a swap agreement either by assignment or other disposition, or by entering into an offsetting swap agreement with the same party
or a similarly creditworthy party.
Forward Foreign Currency Exchange
Contracts. The Fund may enter into forward foreign currency exchange contracts to protect the value of its portfolio against
uncertainty in the level of future currency exchange rates between a particular foreign currency and the U.S. dollar or between
foreign currencies in which its securities are or may be denominated. 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. Forward currency contracts (i) are traded in a market conducted directly between currency traders (typically,
commercial banks or other financial institutions) and their customers, (ii) generally have no deposit requirements and (iii) are
typically consummated without payment of any commissions. The Fund, however, may enter into forward currency contracts requiring
deposits or involving the payment of commissions.
The dealings of the Fund in forward foreign
exchange are limited to hedging involving either specific transactions or portfolio positions. Transaction hedging is the purchase
or sale of one forward foreign currency for another currency with respect to specific receivables or payables of the Fund accruing
in connection with the purchase and sale of its portfolio securities or its payment of distributions. Position hedging is the purchase
or sale of one forward foreign currency for another currency with respect to portfolio security positions denominated or quoted
in the foreign currency to offset the effect of an anticipated substantial appreciation or depreciation, respectively, in the value
of the currency relative to the U.S. dollar. In this situation, the Fund also may, for example, enter into a forward contract to
sell or purchase a different foreign currency for a fixed U.S. dollar amount where it is believed that the U.S. dollar value of
the currency to be sold or bought pursuant to the forward contract will fall or rise, as the case may be, whenever there is a decline
or increase, respectively, in the U.S. dollar value of the currency in which its portfolio securities are denominated (this practice
being referred to as a “cross-hedge”).
In hedging a specific transaction, the Fund
may enter into a forward contract with respect to either the currency in which the transaction is denominated or another currency
deemed appropriate by the Investment Adviser. The amount the Fund may invest in forward currency contracts is limited to the amount
of its aggregate investments in foreign currencies.
The use of forward currency contracts may
involve certain risks, including the failure of the counterparty to perform its obligations under the contract, and such use may
not serve as a complete hedge because of an imperfect correlation between movements in the prices of the contracts and the prices
of the currencies hedged or used for cover. The Fund will only enter into forward currency contracts with parties which the Investment
Adviser believes to be creditworthy institutions.
Under current interpretations of the SEC
and its staff under the 1940 Act, the Fund must segregate with its custodian liquid assets, or engage in other SEC or staff approved
measures, to “cover” open positions in certain types of derivative instruments. The purpose of these requirements is
to prevent the Fund from incurring excessive leverage through such instruments. In the case of futures and forward contracts, for
example, that are not required as a result of one or more contractual arrangements to settle for cash only in an amount equal to
the change in value of the contract over its term but rather may settle through physical delivery or in the notional amount, the
Fund must segregate liquid assets equal to such contract’s full notional value while it has an open long position, or equal
to the market value of the contract in the case of an open short position. With respect to contracts that the Fund is contractually
obligated to settle for cash in an amount equal to the change in value of the contract, the Fund needs to segregate liquid assets
only in an amount equal to the Fund’s unpaid mark to market obligation rather than the entire notional amount. This is because
the Fund’s maximum potential obligation at that point in time is its net unpaid mark to market obligation rather than the
full notional amount.
Futures Contracts and Options on Futures.
Futures and options on futures entail certain risks, including but not limited to the following: no assurance that futures contracts
or options on futures can be offset at favorable prices; possible reduction of the yield of the Fund due to the use of hedging;
possible reduction in value of both the securities hedged and the hedging instrument; possible lack of liquidity due to daily limits
on price fluctuations; imperfect correlation between the contracts and the securities being hedged; losses from investing in futures
transactions that are potentially unlimited; and the segregation requirements for such transactions.
Options Risk. To the extent
that the Fund purchases options pursuant to a hedging strategy, the Fund will be subject to the following additional risks. If
a put or call option purchased by the Fund is not sold when it has remaining value, and if the market price of the underlying security
remains equal to or greater than the exercise price (in the case of a put), or remains less than or equal to the exercise price
(in the case of a call), the Fund will lose its entire investment in the option.
Where a put or call option on a particular security is purchased
to hedge against price movements in that or a related security, the price
The Gabelli Convertible
and Income Securities Fund Inc.
Additional Fund Information (Continued) (Unaudited)
of the put or call option may move more
or less than the price of the security. If restrictions on exercise are imposed, the Fund may be unable to exercise an option it
has purchased. If the Fund is unable to close out an option that it has purchased on a security, it will have to exercise the option
in order to realize any profit or the option may expire worthless.
Dodd-Frank Act Risk. Title
VII of the Dodd-Frank Act (the “Derivatives Title”) imposes a new regulatory structure on derivatives markets, with
particular emphasis on swaps and security-based swaps (collectively “swaps”). This new regulatory framework covers
a broad range of swap market participants, including banks, non-banks, credit unions, insurance companies, broker-dealers and investment
advisers. The SEC, other U.S. regulators, and to a lesser extent the CFTC (the “Regulators”) still are in the process
of adopting regulations, making determinations and providing guidance to implement the Derivatives Title, though certain aspects
of the new regulatory structure are substantially complete. Until the Regulators complete their rulemaking efforts, the full extent
to which the Derivatives Title and the rules adopted thereunder will impact the Fund is unclear. It is possible that the continued
development of this new regulatory structure for swaps may jeopardize certain trades and/or trading strategies that may be employed
by the Investment Adviser, or at least make them more costly.
Current regulations require the mandatory
central clearing and mandatory exchange trading of particular types of interest rate swaps and index credit default swaps (together,
“Covered Swaps”). Together, these new regulatory requirements change the Fund’s trading of Covered Swaps. With
respect to mandatory central clearing, the Fund is now required to clear its Covered Swaps through a clearing broker, which requires,
among other things, posting initial margin and variation margin to the Fund’s clearing broker in order to enter into and
maintain positions in Covered Swaps. With respect to mandatory exchange trading, the Investment Adviser may be required to become
a participant of a new type of execution platform called a swap execution facility (“SEF”) or may be required to access
the SEF through an intermediary (such as an executing broker) in order to be able to trade Covered Swaps for the Fund. In either
scenario, the Investment Adviser and/or the Fund may incur additional legal and compliance costs and transaction fees. Just as
with the other regulatory changes imposed as a result of the implementation of the Derivatives Title, the increased costs and fees
associated with trading Covered Swaps may jeopardize certain trades and/or trading strategies that may be employed by the Investment
Adviser, or at least make them more costly.
Additionally, the Regulators have finalized
regulations with a phased implementation that may require swap dealers to collect from, and post to, the Fund variation margin
(and initial margin, if the Fund exceeds a specified exposure threshold) for uncleared derivatives transactions in certain circumstances. U.S. federal banking regulators have also finalized regulations that would impose upon swap dealers new capital requirements.
The CFTC and SEC have each proposed, but not yet adopted, capital requirements for swap dealers, and the SEC is still in the process
of finalizing its proposed uncleared margin rules. As uncleared margin and capital requirements have been and continue to be finalized
and implemented, such requirements may make certain types of trades and/or trading strategies more costly or impermissible.
There may be market dislocations due to
uncertainty during the implementation period of any new regulation and the Investment Adviser cannot know how the derivatives market
will adjust to new regulations. Until the Regulators complete the rulemaking process for the Derivatives Title, it is unknown the
extent to which such risks may materialize.
Special Risks to Holders of Notes
An investment in our notes is subject to
special risks. Our notes are not likely to be listed on an exchange or automated quotation system. We cannot assure you that any
market will exist for our notes or if a market does exist, whether it will provide holders with liquidity. Broker-dealers that
maintain a secondary trading market for the notes are not required to maintain this market, and the Fund is not required to redeem
notes if an attempted secondary market sale fails because of a lack of buyers. To the extent that our notes trade, they may trade
at a price either higher or lower than their principal amount depending on interest rates, the rating (if any) on such notes and
other factors.
Special Risks to Holders of Preferred
Shares
Illiquidity Prior to Exchange Listing.
Prior to the offering of any additional series of preferred shares, there will be no public market for such shares. In the event
any preferred shares are issued, prior application will have been made to list such shares on the NYSE. However, during an initial
period, which is not expected to exceed 30 days after the date of initial issuance, such shares may not be listed on any securities
exchange. During such period, the underwriters may make a market in such shares, though, they will have no obligation to do so.
Consequently, an investment in such shares may be illiquid during such period.
Market Price Fluctuation.
Preferred shares may trade at a premium to or discount from liquidation preference for a variety of reasons, including changes
in interest rates.
Special Risks to Holders of Notes and
Preferred Shares
Common Share Repurchases.
Repurchases of common shares by the Fund may reduce the net asset coverage of the notes and preferred shares, which could adversely
affect their liquidity or market prices.
The Gabelli Convertible
and Income Securities Fund Inc.
Additional Fund Information (Continued) (Unaudited)
Common Share Distribution Policy.
In the event the Fund does not generate a total return from dividends and interest received and net realized capital gains in an
amount at least equal to the greater of its stated distribution policy or the minimum distribution requirements of the Code in
a given year, the Fund expects that it would return capital as part of its distribution. This would decrease the asset coverage
per share with respect to the Fund’s notes or preferred shares, which could adversely affect their liquidity or market prices.
For the fiscal year ended December 31, 2017,
the Fund made distributions of $0.48 per common share, none of which constituted a return of capital. The composition of each distribution
is estimated based on the earnings of the Fund as of the record date for each distribution. The actual composition of each of the
current year’s distributions will be based on the Fund’s investment activity through the end of the calendar year.
Credit Quality Ratings. The
Fund may obtain credit quality ratings for its preferred shares or notes; however, it is not required to do so and may issue preferred
shares or notes without any rating. If rated, the Fund does not impose any minimum rating necessary to issue such preferred shares
or notes. In order to obtain and maintain attractive credit quality ratings for preferred shares or borrowings, if desired, the
Fund’s portfolio must satisfy over-collateralization tests established by the relevant rating agencies. These tests are more
difficult to satisfy to the extent the Fund’s portfolio securities are of lower credit quality, longer maturity or not diversified
by issuer and industry. These guidelines could affect portfolio decisions and may be more stringent than those imposed by the 1940
Act. With respect to ratings (if any) of the notes or preferred shares, a rating by a ratings agency does not eliminate or necessarily
mitigate the risks of investing in our preferred shares or notes, and a rating may not fully or accurately reflect all of the securities’
credit risks. A rating does not address the liquidity or any other market risks of the securities being rated. A rating agency
could downgrade the rating of our notes or preferred shares, which may make such securities less liquid in the secondary market.
If a rating agency downgrades the rating assigned to our preferred shares or notes, we may alter our portfolio or redeem the preferred
shares or notes under certain circumstances.
Special Risks of Notes to Holders of Preferred Shares
As provided in the 1940 Act, and subject
to compliance with the Fund’s investment limitations, the Fund may issue notes. In the event the Fund were to issue such
securities, the Fund’s obligations to pay dividends or make distributions and, upon liquidation of the Fund, liquidation
payments in respect of its preferred shares would be subordinate to the Fund’s obligations to make any principal and interest
payments due and owing with respect to its outstanding notes. Accordingly, the Fund’s issuance of notes would have the effect
of creating special risks for the Fund’s preferred shareholders that would not be present in a capital structure that did
not include such securities.
Special Risks to Holders of Common Shares
Dilution Risk. If the Fund
determines to conduct a rights offering to subscribe for common shares, holders of common shares may experience dilution or accretion
of the aggregate net asset value of their common shares. Such dilution or accretion will depend upon whether (i) such shareholders
participate in the rights offering and (ii) the Fund’s net asset value per common share is above or below the subscription
price on the expiration date of the rights offering.
Shareholders who do not exercise their subscription
rights may, at the completion of such an offering, own a smaller proportional interest in the Fund than if they exercised their
subscription rights. As a result of such an offering, a shareholder may experience dilution in net asset value per share if the
subscription price per share is below the net asset value per share on the expiration date. If the subscription price per share
is below the net asset value per share of the Fund’s shares on the expiration date, a shareholder will experience an immediate
dilution of the aggregate net asset value of such shareholder’s shares if the shareholder does not participate in such an
offering and the shareholder will experience a reduction in the net asset value per share of such shareholder’s shares whether
or not the shareholder participates in such an offering. The Fund cannot state precisely the extent of this dilution (if any) if
the shareholder does not exercise such shareholder’s subscription rights because the Fund does not know what the net asset
value per share will be when the offer expires or what proportion of the subscription rights will be exercised.
There is also a risk that the Fund’s
largest shareholders, record date shareholders of more than 5% of the outstanding shares of common stock of the Fund, may increase
their percentage ownership of the Fund through the exercise of the primary subscription and over-subscription privilege.
Leverage Risk. The Fund currently
uses financial leverage for investment purposes by issuing preferred shares and is also permitted to use other types of financial
leverage, such as through the issuance of debt securities or additional preferred shares and borrowing from financial institutions.
As provided in the 1940 Act and subject to certain exceptions, the Fund may issue additional senior securities (which may be stock,
such as preferred shares, and/or securities representing debt) only if immediately after such issuance the value of the Fund’s
total assets, less certain ordinary course liabilities, exceeds 300% of the amount of the debt outstanding and exceeds 200% of
the amount of preferred shares and debt outstanding. As of December 31, 2017, the amount of leverage represented approximately
23% of the Fund’s assets.
The Fund’s leveraged capital structure
creates special risks not associated with unleveraged funds having a similar investment objective and policies. These include the
possibility of greater loss and the likelihood of higher volatility of the net asset value of the Fund and the
The Gabelli Convertible
and Income Securities Fund Inc.
Additional Fund Information (Continued) (Unaudited)
asset coverage for the preferred shares.
Such volatility may increase the likelihood of the Fund having to sell investments in order to meet its obligations to make distributions
on the preferred shares or principal or interest payments on debt securities, or to redeem preferred shares or repay debt, when
it may be disadvantageous to do so. The Fund’s use of leverage may require it to sell portfolio investments at inopportune
times in order to raise cash to redeem preferred shares or otherwise de-leverage so as to maintain required asset coverage amounts
or comply with the mandatory redemption terms of any outstanding preferred shares. The use of leverage magnifies both the favorable
and unfavorable effects of price movements in the investments made by the Fund. To the extent that the Fund employs leverage in
its investment operations, the Fund is subject to substantial risk of loss. The Fund cannot assure you that borrowings or the issuance
of preferred shares will result in a higher yield or return to the holders of the common shares. Also, since the Fund utilizes
leverage, a decline in net asset value could affect the ability of the Fund to make common share distributions and such a failure
to make distributions could result in the Fund ceasing to qualify as a RIC under the Code.
Any decline in the net asset value of the
Fund’s investments would be borne entirely by the holders of common shares. Therefore, if the market value of the Fund’s
portfolio declines, the leverage will result in a greater decrease in net asset value to the holders of common shares than if the
Fund were not leveraged. This greater net asset value decrease will also tend to cause a greater decline in the market price for
the common shares. The Fund might be in danger of failing to maintain the required asset coverage of its borrowings, notes or preferred
shares or of losing its ratings on its notes or preferred shares or notes or, in an extreme case, the Fund’s current investment
income might not be sufficient to meet the distribution or interest requirements on the borrowings, preferred shares or notes.
In order to counteract such an event, the Fund might need to liquidate investments in order to fund a redemption or repayment of
some or all of the borrowings, preferred shares or notes.
|
●
|
Preferred Share and Note Risk. The issuance of preferred shares or notes causes the net asset value and market value of the common shares to become more volatile. If the dividend rate on the preferred shares or the interest rate on the notes approaches the net rate of return on the Fund’s investment portfolio, the benefit of leverage to the holders of the common shares would be reduced. If the dividend rate on the preferred shares or the interest rate on the notes plus the management fee rate of 1.00%, subject to the voluntary advisory fee waiver for the Reduced Fee Preferred, exceeds the net rate of return on the Fund’s portfolio, the leverage will result in a lower rate of return to the holders of common shares than if the Fund had not issued preferred shares or notes. If the Fund has insufficient investment income and gains, all or a portion of the distributions to preferred shareholders or interest payments to note holders would come from the common shareholders’ capital. Such distributions and interest payments reduce the net assets attributable to common shareholders. The Prospectus Supplement relating to any sale of preferred shares will set forth dividend rate on such preferred shares.
|
In addition, the Fund would pay (and the
holders of common shares will bear) all costs and expenses relating to the issuance and ongoing maintenance of the preferred shares
or notes, including the advisory fees on the incremental assets attributable to the preferred shares or notes.
Holders of preferred shares and notes may
have different interests than holders of common shares and may at times have disproportionate influence over the Fund’s affairs.
As provided in the 1940 Act and subject to certain exceptions, the Fund may issue senior securities (which may be stock, such as
preferred shares, and/or securities representing debt, such as notes) only if immediately after the issuance the value of the Fund’s
total assets, less certain ordinary course liabilities, exceeds 300% of the amount of the debt outstanding (i.e., for every dollar
of indebtedness outstanding, the Fund is required to have at least three dollars of assets) and exceeds 200% of the amount of preferred
shares and debt outstanding (i.e., for every dollar in liquidation preference of preferred stock outstanding, the Fund is required
to have two dollars of assets), which is referred to as the “asset coverage” required by the 1940 Act. In the event
the Fund fails to maintain an asset coverage of 100% for any notes outstanding for certain periods of time, the 1940 Act requires
that either an event of default be declared or that the holders of such notes have the right to elect a majority of the Fund’s
Directors until asset coverage recovers to 110%. In addition, holders of preferred shares, voting separately as a single class,
have the right (subject to the rights of noteholders) to elect two members of the Board at all times and in the event dividends
become two full years in arrears would have the right to elect a majority of the Directors until such arrearage is completely eliminated.
In addition, preferred shareholders have class voting rights on certain matters, including changes in fundamental investment restrictions
and conversion of the Fund to open-end status, and accordingly can veto any such changes. Further, interest on notes will be payable
when due as described in a Prospectus Supplement and if the Fund does not pay interest when due, it will trigger an event of default
and the Fund expects to be restricted from declaring dividends and making other distributions with respect to common shares and
preferred shares. Upon the occurrence and continuance of an event of default, the holders of a majority in principal amount of
a series of outstanding notes or the trustee will be able to declare the principal amount of that series of notes immediately due
and payable upon written notice to the Fund. The 1940 Act also generally restricts the Fund from declaring distributions on, or
repurchasing, common or preferred shares unless notes have an asset coverage of 300% (200% in the case of declaring distributions
on preferred shares). The Fund’s common shares are structurally subordinated as to income and residual value to any preferred
shares or notes in the Fund’s capital structure, in terms of priority to income and payment in liquidation. See “Description
of the Securities — Preferred Shares” and “Description of the Securities — Notes.”
Restrictions imposed on the declarations and payment of dividends
or other distributions to the holders of the Fund’s common shares and
The Gabelli Convertible
and Income Securities Fund Inc.
Additional Fund Information (Continued) (Unaudited)
preferred shares, both by the 1940 Act and
by requirements imposed by rating agencies, might impair the Fund’s ability to maintain its qualification as a RIC for U.S.
federal income tax purposes. While the Fund intends to redeem its preferred shares or notes to the extent necessary to enable the
Fund to distribute its income as required to maintain its qualification as a RIC under the Code, there can be no assurance that
such actions can be effected in time to meet the Code requirements.
|
●
|
Portfolio Guidelines of Rating Agencies for Preferred Shares and/or Credit Facility. In order to obtain and maintain attractive credit quality ratings for preferred shares or borrowings, the Fund must comply with investment quality, diversification and other guidelines established by the relevant rating agencies. These guidelines could affect portfolio decisions and may be more stringent than those imposed by the 1940 Act. In the event that a rating on the Fund’s preferred shares or notes is lowered or withdrawn by the relevant rating agency, the Fund may also be required to redeem all or part of its outstanding preferred shares or notes, and the common shares of the Fund will lose the potential benefits associated with a leveraged capital structure.
|
|
|
|
|
●
|
Market Discount Risk. As described above in “ — General Risks — Market Discount Risk,” common shares of closed-end funds often trade at a discount to their net asset values and the Fund’s common shares may trade at such a discount. This risk may be greater for investors expecting to sell their common shares of the Fund soon after completion of a public offering. The common shares of the Fund are designed primarily for long term investors and investors in the shares should not view the Fund as a vehicle for trading purposes.
|
Special Risk to Holders of Subscription Rights
There is a risk that changes in market conditions
may result in the underlying common or preferred shares purchasable upon exercise of the subscription rights being less attractive
to investors at the conclusion of the subscription period. This may reduce or eliminate the value of the subscription rights. Investors
who receive subscription rights may find that there is no market to sell rights they do not wish to exercise. If investors exercise
only a portion of the rights, the number of common or preferred shares issued may be reduced, and the common or preferred shares
may trade at less favorable prices than larger offerings for similar securities.
INVESTMENT RESTRICTIONS
AUTOMATIC DIVIDEND REINVESTMENT
AND VOLUNTARY CASH PURCHASE PLANS
Under the Fund’s Automatic Dividend
Reinvestment Plan and Voluntary Cash Purchase Plan (the “Plan”), a shareholder whose shares of common stock are registered
in his or her own name will have all distributions reinvested automatically by Computershare Trust Company, N.A. (“Computershare”),
which is an agent under the Plan, unless the shareholder elects to receive cash. Distributions with respect to shares registered
in the name of a broker-dealer or other nominee (that is, in “street name”) will be reinvested by the broker or nominee
in additional shares under the Plan, unless the service is not provided by the broker or nominee or the shareholder elects to receive
distributions in cash. Investors who own shares of common stock registered in street name should consult their broker-dealers for
details regarding reinvestment. All distributions to investors who do not participate in the Plan will be paid by check mailed
directly to the record holder by Computershare as dividend-disbursing agent.
Enrollment in the Plan
It is the policy of The Gabelli Convertible
and Income Securities Fund Inc. (the “Fund”) to automatically reinvest dividends payable to common shareholders. As
a “registered” shareholder you automatically become a participant in the Fund’s Automatic Dividend Reinvestment
Plan (the “Plan”). The Plan authorizes the Fund to credit shares of common stock to participants upon an income dividend
or a capital gains distribution regardless of whether the shares are trading at a discount or a premium to net asset value. All
distributions to shareholders whose shares are registered in their own names will be automatically reinvested pursuant to the Plan
in additional shares of the Fund. Plan participants may send their stock certificates to Computershare Trust Company, N.A. (“Computershare”)
to be held in their dividend reinvestment account. Registered shareholders wishing to receive their distributions in cash may submit
this request through the Internet, by telephone or in writing to:
The Gabelli Convertible and Income Securities
Fund Inc.
c/o Computershare
P.O. Box 505000
Louisville, KY 40233-5000
Telephone: (800) 336-6983
Website: www.computershare.com/investor
Shareholders requesting this cash election
must include the shareholder’s name and address as they appear on the Fund’s records. Shareholders with additional
questions regarding the Plan or requesting a copy of the terms of the Plan, may contact Computershare at the website or telephone
number above.
The Gabelli Convertible
and Income Securities Fund Inc.
Additional Fund Information (Continued) (Unaudited)
If your shares are held in the name of a
broker, bank, or nominee, you should contact such institution. If such institution is not participating in the Plan, your account
will be credited with a cash dividend. In order to participate in the Plan through such institution, it may be necessary for you
to have your shares taken out of “street name” and re-registered in your own name. Once registered in your own name
your dividends will be automatically reinvested. Certain brokers participate in the Plan. Shareholders holding shares in “street
name” at participating institutions will have dividends automatically reinvested. Shareholders wishing a cash dividend at
such institution must contact their broker to make this change.
The number of shares of common stock distributed
to participants in the Plan in lieu of cash dividends is determined in the following manner. Under the Plan, whenever the market
price of the Fund’s common stock is equal to or exceeds net asset value at the time shares are valued for purposes of determining
the number of shares equivalent to the cash dividends or capital gains distribution, participants are issued shares of common stock
valued at the greater of (i) the net asset value as most recently determined or (ii) 95% of the then current market price of the
Fund’s common stock. The valuation date is the dividend or distribution payment date or, if that date is not a New York Stock
Exchange (“NYSE”) trading day, the next trading day. If the net asset value of the common stock at the time of valuation
exceeds the market price of the common stock, participants will receive shares from the Fund valued at market price. If the Fund
should declare a dividend or capital gains distribution payable only in cash, Computershare will buy common stock in the open market,
or on the NYSE or elsewhere, for the participants’ accounts, except that Computershare will endeavor to terminate purchases
in the open market and cause the Fund to issue shares at net asset value if, following the commencement of such purchases, the
market value of the common stock exceeds the then current net asset value.
The automatic reinvestment of dividends
and capital gains distributions will not relieve participants of any income tax which may be payable on such distributions. A participant
in the Plan will be treated for federal income tax purposes as having received, on a dividend payment date, a dividend or distribution
in an amount equal to the cash the participant could have received instead of shares.
Voluntary Cash Purchase Plan
The Voluntary Cash Purchase Plan is yet another vehicle for our
shareholders to increase their investment in the Fund. In order to participate in the Voluntary Cash Purchase Plan, shareholders
must have their shares registered in their own name.
Participants in the Voluntary Cash Purchase
Plan have the option of making additional cash payments to Computershare for investments in the Fund’s shares at the then
current market price. Shareholders may send an amount from $250 to $10,000. Computershare will use these funds to purchase shares
in the open market on or about the 1st and 15th of each month. Computershare will charge each shareholder who participates $0.75,
plus a per share fee (currently $0.02 per share). Per share fees include any applicable brokerage commissions Computershare is
required to pay and fees for such purchases are expected to be less than the usual fees for such transactions. It is suggested
that any voluntary cash payments be sent to Computershare, P.O. Box 6006, Carol Stream, IL 60197-6006 such that Computershare receives
such payments approximately two business days before the 1st and 15th of the month. Funds not received at least two business days
before the investment date shall be held for investment until the next purchase date. A payment may be withdrawn without charge
if notice is received by Computershare at least two business days before such payment is to be invested.
Shareholders wishing to liquidate shares
held at Computershare may do so through the Internet, in writing or by telephone to the above-mentioned website, address or telephone
number. Include in your request your name, address, and account number. Computershare will sell such shares through a broker-dealer
selected by Computershare within 5 business days of receipt of the request. The sale price will equal the weighted average price
of all shares sold through the Plan on the day of the sale, less applicable fees. Participants should note that Computershare is
unable to accept instructions to sell on a specific date or at a specific price. The cost to liquidate shares is $2.50 per transaction
as well as the per share fee (currently $0.10 per share) Per share fees include any applicable brokerage commissions Computershare
is required to pay and are expected to be less than the usual fees for such transactions.
More information regarding the Automatic Dividend Reinvestment
Plan and Voluntary Cash Purchase Plan is available by calling (914) 921-5070 or by writing directly to the Fund.
The Fund reserves the right to amend or
terminate the Plan as applied to any voluntary cash payments made and any dividend or distribution paid subsequent to written notice
of the change sent to the members of the Plan at least 30 days before the record date for such dividend or distribution. The Plan
also may be amended or terminated by Computershare on at least 30 days written notice to participants in the Plan.
Unresolved Staff Comments
The Fund does not believe that there are
any material unresolved written comments, received 180 days or more before September 30, 2020 from the Staff of the SEC regarding
any of the Fund’s periodic or current reports under the Securities Exchange Act or the Investment Company Act, or its registration
statement.
The
Gabelli Convertible and Income Securities Fund Inc.
Additional Fund Information (Continued) (Unaudited)
Financial
Highlights 2011-2015
|
|
|
Year
Ended December 31,
|
|
|
|
|
2015
|
|
|
2014
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
|
Operating
Performance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
asset value, beginning of year
|
|
$
|
6.09
|
|
|
$
|
6.49
|
|
|
$
|
5.62
|
|
|
$
|
5.48
|
|
|
$
|
6.01
|
|
|
Net
investment income
|
|
|
0.07
|
|
|
|
0.07
|
|
|
|
0.09
|
|
|
|
0.10
|
|
|
|
0.10
|
|
|
Net
realized and unrealized gain/(loss) on investments, securities sold short, swap contracts, and foreign currency transactions
|
|
|
(0.28
|
)
|
|
|
0.14
|
|
|
|
1.37
|
|
|
|
0.63
|
|
|
|
(0.05
|
)
|
|
Total
from investment operations
|
|
|
(0.21
|
)
|
|
|
0.21
|
|
|
|
1.46
|
|
|
|
0.73
|
|
|
|
0.05
|
|
|
Distributions
to Preferred Shareholders: (a)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
investment income
|
|
|
(0.01
|
)
|
|
|
(0.03
|
)
|
|
|
(0.03
|
)
|
|
|
(0.06
|
)
|
|
|
(0.07
|
)
|
|
Net
realized gain
|
|
|
(0.09
|
)
|
|
|
(0.07
|
)
|
|
|
(0.08
|
)
|
|
|
(0.05
|
)
|
|
|
(0.03
|
)
|
|
Total
distributions to preferred shareholders
|
|
|
(0.10
|
)
|
|
|
(0.10
|
)
|
|
|
(0.11
|
)
|
|
|
(0.11
|
)
|
|
|
(0.10
|
)
|
|
Net
Increase/(Decrease) in Net Assets Attributable to Common Shareholders Resulting from Operations
|
|
|
(0.31
|
)
|
|
|
0.11
|
|
|
|
1.35
|
|
|
|
0.62
|
|
|
|
(0.05
|
)
|
|
Distributions
to Common Shareholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
investment income
|
|
|
(0.05
|
)
|
|
|
(0.08
|
)
|
|
|
(0.09
|
)
|
|
|
(0.05
|
)
|
|
|
(0.04
|
)
|
|
Net
realized gain
|
|
|
(0.32
|
)
|
|
|
(0.19
|
)
|
|
|
(0.31
|
)
|
|
|
(0.04
|
)
|
|
|
(0.02
|
)
|
|
Return
of capital
|
|
|
(0.11
|
)
|
|
|
(0.24
|
)
|
|
|
(0.08
|
)
|
|
|
(0.39
|
)
|
|
|
(0.42
|
)
|
|
Total
distributions to common shareholders
|
|
|
(0.48
|
)
|
|
|
(0.51
|
)
|
|
|
(0.48
|
)
|
|
|
(0.48
|
)
|
|
|
(0.48
|
)
|
|
Fund
Share Transactions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase/(decrease)
in net asset value from common share transactions
|
|
|
(0.00
|
)(b)
|
|
|
(0.00
|
)(b)
|
|
|
(0.00
|
)(b)
|
|
|
0.00
|
(b)
|
|
|
0.00
|
(b)
|
|
Net
Asset Value Attributable to Common Shareholders, End of Year
|
|
$
|
5.30
|
|
|
$
|
6.09
|
|
|
$
|
6.49
|
|
|
$
|
5.62
|
|
|
$
|
5.48
|
|
|
NAV
total return †
|
|
|
(5.39
|
)%
|
|
|
1.75
|
%
|
|
|
24.83
|
%
|
|
|
11.69
|
%
|
|
|
(0.74
|
)%
|
|
Market
value, end of year
|
|
$
|
4.78
|
|
|
$
|
6.08
|
|
|
$
|
6.16
|
|
|
$
|
5.34
|
|
|
$
|
5.11
|
|
|
Investment
total return ††
|
|
|
(14.18
|
)%
|
|
|
7.07
|
%
|
|
|
24.73
|
%
|
|
|
13.81
|
%
|
|
|
(9.11
|
)%
|
The
Gabelli Convertible and Income Securities Fund Inc.
Additional Fund Information (Continued) (Unaudited)
|
|
|
Year
Ended December 31,
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2015
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2014
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2013
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2012
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2011
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Ratios
to Average net assets and Supplemental Data:
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Net
assets including liquidation value of preferred shares, end of year (in 000’s)
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$
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98,742
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$
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109,219
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$
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113,795
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$
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101,064
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$
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98,177
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Net
assets attributable to common shares, end of year (in 000’s)
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$
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74,603
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$
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85,080
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$
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89,656
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$
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76,925
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$
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74,038
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Ratio
of net investment income to average net assets attributable to common shares before preferred share distributions
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1.19
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%
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1.05
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%
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1.43
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%
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1.77
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%
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1.77
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%
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Ratio
of operating expenses to average net assets attributable to common shares before fees waived
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1.88
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%(c)(d)
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1.90
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%
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1.80
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%
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1.94
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%
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2.00
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%
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Ratio
of operating expenses to average net assets attributable to common shares net of advisory fee reduction, if any
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1.59
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%(c)(d)
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1.62
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%
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1.80
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%
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1.94
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%
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1.69
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%
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Ratio
of operating expenses to average net assets including liquidation value of preferred shares before fees waived
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1.46
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%(c)(d)
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1.49
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%
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1.40
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%
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1.47
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%
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1.53
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%
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Ratio
of operating expenses to average net assets including liquidation
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value
of preferred shares net of advisory fee reduction, if any
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1.23
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%(c)(d)
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1.27
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%
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1.40
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%
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1.47
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%
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1.29
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%
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Portfolio
turnover rate
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24
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%
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22
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%
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35
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%
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18
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%
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41
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%
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Preferred Stock:
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6.000%
Series B Cumulative Preferred Stock
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Liquidation
value, end of year (in 000’s)
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$
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24,139
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$
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24,139
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$
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24,139
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$
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24,139
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$
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24,139
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Total
shares outstanding (in 000’s)
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966
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966
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966
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966
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966
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Liquidation
preference per share
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$
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25.00
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$
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25.00
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$
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25.00
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$
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25.00
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$
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25.00
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Average
market value (e)
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$
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25.81
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$
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25.44
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$
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25.30
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$
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25.78
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$
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25.48
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Asset
coverage per share
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$
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102.26
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$
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113.12
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$
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117.85
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$
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104.67
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$
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101.68
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Asset
Coverage
|
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409
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%
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452
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%
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|
471
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%
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|
419
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%
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|
407
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%
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†
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For
the years ended 2015, 2014 and 2013 based on net asset value per share, adjusted for
reinvestment of distributions at net asset value on the ex-dividend date. The years ended
2012 and 2011 were based on net asset value per share, adjusted for reinvestment of distributions
at prices determined under the Fund’s dividend reinvestment plan.
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††
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Based
on market value per share, adjusted for reinvestment of distributions at prices determined
under the Fund’s dividend reinvestment plan.
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(a)
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Calculated
based on average common shares outstanding on the record dates throughout the years.
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(b)
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Amount
represents less than $0.005 per share.
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(c)
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The
Fund received credits from a designated broker who agreed to pay certain Fund operating
expenses. For the year ended December 31, 2015, there was no impact on the expense ratios.
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(d)
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The
Fund incurred dividend expenses on securities sold short. If this expense had not been
incurred, the expense ratios for the year ended December 31, 2015 would have been 1.87%
attributable to common shares before fees waived, 1.57% attributable to common shares
net of advisory fee reduction, 1.44% including liquidation value of preferred shares
before fees waived, and 1.22% including liquidation value of preferred shares net of
advisory fee reduction.
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(e)
|
Based
on weekly prices.
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The
Gabelli Convertible and Income Securities Fund Inc.
Additional Fund Information (Continued) (Unaudited)
The
business and affairs of the Fund are managed under the direction of the Fund’s Board of Directors. Information pertaining
to the Directors and officers of the Fund is set forth below. The Fund’s Statement of Additional Information includes additional
information about the Fund’s Directors and is available without charge, upon request, by calling 800-GABELLI (800-422-3554)
or by writing to The Gabelli Convertible and Income Securities Fund Inc. at One Corporate Center, Rye, NY 10580-1422.