<PAGE> 1
Filed pursuant to Rule 497(g)
Registration No. 33-6790
THE GABELLI WESTWOOD FUNDS
================================================================================
One Corporate Center
Rye, New York 10580-1434
Telephone: 1-800-GABELLI (1-800-422-3554)
http://www/gabelli.com/westwood
RETAIL CLASS PROSPECTUS -- MAY 1, 1998
The Gabelli Westwood Funds (the "Trust") is an open-end, diversified,
management investment company, known as a mutual fund. This prospectus contains
information about six separate investment portfolios referred to as the Gabelli
Westwood Equity Fund, the Gabelli Westwood Balanced Fund, the Gabelli Westwood
SmallCap Equity Fund, the Gabelli Westwood Mighty Mites(SM) Fund, the Gabelli
Westwood Realty Fund, and the Gabelli Westwood Intermediate Bond Fund
(collectively, the "Funds").
GABELLI WESTWOOD EQUITY FUND (the "Equity Fund") seeks as its primary goal
to provide investors with capital appreciation; income is a secondary, but
nonetheless an important goal. The net asset value per share of the Equity Fund
will fluctuate.
GABELLI WESTWOOD BALANCED FUND (the "Balanced Fund") seeks to realize both
capital appreciation and current income resulting in a high total investment
return consistent with prudent investment risk and a balanced investment
approach. The net asset value per share of the Balanced Fund will fluctuate.
GABELLI WESTWOOD SMALLCAP EQUITY FUND (the "SmallCap Fund") seeks to
provide investors with long-term capital appreciation by investing primarily in
smaller capitalization equity securities. The net asset value per share of the
SmallCap Fund will fluctuate.
GABELLI WESTWOOD MIGHTY MITES(SM) FUND(the "Mighty Mites Fund") seeks to
provide investors with long-term capital appreciation by investing primarily in
micro capitalization equity securities. The net asset value per share of the
Mighty Mites Fund will fluctuate.
GABELLI WESTWOOD REALTY FUND (the "Realty Fund") seeks to provide investors
with long-term capital appreciation as well as current income through
investments primarily in a portfolio of publicly traded securities of domestic
issuers that are primarily engaged in or related to the real estate industry.
The net asset value per share of the Realty Fund will fluctuate.
GABELLI WESTWOOD INTERMEDIATE BOND FUND (the "Intermediate Bond Fund")
seeks to maximize total return, while maintaining a level of current income
consistent with the maintenance of principal and liquidity. The net asset value
per share of the Intermediate Bond Fund will fluctuate.
The Funds offer two classes of shares, with the exception of the Realty
Fund, Mighty Mites(SM) Fund and the SmallCap Fund that offer only Retail Class
shares. This Prospectus provides information about "Retail Class" shares. Retail
Class shares are offered exclusively to investors who have not purchased their
shares through an entity that has signed a Dealer Agreement with Gabelli &
Company, Inc. (the "Distributor") to offer Service Class Shares, with the
exception of certain dealer-sold retirement plans and other special programs.
Each Fund has a separate investment objective, as set forth below. There is no
assurance that any of these investment objectives will be achieved.
Part B (also known as the Statement of Additional Information), dated May
1, 1998, which may be revised from time to time, provides a further discussion
of certain areas in this Prospectus and other matters which may be of interest
to some investors. It has been filed with the Securities and Exchange Commission
(the "SEC") and is available for reference, along with other materials on the
SEC Internet Web Site (http://www.sec.gov) and is incorporated herein by
reference. For a free copy, write or call The Gabelli Westwood Funds at the
address or telephone number shown above.
Shares of the Funds are not deposits or obligations of any bank, and are
not endorsed or guaranteed by any bank, and are not insured or guaranteed by the
Federal Deposit Insurance Corporation, the Federal Reserve Board, or any other
agency. An investment in the Funds involves investment risks, including the
possible loss of principal.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
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Gabelli Advisers, Inc. (formerly Teton Advisers LLC) (the "Adviser"), a
Delaware corporation formed by Gabelli Funds, Inc. ("Gabelli") and Westwood
Management Corporation ("Westwood"), is adviser to the Funds pursuant to an
investment advisory agreement with the Trust (the "Investment Advisory
Agreement"). The Adviser has entered into a sub-advisory agreement with Westwood
and the Trust whereby Westwood (the "Sub-Adviser") serves as sub-adviser to the
Funds (the "Sub-Advisory Agreement") with the exception of the Mighty Mites(SM)
Fund for which the Adviser is responsible for the management of such Fund's
portfolio. Prior to serving as Sub-Adviser, Westwood acted as adviser to the
Equity, Balanced and Intermediate Bond Funds from their inception through
October 6, 1994. The Adviser oversees the administration of each Fund's business
and affairs and in this connection is responsible for maintaining certain of the
Funds' books and records and providing other administrative services. (See
"Management of the Funds"). On November 18, 1997, the Trustees approved the
change in name to The Gabelli Westwood Funds.
FEE TABLE -- RETAIL CLASS
Each Fund is authorized to issue two separate classes of shares. Service
Class shares will be offered exclusively to investors who have purchased their
shares through an entity that has signed a Dealer Agreement with the Distributor
to offer such shares. Retail Class shares will be offered to all other
investors, including certain retirement plans or other special programs offered
through broker-dealers. Retail Class shares and Service Class shares are
identical in all respects, except that Service Class shares bear a sales load
and higher expenses incurred in the distribution and marketing of such shares
("12b-1 Fees"). Retail Class shares bear no sales load and lower 12b-1 Fees. The
table below sets forth certain information regarding annual operating expenses
incurred by the Retail Class for the fiscal year ended September 30, 1997
(except for the Realty and Mighty Mites(SM) Funds which are estimated for the
year ended September 30, 1998) including the amounts of these fees. The annual
operating expense information for the Realty and Mighty Mites(SM) Funds are
estimated, based on an asset level of $30,000,000.
<TABLE>
<CAPTION>
EQUITY BALANCED SMALLCAP MIGHTY MITES(SM) REALTY INTERMEDIATE
FUND FUND FUND+ FUND+ FUND+ BOND FUND+
---- ---- ----- ----- ----- ----------
<S> <C> <C> <C> <C> <C> <C>
Shareholder Transaction Expenses:
Maximum Sales Load Imposed on
Purchases.............................. None None None None None None
Annual Fund Operating Expenses:
Management Fees........................ 1.00% 0.75% 1.00% 1.00% 1.00% 0.60%
12b-1 Fees............................. 0.25% 0.25% 0.25% 0.25% 0.25% 0.25%
Other Expenses (After Expense
Reimbursements)*..................... 0.34% 0.36% 0.25% 0.75% 0.25% 0.15%
---- ---- ---- ---- ---- ----
Total Fund Operating Expenses (After
Expense Reimbursements)*............... 1.59% 1.36% 1.50% 2.00% 1.50% 1.00%
==== ==== ==== ==== ==== ====
</TABLE>
- ---------------
* Prior to any expense reimbursements, "Other Expenses" for the SmallCap and
Intermediate Bond Funds would have been 1.20% and 0.85%, respectively and
"Total Fund Operating Expenses" would have been 2.45% and 1.70%,
respectively. Prior to any expense reimbursements, estimated "Other Expenses"
for both the Mighty Mites(SM) and Realty Funds would have been 1.00% and
estimated "Total Fund Operating Expenses" would have been 2.25%. Total Fund
Operating Expenses for the Equity and Balanced Funds have been restated to
reflect the elimination of previous reimbursement policies and do not include
a reduction of expenses for custodian fee credits on cash balances maintained
with the custodian. Including such custodian fee credits, the expense ratios
of these funds would have been 1.56% and 1.33%, respectively. The Total Fund
Operating Expenses for SmallCap and Intermediate Bond Funds have been
restated to reflect current reimbursement policies.
+ The Adviser has agreed to voluntarily reimburse the Funds to the extent
necessary to maintain the Total Fund Operating Expenses at the level set
forth in the table above.
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Example:
An investor would pay the following expenses on a $1,000 investment,
assuming (1) 5% annual return and (2) redemption at the end of each time period:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Equity Fund.............................................. $16 $50 $87 $189
Balanced Fund............................................ $14 $43 $74 $164
SmallCap Fund............................................ $15 $47 -- --
Mighty Mites(SM) Fund.................................... $20 $63 -- --
Realty Fund.............................................. $15 $47 -- --
Intermediate Bond Fund................................... $10 $32 $55 $122
</TABLE>
The amounts listed in the example should not be considered as
representative of past or future expenses and actual expenses may be greater or
less than those indicated. The expense ratios used above are after expense
reimbursements. Moreover, while the example assumes a 5% annual return, a Fund's
actual performance will vary and may result in an actual return greater or less
than 5%. The purpose of the foregoing table is to assist you in understanding
the various costs and expenses that investors will bear, directly or indirectly,
the payment of which will reduce investors' return on an annual basis. (See
"Management of the Funds").
Management's Discussion and Analysis of the Funds' performance during the
fiscal year ended September 30, 1997 is included in the Funds' Annual Report to
Shareholders dated September 30, 1997. The Funds' Annual Report to Shareholders
may be obtained upon request and without charge by writing or calling the Fund
at the address or telephone number listed on the Prospectus cover.
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<PAGE> 4
FINANCIAL HIGHLIGHTS
The following information for each of the five years in the period ended
September 30, 1997 has been audited by Price Waterhouse LLP, the Funds'
independent accountants, whose report on the Financial Statements which
incorporate such information appears in the Statement of Additional Information.
All such information should be read in conjunction with the related financial
statements and notes thereto, which are included in the Statement of Additional
Information, and are available upon request. The Realty Fund was launched on
September 30, 1997 and had no operations other than the sale of 10,000 shares at
$10.00 per share on September 30, 1997.
For a share outstanding throughout each period+
EQUITY FUND -- RETAIL CLASS(a)
-----------------------------
YEAR ENDED SEPTEMBER 30,
----------------------------
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING PERFORMANCE:
Net Asset Value,
Beginning of Period... $ 7.68 $ 6.59 $ 5.50 $ 9.91 $14.19 $14.23 $12.62 $15.11 $12.02 $15.12
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net investment income... 0.07 0.08 0.04 0.10 0.05 0.27 0.46 0.53 0.61 0.42
Net realized and
unrealized gain (loss)
on investments........ 2.72 1.59 1.31 0.64 2.12 0.34 1.92 (2.04) 2.89 (2.15)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total from Investment
Operations............ 2.79 1.67 1.35 0.74 2.17 0.61 2.38 (1.51) 3.50 (1.73)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Less Distributions:
Dividends from net
investments
income.............. (0.07) (0.06) (0.06) (0.07) (0.55) (0.51) (0.61) (0.56) (0.41) (0.30)
Distributions from net
realized capital
gains............... (0.83) (0.52) (0.20) (5.08) (5.90) (0.14) (0.16) (0.42) -- (1.07)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total Dividends and
Distributions....... (0.90) (0.58) (0.26) (5.15) (6.45) (0.65) (0.77) (0.98) (0.41) (1.37)
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
Net Asset Value, End of
Period................ $ 9.57 $ 7.68 $ 6.59 $ 5.50 $ 9.91 $14.19 $14.23 $12.62 $15.11 $12.02
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
Total Return............ 39.61% 26.88% 25.85% 9.14% 20.16% 4.16% 19.61% (10.59%) 30.08% (10.40%)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net Assets End of Period
(in thousands)........ $128,697 $29,342 $14,903 $8,637 $5,172 $13,161 $52,884 $51,754 $57,763 $46,245
Ratios to Average Net Assets of:
Net investment
income.............. 1.11% 1.16% 0.77% 1.63% 0.40% 1.85% 3.06% 3.74% 4.57% 4.24%
Expenses net of
reimbursements++.... 1.53% 1.50% 1.61% 0.71% 1.95% 1.40% 1.29% 1.26% 1.27% 1.48%
Expenses before
reimbursements++.... 1.59% 1.95% 2.29% 1.94% 2.32% 1.54% 1.29% 1.26% 1.27% 1.62%
Portfolio Turnover
Rate.................. 61% 106% 107% 137% 102% 75% 143% 127% 151% 198%
Average Commission Rate
(per rate of
security)(b).......... $0.0572 $0.0540 -- -- -- -- -- -- -- --
</TABLE>
- ---------------
+ Per share based on the average number of shares outstanding during the
period.
++ Effective 1995, the ratios do not include a reduction of expenses for
custodian fee credits on cash balances maintained with the custodian.
Including such custodian fee credits, the expense ratios would be 1.50%,
1.44% and 1.50% for Equity Retail Class, net of reimbursements and 1.56%,
1.88% and 2.16% before reimbursements, for 1997, 1996 and 1995,
respectively.
(a) Formerly named "Institutional Class."
(b) For fiscal years beginning on or after September 1, 1995, a fund is required
to disclose its average commission rate paid per share for purchases and
sales of investment securities.
4
<PAGE> 5
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD +
YEAR ENDED SEPTEMBER 30,
<TABLE>
<CAPTION>
RETAIL CLASS
----------------------------------------------------------------------------------
SMALLCAP
EQUITY
BALANCED FUND(A) FUND(B)
1997 1996 1995 1994 1993 1992 1997
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING PERFORMANCE:
Net Asset Value, Beginning of
Period............................. $ 9.71 $ 8.47 $ 7.12 $10.89 $10.45 $10.00 $ 10.00
------- ------- ------ ------ ------ ------ -------
Income from Investment Operations:
Net investment income.............. 0.25 0.22 0.19 0.12 0.20 0.31 0.08
Net realized and unrealized gain on
investments...................... 2.36 1.37 1.35 0.42 1.44 0.49 4.40
------- ------- ------ ------ ------ ------ -------
Total from Investment Operations... 2.61 1.59 1.54 0.54 1.64 0.80 4.48
------- ------- ------ ------ ------ ------ -------
Less Distributions:
Dividends from net investment
income........................... (0.25) (0.22) (0.19) (0.13) (0.24) (0.31) 0.00
Distributions from net realized
capital gains.................... (0.58) (0.13) -- (4.18) (0.96) (0.04) 0.00
------- ------- ------ ------ ------ ------ -------
Total Dividends and
Distributions.................... (0.83) (0.35) (0.19) (4.31) (1.20) (0.35) 0.00
------- ------- ------ ------ ------ ------ -------
Net Asset Value, End of Period....... $ 11.49 $ 9.71 $ 8.47 $ 7.12 $ 0.89 $10.45 $ 14.48
======= ======= ====== ====== ====== ====== =======
Total Return......................... 28.32% 19.11% 21.98% 5.30% 17.60% 7.32% 44.80%
------- ------- ------ ------ ------ ------ -------
Net Assets End of Period (in
thousands)......................... $67,034 $23,158 $6,912 $3,081 $1,583 $3,716 $ 8,546
Ratios to Average Net Assets of:
Net investment income.............. 2.60% 2.62% 2.47% 1.55% 1.90% 3.13% 1.89%
Expenses net of reimbursements..... 1.28%++ 1.32%++ 1.35%++ 1.68% 1.82% 1.44% 1.89%*
Expenses before reimbursements..... 1.36%++ 1.71%++ 1.86%++ 2.36% 2.97% 2.38% 2.45%**
Portfolio Turnover Rate.............. 110% 111% 133% 168% 192% 178% 146%
Average Commission Rate (per share of
security)(c)....................... $0.0593 $0.0550 $0.0358
</TABLE>
- ---------------
+ Per share based on the average number of shares outstanding during the
period.
++ Effective 1995, the ratios do not include a reduction of expenses for
custodian fee credits on cash balances maintained with the custodian.
Including such custodian fee credits, the expense ratios for 1997, 1996 and
1995, net of reimbursements, would be 1.25%, 1.24% and 1.25% respectively,
and 1.33%, 1.63% and 1.85% before reimbursements respectively.
(a) Formerly named "Institutional Class".
(b) For the period from April 15, 1997 (inception date of Fund) through
September 30, 1997.
(c) For the fiscal years beginning on or after September 1, 1995, a fund is
required to disclose its average commission rate period per share for
purchases and sales of investment securities.
* The ratio does not include a reduction of expenses for custodian fee credits
on cash balances maintained with the custodian. Including such custodian fee
credits, the expense ratio would be 1.50%.
** During the period, certain fees were voluntarily reduced and/or reimbursed.
If such fee reductions and/or reimbursement had not occurred, the ratios
would have been as shown.
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<PAGE> 6
For a share outstanding throughout each period+
INTERMEDIATE BOND FUND -- RETAIL CLASS(a)
----------------------------------------------
YEAR ENDED SEPTEMBER 30,
----------------------------
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
OPERATING PERFORMANCE:
Net Asset Value, Beginning of Period.......... $ 9.88 $ 9.98 $ 9.48 $10.73 $10.65 10.00
------ ------ ------ ------ ------ ------
Income from Investment Operations:
Net investment income....................... 0.68 0.51 0.52 0.48 0.39 0.51
Net realized and unrealized gain on
investments............................... 0.41 (0.10) 0.50 (1.04) 0.62 0.65
------ ------ ------ ------ ------ ------
Total from Investment Operations............ 1.09 0.41 1.02 (0.56) 1.01 1.16
------ ------ ------ ------ ------ ------
Less Distributions:
Dividends from net investment income........ -- (0.51) (0.52) (0.48) (0.39) (0.51)
Distributions from net realized capital
gains..................................... (0.68) -- -- (0.21) (0.54) --
------ ------ ------ ------ ------ ------
Total Distributions......................... (0.68) (0.51) (0.52) (0.69) (0.93) (0.51)
------ ------ ------ ------ ------ ------
Net Asset Value, End of Period................ $10.29 $ 9.88 $ 9.98 $ 9.48 $10.73 $10.65
====== ====== ====== ====== ====== ======
Total Return.................................. 11.36% 4.50% 11.13% (5.46%) 10.24% 11.87%
------ ------ ------ ------ ------ ------
Net Assets End of Period (in thousands)....... $5,912 $5,496 $4,729 $7,339 $2,849 $3,153
Ratios to Average Net Assets of:
Net investment income....................... 6.71% 5.43% 5.38% 4.86% 3.74% 5.25%
Expenses net of reimbursements++............ 1.11% 1.09% 1.17% 0.92% 2.40% 1.94%
Expenses before reimbursements++............ 1.70% 2.46% 2.47% 1.75% 3.46% 3.40%
Portfolio Turnover Rate....................... 628% 309% 165% 203% 222% 198%
</TABLE>
- ---------------
+ Per share data based on the average number of shares outstanding during the
period.
++ Effective 1995, the ratios do not include a reduction of expenses for
custodian fee credits on cash balances maintained with the custodian.
Including such custodian fee credits, the expense ratios for 1997, 1996 and
1995 would be 1.00%, 1.00% and 1.00% respectively, and 1.59%, 2.36% and
2.18% before reimbursements respectively.
(a) Formerly named "Institutional Class".
DESCRIPTION OF THE FUNDS AND RISK CONSIDERATIONS
INVESTMENT OBJECTIVES
Each Fund's investment objectives, as previously set forth on the cover
page of this Prospectus, are fundamental policies which cannot be changed
without approval by the holders of a majority (as defined in the Investment
Company Act of 1940) of each Fund's outstanding voting shares. There can be no
assurance that a Fund's investment objectives will be achieved.
MANAGEMENT POLICIES
EQUITY FUND -- The Equity Fund attempts to achieve its goals by investing
primarily (i.e., in normal circumstances) at least 65% of its total assets in
common stocks, some of which may pay dividends, or securities convertible into
common stocks (see "Convertible Securities" below for a complete description).
The Equity Fund invests in securities issued by seasoned companies (generally
with market capitalizations in excess of $500,000,000 and continuous operating
histories of at least three years) believed to have proven records and
above-average historical earnings growth when compared to published indexes,
such as those published by the Department of Commerce, and in smaller companies
(generally with market capitalizations greater than $100,000,000 but less than
$500,000,000) believed to have outstanding potential for capital appreciation,
in both cases in industries which the Adviser has identified as appropriate in
light of the then
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<PAGE> 7
current status of the economic and business cycles. These securities may have
above-average price/earnings ratios or less than average current yields when
compared to published indexes, such as the Standard & Poor's 500 Composite Stock
Price Index. Price/earnings ratio is a comparison of a security's market price
to its earnings per share, usually expressed as a simple numeral, and current
yield expresses the income on an amount invested. The Equity Fund may invest in
preferred stocks and common stock issued by real estate investment trusts (see
"Real Estate Investment Trusts" below for more complete information). The Equity
Fund also may invest, in normal circumstances, up to 35% of its total assets in
U.S. dollar- and foreign currency-denominated debt securities of domestic and
foreign issuers, which are rated at least "BBB" by Standard & Poor's Rating
Services, a division of the McGraw-Hill Companies ("S&P") or "Baa" by Moody's
Investors Service, Inc. ("Moody's") (except with respect to investments in
commercial paper which will consist only of direct obligations that at the time
of purchase are rated in the highest rating category by Moody's or S&P) or, if
unrated, are determined to be of comparable quality by the Adviser, or in index
options when it believes they hold less risk or greater potential for capital
appreciation than equity securities. Such investments are made without regard to
the remaining maturities of such securities. The Equity Fund may invest up to
10% of its total assets in debt securities (other than commercial paper) that
are rated or, if unrated, determined to be below investment grade. (Investment
grade debt securities are those which are rated at least "BBB" by S&P or "Baa"
by Moody's). These investments generally carry a high degree of risk and are
sometimes referred to as "high yield, high risk" securities by the investment
community (see "Lower Rated Securities" below for more complete information).
The Equity Fund will not invest in below investment grade securities which are
rated below "C" by S&P or Moody's.
Debt securities rated "BBB" by S&P or "Baa" by Moody's are considered
medium grade obligations. Securities rated "Baa" by Moody's lack outstanding
investment characteristics and in fact have speculative characteristics as well,
while those rated "BBB" by S&P are regarded as having an adequate capacity to
pay principal and interest. Securities rated in these categories are generally
more sensitive to economic changes than higher rated securities. See the
"Appendix" in the Statement of Additional Information for more details on the
ratings of Moody's and S&P.
In addition, the Equity Fund may invest up to 100% of its total assets in
U.S. Government securities, certificates of deposit, bankers' acceptances, time
deposits, repurchase agreements and other high quality debt instruments in order
to maintain a temporary "defensive" posture when, in the opinion of the Adviser,
it is advisable to do so.
The Equity Fund may invest in U.S. Government securities, certificates of
deposit, bankers' acceptances and other short-term debt instruments or high
quality corporate bonds, and repurchase agreements in respect of the foregoing.
Common stocks, debt securities in periods of declining interest rates, and
index options provide opportunities for capital growth. Dividend paying common
stocks, covered call options written by the Equity Fund and debt securities are
expected to provide income for the Equity Fund. The securities purchasable for
temporary defensive purposes provide income, but little opportunity for capital
growth.
The majority of the Equity Fund's investments are in securities listed on
the New York Stock Exchange or other national securities exchanges. The Equity
Fund may also invest in unlisted securities; but these generally will be
securities that have an established over-the-counter market, although the depth
and liquidity of that market may vary from time to time and from security to
security. Generally, those securities are issued by smaller companies than those
whose securities are listed on national securities exchanges. The market prices
of equity securities of smaller companies may tend to be more volatile than the
market prices of equity securities generally.
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<PAGE> 8
The Equity Fund may invest up to 25% of its total assets in the securities
of foreign issuers, either directly, or in the form of American Depository
Receipts ("ADRs") or other similar arrangements, such as European Depository
Receipts ("EDRs"). ADRs are receipts typically issued by a United States bank or
trust company which evidence ownership of underlying securities issued by a
foreign corporation. Generally, ADRs in registered form are designed for use in
United States securities markets. EDRs are similar to ADRs and are issued and
traded in Europe.
It is a fundamental policy of the Equity Fund that it may invest (together
with all other securities which are not readily marketable -- see "Certain
Fundamental Policies" below and "Investment Restrictions" in the Statement of
Additional Information) up to 10% of the value of its net assets in securities
that have not been registered under the Securities Act of 1933, as amended, and
therefore are subject to restrictions on resale, provided such investments are
consistent with the Equity Fund's goals. When purchasing unregistered
securities, the Equity Fund will endeavor to obtain the right to registration at
the expense of the issuer. Generally, there will be a lapse of time between the
Equity Fund's decision to publicly offer any such security and the registration
of the security permitting such offer. During any such period, the price of the
securities will be subject to market fluctuations.
The Equity Fund may invest up to 2% of its net assets in warrants, except
that this limitation does not apply to warrants acquired in units or attached to
securities. A warrant is an instrument issued by a corporation which gives the
holder the right to subscribe to a specified amount of the issuer's securities
at a set price for a specified period of time.
The Equity Fund also may invest in securities of investment companies
subject to the provisions of the Investment Company Act of 1940. The return on
such investments will be reduced by the operating expenses, including investment
advisory and administration fees, of such companies. See "Investment Objectives
and Management Policies -- Investment Company Securities" in the Statement of
Additional Information.
BALANCED FUND -- The Balanced Fund pursues its objective through a balanced
and diversified program of investing in equity securities and debt instruments.
With respect to its investments in equity securities, the Balanced Fund
invests between 30% to 70% of its assets in common stocks, some of which may pay
dividends, or securities convertible into common stocks. With respect to the
equity portion of its portfolio, the Balanced Fund invests in equity securities
using the same investment criteria as the Equity Fund.
The remaining 70% to 30% of the Balanced Fund's assets are invested in U.S.
dollar or foreign currency-denominated debt securities of domestic and foreign
issuers, including debt securities of corporate and government issuers,
commercial paper and mortgage and asset-backed securities, for the relative
stability of income and principal. With respect to these investments, at least
25% of the Balanced Fund's total assets will be invested in fixed income senior
securities. The debt securities in which the Balanced Fund invests are the same
types of securities used by the Intermediate Bond Fund.
As noted above, the Adviser may also select other equity securities in
addition to common stocks for investment by the Balanced Fund, such as preferred
stocks, REITs, high grade securities convertible into common stocks and
warrants. The Balanced Fund may invest up to 25% of its total assets in the
securities of foreign issuers, either directly, or in the form of American or
European Depository Receipts, and up to 10% of the value of its net assets,
together with all other investments which are not readily marketable, in
securities which have not been registered under the Securities Act of 1933, as
amended, and which therefore are subject to restrictions on resale. (See the
information set forth above under "Management Policies -- Equity Fund" for more
information on these types of investments.) The Balanced Fund may also invest in
warrants.
In addition, the Balanced Fund may invest up to 100% of its total assets in
U.S. Government securities, certificates of deposit, bankers' acceptances, time
deposits, repurchase agreements and other high quality debt
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instruments in order to maintain a temporary "defensive" posture when, in the
opinion of the Adviser, it is advisable to do so.
THE SMALLCAP FUND -- The SmallCap Fund will seek to achieve its investment
objective by investing, under normal circumstances as determined by the Adviser,
at least 65% of the Fund's total assets in equity securities, including
preferred stock and convertible securities ("equity securities"), of companies
that have market capitalization (defined as shares outstanding times current
market price) of $1 billion or less at the time of the Fund's initial
investment. The SmallCap Fund also may invest, under normal circumstances, up to
35% of its total assets in the equity securities of issuers without respect to
market capitalization. The SmallCap Fund may invest up to 25% of its total
assets in the equity securities of foreign issuers, either directly, or in the
form of ADRs or other similar arrangements, such as EDRs. The SmallCap Fund may
also invest in equity securities issued by real estate investment trusts (see
"Real Estate Investment Trusts" below). The SmallCap Fund may invest, in normal
circumstances, up to 35% of its total assets in U.S. dollar and foreign
currency-denominated debt securities of domestic and foreign issuers, which are
rated at least "BBB" by S&P or "Baa" by Moody's (except with respect to
investments in commercial paper which will consist only of direct obligations
that at the time of purchase are rated in the highest rating category by Moody's
or S&P) or, if unrated, are determined to be of comparable quality by the
Adviser, or in index options when it believes they hold less risk or greater
potential for capital appreciation than equity securities. Such investments are
made without regard to the remaining maturities of such securities. The SmallCap
Fund may invest up to 10% of its total assets in debt securities (other than
commercial paper) that are rated or, if unrated, determined to be below
investment grade. (Investment grade debt securities are those which are rated at
least "BBB" by S&P or "Baa" by Moody's). These investments generally carry a
high degree of risk and are sometimes referred to as "high yield, high risk"
securities by the investment community (see "Lower Rated Securities" below for
more complete information). The Fund may invest up to 15% of the value of its
net assets in illiquid securities (see "Illiquid Securities" below). The
SmallCap Fund may invest without limit in U.S. Government securities,
certificates of deposit, bankers' acceptances and other short-term debt
instruments or high quality corporate bonds, and repurchase agreements in
respect of the foregoing as a temporary "defensive" measure as deemed advisable
by the Adviser. The Adviser will utilize a disciplined investment approach to
identify companies that have above average sales and earnings growth prospects
or otherwise improving fundamentals captured on the balance sheet given the
current status of the economic and business cycles on selecting the SmallCap
Fund's securities. Fundamental analysis and computer-aided quantitative analysis
are used to identify companies with attractive fundamental investment
characteristics such as growth potential and earnings growth. Investing in small
capitalization stocks may involve greater risk than investing in medium and
large capitalization stocks, since they can be subject to more abrupt or erratic
movements in price. The Fund may invest in relatively new or unseasoned
companies, which are in their early stages of development, or small companies
positioned in new and emerging industries. Securities of small and unseasoned
companies present greater risks than securities of larger, more established
companies. The companies in which the SmallCap Fund may invest may have
relatively small revenues and limited product lines, and may have a small share
of the market for their products or services. Small companies may lack depth of
management. They may be unable to internally generate funds necessary for growth
or potential development or to generate such funds through external financing on
favorable terms. They may be developing or marketing new products or services
for which markets are not yet established and may never become established. Due
to these and other factors, small companies may incur significant losses, and
investments in such companies are therefore speculative. There can be no
assurance that the SmallCap Fund will achieve its investment objective.
THE MIGHTY MITES(SM) FUND -- The Mighty Mites(SM) Fund will seek to achieve
its investment objective by investing, under normal circumstances as determined
by the Adviser, at least 65% of the Fund's total assets in
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equity securities, including preferred stock and convertible securities ("equity
securities"), of companies that have market capitalization (defined as shares
outstanding times current market price) of $300 million or less at the time of
the Fund's initial investment. The Mighty Mites(SM) Fund also may invest, under
normal circumstances, up to 35% of its total assets in the equity securities of
issuers without respect to market capitalization. The Mighty Mites(SM) Fund may
invest up to 25% of its total assets in the equity securities of foreign
issuers, either directly, or in the form of ADRs or other similar arrangements,
such as EDRs. The Mighty Mites(SM) Fund may also invest in equity securities
issued by real estate investment trusts (see "Real Estate Investment Trusts"
below). The Mighty Mites(SM) Fund may invest, in normal circumstances, up to 35%
of its total assets in U.S. dollar and foreign currency-denominated debt
securities of domestic and foreign issuers, which are rated at least "BBB" by
S&P or "Baa" by Moody's (except with respect to investments in commercial paper
which will consist only of direct obligations that at the time of purchase are
rated in the highest rating category by Moody's or S&P) or, if unrated, are
determined to be of comparable quality by the Adviser, or in index options when
it believes they hold less risk or greater potential for capital appreciation
than equity securities. Such investments are made without regard to the
remaining maturities of such securities. The Mighty Mites(SM) Fund may invest up
to 10% of its total assets in debt securities (other than commercial paper) that
are rated or, if unrated, determined to be below investment grade. (Investment
grade debt securities are those which are rated at least "BBB" by S&P or "Baa"
by Moody's). These investments generally carry a high degree of risk and are
sometimes referred to as "high yield, high risk" securities by the investment
community (see "Lower Rated Securities" below for more complete information).
The Fund may invest up to 15% of the value of its net assets in illiquid
securities, (see "Illiquid Securities" below). The Mighty Mites(SM) Fund may
invest without limit in U.S. Government securities, certificates of deposit,
bankers' acceptances and other short-term debt instruments or high quality
corporate bonds, and repurchase agreements in respect of the foregoing as a
temporary "defensive" measure as deemed advisable by the Adviser. The Adviser
will utilize a disciplined investment approach to identify companies that have
above average sales and earnings growth prospects or otherwise improving
fundamentals captured on the balance sheet given the current status of the
economic and business cycles on selecting the Mighty Mites(SM) Fund's
securities. Additionally, in pursuing the Mighty Mites (SM) Fund's investment
objective, the Adviser seeks companies that it believes are undervalued and that
by virtue of anticipated developments or catalysts particularly applicable to
such companies may, in the Adviser's judgment, achieve significant capital
appreciation. In identifying such companies, the Adviser seeks to invest in
companies that, in the public market, are selling at a significant discount to
their private market value, the value the Adviser believes informed
industrialists would be willing to pay to acquire companies with similar
characteristics. The Adviser's analysis of a company's value focuses on free
cash flow; earnings before interest, taxes, depreciation and amortization
(EBITDA) minus the capital expenditures necessary to grow the business. Also,
the Adviser endeavors to seek a catalyst; something happening in the company's
industry or indigenous to the company itself that will surface value. Examples
of such catalysts are a change in management, sale or spin-off of a division,
the development of a profitable new business or changes in governmental
regulations, political climate or competitive conditions. Fundamental analysis
and computer-aided quantitative analysis are used to identify companies with
attractive fundamental investment characteristics such as growth potential and
earnings growth. Investing in micro capitalization stocks may involve greater
risk than investing in small, medium and large capitalization stocks, since they
can be subject to more abrupt or erratic movements in price. The Fund may invest
in relatively new or unseasoned companies, which are in their early stages of
development, or micro-cap companies positioned in new and emerging industries.
Securities of micro-cap and unseasoned companies present greater risks than
securities of larger, more established companies. The companies in which the
Mighty Mites(SM) Fund may invest may have relatively small revenues and limited
product lines, and may have a small share of the market for their products or
services. Micro-cap companies may lack depth of management. They may be unable
to internally generate funds necessary for growth or
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potential development or to generate such funds through external financing on
favorable terms. They may be developing or marketing new products or services
for which markets are not yet established and may never become established. Due
to these and other factors, micro-cap companies may incur significant losses,
and investments in such companies are therefore speculative. There can be no
assurance that the Mighty Mites(SM) Fund will achieve its investment objective.
THE REALTY FUND -- The Realty Fund will seek to achieve its investment
objective by investing at least 65% of the Fund's total assets, under normal
circumstances as determined by the Adviser, in the securities of publicly traded
real estate investment trusts ("REITs") and real estate operating companies. The
Fund's investments will be restricted to securities with a market capitalization
(defined as shares outstanding times current market price) of a minimum of $50
million at the time of the Fund's initial investment. The Fund may invest in
equity REITs, mortgage REITs and hybrid REITs and other types of real estate
securities such as publicly traded common stock, preferred stock, limited
partnerships (including real estate master limited partnerships), rights or
warrants to purchase common stock or convertible securities of corporations
engaged in real estate development, as well as companies whose financial
prospects are deemed by the Adviser to be real estate oriented (e.g., a
construction company) and consistent with the Fund's investment objectives. The
Fund may invest up to 25% of its total assets in foreign real estate securities.
The Realty Fund also may invest, in normal circumstances, up to 35% of its total
assets in domestic and foreign debt securities and equity securities, including
preferred stock and convertible securities, of issuers engaged in businesses
other than real estate. The Fund may invest up to 15% of the value of its net
assets in illiquid securities (see "Illiquid Securities" below). The Realty Fund
will not purchase direct interests in real estate. The Realty Fund may invest
without limit in U.S. Government securities, certificates of deposit, bankers'
acceptances and other short-term debt instruments or high quality corporate
bonds, and repurchase agreements in respect of the foregoing as a temporary
"defensive" measure as deemed advisable by the Adviser. The Adviser will utilize
a combination of fundamental and quantitative techniques to identify real estate
securities for investment that meet various criteria, including various
financial, geographical and strategic criteria as appropriate in light of the
then current status of the economic and business cycles. Based on a weighting of
the various criteria, securities are to be integrated into the Fund's portfolio
according to their contribution to the portfolio's overall investment
characteristics. The Fund's portfolio will be diversified across regional,
strategic, and financial parameters as deemed appropriate by the Adviser. There
can be no assurance that the Realty Fund will achieve its investment objective.
See "Real Estate Investment Trusts" below for more complete information,
including risk considerations.
INTERMEDIATE BOND FUND -- The Intermediate Bond Fund will pursue its
objective by investing, in normal circumstances, at least 65% of its total
assets in bonds of various types and with various maturities. Although it will
not be a fundamental policy of the Intermediate Bond Fund and there will be no
restrictions as to the maximum or minimum maturity of any individual security in
which the Fund may invest, the Intermediate Bond Fund will normally have a
dollar weighted average portfolio maturity of three to ten years. (See the
discussion below under "Description of Securities and Other Investment
Practices" for special information regarding the maturities of certain of the
Intermediate Bond Fund's permissible investments.)
To achieve its investment objective, the Intermediate Bond Fund invests
primarily in a diversified portfolio of investment grade, U.S. dollar or foreign
currency denominated bonds of domestic and foreign issuers. The Fund's portfolio
consists of bonds issued by both corporate and government entities. In pursuing
its investment objective, the Intermediate Bond Fund may also invest in other
types of investment grade debt securities, including debentures, notes,
convertible debt securities, municipal securities, mortgage-related securities,
and other collateralized securities that are backed by a pool of assets, such as
loans or receivables which generate cash flow to cover the payments due on the
collateralized securities, as well as zero coupon and payment in kind
securities. The Intermediate Bond Fund's portfolio, consisting primarily of
investment grade
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debt securities, will include bonds rated "BBB" or better by S&P or "Baa" or
better by Moody's, commercial paper rated "A-2" or better by S&P or "P-2" or
better by Moody's, mortgage and asset-backed securities rated "AA" or better by
S&P or "Aa" or better by Moody's and other investment grade-rated debt
securities or those which are unrated but determined to be of comparable quality
by the Adviser. The Intermediate Bond Fund may invest in preferred stock, real
estate investment trusts (REITs) or other equity securities including securities
of foreign issuers although it does not expect to invest more than 25% of its
assets in securities of foreign issuers.
Although the lowest rated investment grade securities and those which are
unrated in the Intermediate Bond Fund's portfolio may produce a higher return,
they are subject to a greater degree of market fluctuation and credit risks than
the high quality securities in which the Fund may invest and may be regarded as
having speculative characteristics as well. The Intermediate Bond Fund may also
invest up to 10% of its total assets in debt securities that are rated or, if
unrated, determined to be below investment grade. These investments generally
carry a high degree of risk and are sometimes referred to as "high yield, high
risk" securities by the investment community (see "Lower Rated Securities" below
for more complete information).
In view of the expected maturity of the Intermediate Bond Fund's portfolio,
in normal market conditions, it is anticipated that the Fund may experience a
higher yield and less stable net asset value than a fund which invests primarily
in shorter-term securities. Conversely, it is also anticipated that the
Intermediate Bond Fund may experience a lower yield and more stable net asset
value than a fund which invests primarily in longer-term securities.
The net asset value of the Intermediate Bond Fund will vary in response to
fluctuations in prevailing interest rates and changes in the value of its
portfolio securities. When interest rates decline, the value of securities
already held in the Intermediate Bond Fund's portfolio can be expected to rise.
Conversely, when interest rates rise, the value of existing portfolio security
holdings can be expected to decline. Although the lowest investment grade
securities and those which are unrated in the Intermediate Bond Fund's portfolio
may produce a higher return, they are subject to a greater degree of market
fluctuation and credit risks than the high quality securities in which the
Intermediate Bond Fund may invest. In addition, the Intermediate Bond Fund may
invest in zero coupon and payment in kind securities which may be subject to
greater fluctuations in value due to changes in interest rates than other debt
securities.
In normal circumstances, the Intermediate Bond Fund may invest up to 35% of
its total assets in short-term, money market instruments of at least comparable
quality to the Fund's longer-term investments, and in repurchase agreements.
However, as a temporary "defensive" measure during, or in anticipation of, a
declining market or rising interest rates, or for other reasons when, in the
opinion of the Fund's investment adviser, it is advisable to do so, the
Intermediate Bond Fund may invest up to 100% of its total assets in high quality
short-term investments.
DESCRIPTION OF SECURITIES AND OTHER INVESTMENT PRACTICES
CONVERTIBLE SECURITIES (THE EQUITY FUND, THE BALANCED FUND, THE SMALLCAP
FUND, THE MIGHTY MITES(SM) FUND AND THE REALTY FUND) -- A convertible security
is a fixed-income security, such as a bond or preferred stock, which may be
converted at a stated price within a specified period of time into a specified
number of shares of common stock of the same or a different issuer. Convertible
securities are senior to common stock in a corporation's capital structure, but
usually are subordinated to non-convertible debt securities. While providing a
fixed income stream (generally higher in yield than the income derivable from a
common stock but lower than that afforded by a similar non-convertible debt
security), a convertible security also affords an investor the opportunity,
through its conversion feature, to participate in the capital appreciation of
the common stock into which it is convertible.
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In general, the market value of a convertible security is the higher of its
"investment value" (i.e., its value as a fixed-income security) or its
"conversion value" (i.e., the value of the underlying shares of common stock if
the security is converted). As a fixed-income security, the market value of a
convertible security generally increases when interest rates decline and
generally decreases when interest rates rise. However, the price of a
convertible security also is influenced by the market value of the security's
underlying common stock.
REAL ESTATE INVESTMENT TRUSTS (ALL FUNDS) -- The Funds may invest in the
securities of real estate investment trusts ("REITs"). A REIT is a pooled
investment vehicle that is organized as a corporation or business trust which
invests primarily in income producing real estate or real estate related loans
or interests. REITs are generally classified as equity REITs, mortgage REITs or
a combination of equity and mortgage REITs. Equity REITs invest the majority of
their assets directly in real property and derive income primarily from the
collection of rents. Equity REITs can realize capital gains by selling
properties that have appreciated in value. Mortgage REITs invest the majority of
their assets in real estate mortgages and derive income from the collection of
interest payments. REITs involve risks similar to those associated with
investing in common stock (i.e., securities market risks) and risks associated
with investing in the real estate industry in general: declines in real estate
value, general and local economic conditions, overbuilding and competition,
property tax and operating expense increases, changes in zoning laws, casualty
losses, variations in rental income, costs related to environmental problems and
increases in interest rates. REITs (especially mortgage REITs) are subject to
interest rate risks. In addition to these risks, equity REITs may be affected by
changes in the value of the underlying property owned by the trusts, while
mortgage REITs may be affected by the quality of any credit extended. Further,
equity and mortgage REITs are dependent upon management skills and generally may
not be diversified. Equity and mortgage REITs are also subject to heavy cash
flow dependency, defaults by borrowers and self-liquidation. In addition, equity
and mortgage REITS could possibly fail to qualify for tax free pass-through of
income under the Internal Revenue Code of 1986, as amended, or to maintain their
exemptions from registration under the Investment Company Act of 1940. The above
factors may also adversely affect a borrower's or a lessee's ability to meet its
obligations to the REIT. In the event of a default by a borrower or lessee, the
REIT may experience delays in enforcing its rights as a mortgagee or lessor and
may incur substantial costs associated with protecting its investments.
Investors in REITs indirectly bear a proportionate share of expenses incurred by
the REITs. See "Investment Objectives and Management Policies -- Real Estate
Investment Securities" in the Statement of Additional Information for more
details on REITs.
U.S. GOVERNMENT SECURITIES (ALL FUNDS) -- Securities issued or guaranteed
by the U.S. Government or its agencies or instrumentalities include U.S.
Treasury securities, which differ only in their interest rates, maturities and
times of issuance. Treasury Bills have initial maturities of one year or less;
Treasury Notes have initial maturities of one to ten years; and Treasury Bonds
generally have initial maturities of greater than ten years. Some obligations
issued or guaranteed by U.S. Government agencies and instrumentalities, for
example, Government National Mortgage Association pass-through certificates, are
supported by the full faith and credit of the U.S. Treasury; others, such as
those of the Federal Home Loan Banks, by the right of the issuer to borrow from
the U.S. Treasury; others, such as those issued by the Federal National Mortgage
Association, by discretionary authority of the U.S. Government to purchase
certain obligations of the agency or instrumentality; and others, such as those
issued by the Student Loan Marketing Association, only by credit of the agency
or instrumentality. While the U.S. Government provides financial support to such
U.S. Government-sponsored agencies or instrumentalities, no assurance can be
given that it will always do so since it is not so obligated by law. A Fund will
invest in such securities only when it is satisfied that the credit risk with
respect to the issuer is minimal.
REPURCHASE AGREEMENTS (ALL FUNDS) -- Repurchase agreements involve the
acquisition by a Fund of a security, subject to an obligation of the seller to
repurchase, and the Fund to resell, the security at a fixed price, usually not
more than one week after its purchase. The Fund's custodian will have custody
of, and will
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hold in a segregated account, securities acquired by the Fund under a repurchase
agreement. Repurchase agreements are considered by the staff of the Securities
and Exchange Commission to be loans by a Fund. In an attempt to reduce the risk
of incurring a loss on the repurchase agreement, a Fund will enter into
repurchase agreements only with domestic banks with total assets in excess of
one billion dollars or primary government securities dealers reporting to the
Federal Reserve Bank of New York, with respect to highest rated securities of
the type in which a Fund may invest. It will also require that the repurchase
agreement be at all times fully collateralized in an amount at least equal to
the repurchase price including accrued interest earned on the underlying
securities, and that the underlying securities be marked to market every
business day to assure that the repurchase agreement remains fully
collateralized. Certain costs may be incurred by a Fund in connection with the
sale of the securities if the seller does not repurchase them in accordance with
the repurchase agreement. If bankruptcy proceedings are commenced with respect
to the seller of the securities, realization on the securities by the Fund may
be delayed or limited. A Fund will consider on an ongoing basis the
creditworthiness of the institutions with which it enters into repurchase
agreements.
BANK OBLIGATIONS (ALL FUNDS) -- Time deposits are non-negotiable deposits
maintained in a banking institution for a specified period of time (in no event
longer than seven days) at a stated interest rate. Time deposits which may be
held by a Fund will not benefit from insurance from the Bank Insurance Fund or
the Savings Association Insurance Fund administered by the Federal Deposit
Insurance Corporation. Certificates of deposit are certificates evidencing the
obligation of a bank to repay funds deposited with it for a specified period of
time. Bankers' acceptances are credit instruments evidencing the obligation of a
bank to pay a draft drawn on it by a customer. These instruments reflect the
obligation both of the bank and of the drawer to pay the face amount of the
instrument upon maturity.
COMMERCIAL PAPER (ALL FUNDS) -- Commercial paper includes short-term
unsecured promissory notes, variable rate demand notes and variable rate master
demand notes issued by domestic and foreign bank holding companies, corporations
and financial institutions (see "Variable and Floating Rate Demand and Master
Demand Notes" below for more details) as well as similar taxable and tax-exempt
instruments issued by government agencies and instrumentalities. Each Fund
establishes its own standards of creditworthiness for issuers of such
instruments.
OTHER MUTUAL FUNDS (ALL FUNDS) -- Each Fund may invest in shares of other
management investment companies, subject to the limitations of the 1940 Act and
subject to such investments being consistent with the overall objective and
policies of the Fund making such investment, provided that any such purchases
will be limited to short-term investments in shares of unaffiliated investment
companies. The purchase of securities of other mutual funds results in
duplication of expenses such that investors indirectly bear a proportionate
share of the expenses of such mutual funds including operating costs, and
investment advisory and administrative fees.
CORPORATE DEBT SECURITIES (ALL FUNDS) -- A Fund's investments in corporate
debt may include U.S. dollar or foreign currency denominated corporate bonds,
debentures, notes and other similar corporate debt instruments of domestic and
foreign issuers, which meet the previously disclosed minimum ratings and
maturity criteria established for each Fund under the direction of the Board of
Trustees and the Adviser or, if unrated, are in the Adviser's opinion comparable
in quality to rated corporate debt securities in which each Fund may invest. The
rate of return or return of principal on some debt obligations in which the
Funds may invest may be linked or indexed to the level of exchange rates between
the U.S. dollar and a foreign currency or currencies.
VARIABLE AND FLOATING RATE DEMAND AND MASTER DEMAND NOTES (ALL FUNDS) -- A
Fund may, from time to time, buy variable or floating rate demand notes issued
by corporations, bank holding companies and financial institutions and similar
taxable and tax-exempt instruments issued by government agencies and
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instrumentalities. These securities will typically have a maturity over one year
but carry with them the right of the holder to put the securities to a
remarketing agent or other entity at designated time intervals and on specified
notice. The obligation of the issuer of the put to repurchase the securities may
be backed up by a letter of credit or other obligation issued by a financial
institution. The purchase price is ordinarily par plus accrued and unpaid
interest. Generally, the remarketing agent will adjust the interest rate every
seven days (or at other specified intervals) in order to maintain the interest
rate of the prevailing rate for securities with a seven-day or other designated
maturity. A Fund's investment in demand instruments which provide that the Fund
will not receive the principal note amount within seven days' notice, in
combination with the Fund's other investments which are not readily marketable,
will be limited to an aggregate total of 10% of that Fund's net assets.
A Fund may also buy variable rate master demand notes. The terms of these
obligations permit a Fund to invest fluctuating amounts at varying rates of
interest pursuant to direct arrangements between the Fund, as lender, and the
borrower. These instruments permit weekly and, in some instances, daily changes
in the amounts borrowed. The Fund has the right to increase the amount under the
note at any time up to the full amount provided by the note agreement, or to
decrease the amount, and the borrower may repay up to the full amount of the
note without penalty. The notes may or may not be backed by bank letters of
credit. Because the notes are direct lending arrangements between a Fund and
borrower, it is not generally contemplated that they will be traded, and there
is no secondary market for them, although they are redeemable (and, thus,
immediately repayable by the borrower) at principal amount, plus accrued
interest, at any time. In connection with any such purchase and on an ongoing
basis, the Adviser will consider the earning power, cash flow and other
liquidity ratios of the issuer, and its ability to pay principal and interest on
demand, including a situation in which all holders of such notes make demand
simultaneously. While master demand notes, as such, are not typically rated by
credit rating agencies, a Fund may, under its minimum rating standards, invest
in them only if, at the time of an investment, the issuer meets the criteria set
forth in this Prospectus for commercial paper obligations.
WHEN-ISSUED OR DELAYED-DELIVERY SECURITIES (ALL FUNDS) -- New issues of
fixed-income securities usually are offered on a when-issued or delayed-delivery
basis, which means that delivery and payment for such securities ordinarily take
place within 45 days after the date of the commitment to purchase. The payment
obligation and the interest rate that will be received on such securities are
fixed at the time the Fund enters into the commitment. The Fund will make
commitments to purchase such securities only with the intention of actually
acquiring the securities, but the Fund may sell these securities before the
settlement date if it is deemed advisable. The Fund will not accrue income in
respect of a when-issued or delayed-delivery security prior to its stated
delivery date. No additional when-issued commitments will be made if more than
20% of a Fund's net assets would be so committed.
Securities purchased on a when-issued or delayed-delivery basis and certain
other securities held in a Fund's portfolio are subject to changes in value
(both generally changing in the same way, i.e., appreciating when interest rates
decline and depreciating when interest rates rise) based upon the public's
perception of the creditworthiness of the issuer and changes, real or
anticipated, in the level of interest rates. Securities purchased on a
when-issued or delayed-delivery basis may expose a Fund to the risk that such
fluctuations will occur prior to their actual delivery. Purchasing securities on
a when-issued or delayed-delivery basis can involve an additional risk that the
yield available in the market when the delivery takes place actually may be
higher than that obtained in the transaction itself. A segregated account of a
Fund consisting of cash or other liquid securities at least equal at all times
to the amount of the when-issued commitments will be established and maintained
at the Fund's custodian bank.
FOREIGN SECURITIES (ALL FUNDS, EXCEPT AS SPECIFICALLY NOTED) -- A Fund may
invest directly in both sponsored and unsponsored U.S. dollar- or foreign
currency-denominated corporate debt securities, certificates of deposit and
bankers' acceptances issued by foreign banks, and obligations of foreign
governments or their
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subdivisions, agencies and instrumentalities, international agencies and
supranational entities, and the Equity Fund, Balanced Fund, SmallCap Fund,
Mighty Mites(SM) Fund and Realty Fund may invest directly in foreign equity
securities and in securities represented by European Depository Receipts
("EDRs") or American Depository Receipts ("ADRs"). ADRs are dollar-denominated
receipts generally issued by domestic banks, which represent the deposit with
the bank of a security of a foreign issuer, and which are publicly traded on
exchanges or over-the-counter in the United States. EDRs are receipts similar to
ADRs and are issued and traded in Europe.
Thus, investment in shares of the Funds should be made with an
understanding of the risks inherent in an investment in foreign securities
either directly or in the form of ADRs or EDRs, including risks associated with
government, economic, monetary and fiscal policies, possible foreign withholding
taxes, inflation and interest rates, economic expansion or contraction, and
global or regional political, economic or banking crises. Investment in
obligations of foreign issuers and in direct obligations of foreign nations
involves somewhat different investment risks from those affecting obligations of
United States domestic issuers. Foreign issuers are not necessarily subject to
uniform accounting, auditing and financial reporting standards, practices and
requirements comparable to those applicable to domestic issuers. In addition,
for the foreign issuers that are not subject to the reporting requirements of
the Securities Exchange Act of 1934, there may be less publicly available
information than is available from a domestic issuer. Dividends and interest
paid by foreign issuers may be subject to withholding and other foreign taxes,
which may decrease the net return on foreign investments as compared to
dividends and interest paid to the Funds by domestic companies. Additional risks
include future political and economic developments, the possibility that a
foreign jurisdiction might impose or change withholding taxes on income payable
with respect to foreign securities, the possible seizure, nationalization or
expropriation of the foreign issuer or foreign deposits and the possible
adoption of foreign governmental restrictions such as exchange controls.
There are certain risks associated with investments in unsponsored ADR
programs. Because the non-U.S. company does not actively participate in the
creation of the ADR program, the underlying agreement for service and payment
will be between the depository and the shareholder. The company issuing the
stock underlying the ADRs pays nothing to establish the unsponsored facility, as
fees for ADR issuance and cancellation are paid by brokers. Investors directly
bear the expenses associated with certificate transfer, custody and dividend
payment.
In an unsponsored ADR program, there also may be several depositories with
no defined legal obligations to the non-U.S. company. The duplicate depositories
may lead to marketplace confusion because there would be no central source of
information to buyers, sellers and intermediaries. The efficiency of
centralization gained in a sponsored program can greatly reduce the delays in
delivery of dividends and annual reports.
In addition, with respect to all ADRs and EDRs, there is always the risk of
loss due to currency fluctuations.
ZERO COUPON AND PAYMENT IN KIND SECURITIES (THE BALANCED FUND AND THE
INTERMEDIATE BOND FUND) -- A Fund may invest in zero coupon bonds, deferred
interest bonds and bonds on which the interest is payable in kind ("PIK
securities"). Zero coupon and deferred interest bonds are debt obligations which
are issued at a significant discount from face value. The discount approximates
the total amount of interest the bonds will accrue and compound over the period
until maturity or the first interest accrual date at a rate of interest
reflecting the market rate of the security at the time of issuance. While zero
coupon bonds do not require the periodic payment of interest, deferred interest
bonds provide for a period of delay before the regular payment of interest
begins. Although this period of delay is different for each deferred interest
bond, a typical period is approximately a third of the bond's term to maturity.
PIK securities are debt obligations which provide that the issuer thereof may,
at its option, pay interest on such bonds in cash or in the form of
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additional debt obligations. Such investments benefit the issuer by mitigating
its need for cash to meet debt service, but also require a higher rate of return
to attract investors who are willing to defer receipt of such cash. Such
investments experience greater volatility in market value due to changes in
interest rates than debt obligations which provide for regular payments of
interest. A Fund will accrue income on such investments based on an effective
interest method, which is distributable to shareholders and which, because no
cash is received at the time of accrual, may require the liquidation of other
portfolio securities to satisfy the Fund's distribution obligations. As a
result, a Fund may have to sell securities at a time when it may be
disadvantageous to do so.
LOWER RATED SECURITIES (ALL FUNDS) -- Debt securities rated lower than
investment grade involve much greater risk of principal and income, and often
involve greater volatility of price, than securities in the higher rating
categories. They are also subject to greater credit risks (including, without
limitation, the possibility of default by or bankruptcy of the issuers of such
securities) than securities in higher rating categories. In this connection,
there have been recent instances of such defaults and bankruptcies which were
not foreseen by the financial and investment communities. The lower quality and
unrated obligations in which the Funds may invest will have speculative
characteristics in varying degrees. While such obligations may have some quality
and protective characteristics, these characteristics can be expected to be
offset or outweighed by large uncertainties or major risk exposures to adverse
conditions. The value of such obligations may be more susceptible to real and
perceived adverse economic or industry conditions than is the case of higher
rated securities. The Funds are dependent on the Adviser's judgment, analysis
and experience in the evaluation of high yield obligations. In evaluating the
creditworthiness of a particular issue, whether rated or unrated, the Adviser
will normally take into consideration, among other things, the issuer's
financial resources, its sensitivity to economic conditions and trends, the
operating history of the issuer, the ability of the issuer's management and
regulatory matters. The Adviser will attempt to reduce the risks of investing in
lower rated or unrated obligations through active portfolio management,
diversification, credit analysis and attention to current developments and
trends in the economy and the financial markets. The Funds will also take such
action as they consider appropriate in the event of anticipated financial
difficulties, default or bankruptcy of the issuers of any such obligation.
DERIVATIVES
The Funds may invest in derivative securities as described below, however,
none of the Funds have a present intention to utilize one or more of the various
practices such that five percent or more of a Fund's net assets will be at risk
with respect to derivative practices. The successful use by a Fund of
derivatives is subject to the Adviser's ability to predict correctly movements
in one or more underlying instruments, indexes, stocks, the market generally or
a particular industry. The use of derivatives requires different skills and
techniques than predicting changes in the price of individual stocks. There can
be no assurance of a Fund's successful use of derivatives if and when utilized.
See "Statement of Additional Information" for more information on derivatives,
including risk considerations.
CALL AND PUT OPTIONS ON SPECIFIC SECURITIES (THE EQUITY FUND, THE BALANCED
FUND, THE SMALLCAP FUND, THE MIGHTY MITES(SM) FUND AND THE REALTY FUND) -- A
Fund may invest up to 5% of its assets, represented by the premium paid, in the
purchase of call and put options in respect of specific securities. A Fund may
write covered call and put option contracts to the extent of 10% of the value of
its net assets at the time such option contracts are written. A call option
gives the purchaser of the option the right to buy, and obligates the writer to
sell, the underlying security at the exercise price at any time during the
option period. Conversely, a put option gives the purchaser of the option the
right to sell, and obligates the writer to buy, the underlying security at the
exercise price at any time during the option period.
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STOCK INDEX OPTIONS (THE EQUITY FUND, THE BALANCED FUND, THE SMALLCAP FUND,
THE MIGHTY MITES(SM) FUND AND THE REALTY FUND) -- A Fund may purchase and write
put and call options on stock indexes listed on national securities exchanges as
an investment vehicle for the purpose of realizing its investment objectives or
for the purpose of hedging its portfolio. A stock index fluctuates with changes
in the market values of the stocks included in the index. Should a Fund seek to
engage in transactions concerning put and call options on stock indexes, options
would be purchased or written with respect to not more than 25% of the value of
the Fund's net assets.
FUTURES TRANSACTIONS -- IN GENERAL (ALL FUNDS AS NOTED BELOW) -- The Funds
are not commodity pools. However, the Funds may engage in futures transactions,
including those relating to indexes, as described below.
A Fund's commodities transactions must constitute bona fide hedging or
other permissible transactions pursuant to regulations promulgated by the
Commodity Futures Trading Commission (the "CFTC"). In addition, a Fund may not
engage in such activities if the sum of the amount of initial margin deposits
and premiums paid for unexpired commodity options would exceed 5% of the fair
market value of a Fund's assets, after taking into account unrealized profits
and unrealized losses on such contracts it has entered into; provided, however,
that in the case of an option that is in-the-money at the time of purchase, the
in-the-money amount may be excluded in calculating the 5%.
STOCK INDEX FUTURES (THE EQUITY FUND, THE BALANCED FUND, THE SMALLCAP FUND,
THE MIGHTY MITES(SM) FUND AND THE REALTY FUND) -- A Fund may purchase and sell
stock index futures contracts. A stock index future obligates the seller to
deliver (and the purchaser to take) an amount of cash equal to a specific dollar
amount times the difference between the value of a specific stock index at the
close of the last trading day of the contract and the price at which the
agreement is made. No physical delivery of the underlying stocks in the index is
made. A Fund will intend to purchase and sell futures contracts on the stock
index for which it can obtain the best price with consideration also given to
liquidity. A Fund may not purchase or sell stock index futures contracts if,
immediately thereafter, more than 25% of its net assets would be hedged.
INTEREST RATE FUTURES (THE BALANCED FUND AND THE INTERMEDIATE BOND
FUND) -- A Fund may purchase an interest rate futures contract, in anticipation
of a decline in interest rates, and resulting increase in market price, in debt
securities the Fund intends to acquire. A Fund may sell an interest rate futures
contract, in anticipation of an increase in interest rates, and resulting
decline in market price, in debt securities the Fund owns. An interest rate
futures contract is an agreement to purchase or sell an agreed amount of debt
securities at a set price for delivery on a future date. These transactions are
subject to similar risk factors as those described above with respect to stock
index futures. A Fund may not purchase or sell interest rate futures contracts
if, immediately thereafter, more than 25% of its net assets would be hedged.
OPTIONS ON FUTURES (ALL FUNDS) -- A Fund may purchase and write call and
put options on futures contracts which are traded on a United States exchange or
board of trade. 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 during the option period. Upon exercise of
the option, the writer of the option is obligated to convey the appropriate
futures position to the holder of the option. If an option is exercised on the
last trading day before the expiration date of the option, a cash settlement
will be made in an amount equal to the difference between the closing price of
the futures contract and the exercise price of the option. The risks associated
with these transactions are similar to those described above with respect to
options on securities. A Fund may not purchase or write options on futures if,
immediately thereafter, more than 25% of its net assets would be hedged.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS (ALL FUNDS) -- A Fund may enter
into forward foreign currency exchange contracts for hedging and non-hedging
purposes. A forward foreign currency exchange
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contract is a contract individually negotiated and privately traded by currency
traders and their customers. A forward contract involves an obligation to
purchase or sell a specific currency for an agreed price at a future date, which
may be any fixed number of days from the date of the contract. A Fund may engage
in cross-hedging by using forward contracts in one currency to hedge against
fluctuations in the value of securities denominated in a different currency. The
purpose of entering into forward currency contracts for hedging purposes is to
minimize the risk to a Fund from adverse changes in the relationship between the
U.S. Dollar and foreign currencies.
MORTGAGE-RELATED SECURITIES (THE BALANCED FUND AND THE INTERMEDIATE BOND
FUND) -- Mortgage pass-through securities are securities representing interests
in "pools" of mortgages in which payments of both interest and principal on the
securities are made monthly, in effect "passing through" monthly payments made
by the individual borrowers on the residential mortgage loans which underlie the
securities (net of fees paid to the issuer or guarantor of the securities).
Early repayment of principal on mortgage pass-through securities (arising
from prepayments of principal due to sale of the underlying property,
refinancing, or foreclosure, net of fees and costs which may be incurred) may
expose a Fund to a lower rate of return upon reinvestment of principal. Also, if
a security subject to repayment has been purchased at a premium, in the event of
prepayment the value of the premium would be lost. Like other fixed-income
securities, when interest rates rise, the value of a mortgage-related security
generally will decline and generally may also increase the inherent volatility
of the mortgage-related security by effectively converting short-term debt
instruments into long-term debt instruments; however, when interest rates
decline, the value of mortgage-related securities with prepayment features may
not increase as much as other fixed-income securities. In recognition of this
prepayment risk to investors, the Public Securities Association (the "PSA") has
standardized the method of measuring the rate of mortgage loan principal
prepayments. The PSA formula, the Constant Prepayment Rate (the "CPR") or other
similar models that are standard in the industry will be used by a Fund in
calculating maturity for purposes of its investment in mortgage-related
securities.
Payment of principal and interest on some mortgage pass-through securities
(but not the market value of the securities themselves) may be guaranteed by the
full faith and credit of the U.S. Government (in the case of securities
guaranteed by the Government National Mortgage Association "GNMA"); or
guaranteed by agencies or instrumentalities of the U.S. Government (in the case
of securities guaranteed by the Federal National Mortgage Association ("FNMA")
or the Federal Home Loan Mortgage Corporation ("FHLMC"), which are supported
only by the discretionary authority of the U.S. Government to purchase the
agency's obligations). Mortgage pass-through securities created by
non-governmental issuers (such as commercial banks, savings and loan
institutions, private mortgage insurance companies, mortgage bankers and other
secondary market issuers) may be supported by various forms of insurance or
guarantees, including individual loan, title, pool and hazard insurance, and
letters of credit, which may be issued by governmental entities, private
insurers or the mortgage poolers.
Collateralized Mortgage Obligations ("CMOs") are hybrid instruments with
characteristics of both mortgage-backed bonds and mortgage pass-through
securities. Similar to a bond, interest and prepaid principal on a CMO are paid,
in most cases, monthly. CMOs may be collateralized by whole mortgage loans but
are more typically collateralized by portfolios of mortgage pass-through
securities guaranteed by GNMA, FHLMC or FNMA. CMOs are structured into multiple
classes, with each class bearing a different stated maturity and principal
payment schedule. To the extent a particular CMO is issued by an investment
company, a Fund's ability to invest in such CMOs will be limited. See
"Investment Restrictions" in the Statement of Additional Information.
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OTHER ASSET-BACKED SECURITIES (THE BALANCED FUND AND THE INTERMEDIATE BOND
FUND) -- Other asset-backed securities (unrelated to mortgage loans) have been
offered to investors, such as Certificates for Automobile Receivables
("CARS(SM)"). CARS(SM) represent undivided fractional interests in a trust
("trust") whose assets consist of a pool of motor vehicle retail installment
sales contracts and security interests in the vehicles securing the contracts.
Payments of principal and interest on CARS(SM) are "passed through" monthly to
certificate holders and are guaranteed up to certain amounts and for a certain
time period by a letter of credit issued by a financial institution unaffiliated
with the trustee or originator of the trust or by the existence of a
subordinated class of securities. Underlying sales contracts are subject to
prepayment, which may reduce the overall return to certificate holders. If the
letter of credit is exhausted, certificate holders may also experience delays in
payment or losses on CARS(SM) if the full amounts due on underlying sales
contracts are not realized by the trust because of unanticipated legal or
administrative costs of enforcing the contracts, or because of depreciation,
damage or loss of the vehicles securing the contracts, or other factors. For
asset-backed securities, the industry standard uses a principal prepayment
model, the ABS model, which is similar to the PSA described previously under
"Mortgage-Related Securities". Either the PSA model, the ABS model or other
similar models that are standard in the industry will be used by a Fund in
calculating maturity for purposes of its investment in asset-backed securities.
LENDING PORTFOLIO SECURITIES (ALL FUNDS) -- To earn additional income, a
Fund may lend securities from its portfolio to brokers, dealers or other
financial institutions needing to borrow securities to complete certain
transactions. Such loans may not exceed 33 1/3% of a Fund's total assets. In
connection with such loans, a Fund will receive collateral which will be
maintained at all times in an amount equal to at least 100% of the current
market value of the loaned securities. A Fund can increase its income through
the investment of such collateral.
ILLIQUID SECURITIES (ALL FUNDS, EXCEPT AS NOTED IN "CERTAIN FUNDAMENTAL
POLICIES" BELOW) -- Each Fund may invest its net assets in securities as to
which a liquid trading market does not exist, provided such investments are
consistent with the Fund's investment objective. Such securities may include
securities that are not readily marketable, such as certain securities that are
subject to legal or contractual restrictions on resale, repurchase agreements
providing for settlement in more than seven days after notice, and certain
privately negotiated, non-exchange traded options and securities used to cover
such options. As to these securities, the Fund is subject to a risk that should
the Fund desire to sell them when a ready buyer is not available at a price the
Fund deems representative of their value, the value of the Fund's net assets
could be adversely affected. Illiquid securities do not include securities
eligible for resale pursuant to Rule 144A of the Securities Act of 1933, or
other restricted securities, which have been determined liquid by the Fund's
Board of Trustees.
CERTAIN FUNDAMENTAL POLICIES (ALL FUNDS, EXCEPT AS NOTED BELOW) -- Each
Fund (i) may borrow money from banks, but only for temporary or emergency (not
leveraging) purposes, in an amount up to 5% of the value of its total assets
(including the amount borrowed) valued at the lesser of cost or market, less
liabilities (not including the amount borrowed) at the time the borrowing is
made; (ii) may pledge, hypothecate, mortgage or otherwise encumber its assets,
but only in an amount up to 10% of the value of its total assets to secure
borrowings for temporary or emergency purposes, or up to 20% in connection with
the purchase and sale of put and call options; (iii) may invest up to 5% of the
value of its total assets in the securities of any one issuer (This restriction
applies only with respect to 75% of the total assets of each Fund); (iv) may
invest up to 25% of its total assets in any single industry; and (v) may invest
up to 10% of its total assets in time deposits maturing from two business days
through seven calendar days. The Equity Fund may invest up to 10% of its net
assets in securities that have not been registered under the Securities Act of
1933, as amended, and therefore are subject to restrictions on resale, in
repurchase agreements providing for settlement in more than seven days after
notice and in securities that are not readily marketable (including those
options
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in respect of specific securities that are not traded on a national securities
exchange, and the underlying securities, which are not readily marketable).
Subject to this limitation, the Equity Fund may invest in securities eligible
for resale pursuant to Rule 144A of the Securities Act of 1933 which have been
determined to be liquid by the Fund's Board of Trustees based upon the trading
markets for the securities. Each of the other Funds excluding the SmallCap Fund,
Mighty Mites(SM) Fund and Realty Fund may invest up to 10% of its net assets in
repurchase agreements providing for settlement in more than seven days after
notice and in securities that are not readily marketable. Included in this
limitation are "restricted" securities and any other assets for which an active
and substantial market does not exist at the time of purchase or subsequent
valuation. Restricted securities for purposes of this limitation do not include
investments by these Funds in securities eligible for resale pursuant to Rule
144A of the Securities Act of 1933 which have been determined to be liquid by
the Fund's Board of Trustees based upon the trading markets for the securities
(see "Investment Objectives and Management Policies -- Rule 144A Securities" in
the Statement of Additional Information for further details). This paragraph
describes fundamental policies that cannot be changed without approval by the
holders of a majority (as defined in the Investment Company Act of 1940) of each
Fund's outstanding voting shares. See "Investment Objectives and Management
Policies -- Investment Restrictions" in the Statement of Additional Information.
OTHER INVESTMENT CONSIDERATIONS -- Investment decisions for each Fund are
made independently from those of other investment advisory accounts that may be
advised by the Adviser or Sub-Adviser. However, if such other investment
advisory accounts are prepared to invest in, or desire to dispose of, securities
of the type in which a Fund invests at the same time as the Fund, available
investments or opportunities for sales will be allocated equitably to each of
them. In some cases, this procedure may adversely affect the size of the
position obtained for or disposed of by a Fund or the price paid or received by
the Fund.
MANAGEMENT OF THE FUNDS
INVESTMENT ADVISER AND ADMINISTRATOR
Gabelli Advisers, Inc. (formerly Teton Advisers LLC prior to November 7,
1997), located at One Corporate Center, Rye, New York 10580-1434, is adviser to
the Funds. The Adviser is a Delaware corporation. Gabelli and its affiliates own
a majority of the Adviser. Gabelli and Gabelli Advisers are registered
investment advisers. The Adviser has entered into a Sub-Advisory Agreement with
Westwood whereby, Westwood serves as sub-advisor to the Funds, with the
exception of the Mighty Mites(SM) Fund with which there is not a Sub-Advisory
Agreement. Under the Sub-Advisory Agreement, the Adviser pays Westwood out of
its advisory fees with respect to the Funds (except the Mighty Mites(SM) Fund) a
fee computed daily and payable monthly in an amount equal on an annualized basis
to the greater of (i) $150,000 per year on an aggregate basis for all the
applicable Funds or (ii) 35% of the net revenues to the Adviser from the
applicable Funds. Westwood Management Corporation, formed in 1983 and located at
300 Crescent Court, Suite 1320, Dallas, TX 75201, is a registered investment
adviser managing, as of March 31, 1998, an aggregate of approximately $1.8
billion in separate accounts, primarily corporate pension funds. Westwood
Management Corporation is a wholly owned subsidiary of Southwest Securities
Group, Inc., a Dallas based securities firm. Susan M. Byrne, President of the
Sub-Adviser since 1983, is solely responsible for the day-to-day management of
the Equity Fund and primarily responsible for the day-to-day management of the
Realty Fund by overseeing the activity of several other portfolio managers.
Patricia R. Fraze, Senior Vice President of the Sub-Adviser since 1992, is a
co-manager, along with Ms. Byrne, for the Balanced Fund's portfolio. Ms. Fraze
joined the Sub-Adviser in 1990. Ms. Fraze is also responsible for the day-to-day
management of the Intermediate Bond Funds' portfolio. Lynda Calkin, Senior Vice
President of the Sub-Advisor, is responsible for the day-to-day management of
the SmallCap Fund. Mario J. Gabelli, Marc J. Gabelli, Laura Linehan and Walter
Walsh are the individuals primarily responsible for the day-to-day management of
the Mighty Mites(SM) Fund. Mario J. Gabelli has been
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Chairman, Chief Executive Officer and Chief Investment Officer of Gabelli Funds,
Inc. since its organization in 1980; Marc J. Gabelli has been Managing Director
and an analyst of Gabelli Funds, Inc. since 1993 and Portfolio Manager of the
Gabelli Global Interactive Couch Potato Fund and co-manager of the Gabelli
Global Opportunity Fund; Laura Linehan has been Director of Creative Research at
Gabelli & Company, Inc. where she has been a securities analyst since May 1995,
an associate in Corporate Finance at Smith Barney from May 1994 and a senior
associate financial analyst at the IBM Corporation from June 1993; and Walter K.
Walsh has been Compliance Officer of Gabelli & Company, Inc. since 1994,
Compliance Officer at Dime Securities, Inc. from August 1993 to September 1994,
and prior to that a staff member at the Securities and Exchange Commission for
24 years. Westwood has had other private advisory accounts that have been
invested in the smallcap and realty asset classes.
The Adviser provides advice and supervision with respect to the Funds'
compliance with applicable law, rules and regulations as well as the investment
restrictions set forth herein. Westwood has sole discretion to manage the
day-to-day portfolio activities of the Funds (with the exception of the Mighty
Mites(SM) Fund) within the parameters set by the Sub-Advisory Agreement and
contained herein. The Adviser has no authority with respect to individual
investment decisions for the Funds. The Investment Advisory Agreement provides
that the Adviser will supervise and manage each Fund's investment activities on
a discretionary basis and oversee the administration of each Fund's business and
affairs. In this connection the Adviser is responsible for maintaining certain
of the Funds' books and records and performing other administrative aspects of
the Funds' operations to the extent not performed by the Funds' custodians,
transfer agents and dividend disbursing agents. The Adviser is permitted to
subcontract at its own expense those administrative responsibilities to persons
it believes are qualified to perform such services. As compensation for its
services and related expenses, the Trust will pay the Adviser a fee computed
daily and payable monthly in an amount equal on an annualized basis to 1.0% for
the Equity Fund, 1.0% for the SmallCap Fund, 1.0% for the Mighty Mites(SM) Fund,
1.0% for the Realty Fund, .60% for the Intermediate Bond Fund and .75% for the
Balanced Fund of each Fund's daily average net asset value. The fees paid by the
Trust for the Equity Fund, the SmallCap Fund, the Mighty Mites(SM) Fund, the
Realty Fund, and the Balanced Fund are higher than the fees paid by most funds
for such services and related expenses. The Funds will also pay the Adviser or
Distributor separately for any costs and expenses incurred in connection with
distribution of the classes of each Fund's shares in accordance with the terms
of their respective Plans of Distribution adopted for such classes pursuant to
Rule 12b-1 under the 1940 Act.
The Adviser has retained at its own cost BISYS Fund Services, Inc.
("BISYS") (the "Sub-Administrator") to provide administrative services with
respect to the Funds. BISYS has its main office at 3435 Stelzer Road, Columbus,
Ohio 43219. BISYS is a registered transfer agent and broker-dealer and acts as
administrator and general distribution agent for certain other investment
companies.
DISTRIBUTOR
Gabelli & Company, Inc. serves as the distributor (the "Distributor") of
the Funds and is an indirect subsidiary of Gabelli Funds, Inc. The business
address of Gabelli & Company, Inc. is One Corporate Center, Rye, New York
10580-1434.
The Funds' shareholders have approved a Plan of Distribution for the Retail
Class shares pursuant to Rule 12b-1 (the "Retail 12b-1 Plan"). The Retail 12b-1
Plan authorizes payments by the Funds in connection with the distribution of the
Funds' Retail Class shares at an annual rate of up to .25% of the Funds' average
daily net assets. Payments will be accrued daily and paid monthly or at such
other intervals as the Board may determine and may be paid in advance of actual
billing.
Payments may be made by the Funds under the Retail 12b-1 Plan for the
purpose of financing any activity primarily intended to result in the sale of
the Retail Class shares of the Funds as determined by the Board of
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Trustees. To the extent any activity is one which the Funds may finance without
a plan of distribution, the Funds may also make payments to finance such
activity outside of the Retail 12b-1 Plan and not be subject to its limitations.
On August 8, 1997, the Trustees of the Funds approved an amendment to the Plan
such that payments under the Plan are not solely dependent on distribution
expenses actually incurred by the Distributor.
The Funds have entered into a Distribution Agreement with the Distributor
authorizing payment for reimbursement expenses (including overhead) incurred by
the Distributor and its affiliates as described above. Distribution activities
include, without limitation, advertising the Funds; compensating underwriters,
dealers, brokers, banks and other selling entities and sales and marketing
personnel of any of them for sales of shares of the Funds, whether in a lump sum
or on a continuous, periodic, contingent, deferred or other basis; compensating
underwriters, dealers, brokers, banks and other servicing entities and servicing
personnel of any of them (including the Adviser and its personnel) for providing
services to shareholders of the Funds relating to their investment in the Funds,
including assistance in connection with inquiries relating to shareholder
accounts; the production and dissemination of prospectuses (including statements
of additional information) of the Funds and the preparation, production and
dissemination of sales, marketing and shareholder servicing materials, ordinary
or capital expenses, such as equipment, rent, fixtures, salaries, bonuses,
reporting and recordkeeping and third party consultancy or similar direct and
indirect expenses relating to any activity for which payment is authorized by
the Board of Trustees. To the extent any of these payments are based on
allocations by the Distributor, the Funds may be considered to be participating
in joint distribution activities with other funds distributed by the
Distributor. Various federal and state laws prohibit national banks and some
state-chartered commercial banks from underwriting or dealing in the Funds'
Shares. In the unlikely event that a court were to find that these laws prevent
such banks from providing the services described above, the Funds would seek
alternative providers and expects that shareholders would not experience any
disadvantage.
PURCHASE OF SHARES
Retail Class Shares are no-load. The minimum initial investment is $1,000.
There is no minimum initial investment for accounts establishing an Automatic
Investment Plan. Custodial accounts for minor children are also available. There
is no minimum for subsequent investments. Shares of the Funds are sold at the
public offering price based on the net asset value per share next determined
after receipt of an order by the Funds' Distributor or transfer agent in proper
form with accompanying check or bank wire payments arrangements satisfactory to
the Funds. Although most shareholders elect not to receive stock certificates,
certificates for whole shares only can be obtained on specific written request
to the Transfer Agent.
Shares of the Funds may be purchased through registered broker-dealers.
Certain broker-dealers may charge the investor a fee for their services.
Compensation to sales persons may vary depending upon which class of shares they
sell. Such fees may vary among broker-dealers, and such broker-dealers may
impose higher initial or subsequent investment requirements than those
established by the Funds. Services provided by broker-dealers may include
allowing the investor to establish a margin account and to borrow on the value
of such Fund's shares in that account.
Prospectuses, sales material and subscription order forms ("applications")
may be obtained from the Distributor. The Funds and the Distributor reserve the
right in their sole discretion (1) to suspend the offering of the Funds' shares
and (2) to reject purchase orders when, in the judgment of the Funds'
management, such rejection is in the best interest of the Funds. The calculation
of net asset value per share is performed at 4:15 p.m. for each Fund on each day
that the New York Stock Exchange is open for business. Net asset value per share
is computed by dividing the value of a Fund's net assets (i.e., the value of its
assets less its liabilities) by the total number of shares outstanding. All
expenses of the Funds are accrued daily and taken into account for the purpose
of determining net asset value.
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In determining net asset value, securities listed on an exchange are valued
on the basis of the last sale price prior to the time the valuation is made. If
there has been no sale since the immediately previous valuation, then the
current bid price is used. Quotations are taken for the exchange where the
security is primarily traded. Portfolio securities which are primarily traded on
foreign exchanges may be valued with the assistance of a pricing service and are
generally valued at the preceding closing values of such securities on their
respective exchanges, except that when an occurrence subsequent to the time a
foreign security is valued is likely to have changed such value, then the fair
value of those securities will be determined by consideration of other factors
by or under the direction of the Board of Trustees. Over-the-counter securities
are valued on the basis of the bid price at the close of business on each
business day. Securities for which market quotations are not readily available
are valued at fair value as determined in good faith by or at the direction of
the Board of Trustees. Notwithstanding the above, bonds and other fixed-income
securities are valued by using market quotations and may be valued on the basis
of prices provided by a pricing service approved by the Board of Trustees. All
assets and liabilities initially expressed in foreign currencies will be
converted into U.S. dollars at the mean between the bid and asked prices of such
currencies against U.S. dollars as last quoted by any major bank.
With respect to written options contracts, the premium received is recorded
as an asset and equivalent liability, and thereafter the liability is adjusted
to the market value of the option determined in accordance with the preceding
paragraph. The premium paid for an option purchased by a Fund is recorded as an
asset and subsequently adjusted to market value. See "Determination of Net Asset
Value" in the Statement of Additional Information.
MAIL
To make an initial purchase by mail, send a completed application with a
check for the amount of the investment payable to "The Gabelli Westwood Funds,"
to: THE GABELLI WESTWOOD FUNDS, P.O. BOX 8308, BOSTON, MA 02266-8308. You may
also personally deliver a check made payable to "The Gabelli Westwood Funds"
along with a completed application to: THE GABELLI WESTWOOD FUNDS, THE BFDS
BUILDING, 7TH FLOOR, TWO HERITAGE DRIVE, NORTH QUINCY, MA 02171.
Subsequent purchases do not require a completed application and can be made
by (1) mailing a check to the same address noted above or by (2) bank wire, as
indicated below. The exact name and number of the shareholder's account should
be clearly indicated.
Checks will be accepted if drawn in U.S. currency on a domestic bank for
less than $100,000. U.S. dollar checks drawn against a non-U.S. bank may be
subject to collection delays and will be accepted only upon actual receipt of
funds by the Transfer Agent. Bank collection fees may apply. Bank or certified
checks for investments of $100,000 or more will be required unless the investor
elects to invest by bank wire as described below. Third party checks are not
accepted.
BANK WIRE
To initially purchase shares of the Funds using the wire system for
transmittal of money among banks, an investor should first telephone the Funds
at 1-800-GABELLI to obtain a new account number. The investor should instruct a
Federal Reserve System member bank to wire funds to:
State Street Bank and Trust Company
ABA #011-0000-28 REF DDA #99046187
Attn: Shareholder Services
Re: The Gabelli Westwood Funds
A/C #
- -------------------------------------------------------------------------
Account of (Registered Owner)
225 Franklin Street, Boston, MA
02110
24
<PAGE> 25
For initial purchases by wire, the investor should promptly complete and
mail the application to the address shown above for mail purchases. There may be
a charge by your bank for transmitting the money by bank wire but State Street
Bank and Trust Company does not charge investors in the Funds for the receipt of
wire transfers. If you are planning to wire funds, it is suggested that you
instruct your bank early in the day so the wire transfer can be accomplished the
same day.
TELEPHONE INVESTMENT PLAN
You may purchase additional shares of the Funds by telephone through the
Automated Clearinghouse (ACH) system as long as your bank is a member of the ACH
system and you have a completed, approved Investment Plan application on file
with our Transfer Agent. The funding for your purchase will be automatically
deducted from the ACH eligible account you designate on the application. Your
investment will normally be credited to your Gabelli Westwood Fund account on
the first business day following your telephone request. Your request must be
received no later than 4:00 p.m. eastern time. There is a minimum of $100 for
each telephone investment. Any subsequent changes in banking information must be
submitted in writing and accompanied by a sample voided check. To initiate an
ACH purchase, please call 1-800-GABELLI. Fund shares purchased through the
Telephone or Automatic Investment Plan will not be available for redemption for
up to fifteen (15) days following the purchase date.
AUTOMATIC INVESTMENT PLAN
The Funds offer an automatic monthly investment plan, details of which can
be obtained from the Distributor. There is no minimum initial investment for
accounts establishing an automatic investment plan.
OTHER INVESTORS
No minimum initial investment is required for officers, directors or
full-time employees of the Funds, other investment companies managed by the
Sub-Adviser, the Adviser, the Administrator, the Distributor or their
affiliates, including members of the "immediate family" of such individuals and
retirement plans and trusts for their benefit. The term "immediate family"
refers to spouses, children and grandchildren (adopted or natural), parents,
grandparents, siblings, a spouse's siblings, a sibling's spouse and a sibling's
children.
REDEMPTION OF SHARES
Upon receipt by the Distributor or the Transfer Agent of a redemption
request in proper form, shares of the Funds will be redeemed at their next
determined net asset value. Redemption requests received after the time as of
which each Fund's net asset value is determined on a particular day will be
redeemed at the next determined net asset value of such Fund on the next day
that net asset value is determined. Checks for redemption proceeds will normally
be mailed to the shareholder's address of record within seven days, but will not
be mailed until all checks in payment for the purchase of the shares to be
redeemed have been honored, which may take up to 15 days. The proceeds of a
redemption may be more or less than the amount invested and, therefore, a
redemption may result in gain or loss for income tax purposes. Redemption
requests may be made by letter to the Transfer Agent, specifying the name of the
Fund, the dollar amount or number of shares to be redeemed, and the account
number. The letter must be signed in exactly the same way the account is
registered (if there is more than one owner of the shares, all must sign) and,
if any certificates for the shares to be redeemed are outstanding, presentation
of such certificates properly endorsed is also required. Signatures on a
redemption request and/or certificates must be guaranteed by an "eligible
guarantor institution" as such term is defined in Rule 17Ad-15 under the
Securities and Exchange Act of 1934, which includes certain banks, brokers,
dealers, credit unions, securities exchanges and associations, clearing agencies
and savings associations (signature guarantees by notaries public are not
acceptable). Shareholders may also redeem a Fund's shares through certain
registered broker-dealers, who have made arrangements with the Funds
25
<PAGE> 26
permitting them to redeem shares by telephone or facsimile transmission and who
may charge shareholders a fee for this service if they have not received any
payments under the Distribution Plan.
Further documentation, such as copies of corporate resolutions and
instruments of authority, are normally requested from corporations,
administrators, executors, personal representatives, trustees or custodians to
evidence the authority of the person or entity making the redemption request.
If the Board of Trustees should determine that it would be detrimental to
the remaining shareholders of the Funds to make payment wholly or partly in
cash, the Funds may pay the redemption price in whole or in part by a
distribution in kind of securities from the portfolio of the Funds, in lieu of
cash, in conformity with applicable rules of the Securities and Exchange
Commission. Under such circumstances, shareholders of the Funds receiving
distributions in kind of securities will incur brokerage commissions when they
dispose of the securities.
The Funds may suspend the right of redemption or postpone the date of
payment for more than seven days during any period when (1) trading on the New
York Stock Exchange is restricted or the Exchange is closed, other than
customary weekend and holiday closings; (2) the Securities and Exchange
Commission has by order permitted such suspension; or (3) an emergency, as
defined by rules of the Securities and Exchange Commission, exists making
disposal of portfolio investments or determination of the value of the net
assets of the Funds not reasonably practicable.
To minimize expenses, the Funds reserve the right to redeem, upon not less
than 30 days notice, all shares of the Funds in an account (other than an IRA)
which as a result of shareholder redemption has a value below $500. However, a
shareholder will be allowed to make additional investments prior to the date
fixed for redemption to avoid liquidation of the account.
TELEPHONE REDEMPTION BY CHECK
The Funds accept telephone requests for redemption of unissued shares,
subject to a $25,000 limitation. By calling 1-800-GABELLI, you may request that
a check be mailed to the address of record on the account, provided that the
address has not changed within thirty (30) days prior to your request. The check
will be made payable to the person in whose name the account is registered and
will normally be mailed within seven (7) days.
The Fund and its transfer agent will not be liable for following telephone
instructions reasonably believed to be genuine. In this regard, the Fund and its
transfer agent require personal identification information before accepting a
telephone redemption. If the Fund or its transfer agent fail to use reasonable
procedures, the Fund might be liable for losses due to fraudulent instructions.
A shareholder may redeem shares by telephone unless he elects in the
subscription order form not to have such ability.
Requests for telephone redemption must be received between 9:00 a.m. and
4:00 p.m. eastern time. If your telephone call is received after this time or on
a day when the New York Stock Exchange is not open, the request will be entered
the following business day. Shares are redeemed at the net asset value next
determined following your request. Fund shares purchased by check or through the
automatic purchase plan will not be available for redemption for up to fifteen
(15) days following the purchase. Shares held in certificate form must be
returned to the Transfer Agent for redemption of shares. Telephone redemption is
not available for IRAs. The proceeds of a telephone redemption may be directed
to an existing account in another of the Funds, provided the account is
registered in the redeeming shareholder's name. See "Exchange of Fund Shares".
BY BANK WIRE
The Funds accept telephone requests for wire redemption in excess of $1,000
(but subject to a $25,000 limitation) to a predesignated bank either on the
application or in a subsequent written authorization with the signature
guaranteed. The Funds accept signature guaranteed written requests for
redemption by bank wire
26
<PAGE> 27
without limitation. The proceeds are normally wired on the following business
day. Your bank must be either a member of the Federal Reserve System or have a
correspondent bank which is a member. Any change to the banking information made
at a later date must be submitted in writing with a signature guarantee.
SYSTEMATIC WITHDRAWAL PLAN
The Funds offer a systematic withdrawal program for shareholders whereby
they can authorize an automatic redemption on a monthly, quarterly or annual
basis. Details can be obtained from the Distributor.
EXCHANGE OF FUNDS SHARES
The Funds offer two convenient ways to exchange shares in a class of one
fund for shares in a corresponding class of another fund managed by the Adviser
or an affiliate. Before engaging in an exchange transaction, a shareholder
should read carefully the portions of this Prospectus or the other Prospectus
describing the fund into which the exchange will occur. A shareholder may not
exchange shares of a class of one Fund for shares of a corresponding class of
another fund if either are not legally qualified or registered for sale in the
state of the shareholder's residence. The minimum amount for an initial exchange
is $1,000. No minimum is required in subsequent exchanges. The Trust may
terminate or amend the terms of the exchange privilege at any time upon 60 days'
written notice to shareholders.
A new account opened by exchange must be established with the same name(s),
address and social security number as the existing account. All exchanges will
be made based on the net asset value next determined following receipt of the
request by a Fund in good order, plus any applicable sales load.
An exchange is taxable as a sale of a security on which a gain or loss may
be recognized. Shareholders should receive written confirmation of the exchange
within a few days of the completion of the transaction.
In the case of transactions subject to a sales charge, the sales charge
will be assessed on an exchange of shares, equal to the excess of the sales load
applicable to the shares to be acquired, over the amount of any sales load
previously paid to the Distributor on the shares to be exchanged. No service fee
is imposed. See "Dividends, Distributions and Taxes" for an explanation of
circumstances in which sales load paid to acquire shares of the Funds may not be
taken into account in determining gain or loss on the disposition of those
shares.
EXCHANGE BY MAIL
To exchange Fund shares by mail, simply send a letter of instruction to the
Distributor. The letter of instruction must include: (i) your account number;
(ii) the names of the Funds from which and into which you wish to exchange your
investment; (iii) the dollar or share amount you wish to exchange; and (iv) the
signatures of all registered owners or authorized parties. All signatures must
be guaranteed by a member of a national securities exchange or by a commercial
bank or trust company. Corporations, trusts, partnerships or other legal
entities will be required to furnish other documentation. Please call the Funds
for more information.
EXCHANGE BY TELEPHONE
To exchange Fund shares by telephone or if you have any questions, simply
call the Funds toll free at 1-800-GABELLI. You should be prepared to give the
telephone representative the following information: (i) your account number,
social security number and account registration; (ii) the names of the Funds
from which and into which you wish to exchange your investment; and (iii) the
dollar or share amount you wish to exchange. The conversation may be recorded to
protect you and the Funds. Telephone exchanges are available only if the
shareholder so indicates by checking the "yes" box on the Purchase Application.
27
<PAGE> 28
RETIREMENT PLANS
The Funds have available a form of "Traditional" Individual Retirement
Account ("IRA") and a "Roth" IRA for investment in Fund shares which may be
obtained from the Distributor. The minimum investment required to open an IRA
for investment in shares of the Funds is $1,000 for an individual, except that
both the individual and his or her spouse may establish separate IRAs if their
combined investment is $1,250. There is no minimum for additional investment in
an IRA account. Investors who are self-employed may purchase shares of the Funds
through tax-deductible contributions to retirement plans for self-employed
persons, known as Keogh or HR 10 plans. The Funds do not currently act as
Sponsor for 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" which give participants the right to defer portions of their compensation
for investment on a tax-deferred basis until distributions are made from the
plans. The minimum initial investment for an individual under such plans is
$1,000 and there is no minimum for additional investments.
Under the Internal Revenue Code of 1986 (the "Code"), individuals may make
wholly or partly tax deductible traditional IRA contributions of up to $2,000
annually ($4,000 maximum in the case of a married couple filing joint returns,
even where one spouse is not working, if certain other conditions are met),
depending on whether they are active participants in an employer-sponsored
retirement plan and on their income level. However, dividends and distributions
held in the account are not taxed until withdrawn in accordance with the
provisions of the Code.
Beginning January 1, 1998, investors satisfying statutory income level
requirements may make non-deductible contributions of up to $2,000 annually to a
Roth IRA, distributions from which are not subject to tax if a statutory five
year holding period requirement is satisfied. New for 1998, the Fund also makes
available education IRAs. Education IRAs permit eligible individuals to
contribute up to $500 per year per beneficiary under 18 years old. Distributions
from an education IRA are generally excluded from income when used for qualified
higher education expenses. Consult your tax advisor.
Investors should be aware that they may be subject to penalties of
additional tax on contributions or withdrawals from IRAs or other retirement
plans which are not permitted by the applicable provisions of the Code. Persons
desiring information concerning investments through IRA accounts or other
retirement plans should write or telephone the Distributor.
DIVIDENDS, DISTRIBUTIONS AND TAXES
Each Fund has elected to be treated as and intends to qualify annually as a
regulated investment company pursuant to the provisions of Subchapter M of the
Internal Revenue Code of 1986, as amended (the "Code"). The Funds did so qualify
for the previous taxable year and intend to continue to so qualify. By so
qualifying, each Fund generally will not be subject to Federal income tax to the
extent that it distributes investment company taxable income and net capital
gains in the manner required under the Code. In addition, the Code subjects
regulated investment companies, such as the Funds, to a non-deductible 4% excise
tax in each calender year to the extent that such investment companies do not
distribute substantially all of their taxable investment income and capital
gain, generally determined on a calendar year basis and the one year period
ending October 31 of each calender year, respectively.
Each Fund intends to distribute to its shareholders substantially all of
its investment company taxable income (which includes, among other items,
dividends and interest and the excess, if any, of net short-term capital gains
(generally including any net option premium income) over net long-term capital
losses). Investment company taxable income will be distributed by the Equity
Fund, the Mighty Mites(SM) Fund and the SmallCap Fund annually, and the Realty
Fund and the Balanced Fund quarterly. The Intermediate Bond
28
<PAGE> 29
Fund will declare distributions of such income daily and pay those dividends
monthly. Each Fund intends to distribute, at least annually, substantially all
net capital gains (the excess of net long-term capital gains over net short-term
capital losses). Shareholders will be advised as to what portion of capital
gains are to be treated as "28% rate gain" or "20% rate gain" with respect to
the maximum tax rate for such gains (10% for noncorporate shareholders who are
subject to the 15% marginal tax bracket for ordinary income). In determining
amounts of capital gains to be distributed, any capital loss carryovers from
prior years will be applied against capital gains to reduce the amount of
distributions paid. In addition, any losses incurred in the taxable year
subsequent to October 31 will be deferred to the next taxable year and used to
reduce subsequent year distributions (see "Dividends, Distributions and Taxes"
in the Statement of Additional Information). You may choose whether to receive
dividends and distributions in cash or to reinvest in additional shares of the
class in which you are invested at the next determined net asset value without a
sales load.
Dividends from net investment income or distributions of net realized
short-term securities gains to shareholders generally are taxable as ordinary
income whether received in cash or reinvested in additional shares.
Distributions of net capital gains to shareholders are taxable as capital gains
whether received in cash or reinvested in additional shares. Shareholders will
be notified after the end of year as to the percentage of long-term capital
gains to be treated as 28% rate gain.
Special tax rules may apply to a Fund's acquisition of futures contracts,
forward contracts, and options on futures contracts. Such rules may, among other
things, affect whether gains and losses from such transactions are considered to
be short-term or long-term, may have the effect of deferring losses and/or
accelerating the recognition of gains or losses.
It is anticipated that a portion of the ordinary income dividends paid by
the Equity Fund, the SmallCap Fund, the Mighty Mites(SM) Fund and the Balanced
Fund will qualify for the dividends-received deduction available to
corporations. Shareholders will be notified at the end of the year as to the
amount of the dividends that qualify for the dividends-received deduction.
The Funds may be required to withhold for Federal income tax ("backup
withholding") 31% of the distributions and the proceeds of redemptions payable
to shareholders who fail to provide a correct taxpayer identification number or
to make required certifications, or where a Fund or shareholder has been
notified by the Internal Revenue Service that it is subject to backup
withholding. Corporate shareholders and certain other shareholders specified in
the Code are exempt from backup withholding.
Those Funds which may invest in securities of foreign issuers may be
subject to withholding and other similar income taxes imposed by a foreign
country.
Notice as to the tax status of your dividends and distributions is mailed
to you annually. You also will receive periodic summaries of your account.
Dividends and distributions may be subject to state and local taxes. Dividends
paid or credited to accounts maintained by non-resident shareholders may also be
subject to U.S. non-resident withholding taxes. You should consult your tax
adviser regarding specific questions as to Federal, state and local income and
withholding taxes.
PERFORMANCE INFORMATION
A Fund may, from time to time, include its yield, if applicable, and total
return in advertisements or reports to shareholders or prospective investors.
The methods used to calculate the yield and total return of the Funds are
mandated by the Securities and Exchange Commission.
Quotations of "yield" for each Fund will be based on the investment income
per share during a particular 30-day (or one month) period (including dividends
and interest), less expenses accrued during the period ("net investment
income"), and will be computed by dividing net investment income by the maximum
public offering price per share on the last day of the period.
29
<PAGE> 30
A Fund's average annual total return is expressed in terms of the average
annual compounded rate of return of a hypothetical investment in the Fund over
periods of one, five and ten years (up to the life of the Fund or for shorter
time periods depending upon the length of time during which the Fund has
operated), reflect the deduction of a proportional share of Fund expenses (on an
annual basis), and assume that all dividends and distributions are reinvested
when paid.
Performance information for a Fund may be compared to various unmanaged
indices, such as the Standard & Poor's Composite Stock Price Index, the Dow
Jones Industrial Average, the Russell 2000 Index, Lehman Brothers
Corporate/Government Bond Index, National Association of REIT Index, indices
prepared by Lipper Analytical Services, Morningstar ratings and other entities
or organizations which track the performance of investment companies.
Performance will vary and past results are not necessarily representative
of future results. You should remember that performance is a function of
portfolio management in selecting the type and quality of portfolio securities
and is affected by operating expenses. Performance information, such as that
described above, may not provide a basis for comparison with other investments
or other investment companies using a different method of calculating
performance.
GENERAL INFORMATION
The Funds are series portfolios of The Gabelli Westwood Funds, a
Massachusetts business trust (the "Trust") organized pursuant to an Agreement
and Declaration of Trust (the "Trust Agreement"), as amended and restated on
June 12, 1986. On November 18, 1997, the Board of Trustees approved the change
in the name of the Trust from The Westwood Funds to The Gabelli Westwood Funds.
The Trust is authorized to issue an unlimited number of shares of beneficial
interest, par value $.001 per share. Each share has one vote and, when issued,
is fully paid and non-assessable. The Board of Trustees may, in the future,
authorize the issuance of other series of shares of beneficial interest
representing shares of other investment portfolios which may consist of separate
classes as in the case of the Funds. Each additional portfolio within the Trust
is separate for investment and accounting purposes and is represented by a
separate series of shares. Each portfolio will be treated as a separate entity
for Federal income tax purposes.
Each Fund is comprised of two classes of shares -- the "Retail Class" and
the "Service Class" (the SmallCap Fund, the Mighty Mites(SM) Fund and Realty
Fund will currently offer only Retail Class shares). The classes have identical
rights with respect to the series portfolio of which they are a part; however,
there are certain matters affecting one class but not another, such as the
existence of a load and the amount of permissible payments under a distribution
plan, which may be considered to create a preference. On all such matters,
shareholders vote as a class, and not by series. Service Class shares are sold
to investors who purchase their shares through an entity that has signed a
Dealer Agreement with the Distributor for such shares. Retail Class shares are
sold to all other investors by dealers for certain retirement plans, through
other special programs and to those who contact the Fund directly or purchase
shares through an entity that has signed an agreement to offer the Retail Class
shares (e.g., Charles Schwab & Co., Inc. or Fidelity Brokerage Services).
Service Class shares have higher 12b-1 fees than the Retail Class shares and
unlike Retail Class shares are subject to a sales load. These differences in
fees and charges may affect performance. Investors may inquire about classes of
shares not offered by this prospectus by calling 1-800-GABELLI.
Shareholders have the right to vote on the election of Trustees and on any
and all matters which, by law or the provisions of the Trust's Declaration of
Trust, they may be entitled to vote. All shares of the Trust have equal voting
rights and will be voted in the aggregate, and not by class or series, except
where voting by class or series is required by law or where the matter involved
affects only one class.
30
<PAGE> 31
Under Massachusetts law, shareholders could, under certain circumstances,
be held personally liable for the obligations of the Trust. However, the Trust
Agreement disclaims shareholder liability for acts or obligations of the Trust
and requires that notice of such disclaimer be given in each agreement,
obligation or instrument entered into or executed by the Trust or a Trustee on
behalf of the Trust. The Trust Agreement provides for indemnification from the
Trust's property for all losses and expenses of any shareholder held personally
liable for the obligations of the Trust. Thus, the risk of shareholders
incurring financial loss on account of shareholder liability is limited to
circumstances in which the Trust itself would be unable to meet its obligations,
a possibility which management believes is remote. Upon payment of any liability
incurred by the Trust, the shareholder paying such liability will be entitled to
reimbursement from the general assets of the Trust. The Trustees intend to
conduct the operations of the Trust in such a way so as to avoid, as far as
possible, ultimate liability of the shareholders for liabilities of the Trust.
As described under "Management of the Funds" in the Statement of Additional
Information, the Funds ordinarily will not hold shareholder meetings; however,
the Trustees are required to call a meeting for the purpose of considering the
removal of persons serving as Trustee if requested in writing to do so by the
holders of not less than 10% of the outstanding shares of the Trust. Under the
Trust Agreement, shareholders of record of not less than two-thirds of the
outstanding shares of the Trust may remove a Trustee either by declaration in
writing or by vote cast in person or by proxy at a meeting called for such
purpose. In connection with the calling of such shareholder meetings,
shareholders will be provided with communication assistance.
As the year 2000 approaches, an issue has emerged regarding how existing
application software programs and operating systems can accommodate this date
value. Failure to adequately address this issue could have potentially serious
repercussions. The Adviser is in the process of working with the Funds' service
providers to prepare for the year 2000. Based on information currently
available, the Adviser does not expect that the Funds will incur significant
operating expenses or be required to incur material costs to be year 2000
compliant. Although the Adviser does not anticipate that the year 2000 issue
will have a material impact on the Funds' ability to provide service at current
levels, there can be no assurance that steps taken in preparation for the year
2000 will be sufficient to avoid any adverse impact on the Funds.
State Street Bank and Trust Company and its affiliate, Boston Financial
Data Services, maintain a record of share ownership and send to shareholders
confirmations and statements of account.
Shareholder inquiries may be made by writing to The Gabelli Westwood Funds
at One Corporate
Center, Rye, New York 10580-1434, calling 1-800-GABELLI or through the Internet
http://www.gabelli.com/westwood, or email: [email protected].
Upon request, Gabelli & Company, Inc. will provide, without a charge, a
paper copy of this Prospectus to investors or their representatives who received
this Prospectus in an electronic format.
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS, THE STATEMENT OF ADDITIONAL INFORMATION, AND IN THE FUNDS' OFFICIAL
SALES LITERATURE IN CONNECTION WITH THE OFFER OF FUND SHARES, AND, IF GIVEN OR
MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE FUNDS, ITS INVESTMENT ADVISER, DISTRIBUTOR, OR ANY
AFFILIATE THEREOF. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER IN ANY STATE IN
WHICH, OR TO ANY PERSON TO WHOM, SUCH OFFERING MAY NOT LAWFULLY BE MADE.
31
<PAGE> 32
THE GABELLI WESTWOOD FUNDS
One Corporate Center
Rye, New York 10580-1434
http://www.gabelli.com/westwood
GENERAL AND ACCOUNT INFORMATION:
1-(800) GABELLI
1-(800) 422-3554
Fax 1-(914) 921-5118
INVESTMENT ADVISER
Gabelli Advisers, Inc.
One Corporate Center
Rye, New York 10580-1434
INVESTMENT SUB-ADVISER
Westwood Management Corporation
300 Crescent Court
Suite 1320
Dallas, TX 75201
DISTRIBUTOR
Gabelli & Company, Inc.
One Corporate Center
Rye, New York 10580-1434
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
1177 Avenue of the Americas
New York, New York 10036
LEGAL COUNSEL
Battle Fowler LLP
75 East 55th Street
New York, New York 10022
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Fee Table............................. 2
Financial Highlights.................. 4
Description of the Funds and Risk
Considerations...................... 6
Management of the Funds............... 21
Purchase of Shares.................... 23
Redemption of Shares.................. 25
Exchange of Funds Shares.............. 27
Retirement Plans...................... 28
Dividends, Distributions and Taxes.... 28
Performance Information............... 29
General Information................... 30
</TABLE>
THE
GABELLI
WESTWOOD
FUNDS
EQUITY FUND
BALANCED FUND
SMALLCAP EQUITY FUND
MIGHTY MITES(SM) FUND
REALTY FUND
INTERMEDIATE BOND FUND
RETAIL CLASS
PROSPECTUS
----------------------------------------------------
MAY 1, 1998
----------------------------------------------------
<PAGE> 33
THE GABELLI WESTWOOD FUNDS
PART B
(STATEMENT OF ADDITIONAL INFORMATION)
May 1, 1998
The Gabelli Westwood Funds (the "Trust") is an open-end, diversified,
management investment company, known as a mutual fund, which currently consists
of six separate investment portfolios referred to as the Gabelli Westwood
Equity Fund (the "Equity Fund"), the Gabelli Westwood SmallCap Equity Fund (the
"SmallCap Fund"), the Gabelli Westwood Mighty MitesSM Fund (the "Mighty MitesSM
Fund"), the Gabelli Westwood Realty Fund (the "Realty Fund"), the Gabelli
Westwood Intermediate Bond Fund (the "Intermediate Bond Fund") and the Gabelli
Westwood Balanced Fund (the "Balanced Fund") (collectively, the "Funds"). Each
Fund is authorized to issue two separate classes of shares, referred to as the
"Service Class" and the "Retail Class". The SmallCap Fund, Mighty MitesSM Fund
and Realty Fund are currently offering only Retail Class shares.
This Statement of Additional Information provides information about both
classes of shares. It is not a prospectus, but supplements, and should be read
in conjunction with the Funds' current Prospectus, dated May 1, 1998, as it may
be revised from time to time. To obtain a copy of the Funds' Prospectus,
please write to the Funds at One Corporate Center, Rye, New York 10580, call
(800) GABELLI (1-800-422-3554) or via Internet http://www.gabelli.com/westwood.
Gabelli Advisers, Inc. (formerly Teton Advisers LLC) (the "Adviser")
serves as the Funds' investment adviser and administrator. Westwood Management
Corporation (the "Sub-Adviser") serves as sub-adviser to the Funds, with the
exception of the Mighty MitesSM Fund for which the Adviser is responsible for
the management of such Fund's portfolio.
Gabelli & Company, Inc. serves as the Funds' distributor (the
"Distributor").
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
<S> <C>
General Information and History B-2
Investment Objectives and Management Policies B-2
Management of the Funds B-18
Investment Advisory and Other Services B-24
Purchase and Redemption of Shares B-29
Determination of Net Asset Value B-29
Shareholder Services B-29
Dividends, Distributions and Taxes B-30
Performance Information B-34
Information About the Funds B-37
Custodian, Transfer and Dividend Disbursing Agent, Counsel and Independent Accountants B-38
Appendix B-39
Financial Statements B-41
</TABLE>
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<PAGE> 34
GENERAL INFORMATION AND HISTORY
The Adviser, which was organized in 1994, is a registered investment
adviser and is a subsidiary of Gabelli Funds, Inc., which was organized in 1980
and is currently a registered investment adviser to sixteen management
investment companies. The Adviser is a Delaware corporation and was formally
known as Teton Advisers LLC. The business address of Gabelli Funds, Inc. is
One Corporate Center, Rye, New York 10580-1434. GAMCO Investors, Inc.
("GAMCO"), a wholly-owned subsidiary of Gabelli Funds, Inc., acts as investment
adviser for individuals, pension and profit sharing trusts, institutions and
endowments. As of March 31, 1998 GAMCO had aggregate assets in excess of $7.2
billion under management.
On August 20, 1991, the Board of Trustees approved the change in the name
of the Trust from "The Westwood Fund" to "The Westwood Funds" and the name of
the Trust's initial series of shares from "The Westwood Fund" to "Westwood
Equity Fund". In addition, at the same time the Board authorized the
designation of three new series of shares of the Trust, "Westwood Intermediate
Bond Fund", "Westwood Cash Management Fund," and "Westwood Balanced Fund". The
Board authorized the designation of the "Westwood SmallCap Equity Fund" and
"Westwood Realty Fund" series shares of the Trust on February 25, 1997. On
November 18, 1997, the Board of Trustees approved the change in the name of the
Trust from "The Westwood Funds" to "The Gabelli Westwood Funds" and names of
each series to include the name "Gabelli" before the name "Westwood" (i.e.,
"Gabelli Westwood SmallCap Equity Fund"). On November 18, 1997, the Board of
Trustees then authorized the designation of the "Gabelli Westwood Mighty
MitesSM Fund" series of shares of the Trust.
The Trust operates a multi-class structure pursuant to Rule 18f-3 of the
Investment Company Act of 1940 and the Board of Trustees has authorized
pursuant thereto the designation of two separate classes of shares in each Fund
referred to as "Retail Class" and "Service Class" shares.
The Cash Management Fund has not commenced operations.
INVESTMENT OBJECTIVES AND MANAGEMENT POLICIES
THE FOLLOWING INFORMATION SUPPLEMENTS AND SHOULD BE READ IN CONJUNCTION
WITH THE SECTION IN THE FUNDS' PROSPECTUS ENTITLED "DESCRIPTION OF THE FUNDS
AND RISK CONSIDERATIONS".
The Funds will not (i) invest in real estate limited partnerships (except
the Realty Fund which may also invest in publicly traded master limited
partnerships), (ii) engage in the short-selling of securities, (iii) engage in
arbitrage, or (iv) as a fundamental policy, issue senior securities (collateral
arrangements with regard to initial and variation margin on futures and options
transactions shall not be considered the issuance of a senior security), except
as permitted by Investment Restriction No. 7 set forth under "Investment
Restrictions" below. However, the
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Mighty MitesSM Fund may engage in short-selling of securities or in arbitrage,
although there is no present intention to do so.
CERTIFICATES OF DEPOSIT (ALL FUNDS). Domestic commercial banks organized under
Federal law are supervised and examined by the Comptroller of the Currency and
are required to be members of the Federal Reserve System and to have their
deposits insured by the Federal Deposit Insurance Corporation (the "FDIC").
Domestic banks organized under state law are supervised and examined by state
banking authorities but are members of the Federal Reserve System only if they
elect to join. In addition, state banks whose certificates of deposit (CDs)
may be purchased by the Funds are insured by the FDIC (although such insurance
may not be of material benefit to a Fund, depending upon the principal amount
of the CDs of each bank held by the Fund) and are subject to Federal
examination and to a substantial body of Federal law and regulation. As a
result of Federal or state laws and regulations, domestic banks, among other
things, generally are required to maintain specified levels of reserves,
limited in the amounts which they can loan to a single borrower and subject to
other regulations designed to promote financial soundness.
The Funds may purchase CDs issued by banks, savings and loan associations
and similar institutions with less than one billion dollars in assets, which
have deposits insured by the Bank Insurance Fund or the Savings Association
Insurance Fund administered by the FDIC, provided a Fund purchases any such CD
in a principal amount of no more than $100,000, which amount would be fully
insured by the FDIC. Interest payments on such a CD are not insured by the
FDIC. A Fund would not own more than one such CD per issuer.
INVESTMENT COMPANY SECURITIES (ALL FUNDS). Each Fund may purchase securities
of investment companies in the open market where no commission except the
ordinary broker's commission is paid, which purchases are limited to a maximum
of (i) 3% of the total voting stock of any one closed-end investment company,
(ii) 5% of the Fund's net assets with respect to any one closed-end investment
company and (iii) 10% of the Fund's net assets in the aggregate, or may receive
such securities as part of a merger or consolidation.
REAL ESTATE INVESTMENT SECURITIES (ALL FUNDS). The Funds may invest in REITs
and real estate operating companies, as well as other types of real estate
securities such as publicly traded common stock, preferred stock, limited
partnerships (including real estate master limited partnerships), rights or
warrants to purchase common stock or convertible securities of corporations
engaged in real estate development or companies whose financial prospects are
deemed by the Adviser to be real estate oriented and consistent with the Fund's
investment objectives. Investing in REITs involves certain unique risks in
addition to those risks associated with investing in the real estate industry
in general. Although the Funds will not invest directly in real estate, the
Funds may invest in securities of issuers primarily engaged in or related to
the real estate industry. Therefore, an investment in REITs or other real
estate securities is subject to certain risks associated with the direct
ownership of real estate and with the real estate industry in general. These
risks include, among others: possible declines in the value of real estate;
risks related to general and local economic conditions; possible lack of
availability of mortgage funds;
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<PAGE> 36
overbuilding; extended vacancies of properties; increases in competition,
property taxes and operating expenses; changes in zoning laws; costs resulting
from the clean-up of, and liability to third parties for damages resulting
from, environmental problems; casualty or condemnation losses; uninsured
damages from floods, earthquakes or other natural disasters; limitations on and
variations in rents; and changes in interest rates. To the extent that assets
underlying the REITs' investments are concentrated geographically, by property
type or in certain other respects, the REITs may be subject to certain of the
foregoing risks to a greater extent. Equity REITs may be affected by changes
in the value of the underlying property owned by the REITs, while mortgage
REITs may be affected by the quality of any credit extended. REITs are
dependent upon management skills, are not diversified, and are subject to heavy
cash flow dependency, default by borrowers and self-liquidation. REITs are
also subject to the possibilities of failing to qualify for tax-free
pass-throughs of income under the U.S. Internal Revenue Code and failing to
maintain their exemptions from registration under the 1940 Act.
REITs (especially mortgage REITs) are also subject to interest rate risks.
When interest rates decline, the value of a REIT's investment in fixed rate
obligations can be expected to rise. Conversely, when interest rates rise, the
value of a REIT's investment in fixed rate obligations can be expected to
decline. In contrast, as interest rates on adjustable rate mortgage loans are
reset periodically, yields on a REIT's investment in such loans will gradually
align themselves to reflect changes in market interest rates, causing the value
of such investments to fluctuate less dramatically in response to interest rate
fluctuations than would investments in fixed rate obligations.
Investing in REITs involves risks similar to those associated with
investing in small capitalization companies. REITs may have limited financial
resources, may trade less frequently and in a limited volume and may be subject
to more abrupt or erratic price movements than larger company securities.
CALL AND PUT OPTIONS ON SECURITIES (THE EQUITY FUND, BALANCED FUND, SMALLCAP
FUND, MIGHTY MITESSM FUND AND REALTY FUND). A Fund may engage in options
transactions, such as purchasing call and put options on securities and writing
covered call and put options on securities. The principal reason for writing
covered call options is to realize, through the receipt of premiums, a greater
return than would be realized on a Fund's portfolio securities alone. In
return for a premium, the writer of a covered call option forfeits the right to
any appreciation in the value of the underlying security above the strike price
for the life of the option (or until a closing purchase transaction can be
effected). Nevertheless, the call writer retains the risk of a decline in the
price of the underlying security. Similarly, the principal reason for writing
covered put options is to realize income in the form of premiums. The writer
of a covered put option accepts the risk of a decline in the price of the
underlying security. The size of the premiums that a Fund may receive may be
adversely affected as new or existing institutions, including other investment
companies, engage in or increase their option-writing activities.
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<PAGE> 37
Options written ordinarily will have expiration dates between one and nine
months from the date written. The exercise price of the options may be below,
equal to or above the market values of the underlying securities at the times
the options are written. In the case of call options, these exercise prices
are referred to as "in-the-money," "at-the-money" and "out-of-the money,"
respectively. A Fund may write (a) in-the-money call options when the Adviser
expects that the price of the underlying security will remain stable or decline
moderately during the option period, (b) at-the-money call options when the
Adviser expects that the price of the underlying security will remain stable or
advance moderately during the option period and (c) out-of-the-money call
options when the Adviser expects that the premiums received from writing the
call option plus the appreciation in market price of the underlying security up
to the exercise price will be greater than the appreciation in the price of the
underlying security alone. In these circumstances, if the market price of the
underlying security declines and the security is sold at this lower price, the
amount of any realized loss will be offset wholly or in part by the premium
received. Out-of-the-money, at-the-money and in-the-money put options (the
reverse of call options as to the relation of exercise price to market price)
may be utilized in the same market environments that such call options are used
in equivalent transactions.
So long as a Fund's obligation as the writer of an option continues, the
Fund may be assigned an exercise notice by the broker-dealer through which the
option was sold, requiring the Fund to deliver, in the case of a call, the
underlying security against payment of the exercise price. This obligation
terminates when the option expires or the Fund effects a closing purchase
transaction. A Fund can no longer effect a closing purchase transaction with
respect to an option once it has been assigned an exercise notice. To secure
its obligation to deliver the underlying security when it writes a call option,
or to pay for the underlying security when it writes a put option, a Fund will
be required to deposit in escrow the underlying security or other assets in
accordance with the rules of the Options Clearing Corporation (the "Clearing
Corporation") and of the national securities exchange on which the option is
written.
An options position may be closed out only where there exists a secondary
market for an option of the same series on a recognized national securities
exchange or in the over-the-counter market. As a result, and because of
current trading conditions, the Funds expect to purchase only call or put
options issued by the Clearing Corporation. The Funds expect to write options
on national securities exchanges and in the over-the-counter market.
While it may choose to do otherwise, a Fund generally purchases or writes
only those options for which the Adviser believes there is an active secondary
market so as to facilitate closing transactions. There is no assurance that
sufficient trading interest to create a liquid secondary market on a securities
exchange will exist for any particular option or at any particular time, and
for some options no such secondary market may exist. A liquid secondary market
in an option may cease to exist for a variety of reasons. In the past, for
example, higher than anticipated trading activity or order flow, or other
unforeseen events, at times have rendered certain of the facilities of the
Clearing Corporation and the national securities exchanges inadequate and
resulted in the institution of special procedures, such as trading rotations,
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<PAGE> 38
restrictions on certain types of orders or trading halts or suspensions in one
or more options. There can be no assurance that similar events, or events that
may otherwise interfere with the timely execution of customers' orders, will
not recur. In such event, it might not be possible to effect closing
transactions in particular options. If as a covered call option writer a Fund
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.
A covered call option written by the Fund, which is a call option with
respect to which the Fund owns the underlying security, exposes the Fund during
the term of the option to possible loss of opportunity to realize appreciation
in the market price of the underlying security or to possible continued holding
of a security which might otherwise have been sold to protect against
depreciation in the market price of the security. A covered put option sold by
a Fund exposes the Fund during the term of the option to a decline in price of
the underlying security. A put option sold by a Fund is covered when, among
other things, cash, cash equivalents or U.S. Government securities or other
liquid debt securities are placed in a segregated account to fulfill the
obligation undertaken.
A Fund treats options in respect of specific securities that are not
traded on a national securities exchange, and the underlying security, as not
readily marketable and, therefore, subject to the limitations under "Certain
Fundamental Policies" below.
STOCK INDEX OPTIONS (THE EQUITY FUND, THE BALANCED FUND, THE SMALLCAP FUND, THE
MIGHTY MITESSM FUND AND THE REALTY FUND). A Fund may purchase and write put
and call options on stock indexes listed on national securities exchanges in
order to realize its investment objectives or for the purpose of hedging its
portfolio. A stock index fluctuates with changes in the market values of the
stocks included in the index. Some stock index options are based on a broad
market index such as the New York Stock Exchange Composite Index, or a narrower
market index such as the Standard & Poor's 100. Indexes are also based on an
industry or market segment such as the American Stock Exchange Oil and Gas
Index or the Computer and Business Equipment Index.
Options on stock indexes are similar to options on stock except that (a)
the expiration cycles of stock index options are monthly, while those of stock
options are currently quarterly, and (b) the delivery requirements are
different. Instead of giving the right to take or make delivery of stock at a
specified price, an option on a stock index gives the holder the right to
receive a cash "exercise settlement amount" equal to (i) the amount, if any, by
which the fixed exercise price of the option exceeds (in the case of a put) or
is less than (in the case of a call) the closing value of the underlying index
on the date of exercise, multiplied by (ii) a fixed "index multiplier."
Receipt of this cash amount will depend upon the difference between the closing
level of the stock index upon which the option is based and the exercise price
of the option. The amount of cash received will be equal to such difference
between the closing price of the index and the exercise price of the option
expressed in dollars times a specified multiple. The writer of the option is
obligated, in return for the premium received, to make delivery of this amount.
The
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<PAGE> 39
writer 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 effectiveness of purchasing or writing stock index
options will depend upon the extent to which price movements in a Fund's
portfolio correlate with price movements of the stock index selected. Because
the value of an index option depends upon movements in the level of the index
rather than the price of a particular stock, whether the Fund will realize a
gain or loss from the purchase or writing of options on an index depends upon
movements in the level of stock prices in the stock market generally or, in the
case of certain indexes, in an industry or market segment, rather than
movements in the price of a particular stock. Accordingly, successful use by a
Fund of options on stock indexes is subject to the Adviser's ability to predict
correctly movements in the direction of the stock market generally or of a
particular industry. This requires different skills and techniques than
predicting changes in the price of individual stocks.
A Fund engages in stock index option transactions only when determined by
the Adviser to be consistent with the Fund's investment objectives. There can
be no assurance that the use of these portfolio strategies will be successful.
When a Fund writes an option on a stock index, the Fund will place in a
segregated account with its custodian, cash or U.S. Government securities in an
amount at least equal to the market value of the underlying stock index and
will maintain the account while the option is open or the Fund will otherwise
cover the transaction. Although a Fund intends to purchase or write only those
stock index options for which there appears to be an active secondary market,
there is no assurance that a liquid secondary market will exist for any
particular option at any specific time. In such event, it may not be possible
to effect closing transactions with respect to certain stock index options,
with the result that a Fund would have to exercise those options which it has
purchased in order to realize any profit. With respect to stock index options
written by a Fund, the inability to enter into a closing transaction may result
in material losses to the Fund. For example, because a Fund must maintain a
covered position with respect to any call option it writes, the Fund may not
sell the underlying securities used as cover during the period it is obligated
under an option. This requirement may impair the Fund's ability to sell a
portfolio security or make an investment at a time when such a sale or
investment might be advantageous.
FUTURES TRANSACTIONS -- IN GENERAL (ALL FUNDS). In connection with its futures
transactions, a Fund will establish and maintain at its custodian bank or
qualified futures commission merchant a segregated account consisting of cash
or other high quality liquid securities as determined by the Board of Trustees
in an amount generally equal to the market value of the underlying commodity
less any amount deposited as margin. The segregation of such assets will not
have the effect of limiting a Fund's ability to otherwise invest those assets.
Initially, when purchasing or selling futures contracts, a Fund will be
required to deposit with its custodian in the broker's name an amount of cash
or cash equivalents equal to approximately 5% 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 members of such exchange or board of trade may impose
their own higher requirements. This amount is known as "initial
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<PAGE> 40
margin" and is in the nature of a performance bond or good faith deposit on the
contract which is returned to a Fund upon termination of the futures position,
assuming all contractual obligations have been satisfied. Subsequent payments,
known as "variation margin," to and from the broker will be made daily as the
price of the index underlying the futures contract fluctuates, making the long
and short positions in the futures contract more or less valuable, a process
known as "marking-to-market." At any time prior to the expiration of a futures
contract, a Fund may elect to close the position by taking an opposite position
at the then prevailing price, which will operate to terminate the Fund's
existing position in the contract.
Although a Fund will intend to purchase or sell futures contracts only if
there is an active market for such contracts, no assurance can be given that a
liquid market will exist for any particular contract at any particular time.
Many futures exchanges and boards of trade limit the amount of fluctuation
permitted in futures contract prices during a single trading day. Once the
daily limit has been reached in a particular contract, no trades may be made
that day at a price beyond that limit. Futures contract prices could move to
the daily limit for several consecutive trading days with little or no trading,
thereby preventing prompt liquidation of futures positions and potentially
subjecting a Fund to substantial losses. If it is not possible or a Fund
determines not to close a futures position in anticipation of adverse price
movements, the Fund will be required to make daily cash payments of variation
margin. In such circumstances, an increase in the value of the portion of the
portfolio being hedged, if any, may offset partially or completely losses on
the futures contract. However, no assurance can be given that the price of the
securities being hedged will correlate with the price movements in a futures
contract and thus provide an offset to losses on the futures contract.
In addition, due to the risk of an imperfect correlation between
securities in the Fund's portfolio that are the subject of a hedging
transaction and the futures contract used as a hedging device, it is possible
that the hedge will not be fully effective in that, for example, losses on the
portfolio securities may be in excess of gains on the futures contract or
losses on the futures contract may be in excess of gains on the portfolio
securities that were the subject of the hedge. In futures contracts based on
indexes, the risk of imperfect correlation increases as the composition of the
Fund's portfolio varies from the composition of the index. In an effort to
compensate for the imperfect correlation of movements in the price of the
securities being hedged and movements in the price of futures contracts, a Fund
may buy or sell futures contracts in a greater or lesser dollar amount than the
dollar amount of the securities being hedged if the historical volatility of
the futures contract has been less or greater than that of the securities.
Such "over hedging" or "under hedging" may adversely affect a Fund's net
investment results if market movements are not as accurately anticipated when
the hedge is established.
INTEREST RATE FUTURES CONTRACTS (THE BALANCED FUND AND THE INTERMEDIATE BOND
FUND). These Funds may purchase and sell interest rate futures contracts
("futures contracts") as a hedge against changes in interest rates. A futures
contract is an agreement between two parties to buy and sell a security for a
set price on a future date. Futures contracts are traded on designated
"contracts markets" which, through their clearing corporations, guarantee
performance of the
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<PAGE> 41
contracts. Currently, there are futures contracts based on securities such as
long-term U.S. Treasury bonds, U.S. Treasury notes, GNMA Certificates and
three-month U.S. Treasury bills.
Generally, if market interest rates increase, the value of outstanding
debt securities declines (and vice versa). Entering into a futures contract
for the sale of securities has an effect similar to the actual sale of
securities, although the sale of the futures contract might be accomplished
more easily and quickly. For example, if a Fund holds long-term U.S.
Government securities and the Adviser anticipates a rise in long-term interest
rates, it could, in lieu of disposing of its portfolio securities, enter into
futures contracts for the sale of similar long-term securities. If rates
increased and the value of the Fund's portfolio securities declined, the value
of the Fund's futures contracts would increase, thereby protecting the Fund by
preventing net asset value from declining as much as it otherwise would have.
Similarly, entering into futures contracts for the purchase of securities has
an effect similar to actual purchase of the underlying securities, but permits
the continued holding of securities other than the underlying securities. For
example, if the Adviser expects long-term interest rates to decline, the Fund
might enter into futures contracts for the purchase of long-term securities, so
that it could gain rapid market exposure that may offset anticipated increases
in the cost of securities it intends to purchase, while continuing to hold
higher yielding short-term securities or waiting for the long-term market to
stabilize.
STOCK INDEX FUTURES CONTRACTS (THE EQUITY FUND, THE BALANCED FUND, THE SMALLCAP
FUND, THE MIGHTY MITESSM FUND AND THE REALTY FUND). These Funds may enter into
stock index futures contracts in order to protect the value of their common
stock investments. A stock index futures contract is an agreement in which one
party agrees to deliver to the other an amount of cash equal to a specific
dollar amount times the difference between the value of a specific stock index
at the close of the last trading day of the contract and the price at which the
agreement is made. As the aggregate market value of the stocks in the index
changes, the value of the index also will change. In the event that the index
level rises above the level at which the stock index futures contract was sold,
the seller of the stock index futures contract will realize a loss determined
by the difference between the two index levels at the time of expiration of the
stock index futures contract, and the purchaser will realize a gain in that
amount. In the event the index level falls below the level at which the stock
index futures contract was sold, the seller of the stock index futures contract
will realize a loss determined by the difference between the two index levels
at the time of expiration of the stock index futures contract, and the
purchaser will realize a gain in that amount. In the event the index level
falls below the level at which the stock index futures contract was sold, the
seller will recognize a gain determined by the difference between the two index
levels at the expiration of the stock index futures contract, and the purchaser
will realize a loss. Stock index futures contracts expire on a fixed date,
currently one to seven months from the date of the contract, and are settled
upon expiration of the contract.
The Funds intend to utilize stock index futures contracts only for the
purpose of attempting to protect the value of their common stock portfolios in
the event of a decline in stock prices and, therefore, usually will be sellers
of stock index futures contracts. This risk management strategy is an
alternative to selling securities in a portfolio and investing in money market
instruments.
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Also, stock index futures contracts may be purchased to protect a Fund against
an increase in prices of stocks which the Fund intends to purchase. If a Fund
is unable to invest its cash (or cash equivalents) in stock in an orderly
fashion, the Fund could purchase a stock index futures contract which may be
used to offset any increase in the price of the stock. However, it is possible
that the market may decline instead, resulting in a loss on the stock index
futures contract. If a Fund then concludes not to invest in stock at that
time, or if the price of the securities to be purchased remains constant or
increases, the Fund will realize a loss on the stock index futures contract
that is not offset by a reduction in the price of securities purchased. The
Funds also may buy or sell stock index futures contracts to close out existing
futures positions.
A Fund will intend to purchase and sell futures contracts on the stock
index for which it can obtain the best price with consideration also given to
liquidity. While incidental to its securities activities, a Fund may use stock
index futures as a substitute for a comparable market position in the
underlying securities.
There can be no assurance of a Fund's successful use of stock index
futures as a hedging device. In addition to the possibility that there may be
an imperfect correlation, or no correlation at all, between movements in the
stock index futures and portion of the portfolio being hedged, the price of
stock index futures may not correlate perfectly with the movement in the stock
index because of certain market distortions. First, all participants in the
futures market are subject to margin deposit and maintenance requirements.
Rather than meeting additional margin deposit requirements, investors may close
futures contracts through offsetting transactions which would distort the
normal relationship between the index and futures markets. Secondly, from the
point of view of speculators, the deposit requirements in the futures market
are less onerous than the margin requirements in the securities market.
Therefore, increased participation by speculators in the futures market also
may cause temporary price distortions. Because of the possibility of price
distortions in the futures market and the imperfect correlation between
movements in the stock index and movements in the price of stock index futures,
a correct forecast of general market trends by the Adviser still may not result
in a successful hedging transaction.
Successful use of stock index futures by a Fund also is subject to the
Adviser's ability to predict correctly movements in the direction of the
market. For example, if a Fund has hedged against the possibility of a decline
in the market adversely affecting stocks held in its portfolio and stock prices
increase instead, a Fund will lose part or all of the benefit of the increased
value of its stocks which it has hedged because it will have offsetting losses
in its futures positions. In addition, in such situations, if a Fund has
insufficient cash, it may have to sell securities to meet daily variation
margin requirements. Such sales of securities may be, but will not necessarily
be, at increased prices which reflect the rising market. A Fund may have to
sell securities at a time when it may be disadvantageous to do so.
OPTIONS ON FUTURES (ALL FUNDS). The Funds may purchase and write call and put
options on futures contracts which are traded on a United States or foreign
exchange or board of trade. An option on a futures contract gives the
purchaser the right, in return for the premium paid, to
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assume a position in a future contract at a specified exercise price at any
time during the option period. Upon exercise of the option, the writer of the
option is obligated to convey the appropriate futures position to the holder of
the option. If an option is exercised on the last trading day before the
expiration date of the option, a cash settlement will be made in an amount
equal to the difference between the closing price of the futures contract and
the exercise price of the option.
The Funds may use options on futures contracts solely for bona fide
hedging or other appropriate risk management purposes. If a Fund purchases a
call (put) option on a futures contract, it benefits from any increase
(decrease) in the value of the futures contract, but is subject to the risk of
decrease (increase) in value of the futures contract. The benefits received
are reduced by the amount of the premium and transaction costs paid by a Fund
for the option. If market conditions do not favor the exercise of the option,
a Fund's loss is limited to the amount of such premium and transaction costs
paid by the Fund for the option.
If a Fund writes a call (put) option on a futures contract, the Fund
receives a premium but assumes the risk of a rise (decline) in value in the
underlying futures contract. If the option is not exercised, a Fund gains the
amount of the premium, which may partially offset unfavorable changes due to
interest rate or currency exchange rate fluctuations in the value of securities
held or to be acquired for the Fund's portfolio. If the option is exercised, a
Fund will incur a loss, which will be reduced by the amount of the premium it
receives. However, depending on the degree of correlation between changes in
the value of its portfolio securities (or the currency in which they are
denominated) and changes in the value of futures positions, a Fund's losses
from writing options on futures may be partially offset by favorable changes in
the value of portfolio securities or in the cost of securities to be acquired.
The holder or writer of an option on futures contracts may terminate its
position by selling or purchasing an offsetting option of the same series.
There is no guarantee that such closing transactions can be effected. A Fund's
ability to establish and close out positions on such options will be subject to
the development and maintenance of a liquid market.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS (ALL FUNDS). The Funds may enter
into forward foreign currency exchange contracts. A forward foreign currency
exchange contract involves an obligation to purchase or sell a specific
currency at a future date, which may be any fixed number of days from the date
of the contract agreed upon by the parties, at a price set at the time of the
contract. These contracts are traded in the interbank market conducted
directly between currency traders (usually large commercial banks) and their
customers. A forward contract generally has no deposit requirement, and no
commissions are charged at any stage for trades.
At the maturity of a forward contract, a Fund may either accept or make
delivery of the currency specified in the contract or, at or prior to maturity,
enter into a closing purchase transaction involving the purchase or sale of an
offsetting contract. Closing purchase transactions
-11-
<PAGE> 44
with respect to forward contracts are usually effected with the currency trader
who is a party to the original forward contract.
The Funds may enter into forward foreign currency exchange contracts in
several circumstances. First, when a Fund enters into a contract for the
purchase or sale of a security denominated in a foreign currency, or when a
Fund anticipates the receipt in a foreign currency of dividend or interest
payments on such a security which it holds, the Fund may desire to "lock in"
the U.S. dollar price of the security or the U.S. dollar equivalent of such
dividend or interest payment, as the case may be. By entering into a forward
contract for the purchase or sale, for a fixed amount of dollars, of the amount
of foreign currency involved in the underlying transactions, a Fund will
attempt to protect itself against an adverse change in the relationship between
the U.S. dollar and the subject foreign currency during the period between the
date on which the security is purchased or sold, or on which the dividend or
interest payment is declared, and the date on which such payments are made or
received.
Additionally, when management of the Fund believes that the currency of a
particular foreign country may suffer a substantial decline against the U.S.
dollar, it may enter into a forward contract to sell, for a fixed amount of
dollars, the amount of foreign currency approximating the value of some or all
of the Fund's portfolio securities denominated in such foreign currency. The
precise matching of the forward contract amounts and the value of the
securities involved will not generally be possible because the future value of
such securities in foreign currencies will change as a consequence of market
movements in the value of those securities between the date on which the
contract is entered into and date it matures. The precise projection of
short-term currency market movements is not possible, and short-term hedging
provides a means of fixing the dollar value of only a portion of the Fund's
foreign assets.
The Funds will not enter into forward contracts or maintain a net exposure
to such contracts where the consummation of the contracts would obligate a Fund
to deliver an amount of foreign currency in excess of the value of the Fund's
portfolio securities or other assets denominated in that currency. The Funds'
custodian will place cash or liquid high grade debt securities into a
segregated account of a Fund in an amount equal to the value of the Fund's
total assets committed to the consummation of forward foreign currency exchange
contracts requiring the Fund to purchase foreign currencies or forward
contracts entered into for non-hedging purposes. If the value of the
securities placed in the segregated account declines, additional cash or
securities will be placed in the account on a daily basis so that the value of
the account will equal the amount of a Fund's commitments with respect to such
contracts.
The Funds generally will not enter into a forward contract with a term of
greater than one year. Using forward contracts to protect the value of a
Fund's portfolio securities against a decline in the value of a currency does
not eliminate fluctuations in the underlying prices of the securities. It
simply establishes a rate of exchange which a Fund can achieve at some future
point in time.
-12-
<PAGE> 45
While the Funds will enter into forward contracts to reduce currency
exchange rate risks, transactions in such contracts involve certain other
risks. Thus, while a Fund may benefit from such transactions, unanticipated
changes in currency prices may result in a poorer overall performance for a
Fund than if it had not engaged in any such transactions. Moreover, there may
be imperfect correlation between a Fund's portfolio holdings of securities
denominated in a particular currency and forward contracts entered into by the
Fund. Such imperfect correlation may prevent a Fund from achieving a complete
hedge or may expose the Fund to risk of foreign exchange loss.
SHORT SALES AGAINST THE BOX (MIGHTY MITESSM FUND). The Mighty MitesSM Fund,
although there is not a present intention to do so, may sell securities "short
against the box." While a short sale is the sale of a security that the Mighty
MitesSM Fund does not own, it is "Against the box" if at all times when the
short position is open the Mighty MitesSM Fund owns an equal amount of
securities or securities convertible into, or exchangeable without further
consideration for, securities of the same issue as the securities sold short.
In a short sale, the Fund does not immediately deliver the securities sold or
receive the proceeds from the sale.
The Mighty MitesSM 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 Mighty MitesSM Fund or
security convertible into, or exchangeable for, the security, or when the
Mighty MitesSM Fund does not want to sell the security it owns, because among
other reasons, it wishes to defer recognition of gain or loss for U.S. federal
income tax purposes. The Mighty MitesSM 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 Mighty MitesSM Fund, because the
Mighty MitesSM Fund may want to continue to receive interest and dividend
payments on securities in its portfolio that are convertible into the
securities sold short.
LENDING PORTFOLIO SECURITIES (ALL FUNDS). To a limited extent, each Fund may
lend its portfolio securities to brokers, dealers and other financial
institutions, provided it receives cash collateral which at all times is
maintained in an amount equal to at least 100% of the current market value of
the securities loaned. By lending its portfolio securities, a Fund can
increase its income through the investment of the cash collateral. For the
purposes of this policy, the Funds consider collateral consisting of U.S.
Government securities or irrevocable letters of credit issued by banks whose
securities meet the standards for investment by the Funds to be the equivalent
of cash. Such loans may not exceed 33- 1/3% of a Fund's total assets. From
time to time, a Fund may return to the borrower and/or a third party which is
unaffiliated with the Fund, and which is acting as a "placing broker," a part
of the interest earned from the investment of collateral received for
securities loaned.
The Securities and Exchange Commission currently requires that the
following conditions must be met whenever a Fund's portfolio securities are
loaned: (1) the Fund must receive at least 100% cash collateral from the
borrower; (2) the borrower must increase such collateral whenever
-13-
<PAGE> 46
the market value of the securities rises above the level of such collateral;
(3) the Fund must be able to terminate the loan at any time; (4) the Fund must
receive reasonable interest on the loan, as well as any dividends, interest or
other distributions on the loaned securities, and any increase in market value;
(5) the Fund may pay only reasonable custodian fees in connection with the
loan; and (6) while voting rights on the loaned securities may pass to the
borrower, the Funds' Trustees must terminate the loan and regain the right to
vote the securities if a material event adversely affecting the investment
occurs. These conditions may be subject to future modification.
Such loans will be terminable at any time upon specified notice. A Fund
might experience risk of loss if the institution with which it has engaged in a
portfolio loan transaction breaches its agreement with the Fund.
RULE 144A SECURITIES (ALL FUNDS). The Funds have adopted fundamental policies
with respect to investments in illiquid securities (see Investment Restrictions
Nos. 10 and 11 below). Historically, illiquid securities have included
securities subject to contractual or legal restrictions on resale because they
have not been registered under the Securities Act of 1933, as amended (the
"Securities Act"), securities that are otherwise not readily marketable and
repurchase agreements having a maturity of longer than seven days. Securities
that have not been registered under the Securities Act are referred to as
private placements or restricted securities and are purchased directly from the
issuer or in the secondary market. Mutual funds do not typically hold a
significant amount of these restricted or other illiquid securities because of
the potential for delays on resale and uncertainty in valuation. Limitations
on resale may have an adverse effect on the marketability of portfolio
securities and a mutual fund might be unable to dispose of restricted or other
illiquid securities promptly or at reasonable prices and might thereby
experience difficulty satisfying redemptions within seven days. A mutual fund
might also have to register such restricted securities in order to dispose of
them resulting in additional expense and delay. Adverse market conditions
could impede such a public offering of securities.
In recent years, however, a large institutional market has developed for
certain securities that are not registered under the Securities Act, including
repurchase agreements, commercial paper, foreign securities, municipal
securities and corporate bonds and notes. Institutional investors depend on an
efficient institutional market in which the unregistered security can be
readily resold or on an issuer's ability to honor a demand for repayment. The
fact that there are contractual or legal restrictions on resale to the general
public or to certain institutions may not be indicative of the liquidity of
such investments.
Each Fund may invest up to 5% (except for the SmallCap Fund, Mighty
MitesSM Fund and Realty Fund which may invest up to 15%) of its total assets in
restricted securities issued under Section 4(2) of the Securities Act, which
exempts from registration "transactions by an issuer not involving any public
offering". Section 4(2) instruments are restricted in the sense that they can
only be resold through the issuing dealer and only to institutional inventors;
they cannot be resold to the general public without registration. Restricted
securities issued under Section 4(2) of the
-14-
<PAGE> 47
Securities Act will be treated as illiquid and subject to each Fund's
investment restriction on illiquid securities.
The Commission has adopted Rule 144A, which allows a broader institutional
trading market for securities otherwise subject to restriction on resale to the
general public. Rule 144A establishes a "safe harbor" from the registration
requirements of the Securities Act applicable to resales of certain securities
to qualified institutional buyers. The Adviser anticipates that the market for
certain restricted securities such as institutional commercial paper will
expand further as a result of this new regulation and the development of
automated systems for the trading, clearance and settlement of unregistered
securities of domestic and foreign issuers, such as the PORTAL System sponsored
by the National Association of Securities Dealers, Inc. (the "NASD").
Consequently, it is the intent of the Funds to invest, pursuant to procedures
established by the Board of Trustees and subject to applicable investment
restrictions, in securities eligible for resale under Rule 144A which are
determined to be liquid based upon the trading markets for the securities.
The Adviser will monitor the liquidity of restricted securities in a
Fund's portfolio under the supervision of the Trustees. In reaching liquidity
decisions, the Adviser will consider, inter alia, the following factors: (1)
the frequency of trades and quotes for the security over the course of six
months or as determined in the discretion of the Adviser; (2) the number of
dealers wishing to purchase or sell the security and the number of other
potential purchasers over the course of six months or as determined in the
discretion of the Adviser; (3) dealer undertakings to make a market in the
security; (4) the nature of the security and the nature of the marketplace
trades (e.g., the time needed to dispose of the security, the method of
soliciting offers and the mechanics of the transfer); and (5) other factors, if
any, which the Adviser deems relevant. The Adviser will also monitor the
purchase of Rule 144A securities which the trustees consider to be illiquid to
assure that the total of all such Rule 144A securities held by a Fund (except
for the SmallCap Fund, Mighty MitesSM Fund and Realty Fund, which may invest up
to 15%) does not exceed 5% of the Fund's average daily net assets.
INVESTMENT RESTRICTIONS. The Funds have adopted the following restrictions as
fundamental policies. These restrictions cannot be changed without approval by
the holders of a majority (as defined in the Investment Company Act of 1940
(the "Act")) of each Fund's outstanding voting shares. Each Fund, except as
otherwise indicated, may not:
1. Purchase the securities of any issuer if such purchase would cause
more than 5% of the value of its total assets to be invested in securities of
such issuer. This restriction applies only with respect to 75% of each Fund's
total assets.
2. Purchase the securities of any issuer if such purchase would cause the
Fund to hold more than 10% of the outstanding voting securities of such issuer.
This restriction applies only with respect to 75% of each Fund's total assets.
-15-
<PAGE> 48
3. Each Fund, other than the Mighty MitesSM Fund, may not purchase
securities of any company having less than three years' continuous operations
(including operations of any predecessors) if such purchase would cause the
value of a Fund's investments in all such companies to exceed 5% of the value
of its total assets.
4. Purchase or retain the securities of any issuer if the officers or
Trustees of the Funds or the officers or Directors of the Adviser who
individually own beneficially more than 1/2 of 1% of the securities of such
issuer together own beneficially more than 5% of the securities of such issuer.
5. Purchase, hold or deal in commodities or commodity contracts, but the
Funds may engage in transactions involving futures contracts and related
options, including the futures and related options transactions as described in
the Prospectus and Statement of Additional Information.
6. Purchase, hold or deal in real estate, or oil and gas interests, but
the Funds may purchase and sell securities that are secured by real estate and
may purchase and sell securities issued by companies that invest or deal in
real estate.
7. Borrow money or pledge, mortgage or hypothecate its assets, except as
described in the Funds' Prospectus and the Statement of Additional Information
and in connection with entering into futures contracts, but the deposit of
assets in escrow in connection with the writing of covered call options and the
purchase of securities on a when-issued or delayed-delivery basis and
collateral arrangements with respect to initial or variation margins for
futures contracts will not be deemed to be pledges of a Fund's assets.
8. Lend any funds or other assets except through the purchase of a
portion of an issue of publicly distributed bonds, debentures or other debt
securities, or the purchase of bankers' acceptances and commercial paper of
corporations. However, each Fund may lend its portfolio securities in an
amount not to exceed 33-1/3% of the value of its total assets. Any loans of
portfolio securities will be made according to guidelines established by the
Securities and Exchange Commission and the Funds' Trustees.
9. Act as an underwriter of securities of other issuers.
10. The Equity Fund may not enter into repurchase agreements providing
for settlement in more than seven days after notice, or purchase securities
which are not readily marketable, including certain securities which are
subject to legal or contractual restrictions on resale, if, in the aggregate,
more than 10% of the value of the Fund's net assets would be so invested. This
restriction applies to those options in respect of specific securities that are
not traded on a national securities exchange, and the underlying security,
which are not readily marketable.
-16-
<PAGE> 49
11. Each Fund, other than the Equity Fund, may not enter into repurchase
agreements providing for settlement in more than seven days after notice, or
purchase securities which are not readily marketable, if, in the aggregate,
more than 10% (15% for the SmallCap, Mighty MitesSM and Realty Funds) of the
value of a Fund's net assets would be so invested. Included in this category
are "restricted" securities and any other assets for which an active and
substantial market does not exist at the time of purchase or subsequent
valuation. Restricted securities for purposes of this limitation do not
include securities eligible for resale pursuant to Rule 144A of the Securities
Act of 1933 which have been determined to be liquid by the Fund's Board of
Trustees based upon the trading markets for the securities.
12. Enter into time deposits maturing in more than seven days and time
deposits maturing from two business days through seven calendar days will not
exceed 10% of a Fund's total assets.
13. Invest in the securities of a company for the purpose of exercising
management or control, but each Fund will vote the securities it owns in its
portfolio as a shareholder in accordance with its views.
14. Purchase securities on margin, but the Funds may obtain such
short-term credit as may be necessary for the clearance of purchases and sales
of securities and the Funds may make margin payments in connection with
transactions in options and futures.
15. Purchase or sell put and call options, or combinations thereof,
except as set forth in the Prospectus and Statement of Additional Information.
16. Invest more than 25% of its assets in investments in any particular
industry or industries, provided that, when a Fund has adopted a temporary
defensive posture, there shall be no limitation on the purchase of obligations
issued or guaranteed by the U.S. Government, its agencies or instrumentalities
and repurchase agreements in respect of the foregoing.
17. The Equity Fund shall not purchase warrants in excess of 2% of net
assets. (For purposes of this restriction, such warrants shall be valued at
the lower of cost or market, except that warrants acquired by the Equity Fund
in units or attached to securities shall not be included within this 2%
restriction.) The Balanced Fund shall not invest more than 5% of its net
assets in warrants, no more than 2% of which may be invested in warrants which
are not listed on the New York or American Stock Exchanges.
18. Issue senior securities.
The limitations set forth above in Restriction No. 1 do not apply with
respect to securities issued by the U.S. Government, its agencies or
instrumentalities.
-17-
<PAGE> 50
If a percentage restriction is adhered to at the time of investment, a
later increase in percentage resulting from a change in values or assets will
not constitute a violation of such restriction.
MANAGEMENT OF THE FUNDS
Trustees and officers of the Funds, together with information as to their
principal business occupations during at least the last five years, are shown
below. Each Trustee who is deemed to be an "interested person" of the Funds,
as defined in the Act, is indicated by an asterisk.
TRUSTEES AND OFFICERS OF THE FUNDS
ANTHONY J. COLAVITA, (62) TRUSTEE.
President and Attorney at Law in the firm of Anthony J. Colavita, P.C.,
Director of Gabelli Global Series Funds, Inc., Gabelli Investor Funds, Inc.,
The Gabelli Convertible Securities Fund, Inc., Gabelli Equity Series Funds,
Inc., Gabelli Gold Fund, Inc., The Gabelli Value Fund Inc., Gabelli Capital
Series Funds, Inc., Gabelli International Growth Fund, Inc., The Treasurer's
Fund, Inc., and a Trustee of The Gabelli Growth Fund, The Gabelli Money Market
Funds, and The Gabelli Asset Fund. His address is One Corporate Center, Rye,
New York 10580.
JAMES P. CONN, (59) TRUSTEE.
Managing Director/Chief Investment Officer, Financial Security Assurance,
since 1992. Director of Meditrust Corp., First Republic Bank, The Gabelli
Equity Trust Inc. and Gabelli Global Multimedia Trust Inc., Trustee of The
Gabelli Asset Fund and The Gabelli Growth Fund. His address is One Corporate
Center, Rye, New York 10580.
WERNER ROEDER, M.D., (57) TRUSTEE.
Director of Surgery, Lawrence Hospital and practicing private physician.
Director of Gabelli Investor Funds, Inc., Gabelli Gold Fund, Inc., Gabelli
Capital Series Funds, Inc., Gabelli International Growth Fund, Inc., The
Treasurer's Fund, Inc. and Gabelli Global Series Funds, Inc. His address is One
Corporate Center, Rye, New York 10580.
KARL OTTO POHL*, (68) TRUSTEE.
Partner of Sal Oppenheim Jr. & Cie. (private investment bank); Former
President of the Deutsche Bundesbank (Germany's Central Bank) and Chairman of
its Central Bank Council (1980-1991); Currently board member of IBM World Trade
Europe/Middle East/Africa Corp.; Bertelsmann AG; Zurich
Versicherungs-Gesellshaft (insurance); the International Advisory Board of
General Electric Company; the International Council for JP Morgan & Co.; the
Board of
-18-
<PAGE> 51
Supervisory Directors of ROBECo/o Group; and the Supervisory Board of Royal
Dutch (petroleum company); Advisory Director of Unilever N.V. and Unilever
Deutchland; German Governor, International Monetary Fund (1980-1991); Board
Member, Bank for International Settlements (1980-1991); Chairman, European
Economic Community Central Bank Governors (1990-1991); Director/Trustee of all
the funds in the Gabelli family of funds. His address is One Corporate Center,
Rye, New York 10580.
SUSAN M. BYRNE*, (51) TRUSTEE.
President and CEO of Westwood Management Corporation since 1983. Her
address is 300 Crescent Court, Suite 1320, Dallas, TX 75201.
All of the Funds' Trustees were elected at a meeting of shareholders held
on September 30, 1994 except Mr. Pohl, who was elected by the Board of Trustees
on August 8, 1997 to begin serving on the Board on October 6, 1997.
Ordinarily, there will be no further meetings of shareholders for the purpose
of electing Trustees unless and until such time as less than a majority of the
Trustees holding office have been elected by shareholders, at which time the
Trustees then in office will call a shareholders' meeting for the election of
Trustees. Under the Act, shareholders of record of not less than two-thirds of
the Fund's outstanding shares may remove a Trustee through a declaration in
writing or by vote casting person or by proxy at a meeting called for that
purpose. In accordance with the Act and the Trust's Agreement and Declaration
of Trust, the Trustees are required to call a meeting of shareholders for the
purpose of voting upon the question of removal of any such Trustee when
requested in writing to do so by the shareholders of record of not less than
10% of the Trust's outstanding shares.
The Trust does not pay any remuneration to its officers and Trustees other
than fees and expenses to Trustees who are not officers, directors, employees
or holders of 5% or more of the outstanding voting securities of the Adviser,
Sub-Adviser or the Distributor, which totaled for all such Trustees $11,822.42
for the fiscal year ended September 30, 1997. Each Trustee other than Susan
Byrne is paid an annual fee of $2,500 and $250 for each meeting attended.
-19-
<PAGE> 52
<TABLE>
<CAPTION>
COMPENSATION TABLE
Total Compensation
from the Fund and
Name of Person, Aggregate Compensation Fund Complex
Position From the Fund Paid to Trustees*
- --------------- ---------------------- ------------------
<S> <C> <C>
Susan M. Byrne $ 0 $ 0
President
Anthony J. Colavita $3,500 $79,190(13)
Trustee
Karl Otto Pohl $ 875 $85,690(15)
Trustee
Werner Roeder, M.D. $3,500 $21,691(7)
Trustee
James P. Conn $3,500 $45,500(5)
Trustee
</TABLE>
* Represents the total compensation paid to such persons during the
calendar year ended December 31, 1997. The parenthetical number
represents the number of investment companies (including the Fund) from
which such person received compensation that are considered part of the
same fund complex as the Fund, because, among other things, they have a
common investment adviser.
EXECUTIVE OFFICERS OF THE FUNDS NOT LISTED ABOVE
BRUCE N. ALPERT, (46) VICE PRESIDENT AND TREASURER.
General Manager of the Adviser since 1994. Vice President and Chief
Operating Officer of the Investment Advisory Division of Gabelli Funds, Inc.,
an officer of all funds advised by Gabelli Funds, Inc. and its affiliates. His
address is One Corporate Center, Rye, New York 10580.
PATRICIA R. FRAZE, (53) VICE PRESIDENT.
Senior Vice President of the Sub-Adviser, fixed income analyst and
portfolio manager since April 1990. Her address is 855 Third Avenue, New York,
NY 10022.
LYNDA J. CALKIN, (46) VICE PRESIDENT.
Senior Vice President of the Sub-Adviser, small cap portfolio manager
since 1993. Previously, Vice President and Portfolio Manager for Hourglass
Capital Management Inc.
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<PAGE> 53
JAMES E. MCKEE, (33) SECRETARY.
Secretary of the Adviser since 1995. Vice President and General Counsel
of Gabelli Funds, Inc.; Secretary of all Funds advised by Gabelli Funds, Inc.
since August 1995. Vice President and General Counsel of GAMCO Investors Inc.
since 1993. Formerly Branch Chief of the U.S. Securities and Exchange
Commission in New York from 1992 through 1993. Staff attorney with the
Securities and Exchange Commission in New York from 1989 through 1992. His
address is One Corporate Center, Rye, New York 10580.
As of April 28, 1998, the Officers and Trustees of the Funds, as a group,
owned 1.12% of the Gabelli Westwood Intermediate Bond Fund, and 1.25% of the
Gabelli Westwood SmallCap Equity Fund. Susan M. Byrne, Trustee of the Funds,
owned approximately 3.16% of the outstanding shares of the Gabelli Westwood
Realty Fund. Bruce N. Alpert, Vice President and Treasurer of the Funds, owned
approximately 1.58% of the outstanding shares of the Gabelli Westwood Realty
Fund. In the case of Funds other than the aforementioned funds, the Officers
and Trustees of the Funds, as a group, owned less than 1% of each class of such
Funds.
The following persons were known by the Funds to own of record 5% or more
of the outstanding voting securities of any Fund on April 28, 1998:
<TABLE>
<CAPTION>
NAME AND ADDRESS PERCENTAGE
OF HOLDER OF RECORD OF FUND
- ------------------- ----------
<S> <C>
EQUITY FUND
RETAIL CLASS
Charles Schwab & Co., Inc. 33.10%*
Special Custody Account
FBO Ben of Custs
Attn: Mutual Funds
101 Montgomery Street
San Francisco, CA 94104-4122
The Bank of Tokyo Trust Co. TTEE 12.36%*
FBO The Komatsu Dresser Co. Sav. Plan
Pension & Investment
Attn: Melissa Kruppa
1251 Avenue of Americas
New York NY 10020
SERVICE CLASS
Southwest Securities Inc, FBO 7.69%
Kenneth Reiser & Caroline P. Reiser JTWROS
P.O. Box 509002
Dallas, TX 75280-9002
</TABLE>
-21-
<PAGE> 54
<TABLE>
<CAPTION>
NAME AND ADDRESS PERCENTAGE
OF HOLDER OF RECORD OF FUND
- ------------------- ----------
<S> <C>
EQUITY FUND
SERVICE CLASS
Southwest Securities Inc., FBO 7.83%
Larry G. Taylor
ACCT 76817030
P.O. Box 509002
Dallas, TX 75250-9002
BALANCED FUND
Charles Schwab & Co., Inc. 42.25%*
Special Custody Acct
FBO Ben of Custs
Attn: Mutual Funds
101 Montgomery St.
San Francisco, CA 94104-4122
SMALLCAP EQUITY FUND
RETAIL CLASS
Wendel & Co. 55.56%*
A/C659115
c/o Bank of New York
Attn: Ellen Whalen
1 Wall Street
New York, NY 10286
REALTY FUND
RETAIL CLASS
Charles Schwab & Co., Inc. 9.09%
Special Custody Account
FBO Ben of Custs
Attn: Mutual Funds
101 Montgomery Street
San Francisco, CA 94104-4122
Gabelli & Company, Inc. 7.49%
Profit Sharing Plan
Stephen Bondi TTEE
Douglas Jamieson TTEE
One Corporate Center
Rye, New York 10580
INTERMEDIATE BOND FUND
RETAIL CLASS
TCTCO 18.38%
200 Crescent Ct. Suite 1300
Dallas, TX 75201-7838
</TABLE>
-22-
<PAGE> 55
<TABLE>
<CAPTION>
NAME AND ADDRESS PERCENTAGE
OF HOLDER OF RECORD OF FUND
- ------------------- ----------
<S> <C>
INTERMEDIATE BOND FUND
RETAIL CLASS
Southwest Securities, Inc. FBO 27.28%*
Guarantee & Trust Co. Trial Management Agreement
P.O. Box 509 002
Dallas, TX 75250
Westwood Trust 15.94%
200 Crescent Ct. Suite 1300
Dallas, TX 75201-7838
</TABLE>
* Beneficial ownership is disclaimed.
Beneficial ownership of shares representing 25% or more of the outstanding
shares of each class of the Funds may be deemed to have control, as that term
is defined in the 1940 Act.
-23-
<PAGE> 56
INVESTMENT ADVISORY AND OTHER SERVICES
THE FOLLOWING INFORMATION SUPPLEMENTS AND SHOULD BE READ IN CONJUNCTION
WITH THE SECTION IN THE FUNDS' PROSPECTUS ENTITLED "MANAGEMENT OF THE FUNDS."
INVESTMENT ADVISORY AGREEMENTS. The Adviser retains Westwood Management
Corporation ("Westwood" or the "Sub-Adviser") to furnish investment advice and
manage the Funds' assets (the "Sub-Advised Funds"), with the exception of the
Mighty MitesSM Fund for which the Adviser is responsible for the management of
such Fund's portfolio.
Each Advisory and Sub-Advisory Agreement is subject to annual approval by
(i) the Board of Trustees or (ii) vote of a majority (as defined in the Act) of
the outstanding voting securities of each applicable Fund, provided that in
either event the continuance also is approved by a majority of the Trustees who
are not "interested persons" (as defined in the Act) of the applicable Funds or
the Adviser, by vote cast in person at a meeting called for the purpose of
voting on such approval. Each Advisory Agreement is terminable without
penalty, on 60 days' notice, by the applicable Funds' Board of Trustees or by
vote of the holders of a majority of each applicable Fund's shares, or by the
Adviser, upon not less than 60 days' notice with respect to the Investment
Advisory Agreement for each applicable Fund. Each Advisory Agreement will
terminate automatically in the event of its assignment (as defined in the Act).
The Sub-Adviser manages each applicable Fund's portfolio of investments in
accordance with the stated policies of each applicable Fund, subject to the
approval of the Board of Trustees. The Sub-Adviser is responsible for
investment decisions, and provides each applicable Fund with Investment
Officers who are authorized by the Board of Trustees to execute purchases and
sales of securities. The applicable Funds' Investment Officers are Susan M.
Byrne, Lynda Calkin, and Patricia N. Fraze. All purchases and sales are
reported for the Trustees' review at the meeting subsequent to such
transactions.
The fees paid to the Adviser are allocated between the classes of shares
based upon the amount of assets in each such class. As compensation for its
services under the Advisory Agreement, the Adviser is paid a monthly advisory
fee.
As compensation for its advisory and administrative services under the
Advisory Agreement for the SmallCap Fund, the Realty Fund, the Equity Fund, the
Intermediate Bond Fund and the Balanced Fund, Gabelli Advisers is paid a
monthly fee based upon the average daily net asset value of each Fund, at the
following annual rates: 1.0%, 1.0%, 1.0%, .60% and .75%, respectively. Under
the Sub-Advisory Agreement the Adviser pays Westwood out of its advisory fees
with respect to the Funds, with the exception of the Mighty MitesSM Fund, a fee
computed daily and payable monthly in an amount equal on an annualized basis to
the greater of (i) $150,000 per year on an aggregate basis for the Funds or
(ii) 35% of the net revenues to the Adviser from the Funds.
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<PAGE> 57
<TABLE>
<CAPTION>
ADVISORY FEES
EARNED AND WAIVED BY GABELLI ADVISERS, INC.
FOR THE YEAR ENDED SEPTEMBER 30
EARNED 1997 WAIVED EARNED 1996 WAIVED EARNED 1995 WAIVED
<S> <C> <C> <C> <C> <C> <C>
Equity Fund $700,389 $38,601 $214,970 $82,555 $118,524 $80,907
Balanced Fund $419,264 $43,972 $178,593 $93,020 $97,048 $75,402
SmallCap Equity Fund $24,918 $14,207 N/A N/A N/A N/A
Intermediate Bond Fund $33,052 $32,389 $31,128 $31,128 $28,016 $27,288
</TABLE>
The Adviser is responsible for overseeing Westwood's activities as
Sub-Adviser for the Sub-Advised Funds. Westwood assumes general supervision
over placing orders on behalf of the Sub-Advised Funds for the purchase or sale
of portfolio securities and the Adviser performs this function for the Mighty
MitesSM Fund. Allocation of brokerage transactions, including their frequency,
is made in the best judgment of Westwood (the Adviser in the case of the Mighty
MitesSM Fund) and in a manner deemed fair and reasonable to shareholders. The
primary consideration is prompt execution of orders at the most favorable net
price. Subject to this consideration, the brokers selected will include those
that supplement Westwood's (the Adviser's in the case of the Mighty MitesSM
Fund) research facilities with statistical data, investment information,
economic facts and opinions. Information so received is in addition to and not
in lieu of services required to be performed by Westwood (the Adviser in the
case of the Mighty MitesSM Fund) and the fee for Westwood (the Adviser in the
case of the Mighty MitesSM Fund) is not reduced as a consequence of the receipt
of such supplemental information. Such information may be useful to Westwood
(the Adviser in the case of the Mighty MitesSM Fund) in serving both the Funds
and other accounts it manages and, conversely, supplemental information
obtained by the placement of business of other clients may be useful to
Westwood (the Adviser in the case of the Mighty MitesSM Fund) in carrying out
its obligations to the Funds, although not all of these services are
necessarily useful and of value in managing the Funds. Brokers also are
selected because of their ability to handle special executions such as are
involved in large block trades or broad distributions, provided the primary
consideration is met. While Westwood (the Adviser in the case of the Mighty
MitesSM Fund) generally seeks reasonably competitive spreads or commissions,
the Funds will not necessarily be paying the lowest spread or commissions
available.
As permitted by section 28(e) of the Securities Exchange Act of 1934 (the
"1934 Act"), Westwood (the Adviser in the case of the Mighty MitesSM Fund) may
cause the Funds to pay a broker-dealer which provides "brokerage and research
services" (as defined in the 1934 Act) to Westwood (the Adviser in the case of
the Mighty MitesSM Fund) an amount of undisclosed commission for effecting a
securities transaction for the Funds in excess of the commission which another
broker-dealer would have charged for effecting that transaction. Westwood may
also effect transactions through a broker affiliated with the Adviser and
Southwest Securities Group, Inc. subject to compliance with the 1940 Act.
Consistent with the Rules of Fair Practice of the National Association of
Securities Dealers, Inc. and subject to seeking the most favorable price and
execution available and such other policies
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<PAGE> 58
as the Trustees may determine, Westwood (the Adviser in the case of the Mighty
MitesSM Fund) may consider sales of shares of the Funds as a factor in the
selection of broker-dealers to execute portfolio transactions for the Funds.
Portfolio turnover may vary from year to year, as well as within a year.
The portfolio turnover rate is estimated to be 100% for the Realty Fund and
less than 100% for the Mighty MitesSM Fund. For the fiscal years ended
September 30, 1997 and September 30, 1996, the turnover rates were 61% and 106%
in the case of the Equity Fund, 628% and 309% in the case of the Intermediate
Bond Fund, 110% and 111% in the case of the Balanced Fund and 146% and 0% in
the case of the SmallCap Equity Fund; however, in periods in which
extraordinary market conditions prevail, the Adviser will not be deterred from
changing investment strategy as rapidly as needed, in which case higher
turnover rates can be anticipated. High turnover rates are likely to result in
comparatively greater brokerage expenses. The overall reasonableness of
brokerage commissions paid is evaluated by the Adviser based upon its knowledge
of available information as to the general level of commissions paid by other
institutional investors for comparable services.
<TABLE>
<CAPTION>
BROKERAGE COMMISSIONS PAID*
FOR THE YEAR ENDED SEPTEMBER 30
1997 1996 1995
-------- ------- -------
<S> <C> <C> <C>
Equity Fund $154,989 $48,678 $ 0
Balanced Fund $ 69,311 $36,359 $41,300
SmallCap Equity Fund $ 21,208 $ 0 $ 0
Intermediate Bond Fund $ 0 $ 0 $ 0
</TABLE>
* None of these amounts were paid to the affiliates.
The Adviser is responsible for overseeing the administration of each
Fund's business and affairs, including the maintenance of certain of the Funds'
books and records and the performance of other administrative aspects of the
Funds' operations to the extent not performed by the Funds' custodians,
transfer agents and dividend disbursing agents. The Adviser is permitted to
subcontract at its own expense the administrative responsibilities to persons
it believes are qualified to perform such services and has retained BISYS Fund
Services, Inc. ("BISYS") to provide administrative services with respect to the
Funds. Pursuant to the Sub-Administration Contracts, BISYS provides management
and administrative services necessary for the operation of the Funds,
including, among other things, (i) preparation of shareholder reports and
communications, (ii) regulatory compliance, such as reports to and filings with
the Securities and Exchange Commission ("SEC") and state securities commissions
and (iii) general supervision of the operation of the Funds, including
coordination of the services performed by the Funds' Adviser and Sub-Adviser,
transfer agent, custodians, independent accountants, legal counsel and others.
In addition, Gabelli Funds, Inc. furnishes office space and facilities required
for
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<PAGE> 59
conducting the business of the Funds and pays the compensation of the Funds'
officers, employees and Trustees affiliated with Gabelli Funds, Inc.
DISTRIBUTION OF FUND SHARES. The Funds have retained Gabelli & Company, Inc.
to serve as principal underwriter and distributor (the "Distributor") for the
shares of the Funds pursuant to Distribution Contracts (the "Distribution
Contracts"). The Distribution Contracts provide that the Distributor will use
its best efforts to maintain a broad distribution of the Funds' shares among
bona fide investors and may enter into selling group agreements with
responsible dealers and dealer managers as well as to sell the Funds' shares to
individual investors. The Distributor is not obligated to sell any specific
amount of shares.
For the fiscal year ended September 30, 1997, the purchasers of fund
shares paid $33,750 and $207,478 in sales charges for sales of Service Class
shares of the Equity Fund and the Balanced Fund, respectively. Of those
amounts, $4,500 and $12,518 were retained by the Distributor.
The Funds have adopted on behalf of the Service Class shares of each Fund
a Rule 12b-1 Distribution Plan and Agreement (the "Service Class Plan") and on
behalf of the Retail Class shares of each Fund, a Plan of Distribution Pursuant
to Rule 12b-1 (the "Retail Class Plan") pursuant to which each Class of shares
of the Funds makes payments to the Distributor on a monthly basis in amounts
described in the Prospectus in connection with distribution of shares of such
class, respectively. The Board of Trustees has concluded that there is a
reasonable likelihood that the Retail Class Plan and Service Class Plan will
benefit these classes and their shareholders, respectively.
Each Plan provides that it may not be amended to increase materially the
payment made by each Class pursuant to such Plan without shareholder approval
and that other material amendments of such Plan must be approved by the Board
of Trustees, and by the Trustees who are neither "interested persons" (as
defined in the Act) of the Funds nor have any direct or indirect financial
interest in the operation of the Plan or in any related agreement (the
"non-interested Trustees"), by a vote cast in person at a meeting called for
the purpose of considering such amendments. The selection and nomination of
the Funds' Trustees have been committed to the discretion of the non-interested
Trustees. The Service Class Plan was approved by Service Class shareholders on
January 15, 1991, and the Retail Class Plan was approved by Retail Class
shareholders on September 30, 1994. On August 8, 1997, the Board of Trustees,
including a majority of the non-interested Trustees, amended the Retail Class
Plan to authorize payments by the Funds to the Distributor of a fee in
connection with the distribution and servicing of its Retail Class shares at an
annual rate of .25% of the Funds' average daily net assets, whether or not the
Distributor spent all of such amount. Each Plan is subject to annual approval
by the Board of Trustees and by the non-interested Trustees, by a vote cast in
person at a meeting called for the purpose of voting on the applicable Plan.
Each Plan is terminable with respect to the applicable Class at any time by a
vote of a majority of the non-interested Trustees or by a vote of the holders
of a majority of the shares of such class. Payments will be accrued daily and
paid monthly or at such other intervals as the Board may determine and may be
paid in advance of actual billing.
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<PAGE> 60
Payments may be made by the Funds under the Retail Class Plan for the
purpose of financing any activity primarily intended to result in the sale of
the Retail Class shares of the Funds as determined by the Board of Trustees.
Such activities typically include advertising, compensation for sales and sales
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 Funds may finance without a plan of
distribution, the Funds may also make payments to finance such activity outside
of the Retail Class Plan and not be subject to its limitations.
The Retail Class Plan of the Funds has been implemented by written
agreements between the Funds and/or the Distributor and each person (including
the Distributor) to which payments may be made. Administration of the Retail
Class and Service Class Plan is regulated by Rule
12b-1 under the 1940 Act, which includes requirements that the Board of
Trustees receive and review at least quarterly reports concerning the nature
and qualification of expenses for which payments are made and that the Board of
Trustees approve all agreements implementing the Retail Class and Service Class
Plans and other requirements of Rule 12b-1.
The Board of Trustees has approved implementation of the Retail 12b-1 Plan
through the Advisory Agreements which provide for separate payments pursuant to
a plan of distribution, and by having the Funds enter into a Distribution
Agreement with the Distributor authorizing reimbursement of expenses (including
overhead) incurred by the Distributor and its affiliates up to the .25% rate
authorized by the Retail 12b-1 Plan. Distribution activities include, without
limitation, advertising the Funds; compensating underwriters, dealers, brokers,
banks and other selling entities and sales and marketing personnel of any of
them for sales of shares of the Funds, whether in a lump sum or on a
continuous, periodic, contingent, deferred or other basis; compensating
underwriters, dealers, brokers, banks and other servicing entities and
servicing personnel of any of them (including Westwood and its personnel) for
providing services to shareholders of the Funds relating to their investment in
the Funds, including assistance in connection with inquiries relating to
shareholder accounts; the production and dissemination of prospectuses
(including statements of additional information) of the Funds and the
preparation, production and dissemination of sales, marketing and shareholder
servicing materials; ordinary or capital expenses, such as equipment, rent,
fixtures, salaries, bonuses, reporting and recordkeeping and third party
consultancy or similar direct and indirect expenses relating to any activity
for which payment is authorized by the Board of Trustees; and the financing of
any activity for which payment is authorized by the Board of Trustees. To the
extent any of these payments is based on allocations by the Distributor, the
Funds may be considered to be participating in joint distribution activities
with other funds distributed by the Distributor. Various federal and state
laws prohibit national banks and some state-chartered commercial banks from
underwriting or dealing in the Funds' Shares. In the unlikely event that a
court were to find that these laws prevent such banks from providing the
services described above, the Funds would seek alternative providers and expect
that shareholders would not experience any disadvantage.
For the year ended September 30, 1997, the Funds, with respect to the
Service Class, incurred distribution costs and expenses of $11,200 for the
Equity Fund and $43,400 for the
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<PAGE> 61
Balanced Fund. There were no Service Class shares outstanding during the year
ended September 30, 1997 for the Intermediate Bond Fund. For the year ended
September 30, 1997, with respect to the Retail Class, distribution costs and
expenses of $417,000, $6,900, $62,000, and $12,500 were incurred for the Equity
Fund, Intermediate Bond Fund, Balanced Fund, and SmallCap Equity Fund,
respectively. There were no Service Class or Retail Class shares outstanding
during the year ended September 30, 1997 for the Mighty MitesSM Fund. During
the fiscal year ended September 30, 1997, the Distributor paid total
distribution expenses under the Retail Class and Service Class Plans of
$553,000. Of this amount $111,090 was spent on printing, postage and
stationery, $21,400 on overhead support expenses, $284,000 on salaries of
personnel of the Distributor and $136,510 on third party brokers.
EXPENSES AND EXPENSE INFORMATION. On October 11, 1996 the "National Securities
Market Improvement Act of 1996" vested in the Securities and Exchange
Commission exclusive authority for the registration or qualification of
investment company offerings, thus preempting any state law expense limitation
requirement, effective October 11, 1996. Notwithstanding, Gabelli Advisers,
Inc. reimbursed the Equity Fund, SmallCap Fund, Intermediate Bond Fund, and
Balanced Fund in the amounts of $38,601, $14,207, $32,389 and $43,972 for the
period ended September 30, 1997 for expenses in excess of its voluntary
limitation of expenses.
PURCHASE AND REDEMPTION OF SHARES
Cancellation of purchase orders for Fund shares (as, for example, when
checks submitted to purchase shares are returned unpaid) cause 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 each Fund may reimburse itself or the
Distributor for such loss by automatically redeeming shares from any account
registered in that shareholder's name, or by seeking other redress. If a 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 such Fund whole.
DETERMINATION OF NET ASSET VALUE
The Funds value their portfolio securities in accordance with the
procedures described in the Prospectus.
NEW YORK STOCK EXCHANGE CLOSINGS. The holidays (as observed) on which the New
York Stock Exchange is closed, and therefore days upon which shareholders
cannot redeem shares, currently are: New Year's Day, Martin Luther King, Jr.
Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.
SHAREHOLDER SERVICES
CORPORATE PENSION/PROFIT-SHARING AND PERSONAL RETIREMENT PLANS. The Funds make
available to corporations a 401(k) Salary Reduction Plan. In addition, the
Funds make available IRAs, including IRAs set up under a Simplified Employee
Pension Plan ("SEP-IRAs") and IRA "Rollover Accounts." New for 1998, the Funds
also make available education
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<PAGE> 62
IRAs. Education IRAs permit eligible individuals to contribute up to $500 per
year per beneficiary under 18 years old. Distributions from an education IRA
are generally excluded from income when used for qualified higher education
expenses. Also new for 1998 is the Roth IRA. Unlike a traditional IRA,
contributions to a Roth IRA are not deductible. However, distributions are
generally excluded from income provided they occur at least five years after
the creation of the IRA and are either after the individual reaches age 59 1/2,
because of death or disability, or for first time home buyers' expenses. Plan
support services are also available. For details contact the Distributor by
calling toll free 1-800-GABELLI (1-800-422-3554). The Funds have the right to
terminate any of these plans at any time giving proper notice to existing
accounts.
Investors who wish to purchase Fund shares in conjunction with an IRA,
including a SEP-IRA, Roth IRA or education IRA may request from the Distributor
forms for adoption of such plans. The Funds can also be used as vehicles for
existing pension and profit-sharing plans.
A fee may be charged by the entity acting as custodian for 401(k) Plans or
IRAs, payment of which could require the liquidation of shares.
SHARES MAY BE PURCHASED IN CONNECTION WITH THESE PLANS ONLY BY DIRECT
REMITTANCE TO THE ENTITY WHICH ACTS AS CUSTODIAN. PURCHASES FOR THESE PLANS
MAY NOT BE MADE IN ADVANCE OF RECEIPT OF FUNDS.
The minimum initial investment for corporate plans, Salary Reduction
Plans, 403(b)(7) Plans, and SEP-IRAs, with more than one participant, is
$1,000, with no minimum on subsequent purchases. The minimum initial
investment for Distributor-sponsored IRAs, SEP-IRAs and Roth or education IRAs
with only one participant is normally $750, with no minimum on subsequent
purchases.
The investor should read the Prototype Retirement Plan and the relevant
form of custodial agreement for further details as to eligibility, service fees
and tax implications, and should consult a tax advisor.
DIVIDENDS, DISTRIBUTIONS AND TAXES
THE FOLLOWING INFORMATION SUPPLEMENTS AND SHOULD BE READ IN CONJUNCTION WITH
THE SECTION IN THE FUNDS' PROSPECTUS ENTITLED "DIVIDENDS, DISTRIBUTIONS AND
TAXES."
The Funds intend to continue to qualify to be treated as regulated
investment companies under Subchapter M of the Internal Revenue Code of 1986,
as amended (the "Code"). To qualify as a regulated investment company, a Fund
must distribute to shareholders at least 90% of its investment company taxable
income (which includes, among other items, dividends, taxable interest and the
excess of net short-term capital gains over net long-term capital losses), and
meet certain diversification of assets, source of income, and other
requirements of the Code. By meeting these requirements, a Fund generally will
not be subject to Federal income tax on its investment company taxable income
and net capital gains (the excess of net long-term capital gains
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<PAGE> 63
over net short-term capital losses) designated by the Fund as capital gain
dividends and distributed to shareholders. If the Funds do not meet all of
these Code requirements, they will be taxed as ordinary corporations and their
distributions will be taxed to shareholders as ordinary income. In determining
the amount of capital gains to be distributed, any capital loss carryover from
prior years will be applied against capital gains to reduce the amount of
distributions paid. In addition, any losses incurred in the taxable year
subsequent to October 31, will be deferred to the next taxable year and used to
reduce distributions in the subsequent year.
Amounts, other than tax-exempt interest, not distributed on a timely basis
in accordance with a calendar year distribution requirement may be subject to a
nondeductible 4% excise tax. To prevent imposition of the excise tax, each
Fund must distribute for the calendar year an amount equal to the sum of (1) at
least 98% of its ordinary income (excluding any capital gains or losses) for
the calendar year, (2) at least 98% of the excess of its capital gains over
capital losses (adjusted for certain ordinary losses) for the one-year period
ending October 31 of such year, and (3) all ordinary income and capital gain
net income (adjusted for certain ordinary losses) for previous years that were
not distributed during such years. A distribution will be treated as paid on
December 31 of a calendar year if it is declared by a Fund during October,
November or December of that year to shareholders of record on a date in such a
month and paid by the Fund during January of the following year. Such
distributions will be taxable to shareholders in the calendar year in which the
distributions are declared, rather than the calendar year in which the
distributions are received.
The Funds may invest in stocks of foreign companies that are classified
under the Code as passive foreign investment companies ("PFICs"). In general,
a foreign company is classified as a PFIC under the Code if at least one-half
of its assets constitutes investment-type assets or 75% or more of its gross
income is investment-type income. Under the PFIC rules, an "excess
distribution" received with respect to PFIC stock is treated as having been
realized ratably over the period during which the Fund held the PFIC stock.
A Fund itself will be subject to tax on the portion, if any, of the excess
distribution that is allocated to the Fund's holding period in prior taxable
years (and an interest factor will be added to the tax, as if the tax had
actually been payable in such prior taxable years) even though the Fund
distributes the corresponding income to stockholders. Excess distributions
include any gain from the sale of PFIC stock as well as certain distributions
from a PFIC. All excess distributions are taxable as ordinary income.
A Fund may be able to elect alternative tax treatment with respect to PFIC
stock it holds. One election that is currently available, provided the
appropriate information is received from the PFIC, requires a Fund to generally
include in its gross income its share of the earnings of a PFIC on a current
basis, regardless of whether any distributions are received from the PFIC. If
this election is made, the special rules, discussed above, relating to the
taxation of excess distributions, would not apply. In addition, other
elections may become available that would affect the tax treatment of PFIC
stock held by a Fund. Each Fund's intention to qualify annually as a regulated
investment company may limit its elections with respect to PFIC stock.
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<PAGE> 64
Because the application of the PFIC rules may affect, among other things,
the character of gains, the amount of gain or loss and the timing of the
recognition of income and loss with respect to PFIC stock, as well as subject a
Fund itself to tax on certain income from PFIC stock, the amount that must be
distributed to stockholders, and which will be taxed to stockholders as
ordinary income or long-term capital gain, may be increased or decreased
substantially as compared to a fund that did not invest in PFIC stock.
Investors should consult their own tax advisors in this regard.
Distributions of investment company taxable income generally are taxable
to shareholders as ordinary income. Distributions from certain of the Funds
may be eligible for the dividends-received deduction available to corporations.
To the extent dividends received by a Fund are attributable to foreign
corporations, a corporation that owns shares in a Fund will not be entitled to
the dividends received deduction with respect to its pro rata portion of such
dividends, since the dividends-received deduction is generally available only
with respect to dividends paid by domestic corporations. In addition, the
dividends received deduction will be disallowed for shareholders who do not
hold their shares in a Fund for at least 45 days during the 90 day period
beginning 45 days before a share in the Fund becomes ex dividend with respect
to such dividend.
Distributions of net capital gains, if any, designated by a Fund as
capital gain dividends are taxable to shareholders as 20% rate capital gain or
28% rate capital gain, regardless of the length of time the Fund's shares have
been held by a shareholder. All distributions are taxable to the shareholder
whether reinvested in additional shares or received in cash. Shareholders will
be notified annually as to the Federal tax status of distributions.
Investors should be careful to consider the tax implications of buying
shares just prior to a distribution by the Funds. Distributions by a Fund
reduce the net asset value of the Fund's shares. Should a distribution reduce
the net asset value below a stockholder's cost basis, such distribution,
nevertheless, would be taxable to the shareholder as ordinary income or capital
gain as described above, even though, from an investment standpoint, it may
constitute a partial return of capital. The price of shares purchased at that
time includes the amount of the forthcoming distribution.
Upon the taxable disposition (including a sale or redemption) of shares of
a Fund, a shareholder may realize a gain or loss depending upon his basis in
his shares. Such gain or loss will be treated as capital gain or loss if the
shares are capital assets in the shareholder's hands. Such gain or loss will
be 20% rate capital gain, 28% rate capital gain, or short-term, generally
depending upon the shareholder's holding period for the shares. Non-corporate
shareholders are subject to tax at a maximum rate of 28% on capital gains
resulting from the disposition of shares held for more than 12 months but not
more than 18 months, and at a maximum rate of 20% on capital gains from the
disposition of shares held for more than 18 months (10% if the taxpayer is, and
would be after accounting for such gains, subject to the 15% tax bracket for
ordinary income). However, a loss realized by a shareholder on the disposition
of Fund shares with respect to which capital gain dividends have been paid
will, to the extent of such capital gain dividends, be treated as long-term
capital loss if such shares have been held by the shareholder for six months or
less. Further, a loss realized on a disposition will be disallowed to the
extent the shares disposed of are
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<PAGE> 65
replaced (whether by reinvestment of distributions or otherwise) 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. Shareholders receiving distributions
in the form of additional shares will have a cost basis for Federal income tax
purposes in each share received equal to the net asset value of a share of the
Funds on the reinvestment date.
Under certain circumstances, the sales charge incurred in acquiring shares
of a Fund may not be taken into account in determining the gain or loss on the
disposition of those shares. This rule applies where shares of a Fund are
exchanged within 90 days after the date they were purchased and new Service
Class shares of a Fund are acquired without a sales charge or at a reduced
sales charge. In that case, the gain or loss recognized on the exchange will
be determined by excluding from the tax basis of the shares exchanged all or a
portion of the sales charge incurred in acquiring those shares. This exclusion
applies to the extent that the otherwise applicable sales charge with respect
to the newly acquired shares is reduced as a result of having incurred the
sales charge initially. Instead, the portion of the sales charge affected by
this rule will be treated as a sales charge paid for the new shares.
Certain of the options, futures contracts, and forward foreign currency
exchange contracts in which certain of the Funds may invest are so-called
"section 1256 contracts". With certain exceptions, realized gains or losses on
section 1256 contracts generally are considered 60% long-term and 40%
short-term capital gains or losses ("60/40"). Also, section 1256 contracts
held by a Fund at the end of each taxable year (and, generally, for purposes of
the 4% excise tax, on October 31 of each year) are "marked-to-market" with the
result that unrealized gains or losses are treated as though they were realized
and the resulting gain or loss is treated as 60/40 gain or loss. Investors
should consult their own tax advisers in this regard.
Generally, the hedging transactions undertaken by a Fund may result in
"straddles" for Federal income tax purposes. The straddle rules may affect the
character of gains (or losses) realized by a Fund. In addition, losses
realized by a Fund on a position that is part of a straddle may be deferred
under the straddle rules, rather than being taken into account in calculating
the taxable income for the taxable year in which such losses are realized.
Because only a few regulations implementing the straddle rules have been
promulgated, the tax consequences to a Fund of hedging transactions are not
entirely clear. The hedging transactions may increase the amount of short-term
capital gain realized by a Fund which is taxed as ordinary income when
distributed to stockholders.
A Fund may make one or more of the elections available under the Code
which are applicable to straddles. If a Fund makes any of the elections, the
amount, character and timing of the recognition of gains or losses from the
affected straddle positions will be determined under rules that vary according
to the election(s) made. The rules applicable under certain of the elections
may operate to accelerate the recognition of gains or losses from the affected
straddle positions.
Because application of the straddle rules may affect the character of
gains or losses, defer losses and/or accelerate the recognition of gains or
losses from the affected straddle positions, the
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amount which must be distributed to shareholders, and will be taxed to
shareholders as ordinary income or long-term capital gain, may be increased or
decreased substantially as compared to a Fund that did not engage in such
hedging transactions.
Under the Code, gains or losses attributable to fluctuations in exchange
rates which occur between the time a Fund accrues interest or other receivables
or accrues expenses or other liabilities denominated in a foreign currency and
the time the Fund actually collects such receivables or pays such liabilities
generally are treated as ordinary income or ordinary loss. Similarly, on
disposition of debt securities denominated in a foreign currency and on
disposition of certain forward contracts, gains or losses attributable to
fluctuations in the value of foreign currency between the date of acquisition
of the security or contract and the date of disposition also are treated as
ordinary gain or loss. These gains or losses, referred to under the Code as
"section 988" gains or losses, may increase, decrease, or eliminate the amount
of a Fund's investment company taxable income to be distributed to its
shareholders as ordinary income.
Income received by a Fund from sources within foreign countries may be
subject to withholding and other similar income taxes imposed by the foreign
country. The Funds do not expect to be eligible to elect to allow shareholders
to claim such foreign taxes or a credit against their U.S. tax liability.
The Funds are required to report to the Internal Revenue Service ("IRS")
all distributions to shareholders except in the case of certain exempt
shareholders. All such distributions generally are subject to withholding of
Federal income tax at a rate of 31% ("backup withholding") in the case of
non-exempt shareholders if (1) the shareholder fails to furnish the Funds with
and to certify the shareholder's correct taxpayer identification number or
social security number, (2) the IRS notifies the Funds or a shareholder 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 is not subject to
backup withholding. If the withholding provisions are applicable, any such
distributions whether reinvested in additional shares or taken in cash, will be
reduced by the amounts required to be withheld.
The foregoing discussion relates only to Federal income tax law as
applicable to U.S. persons (i.e., U.S. citizens and residents and U.S. domestic
corporations, partnerships, trusts and estates). Distributions by the Funds
also may be subject to state and local taxes and their treatment under state
and local income tax laws may differ from the Federal income tax treatment.
Shareholders should consult their tax advisors with respect to particular
questions of Federal, state and local taxation. Shareholders who are not U.S.
persons should consult their tax advisors regarding U.S. and foreign tax
consequences of ownership of shares of the Funds, including the likelihood that
distributions to them would be subject to withholding of U.S. tax at a rate of
30% (or at a lower rate under a tax treaty).
PERFORMANCE INFORMATION
THE FOLLOWING INFORMATION SUPPLEMENTS AND SHOULD BE READ IN CONJUNCTION WITH
THE SECTION IN THE FUNDS' PROSPECTUS ENTITLED "PERFORMANCE INFORMATION".
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<PAGE> 67
The Funds may, from time to time, include their yield, effective yield and
average annual total return in advertisements or reports to shareholders or
prospective investors.
Current yield for the Cash Management Fund will be based on the change in
the value of a hypothetical investment (exclusive of capital changes) over a
particular seven-day period, less a pro-rata share of the Fund's expenses
accrued over that period (the "base period"), and stated as a percentage of the
investment at the start of the base period (the "base period return"). The
base period return is then annualized by multiplying by 365/7, with the
resulting yield figure carried to at least the nearest hundredth of one
percent. "Effective yield" for the Cash Management Fund assumes that all
dividends received during an annual period have been reinvested.
Calculation of "effective yield" begins with the same "base period return"
used in the calculation of yield, which is then annualized to reflect weekly
compounding pursuant to the following formula:
Effective Yield = [(Base Period Return + 1) 365/7] -1.
Quotations of yield for the other Funds will be based on the investment
income per share earned during a particular 30-day period, less expenses
accrued during a period ("net investment income") and will be computed by
dividing net investment income by the maximum offering price per share on the
last day of the period, according to the following formula:
YIELD = 2[(a-b + 1)6-1]
cd
where a = dividends and interest earned during the period, b = expenses accrued
for the period (net of any reimbursements), c = the average daily number of
shares outstanding during the period that were entitled to receive dividends,
and d = the maximum offering price per share on the last day of the period.
For the thirty day period ended September 30, 1997, the yield of the
Intermediate Bond Fund was 5.56%.
Quotations of average annual total return will be expressed in terms of
the average annual compounded rate of return of a hypothetical investment in a
Fund over periods of 1, 5 and 10 years (up to the life of the Fund), 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 ending redeemable value of
a hypothetical $1,000 payment made at the beginning of the period). All total
return figures will reflect the deduction of the maximum sales charge and a
proportional share of Fund expenses (net of certain reimbursed expenses) on an
annual basis, and will assume that all dividends and distributions are
reinvested when paid.
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<TABLE>
<CAPTION>
RATES OF TOTAL RETURN
FOR THE YEAR ENDED SEPTEMBER 30
1997 1996 1995
RETAIL SVC. RETAIL SVC. RETAIL SVC.
CLASS CLASS CLASS CLASS CLASS CLASS
------- ------ ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Equity 39.61% 33.75% 26.9% 26.3% 25.54% 25.85%
Balanced 28.32% 22.91% 19.0% 18.8% 21.6% 21.98%
SmallCap Equity 44.8%* N/A N/A N/A N/A N/A
11.13%
Intermediate Bond 11.36% N/A 4.5% N/A (.95%) N/A
</TABLE>
* For the period from April 15, 1997 through September 30, 1997.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
ONE YEAR FIVE YEARS TEN YEARS LIFE OF FUND
-------- --------- --------- ------------
<S> <C> <C> <C> <C>
Equity -- Retail Class 39.6% 23.9% 14.3% 16.1%
Equity -- Service Class 33.7% 22.4%
Balanced -- Retail Class 28.3% 18.1% 16.3%
Balanced -- Service Class 22.9% 16.6%
SmallCap Equity -- Retail Class 44.8%*
Intermediate Bond -- Retail Class 11.4% 6.1% 7.1%
</TABLE>
* For the period from April 15, 1997 through September 30, 1997 (not
annualized).
Quotations of yield and total return will reflect only the performance of
a hypothetical investment in the Funds during the particular time period shown.
Yield and total return for the Funds will vary based on changes in the market
conditions and the level of the Funds' expenses, and no reported performance
figure should be considered an indication of performance which may be expected
in the future.
In connection with communicating its yields or total return to current or
prospective shareholders, the Funds also may compare these figures to the
performance of other mutual funds tracked by mutual fund rating services or to
other unmanaged indexes which may assume reinvestment of dividends but
generally do not reflect deductions for administrative and management costs.
Performance information for the Funds may be compared, in reports and
promotional literature, to: (i) the Standard & Poor's 500 Composite Stock
Index, the Dow Jones Industrial
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<PAGE> 69
Average, the Russell 2000 Index, Lehman Brothers Corporate/Government Bond
Index, National Association of REIT Index, or other unmanaged indices so that
investors may compare the Funds' results with those of a group of unmanaged
securities widely regarded by investors as representative of the securities
markets in general; (ii) other groups of mutual funds tracked by Lipper
Analytical Services, a widely used independent research firm which ranks mutual
funds by overall performance, investment objectives, and assets, or tracked by
other services, companies, publications, or persons who rank mutual funds on
overall performance or other criteria; and (iii) the Consumer Price Index
(measure for inflation) to assess the real rate of return from an investment of
dividends but generally do not reflect deductions for administrative and
management costs and expenses.
INFORMATION ABOUT THE FUNDS
THE FOLLOWING INFORMATION SUPPLEMENTS AND SHOULD BE READ IN CONJUNCTION WITH
THE SECTION IN THE FUNDS' PROSPECTUS ENTITLED "GENERAL INFORMATION."
The authorized capitalization of the Trust consists of an unlimited number
of shares of beneficial interest having a par value of $0.001 per share. The
Trust's Declaration of Trust authorizes the Board of Trustees to classify or
reclassify any unissued shares of beneficial interest. Pursuant to that
authority, the Board of Trustees has authorized the issuance of six series
representing six portfolios of the Trust (i.e., the Funds).
Except as noted below, each share of a Fund represents an equal
proportionate interest in that Fund with each other share of the same Fund and
is entitled to such dividends and distributions out of the income earned on the
assets belonging to that Fund as are declared in the discretion of the Trust's
Board of Trustees. In the event of the liquidation or dissolution of the
Trust, shares of a Fund are entitled to receive the assets belonging to that
Fund which are available for distribution, and a proportionate distribution,
based upon the relative net assets of the Funds, of any general assets not
belonging to a Fund which are available for distribution.
Each Fund is comprised of two classes of shares of beneficial interest --
"Retail Class" shares (formerly "Institutional Class") and "Service Class"
shares. Retail Class shares and Service Class shares are identical in all
respects, except that Service Class shares are subject to a sales load and bear
higher expenses incurred in the distribution and marketing of such shares.
These expenses are paid pursuant to the Rule 12b-1 Distribution Plan and
Agreement described under "Investment Advisory and Other Services" in this
Statement of Additional Information.
All shares of the Trust have equal voting rights and will be voted in the
aggregate, and not by class or series, except where voting by class or series
is required by law or where the matter involved affects only one class or
series. For example, shareholders of each Fund will vote separately by series
on matters involving investment advisory contracts and shareholders of each
Class will vote separately by class for matters involving the Rule 12b-1
Distribution Plan. As used in the Prospectus and in this Statement of
Additional Information, the term "majority", when referring to the approvals to
be obtained from shareholders in connection with general matters
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<PAGE> 70
affecting all of the Funds (e.g., election of Trustees and ratification of
independent accountants), means the vote of a majority of each Fund's
outstanding shares represented at a meeting. The term "majority", as defined
by the Act when referring to the approvals to be obtained from shareholders in
connection with matters affecting a single Fund or class (e.g., approval of
investment advisory contracts or changing the fundamental policies of a Fund,
or approving the Rule 12b-1 Distribution Plan and Agreement with respect to a
class), means the vote of the lesser of (i) 67% of the shares of the Fund (or
class) represented at a meeting if the holders of more than 50% of the
outstanding shares of the Fund (or class) are present in person or by proxy, or
(ii) more than 50% of the outstanding shares of the Fund (or class).
Shareholders are entitled to one vote for each full share held, and fractional
votes for fractional shares held.
Shareholders are not entitled to any preemptive rights. All shares, when
issued, will be fully paid and non-assessable by the Trust.
The Funds send annual and semi-annual financial statements to all of their
shareholders.
CUSTODIAN, TRANSFER AND DIVIDEND DISBURSING AGENT, COUNSEL
AND INDEPENDENT ACCOUNTANTS
The Bank of New York, 110 Washington Street, New York, New York 10286,
acts as the Funds' custodian. State Street Bank and Trust Company, 225
Franklin Street, Boston, MA 02110, acts as transfer agent for the Trust.
Neither State Street Bank and Trust Company nor The Bank of New York takes any
part in determining the investment policies of the Funds or which portfolio
securities are to be purchased or sold by the Funds.
Battle Fowler LLP, 75 East 55th Street, New York, New York 10022, passes
upon certain legal matters in connection with the shares offered by the Funds
and also acts as Counsel to the Funds.
Price Waterhouse LLP, 1177 Avenue of the Americas, New York, New York
10036, independent accountants, have been selected as independent accountants
of the Funds.
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<PAGE> 71
APPENDIX
Descriptions of certain Standard & Poor's Corporation ("S&P") and Moody's
Investors Service, Inc. ("Moody's") corporate bond ratings:
S&P
AAA
Bonds rated AAA have the highest rating assigned by S&P to a debt obligation.
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 highest rated issues only in a 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 higher 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 for bonds in higher rated categories.
BB, B, CCC, CC, C
Bonds rated BB, B, CCC, CC and C are regarded, on balance, as predominantly
speculative with respect to capacity to pay interest and repay principal in
accordance with the terms of this obligation. BB indicates the lowest degree
of speculation and C the highest degree of speculation. While such bonds will
likely have some quality and protective characteristics, they are outweighed by
large uncertainties of major risk exposures to adverse conditions.
Plus (+) or minus (-): The ratings from AA to BBB may be modified by the
addition of a plus or minus designation to show relative standing within the
major ratings categories.
MOODY'S
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.
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<PAGE> 72
AA
Bonds which are rated Aa are judged to be of higher quality by all standards.
Together with the Aaa group they comprise what generally are 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 larger 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 a high
degree. Such issues are often in default or have other marked shortcomings.
C
Bonds which are rated C are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
Moody's applies the numerical modifiers 1, 2 and 3 to show relative
standing within the major rating categories, except in the Aaa category and in
the categories below B. The modifier
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<PAGE> 73
1 indicates a ranking for the security in the higher end of a rating category;
the modifier 2 indicates a mid-range ranking; and the modifier 3 indicates a
ranking in the lower end of a rating category.
DESCRIPTION OF S&P AND MOODY'S COMMERCIAL PAPER RATINGS:
The designation A-1 by S&P indicates that the degree of safety regarding
timely payment is either overwhelming or very strong. Those issues determined
to possess overwhelming safety characteristics are denoted with a plus sign
designation. Capacity for timely payment on issues with an A-2 designation is
strong. However, the relative degree of safety is not as high as for issues
designated A-1.
The rating Prime-1 (P-1) is the highest commercial paper rating assigned
by Moody's. Issuers of P-1 paper must have a superior capacity for repayment
of short-term promissory obligations, and ordinarily will be evidenced by
leading market positions in well established industries, high rates of return
of funds employed, conservative capitalization structures with moderate
reliance on debt and ample asset protection, broad margins in earnings coverage
of fixed financial charges and high internal cash generation, and well
established access to a range of financial markets and assured sources of
alternate liquidity.
FINANCIAL STATEMENTS
The audited financial statements for the Funds dated September 30, 1997
and the Report of Price Waterhouse LLP thereon, are incorporated herein by
reference to the Trust's Annual Report. The Annual Report is available upon
request and without charge.
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