THE
GABELLI
BLUE CHIP
VALUE
FUND
CLASS AAA SHARES
PROSPECTUS
MAY 1, 2000
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THE
SHARES DESCRIBED IN THIS PROSPECTUS OR DETERMINED WHETHER THIS PROSPECTUS IS
ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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INVESTMENT AND PERFORMANCE SUMMARY
INVESTMENT OBJECTIVE:
The Gabelli Blue Chip Value Fund (the "Fund") seeks to provide long-term growth
of capital. Capital is the amount of money you invest in the Fund.
PRINCIPAL INVESTMENT STRATEGIES:
The Fund will primarily invest in common stocks of large, well known,
widely-held, high quality companies that have a market capitalization of greater
than $5 billion. Companies of this general type are often referred to as "Blue
Chip" companies. Blue Chip companies are generally identified by their
substantial capitalization, established history of earnings and dividends, ample
liquidity and easy access to credit. Blue Chip companies generally exhibit less
investment risk and less price volatility than companies lacking these high
quality characteristics. The Fund focuses on those Blue Chip companies which the
Fund's investment adviser, Gabelli Funds, LLC (the "Adviser") believes are
undervalued and have the potential to achieve significant capital appreciation.
In selecting investments, the Adviser will consider, among other things, the
market price of the issuer's securities, earnings expectations, earnings and
price histories, balance sheet characteristics and perceived management skills.
The Adviser will also consider changes in economic and political outlooks as
well as individual corporate developments.
PRINCIPAL RISKS:
The Fund's share price will fluctuate with changes in the market value of the
Fund's portfolio securities. Stocks are subject to market, economic and business
risks that cause their prices to fluctuate. When you sell Fund shares, they may
be worth less than what you paid for them. Consequently, you can lose money by
investing in the Fund. The Fund is also subject to the risk that market values
may never be realized in the market, or that the price of its portfolio
securities will decline, or that value stocks as a category lose favor with
investors compared to growth stocks or because the Adviser was incorrect in its
judgment of which stocks or which industries would benefit from changing market
or economic conditions.
WHO MAY WANT TO INVEST:
The Fund's Class AAA Shares offered herein are offered only to investors who
acquire them directly through Gabelli & Company, Inc., the Fund's distributor
(the "Distributor"), or through a select number of financial intermediaries with
whom the Fund's Distributor has entered into selling agreements specifically
authorizing them to offer Class AAA Shares.
The Fund may appeal to you if:
o you are a long-term investor
o you seek growth of capital
o you believe that the market will favor value over growth stocks over the
long term
o you wish to include a value strategy as a portion of your overall
investments
You may not want to invest in the Fund if:
o you are conservative in your investment approach
o you seek a high level of current income
o you seek stability of principal more than growth of capital
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PERFORMANCE:
The Fund commenced operations on August 26, 1999 and does not have a full year
of performance history. Therefore no performance bar chart or table has been
presented.
FEES AND EXPENSES OF THE FUND:
This table describes the fees and expenses that you may pay if you buy and hold
Class AAA Shares of the Fund.
ANNUAL FUND OPERATING EXPENSES (expenses that are deducted from Fund assets):
Management Fees ...................................................... 1.00%
Distribution and Service (Rule 12b-1) Fees ........................... 0.25%
Other Expenses(1)..................................................... 1.55%
----
Total Annual Fund Operating Expenses(2) .............................. 2.80%
----
Fee Waiver and/or Expense Reimbursement(2)............................ (0.80)%
----
Net Annual Fund Operating Expenses(2)................................. 2.00%
====
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(1) Other expenses are based on estimated amounts for the current fiscal year.
(2) The Adviser has agreed to waive its investment advisory fee and/ or
reimburse expenses of the Fund to the extent necessary to maintain the Total
Annual Fund Operating Expenses (excluding brokerage, interest, tax and
extraordinary expenses) at no more than 2.00% through December 31, 2000. In
addition, the Fund has agreed during the two-year period following any
waiver or reimbursement by the Adviser, to repay such amount to the extent,
after giving effect to the repayment, such adjusted Total Annual Fund
Operating Expenses would not exceed 2.00% on an annualized basis.
EXPENSE EXAMPLE:
This example is intended to help you compare the cost of investing in Class AAA
Shares of the Fund with the cost of investing in other mutual funds. The example
assumes (1) you invest $10,000 in the Fund for the time periods shown, (2) you
redeem your shares at the end of those periods, (3) your investment has a 5%
return each year and (4) the Fund's operating expenses remain the same. Although
your actual costs may be higher or lower, based on these assumptions your costs
would be:
1 YEAR 3 YEARS
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$203 $793
INVESTMENT AND RISK INFORMATION
The Fund's primary investment objective is to seek long-term growth of capital,
and investments will be made based on the Adviser's perception of their
potential for capital appreciation. The investment objective of the Fund may not
be changed without shareholder approval.
Under normal market conditions, the Fund invests at least 65% of its assets in
common stocks of Blue Chip companies which the Adviser believes are undervalued
and have the potential to achieve significant capital appreciation.
Undervaluation of the stock of an established company with good intermediate and
longer-term fundamentals can result from a variety of factors, such as a lack of
investor recognition of:
o the underlying value of a company's fixed assets,
o the value of a consumer or commercial franchise,
o changes in the economic or financial environment affecting the company,
o new, improved or unique products or services,
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o new or rapidly expanding markets,
o technological developments or advancements affecting the company or its
products, or
o changes in governmental regulations, political climate or competitive
conditions.
Additionally, undervaluation may result from:
o poor management decisions which result in a low return on the company's
assets,
o short-term earnings problems, or
o a difficult near-term operating or economic environment affecting the
company's business.
The actual events that may lead to a significant increase in the value of a
company's securities include:
o earnings surprises relative to analysts' expectations,
o the company's development of new, improved or unique products and
services,
o a change in the company's management or management policies,
o an investor's purchase of a large portion of the company's stock,
o a merger or reorganization or recapitalization of the company,
o a sale of a division of the company,
o a tender offer (an offer to purchase investors' shares),
o the spin-off to shareholders of a subsidiary, division or other
substantial assets, or
o the retirement or death of a senior officer or substantial shareholder
of the company.
In general, the Adviser seeks to take advantage of investors' tendency to
overemphasize near-term events by investing in companies which are temporarily
undervalued and which may return to a significantly higher valuation. In
selecting investments, the Adviser will consider factors such as the market
price of the issuer's securities, earnings expectations, earnings and price
histories, balance sheet characteristics and perceived management skills. The
Adviser will also consider changes in economic and political outlooks as well as
individual corporate developments. The Adviser will sell any Fund investments
which lose their perceived value relative to other investments.
The Fund's assets will be invested primarily in a broad range of readily
marketable equity securities consisting primarily of common stocks. Many of the
common stocks the Fund will buy will be bought for the potential that their
prices will increase, providing capital appreciation for the Fund. The Fund's
secondary objective is to achieve current income by investing in dividend-paying
common stocks. The value of common stocks will fluctuate due to many factors,
including the past and predicted earnings of the issuer, the quality of the
issuer's management, general market conditions, the forecasts for the issuer's
industry and the value of the issuer's assets. Holders of common stocks only
have rights to value in the company after all debts have been paid, and they
could lose their entire investment in a company that encounters financial
difficulty.
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The Fund may also use the following investment technique:
o DEFENSIVE INVESTMENTS. When adverse market or economic conditions occur,
the Fund may temporarily invest all or a portion of its assets in
defensive investments. Such investments include high grade debt
securities, obligations of the U.S. Government and its agencies or
instrumentalities or high quality short-term money market instruments.
When following a defensive strategy, the Fund will be less likely to
achieve its investment goal.
The Fund may also engage in other investment practices in order to achieve its
investment objective. These are briefly discussed in the Statement of Additional
Information which may be obtained by calling 1-800-GABELLI (1-800-422-3554) or
your broker.
Investing in the Fund involves the following risks:
o EQUITY RISK. The principal risk of investing in the Fund is equity risk.
Equity risk is the risk that the prices of the securities held by the
Fund will change due to general market and economic conditions,
perceptions regarding the industries in which the companies issuing the
securities participate and the issuer company's particular
circumstances.
o FUND AND MANAGEMENT RISK. The Fund invests in stocks issued by companies
that have a market capitalization of greater than $5 billion and which
are believed by the Adviser to be undervalued and have the potential to
achieve significant capital appreciation. The Fund's price may decline
because the market favors other stocks or small capitalization stocks
over stocks of mid- to large size companies. If the Adviser is incorrect
in its assessment of the values of the securities it holds or no event
occurs which surfaces value, then the value of the Fund's shares may
decline.
MANAGEMENT OF THE FUND
THE ADVISER. Gabelli Funds, LLC, with principal offices located at One Corporate
Center, Rye, New York 10580-1434, serves as investment adviser to the Fund. The
Adviser makes investment decisions for the Fund and continuously reviews and
administers the Fund's investment program under the supervision of the Fund's
Board of Trustees. The Adviser also manages several other open-end and
closed-end investment companies in the Gabelli family of funds. The Adviser is a
New York limited liability company organized in 1999 as successor to Gabelli
Group Capital Partners, Inc. (formerly named Gabelli Funds, Inc.), a New York
corporation organized in 1980. The Adviser is a wholly owned subsidiary of
Gabelli Asset Management Inc. ("GAMI"), a publicly held company listed on the
New York Stock Exchange ("NYSE").
As compensation for its services and the related expenses borne by the Adviser,
the Fund will pay the Adviser an annual fee equal to 1.00% of the value of the
Fund's average daily net assets.
The Adviser contractually has agreed to waive its investment advisory fees
and/or reimburse expenses to the extent necessary to maintain the Total
Operating Expenses (excluding brokerage, interest, taxes and extraordinary
expenses) at no more than 2.00% for the Fund. This fee waiver and expense
reimbursement arrangement will continue until at least December 31, 2000.
Effective January 1, 2000, the Fund has agreed during the two year period
following any waiver or reimbursement by the Adviser, to repay such amount to
the extent that after giving effect to the repayment, such adjusted Total Annual
Operating Expenses would not exceed 2.00% on an annualized basis.
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THE PORTFOLIO MANAGER. Ms. Barbara G. Marcin is primarily responsible for the
day-to-day management of the Fund. Ms. Marcin has been a Vice President with the
Adviser since June 1999. Ms. Marcin served as the head of value investments at
Citibank Global Asset Management, managing mid- and large-cap equity securities
in value-style mutual funds and in separate accounts from 1993 until June 1999.
RULE 12B-1 PLAN. The Fund has adopted a plan under Rule 12b-1 (the "Plan") which
authorizes payments by the Fund on an annual basis of 0.25% of the Fund's
average daily net assets attributable to Class AAA Shares to finance
distribution of the Fund's Class AAA Shares. The Fund may make payments under
the Plan for the purpose of financing any activity primarily intended to result
in the sales of Class AAA Shares of the Fund. To the extent any activity is one
which the Fund may finance without a distribution plan, the Fund may also make
payments to compensate such activity outside of the Plan and not be subject to
its limitations.
PURCHASE OF SHARES
You can purchase the Fund's shares on any day the NYSE is open for trading (a
"Business Day"). You may purchase shares through the Fund's Distributor,
directly from the Fund through the Fund's transfer agent or through registered
broker-dealers that have entered into selling agreements with the Fund's
Distributor.
o BY MAIL OR IN PERSON. You may open an account by mailing a completed
subscription order form with a check or money order payable to "The
Gabelli Blue Chip Value Fund" to:
BY MAIL BY PERSONAL DELIVERY
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THE GABELLI FUNDS THE GABELLI FUNDS
P.O. BOX 8308 C/O BFDS
BOSTON, MA 02266-8308 66 BROOKS DRIVE
BRAINTREE, MA 02184
You can obtain a subscription order form by calling 1-800-GABELLI
(1-800-422-3554). Checks made payable to a third party and endorsed by the
depositor are not acceptable. For additional investments, send a check to the
above address with a note stating your exact name and account number, the name
of the Fund and class of shares you wish to purchase.
o BY BANK WIRE. To open an account using the bank wire transfer system,
first telephone the Fund at 1-800-GABELLI (1-800-422-3554) to obtain a
new account number. Then instruct a Federal Reserve System member bank
to wire funds to:
STATE STREET BANK AND TRUST COMPANY
[ABA #011-0000-28 REF DDA #99046187]
RE: THE GABELLI BLUE CHIP VALUE FUND
CLASS AAA SHARES
ACCOUNT #__________
ACCOUNT OF [REGISTERED OWNERS]
225 FRANKLIN STREET, BOSTON, MA 02110
If you are making an initial purchase, you should also complete and mail
a subscription order form to the address shown under "By Mail." Note
that banks may charge fees for wiring funds, although State Street Bank
and Trust Company ("State Street") will not charge you for receiving
wire transfers.
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SHARE PRICE. The Fund sells its Class AAA Shares at the net asset value next
determined after the Fund receives your completed subscription order form and
your payment. See "Pricing of Fund Shares" for a description of the calculation
of net asset value.
MINIMUM INVESTMENTS. Your minimum initial investment must be at least $1,000.
See "Retirement Plans" and "Automatic Investment Plan" regarding minimum
investment amounts applicable to such plans. There is no minimum for subsequent
investments. Broker-dealers may have different minimum investment requirements.
RETIREMENT PLANS. The Fund has available a form of IRA, "Roth" IRA and Education
IRA for investment in Fund shares that may be obtained from the Fund's
Distributor by calling 1-800-GABELLI (1-800-422-3554). Self-employed investors
may purchase shares of the Fund through tax-deductible contributions to existing
retirement plans for self-employed persons, known as "Keogh" or "H.R.-10" plans.
The Fund does not currently act as a sponsor to such plans. Fund shares may also
be a suitable investment for other types of qualified pension or profit-sharing
plans which are employer sponsored, including deferred compensation or salary
reduction plans known as "401(k) Plans." The minimum initial investment in all
such retirement plans is $250. There is no subsequent investment requirement for
retirement plans.
AUTOMATIC INVESTMENT PLAN. The Fund offers an automatic monthly investment plan.
There is no minimum initial nvestment for accounts establishing an automatic
investment plan. Call the Fund's Distributor at 1-800-GABELLI (1-800-422-3554)
for more details about the plan.
TELEPHONE OR INTERNET INVESTMENT PLAN. You may purchase additional shares of the
Fund by telephone and/or over the Internet if your bank is a member of the
Automated Clearing House ("ACH") system. You must also have a completed,
approved Investment Plan application on file with the Fund's Transfer Agent.
There is a minimum of $100 for each telephone or Internet investment. To
initiate an ACH Purchase, please call 1-800-GABELLI (1-800-422-3554) or
1-800-872-5365 or visit our website at www.gabelli.com.
GENERAL. State Street will not issue share certificates unless requested by you.
The Fund reserves the right to (i) reject any purchase order if, in the opinion
of the Fund's management, it is in the Fund's best interest to do so, (ii)
suspend the offering of shares for any period of time and (iii) waive the Fund's
minimum purchase requirement.
REDEMPTION OF SHARES
You can redeem shares of the Fund on any Business Day without a redemption fee.
The Fund may temporarily stop redeeming its shares when the NYSE is closed or
trading on the NYSE is restricted, when an emergency exists and the Fund cannot
sell its shares or accurately determine the value of its assets, or if the
Securities and Exchange Commission orders the Fund to suspend redemptions.
The Fund redeems its shares at the net asset value next determined after the
Fund receives your redemption request. See "Pricing of Fund Shares" below for a
description of the calculation of net asset value.
You may redeem shares through the Fund's Distributor or directly from the Fund
through the Fund's transfer agent.
o BY LETTER. You may mail a letter requesting redemption of shares to: THE
GABELLI FUNDS, P.O. BOX 8308, BOSTON, MA 02266-8308. Your letter should
state the name of the Fund and the share class, the dollar amount or
number of shares you wish to redeem and your account number. You must
sign the letter in exactly the same way the account is registered and if
there is more than one owner of
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shares, all must sign. A signature guarantee is required for each
signature on your redemption letter. You can obtain a signature
guarantee from financial institutions such as commercial banks, brokers,
dealers and savings associations. A notary public cannot provide a
signature guarantee.
o BY TELEPHONE OR THE INTERNET. You may redeem your shares in an account
directly registered with State Street by calling either 1-800-GABELLI
(1-800-422-3554) or 1-800-872-5365 (617-328-5000 from outside the United
States) or visiting our website at www.gabelli.com, subject to a $25,000
limitation. YOU MAY NOT REDEEM SHARES HELD THROUGH AN IRA BY TELEPHONE
OR THE INTERNET. If State Street properly acts on telephone or Internet
instructions and follows reasonable procedures to protect against
unauthorized transactions, neither State Street nor the Fund will be
responsible for any losses due to telephone or Internet transactions.
You may be responsible for any fraudulent telephone or Internet order as
long as State Street or the Fund takes reasonable measures to verify the
order. You may request that redemption proceeds be mailed to you by
check (if your address has not changed in the prior 30 days), forwarded
to you by bank wire or invested in another mutual fund advised by the
Adviser (see "Exchange of Shares").
1. TELEPHONE OR INTERNET REDEMPTION BY CHECK. The Fund will make checks
payable to the name in which the account is registered and normally
will mail the check to the address of record within seven days.
2. TELEPHONE OR INTERNET REDEMPTION BY BANK WIRE. The Fund accepts
telephone or Internet requests for wire redemption in amounts of at
least $1,000. The Fund will send a wire to either a bank designated
on your subscription order form or on a subsequent letter with a
guaranteed signature. The proceeds are normally wired on the next
Business Day.
AUTOMATIC CASH WITHDRAWAL PLAN. You may automatically redeem shares on a
monthly, quarterly or annual basis if you have at least $10,000 in your account
and if your account is directly registered with State Street. Call 1-800-GABELLI
(1-800-422-3554) for more information about this plan.
INVOLUNTARY REDEMPTION. The Fund may redeem all shares in your account (other
than an IRA account) if their value falls below $1,000 as a result of
redemptions (but not as a result of a decline in net asset value). You will be
notified in writing if the Fund initiates such action and allowed 30 days to
increase the value of your account to at least $1,000.
REDEMPTION PROCEEDS. A redemption request received by the Fund will be effected
at the net asset value next determined after the Fund receives the request. If
you request redemption proceeds by check, the Fund will normally mail the check
to you within seven days after receipt of your redemption request. If you
purchased your Fund shares by check or through the Automatic Investment Plan,
you may not receive proceeds from your redemptions until the check clears, which
may take up to as many as 15 days following purchase. While the Fund will delay
the processing of the redemption until the check clears, your shares will be
valued at the next determined net asset value after receipt of your redemption
request.
The Fund may pay to you your redemption proceeds wholly or partly in portfolio
securities. Payments would be made in portfolio securities only in the rare
instance that the Fund's Board of Trustees believes that it would be in the
Fund's best interest not to pay redemption proceeds in cash.
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EXCHANGE OF SHARES
You may exchange shares of the Fund you hold for shares of the same class of
another fund managed by the Adviser or its affiliates based on their relative
net asset values. To obtain a list of the funds whose shares you may acquire
through an exchange call 1-800-GABELLI (1-800-422-3554). You may also exchange
your shares for shares of a money market fund managed by the Adviser or its
affiliates.
In effecting an exchange:
o you must meet the minimum investment requirements for the fund whose
shares you purchase through exchange
o if you are exchanging to a fund with a higher sales charge, you must pay
the difference at the time of exchange
o you may realize a taxable gain or loss
o you should read the prospectus of the fund whose shares you are
purchasing through exchange. Call 1-800-GABELLI (1-800-422-3554) to
obtain the prospectus.
You may exchange shares through the Fund's Distributor, directly through the
Fund's transfer agent or through a registered broker-dealer.
o EXCHANGE BY TELEPHONE. You may give exchange instructions by telephone
by calling 1-800-GABELLI (1-800-422-3554). You may not exchange shares
by telephone if you hold share certificates.
o EXCHANGE BY MAIL. You may send a written request for exchanges to: THE
GABELLI FUNDS, P.O. BOX 8308, BOSTON, MA 02266-8308. Your letter should
state your name, your account number, the dollar amount or number of
shares you wish to exchange, the name and class of the fund whose shares
you wish to exchange, and the name of the funds whose shares you wish to
acquire.
o EXCHANGE THROUGH THE INTERNET. You may also give exchange instructions
via the Internet at www.gabelli.com. You may not exchange shares through
the Internet if you hold share certificates.
We may modify or terminate the exchange privilege at any time. You will be given
notice 60 days prior to any material change in the exchange privilege.
PRICING OF FUND SHARES
The Fund's net asset value per share of the Class AAA Shares is calculated on
each Business Day. The NYSE is open Monday through Friday, but is currently
scheduled to be closed on New Year's Day, Dr. Martin Luther King, Jr. Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day and on the preceding Friday or subsequent
Monday when a holiday falls on a Saturday or Sunday, respectively.
The Fund's net asset value per share of the Class AAA Shares is determined as of
the close of regular trading on the NYSE, normally 4:00 p.m., Eastern Time. Net
asset value is computed by dividing the value of the Fund's net assets (i.e. the
value of its securities and other assets less its liabilities, including
expenses payable or accrued but excluding capital stock and surplus) by the
total number of its shares outstanding at the time the determination is made.
The Fund uses market quotations in valuing its portfolio securities. Short-term
investments that mature in 60 days or less are valued at amortized cost, which
the Trustees of the Fund believe represents fair value. The price of Fund shares
for purposes of purchase and redemption orders will be based upon the next
calculation of net asset value after the purchase or redemption order is
received in proper form.
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Because the Fund is not open for business every day that its assets trade, the
net asset value of the Fund's shares may change on days when shareholders will
not be able to purchase or redeem the Fund's shares.
DIVIDENDS AND DISTRIBUTIONS
The Fund intends to pay dividends and capital gain distributions, if any, on an
annual basis. You may have dividends or capital gains distributions that are
declared by the Fund automatically reinvested at net asset value in additional
shares of the Fund. You will make an election to receive dividends and
distributions in cash or Fund shares at the time you purchase your shares. You
may change this election by notifying the Fund in writing at any time prior to
the record date for a particular dividend or distribution. There are no sales or
other charges in connection with the reinvestment of dividends and capital gains
distributions. There is no fixed dividend rate, and there can be no assurance
that the Fund will pay any dividends or realize any capital gains.
TAX INFORMATION
The Fund expects that its distributions will consist primarily of net investment
income and net realized capital gains. Capital gains may be taxed at different
rates depending on the length of time the Fund holds the asset giving rise to
such gains. Dividends out of net investment income and distributions of net
realized short-term capital gains (i.e., gains from assets held by the Fund for
one year or less) are taxable to you as ordinary income. Distributions of net
long-term capital gains are taxable to you at long-term capital gain rates. The
Fund's distributions, whether you receive them in cash or reinvest them in
additional shares of the Fund, generally will be subject to federal, state or
local taxes. An exchange of the Fund's shares for shares of another fund will be
treated for tax purposes as a sale of the Fund's shares, and any gain you
realize on such a transaction generally will be taxable. Foreign shareholders
generally will be subject to a federal withholding tax .
This summary of tax consequences is intended for general information only. You
should consult a tax adviser concerning the tax consequences of your investment
in the Fund.
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FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the financial
performance for the period of the Fund's operation. The total return in the
table represents the rate that an investor would have earned or lost on an
investment in the Fund's Class AAA Shares. This information has been audited by
Ernst & Young LLP, independent auditors, whose report along with the Fund's
financial statements and related notes are included in the annual report, which
is available upon request.
THE GABELLI BLUE CHIP VALUE FUND
Per share amounts for the Fund's Class AAA Shares outstanding throughout the
period
<TABLE>
<CAPTION>
PERIOD ENDED
DECEMBER 31, 1999+
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<S> <C>
OPERATING PERFORMANCE:
Net asset value, beginning of period ........................................ $10.00
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Net investment loss ......................................................... (0.01)
Net realized and unrealized gain on investments ............................. 1.79
------
Total from investment operations ............................................ 1.78
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DISTRIBUTIONS TO SHAREHOLDERS:
Net realized gain on investments ............................................ (0.11)
In excess of net realized gain on investments ............................... (0.02)
------
Total distributions ......................................................... (0.13)
------
NET ASSET VALUE, END OF PERIOD .............................................. $11.65
======
Total return++ .............................................................. 17.8%
======
RATIOS TO AVERAGE NET ASSETS AND SUPPLEMENTAL DATA:
Net assets, end of period (in 000's) ........................................ $7,228
Ratio of net investment loss to average net assets (b) ...................... (0.50)%(a)
Ratio of operating expenses to average net assets (b) ....................... 2.00%(a)
Portfolio turnover rate ..................................................... 71%
<FN>
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+ From commencement of investment operations on August 26, 1999 through
December 31, 1999.
++ Total return represents aggregate total return of a hypothetical $1,000
investment at the beginning of the period and sold at the end of the period
including reinvestment of dividends. Total return for the period less than
one year is not annualized.
(a) Annualized.
(b) During the period ended December 31, 1999, the Adviser voluntarily
reimbursed certain expenses. Before reimbursement, the ratios of operating
expenses and net investment loss to average net assets would have been 4.86%
and (3.36)% for 1999 (annualized), respectively.
</FN>
</TABLE>
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THE GABELLI BLUE CHIP VALUE FUND
================================================================================
FOR MORE INFORMATION:
For more information about the Fund, the following documents are available upon
request:
ANNUAL/SEMI-ANNUAL REPORTS
The Fund's semi-annual and annual reports to shareholders contain additional
information on the Fund's investments. In the Fund's annual report, you will
find a discussion of the market conditions and investment strategies that
significantly affected the Fund's performance during its last fiscal year.
STATEMENT OF ADDITIONAL INFORMATION (SAI):
The SAI provides more detailed information about the Fund, including its
operations and investment policies. It is incorporated by reference, and is
legally considered a part of this prospectus.
You can get free copies of these documents and prospectuses of other funds
in the Gabelli family, or request other
information and discuss your questions about the Fund, by contacting:
The Gabelli Blue Chip Value Fund
One Corporate Center
Rye, NY 10580
Telephone: 1-800-GABELLI (1-800-422-3554)
www.gabelli.com
You can review the Fund's reports and SAI at the Public Reference Room of the
Securities and Exchange Commission. Information on the operation of the Public
Reference Room may be obtained by calling the Commission at 1-202-942-8090.
You can get text-only copies:
o For a fee, by writing the Commission's Public Reference Section,
Washington, D.C. 20549-0102, or by calling 1-202-942-8090, or by
electronic request at the following email address: [email protected].
o Free from the Commission's Website at http://www.sec.gov.
Investment Company Act File No. 811-09377
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<PAGE>
THE GABELLI BLUE CHIP VALUE FUND
One Corporate Center
Rye, New York 10580-1434
1-800-GABELLI
[1-800-422-3554]
FAX: 1-914-921-5118
HTTP://WWW.GABELLI.COM
E-MAIL: [email protected]
(Net Asset Value may be obtained daily by calling
1-800-GABELLI after 6:00 p.m.)
----------------------------------
QUESTIONS?
Call 1-800-GABELLI
or your investment representative.
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TABLE OF CONTENTS
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INVESTMENT AND PERFORMANCE SUMMARY ............. 2-3
INVESTMENT AND RISK INFORMATION ................ 3-5
MANAGEMENT OF THE FUND ......................... 5-6
Purchase of Shares .................... 6
Redemption of Shares .................. 7
Exchange of Shares .................... 8
Pricing of Fund Shares ................ 9
Dividends and Distributions ........... 10
Tax Information ....................... 10
FINANCIAL HIGHLIGHTS ........................... 11
<PAGE>
THE GABELLI BLUE CHIP VALUE FUND
Statement of Additional Information
May 1, 2000
This Statement of Additional Information (the "SAI"), which is not a prospectus,
describes The Gabelli Blue Chip Value Fund (the "Fund"). This SAI should be read
in conjunction with the Fund's Prospectuses for Class A Shares, Class B Shares,
Class C Shares and Class AAA Shares, each dated May 1, 2000. For a free copy of
the Prospectuses, please contact the Fund at the address, telephone number or
Internet website printed below.
One Corporate Center
Rye, New York 10580-1434
Telephone 1-800-GABELLI (1-800-422-3554)
HTTP://WWW.GABELLI.COM
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TABLE OF CONTENTS
PAGE
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GENERAL INFORMATION.........................................................2
INVESTMENT STRATEGIES AND RISKS.............................................2
INVESTMENT RESTRICTIONS....................................................10
TRUSTEES AND OFFICERS......................................................11
CONTROL PERSONS AND PRINCIPAL SHAREHOLDERS.................................13
INVESTMENT ADVISORY AND OTHER SERVICES.....................................14
DISTRIBUTION PLANS.........................................................17
PORTFOLIO TRANSACTIONS AND BROKERAGE.......................................18
REDEMPTION OF SHARES.......................................................20
DETERMINATION OF NET ASSET VALUE...........................................20
DIVIDENDS AND DISTRIBUTIONS ...............................................21
TAXES......................................................................21
INVESTMENT PERFORMANCE INFORMATION.........................................24
DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES.......................25
FINANCIAL STATEMENTS.......................................................26
APPENDIX A.................................................................27
<PAGE>
GENERAL INFORMATION
The Fund is a diversified, open-end, management investment company organized
under the laws of the state of Delaware on May 13, 1999. The Fund commenced
operations on August 26, 1999.
INVESTMENT STRATEGIES AND RISKS
The Fund's Prospectuses discuss the investment objective of the Fund and the
principal strategies to be employed to achieve that objective. This SAI contains
supplemental information concerning certain types of securities and other
instruments in which the Fund may invest, additional strategies that the Fund
may utilize and certain risks associated with such investments and strategies.
CONVERTIBLE SECURITIES
The Fund may invest in convertible securities when it appears to Gabelli Funds,
LLC, the Fund's Adviser (the "Adviser"), that it may not be prudent to be fully
invested in common stocks. In evaluating a convertible security, the Adviser
places primary emphasis on the attractiveness of the underlying common stock and
the potential for capital appreciation through conversion. The Fund will
normally purchase only investment grade, convertible debt securities having a
rating of, or equivalent to, at least "BBB" (which securities may have
speculative characteristics) by Standard & Poor's Rating Service ("S&P") or, if
unrated, judged by the Adviser to be of comparable quality. However, the Fund
may also invest up to 25% of its assets in more speculative convertible debt
securities.
Convertible securities may include corporate notes or preferred stock but are
ordinarily a long-term debt obligation of the issuer convertible at a stated
exchange rate into common stock of the issuer. As with all debt securities, the
market value of convertible securities tends to decline as interest rates
increase and, conversely, to increase as interest rates decline. Convertible
securities generally offer lower interest or dividend yields than
non-convertible securities of similar quality. However, when the market price of
the common stock underlying a convertible security exceeds the conversion price,
the price of the convertible security tends to reflect the value of the
underlying common stock. As the market price of the underlying common stock
declines, the convertible security tends to trade increasingly on a yield basis,
and thus may not depreciate to the same extent as the underlying common stock.
Convertible securities rank senior to common stocks on an issuer's capital
structure and are consequently of higher quality and entail less risk than the
issuer'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.
In selecting convertible securities for the Fund, the Adviser relies primarily
on its own evaluation of the issuer and the potential for capital appreciation
through conversion. It does not rely on the rating of the security or sell
because of a change in rating absent a change in its own evaluation of the
underlying common stock and the ability of the issuer to pay principal and
interest or dividends when due without disrupting its business goals. Interest
or dividend yield is a factor only to the extent it is reasonably consistent
with prevailing rates for securities of similar quality and thereby provides a
support level for the market price of the security. The Fund will purchase the
convertible securities of highly leveraged issuers only when, in the judgment of
the Adviser, the risk of default is outweighed by the potential for capital
appreciation.
<PAGE>
The issuers of debt obligations having speculative characteristics may
experience difficulty in paying principal and interest when due in the event of
a downturn in the economy or unanticipated corporate developments. The market
prices of such securities may become increasingly volatile in periods of
economic uncertainty. Moreover, adverse publicity or the perceptions of
investors over which the Adviser has no control, whether or not based on
fundamental analysis, may decrease the market price and liquidity of such
investments. Although the Adviser will attempt to avoid exposing the Fund to
such risks, there is no assurance that it will be successful or that a liquid
secondary market will continue to be available for the disposition of such
securities.
DEBT SECURITIES
The Fund may invest up to 25% of its assets in low rated and unrated corporate
debt securities (often referred to as "junk bonds"), although the Fund does not
expect to invest more than 10% of its assets in such securities. Corporate debt
securities which are either unrated or have a predominantly speculative rating
may present opportunities for significant long-term capital appreciation if the
ability of the issuer to repay principal and interest when due is underestimated
by the market or the rating organizations. Because of its perceived credit
weakness, the issuer is generally required to pay a higher interest rate and/or
its debt securities may be selling at a significantly lower market price than
the debt securities of issuers actually having similar strengths. When the
inherent value of such securities is recognized, the market value of such
securities may appreciate significantly. The Adviser believes that its research
on the credit and balance sheet strength of certain issuers may enable it to
select a limited number of corporate debt securities which, in certain markets,
will better serve the objective of capital appreciation than alternative
investments in common stocks. Of course, there can be no assurance that the
Adviser will be successful. In its evaluation, the Adviser will not rely
exclusively on ratings and the receipt of income is only an incidental
consideration.
The ratings of Moody's Investors Service, Inc. and S&P generally represent the
opinions of those organizations as to the quality of the securities that they
rate. Such ratings, however, are relative and subjective, are not absolute
standards of quality and do not evaluate the market risk of the securities.
Although the Adviser uses these ratings as a criterion for the selection of
securities for the Fund, the Adviser also relies on its independent analysis to
evaluate potential investments for the Fund. See Appendix A - "Description of
Corporate Debt Ratings."
As in the case of the convertible debt securities discussed above, low rated and
unrated corporate debt securities are generally considered to be more subject to
default and therefore significantly more speculative than those having an
investment grade rating. They also are more subject to market price volatility
based on increased sensitivity to changes in interest rates and economic
conditions or the liquidity of their secondary trading market. The Fund does not
intend to purchase debt securities for which a liquid trading market does not
exist but there can be no assurance that such a market will exist for the sale
of such securities.
INVESTMENTS IN WARRANTS AND RIGHTS
The Fund may invest in warrants and rights (other than those acquired in units
or attached to other securities) which entitle the holder to buy equity
securities at a specific price for or at the end of a specific period of time.
<PAGE>
Investing in rights and warrants can provide a greater potential for profit or
loss than an equivalent investment in the underlying security, and thus can be a
speculative investment. The value of a right or warrant may decline because of a
decline in the value of the underlying security, the passage of time, changes in
interest rates or in the dividend or other policies of the Fund whose equity
underlies the warrant or a change in the perception as to the future price of
the underlying security, or any combination thereof. Rights and warrants
generally pay no dividends and confer no voting or other rights other than to
purchase the underlying security.
INVESTMENT IN ILLIQUID SECURITIES
The Fund will not invest, in the aggregate, more than 15% of its net assets in
illiquid securities. These securities include securities which are restricted
for public sale, securities for which market quotations are not readily
available, and repurchase agreements maturing or terminable in more than seven
days. Securities freely salable among qualified institutional investors pursuant
to Rule 144A under the Securities Act of 1933, as amended, and as adopted by the
Securities and Exchange Commission ("SEC"), may be treated as liquid if they
satisfy liquidity standards established by the Board of Trustees. The continued
liquidity of such securities is not as well assured as that of publicly traded
securities, and accordingly, the Board of Trustees will monitor their liquidity.
CORPORATE REORGANIZATIONS
In general, securities of companies engaged in reorganization transactions sell
at a premium to their historic market price immediately prior to the
announcement of the tender offer or reorganization proposal. However, the
increased market price of such securities may also discount what the stated or
appraised value of the security would be if the contemplated transaction were
approved or consummated. Such investments may be advantageous when the discount
significantly overstates the risk of the contingencies involved; significantly
undervalues the securities, assets or cash to be received by shareholders of the
prospective portfolio company as a result of the contemplated transaction; or
fails adequately to recognize the possibility that the offer or proposal may be
replaced or superseded by an offer or proposal of greater value. The evaluation
of such contingencies requires unusually broad knowledge and experience on the
part of the Adviser which must appraise not only the value of the issuer and its
component businesses as well as the assets or securities to be received as a
result of the contemplated transaction, but also the financial resources and
business motivation of the offeror as well as the dynamic of the business
climate when the offer or proposal is in progress.
In making such investments, the Fund will not violate any of its diversification
requirements or investment restrictions (see below, "Investment Restrictions")
including the requirements that, except for the investment of up to 25% of its
assets in any one company or industry, not more than 5% of its assets may be
invested in the securities of any issuer. Since such investments are ordinarily
short term in nature, they will tend to increase the Fund's portfolio turnover
ratio thereby increasing its brokerage and other transaction expenses. The
Adviser intends to select investments of the type described which, in its view,
have a reasonable prospect of capital appreciation which is significant in
relation to both the risk involved and the potential of available alternate
investments.
<PAGE>
WHEN ISSUED, DELAYED DELIVERY SECURITIES & 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 securities 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 the Fund will only enter
into a forward commitment with the intention of actually acquiring the security,
the Fund may sell the security before the settlement date if it is deemed
advisable.
Securities purchased under a forward commitment are subject to market
fluctuation, and no interest (or dividends) accrues to the Fund prior to the
settlement date. The Fund will segregate with its custodian cash or liquid
securities in an aggregate amount at least equal to the amount of its
outstanding forward commitments.
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements with banks and non-bank dealers of
U.S. Government securities which are listed as reporting dealers of the Federal
Reserve Bank and which furnish collateral at least equal in value or market
price to the amount of their repurchase obligation. In a repurchase agreement,
the Fund purchases a debt security from a seller which undertakes to repurchase
the security at a specified resale price on an agreed future date. The resale
price generally exceeds the purchase price by an amount which reflects an
agreed-upon market interest rate for the term of the repurchase agreement.
The Fund's risk is primarily that, if the seller defaults, the proceeds from the
disposition of underlying securities and other collateral for the seller's
obligation are less than the repurchase price. If the seller becomes bankrupt,
the Fund might be delayed in selling the collateral. Under the Investment
Company Act of 1940, as amended (the "1940 Act"), repurchase agreements are
considered loans. Repurchase agreements usually are for short periods, such as
one week or less, but could be longer. Except for repurchase agreements for a
period of a week or less in respect to obligations issued or guaranteed by the
U.S. Government, its agencies or instrumentalities, not more than 15% of the
Fund's total assets may be invested in repurchase agreements. In addition, the
Fund will not enter into repurchase agreements of a duration of more than seven
days if, taken together with restricted securities and other securities for
which there are no readily available quotations, more than 15% of its total
assets would be so invested. These percentage limitations are fundamental and
may not be changed without shareholder approval.
BORROWING
The Fund may not borrow money except for (1) short-term credits from banks as
may be necessary for the clearance of portfolio transactions, and (2) borrowings
from banks for temporary or emergency purposes, including the meeting of
redemption requests, which would otherwise require the untimely disposition of
its portfolio securities. Borrowing may not, in the aggregate, exceed 15% of
assets after giving effect to the borrowing, and borrowing for purposes other
than meeting redemptions may not exceed 5% of the Fund's assets after giving
effect to the borrowing. The Fund will not make additional investments when
borrowings exceed 5% of assets. The Fund may mortgage, pledge or hypothecate up
to 20% of its assets to secure such borrowings.
Borrowing may exaggerate the effect on net asset value of any increase or
decrease in the market value of securities purchased with borrowed funds. Money
borrowed will be subject to interest costs which may or may not be recovered by
an appreciation of securities purchased.
<PAGE>
SHORT SALES
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.
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 the sales. However,
short sales "against the box" are not subject to any limitation.
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 security convertible into, or
exchangeable for, the security.
To secure its obligations to deliver the securities sold short, the Fund will
deposit in escrow in a separate account with the Fund's custodian, State Street
Bank and Trust Company ("State Street"), an amount at least equal to the
securities sold short or securities convertible into, or exchangeable for, the
securities. The Fund may close out a short position by purchasing and delivering
an equal amount of 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.
OPTIONS
The Fund may purchase or sell listed call or put options on securities 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 underlying the option at a specified exercise price at any time during
the term of the option. The writer of the call option has the obligation, upon
exercise of the option, to deliver the underlying security upon payment of the
exercise price during the option period. A put option is a contract that gives
the holder the right to sell the security to the writer and obligating the
writer to purchase the underlying security from the holder.
A call option is "covered" if the Fund owns the underlying security covered by
the call or has an absolute and immediate right to acquire that security without
additional cash consideration (or for additional cash consideration held in a
segregated account by its custodian) upon conversion or exchange of other
securities held in its portfolio. A call option is also covered if the Fund
holds a call on the same security as the call written where the exercise price
of the call held is (1) equal to or less than the exercise price of the call
written or (2) greater than the exercise price of the call written if the
difference is maintained by the Fund in cash, U.S. Government securities or
other high grade short-term obligations in a segregated account held with its
custodian. A put option is "covered" if the Fund maintains cash or other liquid
portfolio securities with a value equal to the exercise price in a segregated
account held with its custodian, or else holds a put on the same security as the
put written where the exercise price of the put held is equal to or greater than
the exercise price of the put written.
If the Fund has written an option, it may terminate its obligation by effecting
a closing purchase transaction. This is accomplished by purchasing an option of
the same series as the option previously written. However, once the Fund has
been assigned an exercise notice, the Fund will be unable to effect a closing
purchase transaction. Similarly, if the Fund is the holder of an option it may
liquidate its position by effecting a closing sale transaction. This is
accomplished by selling an option of the same series as the option previously
purchased. There can be no assurance that either a closing purchase or sale
transaction can be effected when the Fund so desires.
<PAGE>
The Fund will realize a profit from a closing transaction if the price of the
transaction is less than the premium received from writing the option or is more
than the premium paid to purchase the option; the Fund will realize a loss from
a closing transaction if the price of the transaction is more than the premium
received from writing the option or is less than the premium paid to purchase
the option. Since call option prices generally reflect increases in the price of
the underlying security, any loss resulting from the repurchase of a call option
may also be wholly or partially offset by unrealized appreciation of the
underlying security. Other principal factors affecting the market value of a put
or a call option include supply and demand, interest rates, the current market
price and price volatility of the underlying security and the time remaining
until the expiration date.
An option position may be closed out only on an exchange which provides a
secondary market for an option of the same series. Although the Fund will
generally purchase or write only those options for which there appears to be an
active secondary market, there is no assurance that a liquid secondary market on
an exchange will exist for any particular option. In such event it might not be
possible to effect closing transactions in particular options, so that the Fund
would have to exercise its options in order to realize any profit and would
incur brokerage commissions upon the exercise of call options and upon the
subsequent disposition of underlying securities for the exercise of put options.
If the Fund, as a covered call option writer, is unable to effect a closing
purchase transaction in a secondary market, it will not be able to sell the
underlying security until the option expires or it delivers the underlying
security upon exercise or otherwise covers the position.
In addition to options on securities, the Fund may also purchase and sell call
and put options on securities indexes. A stock index reflects in a single number
the market value of many different stocks. Relative values are assigned to the
stocks included in an index and the index fluctuates with changes in the market
values of the stocks. The options give the holder the right to receive a cash
settlement during the term of the option based on the difference between the
exercise price and the value of the index. By writing a put or call option on a
securities index, the Fund is obligated, in return for the premium received, to
make delivery of this amount. The Fund may offset its position in stock index
options prior to expiration by entering into a closing transaction on an
exchange or it may let the option expire unexercised.
The Fund may write put and call options on stock indexes for the purposes of
increasing its gross income and protecting its portfolio against declines in the
value of the securities it owns or increases in the value of securities to be
acquired. In addition, the Fund may purchase put and call options on stock
indexes in order to hedge its investments against a decline in value or to
attempt to reduce the risk of missing a market or industry segment advance.
Options or stock indexes are similar to options on specific securities. However,
because options on stock indexes do not involve the delivery of an underlying
security, the option represents the holder's right to obtain from the writer
cash in an amount equal to a fixed multiple of the amount by which the exercise
price exceeds (in the case of a put) or is less than (in the case of a call) the
closing value of the underlying stock index on the exercise date. Therefore,
while one purpose of writing such options is to generate additional income for
the Fund, the Fund recognizes that it may be required to deliver an amount of
cash in excess of the market value of a stock index at such time as an option
written by the Fund is exercised by the holder. The writing and purchasing of
options is a highly specialized activity which involves investment techniques
and risks different from those associated with ordinary portfolio securities
transactions. The successful use of protective puts for hedging purposes depends
in part on the Adviser's ability to predict future price fluctuations and the
degree of correlation between the options and securities markets.
Use of options on securities indexes entails the risk that trading in the
options may be interrupted if trading in certain securities included in the
index is interrupted. The Fund will not purchase these options unless the
Adviser is satisfied with the development, depth and liquidity of the market and
the Adviser believes the options can be closed out.
Price movements in the Fund's portfolio may not correlate precisely with
movements in the level of an index and, therefore, the use of options on indexes
cannot serve as a complete hedge and will depend, in
<PAGE>
part, on the ability of the Adviser to predict correctly movements in the
direction of the stock market generally or of a particular industry. Because
options on securities indexes require settlement in cash, the Adviser may be
forced to liquidate portfolio securities to meet settlement obligations.
Although the 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.
LOANS OF PORTFOLIO SECURITIES
The Fund may lend its portfolio securities to broker-dealers or financial
institutions provided that the loans are callable at any time by the Fund. Loans
by the Fund, if and when made, (1) will be collateralized in accordance with
applicable regulatory requirements and (2) will be limited so that the value of
all loaned securities does not exceed 33% of the value of the Fund's total
assets. The Fund, however, currently intends to limit the value of all loaned
securities to no more than 5% of the Fund's total assets.
The Fund lends its portfolio securities in order to generate revenue to defray
certain operating expenses. The advantage of this practice is that the Fund
continues to receive the income on the loaned securities while at the same time
earns interest on the cash amounts deposited as collateral, which will be
invested in short-term obligations.
A loan may generally be terminated by the borrower on one business day's notice,
or by the Fund on five business days' notice. If the borrower fails to deliver
the loaned securities within five days after receipt of notice, the Fund could
use the collateral to replace the securities while holding the borrower liable
for any excess of replacement cost over collateral. As with any extensions of
credit, there are risks of delay in recovery and in some cases even loss of
rights in the collateral should the borrower of the securities fail financially.
However, loans of portfolio securities will only be made to firms deemed by the
Fund's management to be creditworthy and when the income that can be earned from
the loans justifies the attendant risks. The Board of Trustees will oversee the
creditworthiness of the contracting parties on an ongoing basis. Upon
termination of the loan, the borrower is required to return the securities to
the Fund. Any gain or loss in the market price during the loan period would
inure to the Fund. The risks associated with loans of portfolio securities are
substantially similar to those associated with repurchase agreements. Thus, if
the party to whom the loan was made petitions for bankruptcy or becomes subject
to the U.S. 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 could suffer a loss.
When voting or consent rights that accompany loaned securities pass to the
borrower, the Fund will follow the policy of calling the loaned securities, to
be delivered within one day after notice, to permit the exercise of such rights
if the matters involved would have a material effect on the Fund's investment in
such loaned securities. The Fund will pay reasonable finder's, administrative
and custodial fees in connection with a loan of its securities.
FUTURES CONTRACTS AND OPTIONS ON FUTURES
The Fund has authorized the Adviser to enter into futures contracts that are
traded on a U.S. exchange or board of trade, provided, however, that, other than
to close an existing position, the Fund will not enter into futures contacts for
which the aggregate initial margins and premiums would exceed 5% of the fair
market value of the Fund's assets. Although the Fund has no current intention of
using options on futures contracts, the Fund may at some future date authorize
the Adviser to enter into options on futures contracts, subject to the
limitations stated in the preceding sentence. These investments will be made by
the Fund solely for the purpose of hedging against changes in the value of its
portfolio securities and in the value of securities it intends to purchase. Such
investments will only be made if they are
<PAGE>
economically appropriate to the reduction of risks involved in the management of
the Fund. In this regard, the Fund may enter into futures contracts or options
on futures for the purchase or sale of securities indices or other financial
instruments including but not limited to U.S. Government securities. Futures
exchanges and trading in the United States are regulated under the Commodity
Exchange Act by the Commodity Futures Trading Commission.
A "sale" of a futures contract (or a "short" futures position) means the
assumption of a contractual obligation to deliver the securities underlying the
contract at a specified price at a specified future time. A "purchase" of a
futures contract (or a "long" futures position) means the assumption of a
contractual obligation to acquire the securities underlying the contract at a
specified price at a specified future time. Certain futures contracts, including
stock and bond index futures, are settled on a net cash payment basis rather
than by the sale and delivery of the securities underlying the futures
contracts.
No consideration will be paid or received by the Fund upon the purchase or sale
of a futures contract. Initially, the Fund will be required to deposit with the
broker an amount of cash or cash equivalents equal to approximately 1% to 10% of
the contract amount (this amount is subject to change by the exchange or board
of trade on which the contract is traded and brokers or members of such board of
trade may charge a higher amount). This amount is known as "initial margin" and
is in the nature of a performance bond or good faith deposit on the contract.
Subsequent payments, known as "variation margin," to and from the broker will be
made daily as the price of the index or security underlying the futures contract
fluctuates. At any time prior to the expiration of a futures contract, the
portfolio may elect to close the position by taking an opposite position, which
will operate to terminate the Fund's existing position in the contract.
An option on a futures contract gives the purchaser the right, in return for the
premium paid, to assume a position in a futures contract at a specified exercise
price at any time prior to the expiration of the option. Upon exercise of an
option, the delivery of the futures position by the writer of the option to the
holder of the option will be accompanied by delivery of the accumulated balance
in the writer's futures margin account attributable to that contract, which
represents the amount by which the market price of the futures contract exceeds,
in the case of a call, or is less than, in the case of a put, the exercise price
of the option on the futures contract. The potential loss related to the
purchase of an option on futures contracts is limited to the premium paid for
the option (plus transaction costs). Because the value of the option purchased
is fixed at the point of sale, there are no daily cash payments by the purchaser
to reflect changes in the value of the underlying contract; however, the value
of the option does change daily and that change would be reflected in the net
asset value of the portfolio.
As noted above, the Fund may authorize the Adviser to use such instruments
depending upon market conditions prevailing at such time and the perceived
investment needs of the Fund. However, in no event may the Fund enter into
futures contracts or options on futures contracts if, immediately thereafter,
the sum of the amount of margin deposits on the Fund's existing futures
contracts and premiums paid for options would exceed 5% of the value of the
Fund's total assets after taking into account unrealized profits and losses on
any existing contracts. In the event the Fund enters into long futures contracts
or purchases call options, an amount of cash, obligations of the U.S. Government
and its agencies and instrumentalities or other high grade debt securities equal
to the market value of the contract will be deposited and maintained in a
segregated account with the Fund's custodian to collateralize the positions,
thereby insuring that the use of the contract is unleveraged.
The success of hedging depends on the Adviser's ability to predict movements in
the prices of the hedged securities and market fluctuations. The Adviser may not
be able to perfectly correlate changes in the market value of securities and the
prices of the corresponding options or futures. The Adviser may have difficulty
selling or buying futures contracts and options when it chooses and there may be
certain restrictions on trading futures contracts and options. The Fund is not
obligated to pursue any hedging strategy. While hedging can reduce or eliminate
losses, it can also reduce or eliminate gains. In addition, hedging practices
may not be available, may be too costly to be used effectively or may be unable
to be used for other reasons.
<PAGE>
INVESTMENT RESTRICTIONS
The Fund's investment objectives and the following investment restrictions are
fundamental and may not be changed without the approval of a majority of the
Fund's shareholders, defined as the lesser of (1) 67% of the Fund's shares
present at a meeting if the holders of more than 50% of the outstanding shares
are present in person or by proxy, or (2) more than 50% of the Fund's
outstanding shares. All other investment policies or practices are considered by
the Fund not to be fundamental and accordingly may be changed without
shareholder approval. If a percentage restriction on investment or the use of
assets set forth below is adhered to at the time the transaction is effected,
later changes in percentage resulting from changing market values or total
assets of the Fund will not be considered a deviation from policy. Under such
restrictions, the Fund may not:
(1) Purchase the securities of any one issuer, other than the United
States Government, or any of its agencies or instrumentalities, if immediately
after such purchase more than 5% of the value of its total assets would be
invested in such issuer or the Fund would own more than 10% of the outstanding
voting securities of such issuer, except that up to 25% of the value of the
Fund's total assets may be invested without regard to such 5% and 10%
limitations;
(2) Invest more than 25% of the value of its total assets in any
particular industry (this restriction does not apply to obligations issued or
guaranteed by the U.S. Government or its agencies or its instrumentalities);
(3) Make loans of its assets except for: (a) purchasing private or
publicly distributed debt obligations, (b) engaging in repurchase agreements,
and (c) lending its portfolio securities consistent with applicable regulatory
requirements;
(4) Purchase securities on margin, but it may obtain such short-term
credits from banks as may be necessary for the clearance of purchase and sales
of securities;
(5) Issue senior securities, except to the extent permitted by
applicable law;
(6) Borrow money, except subject to the restrictions set forth in this
SAI ;
(7) Mortgage, pledge or hypothecate any of its assets except that, in
connection with permissible borrowings mentioned in restriction (6) above, not
more than 30% of the assets of the Fund (not including amounts borrowed) may be
used as collateral and except for collateral arrangements with respect to
options, futures, hedging transactions, short sales, when-issued and forward
commitment transactions and similar investment strategies;
(8) Engage in the underwriting of securities, except insofar as the
Fund may be deemed an underwriter under the Securities Act of 1933, as amended,
in disposing of a portfolio security;
(9) Purchase or sell commodities or commodity contracts except for bona
fide hedging, yield enhancement and risk management purposes or invest in any
oil, gas or mineral interests;
(10) Purchase real estate or interests therein, other than
mortgage-backed securities and securities of companies that invest in real
estate or interests therein; or
(11) Invest for the purpose of exercising control over management of
any company (the Fund does not view efforts to affect management or business
decisions of portfolio companies as investing for the purpose of exercising
control).
<PAGE>
TRUSTEES AND OFFICERS
Under Delaware law, the Fund's Board of Trustees is responsible for establishing
the Fund's policies and for overseeing the management of the Fund. The Board
also elects the Fund's officers who conduct the daily business of the Fund. The
Trustees and executive officers of the Fund, their ages and their principal
occupations during the last five years, and their affiliations, if any with the
Adviser, are set forth below. Trustees deemed to be "interested persons" of the
Fund for purposes of the 1940 Act are indicated by an asterisk. Unless otherwise
specified, the address of each such person is One Corporate Center, Rye, New
York 10580-1434.
<PAGE>
<TABLE>
<CAPTION>
NAME, AGE AND POSITIONS(S)
WITH FUND PRINCIPAL OCCUPATIONS DURING LAST FIVE YEARS
- ----------------------------------------------- -------------------------------------------------------------
<S> <C>
Mario J. Gabelli* Chairman of the Board and Chief Investment Officer of
Trustee Gabelli Asset Management Inc. and Chief Investment Officer
Age: 57 of Gabelli Funds, LLC and GAMCO Investors, Inc.; Chairman of
the Board and Chief Executive Officer of Lynch Corporation
(diversified manufacturing company) and Chairman of the
Board of Lynch Interactive Corporation (multimedia and
services company); Director of Spinnaker Industries, Inc.
(manufacturing company); Director or Trustee of 16 other
mutual funds advised by Gabelli Funds, LLC and it
affiliates.
Anthony J. Colavita President and Attorney at Law in the law firm of Anthony J.
Trustee Colavita, P.C. since 1961; Director or Trustee of 17
Age: 64 other mutual funds advised by Gabelli Funds, LLC and
its affiliates.
Former Senior Vice President and Chief Financial Officer
Vincent D. Enright of Key Span Energy Corporation; Director or Trustee of 6
Trustee other mutual funds advised by Gabelli Funds, LLC and its
Age: 56 affiliates.
Werner J. Roeder, M.D. Medical Director, Lawrence Hospital and practicing
Trustee private physician; Director or Trustee of 10 other mutual
Age: 59 funds advised by Gabelli Funds, LLC and its affiliates.
Karl Otto Pohl*+ Member of the Shareholder Committee of Sal Oppenheim Jr.
Trustee & Cie (private investment bank); Director of Gabelli Asset
Age: 70 Management Inc. (investment management), Zurich Allied
(insurance company), and TrizecHahn Corp. (real estate
company); Former President of the Deutsche Bundesbank and
Chairman of its Central Bank Council from 1980 through 1991;
Director or Trustee of all other mutual funds advised by Gabelli
Funds, LLC and its affiliates.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
NAME, AGE AND POSITIONS(S)
WITH FUND PRINCIPAL OCCUPATIONS DURING LAST FIVE YEARS
- --------------------------------------------------------------------------------------------------------------
<S> <C>
James E. McKee Secretary of Gabelli Funds, LLC; Vice President,
Secretary Secretary and General Counsel of GAMCO Investors, Inc. since
Age: 36 1993, and of Gabelli Asset Management Inc. since 1999;
Secretary of all mutual funds advised by Gabelli Funds, LLC
and Gabelli Advisers, Inc. since August 1995.
Bruce N. Alpert Executive Vice President and Chief Operating Officer of
Vice President and Gabelli Funds, LLC since 1988; President and Director of
Treasurer Gabelli Advisers, Inc. and an officer of all mutual funds
Age: 48 advised by Gabelli Funds, LLC and its affiliates.
<FN>
- ----------------
+ Mr. Pohl is a director of the parent company of the Adviser.
</FN>
</TABLE>
The Fund, its Adviser and principal underwriter have adopted a code of ethics
(the "Code of Ethics") under Rule 17j-1 of the 1940 Act. The Code of Ethics
permits personnel, subject to the Code of Ethics and its restrictive provisions,
to invest in securities, including securities that may be purchased or held by
the Fund.
No director, officer or employee of the Adviser or any affiliate of the Adviser
receives any compensation from the Fund for serving as an officer or Trustee of
the Fund. The Fund pays each of its Trustees who is not a director, officer or
employee of the Adviser or any of their affiliates, $3,000 per annum plus $500
per meeting attended in person or by telephone and reimburses each Trustee for
related travel and other out-of-pocket expenses. The Fund also pays each Trustee
serving as a member of the Audit, Proxy or Nominating Committees a fee of $500
per committee meeting if held on a day other than a regularly scheduled board
meeting.
The following table sets forth certain information regarding the compensation of
the Fund's Trustees. No executive officer or person affiliated with the Fund
received compensation in excess of $60,000 from the Fund for the fiscal period
ended December 31, 1999.
<PAGE>
COMPENSATION TABLE
------------------
<TABLE>
<CAPTION>
- ------------------------------------ --------------------------------- ------------------------------------
(1) (2) (3)
NAME OF PERSON AGGREGATE COMPENSATION FROM THE FROM THE FUND AND FUND
AND POSITION FUND COMPLEX PAID TO TRUSTEES*
- ------------------------------------- ---------------------------------- -------------------------------------
<S> <C> <C> <C>
Anthony J. Colavita $1,750 $94,875 (18)
Trustee
Vincent D. Enright $1,750 $25,500 (7)
Trustee
Karl Otto Pohl $ 0 $ 7,042 (19)
Trustee
Werner J. Roeder $1,750 $34,859 (11)
Trustee
<FN>
- --------------
* Represents the total compensation paid to such persons from the Fund's
commencement of operations on August 26, 1999 through December 31,
1999. The parenthetical number represents the number of investment
companies (including the Fund) from which such person receives
compensation which are considered part of the same "fund complex" as
the Fund because they have common or affiliated investment advisers.
</FN>
</TABLE>
CONTROL PERSONS AND PRINCIPAL SHAREHOLDERS
As of April 17, 2000, the following persons owned of record or beneficially 5%
or more of the Fund's outstanding shares:
<TABLE>
<CAPTION>
NAME AND ADDRESS OF HOLDER OF RECORD PERCENTAGE OF FUND NATURE OF OWNERSHIP
- ------------------------------------ ------------------ -------------------
<S> <C> <C>
Balsa and Company. 5.43% Record(a)
P.O. Box 1768
New York, NY 10163-1768
National Financial Serv. Corp. 12.83% Record(a)
FBO Customers
Attn: Mutual Funds Dept.
200 Liberty Street, 5th Floor
New York, NY 10281-5500
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
NAME AND ADDRESS OF HOLDER OF RECORD PERCENTAGE OF FUND NATURE OF OWNERSHIP
- ------------------------------------ ------------------ -------------------
<S> <C> <C>
Charles Schwab & Co., Inc. 43.00% Record(a)
Special Custody Account
FBO Customers
Attn: Mutual Funds
101 Montgomery Street
San Francisco, CA 94104-4122
<FN>
(a) Balsa and Company, National Financial Service Corp. and Charles Schwab
disclaim beneficial ownership and have not indicated that any account
holders own beneficially more than 5% of the shares of the Fund.
</FN>
</TABLE>
As of April 1, 2000, as a group, the Directors and officers of the Fund owned
10,823 or 1.68% of the outstanding shares of the Fund.
INVESTMENT ADVISORY AND OTHER SERVICES
INVESTMENT ADVISER
The Adviser is a New York limited liability company which serves as an
investment adviser to 13 open-end investment companies, and 4 closed-end
investment companies with aggregate assets in excess of $10.6 billion as of
December 31, 1999. The Adviser is a registered investment adviser under the
Investment Advisers Act of 1940, as amended. Mr. Mario J. Gabelli may be deemed
a "controlling person" of the Adviser on the basis of his controlling interest
of the ultimate parent company of the Adviser. The Adviser has several
affiliates that provide investment advisory services: GAMCO Investors, Inc.
("GAMCO"), a wholly-owned subsidiary of the Adviser, acts as investment adviser
for individuals, pension trusts, profit-sharing trusts and endowments, and had
assets under management of approximately $9.4 billion under its management as of
December 31, 1999; Gabelli Advisers, Inc. acts as investment adviser to the
Gabelli Westwood Funds with assets under management of approximately $390
million as of December 31, 1999; Gabelli Securities, Inc. acts as investment
adviser to certain alternative investments products, consisting primarily of
risk arbitrage and merchant banking limited partnerships and offshore companies,
with assets under management of approximately $230 million as of December 31,
1999; and Gabelli Fixed Income LLC acts as investment adviser for the five
portfolios of The Treasurer's Fund, Inc. and separate accounts having assets
under management of approximately $1.4 billion as of December 31, 1999.
Affiliates of the Adviser may, in the ordinary course of their business, acquire
for their own account or for the accounts of their advisory clients, significant
(and possibly controlling) positions in the securities of companies that may
also be suitable for investment by the Fund. The securities in which the Fund
might invest may thereby be limited to some extent. For instance, many companies
in the past several years have adopted so-called "poison pill" or other
defensive measures designed to discourage or prevent the completion of
non-negotiated offers for control of the company. Such defensive measures may
have the effect of limiting the shares of the company which might otherwise be
acquired by the Fund if the affiliates of the Adviser or their advisory accounts
have or acquire a significant position in the same securities. However, the
Adviser does not believe that the investment activities of its affiliates will
have a material adverse effect upon the Fund in seeking to achieve its
investment objectives. Securities purchased or sold pursuant to contemporaneous
orders entered on behalf of the investment company
<PAGE>
accounts of the Adviser or the advisory accounts managed by its affiliates for
their unaffiliated clients are allocated pursuant to principles believed to be
fair and not disadvantageous to any such accounts. In addition, all such orders
are accorded priority of execution over orders entered on behalf of accounts in
which the Adviser or its affiliates have a substantial pecuniary interest. The
Adviser may on occasion give advice or take action with respect to other clients
that differ from the actions taken with respect to the Fund. The Fund may invest
in the securities of companies which are investment management clients of GAMCO.
In addition, portfolio companies or their officers or directors may be minority
shareholders of the Adviser or its affiliates.
Pursuant to an Investment Advisory Contract, which was initially approved by the
Trustees of the Fund at a meeting held on May 19, 1999 (the "Contract"), the
Adviser furnishes a continuous investment program for the Fund's portfolio,
makes the day-to-day investment decisions for the Fund, arranges the portfolio
transactions of the Fund and generally manages the Fund's investments in
accordance with the stated policies of the Fund, subject to the general
supervision of the Board of Trustees of the Fund.
Under the Contract, the Adviser also (i) provides the Fund with the services of
persons competent to perform such supervisory, administrative, and clerical
functions as are necessary to provide effective administration of the Fund,
including maintaining certain books and records and overseeing the activities of
the Fund's Custodian and Transfer Agent; (ii) oversees the performance of
administrative and professional services to the Fund by others, including PFPC
Inc., the Fund's Sub-Administrator, and State Street, the Fund's Custodian,
Transfer Agent and Dividend Disbursing Agent, as well as accounting, auditing
and other services performed for the Fund; (iii) provides the Fund with adequate
office space and facilities; (iv) prepares, but does not pay for, the periodic
updating of the Fund's registration statement, Prospectus and Additional
Statement, including the printing of such documents for the purpose of filings
with the SEC and state securities administrators, the Fund's tax returns, and
reports to the Fund's shareholders and the SEC; (v) calculates the net asset
value of shares in the Fund; (vi) prepares, but does not pay for, all filings
under the securities or "Blue Sky" laws of such states or countries as are
designated by Gabelli & Company, Inc. (the "Distributor"), which may be required
to register or qualify, or continue the registration or qualification, of the
Fund and/or its shares under such laws; and (vii) prepares notices and agendas
for meetings of the Fund's Board of Trustees and minutes of such meetings in all
matters required by the Act to be acted upon by the Board.
The Contract provides that absent willful misfeasance, bad faith, gross
negligence or reckless disregard of its duty, the Adviser and its employees,
officers, directors and controlling persons are not liable to the Fund or any of
its investors for any act or omission by the Adviser or for any error of
judgment or for losses sustained by the Fund. However, the Contract provides
that the Fund is not waiving any rights it may have with respect to any
violation of law which cannot be waived. The Contract also provides
indemnification for the Adviser and each of these persons for any conduct for
which they are not liable to the Fund. The Contract in no way restricts the
Adviser from acting as adviser to others. The Fund has agreed by the terms of
the Contract that the word "Gabelli" in its name is derived from the name of the
Adviser which in turn is derived from the name of Mario J. Gabelli; that such
name is the property of the Adviser for copyright and/or other purposes; and
that, therefore, such name may freely be used by the Adviser for other
investment companies, entities or products. The Fund has further agreed that in
the event that for any reason, the Adviser ceases to be its investment adviser,
the Fund will, unless the Adviser otherwise consents in writing, promptly take
all steps necessary to change its name to one which does not include "Gabelli."
By its terms, the Contract will remain in effect for a period of two years and
thereafter from year to year, provided each such annual continuance is
specifically approved by the Fund's Board of Trustees or by a "majority" (as
defined in the 1940 Act) vote of its shareholders and, in either case, by a
majority vote of the Trustees who are not parties to the Contract or interested
persons of any such party, cast in person at a meeting called specifically for
the purpose of voting on the Contract. The Contract is terminable without
penalty by the Fund on sixty days' written notice when authorized either by
majority vote of its outstanding voting shares or by a vote of a majority of its
Board of Trustees, or by the Adviser on sixty
<PAGE>
days' written notice, and will automatically terminate in the event of its
"assignment" as defined by the 1940 Act.
As compensation for its services and the related expenses borne by the Adviser,
the Fund pays the Adviser a fee, computed daily and paid monthly, at the annual
rate of 1.00% of the Fund's average daily net assets, payable out of the Fund's
net assets. For the fiscal period ended December 31, 1999, the Fund incurred
$17,312 in investment advisory fees and reimbursed expenses of the Fund in the
amount of $49,488 to maintain the annualized total operating expenses of the
Fund (excluding brokerage, interest, tax and extraordinary expenses) at 2.00% of
the value of the Fund's average daily net assets.
Additionally, the Adviser has contractually agreed to waive its investment
advisory fee and/or reimburse expenses of the Fund to the extent necessary to
maintain the Total Annual Fund Operating Expenses (excluding brokerage,
interest, tax and extraordinary expenses) at no more than 2.00% (2.00%, 2.75%
and 2.75% in the case of Class A, Class B and Class C Shares, respectively)
through December 31, 2000. Effective January 1, 2000, the Fund has agreed during
the two-year period following any waiver or reimbursement by the Adviser, to
repay such amount to the extent, after giving effect to the repayment, such
adjusted Total Annual Fund Operating Expenses would not exceed 2.00% (2.00%,
2.75% and 2.75% in the case of Class A, Class B and Class C Shares,
respectively) on an annualized basis.
SUB-ADMINISTRATOR
The Adviser has entered into a Sub-Administration Agreement (the
"Sub-Administration Agreement") with PFPC Inc. (formerly known as First Data
Investor Services Group, Inc.) (the "Sub-Administrator"), a majority-owned
subsidiary of PNC Bank Corp., which is located at 101 Federal Street, Boston,
Massachusetts 02110. Under the Sub-Administration Agreement, the
Sub-Administrator (a) assists in supervising all aspects of the Fund's
operations except those performed by the Adviser under its advisory agreement
with the Fund; (b) supplies the Fund with office facilities (which may be in the
Sub-Administrator's own offices), statistical and research data, data processing
services, clerical, accounting and bookkeeping services, including, but not
limited to, the calculation of the net asset value of shares in the Fund,
internal auditing and legal services, internal executive and administrative
services, and stationery and office supplies; (c) prepares and distributes
materials for all Fund Board of Trustees' Meetings including the mailing of all
Board materials and collates the same materials into the Board books and assists
in the drafting of minutes of the Board Meetings; (d) prepares reports to Fund
shareholders, tax returns and reports to and filings with the SEC and state
"Blue Sky" authorities; (e) calculates the Fund's net asset value per share,
provides any equipment or services necessary for the purpose of pricing shares
or valuing the Fund's investment portfolio and, when requested, calculates the
amounts permitted for the payment of distribution expenses under any
distribution plan adopted by the Fund; (f) provides compliance testing of all
Fund activities against applicable requirements of the 1940 Act and the rules
thereunder, the Internal Revenue Code of 1986, as amended (the "Code"), and the
Fund's investment restrictions; (g) furnishes to the Adviser such statistical
and other factual information and information regarding economic factors and
trends as the Adviser from time to time may require;
<PAGE>
and (h) generally provides all administrative services that may be required for
the ongoing operation of the Fund in a manner consistent with the requirements
of the 1940 Act.
For the services it provides, the Adviser pays the Sub-Administrator an annual
fee based on the value of the aggregate average daily net assets of all funds
under its administration managed by the Adviser as follows: up to $10 billion -
.0275%; $10 billion to $15 billion - .0125%; over $15 billion - .0100%. The
Sub-Administrator's fee is paid by the Adviser and will result in no additional
expenses to the Fund.
COUNSEL
Skadden, Arps, Slate, Meagher & Flom LLP, Four Times Square, New York, New York
10036, serves as the Fund's legal counsel.
INDEPENDENT AUDITORS
Ernst & Young LLP, independent auditors, have been selected to audit the Fund's
annual financial statements, and is located at 787 Seventh Avenue, New York, New
York 10019.
CUSTODIAN, TRANSFER AGENT AND DIVIDEND DISBURSING AGENT
State Street, 225 Franklin Street, Boston, MA 02110 is the Custodian for the
Fund's cash and securities. Boston Financial Data Services, Inc. ("BFDS"), an
affiliate of State Street located at the BFDS Building, 66 Brooks Drive,
Braintree, Massachusetts 02184, performs the services of transfer agent and
dividend disbursing agent for the Fund. Neither BFDS nor State Street assists in
or is responsible for investment decisions involving assets of the Fund.
DISTRIBUTOR
To implement the Fund's 12b-1 Plans, the Fund has entered into a Distribution
Agreement with Gabelli & Company, Inc. (the "Distributor"), a New York
corporation which is an indirect majority owned subsidiary of Gabelli Asset
Management Inc. ("GAMI"), having principal offices located at One Corporate
Center, Rye, New York 10580. The Distributor acts as agent of the Fund for the
continuous offering of its shares on a best efforts basis.
DISTRIBUTION PLANS
The Fund has adopted a Plan of Distribution (a "Plan") pursuant to Rule 12b-1
under the 1940 Act on behalf of each of the Class AAA Shares, Class A Shares,
the Class B Shares and the Class C Shares. Payments may be made by the Fund
under each Plan for the purpose of financing any activity primarily intended to
result in the sales of shares of the class to which such Plan relates as
determined by the Board of Trustees. Such activities typically include
advertising, compensation for sales and marketing activities of the Distributor
and other banks, broker-dealers and service providers; shareholder account
servicing; production and dissemination of prospectus and sales and marketing
materials; and capital or other expenses of associated equipment, rent,
salaries, bonuses, interest and other overhead. To the extent any activity is
one which the Fund may finance without a distribution plan, the Fund may also
make payments to finance such activity outside of the Plans and not be subject
to its limitations. Payments under the Plans are not solely dependent on
distribution expenses actually incurred by the Distributor. The Plans compensate
the Distributor regardless of expense. The Plans are intended to benefit the
Fund by increasing its assets and thereby reducing the Fund's expense ratio.
Under its terms, each Plan remains in effect so long as its continuance is
specifically approved at least annually by vote of the Fund's Board of Trustees,
including a majority of the Trustees who are not interested persons of the Fund
and who have no direct or indirect financial interest in the operation of the
<PAGE>
Fund ("Independent Trustees"). No Plan may be amended to increase materially the
amount to be spent for services provided by the Distributor thereunder without
shareholder approval, and all material amendments of any Plan must also be
approved by the Trustees in the manner described above. Each Plan may be
terminated at any time, without penalty, by vote of a majority of the
Independent Trustees, or by a vote of a majority of the outstanding voting
securities of the Fund (as defined in the 1940 Act). Under each Plan, the
Distributor will provide the Trustees periodic reports of amounts expanded under
such Plan and the purpose for which expenditures were made.
During the fiscal period ended December 31, 1999, the Fund incurred distribution
expenses under the Distribution Plan for Class AAA Shares of $181,700. Of this
amount, $1,300 was spent on advertising, $64,600 for printing, postage and
stationary, $26,500 for overhead support expenses and $89,300 for salaries of
personnel of the Distributor.
As of December 31, 1999, the Fund had not commenced offering Class A, B and C
Shares to the public.
No interested person of the Fund or any Independent Trustee of the Fund had a
direct or indirect financial interest in the operation of any Plan or related
agreements.
PORTFOLIO TRANSACTIONS AND BROKERAGE
Under the Contract, the Adviser is authorized on behalf of the Fund to employ
brokers to effect the purchase or sale of portfolio securities with the
objective of obtaining prompt, efficient and reliable execution and clearance of
such transactions at the most favorable price obtainable ("best execution") at
reasonable expense. The Adviser is permitted to (1) direct Fund portfolio
brokerage to Gabelli & Company, a broker-dealer member of the National
Association of Securities Dealers, Inc. and an affiliate of the Adviser; (2) pay
commissions to brokers other than Gabelli & Company which are higher than might
be charged by another qualified broker to obtain brokerage and/or research
services considered by the Adviser to be useful or desirable for its investment
management of the Fund and/or other advisory accounts under the management of
the Adviser and any investment adviser affiliated with it; and (3) consider the
sales of shares of the Fund by brokers other than Gabelli & Company as a factor
in its selection of brokers for Fund portfolio transactions. Transactions in
securities other than those for which a securities exchange is the principal
market are generally executed through a brokerage firm and a commission is paid
whenever it appears that the broker can obtain a more favorable overall price.
In general, there may be no stated commission on principal transactions in
over-the-counter securities, but the prices of such securities may usually
include undisclosed commissions or markups.
When consistent with the objective of obtaining best execution, Fund brokerage
may be directed to brokers or dealers which furnish brokerage or research
services to the Fund or the Adviser of the type described in Section 28(e) of
the Securities Exchange Act of 1934, as amended. The commissions charged by a
broker furnishing such brokerage or research services may be greater than that
which another qualified broker might charge if the Adviser determines, in good
faith, that the amount of such greater commission is reasonable in relation to
the value of the additional brokerage or research services provided by the
executing broker, viewed in terms of either the particular transaction or the
overall responsibilities of the Adviser or its advisory affiliates to the
accounts over which they exercise investment discretion. Since it is not
feasible to do so, the Adviser need not attempt to place a specific dollar value
on such services or the portion of the commission which reflects the amount paid
for such services but must be prepared to demonstrate a good faith basis for its
determinations.
Investment research obtained by allocations of Fund brokerage is used to augment
the scope and supplement the internal research and investment strategy
capabilities of the Adviser but does not reduce the overall expenses of the
Adviser to any material extent. Such investment research may be in written form
or through direct contact with individuals and includes information on
particular companies and industries as well as market, economic or institutional
activity areas. Research services furnished by
<PAGE>
brokers through which the Fund effects securities transactions are used by the
Adviser and its advisory affiliates in carrying out their responsibilities with
respect to all of their accounts over which they exercise investment discretion.
Such investment information may be useful only to one or more of the other
accounts of the Adviser and its advisory affiliates, and research information
received for the commissions of those particular accounts may be useful both to
the Fund and one or more of such other accounts. The purpose of this sharing of
research information is to avoid duplicative charges for research provided by
brokers and dealers. Neither the Fund nor the Adviser has any agreement or
legally binding understanding with any broker regarding any specific amount of
brokerage commissions which will be paid in recognition of such services.
However, in determining the amount of portfolio commissions directed to such
brokers, the Adviser does consider the level of services provided. Based on such
determinations, the Adviser allocated brokerage commissions of $13,482 on
portfolio transactions in the principal amount of $9,424,136 during the fiscal
period ended December 31, 1999 to any broker-dealer for research services
provided to the Adviser.
The Adviser may also place orders for the purchase or sale of portfolio
securities with Gabelli & Company when it appears that, as an introducing broker
or otherwise, Gabelli & Company can obtain a price and execution which is at
least as favorable as that obtainable by other qualified brokers. The Adviser
may also consider sales of shares of the Fund and any other registered
investment company managed by the Adviser and its affiliates by brokers and
dealers other than the distributor as a factor in its selection of brokers and
dealers to execute portfolio transaction for the Fund. The Fund paid the
following brokerage commissions for the fiscal period ended December 31, 1999 as
indicated:
Period Ended December 31, 1999
Total Brokerage Commissions Paid $14,716
Commissions paid to Gabelli & $0
Company
As required by Rule 17e-1 under the 1940 Act, the Board of Trustees has adopted
procedures which provide that commissions paid to the Distributor on stock
exchange transactions may not exceed that which would have been charged by
another qualified broker or member firm able to effect the same or a comparable
transaction at an equally favorable price. Rule 17e-1 and the procedures contain
requirements that the Board, including its "independent" Trustees, conduct
periodic compliance reviews of such brokerage allocations. The Adviser and
Distributor are also required to furnish reports and maintain records in
connection with such reviews.
To obtain the best execution of portfolio transactions on the New York Stock
Exchange ("NYSE"), the Distributor controls and monitors the execution of such
transactions on the floor of the NYSE through independent "floor brokers" or
through the Designated Order Turnaround System of the NYSE. Such transactions
are then cleared, confirmed to the Fund for the account of the Distributor, and
settled directly with the Custodian of the Fund by a clearing house member firm
which remits the commission less its clearance charges to the Distributor.
Pursuant to an agreement with the Fund, the Distributor pays all charges
incurred for such services and reports at least quarterly to the Board the
amount of such expenses and commissions. The compensation realized by the
Distributor for its brokerage services is subject to the approval of the Board,
including its "independent" Trustees, who must approve the continuance of the
arrangement at least annually. Commissions paid by the Fund pursuant to the
arrangement may not exceed the commission level specified by the procedures
described above. The Distributor may also effect Fund portfolio transactions in
the same manner and pursuant to the same arrangements on other national
securities exchanges which adopt direct order access rules similar to those of
the NYSE.
<PAGE>
REDEMPTION OF SHARES
Payment of the redemption price for shares redeemed may be made either in cash
or in portfolio securities (selected in the discretion of the Board of Trustees
of the Fund and taken at their value used in determining the Fund's net asset
value per share as described under "Computation of Net Asset Value"), or partly
in cash and partly in portfolio securities. However, payments will be made
wholly in cash unless the shareholder has redeemed more than $250,000 over the
preceding three months and the Adviser believes that economic conditions exist
which would make payments in cash detrimental to the best interests of the Fund.
If payment for shares redeemed is made wholly or partly in portfolio securities,
brokerage costs may be incurred by the investor in converting the securities to
cash. The Fund will not distribute in-kind portfolio securities that are not
readily marketable.
Cancellation of purchase orders for Fund shares (as, for example, when checks
submitted to purchase shares are returned unpaid) causes a loss to be incurred
when the net asset value of the Fund shares on the date of cancellation is less
than on the original date of purchase. The investor is responsible for such
loss, and the Fund may reimburse itself or the Distributor for such loss by
automatically redeeming shares from any account registered at any time in that
shareholder's name, or by seeking other redress. If the Fund is unable to
recover any loss to itself, it is the position of the SEC that the Distributor
will be immediately obligated to make the Fund whole.
DETERMINATION OF NET ASSET VALUE
Net asset value ("NAV") is calculated separately for each class of the Fund. The
NAV of Class B Shares and Class C Shares of the Fund will generally be lower
than the NAV of Class A Shares or Class AAA Shares as a result of the higher
distribution-related fee to which Class B Shares and Class C Shares are subject.
It is expected, however, that the NAV per share of each class will tend to
converge immediately after the recording of dividends, if any, which will differ
by approximately the amount of the distribution and/or service fee expense
accrual differential among the classes.
For purposes of determining the Fund's NAV per share, readily marketable
portfolio securities listed on a market subject to governmental regulation on
which trades are reported contemporaneously are valued, except as indicated
below, at the last sale price reflected at the close of the regular trading
session of the principal market for such security on the business day as of
which such value is being determined. If there has been no sale on such day, the
securities are valued at the average of the closing bid and asked prices on the
principal market for such security on such day. If no asked prices are quoted on
such day, then the security is valued at the closing bid price on the principal
market for such security on such day. If no bid or asked prices are quoted on
such day, then the security is valued by such method as the Board of Trustees
shall determine in good faith to reflect its fair market value.
All other readily marketable securities are valued at the latest average of the
bid and asked price obtained from a dealer maintaining an active market in such
security.
Debt instruments having 60 days or less remaining until maturity are stated at
amortized cost. Debt instruments having a greater remaining maturity will be
valued at the latest bid price obtainable from a dealer which maintains an
active market in the security until the maturity of the instrument is 60 days or
less when it will be valued as if purchased at the valuation established as of
the 61st day of its maturity. Listed debt securities which are actively traded
on a securities exchange may also be valued at the last sale price in lieu of
the quoted bid price of a dealer. All other investment assets, including
restricted and not readily marketable securities, are valued under procedures
established by and under the general
<PAGE>
supervision and responsibility of the Fund's Board of Trustees designed to
reflect in good faith the fair value of such securities.
DIVIDENDS AND DISTRIBUTIONS
Each dividend and capital gains distribution, if any, declared by the Fund on
its outstanding shares will, unless you have elected otherwise, be paid on the
payment date fixed by the Board of Trustees in additional shares of the Fund
having an aggregate net asset value as of the ex-dividend date of such dividend
or distribution equal to the cash amount of such distribution. An election to
receive dividends and distributions in cash or inadditional shares may be
changed by notifying the Fund in writing at any time prior to the record date
for a particular dividend or distribution. No sales charges or other fees are
imposed on shareholders in connection with the reinvestment of dividends and
capital gains distribution. There is no fixed dividend rate, and there can be no
assurance that the Fund will pay any dividends or realize any capital gains.
TAXATION
GENERAL
Set forth below is a discussion of certain U.S. federal income tax issues
concerning the Fund and the purchase, ownership and disposition of Fund shares.
This discussion is based upon present provisions of the Internal Revenue Code of
1986, as amended (the "Code"), the regulations promulgated thereunder, and
judicial and administrative ruling authorities, all of which are subject to
change and which may be retroactive. This discussion does not purport to be
complete or to deal with all aspects of U.S. federal income taxation that may be
relevant to investors in light of their particular circumstances. Prospective
investors should consult their own tax advisers with regard to the U.S. federal
tax consequences of the purchase, ownership, or disposition of Fund shares, as
well as the tax consequences arising under the laws of any state, foreign
country, or other taxing jurisdiction.
TAX STATUS OF THE FUND
The Fund has qualified and intends to remain qualified to be taxed as a
regulated investment company under Subchapter M of the Code. Accordingly, the
Fund must, among other things, (a) derive in each taxable year at least 90% of
its gross income from dividends, interest, payments with respect to certain
securities loans, and gains from the sale or other disposition of stock,
securities or foreign currencies, or other income (including but not limited to
gains from options, futures, or forward contracts) derived with respect to its
business of investing in such stock, securities or currencies; and (b) diversify
its holdings so that, at the end of each fiscal quarter (i) at least 50% of the
value of the Fund's total assets is represented by cash and cash items, U.S.
Government securities, the securities of other regulated investment companies
and other securities, with such other securities limited, in respect of any one
issuer, to an amount not greater than 5% of the value of the Fund's total assets
and 10% of the outstanding voting securities of such issuer, and (ii) not more
than 25% of the value of its total assets is invested in the securities (other
than U.S. Government securities and the securities of other regulated investment
companies) of any one issuer or of any two or more issuers that it controls and
that are determined to be engaged in the same or similar trades or businesses or
related trades or businesses.
As a regulated investment company, the Fund generally is not subject to U.S.
federal income tax on income and gains that it distributes to shareholders, if
at least 90% of the Fund's investment company taxable income (which includes,
among other items, dividends, interest and the excess of any net short-term
capital gains over net long-term capital losses) for the taxable year is
distributed. The Fund intends to distribute substantially all of such income.
<PAGE>
Amounts not distributed on a timely basis in accordance with a calendar year
distribution requirement are subject to a nondeductible 4% excise tax at the
Fund level. To avoid the tax, the Fund must distribute during each calendar year
an amount equal to the sum of (1) at least 98% of its ordinary income (not
taking into account any capital gains or losses) for the calendar year, (2) at
least 98% of its capital gains in excess of its capital losses (adjusted for
certain ordinary losses) for a one-year period generally ending on October 31 of
the calendar year, and (3) all ordinary income and capital gains for previous
years that were not distributed during such years. To avoid application of the
excise tax, the Fund intends to make distributions in accordance with the
calendar year distribution requirement.
A distribution will be treated as paid on December 31 of a calendar year if it
is declared by the Fund in October, November or December of that year with a
record date in such a month and paid by the Fund during January of the following
year. Such a distribution will be taxable to shareholders in the calendar year
in which the distribution is declared, rather than the calendar year in which it
is received.
DISTRIBUTIONS
Distributions of investment company taxable income (which includes taxable
interest and dividend income and the excess of net short-term capital gains over
long-term capital losses) are taxable to U.S. shareholders as ordinary income,
whether paid in cash or shares. Dividends paid by the Fund to a corporate
shareholder, to the extent such dividends are attributable to dividends received
by the Fund from U.S. corporations and to the extent the aggregate amount of
such dividends do not exceed the aggregate dividends received by the Fund for
the taxable year, may, subject to limitations, be eligible for the dividends
received deduction. The alternative minimum tax applicable to corporations,
however, may reduce the value of the dividends received deduction.
Capital gains may be taxed at different rates depending on how long the Fund
held the asset giving rise to such gains. Distributions of the excess of net
long-term capital gains over net short-term capital losses realized, if any,
properly designated by the Fund, whether paid in cash or reinvested in Fund
shares, will generally be taxable to shareholders at the rates applicable to
long-term capital gains, regardless of how long a shareholder has held Fund
shares. Distributions of net capital gains from assets held for one year or less
will be taxable to shareholders at rates applicable to ordinary income.
To the extent that the Fund retains any net long-term capital gains, it may
designate them as "deemed distributions" and pay a tax thereon for the benefit
of its shareholders. In that event, the shareholders report their share of the
Fund's retained realized capital gains on their individual tax returns as if it
had been received, and report a credit for the tax paid thereon by the Fund. The
amount of the deemed distribution net of such tax is then added to the
shareholder's cost basis for his shares. Shareholders who are not subject to
U.S. federal income tax or tax on capital gains should be able to file a return
on the appropriate form or a claim for refund that allows them to recover the
tax paid on their behalf.
Shareholders will be notified annually as to the U.S. federal tax status of
distributions, and shareholders receiving distributions in the form of newly
issued shares will receive a report as to the net asset value of the shares
received
Investors should be careful to consider the tax implications of buying shares of
the Fund just prior to the record date of a distribution (including a capital
gain dividend). The price of shares purchased at such a time will reflect the
amount of the forthcoming distribution, but the distribution will generally be
taxable to the shareholder.
FOREIGN TAXES
The Fund may be subject to certain taxes imposed by the countries in which it
invests or operates. The Fund will not have more than 50% of its total assets
invested in securities of foreign governments or
<PAGE>
corporations and consequently will not qualify to elect to treat any foreign
taxes paid by the Fund as having been paid by the Fund's shareholders.
DISPOSITIONS
Upon a redemption, sale or exchange of shares of the Fund, a shareholder will
realize a taxable gain or loss depending upon his basis in the shares. A gain or
loss will be treated as capital gain or loss if the shares are capital assets in
the shareholder's hands, and for noncorporate shareholders the rate of tax will
depend upon the shareholder's holding period for the shares. Any loss realized
on a redemption, sale or exchange will be disallowed to the extent the shares
disposed of are replaced (including through reinvestment of dividends) within a
period of 61 days, beginning 30 days before and ending 30 days after the shares
are disposed of. In such a case, the basis of the shares acquired will be
adjusted to reflect the disallowed loss. If a shareholder holds Fund shares for
six months or less and during that period receives a distribution taxable to the
shareholder as long-term capital gain, any loss realized on the sale of such
shares during such six month period would be a long-term capital loss to the
extent of such distribution.
BACKUP WITHHOLDING
The Fund generally will be required to withhold U.S. federal income tax at a
rate of 31% ("backup withholding") from dividends paid, capital gain
distributions, and redemption proceeds to shareholders if (1) the shareholder
fails to furnish the Fund with the shareholder's correct taxpayer identification
number or social security number, (2) the IRS notifies the shareholder or the
Fund that the shareholder has failed to report properly certain interest and
dividend income to the IRS and to respond to notices to that effect, or (3) when
required to do so, the shareholder fails to certify that he or she is not
subject to backup withholding. Any amounts withheld may be credited against the
shareholder's U.S. federal income tax liability.
OTHER TAXATION
Distributions may be subject to additional state, local and foreign taxes,
depending on each shareholder's particular situation. Non-U.S. shareholders may
be subject to U.S. tax rules that differ significantly from those summarized
above, including the likelihood that ordinary income dividends distributed to
them will be subject to withholding of U.S. tax at a rate of 30% (or a lower
treaty rate, if applicable). Non-U.S. investors should consult their own tax
advisers regarding U.S. federal, state, local and foreign tax considerations.
FUND INVESTMENTS
OPTIONS, FUTURES AND FORWARD CONTRACTS. Any regulated futures contracts and
certain options in which the Fund may invest may be "section 1256 contracts."
Gains (or losses) on these contracts generally are considered to be 60%
long-term and 40% short-term capital gains or losses. Also, section 1256
contracts held by the Fund at the end of each taxable year (and on certain other
dates prescribed in the Code) are "marked to market" with the result that
unrealized gains or losses are treated as though they were realized. Code
section 1092, which applies to certain straddles, may affect the taxation of the
Fund's sales of securities and transactions in financial futures contracts and
related options. Under section 1092, the Fund may be required to postpone
recognition of losses incurred in certain sales of securities and certain
closing transactions in financial futures contracts or related options.
Special Code provisions applicable to Fund investments, discussed above, may
affect characterization of gains and losses realized by the Fund, and may
accelerate recognition of income or defer recognition of losses. The Fund will
monitor these investments and when possible will make appropriate elections in
order to mitigate unfavorable tax treatment.
<PAGE>
INVESTMENT PERFORMANCE INFORMATION
The investment performance of the Fund quoted in advertising or sales literature
for the sale of its shares will be calculated on a total return basis which
assumes the reinvestment of all dividends and distributions. Total return is
computed by comparing the value of an assumed investment in Fund shares at the
offering price in effect at the beginning of the period shown with the
redemption price of the same investment at the end of the period (including
share(s) accrued thereon by the reinvestment of dividends and distributions).
Performance quotations given as a percentage will be derived by dividing the
amount of such total return by the amount of the assumed investment. When the
period shown is greater than one year, the result is referred to as cumulative
performance or cumulative total return.
Quotations of the Fund's total return will represent the average annual
compounded rate of return of a hypothetical investment in the Fund over periods
of 1, 5, and 10 years (up to the life of the Fund), and are calculated pursuant
to the following formula:
P (1 + T) n = ERV
(where P = a hypothetical initial payment of $1,000, T = the average annual
total return, n = the number of years, and ERV = the redeemable value at the end
of the period of a $1,000 payment made at the beginning of the period). Total
return figures will reflect the deduction of Fund expenses (net of certain
expenses reimbursed by the Adviser) on an annual basis, and will assume that all
dividends and distributions are reinvested and will deduct the maximum sales
charge, if any is imposed.
Investors are cautioned that past results are not necessarily representative of
future results; that investment returns and principal value will fluctuate; that
investment performance is primarily a function of portfolio management (which is
affected by the economic and market environment as well as the volatility of
portfolio investments) and operating expenses; and that performance information,
such as that described above, may not provide a valid basis of comparison with
other investments and investment companies using a different method of computing
performance data.
The Fund's aggregate total return for Class AAA Shares since its inception on
August 26, 1999 through December 31,
1999 was 17.78%.
As of December 31, 1999, the Fund had not commenced offering Class A, Class B
and Class C Shares to the public.
DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES
The Fund may issue an unlimited number of full and fractional shares of
beneficial interest (par value $.001 per share). The Fund's shares have no
preemptive or conversion rights.
<PAGE>
VOTING RIGHTS
Shareholders are entitled to one vote for each share held (and fractional votes
for fractional shares) and may vote on the election of Trustees and on other
matters submitted to meetings of shareholders. As a Delaware Business Trust, the
Fund is not required, and does not intend, to hold regular annual shareholder
meetings but may hold special meetings for the consideration of proposals
requiring shareholder approval such as changing fundamental policies. In
addition, if the Trustees have not called an annual meeting of shareholders for
any year by May 31 of that year, the Trustees will call a meeting of
shareholders upon the written request of shareholders holding in excess of 50%
of the affected shares for the purpose of removing one or more Trustees or the
termination of any investment advisory agreement. The Declaration of Trust
provides that the Fund's shareholders have the right, upon the vote of more than
662/3 of its outstanding shares, to remove a Trustee. Except as may be required
by the 1940 Act or any other applicable law, the Trustees may amend the
Declaration of Trust in any respect without any vote of shareholders to make any
change that does not (i) impair the exemption from personal liability as
provided therein or (ii) permit assessments on shareholders. Shareholders have
no preemptive or conversion rights except with respect to shares that may be
denominated as being convertible or as otherwise provided by the Trustees or
applicable law. The Fund may be (i) terminated upon the affirmative vote of a
majority of the Trustees or (ii) merged or consolidated with, or sell all or
substantially all of its assets to another issuer, if such transaction is
approved by the vote of two-thirds of the Trustees without any vote of the
shareholders, in each case except as may be required by the 1940 Act or any
other applicable law. If not so terminated, the Fund intends to continue
indefinitely.
LIABILITIES
The Fund's Declaration of Trust provides that the Trustees will not be liable
for errors of judgment or mistakes of fact or law, but nothing in the
Declaration of Trust protects a Trustee against any liability to which he would
otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence, or reckless disregard of the duties involved in the conduct of his
office. Under Delaware law, shareholders of such a trust may, under certain
circumstances, be held personally liable as partners for a trust's obligations.
However, the risk of a shareholder incurring financial loss on account of
shareholder liability is limited to circumstances in which the Fund itself is
unable to meet its obligations since the Declaration of Trust provides for
indemnification and reimbursement of expenses out of the property of the Fund to
any shareholder held personally liable for any obligation of the Fund and also
provides that the Fund shall, if requested, assume the defense of any claim made
against any shareholder for any act or obligation of the Trust and satisfy any
judgment recovered thereon.
FINANCIAL STATEMENTS
The Fund's Financial Statements for the fiscal period ended December 31, 1999,
including the report of Ernst & Young LLP, independent auditors, is incorporated
by reference to the Fund's Annual Report. The Fund's Annual Report is available
upon request and without charge. Ernst & Young LLP provides audit services, tax
return preparation and assistance and consultation in connection with certain
SEC filings.
<PAGE>
APPENDIX A
DESCRIPTION OF CORPORATE DEBT RATINGS
MOODY'S INVESTORS SERVICE, INC.
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally
referred to as "gilt edge." Interest payments are protected by a large
or by an exceptionally stable margin and principal is secure. While
the various protective elements are likely to change, such changes as
can be visualized are most unlikely to impair the fundamentally strong
position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are
generally known as high grade bonds. They are rated lower than the
best bonds because margins of protection may not be as large as in Aaa
securities or fluctuation of protective elements may be of greater
amplitude or there may be other elements present which make the
long-term risks appear somewhat large than in Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors
giving security to principal and interest are considered adequate, but
elements may be present which suggest a susceptibility to impairment
sometime in the future.
Baa: Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest
payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such
bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the
protection of interest and principal payments may be very moderate and
thereby not well safeguarded during both good and bad times over the
future. Uncertainty of position characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of a desirable
investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of
time may be small.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to
principal or interest.
Ca: Bonds which are rated Ca represent obligations which are speculative
in high degree. Such issues are often in default or have other marked
shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds, and
issues so rated can be regarded as having extremely poor prospects of
ever attaining any real investment standing.
Unrated: Where no rating has been assigned or where a rating has been suspended
or withdrawn, it may be for reasons unrelated to the quality of the issue.
<PAGE>
Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities that are not rated as
a matter of policy.
3. There is a lack of essential data pertaining to the issue or issuer.
4. The issue was privately placed, in which case the rating is not published
in Moody's Investors Services, Inc.'s publications.
Suspension or withdrawal may occur if new and material circumstances
arise, the effects of which preclude satisfactory analysis; if there is no
longer available reasonable up-to-date data to permit a judgment to be formed;
if a bond is called for redemption; or for other reasons.
Note:Moody's may apply numerical modifiers, 1, 2 and 3 in each generic rating
classification grom Aa through B in its corporate bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its
generic rating category; the modifier 2 indicates a mid-range rating; and
the modifier 3 indicates that the issue ranks in the lower end of its
generic rating category.
STANDARD & POOR'S RATINGS SERVICE
AAA: Bonds rated AAA have the highest rating assigned by Standard & Poor's
Ratings Service, a division of McGraw Hill Companies, Inc. Capacity to
pay interest and repay principal is extremely strong.
AA: Bonds rated AA have a very strong capacity to pay interest and repay
principal and differ from the higher rated issues only in small
degree.
A: Bonds rated A have a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than bonds
in the highest rated categories.
BBB: Bonds rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for bonds in this category than in higher
rated categories.
BB,B Bonds rated BB, B, CCC, CC and C are regarded, on balance, as
CCC predominantly BB, B speculative with respect to capacity to pay
CC,C:interest and repay principal in accordance with the terms of this
obligation. BB indicates the lowest degree of speculation and CCC, C
the highest degree of speculation. While such bonds will likely have
some quality and protective characteristics, they are outweighed by
large uncertainties of major risk exposures to adverse conditions.
C1: The rating C1 is reserved for income bonds on which no interest is
being paid.
D: Bonds rated D are in default, and payment of interest and/or repayment
of principal is in arrears.
Plus(+)The ratings from AA to CCC may be modified by the
or addition of a plus or minus sign to show relative standing
Minus(-)within the major rating categories.
NR: Indicates that no rating has been requested, that there
is insufficient information on which to base a rating, or that S&P
does not rate a particular type of obligation as a matter of policy.
