As filed with the Securities and Exchange Commission on June 29, 2000
Securities Act File No. 33-40771
Investment Company Act File No. 811-05502
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 X
---
Pre-Effective Amendment No. ____
Post-Effective Amendment No. 16 X
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940
Amendment No. 17 X
GABELLI COMSTOCK FUNDS, INC.
(Exact Name of Registrant as Specified in Charter)
ONE CORPORATE CENTER, RYE, NEW YORK 10580-1434
(Address of Principal Executive Offices)
Registrant's Telephone Number, including Area Code: 1- 800-422-3554
Bruce N. Alpert
Gabelli Funds, LLC
One Corporate Center,
RYE, NEW YORK 10580-1434
(Name and Address of Agent for Service)
Copies to:
James E. McKee, Esq. Richard T. Prins, Esq.
Gabelli Gold Fund, Inc. Skadden, Arps, Slate, Meagher & Flom
One Corporate Center 919 Third Avenue
Rye, New York 10580-1434 New York, New York 10022
It is proposed that this filing will become effective:
___ immediately upon filing pursuant to paragraph (b); or
___ on [____] pursuant to paragraph (b);
___ or 60 days after filing pursuant to paragraph (a)(1); or
X on August 28, 2000 pursuant to paragraph (a)(1); or
___ 75 days after filing pursuant to paragraph (a)(2); or
___ on [____] pursuant to paragraph (a)(2) of Rule 485
If appropriate, check the following box:
___ This post-effective amendment designates a new effective date
for a previously filed post-effective amendment.
1
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GABELLI
COMSTOCK
FUNDS,
INC.
GABELLI COMSTOCK STRATEGY FUND
GABELLI COMSTOCK CAPITAL VALUE FUND
PROSPECTUS
AUGUST 28, 2000
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THE
SHARES DESCRIBED IN THIS PROSPECTUS OR DETERMINED WHETHER THIS PROSPECTUS IS
ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
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INTRODUCTION
Gabelli Comstock Funds, Inc. (the "Company") currently consists of the
following two separate investment portfolios (each a "Fund," and collectively
the "Funds"):
o Gabelli Comstock Strategy Fund (the "Strategy Fund")
o Gabelli Comstock Capital Value Fund (the "Capital Value Fund")
Each Fund is advised by Gabelli Funds, LLC (the "Adviser"). Neither Fund
may change its investment objective without shareholder approval.
GABELLI COMSTOCK STRATEGY FUND
INVESTMENT OBJECTIVE:
The Fund seeks to maximize total return, consisting of capital appreciation
and current income, over the long term investment horizon by investing primarily
in a portfolio of debt securities. Capital is the amount of money the Fund has
to invest and capital appreciation is the increase in the value of the Fund's
investments. Current income is the amount of money that the Fund earns annually
on its invested capital.
PRINCIPAL INVESTMENT STRATEGIES:
Under normal market conditions, the Fund will invest at least 65% of its
assets in debt securities. The Fund may also invest in a wide range of asset
classes, including domestic and foreign equity securities and derivatives. For
each asset class, the Adviser uses a broad approach to investing by examining
the overall economic picture, the characteristics of individual securities, and
historical market information.
The Adviser seeks to emphasize investments in debt securities which
maximize total return in light of (1) the credit risk, (2) the interest rate
risk, and (3) the risk associated with the length of maturity of the debt
instrument. Credit risk involves the ability of the issuer to make timely
payments of principal and interest. Interest rate risk involves the change in
market value of debt securities that normally occurs as a result of changes in
prevailing interest rates. Assuming that there is no change in the
creditworthiness of the issuer, the degree of the change in market value of debt
securities will depend on changes in prevailing interest rates and the length of
the maturity of the debt security.
The Adviser considers whether particular debt securities contain "call"
provisions or are otherwise subject to prepayment of principal. The Adviser also
considers the market's perception of the issuer's creditworthiness and how that
may affect the market value of the issuer's debt securities. Additionally, the
Adviser considers the maturity of particular debt securities in light of
anticipated interest rate movements.
The Fund won't necessarily invest in securities with the highest current
yield permitted by the Fund's investment policies if the Adviser believes that
the differences in yield and the potential for capital gain aren't enough to
justify the greater risks. The Adviser believes that its strategies tend to
minimize credit and reinvestment risks.
As of the date of this prospectus, the portfolio managers view the U.S.
equity market as highly overvalued by most traditional measurements, and have
positioned the Fund to seek profits from a major U.S. equity market decline
through a variety of investment practices, including puts, together with the
investments in fixed-income securities. The Fund is flexibly managed, however,
and the Adviser may, without notice, change the Fund's asset positioning quickly
and decisively.
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2
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The Fund may invest in a wide range of debt securities. These include
corporate debt, U.S. government and agency debt and foreign sovereign and other
debt securities (including sovereign and other debt securities from emerging
market issuers). The Fund may invest a substantial portion of its assets in
foreign debt securities. The Fund may also invest in debt securities convertible
into shares of common stock. These debt securities may have fixed, floating or
variable rates of interest.
The Fund may invest up to 25% of its total assets in high yield debt
securities (commonly referred to as "junk bonds"). These securities may be rated
as low as "C" at the time of purchase by Moody's Investors Service, Inc.
("Moody's") or Standard & Poors Corporation ("S&P") or, if unrated, will be
determined by the Adviser to be of comparable quality. If a debt security falls
below the minimum rating, the Adviser will decide whether to dispose of the
security.
There is no restriction on the maturity of the Fund's portfolio or on any
individual debt security in the Fund's portfolio. The Adviser may adjust the
average maturity according to actual or anticipated changes in the market.
The Fund may invest in high quality money market instruments, and may enter
into repurchase agreements. In addition, when the Adviser determines that a
temporary defensive position is advisable or to meet anticipated redemption
requests, the Fund may invest without limit in short-term debt obligations, such
as commercial paper, bank obligations and U.S. Treasury bills.
To enhance total return, the Fund may invest up to 35% of its total assets
in equity securities of domestic and foreign issuers. These equity securities
may take the form of common and preferred stock (including convertible preferred
stock), depository receipts, equity interests in trusts, partnerships, joint
ventures and similar enterprises, and equity warrants and other rights and may
include short sales, puts and other investment techniques designed to profit
from a decrease in value of the underlying securities rather than an increase in
value.
The Fund intends to invest in derivatives, which are financial instruments
whose value is based on another security, an index of securities or market
changes or exchange rate movements. The Fund may use derivatives to hedge
various market risks. Derivative strategies the Fund may use include writing
covered call or put options or purchasing put and call options on securities,
foreign currencies or stock indices. The Fund may also purchase stock index
futures contracts or interest rate futures contracts and may enter into interest
rate or forward currency transactions. In addition, the Fund may purchase
options on securities and securities indices for speculative purposes in order
to increase the Fund's income or gain. The Fund's net exposure under all
permitted types of derivatives transactions, when used for speculative purposes,
is limited to 15% of its total assets. The Fund's compliance with this
limitation is calculated only at the time any new position is added, with the
result that this limitation may be exceeded if derivatives positions held by the
Fund appreciate.
The Fund may trade securities actively, which could increase transaction
costs, thus lowering performance, and increasing your taxable dividends.
PRINCIPAL RISKS:
While the Fund seeks to maximize total return, there is no guarantee that
shares of the Fund will not lose value. This means that you can lose money on
your investment in the Fund. The Fund may not be able to achieve its objective
if the portfolio managers' expectations regarding particular securities or
markets are not met. In particular, as long as the Fund is positioned to seek
profits from a major U.S. equity
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3
<PAGE>
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market decline, the value of the Fund's shares may be adversely affected during
periods in which there are stable or rising market conditions.
Two of the main risks of the Fund are credit risk and interest rate risk.
Typically, when interest rates rise, the market value of debt securities, such
as those held by the Fund, will decline. Debt securities with longer maturities
are more sensitive to interest rate risk than shorter term debt securities.
During periods of falling interest rates, the Fund's total return may be subject
to reinvestment rate risk. Reinvestment rate risk could occur during a time of
declining interest rates due to the need to reinvest prepayments on debt
securities, income generated by the Fund's assets or a substantial inflow of
money into the Fund. The Fund's total return may suffer as a result of
reinvestment rate risk to the extent the market value gains caused by falling
interest rates are not enough to offset the lower rates of return available for
the continuing investment or reinvestment of the Fund's assets. Credit risk is
the risk that the issuer of a debt security may not be able to pay principal and
interest payments on time. The market's perception that an issuer might not be
able to make such timely payments may negatively affect the market value of that
issuer's debt securities.
The Fund also is subject to market risks that affect the value of its
shares, including general economic and market conditions. To the extent that the
Fund has significant equity exposure, the value of the Fund's shares will be
influenced by conditions in the stock markets, as well as the performance of the
companies and industries selected for the Fund's portfolio.
The Fund is classified as "non-diversified." It may invest a greater
percentage of its assets in a particular issuer or group of issuers than a
diversified fund would. That makes the value of its shares more sensitive to
problems affecting the issuers of the securities it holds.
Investments in foreign securities may be riskier than investments in the
securities of U.S. issuers. Foreign issuers may be affected by political, social
and economic instability. Some foreign securities may be harder to trade without
incurring a loss and may be difficult to convert into cash. There may be less
public information available, differing settlement procedures, or regulations
and standards that don't match U.S. standards. Some countries may nationalize or
expropriate assets or impose exchange controls. If the Fund invests in a
security which is not denominated in U.S. dollars, it also will be subject to
currency exchange risk. These risks increase when investing in issuers located
in emerging markets.
High yield securities, which are rated Ba or lower by Moody's or BB or
lower by S&P, may have fewer protective provisions and are generally riskier and
less liquid than higher rated securities. Issuers of these securities may have
trouble making principal and interest payments when difficult economic
conditions exist.
The market value of convertible securities tends to decline as interest
rates increase.Their value also tends to change whenever the market value of the
underlying common or preferred stock fluctuates.
If the Fund invests a substantial portion of its assets in money market
instruments, repurchase agreements and short-term debt obligations, such as
commercial paper, bank obligations and U.S. Treasury bills, including where the
Fund is investing for temporary defensive purposes, it could reduce the Fund's
potential return as these securities earn only limited returns.
Derivatives may be riskier than other types of investments because they may
respond more to changes in economic conditions than other investments. An
investment in derivatives may entail the loss of an entire derivative position.
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4
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If the interest rates on floating and variable rate securities falls, the
Fund's yield may decline and it may lose the opportunity for capital
appreciation.
PERFORMANCE:
The bar chart and table below show the Fund's annual returns and its
long-term performance. The bar chart shows changes in the performance of the
Fund's Class A Shares from year to year (since 1990). This provides some
indication of the risk of investing in the Fund. The table compares the average
annual returns for each class of the Fund's shares for one year, five years, ten
years and the life of the Fund with those of the S&P 500 Index, the Lehman
Brothers Government/Corporate Bond Index, and a blended index containing 65% of
the Lehman Brothers Government/Corporate Bond Index and 35% of the S&P 500
Index. As with all mutual funds, the Fund's past performance does not predict
how the Fund will perform in the future. Both the chart and the table assume
reinvestment of dividends and distributions.
GABELLI COMSTOCK STRATEGY FUND (FOR THE PERIODS ENDED DECEMBER 31)*
[GRAPHIC OMITTED]
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
1990 2.95%
1991 13.44%
1992 -1.98%
1993 20.91%
1994 -3.73%
1995 4.02%
1996 -1.26%
1997 -15.18%
1998 -7.54%
1999
------------
* The Fund's Class A shares were first introduced on July 15, 1992. Total return
prior to July 15, 1992 reflects the performance of the Fund's Class O shares,
which the Fund no longer offers, except in connection with the reinvestment of
dividends on outstanding Class O shares. The actual returns of Class A shares
prior to July 15, 1992 would have been lower than shown because Class A shares
have higher expenses than Class O shares. Total return prior to August 1, 1991
reflects the performance of the Fund as a closed-end fund.
Class A and C Share sales loads are not reflected in the above chart. If
sales loads were reflected, the Fund's returns would be less than those shown.
During the period shown in the bar chart, the highest return for a quarter was (
)% (quarter ended ) and the lowest return for a quarter was [(13.36)]% (quarter
ended [December 31, 1998]).
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5
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<TABLE>
<CAPTION>
SINCE
AVERAGE ANNUAL TOTAL RETURNS** PAST PAST PAST 10 MAY 26,
(FOR THE PERIODS ENDED DECEMBER 31, 1999) 1 YEAR 5 YEARS YEARS 1988*
----------------------------------------- ------ ------- ------- -------
<S> <C> <C> <C> <C>
Class A Shares*** ..................................... -19.33% -8.26% % 14.41%
Class C Shares**** .................................... -19.60% -8.80% % 11.06%
S&P 500 Index+ ........................................ % % % %
Lehman Brothers Government/Corporate Bond Index++ ..... % % % %
Blended Index (containing 65% Lehman Brothers
Govt./Corp. Bond Index and 35% S&P 500 Index) ....... % % % %
<FN>
--------------
*Commencement of investment operations.
**The performance for the Class A shares reflects the deduction of the maximum
front-end sales load and the performance for Class C shares reflects the
deduction of the applicable contingent deferred sales charge. The Fund no
longer offers Class O shares, except in connection with the reinvestment of
dividends on outstanding Class O shares. Total return prior to August 1,
1991 reflects the performance of the Fund as a closed-end fund.
***Class A shares were introduced on July 15, 1992. The performance for the
period before Class A shares were launched is based on the performance of
Class O shares. The actual returns of Class A shares would have been lower
than shown because Class A shares have higher expenses than Class O shares.
****Class C shares were introduced on August 1, 1995. The performance for the
period before Class C shares were launched is based on the performance of
Class O and Class A shares. The actual returns of Class C shares would have
been lower than shown because Class A and Class C shares have higher
expenses than Class O shares and Class A shares have higher expenses than
Class C shares.
+ The S&P 500 Registered is the Standard & Poor's Composite Index of 500
stocks, a widely recognized, unmanaged index of common stocks.
++ The Lehman Brothers Government/Corporate Bond Index is an unmanaged
broad-based index comprised of U.S. Government Agency and Treasury
securities and investment grade corporate debt.
</FN>
</TABLE>
FEES AND EXPENSES OF THE FUND:
The following table describes the fees and expenses that you may pay if you
buy and hold shares of the Fund.
<TABLE>
<CAPTION>
Class A Shares Class C Shares
-------------- --------------
<S> <C> <C>
SHAREHOLDER FEES (fees paid directly from your investment)
Maximum sales charge (as a percentage of offering price) 4.50% 0%
Maximum deferred sales charge (as a percentage of purchase price) 0%* 1.00%
<FN>
------------
*1% applicable only to purchases in excess of $1 million without a sales charge.
</FN>
</TABLE>
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The costs of operating the Fund are deducted from the Fund's assets, which
means that Fund shareholders pay them indirectly. The expense information shown
below is based on year-end net assets of the Fund for 1999 of approximately $35
million, adjusted for the new advisory and administrative arrangements and
savings in other expenses anticipated in connection with the Adviser becoming
the Strategy Fund's investment adviser and administrator.
<TABLE>
<CAPTION>
Class A Class C
------- -------
<S> <C> <C>
ANNUAL FUND OPERATING EXPENSES (expenses that are deductible from Strategy Fund assets)
Management Fees 0.85% 0.85%
Service and Distribution (12b-1) Fees 0.25% 1.00%
Other Expenses 1.14% 1.14%
Total Fund Operating Expenses (before fee waiver)* 2.24% 2.99%
----- -----
Fee Waiver* 0 0
----- -----
Total Fund Operating Expenses (after fee waiver)* 2.24% 2.99%
===== =====
<FN>
-------------
* Pursuant to the Advisory Agreement, the Adviser has agreed to waive a portion
of its management fee for the first two years to the extent necessary to
maintain expense ratios for the Fund at 1999 levels (other than extraordinary
expenses) with respect to the amount of assets held by the Fund at the time
the Advisory Agreement went into effect. This waiver will not apply to
incremental assets or expense ratio increases.
** Other Expenses are based on amounts incurred during 1999, with average net
assets of approximately $35 million restated to reflect estimated reductions
in transfer agent, audit, legal and insurance expenses anticipated to take
effect in connection with the Adviser becoming the investment adviser and
administrator to the Strategy Fund.
</FN>
</TABLE>
EXAMPLE: This example is intended to help you compare the cost of investing in
the Fund with the cost of investing in other mutual funds. The example assumes
(1) you invest $10,000 in the Fund for the time periods shown, (2) you redeem
your shares at the end of those periods (except as noted), (3) your investment
has a 5% return each year and (4) the Fund's operating expenses remain the same.
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
<S> <C> <C> <C> <C>
CLASS A SHARES $667 $1,119 $1,596 $2,909
CLASS C SHARES Assuming no redemption $302 $924 $1,572 $3,308
Assuming redemption $402 $924 $1,572 $3,308
</TABLE>
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GABELLI COMSTOCK CAPITAL VALUE FUND
INVESTMENT OBJECTIVE:
The Fund seeks to maximize total return, consisting of capital appreciation
and current income. Capital is the amount of money the Fund has to invest and
capital appreciation is the increase in the value of your investments. Current
income is the amount of money the Fund earns annually on its invested capital.
PRINCIPAL INVESTMENT STRATEGIES:
The Fund invests in, and may shift frequently among, a wide range of asset
classes and market sectors. These include foreign and domestic equity and debt
securities, money market instruments, and derivatives. The Fund is classified as
a diversified portfolio, but is not managed as a balanced portfolio. As a
result, the Adviser has considerable flexibility in selecting the types of
investments and market sectors for investment of the Fund's assets and is not
required to maintain any minimum portion of the Fund's assets in any particular
asset class. Thus, during the course of a business cycle, for example, the Fund
may invest solely in equity securities, debt securities or money market
instruments, or in a combination of these classes of investments. For each asset
class, the Adviser uses a valuation approach to investing by examining the
overall economic picture, the characteristics of individual securities,
historical market information and technical analysis to determine securities
which it believes are overvalued or undervalued. The Fund may use either long or
short positions in pursuit of its objective. The Fund's investment performance
will depend in large part on the asset allocation selected by the portfolio
managers.
As of the date of this prospectus, the portfolio managers view the U.S.
equity markets as highly overvalued by most traditional measurements, and have
positioned the Fund to seek profits in a major U.S. equity market decline
through a variety of investment practices, including puts and short sales,
together with its investments in short-term fixed income securities. The Fund is
flexibly managed, however, and the Adviser may, without notice, change the
Fund's asset positioning quickly and decisively.
The Fund may invest in a wide range of assets. Equity securities in which
the Fund may invest include common stock, preferred stock (including convertible
preferred stock), warrants and depository receipts. Debt securities in which the
Fund may invest include U.S. corporate debt, U.S. government and agency debt and
foreign sovereign and other debt securities (including sovereign and other debt
securities from emerging market issuers). The Fund may invest up to 65% of its
assets in the equity and debt securities of foreign issuers. The Fund may also
invest in debt securities convertible into shares of common stock. The Fund's
debt securities may have fixed, floating or variable rates of interest.
The Fund may invest without limit in debt securities with no minimum rating
assigned by Moody's or S&P. However, the Fund intends to invest less than 35% of
its assets in debt securities rated at the time of purchase "Ba" or lower by
Moody's or "BB" or lower by S&P (commonly referred to as "junk bonds").
The Fund may invest in high quality domestic and foreign money market
instruments, and may enter into repurchase agreements. In addition, when the
Adviser determines that a temporary defensive position is advisable or to meet
anticipated redemption requests, the Fund may invest without limit in short-term
debt obligations, such as commercial paper, bank obligations and U.S. Treasury
bills.
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8
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There is no restriction on the maturity of the Fund's portfolio or on any
individual debt security in the Fund's portfolio. The Adviser may adjust the
average maturity according to actual or anticipated changes in the market.
The Fund may make short sales, which are transactions in which the Fund
sells a security it does not own, with the expectation that the security's value
will decline. To complete a short sale, the Fund must borrow the security to
make delivery, and then replace the security by purchasing it. The total market
value of all the Fund's short sales may not exceed 25% of the value of the
Fund's net assets. In addition, the Fund's short sales of the securities of any
single issuer listed on a national securities exchange may not exceed 5% of the
value of the Fund's net assets, and the Fund may not sell short more than 5% of
the outstanding securities of a single class of securities of an issuer. The
Fund may enter into short sales of securities the Fund owns, but such sales
cannot exceed 5% of the value of the Fund's net assets. The Fund's compliance
with these limitations is calculated at the time a transaction is effected.
The Fund intends to invest in derivatives, which are financial instruments
whose value is based on another security, an index of securities or market
changes or exchange rate movements. The Fund may use derivatives to hedge
various market risks. Derivative strategies the Fund may use include writing
covered call or put options or purchasing put and call options on securities,
foreign currencies or stock indices. The Fund may also purchase or sell stock
index futures contracts or interest rate futures contracts and may enter into
interest rate or forward currency transactions. In addition, the Fund may
purchase futures and options on futures and may purchase options on securities
or securities indices for speculative purposes in order to increase the Fund's
income or gain. The Fund may enter into futures contracts and options on futures
for speculative purposes if, immediately thereafter, the sum of the amount of
its initial margin on futures contracts and premiums on options on futures would
not exceed 5% of the liquidation value of the Fund's portfolio; provided, 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 this 5% limitation. In
addition to the preceding limitation, the value of all put and call options held
by the Fund cannot exceed 5% of the Fund's net assets. The Fund may not write
covered call and put option contracts in excess of 20% of its net assets. The
Fund's compliance with these limitations is only calculated at the time any new
position is added, with the result that the limitations may be exceeded if
derivatives positions held by the Fund appreciate.
The Fund may trade securities actively, which could increase transaction
costs, thus lowering performance, and increasing your taxable dividends.
PRINCIPAL RISKS:
While the Fund seeks to maximize total return, there is no guarantee that
shares of the Fund will not lose value. This means that you can lose money on
your investment in the Fund. The Fund may not be able to achieve its objective
if the portfolio managers' expectations regarding particular securities or
markets are not met. In particular, as long as the Fund is positioned to seek
profits from a major U.S. equity market decline, the value of the Fund's shares
may be adversely affected during periods in which there are stable or rising
market conditions.
The Fund is subject to market risks that affect the value of its shares,
including general economic and market conditions. To the extent the Fund has
significant equity exposure, the value of the Fund's shares will be influenced
by conditions in the stock markets, as well as the performance of the companies
or industries selected for the Fund's portfolio.
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9
<PAGE>
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To the extent the Fund's assets are invested in debt securities, the Fund
is subject to credit risk and interest rate risk. Typically, when interest rates
rise, the market value of debt securities, such as those held by the Fund, will
decline. Debt securities with longer maturities are more sensitive to interest
rate risk than shorter term debt securities. During periods of falling interest
rates, the Fund's total return may be subject to reinvestment rate risk.
Reinvestment rate risk could occur during a time of declining interest rates due
to the need to reinvest prepayments on debt securities, income generated by the
Fund's assets or a substantial inflow of money into the Fund. The Fund's total
return may suffer as a result of reinvestment rate risk to the extent the market
value gains caused by falling interest rates are not enough to offset the lower
rates of return available for the continuing investment or reinvestment of the
Fund's assets. Credit risk is the risk that the issuer of a debt security may
not be able to pay principal and interest payments on time. The market's
perception that an issuer might not be able to make such timely payments may
negatively affect the market value of that issuer's debt securities.
Investments in foreign securities may be riskier than investments in the
securities of U.S. issuers. They may be affected by political, social and
economic instability. Some securities may be harder to trade without incurring a
loss and may be difficult to convert into cash. There may be less public
information available, differing settlement procedures, or regulations and
standards that don't match U.S. standards. Some countries may nationalize or
expropriate assets or impose exchange controls. If the Fund invests in a
security which is not denominated in U.S. dollars, it also will be subject to
currency exchange risk. These risks increase when investing in issuers located
in emerging markets.
High yield securities, which are rated Ba or lower by Moody's or BB or
lower by S&P, may have fewer protective provisions and are generally riskier and
less liquid than higher rated securities. Issuers of these securities may have
trouble making principal and interest payments when difficult economic
conditions exist.
The market value of convertible securities tends to decline as interest
rates increase. Their value also tends to change whenever the market value of
the underlying common or preferred stock fluctuates.
If the price of a security sold "short" by the Fund declines between the
date of the short sale and the date on which the Fund replaces the borrowed
security, the Fund will make money on the transaction. If the price of the
"shorted" security increases between these two dates, the Fund will incur a
loss.
If the Fund invests a substantial portion of its assets in money market
instruments, repurchase agreements and short-term debt obligations, such as
commercial paper, bank obligations and U.S. Treasury bills, including where the
Fund is investing for temporary defensive purposes, it could reduce the Fund's
potential return as these securities earn only limited returns.
Derivatives may be riskier than other types of investments because they may
respond more to changes in economic conditions than other investments. An
investment in derivatives may entail the loss of an entire derivative position.
In certain cases, the use of derivatives may result in losses which exceed the
Fund's original investment in derivatives.
If the interest rates on floating or variable rate securities falls, the
Fund's yield may decline and it may lose the opportunity for capital
appreciation.
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10
<PAGE>
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PERFORMANCE:
The bar chart and table below show the Fund's annual returns and its
long-term performance. The bar chart provides changes in the performance of the
Fund's Class A Shares from year to year (since 1990). This provides some
indication of risk of investing in the Fund. The table shown below compares the
average annual returns for each class of the Fund's Shares for one year, five
years, ten years and the life of the Fund with those of the S&P 500 Index. As
with all mutual funds, the Fund's past performance does not predict how the Fund
will perform in the future. Both the chart and the table assume reinvestment of
dividends and distributions.
GABELLI COMSTOCK CAPITAL VALUE FUND (FOR THE PERIODS ENDED DECEMBER 31)*
[GRAPHIC OMITTED]
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
1990 1.34
1991 4.08
1992 -10.34
1993 12.70
1994 -3.87
1995 -3.12
1996 -5.67
1997 -27.26
1998 -22.10
1999
------------
* On July 25, 1996, the Fund became the successor to the Dreyfus Capital Value
Fund. Performance prior to this date reflects the performance of the Dreyfus
Capital Value Fund.
Class A, B and C Share sales loads are not reflected in the above chart. If
sales loads were reflected, the Fund's returns would be less than those shown.
During the period shown in the bar chart, the highest return for a quarter was [
]% (quarter ended ) and the lowest return for a quarter was (23.32)% (quarter
ended December 31, 1998).
--------------------------------------------------------------------------------
11
<PAGE>
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SINCE
AVERAGE ANNUAL TOTAL RETURNS** PAST PAST PAST 10 OCTOBER 10,
(FOR THE PERIODS ENDED DECEMBER 31, 1999) 1 YEAR 5 YEARS YEARS 1985*
----------------------------------------- ------ ------- ------- -----------
<S> <C> <C> <C> <C>
Class A Shares** ................................... -27.40% -17.76% % -0.46%
Class B Shares*** .................................. -28.22% -18.44% % -12.70%
Class C Shares**** ................................. -27.99% N/A% % -20.43%
Class R Shares***** ................................ -27.46% N/A% % -19.48%
S&P 500 Index+ ..................................... % % % %
<FN>
------------
* Commencement of investment operations.
** The performance for Class A shares reflects the deduction of the maximum
front-end sales load and the performance for Class B and Class C shares
reflects the deduction of the applicable contingent deferred sales charge.
On July 25, 1996, the Fund became the successor to the Dreyfus Capital
Value Fund. Performance prior to this date reflects the performance of the
Dreyfus Capital Value Fund.
*** Class B shares were introduced on January 15, 1993. The performance for
the period before Class B shares were launched is based on the performance
of Class A shares. The actual returns of Class B shares would have been
lower than shown because Class B shares have higher expenses than Class A
shares.
**** Class C shares were introduced on August 22, 1995. The performance for the
period before Class C shares were launched is based on the performance of
Class A shares for the period prior to January 15, 1993 and the
performance of Class B shares from that time until the introduction of
Class C shares. The actual returns of Class C shares would have been lower
because Class C shares and Class B shares have higher expenses than Class
A shares.
***** Class R shares were introduced on August 22, 1995. The performance for the
period before Class R shares were launched is based on the performance of
Class A shares.
+ The S&P 500 Registered is the Standard & Poor's Composite Index of 500
stocks, a widely recognized, unmanaged index of common stocks.
</FN>
</TABLE>
FEES AND EXPENSES OF THE FUND:
The following table describes the fees and expenses that you may pay if you
buy and hold shares of the Fund.
<TABLE>
<CAPTION>
Class A Shares Class B Shares Class C Shares Class R Shares
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
SHAREHOLDER FEES
(fees paid directly from your investment)
Maximum sales charge
(as a percentage of offering price) 4.50% 0% 0% 0%
Maximum deferred sales charge
(as a percentage of purchase price) 0%** 4.00% 1.00% 0%
<FN>
-------------
**1% applicable only to purchases in excess of $1 million without a sales
charge.
</FN>
</TABLE>
--------------------------------------------------------------------------------
12
<PAGE>
--------------------------------------------------------------------------------
The costs of operating the Fund are deducted from the Fund's assets, which
means that Fund shareholders pay them indirectly. The expense information shown
below is based on year-end net assets of the Fund for 1999 of approximately $65
million, adjusted for the new advisory and administrative arrangements and
savings in other expenses anticipated in connection with the Adviser being the
Fund's investment adviser and administrator:
<TABLE>
<CAPTION>
Class A Class B Class C Class R
------- ------- ------- -------
<S> <C> <C> <C> <C>
ANNUAL FUND OPERATING EXPENSES
(expenses that are deductible from Fund assets)
Management Fees 1.00% 1.00% 1.00% 1.00%
Service and Distribution (12b-1) Fees 0.25% 1.00% 1.00% 0.00%
Other Expenses 0.57% 0.57% 0.57% 0.57%
Total Fund Operating Expenses (before fee waiver)* 1.82% 2.57% 2.57% 1.57%
------- ------- ------- -------
Fee Waiver* (0.19)% (0.19)% (0.19)% (0.19)%
------- ------- ------- -------
Total Fund Operating Expenses (after fee waiver)* 1.63% 2.38% 2.38% 1.38%
======= ======= ======= =======
<FN>
-------------
* Pursuant to the Advisory Agreement, the Adviser will agree to waive a portion
of its management fee for the first two years to the extent necessary to
maintain expense ratios for the Fund at 1999 levels (other than extraordinary
expenses) with respect to the amount of assets held by the Fund at the time
the Advisory Agreement went into effect. This waiver will not apply to
incremental assets or expense ratio increases.
** Other Expenses are based on amounts incurred during 1999, with average net
assets of approximately $65 million, restated to reflect estimated reductions
in transfer agent, audit, legal and insurance expenses.
</FN>
</TABLE>
EXAMPLE: This example is intended to help you compare the cost of investing in
the Fund with the cost of investing in other mutual funds. The example assumes
(1) you invest $10,000 in the Fund for the time periods shown, (2) you redeem
your shares at the end of those periods (except as noted), (3) your investment
has a 5% return each year and (4) the Fund's operating expenses remain the same.
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
<S> <C> <C> <C> <C>
CLASS A SHARES $608 $ 941 $1,297 $2,296
CLASS B SHARES Assuming no redemption $241 $ 742 $1,270 $2,716
Assuming redemption $641 $1,042 $1,470 $2,716
CLASS C SHARES Assuming no redemption $241 $ 742 $1,270 $2,716
Assuming redemption $341 $ 742 $1,270 $2,716
CLASS R SHARES $140 $ 437 $ 755 $1,657
</TABLE>
MANAGEMENT OF THE FUNDS
THE ADVISER. On May 22, 2000, Gabelli Funds, LLC, with principal offices
located at One Corporate Center, Rye, NY 10580-1434, commenced services as
investment adviser to the Funds. The Adviser makes investment decisions for the
Funds and continuously reviews and administers the Funds' investment program
under the supervision of the Company's Board of Directors. The Adviser manages
several other open-end and closed-end investment companies in the Gabelli Family
of funds. The Adviser is a New York limited liability company organized in 1999
as successor to the mutual fund advisory business of Gabelli Group Capital
Partners, Inc. (formerly named, Gabelli Funds, Inc.), a New York corporation
organized in 1980. The Adviser is a wholly owned subsidiary of Gabelli Asset
Management Inc. ("GAMI"), a publicly held company listed on the New York Stock
Exchange ("NYSE").
--------------------------------------------------------------------------------
13
<PAGE>
--------------------------------------------------------------------------------
As compensation for its services and the related expenses the Adviser
bears, the Adviser is entitled to an advisory fee computed daily and payable
monthly, at the annual rates set forth below:
FUND
------
Strategy Fund ........................................ 0.85%*
Capital Value Fund ................................... 1.00%*
---------------
* Pursuant to the Advisory Agreement, the Adviser has agreed to waive a portion
of its management fee for the first two years to the extent necessary to
maintain expense ratios for each Fund at 1999 levels (other than extraordinary
expenses) with respect to the amount of assets held by each Fund at the time
the Advisory Agreement went into effect. The waiver will not apply to
incremental assets or expense ratio increases.
Prior to May 22, 2000, Comstock Partners, Inc. ("Comstock Partners")
located at 993 Lenox Drive, Suite 106, Lawrenceville, NJ 08648 served as
investment adviser to the Funds. Under its investment advisory agreement,
Comstock Partners received advisory fees with respect to the Funds for the
fiscal year and ended April 30, 2000 at the rates set forth below:
FUND
------
Strategy Fund ........................................ %
Capital Value Fund ................................... %
PORTFOLIO MANAGERS. The portfolio managers for the Funds are Charles L.
Minter and Martin Weiner. Mr. Minter is currently a Director of the Funds. Prior
to May 2000, Mr. Minter was Comstock Partners' Chairman and Chief Executive
Officer. Mr. Minter worked for Merrill Lynch from 1966 to 1986, serving as Vice
President Institutional Sales from 1976 to 1986. In that capacity, he serviced
institutional accounts and supervised portfolios, which included commodity and
financial futures, options, foreign securities and zero coupon bonds. Mr. Minter
has been primarily responsible for the management of the Strategy Fund since its
inception and the Capital Value Fund (including its predecessor, the Dreyfus
Capital Value Fund) since April 30, 1987. Mr. Minter has a M.B.A. degree from
New York University's Graduate School of Business.
Prior to May 2000, Mr. Weiner, a Chartered Financial Analyst, was employed
by Comstock Partners. He began his career as a financial analyst at the
Securities and Exchange Commission in 1959. From 1966 to 1969, he was Equity
Analyst and Division Chief at the Value Line Investment Survey, and from 1969 to
1974, he was Equity Analyst and then Vice President at Standard & Poor's
Intercapital. In 1974, Mr. Weiner joined the Grumman Corporation where he served
as Senior Equity Portfolio Manager for the employee benefit plan from 1978 to
1994. Mr. Weiner has a M.S. degree in Finance from Columbia University's
Graduate School of Business.
--------------------------------------------------------------------------------
14
<PAGE>
--------------------------------------------------------------------------------
CLASSES OF SHARES
SALES CHARGES, ANNUAL FEES AND CHOOSING A SHARE CLASS
The Strategy Fund offers two options for purchasing shares; Class A shares
and Class C shares. The Capital Value Fund offers four options for purchasing
shares; Class A shares, Class B shares, Class C shares and Class R shares.
ABOUT SALES CHARGES
Class A shares, Class B shares and Class C shares each carry their own
sales charges. There are also ongoing charges that all investors pay as long as
they own their shares. Class A shares have an initial sales charge which is
deducted directly from the money you invest. Class B shares have a contingent
deferred sales charge ("CDSC") which is deducted directly from your assets when
you sell your shares. You don't pay any sales charge when you buy Class B
shares, but you may have to pay a charge when you sell them, depending on how
long you hold them. Class C shares also have a CDSC that you may have to pay if
you sell your shares within one year of buying them. Class R shares have no
sales charges.
SERVICE AND DISTRIBUTION FEES
Service and distribution fees are ongoing charges that investors pay as
long as they own their shares. The Funds have adopted Rule 12b-1 service and
distribution plans for Class A, B and C shares under which each Fund pays annual
fees for distribution of the Fund's shares and shareholder services at the
following rates:
o 0.25% of the average daily net assets attributed to Class A shares (as a
distribution and service fee)
o 1.00% of the average daily net assets attributed to Class B shares (0.75%
for distribution fees; 0.25% for service fees)
o 1.00% of the average daily net assets attributed to Class C shares (0.75%
for distribution fees; 0.25% for service fees)
These are annual rates based on the value of each of these Classes' average
daily net assets. Because the Rule 12b-1 fees are higher for Class B and Class C
Shares than for Class A Shares, Class B and Class C Shares will have higher
annual expenses. Because Rule 12b-1 fees are paid out of the Funds' assets on an
on-going basis, over time these fees will increase the cost of your investment
and may cost you more than paying other types of sales charges. These payments
cover such things as compensation for services provided by broker-dealers and
expenses connected to the sale of shares and the servicing of accounts. Payments
are not tied to actual expenses incurred. There are no service or distribution
fees for Class R shares.
CLASS A SHARES (STRATEGY FUND AND CAPITAL VALUE FUND)
The initial sales charge is deducted directly from the money you invest. As
the table below shows, the charge is lower the more you invest. The public
offering price of Class A shares is the net asset value plus the initial sales
charge. The applicable Fund receives the net asset value.
--------------------------------------------------------------------------------
15
<PAGE>
--------------------------------------------------------------------------------
The following chart shows the sales charges for Class A shares for both the
Strategy Fund and the Capital Value Fund:
<TABLE>
<CAPTION>
TOTAL SALES CHARGE (CLASS A SHARES)
------------------------------------------
AS % OF THE AS %* OF NET
OFFERING PRICE ASSET VALUE PER
AMOUNT OF INVESTMENT PER SHARE SHARE
---------------------------- -------------- ---------------
<S> <C> <C>
Less than $50,000 ................................. 4.50% 4.70%
$50,000 to less than $100,000 ..................... 4.00% 4.20%
$100,000 to less than $250,000 .................... 3.00% 3.10%
$250,000 to less than $500,000 .................... 2.50% 2.60%
$500,000 to less than $1 million .................. 2.00% 2.00%
$1,000,000 or more ................................ 0 0
<FN>
---------------
* Rounded to the nearest one-hundredth percent.
</FN>
</TABLE>
There is no sales charge for investments in Class A shares of $1 million or
more, except that you will pay a deferred sales charge of 1% if you purchase $1
million or more of Class A shares without a sales load and you redeem within two
years. The distributor may pay a dealer concession of up to 1% on investments
made with no initial sales charge.
[SALES CHARGE REDUCTIONS AND WAIVERS - CLASS A SHARES:
Reduced sales charges are available to (1) investors who are eligible to combine
their purchases of Class A Shares to receive volume discounts and (2) investors
who sign a Letter of Intent agreeing to make purchases over time. Certain types
of investors are eligible for sales charge waivers.
1. VOLUME DISCOUNTS. Investors eligible to receive volume discounts are
individuals and their immediate families, tax-qualified employee benefit
plans and a trustee or other fiduciary purchasing shares for a single trust
estate or single fiduciary account even though more than one beneficiary is
involved. You also may combine the value of Class A Shares you already hold
in a Fund and other funds advised by the Adviser or its affiliates along
with the value of the Class A Shares being purchased to qualify for a
reduced sales charge. For example, if you own Class A Shares of a Fund that
have an aggregate value of $100,000, and make an additional investment in
Class A Shares of the Fund of $4,000, the sales charge applicable to the
additional investment would be 3.00%, rather than the 4.50% normally
charged on a $4,000 purchase. If you want more information on volume
discounts, call your broker.
2. LETTER OF INTENT. If you initially invest at least [$1,000] in Class A
Shares of a Fund and submit a Letter of Intent to Gabelli & Company, Inc.
(the "Distributor"), you may make purchases of Class A Shares of the Fund
during a 13-month period at the reduced sales charge rates applicable to
the aggregate amount of the intended purchases stated in the Letter. The
Letter may apply to purchases made up to 90 days before the date of the
Letter. You will have to pay sales charges at the higher rate if you fail
to honor your Letter of Intent. For more information on the Letter of
Intent, call your broker.
3. INVESTORS ELIGIBLE FOR SALES CHARGE WAIVERS. Class A Shares of each Fund
may be offered without a sales charge to: (1) any other investment company
in connection with the combination of such company with the Fund by merger,
acquisition of assets or otherwise; (2) shareholders who have redeemed
shares in the Fund and who wish to reinvest in the Fund, provided the
reinvestment is made within 30 days of the redemption; (3) tax-exempt
organizations enumerated in Section
--------------------------------------------------------------------------------
16
<PAGE>
--------------------------------------------------------------------------------
501(c)(3) of the Internal Revenue Code of 1986, as amended (the "Code") and
private, charitable foundations that in each case make lump-sum purchases
of $100,000 or more; (4) qualified employee benefit plans established
pursuant to Section 457 of the Code that have established omnibus accounts
with the Fund; (5) qualified employee benefit plans having more than one
hundred eligible employees and a minimum of $1 million in plan assets
invested in the Fund (plan sponsors are encouraged to notify the Funds'
Distributor when they first satisfy these requirements); (6) any unit
investment trusts registered under the Investment Company Act of 1940, as
amended (the "1940 Act") which have shares of the Fund as a principal
investment; (7) financial institutions purchasing Class A Shares of the
Fund for clients participating in a fee based asset allocation program or
wrap fee program which has been approved by the Distributor; and (8)
registered investment advisers or financial planners who place trades for
their own accounts or the accounts of their clients and who charge a
management, consulting or other fee for their services; and clients of such
investment advisers or financial planners who place trades for their own
accounts if the accounts are linked to the master account of such
investment adviser or financial planner on the books and records of a
broker or agent.]
Investors who qualify under any of the categories described above should
contact their brokerage firm.
CLASS B SHARES (CAPITAL VALUE FUND ONLY)
The deferred sales charge is deducted directly from your investment when
you sell your shares. It is a percentage of the original purchase price or the
current value of the shares, whichever is lower. As the table shows, the CDSC
gets lower the longer you hold the shares and disappears altogether after six
years. Class B shares automatically convert into Class A shares at the end of
the sixth year after purchase.
YEAR CONTINGENT DEFERRED SALES CHARGE
---- --------------------------------
1 4.00%
2 4.00%
3 3.00%
4 3.00%
5 2.00%
6 1.00%
[We calculate the CDSC from the month you buy your shares. We always redeem
the shares with the lowest CDSC first. Shares acquired by reinvestment of
distributions can be sold without a CDSC.
The Distributor pays sales commissions of up to 4.00% of the purchase price
of Class B Shares of a Fund to brokers at the time of sale that initiate and are
responsible for purchases of such Class B Shares of the Fund.
The Distributor pays sales commissions of up to 1.00% of the purchase price
of Class C Shares of the Fund to brokers at the time of sale that initiate and
are responsible for purchase of such Class C Shares of the Fund.
You will not pay a CDSC to the extent that the value of the redeemed shares
represents reinvestment of dividends or capital gains distributions or capital
appreciation of shares redeemed. When you redeem shares, we will assume that you
are first redeeming shares representing reinvestment of dividends and capital
gains distributions, then any appreciation on shares redeemed, and then
remaining shares held
--------------------------------------------------------------------------------
17
<PAGE>
--------------------------------------------------------------------------------
by you for the longest period of time. We will calculate the holding period of
shares acquired through an exchange of shares of another fund from the date you
acquired the original shares of the other fund. The time you hold shares in a
money market fund, however, will not count for purposes of calculating the
applicable CDSC.
We will waive the CDSC payable upon redemptions of shares for:
o redemptions and distributions from retirement plans made after the death
or disability of a shareholder
o minimum required distributions made from an IRA or other retirement plan
account after you reach age 591/2
o involuntary redemptions made by the Funds
o a distribution from a tax-deferred retirement plan after your retirement
o returns of excess contributions to retirement plans following the
shareholder's death or disability
[CONVERSION FEATURE - CLASS B SHARES:
o Class B Shares automatically convert to Class A Shares of a Fund at the
end of the sixth year after purchase.
o After conversion, your shares will be subject to the lower Rule 12b-1
fees charged on Class A Shares, which will increase your investment
return compared to the Class B Shares.
o You will not pay any sales charge or fees when your shares convert, nor
will the transaction be subject to any tax.
o The dollar value of Class A Shares you receive will equal the dollar
value of the Class B Shares converted.
o If you exchange Class B Shares of one fund for Class B Shares of another
fund, your holding period for calculating the CDSC will be from the time
of your original purchase of Class B Shares. If you exchange shares into
a Gabelli money market fund, however, your holding period will be
suspended.]
The Board of Directors may suspend the automatic conversion of Class B
Shares to Class A Shares for legal reasons or due to the exercise of its
fiduciary duty. If the Board determines that such suspension is likely to
continue for a substantial period of time, it will create another class of
shares into which Class B Shares are convertible.
CLASS C SHARES (STRATEGY FUND AND CAPITAL VALUE FUND)
The CDSC is deducted directly from your investment when you sell your
shares. It is equal to 1% of the original purchase price or the current value of
the shares, whichever is lower. The CDSC on Class C shares disappears altogether
after one year. We calculate the CDSC from the month you buy your shares. We
always redeem the shares with the lowest CDSC first.
Unlike Class B shares, Class C shares are never converted to Class A
shares. That means you keep paying the higher distribution and service fees
associated with Class C shares as long as you hold them. Over the long term,
this can add up to higher total fees than either Class A or Class B shares.
--------------------------------------------------------------------------------
18
<PAGE>
--------------------------------------------------------------------------------
CLASS R SHARES (CAPITAL VALUE FUND ONLY)
Class R shares have no sales charges and no distribution or service fees.
COMPARING SHARE CLASSES
The table below summarizes the sales charges and fees applicable to each
class of shares.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------
CLASS B CLASS R
CLASS A (CAPITAL VALUE CLASS C (CAPITAL VALUE
(BOTH FUNDS) FUND ONLY) (BOTH FUNDS) FUND ONLY)
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
WHO MAY INVEST? [Limited to [Limited to [Limited to Limited to
clients of clients of clients of certain
service agents, service agents, service agents, institutional
which include which include which include investors acting
certain banks, certain banks, certain banks, for themselves or
securities securities securities for certain
dealers, and dealers, and dealers, and benefit or
other financial other financial other financial retirement plans
industry industry industry in an advisory,
professionals.] professionals.] professionals.] agency, custodial
or fiduciary
capacity.
--------------------------------------------------------------------------------------------------------
UPFRONT SALES CHARGE? Yes. Payable at No. Entire No. Entire No Entire
time of purchase. purchase price is purchase price is purchase price is
However, lower invested in invested in invested in
sales charges are shares of the shares of the shares of the
available for Fund. Fund. Fund.
larger
investments.
--------------------------------------------------------------------------------------------------------
CONTINGENT DEFERRED No. However, will Yes. Payable if Yes. Payable if No.
SALES CHARGES? be charged for you redeem within you redeem within
purchases over $1 six years of one year of
million that are purchase (on a purchase.
redeemed within descending scale,
one year. depending on how
long you hold
your shares.)
--------------------------------------------------------------------------------------------------------
12B-1 SERVICE AND 0.25% 0.75% 0.75% None.
DISTRIBUTION FEES? distribution and distribution fee; distribution fee;
service fee. 0.25% service 0.25% service
fee. fee.
--------------------------------------------------------------------------------------------------------
CONVERSION TO CLASS A Not applicable. Yes. No. No.
SHARES? Automatically
after 6 years.
--------------------------------------------------------------------------------------------------------
</TABLE>
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19
<PAGE>
--------------------------------------------------------------------------------
PURCHASE OF SHARES
You can purchase the Funds' shares on any day the NYSE is open for trading
(a "Business Day"). [Class R Shares may only be purchased by institutional
investors acting for themselves or in a fiduciary, advisory, agency, custodial
or similar capacity for certain benefit plans and retirement plans.] You may
purchase shares through registered broker-dealers or other financial
intermediaries that have entered into selling agreements with the Funds'
Distributor.
The broker-dealer or other financial intermediary will transmit a purchase
order and payment to State Street Bank and Trust Company ("State Street") on
your behalf. Broker-dealers or other financial intermediaries may send
confirmations of your transactions and periodic statements showing your
investments in the Funds.
SHARE PRICE. The Funds sell shares at the net asset value next determined
after the Funds receive your completed subscription order form and your payment,
subject to an upfront sales charge in the case of Class A Shares. See "Pricing
of Fund Shares" for a description of the calculation of net asset value as
described under "Classes of Shares - Class A Shares."
MINIMUM INVESTMENT. Your minimum initial investment must be at least
$1,000. See "Retirement Plans" and "Automatic Investment Plan" regarding minimum
investment amounts applicable to such plans. There is no minimum for subsequent
investments. Broker-dealers may have different minimum investment requirements.
RETIREMENT PLANS. The Funds have available a form of IRA, "Roth" IRA and
Education IRA for investment in Fund shares that may be obtained from the
Distributor by calling 1-800-GABELLI (1-800-422-3554). Self-employed investors
may purchase shares of the Funds through tax-deductible contributions to
existing retirement plans for self-employed persons, known as "Keogh" or
"H.R.-10" plans. The Funds do not currently act as a sponsor to such plans. Fund
shares may also be a suitable investment for other types of qualified pension or
profit-sharing plans which are employer sponsored, including deferred
compensation or salary reduction plans known as "401(k) Plans." The minimum
initial investment in all such retirement plans is $250. There is no minimum
subsequent investment requirement for retirement plans.
AUTOMATIC INVESTMENT PLAN. The Funds offer an automatic monthly investment
plan. There is no minimum monthly investment for accounts establishing an
automatic investment plan. Call the Distributor at 1-800-GABELLI
(1-800-422-3554) for more details about the plan.
GENERAL. State Street will not issue share certificates unless requested by
you. The Funds reserve the right to (i) reject any purchase order if, in the
opinion of the Funds' management, it is in the Funds' best interest to do so,
(ii) suspend the offering of shares for any period of time and (iii) waive the
Funds' minimum purchase requirement.
REDEMPTION OF SHARES
You can redeem shares of the Funds on any Business Day without a redemption
fee. Each Fund may temporarily stop redeeming shares when the NYSE is closed or
trading on the NYSE is restricted, when an emergency exists and the Fund cannot
sell shares or accurately determine the value of its assets, or if the
Securities and Exchange Commission ("SEC") orders the Fund to suspend
redemptions.
--------------------------------------------------------------------------------
20
<PAGE>
--------------------------------------------------------------------------------
Each Fund redeems its shares at the net asset value next determined after
the Fund receives your redemption request, subject in some cases to a CDSC, as
described under "Classes of Shares - Class B Shares" or "Classes of Shares -
Class C Shares"). See "Pricing of Fund Shares" for a description of the
calculation of net asset value.
You may redeem shares through a broker-dealer or other financial
intermediary that has entered into a selling agreement with the Distributor. The
broker-dealer or financial intermediary will transmit a redemption order to
State Street on your behalf. The redemption request will be effected at the net
asset value next determined (less any applicable CDSC) after State Street
receives the request. If you hold share certificates, you must present the
certificates endorsed for transfer. A broker-dealer may charge you fees for
effecting redemptions for you.
In the event that you wish to redeem shares and you are unable to contact
your broker-dealer or other financial intermediary, you may redeem shares by
mail. You may mail a letter requesting redemption of shares to: THE GABELLI
FUNDS, P.O. BOX 8308, BOSTON, MA 02266-8308. Your letter should state the name
of the Fund and the share class, the dollar amount or number of shares you wish
to redeem and your account number. If there is more than one owner of shares,
all must sign. A signature guarantee is required for each signature on your
redemption letter. You can obtain a signature guarantee from financial
institutions such as commercial banks, brokers, dealers and savings
associations. A notary public cannot provide a signature guarantee.
INVOLUNTARY REDEMPTION. The Funds may redeem all shares in your account
(other than an IRA account) if its value falls below $500 as a result of
redemptions (but not as a result of a decline in net asset value). You will be
notified in writing if the Funds initiate such action and allowed 45 days to
increase the value of your account to at least $500.
REDEMPTION PROCEEDS. A redemption request received by a Fund will be
effected at the net asset value next determined after a Fund receives the
request. If you request redemption proceeds by check, the Fund will normally
mail the check to you within seven days after receipt of your redemption
request. If you purchased your Fund shares by check or through the Automatic
Investment Plan, you may not receive proceeds from your redemption until the
check clears, which may take up to as many as 15 days following purchase. While
the Fund will delay the processing of the redemption until the check clears,
your shares will be valued at the next determined net asset value after receipt
of your redemption request.
EXCHANGE OF SHARES
You can exchange shares of the Fund you hold for shares of the
corresponding class of certain other funds managed by the Adviser or its
affiliates based on their relative net asset values. To obtain a list of the
funds whose shares you may acquire through an exchange call your broker. Class B
and Class C Shares will continue to age from the date of the original purchase
of such shares and will assume the CDSC rate such shares had at the time of
exchange. You may also exchange your shares for shares of a money market fund
managed by the Adviser or its affiliates, without imposition of any CDSC at the
time of exchange. Upon subsequent redemption from such money market funds or the
Fund (after re-exchange into the Fund), such shares will be subject to the CDSC
calculated by excluding the time such shares were held in the money market fund.
--------------------------------------------------------------------------------
21
<PAGE>
--------------------------------------------------------------------------------
In effecting an exchange:
o you must meet the minimum investment requirements for the fund whose
shares you purchase through exchange
o if you are exchanging into a fund with a higher sales charge, you must
pay the difference at the time of exchange
o you may realize a taxable gain or loss
o you should read the prospectus of the fund whose shares you are
purchasing through exchange (call your broker to obtain the prospectus)
o you should be aware that brokers may charge a fee for handling an
exchange for you
You may exchange shares by telephone, by mail, over the Internet or through
a registered broker-dealer or other financial intermediary.
o EXCHANGE BY TELEPHONE. You may give exchange instructions by telephone by
calling 1-800-GABELLI (1-800-422-3554). You may not exchange shares by
telephone if you hold share certificates.
o EXCHANGE BY MAIL. You may send a written request for exchanges to: The
Gabelli Funds, P.O. Box 8308, Boston, MA 02266-8308. Your letter should
state your name, your account number, the dollar amount or number of
shares you wish to exchange, the name and class of the fund whose shares
you wish to exchange, and the name of the fund whose shares you wish to
acquire.
o EXCHANGE THROUGH THE INTERNET. You may also give exchange instructions
via the Internet site of your broker, if available, or at
www.gabelli.com. You may not exchange shares through the Internet if you
hold share certificates.
We may modify or terminate the exchange privilege at any time. You will be
given notice 60 days prior to any material change in the exchange privilege.
PRICING OF FUND SHARES
Net asset value is calculated separately for each class of shares of each
Fund on each Business Day. The NYSE is open Monday through Friday, but currently
is scheduled to be closed on New Year's Day, Dr. Martin Luther King, Jr. Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day and on the preceding Friday or subsequent
Monday when a holiday falls on a Saturday or Sunday, respectively.
Net asset value is determined as of the close of regular trading on the
NYSE, normally 4:00 p.m., Eastern Time. Net asset value is computed by dividing
the value of the net assets attributable to each class (i.e. the value of the
securities and other assets less the liabilities, including expenses payable or
accrued but excluding capital stock and surplus, attributable to that class) by
the total number of shares of the class outstanding at the time the
determination is made. The Funds use market quotations in valuing portfolio
securities. Short-term investments that mature in 60 days or less are valued at
amortized cost, which the Directors of the Fund believe represent fair value.
The price of Fund shares for purchases and redemptions will be based upon the
next calculation of net asset value after the purchase or redemption order is
received by the applicable Fund.
--------------------------------------------------------------------------------
22
<PAGE>
--------------------------------------------------------------------------------
If a Fund has portfolio securities that are primarily listed on foreign
exchanges that trade on weekends or other days when the Fund does not price
shares, the net asset value of that Fund's shares may change on days when
shareholders will not be able to purchase or redeem shares.
DIVIDENDS AND DISTRIBUTIONS
Dividends of net investment income and capital gains, if any, will be paid
annually for the Capital Value Fund and will be paid monthly for the Strategy
Fund. You may have dividends or capital gain distributions that are declared by
a Fund automatically reinvested at net asset value in additional shares of that
Fund. You will make an election to receive dividends and distributions in cash
or Fund shares at the time you purchase your shares. You may change this
election by notifying your broker or the Fund in writing at any time prior to
the record date for a particular dividend or distribution. There are no sales or
other charges in connection with the reinvestment of dividends and capital gain
distributions. There is no fixed dividend rate, and there can be no assurance
that either Fund will pay any dividends or realize any capital gains. Dividends
and distributions may differ for different classes of shares.
TAX INFORMATION
Each Fund expects that its distributions will consist primarily of net
investment income and net realized capital gains. Capital gains may be taxed at
different rates depending on the length of time the Fund holds the asset giving
rise to such gains. Dividends out of net investment income and distributions of
net realized short-term capital gains (i.e. gains from assets held by a Fund for
one year or less) are taxable to you as ordinary income. Distributions of net
long-term capital gains are taxable to you at long-term capital gain rates. The
Funds' distributions, whether you receive them in cash or reinvest them in
additional shares, generally will be subject to federal, state or local taxes.
An exchange of a Fund's shares for shares of another fund will be treated for
tax purposes as a sale of the Fund's shares; and any gain you realize on such a
transaction generally will be taxable. Foreign shareholders generally will be
subject to federal withholding tax on dividends out of net investment income.
This summary of tax consequences is intended for general information only.
You should consult a tax adviser concerning the tax consequences of your
investment in the Funds.
--------------------------------------------------------------------------------
23
<PAGE>
--------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS--STRATEGY FUND
The following Financial Highlights tables are intended to help you
understand the Fund's financial performance for the past five years. The total
returns in the tables represent the rate an investor would have earned or lost
on an investment in shares of the Fund (assuming reinvestment of all dividends).
The tables set forth below provide selected per share data and ratios for
one Class A or Class C share outstanding throughout each period shown.
The information in the following tables should be read together with the
financial statements of the Fund appearing in the Fund's Annual Report to
Shareholders for the year ended April 30, 2000, which is incorporated by
reference into the Statement of Additional Information. Shareholders may obtain
a copy of the Annual Report to Shareholders by contacting the Fund.
The financial information in the following tables for each of the five
years in the period ended April 30, 2000 has been audited by Ernst & Young LLP,
independent auditors, whose report on the Fund's financial statements is
included in the Annual Report to Shareholders.
--------------------------------------------------------------------------------
24
<PAGE>
--------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS--STRATEGY FUND
The following per share data and ratios have been derived from information
provided in the financial statements.
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE YEAR FOR THE YEAR
ENDED ENDED ENDED
APRIL 30, 2000 APRIL 30, 1999 APRIL 30, 1998
----------------------------- ---------------------------- ---------------------------
CLASS O CLASS A CLASS C CLASS O CLASS A CLASS C CLASS O CLASS A CLASS C
------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF YEAR .............. $ $ $ $ 6.06 $ 6.06 $ 6.06 $ 7.77 $ 7.77 $ 7.74
------- ------- ------- ------- ------- ------- ------- ------- -------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income(1) ......... 0.30 0.29 0.26 0.43 0.42 0.37
Net realized and unrealized
gain (loss) on investments,
put options purchased,
futures transactions and
foreign currency
transactions ................... (0.94) (0.95) (0.97) (1.54) (1.55) (1.54)
------- ------- ------- ------- ------- ------- ------- ------- -------
Total from investment
operations ................. (0.64) (0.66) (0.71) (1.11) (1.13) (1.17)
------- ------- ------- ------- ------- ------- ------- ------- -------
LESS DIVIDENDS AND
DISTRIBUTIONS
Dividends from net
investment income .............. (0.48) (0.46) (0.41) (0.60) (0.58) (0.51)
Distributions from realized
gains on foreign currency
transactions ................... -- -- -- -- -- --
------- ------- ------- ------- ------- ------- ------- ------- -------
Total dividends and
distributions .............. (0.48) (0.46) (0.41) (0.60) (0.58) (0.51)
------- ------- ------- ------- ------- ------- ------- ------- -------
NET ASSET VALUE,
END OF YEAR .................... $ 4.94 $ 4.94 $ 4.94 $ 6.06 $ 6.06 $ 6.06
======= ======= ======= ======= ======= ======= ======= ======= =======
Total investment return(2) ....... (11.32)% (11.56)% (12.42)% (14.88)% (15.11)% (15.61)%
======= ======= ======= ======= ======= ======= ======= ======= =======
RATIOS/SUPPLEMENTARY DATA
Net assets, end of year
(000 omitted) .................. $45,803 $ 7,858 $ 710 $71,692 $17,871 $ 1,780
======= ======= ======= ======= ======= ======= ======= ======= =======
Ratio of expenses to
average net assets ............. 1.49% 1.75% 2.48% 1.31% 1.55% 2.29%
======= ======= ======= ======= ======= ======= ======= ======= =======
Decrease reflected in above
expense ratios due to
waiver of administrative
fees ........................... 0.14% 0.14% 0.14% 0.01% 0.01% 0.01%
======= ======= ======= ======= ======= ======= ======= ======= =======
Ratio of net investment
income to average
net assets ..................... 5.29% 5.05% 4.14% 6.01% 5.79% 5.08%
======= ======= ======= ======= ======= ======= ======= ======= =======
Portfolio turnover rate .......... 130% 130% 130% 227% 227% 227%
======= ======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
--------------------------------------------------------------------------------
25
<PAGE>
--------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS--STRATEGY FUND (CONTINUED)
The following per share data and ratios have been derived from information
provided in the financial statements.
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
APRIL 30, 1997 APRIL 30, 1996
------------------------------ -----------------------------
CLASS O CLASS A CLASS C CLASS O CLASS A CLASS C
-------- ------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR .................. $ 8.78 $ 8.87 $ 8.77 $ 9.10 $ 9.10 $ 9.00
-------- ------- ------- -------- ------- -------
INCOME FROM INVESTMENT OPERATIONS
Net investment income(1) ............................ 0.78 0.54 0.45 0.76 0.57 0.37
Net realized and unrealized gain (loss) on
investments, put options purchased,
futures transactions and foreign
currency transactions ............................. (1.19) (0.96) (0.95) (0.53) (0.36) (0.22)
-------- ------- ------- -------- ------- -------
Total from investment operations ................ (0.41) (0.42) (0.50) 0.23 0.21 0.15
-------- ------- ------- -------- ------- -------
LESS DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income ................ (0.47) (0.46) (0.41) (0.55) (0.53) (0.38)
Distributions from realized gains on
foreign currency transactions ..................... (0.13) (0.13) (0.12) -- -- --
-------- ------- ------- -------- ------- -------
Total dividends and distributions ............... (0.60) (0.59) (0.53) (0.55) (0.53) (0.38)
-------- ------- ------- -------- ------- -------
NET ASSET VALUE, END OF YEAR ........................ $ 7.77 $ 7.77 $ 7.74 $ 8.78 $ 8.78 $ 8.77
======== ======= ======= ======== ======= =======
Total investment return(2) .......................... (4.85)% (5.10)% (5.94)% 2.66% 2.40% 1.96%(3)
======== ======= ======= ======== ======= =======
RATIOS/SUPPLEMENTARY DATA
Net assets, end of year (000 omitted) ............... $134,719 $43,327 $13,020 $224,148 $53,652 $ 317
======== ======= ======= ======== ======= =======
Ratio of expenses to average net assets ............. 1.18% 1.43% 2.14% 1.23% 1.48% 2.28%(4)
======== ======= ======= ======== ======= =======
Ratio of net investment income to
average net assets ................................ 6.80% 6.55% 5.81% 6.56% 6.33% 5.79%(4)
======== ======= ======= ======== ======= =======
Portfolio turnover rate ............................. 126% 126% 126% 96% 96% 96%
======== ======= ======= ======== ======= =======
<FN>
------------------
+ Class C shares were introduced on August 1, 1995. Except as indicated below,
information is presented for the period from August 1, 1995 to April 30,
1996.
(1) Based on average shares outstanding.
(2) Total investment returns exclude the effects of sales loads and assume
reinvestment of dividends and distributions.
(3) Total investment return is presented for the year ended April 30, 1996. For
the period prior to August 1, 1995, total investment return is based upon
the total investment return for Class A shares, and does not reflect the
greater service and distribution fees and certain other expenses borne by
Class C shares.
(4) Annualized.
</FN>
</TABLE>
--------------------------------------------------------------------------------
26
<PAGE>
--------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS--CAPITAL VALUE FUND
The following Financial Highlights tables are intended to help you
understand the Fund's financial performance for approximately the past five
years. The total returns in the table represent the rate an investor would have
earned or lost on an investment in shares of the Fund (assuming reinvestment of
all dividends).
The tables set forth below provide selected per share data and ratios for
one Class A, B, C or R share outstanding throughout each period shown and
include, where applicable, information with respect to the Dreyfus Capital Value
Fund, the predecessor to the Capital Value Fund. The Capital Value Fund
commenced operations on July 25, 1996.
The information in the following tables should be read together with the
financial statements of the Fund appearing in the Fund's Annual Report to
Shareholders for the year ended April 30, 2000, which is incorporated by
reference into the Statement of Additional Information. Shareholders may obtain
a copy of the Annual Report to Shareholders by contacting the Fund.
The financial information in the following tables has been audited by Ernst
& Young LLP, independent auditors, whose report on the Fund's financial
statements is included in the Annual Report to Shareholders.
--------------------------------------------------------------------------------
27
<PAGE>
--------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS--CAPITAL VALUE FUND
The following per share data and ratios have been derived from information
provided in the financial statements.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE YEAR ENDED
APRIL 30, 2000 APRIL 30, 1999
-------------------------------------- --------------------------------------
CLASS A CLASS B CLASS C CLASS R CLASS A CLASS B CLASS C CLASS R
------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD ................................ $ $ $ $ $ 5.06 $ 4.99 $ 4.80 $ 5.05
------- ------- ------- ------- ------- ------- ------ -------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income (loss) .......... 0.14(1) 0.11(1) 0.10(1) 0.15(1)
Net realized and unrealized
gain (loss) on investments,
put options purchased, futures
transactions, short sale
transactions and foreign
currency transactions ............... (1.40) (1.38) (1.32) (1.40)
------- ------- ------- ------- ------- ------- ------ -------
Total from investment
operations ...................... (1.26) (1.27) (1.22) (1.25)
------- ------- ------- ------- ------- ------- ------ -------
LESS DIVIDENDS
Dividends from net investment
income ................................ (0.31) (0.25) (0.26) (0.32)
------- ------- ------- ------- ------- ------- ------ -------
NET ASSET VALUE, END OF PERIOD .......... $ 3.49 $ 3.47 $ 3.32 $ 3.48
======= ======= ======= ======= ======= ======= ====== =======
Total investment return(2) .............. (25.80)% (26.19)% (26.22)% (25.67)%
======= ======= ======= ======= ======= ======= ====== =======
RATIOS/SUPPLEMENTARY DATA
Net assets, end of period
(000 omitted) ......................... $59,246 $13,752 $5,014 $ 29
======= ======= ======= ======= ======= ======= ====== =======
Ratio of expenses to average
net assets ............................ 1.47% 2.21% 2.18% 1.24%
======= ======= ======= ======= ======= ======= ====== =======
Ratio of interest expense and
dividends on securities sold short
to average net assets ................. 0.72% 0.85% 0.78% 0.72%
======= ======= ======= ======= ======= ======= ====== =======
Ratio of net investment income to
average net assets .................... 3.31% 2.46% 2.54% 3.56%
======= ======= ======= ======= ======= ======= ====== =======
Portfolio turnover rate ................. 465% 465% 465% 465%
======= ======= ======= ======= ======= ======= ====== =======
</TABLE>
--------------------------------------------------------------------------------
28
<PAGE>
--------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS--CAPITAL VALUE FUND (CONTINUED)
The following per share data and ratios have been derived from information
provided in the financial statements.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE YEAR ENDED
APRIL 30, 1998 APRIL 30, 1997
-------------------------------------- ---------------------------------------
CLASS A CLASS B CLASS C CLASS R CLASS A CLASS B CLASS C CLASS R
------- ------- ------- ------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD .................. $ 8.62 $ 8.45 $ 8.31 $ 8.62 $ 10.54 $ 10.38 $ 10.24 $ 10.53
------- ------- ------ ------- -------- ------- ------- -------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income
(loss) ............................. 0.31(1) 0.25(1) 0.23(1) 0.33(1) 0.59 0.54 0.57 0.82(1)
Net realized and unrealized
gain (loss) on investments,
put options purchased,
futures transactions,
short sale transactions
and foreign currency
transactions ....................... (2.91) (2.85) (2.78) (2.91) (1.92) (1.93) (1.91) (2.13)
------- ------- ------ ------- -------- ------- ------- -------
Total from investment
operations ..................... (2.60) (2.60) (2.55) (2.58) (1.33) (1.39) (1.34) (1.31)
------- ------- ------ ------- -------- ------- ------- -------
LESS DIVIDENDS
Dividends from net investment
income ............................... (0.96) (0.86) (0.96) (0.99) (0.59) (0.54) (0.59) (0.60)
------- ------- ------ ------- -------- ------- ------- -------
NET ASSET VALUE, END OF
PERIOD ............................... $ 5.06 $ 4.99 $ 4.80 $ 5.05 $ 8.62 $ 8.45 $ 8.31 $ 8.62
======= ======= ====== ======= ======== ======= ======= =======
Total investment return(2) ............. (31.48)% (32.01)% (32.10)% (31.28)% (12.97)% (13.69)% (13.47)% (12.83)%
======= ======= ====== ======= ======== ======= ======= =======
RATIOS/SUPPLEMENTARY DATA
Net assets, end of period
(000 omitted) ........................ $64,452 $26,235 $8,029 $ 28 $160,834 $64,671 $ 7,271 $ 117
======= ======= ====== ======= ======== ======= ======= =======
Ratio of expenses to average
net assets ........................... 1.35% 2.10% 2.08% 1.11% 1.28% 2.03% 2.07% 1.19%
======= ======= ====== ======= ======== ======= ======= =======
Ratio of interest expense
and dividends on securities
sold short to average
net assets ........................... 0.24% 0.24% 0.21% 0.26% 0.51% 0.50% 0.47% 0.38%
======= ======= ====== ======= ======== ======= ======= =======
Ratio of net investment
income to average
net assets ........................... 4.49% 3.74% 3.70% 4.73% 6.16% 5.52% 6.02% 8.65%
======= ======= ====== ======= ======== ======= ======= =======
Portfolio turnover rate ................ 359% 359% 359% 359% 399% 399% 399% 399%
======= ======= ====== ======= ======== ======= ======= =======
</TABLE>
--------------------------------------------------------------------------------
29
<PAGE>
--------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS--CAPITAL VALUE FUND (CONCLUDED)
The following per share data and ratios have been derived from information
provided in the financial statements.
<TABLE>
<CAPTION>
FOR THE SEVEN MONTHS ENDED
APRIL 30, 1996
----------------------------------------
CLASS A CLASS B CLASS C CLASS R
-------- ------- ------- -------
<S> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD ................................. $ 10.61 $ 10.41 $ 10.41 $ 10.62
-------- ------- ------- -------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income (loss) ........................ 0.22 0.18 0.44 0.30
Net realized and unrealized gain (loss)
on investments, put options purchased,
futures transactions, short sale transactions
and foreign currency transactions ................. 0.17 0.16 (0.12) 0.09
-------- ------- ------- -------
Total from investment operations ................ 0.39 0.34 0.32 0.39
-------- ------- ------- -------
LESS DIVIDENDS
Dividends from net investment
income .............................................. (0.46) (0.37) (0.49) (0.48)
-------- ------- ------- -------
NET ASSET VALUE, END OF
PERIOD .............................................. $ 10.54 $ 10.38 $ 10.24 $ 10.53
======== ======= ======= =======
Total investment return(2) ............................ 3.81% 3.36% 3.30% 3.97%
======== ======= ======= =======
RATIOS/SUPPLEMENTARY DATA
Net assets, end of period (000 omitted) ............... $241,472 $81,786 $ 3,531 $ 1
======== ======= ======= =======
Ratio of expenses to average net assets ............... 0.75%(3) 1.18%(3) 1.28%(3) 0.61%(3)
======== ======= ======= =======
Ratio of interest expense and dividends on
securities sold short to average net assets ......... 0.18%(3) 0.19%(3) 0.18%(3) 0.17%(3)
======== ======= ======= =======
Ratio of net investment income to average
net assets .......................................... 2.13%(3) 1.70%(3) 1.71%(3) 2.28%(3)
======== ======= ======= =======
Portfolio turnover rate ............................... 56%(3) 56%(3) 56%(3) 56%(3)
======== ======= ======= =======
<FN>
---------------
+ Class C shares and Class R shares were introduced on August 22, 1995.
(1) Based on average shares outstanding.
(2) Total investment returns exclude the effects of sales loads and assume
reinvestment of dividends and distributions. Total investment returns for
periods of less than one full year are not annualized.
(3) Not annualized.
</FN>
</TABLE>
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30
<PAGE>
THIS PAGE LEFT BLANK INTENTIONALLY
<PAGE>
GABELLI COMSTOCK FUNDS, INC.
GABELLI COMSTOCK STRATEGY FUND
CLASS A, C SHARES
GABELLI COMSTOCK CAPITAL VALUE FUND
CLASS A, B, C, R SHARES
================================================================================
FOR MORE INFORMATION:
For more information about the Funds, the following documents are available free
upon request:
ANNUAL/SEMI-ANNUAL REPORTS:
Each Fund's semi-annual and audited annual reports to shareholders contain
additional information on the Funds' investments. In the annual report, you will
find a discussion of the market conditions and investment strategies that
significantly affected each Fund's performance during its last fiscal year.
STATEMENT OF ADDITIONAL INFORMATION (SAI):
The SAI provides more detailed information about the Funds, including their
operations and investments policies. It is incorporated by reference, and is
legally considered a part of this prospectus.
You can get free copies of these documents and prospectuses of other
funds in the Gabelli family, or request other information and
discuss your questions about the Funds by contacting:
Gabelli Comstock Funds, Inc.
One Corporate Center
Rye, NY 10580
Telephone: 1-800-GABELLI (1-800-422-3554)
WWW.GABELLI.COM
You can review the Funds' reports and SAIs at the Public Reference Room of the
Securities and Exchange Commission. You can get text-only copies:
o For a fee, by electronic request at [email protected], by writing the
Public Reference Section of the Commission, Washington, D.C. 20549-6009
or calling 1-202-942-8090, or by electronic request at the following
email address: [email protected].
o Free from the Commission's Website at http://www.sec.gov.
Investment Company Act File No. 811-5502
--------------------------------------------------------------------------------
<PAGE>
GABELLI COMSTOCK FUNDS, INC.
One Corporate Center
Rye, New York 10580-1434
1-800-GABELLI
[1-800-422-3554]
FAX: 1-914-921-5118
HTTP://WWW.GABELLI.COM
EMAIL: [email protected]
(Net Asset Value may be obtained daily by calling
1-800-GABELLI after 6:00 p.m.)
----------------------------------
QUESTIONS?
Call 1-800-GABELLI
or your investment representative.
----------------------------------
TABLE OF CONTENTS
-----------------
INTRODUCTION ................................... 2
INVESTMENT, PERFORMANCE AND
RISK INFORMATION ............................... 2-13
MANAGEMENT OF THE FUNDS ........................ 13-14
CLASSES OF SHARES .............................. 15
PURCHASE OF SHARES ............................. 20
REDEMPTION OF SHARES ........................... 20
EXCHANGE OF SHARES ............................. 21
PRICING OF FUND SHARES ......................... 22
DIVIDENDS AND DISTRIBUTIONS .................... 23
TAX INFORMATION ................................ 23
FINANCIAL HIGHLIGHTS ........................... 24
107/503p0899
<PAGE>
GABELLI COMSTOCK FUNDS, INC.
GABELLI COMSTOCK STRATEGY FUND
GABELLI COMSTOCK CAPITAL VALUE FUND
STATEMENT OF ADDITIONAL INFORMATION
August 28, 2000
This Statement of Additional Information ("SAI"), which is not a prospectus,
describes
o Gabelli Comstock Strategy Fund (the "Strategy Fund")
o Gabelli Comstock Capital Value Fund (the "Capital Value Fund")
(each a "Fund" and collectively the "Funds") which are series of the Gabelli
Comstock Funds, Inc., a Maryland corporation (the "Company"). This SAI should be
read in conjunction with the Funds' Prospectus for Class A Shares, Class B
Shares, Class C Shares and Class R Shares, dated August 28, 2000. For a free
copy of the Prospectus, please contact the Funds at the address, telephone
number or Internet website printed below.
One Corporate Center
Rye, New York 10580-1434
Telephone: 1-800-GABELLI (1-800-422-3554)
http://www.gabelli.com
----------------------
TABLE OF CONTENTS
PAGE
General Information........................................................
Investment Strategies and Risks............................................
Investment Restrictions....................................................
Directors and Officers.....................................................
Control Persons and Principal Shareholders.................................
Investment Advisory and Other Services.....................................
Distribution Plans.........................................................
Portfolio Transactions and Brokerage.......................................
Redemption of Shares.......................................................
Determination of Net Asset Value...........................................
Investment Performance Information.........................................
Description of Shares, Voting Rights and Liabilities.......................
Financial Statements.......................................................
3
<PAGE>
GENERAL INFORMATION
The Company is an open-end, management investment company registered under the
Investment Company Act of 1940, as amended (the "1940 Act") and currently
consists of two separate portfolios: the Strategy Fund, a non-diversified
portfolio, and the Capital Value Fund, a diversified portfolio. The Company was
incorporated under the laws of the State of Maryland on March 14, 1988 as
Comstock Partners Strategy Fund, Inc., and commenced operations in May of 1988
as a non-diversified, closed-end investment company. The Company converted to an
open-end investment company effective as of August 1, 1991. On February 8, 1996,
the Company changed its name to Comstock Partners Funds, Inc. and adopted a
series fund structure. A series fund is an open-end investment company that has
the ability to issue different series of shares representing interests in
separate mutual fund portfolios. In that connection, the Strategy Fund, the
Company's existing portfolio, became a separate portfolio of the Company and the
Capital Value Fund was organized as a new portfolio of the Company. On July 25,
1996, the Capital Value Fund acquired all of the assets, subject to the
liabilities (whether contingent or otherwise) of the Dreyfus Capital Value Fund,
Inc. in exchange for shares in the Capital Value Fund (the "Reorganization").
The Capital Value Fund commenced operations upon the consummation of the
Reorganization. On May 22, 2000, (i) the Company changed its name to Gabelli
Comstock Funds, Inc. and (ii) Comstock Partners Strategy Fund and Comstock
Partners Capital Value Fund were renamed Gabelli Comstock Strategy Fund and
Gabelli Comstock Capital Value Fund, respectively.
The Company's principal office is located at One Corporate Center, Rye, New York
10580-1434. The Funds are advised by Gabelli Funds, LLC (the "Investment
Adviser").
INVESTMENT STRATEGIES AND RISKS
The Funds' Prospectus discusses the investment objectives of the Funds and the
principal strategies to be employed to achieve that objective. This SAI contains
supplemental information concerning certain types of securities and other
instruments which the Funds may invest, additional strategies the Funds may
utilize and certain risks associated with such investments and strategies.
Each Fund's debt securities may include obligations issued or guaranteed by the
United States Government, its agencies or instrumentalities (including
repurchase agreements secured by such instruments); obligations issued or
guaranteed by a foreign government or any of its political subdivisions,
agencies or instrumentalities; and obligations (including convertible
securities) of domestic and foreign corporations, banks, thrift institutions,
savings and loan institutions and finance companies and supranational
organizations.
In determining whether a Fund should invest in particular debt securities, the
Investment Adviser considers factors such as: the price, coupon and yield to
maturity; its assessment of the credit quality of the issuer; the issuer's
available cash flow and the related coverage ratios; the property, if any,
securing the obligation; and the terms of the debt securities, including the
subordination, default, sinking fund and early redemption provisions. It also
will review the ratings, if any, assigned to the securities by Moody's Investors
Service, Inc. ("Moody's") or Standard & Poor's Corporation ("S&P") or other
recognized rating agencies. The judgment of the Investment Adviser as to credit
quality of a debt security may differ, however, from that suggested by the
ratings published by a rating service.
The Strategy Fund is classified as a "non-diversified" investment company under
the 1940 Act, which means that the Strategy Fund is not limited by the 1940 Act
in the proportion of its assets that may be invested in the securities of a
single issuer. In addition, each Fund may invest up to 25% of its total assets,
measured at the time of investment, in a single industry, subject to certain
exceptions. Since a relatively high percentage of the Strategy Fund's assets may
be invested in the obligations of a limited number of issuers and each Fund may
invest in a limited number of industries, the Funds may be more susceptible to
any single economic, political or regulatory occurrence than more widely
diversified funds.
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Each Fund intends to conduct its operations so as to qualify as a "regulated
investment company" for purposes of the Internal Revenue Code of 1986, as
amended (the "Code"), which will relieve the Fund of any liability for federal
income taxes to the extent its earnings are distributed to shareholders. [See
"Additional Information Concerning Taxes-General."] To so qualify, among other
requirements, each Fund will limit its investments so that, at the close of each
quarter of the taxable year, (i) not more than 25% of the market value of the
Fund's total assets will be invested in the securities of a single issuer and
(ii) with respect to 50% of the market value of its total assets, not more than
5% of the market value of its total assets will be invested in the securities of
a single issuer and the Fund will not own more than 10% of the outstanding
voting securities of a single issuer. A Fund's investments in securities of the
United States Government, its agencies or instrumentalities or other regulated
investment companies are not subject to these limitations.
In many instances, the Investment Adviser will rely on ratings of debt
securities and preferred stock in making its investment decisions. In analyzing
unrated debt securities or preferred stock, the Investment Adviser may consider
the issuer's experience and managerial strength, changing financial condition,
borrowing requirements or debt maturity schedules, and its responsiveness to
changes in business conditions and interest rates. The Investment Adviser may
also consider relative values based on anticipated cash flow, interest or
dividend coverage, asset coverage and earnings prospects.
CERTAIN INVESTMENT TECHNIQUES
The use of investment techniques such as engaging in financial futures and
options and currency transactions, purchasing securities on a forward commitment
basis, lending portfolio securities, purchasing foreign securities, investing in
illiquid securities, utilizing certain other specialized instruments and, in the
case of the Capital Value Fund, engaging in short-selling and leverage through
borrowing, involves greater risk than that incurred by many other funds with
similar objectives to the Funds. In addition, using these techniques may produce
higher than normal portfolio turnover and may affect the degree to which the
Funds' net asset value fluctuates. Higher portfolio turnover rates are likely to
result in comparatively greater brokerage commissions or transaction costs.
Short-term gains realized from portfolio transactions are taxable to
shareholders as ordinary income. [See "Additional Information Concerning
Taxes."]
LOWER RATED SECURITIES
Each Fund is permitted to invest in securities rated below Baa by Moody's and
below BBB by S&P. Such securities, though higher yielding, are characterized by
risk. These securities, commonly referred to as "junk bonds", provide yields
superior to those of more highly rated securities, but involve greater risks
(including the possibility of default or bankruptcy of the issuers of such
securities) and are regarded as speculative in nature. While the market values
of securities rated below investment grade and comparable unrated securities
tend to react less to fluctuations in interest rate levels than do those of
higher-rated securities, the market values of certain of these securities also
tend to be more sensitive to individual corporate developments and changes in
economic conditions than higher rated securities. In addition, the markets in
which securities rated below investment grade and comparable unrated securities
are traded are generally more limited than those in which higher-rated
securities are traded. Because of risks associated with an investment in
securities rated below investment grade and comparable unrated securities, an
investment in a Fund should not be considered as a complete investment program
and may not be appropriate for all investors.
Although ratings may be useful in evaluating the safety of interest and
principal payments, they do not evaluate the market value risk of these
securities. The Funds will rely on the Investment Adviser's judgment, analysis
and experience in evaluating the creditworthiness of an issuer. In this
evaluation, the Investment Adviser will take into consideration, among other
things, the issuer's financial resources, its sensitivity to economic conditions
and trends, its operating history, the quality of the issuer's management and
regulatory matters. It also is possible that a rating agency might not timely
change the rating on a particular issue to reflect subsequent events. Once the
rating of a security in a Fund's portfolio has been changed, the Investment
Adviser will consider all circumstances deemed relevant in determining whether
that Fund should continue to hold the security.
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The Strategy Fund may invest up to 25% of its total assets in debt securities
that are rated below A by either Moody's or by S&P, or, if not rated, are
determined by the Investment Adviser to be of comparable quality. With respect
to such 25%, the Strategy Fund may invest in debt securities rated as low as C
by Moody's or S&P or, if not rated, determined by the Investment Adviser to be
of comparable quality. The Capital Value Fund is not subject to any limit on the
percentage of its assets that may be invested in debt securities having a
certain rating. Thus, it is possible that a substantial portion of the Capital
Value Fund's assets may be invested in debt securities that are unrated or rated
in the lowest categories of the recognized rating agency (i.e. securities rated
C by Moody's or D by S&P). The Capital Value Fund intends to invest less than
35% of its assets in debt securities rated Ba or lower by Moody's or BB or lower
by S&P. Management's decision to invest in lower rated securities is not subject
to shareholder approval.
Investors should be aware that the market values of many of these securities
tend to be more sensitive to economic conditions than are higher rated
securities and will fluctuate more over time. These securities are considered by
S&P and Moody's, on balance, as predominantly speculative with respect to
capacity to pay interest and repay principal in accordance with the terms of the
obligation and generally will involve more credit risk than securities in the
higher rating categories.
You should carefully consider the relative risks of investing in the higher
yielding (and, therefore, higher risk) debt securities in which the Funds may
invest. Lower rated securities are securities such as those rated Ba by Moody's
or BB by S&P or as low as the lowest rating assigned by Moody's or S&P. They
generally are not meant for short-term investing and may be subject to certain
risks with respect to the issuing entity and to greater market fluctuations than
certain lower yielding, higher rated fixed-income securities. Obligations rated
Ba by Moody's are judged to have speculative elements; their future cannot be
considered as well assured and often the protection of interest and principal
payments may be very moderate. Obligations rated BB by S&P are regarded as
having predominantly speculative characteristics and, while such obligations
have less near-term vulnerability to default than other speculative grade debt,
they face major ongoing uncertainties or exposure to adverse business, financial
or economic conditions which could lead to inadequate capacity to meet timely
interest and principal payment. Obligations rated C by Moody's are regarded as
having extremely poor prospects of ever attaining any real investment standing.
Obligations rated D by S&P are in default and the payment of interest and/or
repayment of principal is in arrears. Such obligations, though high yielding,
are characterized by great risk. See "Description of Bond and Commercial Paper
Ratings" for a general description of Moody's and S&P securities ratings. The
ratings of Moody's and S&P represent their opinions as to the quality of the
securities which they undertake to rate. It should be emphasized, however, that
ratings are relative and subjective and, although ratings may be useful in
evaluating the safety of interest and principal payments, they do not evaluate
the market value risk of these securities. Therefore, although these ratings may
be an initial criterion for selection of portfolio investments, the Investment
Adviser also will evaluate these securities and the ability of the issuers of
such securities to pay interest and principal. The Funds' ability to achieve
their investment objectives may be more dependent on the Investment Adviser's
credit analysis than might be the case for funds that invest in higher rated
securities. Once the rating of a portfolio security has been changed, the Funds
will consider all circumstances deemed relevant in determining whether to
continue to hold the security.
Companies that issue certain of these securities often are highly leveraged and
may not have available to them more traditional methods of financing. Therefore,
the risk associated with acquiring the securities of such issuers generally is
greater than is the case with higher rated securities. For example, during an
economic downturn or a sustained period of rising interest rates, highly
leveraged issuers of these securities may experience financial stress. During
such periods, such issuers may not have sufficient revenues to meet their
interest payment obligations. The issuer's ability to service its debt
obligations also may be affected adversely by specific corporate developments or
the issuer's inability to meet specific projected business forecasts, or the
unavailability of additional financing. The risk of loss because of default by
the issuer is significantly greater for the holders of these securities because
such securities generally are unsecured and often are subordinated to other
creditors of the issuer.
Such securities are generally traded only among dealers and institutional
investors. The secondary trading market for these securities generally is not as
liquid as the secondary market for higher rated securities. The weak secondary
market may have an adverse impact on market price and a Fund's ability to
dispose of
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particular issues when necessary to meet that Fund's liquidity needs or in
response to a specific economic event such as a deterioration in the
creditworthiness of the issuer. The weak secondary market also may make it more
difficult for a Fund to obtain accurate market quotations for purposes of
valuing that Fund's portfolio and calculating its net asset value. Adverse
publicity and investor perceptions, whether or not based on fundamental
analysis, may decrease further the values and liquidity of these securities.
The market values of certain lower rated debt securities tend to reflect
individual corporate developments to a greater extent than do higher rated
securities, which react primarily to fluctuations in the general level of
interest rates, and tend to be more sensitive to economic conditions than are
higher rated securities. Companies that issue such securities often are highly
leveraged and may not have available to them more traditional methods of
financing. Therefore, the risk associated with acquiring the securities of such
issuers generally is greater than is the case with higher rated securities.
A Fund may acquire these securities during an initial offering. Such securities
may involve special risks because they are new issues. The Funds have no
arrangement with any persons concerning the acquisition of such securities, and
the Investment Adviser will review carefully the credit and other
characteristics pertinent to such new issues.
Lower rated zero coupon securities and pay-in-kind bonds, (in which the Capital
Value Fund is limited to 5% of its total assets), involve special
considerations. Such zero coupon securities, pay-in-kind or delayed interest
bonds carry an additional risk in that, unlike bonds which pay interest
throughout the period to maturity, the Funds will realize no cash until the cash
payment date unless a portion of such securities are sold and, if the issuer
defaults, the Funds may obtain no return at all on their investment. [See
"Additional Information Concerning Taxes."]
U.S. GOVERNMENT SECURITIES
Securities issued or guaranteed by the U.S. Government or its agencies or
instrumentalities include U.S. Treasury securities, which differ in their
interest rates, maturities and times of issuance. 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 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 the credit of the
agency or instrumentality. These securities bear fixed, floating or variable
rates of interest. Principal and interest may fluctuate based on generally
recognized reference rates or the relationship of rates. While the U.S.
Government provides financial support to such U.S. Government-sponsored agencies
and instrumentalities, no assurance can be given that it will always do so since
it is not so obligated by law. The Fund will invest in such securities only when
it is satisfied that the credit risk with respect to the issuer is minimal.
FOREIGN SECURITIES
The Strategy Fund may invest without limit, and the Capital Value Fund may
invest up to 65% of its assets, in foreign securities, including securities of
emerging market issuers. The Funds' investments in foreign and emerging market
securities involve certain other considerations and risks not typically
associated with investing in domestic securities, including greater price
volatility; uncertainties regarding future social, political and economic
developments; the possible imposition of foreign withholding or brokerage taxes
or exchange controls; risks of seizure or expropriation; the availability of
less information than is generally available in the U.S. and a lack of uniform
accounting and auditing standards; higher transaction costs and possible delays
or problems with settlement; limited liquidity and relatively small market
capitalization of securities markets; high rates of inflation and interest; less
government supervision of exchanges, brokers and issuers; difficulty in
enforcing contractual obligations; and the possible adverse effects of changes
in the exchange rates of foreign currencies in which the Funds' investments may
be denominated.
Many countries providing investment opportunities for the Funds have experienced
substantial, and in some periods extremely high, rates of inflation for many
years. Inflation and rapid fluctuations in inflation
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rates have had and may continue to have adverse effects on the economies and
securities markets of certain of these countries. In an attempt to control
inflation, wage and price controls have been imposed in certain countries.
Because stock certificates and other evidences of ownership of such securities
usually are held outside the United States, the Funds will be subject to
additional risks which include possible adverse political and economic
developments, possible seizure or nationalization of foreign deposits and
possible adoption of governmental restrictions which might adversely affect the
payment of principal and interest on the foreign securities or might restrict
the payment of principal and interest to investors located outside the country
of the issuer, whether from currency blockage or otherwise. Custodial expenses
for a portfolio of non-U.S. securities generally are higher than for a portfolio
of U.S. securities.
By investing in foreign securities, the Funds will be exposed to the direct or
indirect consequences of political, social and economic changes in various
countries. Political changes in a country may affect the willingness of a
foreign government to make or provide for timely payments of its obligations.
The country's economic status, as reflected, among other things, in its
inflation rate, the amount of its external debt and its gross domestic product,
will also affect the government's ability to honor its obligations.
No established secondary markets may exist for many of the foreign securities in
which the Funds may invest. Reduced secondary market liquidity may have an
adverse effect on the market price and a Fund's ability to dispose of particular
instruments when necessary to meet its liquidity requirements or in response to
specific economic events such as deterioration in the creditworthiness of the
issuer. Reduced secondary market liquidity for certain foreign securities also
may make it more difficult for a Fund to obtain accurate market quotations for
purposes of valuing its portfolio. Market quotations are generally available on
many foreign securities only from a limited number of dealers and may not
necessarily represent firm bids of those dealers or prices for actual sales.
Since foreign securities often are purchased with and payable in currencies of
foreign countries, the value of these assets as measured in U.S. dollars may be
affected favorably or unfavorably by changes in currency rates and exchange
control regulations. Some currency exchange costs may be incurred when a Fund
changes investments from one country to another.
Furthermore, some of these securities may be subject to brokerage taxes levied
by foreign governments, which have the effect of increasing the cost of such
investment and reducing the realized gain or increasing the realized loss on
such securities at the time of sale. Income received by a Fund from sources
within foreign countries may be reduced by withholding and other taxes imposed
by such countries. Tax conventions between certain countries and the United
States, however, may reduce or eliminate such taxes. All such taxes paid by a
Fund will reduce its net income available for distribution to its shareholders.
[See "Additional Information Concerning Taxes--Foreign Withholding Taxes."]
Currency exchange rates may fluctuate significantly over short periods of time.
They generally are determined by the forces of supply and demand in the foreign
exchange markets and the relative merits of investments in different countries,
actual or perceived changes in interest rates and other complex factors, as seen
from an international perspective. Currency exchange rates also can be affected
unpredictably by intervention by U.S. or foreign governments or central banks or
the failure to intervene or by currency controls or political developments in
the U.S. or abroad.
The foreign currency market offers less protection against defaults in the
forward trading of currencies than is available when trading in currencies
occurs on an exchange. Since a forward currency contract is not guaranteed by an
exchange or clearinghouse, a default on the contract would deprive a Fund of
unrealized profits or force that Fund to cover its commitments for purchase or
resale, if any, at the current market price.
Emerging markets will include any countries (i) having an "emerging stock
market" as defined by the International Finance Corporation; (ii) with low to
middle-income economies according to the World Bank; or (iii) listed in World
Bank publications as developing. Issuers whose principal activities are in
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countries with emerging markets include issuers: (1) organized under the laws
of, (2) whose securities have their primary trading market in, (3) deriving at
least 50% of their revenues or profits from goods sold, investments made, or
services performed in, or (4) having at least 50% of their assets located in, a
country with an emerging market. In emerging markets, the Funds may also
purchase debt securities issued or guaranteed by foreign governments, including
participations in loans between foreign governments and financial institutions,
and interests in entities organized and operated for the purpose of
restructuring the investment characteristics of instruments issued or guaranteed
by foreign governments ("Sovereign Debt Obligations"). These include Brady
Bonds, Structured Investments and Loan Participations and Assignments (as
defined below). See "Brady Bonds," "Structured Investments" and "Loan
Participations and Assignments" below.
Investing in Sovereign Debt Obligations involves economic and political risks.
The Sovereign Debt Obligations in which the Funds will invest in most cases
pertain to countries that are among the world's largest debtors to commercial
banks, foreign governments, international financial organizations and other
financial institutions. In recent years, the governments of some of these
countries have encountered difficulties in servicing their external debt
obligations, which led to defaults on certain obligations and the restructuring
of certain indebtedness. Restructuring arrangements have included, among other
things, reducing and rescheduling interest and principal payments by negotiating
new or amended credit agreements or converting outstanding principal and unpaid
interest to Brady Bonds, and obtaining new credit to finance interest payments.
Certain governments have not been able to make payments of interest on or
principal of Sovereign Debt Obligations as those payments have come due.
Obligations arising from past restructuring agreements may affect the economic
performance and political and social stability of those issuers. The ability of
governments to make timely payments on their obligations is likely to be
influenced strongly by the issuer's balance of payments, including export
performance, and its access to international credits and investments. A country
whose exports are concentrated in a few commodities could be vulnerable to a
decline in the international prices of one or more of those commodities.
Increased protectionism on the part of a country's trading partners also could
adversely affect the country's exports and diminish its trade account surplus,
if any. To the extent that a country receives payment for its exports in
currencies other than dollars, its ability to make debt payments denominated in
dollars could be adversely affected.
To the extent that a country develops a trade deficit, it will need to depend on
continuing loans from foreign governments, multilateral organizations or private
commercial banks, aid payments from foreign governments and on inflows of
foreign investment. The access of a country to these forms of external funding
may not be certain, and a withdrawal of external funding could adversely affect
the capacity of a government to make payments on its obligations. In addition,
the cost of servicing debt obligations can be affected by a change in
international interest rates since the majority of these obligations carry
interest rates that are adjusted periodically based upon international rates.
Central banks and other governmental authorities which control the servicing of
Sovereign Debt Obligations may not be willing or able to permit the payment of
the principal or interest when due in accordance with the terms of the
obligations. As a result, the issuers of Sovereign Debt Obligations may default
on their obligations. Defaults on certain Sovereign Debt Obligations have
occurred in the past. Holders of certain Sovereign Debt Obligations may be
requested to participate in the restructuring and rescheduling of these
obligations and to extend further loans to the issuers. These interests of
holders of Sovereign Debt Obligations could be adversely affected in the course
of restructuring arrangements or by certain other factors referred to below.
Furthermore, some of the participants in the secondary market for Sovereign Debt
Obligations also may be directly involved in negotiating the terms of these
arrangements and, therefore, may have access to information not available to
other market participants.
Each Fund is permitted to invest in Sovereign Debt Obligations that are not
current in the payment of interest or principal or are in default, so long as
the Investment Adviser believes it to be consistent with that Fund's investment
objective. A Fund may have limited legal recourse in the event of a default with
respect to certain Sovereign Debt Obligations it holds. Bankruptcy, moratorium
and other similar laws applicable to issuers of Sovereign Debt Obligations may
be substantially different from those applicable to issuers of private debt
obligations. The political context, expressed as the willingness of an issuer of
Sovereign Debt
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Obligations to meet the terms of the debt obligation, for example, is of
considerable importance. In addition, no assurance can be given that the holders
of commercial bank debt will not contest payments to the holders of securities
issued by foreign governments in the event of default under commercial bank loan
agreements.
Another factor bearing on the ability of a country to repay
Sovereign Debt Obligations is the level of the country's international reserves.
Fluctuations in the level of these reserves can affect the amount of foreign
exchange readily available for external debt payments and, thus, could have a
bearing on the capacity of the country to make payments on its Sovereign Debt
Obligations.
Expropriation, confiscatory taxation, nationalization, political, economic or
social instability or other similar developments, such as military coups, have
occurred in the past in countries in which the Fund will invest and could
adversely affect the Fund's assets should these conditions or events recur.
Foreign investment in certain Sovereign Debt Obligations is restricted or
controlled to varying degrees. These restrictions or controls at times may limit
or preclude foreign investment in certain Sovereign Debt Obligations and
increase the costs and expenses of the Fund investing in such instruments.
Certain countries in which the Funds will invest require governmental approval
prior to investments by foreign persons, limit the amount of investment by
foreign persons in a particular issuer, limit the investment by foreign persons
only to a specific class of securities of an issuer that may have less
advantageous rights than the classes available for purchase by domiciliaries of
the countries and/or impose additional taxes on foreign investors.
In addition, if deterioration occurs in a country's balance of payments, the
country could impose temporary restrictions on foreign capital remittances. A
Fund could be adversely affected by delays in, or a refusal to grant, any
required governmental approval for repatriation of capital, as well as by the
application to that Fund of any restrictions on investments. Investing in local
markets may require the Fund to adopt special procedures, seek local government
approvals or take other actions, each of which may involve additional costs to
the Fund.
DERIVATIVES TRANSACTIONS-OPTIONS, FUTURES AND CURRENCIES
Each of the Funds is authorized to use certain investment strategies commonly
referred to as derivatives, such as trading in options, futures and foreign
currencies for bona fide hedging and/or speculative purposes as specified in the
Prospectus. A Fund may write covered put and call options on securities and
stock indices and purchase put and call options on securities and stock indices.
In addition, through the writing of covered options and the purchase of options
and the purchase and sale of stock index futures contracts, interest rate
futures contracts and options thereon, a Fund at times may speculate or seek to
hedge against either a decline in the value of securities owned by them or an
increase in the price of securities which it plans to purchase, provided that
with respect to all futures contracts traded by a Fund, the Fund will establish
a segregated account consisting of liquid assets in an amount equal to the total
market value of such futures contracts less the amount of initial margin on
deposit for such contracts. A Fund may also purchase put and call options and
write covered put and call options on foreign currencies and enter into
exchange-traded contracts for the purchase and sale for future delivery of
foreign currencies for speculative purposes or to hedge against declines in the
dollar value of foreign portfolio securities and against increases in the dollar
value of foreign securities to be acquired. Neither of the Funds is a commodity
pool and all futures and related options transactions engaged in by a Fund will
constitute bona fide hedging or other permissible transactions in accordance
with the Commodity Exchange Act, as amended, and the rules and regulations
promulgated by the Commodity Futures Trading Commission; provided, however, that
a Fund may enter into futures contracts and options on futures for purposes
other than bona fide hedging if, immediately thereafter, the sum of the amount
of its initial margin on futures contracts and premiums on options would not
exceed 5% of the liquidation value of the Fund's portfolio; provided further,
that in case of an option that is in-the-money at the time of the purchase, the
in-the-money amount may be excluded in calculating the 5% limitation. Because
the 5% limitation applies only at the time a Fund enters into a futures contract
or option thereon, the value of futures contracts and options thereon may be
significantly more or less than 5% of the value of the Fund's portfolio. Each
Fund may also enter into forward foreign currency exchange contracts ("forward
contracts") for speculative purposes or to attempt to minimize the risk to the
Fund from adverse changes in the relationship between the United States dollar
and foreign
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currencies. In addition, each Fund may engage in cross-hedging transactions with
respect to forward contracts whereby, for example, if the Investment Adviser
believes that a foreign currency may suffer a substantial decline against the
United States dollar, it may enter into a forward contract to sell an amount of
the foreign currency approximating the value of some or all of the Fund's
portfolio securities denominated in such foreign currency.
In addition to the limitations set forth in the preceding paragraph relating to
the use of futures and options on futures, the Funds have adopted certain
additional policies relating to derivatives transactions. The Strategy Fund will
not enter into a derivatives transaction for speculative purposes if,
immediately after giving effect to such transaction, the amount of the Strategy
Fund's net exposure under all such derivatives transactions would exceed 15% of
the Strategy Fund's net assets. For purposes of the foregoing policy, the
Strategy Fund's net exposure is measured by the market value of the relevant
instruments, after giving effect to any offsetting positions. There is no
comparable limitation on the Strategy Fund's ability to enter into derivatives
transactions for hedging purposes. The Capital Value Fund will not purchase put
or call options if, immediately after giving effect to such purchase, the value
of put and call options held by the Capital Value Fund would exceed 5% of the
value of its net assets. The Capital Value Fund may not write (i.e., sell)
covered call and put option contracts in excess of 20% of the value of its net
assets at the time such option contracts are written. Because the foregoing
limitations apply only at the time a Fund enters into a transaction, the value
of a Fund's holdings or its net exposure under the relevant instruments may be
significantly more or less than at the time of its initial investment.
The ability of the Funds to engage in the options and futures strategies
described herein will depend on the availability of liquid markets in such
instruments. It is impossible to predict the amount of trading interest that may
exist in various types of options or futures. In addition, daily limits on price
fluctuations on exchanges on which the Funds conduct their futures and options
transactions may prevent the prompt liquidation of positions at the optimal
time, thus subjecting the Funds to the potential of losses. Therefore no
assurance can be given that the Funds will be able to utilize these instruments
effectively for the purposes stated below. Furthermore, the Funds' ability to
engage in options and futures transactions may be limited by tax considerations.
Options and futures transactions may involve certain risks which are described
herein.
In connection with transactions in stock index futures contracts, interest rate
futures contracts and options thereon written by the Funds on such futures
contracts, a Fund engaging in such transactions will be required to deposit as
"initial margin" an amount of cash and short-term United States Government
securities equal to 5% to 8% of the contract amount. Thereafter, subsequent
payments (referred to as "variation margin") are made to and from the broker to
reflect changes in the value of the futures contract.
FUTURE DEVELOPMENTS
The Funds may take advantage of opportunities in the area of options and futures
contracts and options on futures contracts and any other derivative investments
which are not presently contemplated for use by the Funds or which are not
currently available but which may be developed, to the extent such opportunities
are both consistent with the Funds' investment objective and legally permissible
for the Funds. Before entering into such transactions or making any such
investment, the Funds will provide appropriate disclosure in the Prospectus or
this SAI.
WRITING COVERED OPTIONS ON SECURITIES. Each Fund may write covered call options
and covered put options on optionable securities and stock indices of the types
in which it is permitted to invest from time to time as its Investment Adviser
determines is appropriate in seeking to attain its objectives. Call options
written by a Fund give the holder the right to buy the underlying securities
from that Fund at a stated exercise price; put options give the holder the right
to sell the underlying security to a Fund at a stated price. In addition,
through the writing of covered options and the purchase of options and the
purchase and sale of stock index futures contracts, interest rate futures
contracts and related options on such futures contracts, the Investment Adviser
at times may speculate or seek to hedge against a decline in the value of
securities included in a Fund's portfolio or an increase in the price of
securities which it plans to purchase for a Fund; provided, that the value of
all futures contracts sold by a Fund will not exceed the total market value of
the Fund's portfolio securities; and provided, further, that with respect to all
futures contracts
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traded by a Fund, the Fund will establish a segregated account consisting of
liquid assets in an amount equal to the total market value of such futures
contracts less the amount of initial margin on deposit for such contracts.
Each Fund may write only covered options, which means that, so long as that Fund
is obligated as the writer of a call option, it will own the underlying
securities subject to the option (or comparable securities satisfying the cover
requirements of securities exchanges). In the case of put options, each Fund
will maintain in a segregated account liquid assets with a value equal to or
greater than the exercise price of the underlying securities. Each Fund may also
write combinations of covered puts and calls on the same underlying security.
Each Fund intends to treat certain options in respect of specific securities
that are not traded on a securities exchange and the securities underlying
covered call options written by a Fund as illiquid securities. See "Illiquid or
Restricted Securities."
Each Fund will receive a premium from writing a put or call option, which
increases the Fund's return in the event the option expires unexercised or is
closed out at a profit. The amount of the premium will reflect, among other
things, the relationship of the market price of the underlying security to the
exercise price of the option, the term of the option and the volatility of the
market price of the underlying security. By writing a call option, a Fund limits
its opportunity to profit from any increase in the market value of the
underlying security above the exercise price of the option. By writing a put
option, a Fund assumes the risk that it may be required to purchase the
underlying security for an exercise price higher than its then current market
value, resulting in a potential capital loss if the purchase price exceeds the
market value plus the amount of the premium received, unless the security
subsequently appreciates in value.
Each Fund may terminate an option that it has written prior to its expiration by
entering into a closing purchase transaction in which it purchases an option
having the same terms as the option written. A Fund will realize a profit or
loss from such transaction if the cost of such transaction is less or more than
the premium received from the writing of the option. In the case of a put
option, any loss so incurred may be partially or entirely offset by the premium
received from a simultaneous or subsequent sale of a different put option.
Because increases in the market price of a call option will generally reflect
increases in the market price of the underlying security, any loss to a Fund
resulting from the repurchase of a call option is likely to be offset in whole
or in part by unrealized appreciation of the underlying security owned by that
Fund.
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 time 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 Investment 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 Investment 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 Investment 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, a 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, or take delivery of,
in the case of a put, the underlying security against payment of the exercise
price. This obligation terminates when the option expires or the Fund effects a
closing purchase
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transaction. A Fund can no longer effect a closing purchase transaction with
respect to an option once it has been assigned an exercise notice.
PUT AND CALL OPTIONS ON SECURITIES. Each Fund may purchase put options for
speculative purposes or to protect its portfolio holdings in an underlying
security against a decline in market value. Such hedge protection is provided
during the life of the put option since a Fund, as holder of the put option, is
able to sell the underlying security at the put exercise price regardless of any
decline in the underlying security's market price. In order for a put option to
be profitable, the market price of the underlying security must decline
sufficiently below the exercise price to cover the premium and transaction
costs. By using put options for hedging purposes, the Fund engaging in that
transaction will reduce any profit it might otherwise have realized on its
underlying security by the premium paid for the put option and by transaction
costs.
Each Fund may also purchase call options for speculative purposes or to hedge
against an increase in prices of securities that it wants ultimately to buy.
Such hedge protection is provided during the life of the call option since a
Fund, as holder of the call option, is able to buy the underlying security at
the exercise price regardless of any increase in the underlying security's
market price. In order for a call option to be profitable, the market price of
the underlying security must rise sufficiently above the exercise price to cover
the premium and transaction costs. By using call options for hedging purposes,
the Fund engaging in that transaction will reduce any profit it might have
realized had it bought the underlying security at the time it purchased the call
option by the premium paid for the call option and by transaction costs.
Alternatively, the Investment Adviser may purchase a call or a put option on a
security in lieu of an actual investment in, or disposition of, a particular
security if it expects an increase or a decrease, as the case may be, in the
price of the security.
The purchase of an option entails a risk of loss of the entire investment
because an option may become worthless upon expiration.
An option position may be closed out only if a secondary market for an option of
the same series exists on a recognized national securities exchange or in the
over-the-counter market. Because of this fact and current trading conditions,
the Funds expect to purchase only call or put options issued by the Options
Clearing Corporation. The Funds expect to write options on national securities
exchanges and in the over-the-counter market.
While they may choose to do otherwise, the Funds generally will purchase or
write only those options for which the Investment 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 clearing
facilities inadequate and resulted in the institution of special procedures,
such as trading rotations, 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 or it otherwise
covers its position.
PURCHASE AND SALE OF OPTIONS AND FUTURES CONTRACTS ON STOCK INDICES. Each Fund
may purchase put and call options and write covered put and call options on
stock indices for speculative purposes or as a hedge against movements in the
equity markets. Each Fund may also purchase and sell stock index futures
contracts for speculative purposes or as a hedge against movements in the equity
markets.
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Options on stock indices are similar to options on specific securities except
that, rather than the right to take or make delivery of the specific security at
a specific price, an option on a stock index ordinarily gives the holder the
right to receive, upon exercise of the option, an amount of cash if the closing
level of that stock index is greater than, in the case of a call, or less than,
in the case of a put, the exercise price of the option. This amount of cash is
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. Unlike options on specific securities, all settlements of
options on stock indices are in cash and gain or loss depends on general
movements in stock included in the index rather than price movements in
particular stocks. When a Fund writes an option on a stock index, it will
establish a segregated account with the Fund's custodian in which it will
deposit liquid assets in an amount equal to the market value of the option, and
it will maintain the account while the option is open. As indicated above, the
purchase of an option entails a risk of loss of the entire investment because an
option may become worthless upon expiration.
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 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 securities is made.
If the Investment Adviser expects general stock market prices to rise, it might
purchase a call option on a stock index or a futures contract on that index as a
hedge against an increase in prices of particular equity securities it wants
ultimately to buy. If in fact the stock index does rise, the price of the
particular equity securities intended to be purchased may also increase, but
that increase would be offset in part by the increase in the value of a Fund's
index option or futures contract resulting from the increase in the index. If,
on the other hand, the Investment Adviser expects general stock market prices to
decline, it might purchase a put option or sell a futures contract on the index.
If that index does in fact decline, the value of some or all of the equity
securities in a Fund's portfolio may also be expected to decline, but that
decrease would be offset in part by the increase in the value of that Fund's
position in such put option or futures contract.
Alternatively, the Investment Adviser may purchase a call or a put option (or
buy or sell a futures contract) on a stock index in lieu of an actual investment
in, or disposition of, particular equity securities if it expects an increase or
a decrease, as the case may be, in general stock market prices.
PURCHASE AND SALE OF INTEREST RATE FUTURES CONTRACTS. Each Fund may purchase and
sell interest rate futures contracts on United States Treasury bills, notes and
bonds for speculative purposes or to hedge its portfolio of fixed income
securities against the adverse effects of anticipated movements in interest
rates.
Each Fund may sell interest rate futures contracts in anticipation of an
increase in the general level of interest rates. Generally, as interest rates
rise, the market value of the fixed income securities held by a Fund will fall,
thus reducing the net asset value of that Fund. This interest rate risk can be
reduced without employing futures contracts as a hedge by selling long-term
fixed income securities and either reinvesting the proceeds in securities with
shorter maturities or by holding assets in cash. This strategy, however, entails
increased transaction costs in the form of dealer spreads and brokerage
commissions and would as a result of the shortening of maturities typically
reduce the average yield of the Fund engaging in the strategy.
The sale of interest rate futures contracts provides an alternative means of
hedging against rising interest rates. As rates increase, the value of a Fund's
short position in the futures contracts will also tend to increase, thus
offsetting all or a portion of the depreciation in the market value of that
Fund's investments which are being hedged. While the Fund will incur commission
expenses in selling and closing out futures positions (which is done by taking
an opposite position which operates to terminate the position in the futures
contract), commissions on futures transactions are lower than the transaction
costs incurred in the purchase and sale of portfolio securities.
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Each Fund may purchase interest rate futures contracts in anticipation of a
decline in interest rates when it is not fully invested in debt securities it
intends to purchase. As such purchases are made, the Funds intend that an
equivalent amount of futures contracts will be closed out.
Alternatively, the Investment Adviser may buy or sell an interest rate futures
contract in lieu of an actual investment in, or disposition of, particular fixed
income securities if it expects an increase or a decrease, as the case may be,
in interest rates.
OPTIONS ON STOCK INDEX FUTURES CONTRACTS AND INTEREST RATE FUTURES CONTRACTS.
Each Fund may purchase call and put options and write covered call and put
options on stock index and interest rate futures contracts. A Fund may use such
options on futures contracts for speculative purposes or in connection with its
hedging strategies in lieu of purchasing and writing options directly on the
underlying securities or stock indices or purchasing and selling the underlying
futures. For example, a Fund may purchase put options or write call options on
stock index futures contracts or interest rate futures contracts, rather than
selling futures contracts, in anticipation of a decline in general stock market
prices or rise in interest rates, respectively, or purchase call options or
write covered put options on stock index or interest rate futures contracts,
rather than purchasing such futures contracts, to hedge against possible
increases in the price of equity securities or debt securities, respectively,
which that Fund intends to purchase.
FOREIGN DERIVATIVES TRANSACTIONS. Unlike trading on domestic exchanges for
certain derivatives instruments, trading on foreign exchanges is not regulated
by the Commodity Futures Trading Commission ("CFTC") and may be subject to
greater risks than trading on domestic exchanges. For example, some foreign
exchanges are principal markets so that no common clearing facility exists and a
trader may look only to the broker for performance of the contract. In addition,
unless a Fund hedges against fluctuations in the exchange rate between the U.S.
dollar and the currencies in which trading is done on foreign exchanges, any
profits that the Fund might realize in trading could be eliminated by adverse
changes in the exchange rate, or the Fund could incur losses as a result of
those changes. Transactions on foreign exchanges may include both instruments
which are traded on domestic exchanges and those which are not.
FOREIGN CURRENCY TRANSACTIONS. Each Fund may enter into forward foreign currency
exchange contracts ("forward contracts") for speculative purposes or to attempt
to minimize the risk to the Fund from adverse changes in the relationship
between the United States dollar and foreign currencies. A forward contract is
an obligation to purchase or sell a specific currency for an agreed price at a
future date which is individually negotiated and privately traded by currency
traders and their customers. A Fund may enter into a forward contract for
hedging purposes, for example, when it enters into a contract for the purchase
or sale of a security denominated in a foreign currency in order to "lock in"
the United States dollar price of the security. Likewise, for example, when a
Fund believes that a foreign currency may suffer a substantial decline against
the United States dollar, it may enter into a forward contract to sell an amount
of that foreign currency approximating the value of some or all of the Fund's
portfolio securities denominated in such foreign currency, or when a Fund
believes that the United States dollar may suffer a substantial decline against
a foreign currency, it may enter into a forward contract to buy that foreign
currency for a fixed dollar amount. This second investment practice is generally
referred to as "cross-hedging." The Fund may enter into a forward contract for
speculative purposes in order to seek to take advantage of changes in the
relative values of two currencies which the Investment Adviser believes may
occur. Because in connection with a Fund's foreign currency forward transactions
an amount of the Fund's assets equal to the amount of the purchase will be held
aside or segregated to be used to pay for the commitment, each Fund will always
have liquid assets available that are sufficient to cover any commitments of the
Fund under these contracts or to limit any potential risk. The segregated
account will be maintained with the relevant Fund's custodian or a sub-custodian
and marked-to-market on a daily basis. While these contracts are not currently
regulated by the CFTC, the CFTC may in the future assert authority to regulate
forward contracts. In such event, the Funds' ability to utilize forward
contracts in the manner set forth above may be restricted. Forward contracts may
limit potential gain from a positive change in the relationship between the
United States dollar and foreign currencies. Unanticipated changes in currency
prices may result in poorer overall performance for the Fund than if it had not
engaged in such contracts.
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Each Fund may purchase put and call options and write covered call and put
options on foreign currencies for speculative purposes or for the purpose of
protecting against declines in the dollar value of foreign portfolio securities
and against increases in the dollar cost of foreign securities to be acquired.
As is the case with other kinds of options, however, the writing of an option on
foreign currency for hedging purposes will constitute only a partial hedge, up
to the amount of the premium received, and the Fund could be required to
purchase or sell foreign currencies at disadvantageous exchange rates, thereby
incurring losses. The purchase of an option on foreign currency may constitute
an effective hedge against fluctuations in exchange rates although, in the event
of rate movements adverse to the Fund's position, the Fund may forfeit the
entire amount of the premium plus related transaction costs. Options on foreign
currencies to be written or purchased by the Fund will be traded on United
States and foreign exchanges or over-the-counter.
Each Fund may enter into exchange-traded contracts for the purchase or sale for
future delivery of foreign currencies ("foreign currency futures contracts").
This investment technique may be used for speculative purposes or to hedge
against anticipated future changes in exchange rates which otherwise might
adversely affect the value of a Fund's portfolio securities or adversely affect
the prices of securities that the Fund intends to purchase at a later date. The
successful use of foreign currency futures contracts will depend, in part, on
the Investment Adviser's ability to forecast currency exchange rate movements
correctly. Should exchange rates move in an unexpected manner, the Funds may not
achieve the anticipated benefits of foreign currency futures contracts or may
realize losses. The costs, limitations and risks associated with transactions in
foreign currency futures contracts are similar to those associated with other
types of futures contracts discussed in this SAI.
The cost to a Fund of engaging in currency transactions varies with factors such
as the currency involved, the length of the contract period and the market
conditions then prevailing. Because transactions in currency exchange are
usually conducted on a principal basis, no fees or commissions are involved. The
use of forward currency exchange contracts does not eliminate fluctuations in
the underlying prices of the securities, but it does establish a rate of
exchange that can be achieved in the future.
If a devaluation is generally anticipated, a Fund may not be able to contract to
sell the currency at a price above the devaluation level it anticipates. The
requirements for qualification as a regulated investment company under the Code
may cause a Fund to restrict the degree to which it engages in currency
transactions. [See "Additional Information Concerning Taxes."]
RISK FACTORS IN DERIVATIVES TRANSACTIONS. Derivatives transactions involve
special risks, including possible default by the other party to the transaction,
illiquidity, increased volatility in the relevant Fund's net asset value and, to
the extent the Investment Adviser's view as to certain market movements is
incorrect, the risk that the use of such instruments could result in
substantially greater losses than if it had not been used. Use of put and call
options could result in losses to a Fund, force the purchase or sale of
portfolio securities at inopportune times or for prices lower than current
market values, or cause the Fund to hold a security it might otherwise sell. The
use of currency transactions could result in the Fund's incurring losses as a
result of the imposition of exchange controls, suspension of settlements, or the
inability to deliver or receive a specified currency in addition to exchange
rate fluctuations. The use of options and futures transactions entails certain
special risks. In particular, in the case of hedging, the variable degree of
correlation between price movements of options or futures contracts and price
movements in the related portfolio position of the Fund could create the
possibility that losses on the instrument will be greater than gains in the
value of the Fund's position. In addition, futures and options markets could be
illiquid in some circumstances and certain over-the-counter options could have
no markets. The Fund might not be able to close out certain positions without
incurring substantial losses. To the extent the Fund utilizes futures and
options transactions for hedging, such transactions should tend to minimize the
risk of loss due to a decline in the value of the hedged position and, at the
same time, limit any potential gain to the Fund that might result from an
increase in value of the position. Finally, the daily variation margin
requirements for futures contracts create a greater ongoing potential financial
risk than would purchases of options, in which case the exposure is limited to
the cost of the initial premium and transaction costs. Expenses and losses
incurred as a result of the use of options, futures or currency
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transactions will reduce the Fund's net asset value, and possibly income, and
the losses may be greater than if such instruments had not been used.
The value of a derivative instrument depends largely upon price movements in the
securities or other instruments upon which it is based. Therefore, many of the
risks applicable to trading the underlying securities or other instruments are
also applicable to derivatives trading. However, there are a number of other
risks associated with derivatives trading, including the risk that derivatives
often fluctuate in value more than the securities or other instruments upon
which they are based. Relatively small changes in the value of the underlying
securities or instruments may have significantly larger effects on the value of
derivatives held by a Fund. Derivatives may entail the risk of loss of the
entire amount invested or, in certain cases, losses in excess of the amount
invested. A derivative utilized for hedging purposes may limit the amount of
potential gain on the related transaction or may result in greater losses than
if the derivative had not been used. The Funds generally expect that their
options and futures transactions will be conducted on recognized securities and
commodities exchanges. In certain instances, however, the Funds may purchase and
sell stock options in the over-the-counter market. A Fund's ability to terminate
stock option positions established in the over-the-counter market may be more
limited than in the case of exchange-traded options and may also involve the
risk that securities dealers participating in such transactions would fail to
meet their obligations to the Fund. The staff of the Securities and Exchange
Commission ("SEC") generally considers over-the-counter options to be illiquid.
There can be no assurance that a Fund will be able to effect closing
transactions at any particular time or at an acceptable price. The use of
options and futures for hedging purposes involves the risk of imperfect
correlation between movements in options and futures prices and movements in the
price of securities which are the subject of the hedge. The use of derivatives
for speculative purposes involves a variety of risks, including the risk of an
increased volatility that may potentially increase losses. Certain provisions of
the Code may limit the ability of a Fund to quickly liquidate options, futures
and currency positions in which significant unrealized gains have developed when
the Investment Adviser deems it appropriate to realize the gains. [For a
discussion of certain tax implications associated with such investment
techniques, see "Additional Information Concerning Taxes."]
SHORT-SELLING
The Capital Value Fund may make short sales, which are transactions in which the
Fund sells a security it does not own in anticipation of a decline in the market
value of that security. To complete such a transaction, the Fund must borrow the
security to make delivery to the buyer. The Fund then is obligated to replace
the security borrowed by purchasing it at the market price at the time of
replacement. The Fund will incur a loss as a result of the short sale if the
price of the security increases between the date of the short sale and the date
on which the Fund replaces the borrowed security. The Fund will realize a gain
if the security declines in price between those dates. The Capital Value Fund
may purchase call options to provide a hedge against an increase in the price of
a security sold short by the Fund. When the Fund purchases a call option it has
to pay a premium to the person writing the option and a commission to the broker
selling the option. If the option is exercised by the Fund, the premium and the
commission paid may be more than the amount of the brokerage commission charged
if the security were to be purchased directly. No securities will be sold short
by the Capital Value Fund if, after effect is given to any such short sale, the
total market value of all securities sold short would exceed 25% of the value of
the Fund's net assets. The Fund may not sell short the securities of any single
issuer listed on a national securities exchange to the extent of more than 5% of
the value of the Fund's net assets. The Fund may not sell short the securities
of any class of an issuer to the extent, at the time of the transaction, of more
than 5% of the outstanding securities of that class. In addition to the short
sales discussed above, the Capital Value Fund may make short sales "against the
box," a transaction in which the Capital Value Fund enters into a short sale of
a security which the Capital Value Fund owns. The Capital Value Fund at no time
will have more than 15% of the value of its net assets in deposits on short
sales against the box.
Until the Capital Value Fund replaces a borrowed security in connection with a
short sale, the Capital Value Fund will: (a) maintain daily a segregated
account, containing liquid assets, at such a level that (i) the amount deposited
in the account plus the amount deposited with the broker as collateral will
equal the current value of the security sold short and (ii) the amount deposited
in the segregated account plus the
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amount deposited with the broker as collateral will not be less than the market
value of the security at the time it was sold short; or (b) otherwise cover its
short position.
BANK OBLIGATIONS
Bank obligations that the Funds may purchase include time deposits ("TDs"),
certificates of deposit ("CDs") and banker acceptances ("BAs"). TDs 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.
CDs are negotiable certificates evidencing the obligation of a bank to repay
funds deposited with it for a specified period of time. BAs are credit
instruments evidencing the obligation of a bank to pay a draft drawn on it by a
customer. These and other short-term instruments reflect the obligation both of
the bank and of the drawer to pay the face amount of the instrument upon
maturity. The other short-term obligations may include uninsured, direct
obligations bearing fixed, floating or variable interest rates.
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 CDs may be purchased by the Fund are insured by the FDIC (although such
insurance may not be of material benefit to the 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 branches of domestic
banks generally are required, among other things, to maintain specified levels
of reserves, are limited in the amounts which they can loan to a single borrower
and are subject to other regulation designed to promote financial soundness.
However, not all such laws and regulations apply to foreign branches of domestic
banks.
Obligations of foreign branches of domestic banks, foreign subsidiaries of
domestic banks and domestic and foreign branches of foreign banks, such as CDs
and TDs, may be general obligations of the parent banks in addition to the
issuing branches, or may be limited by the terms of a specific obligation and
governmental regulation. Such obligations are subject to different risks than
are those of domestic banks. These risks include foreign economic and political
developments, foreign governmental restrictions that may adversely affect
payment of principal and interest on the obligations, foreign exchange controls
and foreign withholding and other taxes on interest income. Foreign branches and
subsidiaries are not necessarily subject to the same or similar regulatory
requirements that apply to domestic banks, such as mandatory reserve
requirements, loan limitations, and accounting, auditing and financial
recordkeeping requirements. In addition, less information may be publicly
available about a foreign branch of a domestic bank or about a foreign bank than
about a domestic bank.
Obligations of United States branches of foreign banks may be general
obligations of the parent banks in addition to the issuing branches, or may be
limited by the terms of a specific obligation and by Federal or state regulation
as well as governmental action in the country in which the foreign bank has its
head office. A domestic branch of a foreign bank with assets in excess of $1
billion may be subject to reserve requirements imposed by the Federal Reserve
System or by the state in which the branch is located if the branch is licensed
in that state. In addition, Federal branches licensed by the Comptroller of the
Currency and branches licensed by certain states ("State Branches") may be
required to: (1) pledge to the regulator, by depositing assets with a designated
bank within the state, a certain percentage of their assets as fixed from time
to time by the appropriate regulatory authority; and (2) maintain assets within
the state in an amount equal to a specified percentage of the aggregate amount
of liabilities of the foreign bank payable at or through all of its agencies or
branches within the state. The deposits of Federal and State branches generally
must be insured by the FDIC if such branches take deposits of less than
$100,000.
In view of the foregoing factors associated with the purchase of CDs and TDs
issued by foreign branches of domestic banks, foreign subsidiaries of domestic
banks, foreign branches of foreign banks or domestic branches of foreign banks,
the Investment Adviser carefully evaluates such investments on a case-by-case
basis.
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COMMERCIAL PAPER
Each Fund may purchase commercial paper, which consists of short-term, unsecured
promissory notes issued to finance short-term credit needs. The Funds will
invest in commercial paper that is rated at least Prime-1 by Moody's or A-1 by
S&P or, if not rated, is determined by the Investment Adviser to be of
comparable quality.
REPURCHASE AGREEMENTS
The Funds may enter into repurchase agreements only with member banks of the
Federal Reserve System and primary dealers in United States Government
securities and only with respect to obligations issued or guaranteed by the
United States Government, its agencies or instrumentalities. Repurchase
agreements are contracts under which the buyer of a security simultaneously buys
and commits to resell the security to the seller at an agreed upon price and
date. Under a repurchase agreement, the seller is required to maintain the value
of the securities subject to the repurchase agreement at not less than their
repurchase price. Repurchase agreements may involve risks in the event of
default or insolvency of the seller, including possible delays or restrictions
upon a Fund's ability to dispose of the underlying securities. Repurchase
agreements with maturities of more than seven days will be treated as illiquid
securities by the Funds.
Each Fund's custodian or sub-custodian will have custody of, and will hold in a
segregated account, securities acquired by that Fund under a repurchase
agreement. Repurchase agreements are considered by the staff of the SEC to be
loans by the Fund. In an attempt to reduce the risk of incurring a loss on a
repurchase agreement, the 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 securities of the type in which the Fund may invest, and will
require that additional securities be deposited with it if the value of the
securities purchased should decrease below the resale price. Each Fund will
consider on an ongoing basis the creditworthiness of the institutions with which
it enters into repurchase agreements.
BRADY BONDS AND EMERGING MARKET GOVERNMENTAL OBLIGATIONS
Each Fund may invest in emerging market governmental debt obligations commonly
referred to as "Brady Bonds." Brady Bonds are debt securities, generally
denominated in U.S. dollars, issued under the framework of the "Brady Plan," an
initiative announced by former U.S. Treasury Secretary Nicholas F. Brady in 1989
as a mechanism for debtor nations to restructure their outstanding external
commercial bank indebtedness. Investors should recognize that Brady Bonds have
only been issued relatively recently, and accordingly do not have a long payment
history. In addition to Brady Bonds, the Funds may invest in emerging market
governmental obligations issued as a result of debt restructuring agreements
outside of the scope of the Brady Plan. A substantial portion of the Brady Bonds
and other similar obligations in which the Funds may invest are likely to be
acquired at a discount, which involves certain considerations discussed below
under "Zero Coupon Securities and Discount Obligations."
The Brady Plan framework, as it has developed, contemplates the exchange of
external commercial bank debt for newly issued bonds. Brady Bonds may also be
issued in respect of new money being advanced by existing lenders in connection
with the debt restructuring. Brady Bonds issued to date generally have
maturities of between 15 and 30 years from the date of issuance. The following
emerging market countries have issued Brady Bonds: Argentina, Brazil, Bulgaria,
Costa Rica, the Dominican Republic, Ecuador, Jordan, Mexico, Nigeria, the
Philippines, Poland, Uruguay and Venezuela. In addition, other countries may
announce plans to issue Brady Bonds. The Funds may invest in Brady Bonds of
emerging market countries that have been issued to date, as well as those which
may be issued in the future.
Agreements implemented under the Brady Plan to date are designed to achieve debt
and debt-service reduction through specific options negotiated by a debtor
nation with its creditors. As a result, the financial packages offered by each
country differ. The types of options have included the exchange of outstanding
commercial bank debt for bonds issued at 100% of face value of such debt which
carry a below-market stated rate of interest (generally known as par bonds),
bonds issued at a discount from the face value of such debt (generally known as
discount bonds), bonds bearing an interest rate which increases over time and
bonds issued in exchange for the advancement of new money by existing lenders.
Discount bonds issued to date under the framework of the Brady Plan have
generally borne interest computed semiannually
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at a rate equal to 13/16 of one percent above the then current six month LIBOR
(London Interbank Offered Rate). Regardless of the stated face amount and stated
interest rate of the various types of Brady Bonds, the Fund will purchase Brady
Bonds in secondary markets, as described below, in which the price and yield to
the investor reflect market conditions at the time of purchase. Brady Bonds
issued to date have traded at a deep discount from their face value. Certain
sovereign bonds are entitled to "value recovery payments" in certain
circumstances, which in effect constitute supplemental interest payments but
generally are not collateralized. Certain Brady Bonds have been collateralized
as to principal due at maturity (typically 15 to 30 years from the date of
issuance) by U.S. Treasury zero coupon bonds with a maturity equal to the final
maturity of such Brady Bonds, although the collateral is not available to
investors until the final maturity of the Brady Bonds. Collateral purchases are
financed by the International Monetary Fund, the World Bank and the debtor
nations' reserves. In addition, interest payments on certain types of Brady
Bonds may be collateralized by cash or high-grade securities in amounts that
typically represent between 12 and 18 months of interest accruals on these
instruments with the balance of the interest accruals being uncollateralized.
Brady Bonds are often viewed as having three or four valuation components: (i)
the collateralized repayment of principal at final maturity; (ii) the
collateralized interest payments; (iii) the uncollateralized interest payments;
and (iv) any uncollateralized repayment of principal at maturity (these
uncollateralized amounts constitute the "residual risk"). The Fund may purchase
Brady Bonds with no or limited collateralization, and will be relying for
payment of interest and (except in the case of principal collateralized Brady
Bonds) principal primarily on the willingness and ability of the foreign
government to make payment in accordance with the terms of the Brady Bonds.
Brady Bonds issued to date are purchased and sold in secondary markets through
U.S. securities dealers and other financial institutions and are generally
maintained through European transnational securities depositories.
ZERO COUPON SECURITIES AND DISCOUNT OBLIGATIONS
Each Fund may invest in zero coupon U.S. Treasury securities, which are Treasury
Notes and Bonds that have been stripped of their unmatured interest coupons, the
coupons themselves and receipts or certificates representing interests in such
stripped debt obligations and coupons. The Funds also may invest in zero coupon
securities issued by financial institutions which constitute a proportionate
ownership of the issuer's pool of underlying U.S. Treasury securities. Zero
coupon securities are debt securities that pay no cash income but are sold at
substantial discounts from their value at maturity. Certain zero coupon
securities also are sold at substantial discounts from their maturity value and
provide for the commencement of regular interest payments at a deferred date. In
addition, as indicated above, certain of the Fund's emerging market governmental
debt securities may be acquired at a discount ("Discount Obligations").
Zero coupon securities and Discount Obligations tend to be subject to greater
price fluctuations in response to changes in interest rates than are ordinary
interest-paying debt securities with similar maturities. The value of zero
coupon securities and Discount Obligations appreciates more during periods of
declining interest rates and depreciates more during periods of rising interest
rates than ordinary interest-paying debt securities with similar maturities.
When a zero coupon security is held to maturity, its entire return, which
consists of the amortization of discount, comes from the difference between its
purchase price and its maturity value. This difference is known at the time of
purchase, so that investors holding zero coupon securities until maturity know
at the time of their investment what the expected return on their investment
will be.
Under current Federal income tax law, the Fund is required to accrue as income
each year a portion of the original issue discount with respect to zero coupon
securities and other securities issued at a discount to the stated redemption
price prior to the receipt of cash payments. Accordingly, to maintain its
qualification as a regulated investment company and avoid liability for Federal
income taxes, a Fund may have to dispose of portfolio securities under
disadvantageous circumstances in order to generate current cash to satisfy
certain distribution requirements of that Fund. [See "Additional Information
Concerning Taxes."]
STRIPPED MORTGAGE-BACKED SECURITIES
Each Fund may invest up to 10% of its total assets in stripped mortgage-backed
securities ("SMBS"), all of which will be issued or guaranteed by the United
States Government, its agencies or instrumentalities. SMBS are derivative
multiclass securities that indirectly represent a participation in, or are
secured by and payable from, mortgage loans secured by real property. SMBS are
structured with two or more classes of
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securities that receive different proportions of the interest and principal
payments on an underlying pool of mortgage assets. A common type of SMBS will
have one class receiving all of the interest ("IO" or interest-only class) and
the other class receiving all of the principal ("PO" or principal-only class).
SMBS may be highly sensitive to changes in prepayment and interest rates, and
under certain interest rate or prepayment rate scenarios a Fund may fail to
recoup fully its investment in these securities even if the securities are of
the highest credit quality. Furthermore, the yield to maturity on these
securities may be adversely affected.
STRUCTURED INVESTMENTS
Each Fund may invest in structured investments, which are securities issued
solely for the purpose of restructuring the investment characteristics of other
securities, such as commercial bank loans or Brady Bonds. The Strategy Fund
limits its investments in structured investments to 5% of its total assets.
Structured investment products may involve special risks, including substantial
volatility in their market values and potential illiquidity. The Funds are
permitted to invest in a class of structured investments which is either
subordinated or unsubordinated to the right of payment of another class.
Subordinated structured investments typically have higher yields and present
greater risks than unsubordinated structured investments. Although a Fund's
purchase of subordinated structured investments would have a similar economic
effect to that of borrowing against the underlying securities, the purchase will
not be deemed to be a borrowing by that Fund for purposes of that Fund's
fundamental investment restriction on borrowing.
Issuers of structured investments are typically organized by investment banking
firms which receive fees in connection with establishing each issuing entity and
arranging for the placement of its securities. This type of restructuring of
investment characteristics involves the deposit with or purchase by an entity,
such as a corporation or trust, of specified instruments (such as Brady Bonds)
and the issuance by that entity of one or more classes of securities backed by,
or representing interests in, the underlying instruments. The cash flow on the
underlying instruments may be apportioned among the newly issued structured
investments to create securities with different investment characteristics such
as varying maturities, payment priorities or interest rate provisions; the
extent of the payments made with respect to structured investments is dependent
on the extent of the cash flow on the underlying instruments. Because structured
investments of the type in which the Fund anticipates investing typically
involve no credit enhancement, their credit risk will generally be equivalent to
that of the underlying instruments.
Certain issuers of structured investments may be deemed to be "investment
companies" as defined in the 1940 Act. As a result, the Funds' investment in
these structured investments may be limited by the restrictions contained in the
1940 Act. Structured investments are typically sold in private placement
transactions, and there currently is no active trading market for structured
investments.
PREFERRED STOCK
Preferred stock has a preference over common stock in liquidation and generally
in dividends as well, but is subordinated to the liabilities of the issuer in
all respects. Preferred stock may or may not be convertible into common stock.
As a general rule, the market value of preferred stock with a fixed dividend
rate and no conversion element varies inversely with interest rates and
perceived credit risk. Because preferred stock is junior to debt securities and
other obligations of the issuer, deterioration in the credit quality of the
issuer will cause greater changes in the value of a preferred stock than in a
debt security with similar stated yield characteristics.
CONVERTIBLE SECURITIES
A convertible security is a fixed-income security that may be converted at
either a stated price or stated rate into underlying shares of common stock.
Convertible securities have general characteristics similar to both fixed-income
and equity securities. Although to a lesser extent than with fixed-income
securities generally, the market value of convertible securities tends to
decline as interest rates increase and, conversely, tends to increase as
interest rates decline. In addition, because of the conversion feature, the
market value of convertible securities tends to vary with fluctuations in the
market value of the underlying common stock, and therefore, also will react to
variations in the general market for equity securities. A unique feature of
convertible securities is that as the market price of the underlying common
stock declines, convertible securities tend to trade increasingly on a yield
basis, and so may not experience market value declines to
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the same extent as the underlying common stock. When the market price of the
underlying common stock increases, the prices of the convertible securities tend
to rise as a reflection of the value of the underlying common stock. While no
securities investments are without risk, investments in convertible securities
generally entail less risk than investments in common stock of the same issuer.
As fixed-income securities, convertible securities are investments that provide
for a stable stream of income with generally higher yields than common stocks.
Of course, like all fixed-income securities, there can be no assurance of
current income because the issuers of the convertible securities may default on
their obligations. Convertible securities, however, generally offer lower
interest or dividend yields than non-convertible securities of similar quality
because of the potential for capital appreciation. A convertible security, in
addition to providing fixed income, offers the potential for capital
appreciation through the conversion feature, which enables the holder to benefit
from increases in the market price of the underlying common stock. There can be
no assurance of capital appreciation, however, because securities prices
fluctuate. Convertible securities generally are subordinated to other similar
but non-convertible securities of the same issuer, although convertible bonds,
as corporate debt obligations, enjoy seniority in right of payment to all equity
securities, and convertible preferred stock is senior to common stock, of the
same issuer. Because of the subordination feature, however, convertible
securities typically have lower ratings than similar non-convertible securities.
WARRANTS
Equity warrants and rights are securities permitting, but not obligating, their
holder to subscribe for other equity securities. Warrants and rights do not
carry with them the right to dividends or voting rights with respect to the
securities that they entitle their holder to purchase, and they do not represent
any rights in the assets of the issuer. As a result, an investment in warrants
or rights may be considered speculative. The value of a warrant does not
necessarily change with the value of the underlying securities and a warrant
ceases to have value if it is not exercised prior to its expiration date. Each
Fund may invest up to 5% of the value of its net assets in warrants for equity
securities, but will not invest more than 2% of the value of its net assets in
warrants which are not listed on the New York or American Stock Exchange.
DEPOSITORY RECEIPTS
American Depository Receipts ("ADRs"), Global Depository Receipts ("GDRs"),
European Depository Receipts ("EDRs") and other types of depository receipts
(which, together with ADRs, GDRs and EDRs, are collectively referred to as
"Depository Receipts") evidence ownership of underlying securities issued by
either a non-U.S. or a U.S. corporation that have been deposited with a
depository or custodian bank. Depository Receipts may be issued in connection
with an offering of securities by the issuer of the underlying securities or
issued by a depositary bank as a vehicle to promote investment and trading in
the underlying securities. ADRs are receipts issued by U.S. banks or trust
companies in respect of securities of non-U.S. issuers held on deposit for use
in the U.S. securities markets. GDRs, EDRs and other types of Depository
Receipts are typically issued by a U.S. bank or trust company and traded
principally in the U.S. and other international markets.
The Funds treat Depository Receipts as interests in the underlying securities
for purposes of their investment policies. While Depository Receipts may not
necessarily be denominated in the same currency as the securities into which
they may be converted, they entail certain of the risks associated with
investments in foreign securities. Each Fund will limit its investment in
Depository Receipts not sponsored by the issuer of the underlying securities to
no more than 5% of the value of its net assets (at the time of the investment).
A purchaser of unsponsored Depository Receipts may not have unlimited voting
rights and may not receive as much information about the issuer of the
underlying security as with sponsored Depository Receipts.
INVESTMENT FUNDS
Each Fund may invest in unaffiliated investment funds which invest principally
in securities in which that Fund is authorized to invest, subject to the
limitations imposed by the 1940 Act on certain of these investments. These
investment funds may be registered investment companies as well as private
investment funds which are designed to pursue specialized investment
opportunities such as private equity and emerging market investments. Under the
1940 Act, a Fund may invest up to 10% of its total assets in the
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shares of other investment companies and up to 5% of its total assets in any one
investment company, provided that the investment does not represent more than 3%
of the voting stock of the acquired investment company. Only the 3% limitation
would apply to investment funds which are "investment companies" as defined
under the 1940 Act. By investing in another investment fund, a Fund bears a
ratable share of the investment fund's expenses, as well as continuing to bear
the Fund's advisory and administrative fees with respect to the amount of the
investment. A Fund's investment in certain investment funds will result in
special U.S. federal income tax consequences. [See "Additional Information
Concerning Taxes."]
ILLIQUID OR RESTRICTED SECURITIES
Each Fund may purchase securities for which there is a limited or no trading
market or which are subject to restrictions on resale to the public. Investments
in securities which are illiquid or "restricted" may involve added expense to a
Fund should the Fund be required to bear registration or other costs to dispose
of such securities and could involve delays in disposing of such securities
which might have an adverse effect upon the price and timing of sales of such
securities and the liquidity of the Fund with respect to redemptions. Neither
Fund may enter into repurchase agreements providing for settlement in more than
seven days after notice or purchase securities which are illiquid (such as
"restricted securities" which are illiquid, and securities that are not readily
marketable) if, in the aggregate, more than 15% of the value of that Fund's net
assets would be so invested.
RULE 144A SECURITIES
Each Fund may purchase certain restricted securities ("Rule 144A Securities")
for which there is a secondary market of qualified institutional buyers, as
contemplated by Rule 144A under the Securities Act of 1933, as amended
("Securities Act"). Rule 144A provides an exemption from the registration
requirements of the Securities Act for the resale of certain restricted
securities to qualified institutional buyers.
One effect of Rule 144A is that certain restricted securities may now be liquid,
though there is no assurance that a liquid market for Rule 144A securities will
develop or be maintained. The Board of Directors has adopted policies and
procedures for the purpose of determining whether securities that are eligible
for resale under Rule 144A are liquid or illiquid for purposes of the Fund's 15%
limitation on investment in illiquid securities. Pursuant to those policies and
procedures, the Board of Directors has delegated to the Investment Adviser the
determination as to whether a particular security is liquid or illiquid,
requiring that consideration be given to, among other things, the frequency of
trades and quotes for the security, the number of dealers willing to sell the
security and the number of potential purchasers, dealer undertakings to make a
market in the security, the nature of the security and the time needed to
dispose of the security. The Board of Directors periodically reviews the Fund's
purchases and sales of Rule 144A securities and the Investment Adviser's
compliance with the above procedures.
LOAN PARTICIPATIONS AND ASSIGNMENTS
Each Fund may invest in fixed and floating rate loans ("Loans") arranged through
private negotiations between a borrower (often an issuer of Sovereign Debt
Obligations) and one or more financial institutions ("Lenders"). The Funds'
investments in Loans are expected in most instances to be in the form of
participations in Loans ("Participations") and, in the case of the Capital Value
Fund but not the Strategy Fund, assignments of all or a portion of Loans
("Assignments") from third parties. A Fund's investment in Participations
typically will result in such Fund having a contractual relationship only with
the Lender and not with the borrower. Such Fund will have the right to receive
payments of principal, interest and any fees to which it is entitled only from
the Lender selling the Participations and only upon receipt by the Lender of the
payments from the borrower. In connection with purchasing Participations, a Fund
generally will have no right to enforce compliance by the borrower with the
terms of the loan agreement relating to the Loan, nor any rights of set-off
against the borrower, and a Fund may not directly benefit from any collateral
supporting the Loan in which it has purchased the Participations. As a result,
the Fund may be subject to the credit risk of both the borrower and the Lender
that is selling the Participations and, accordingly, the Funds will consider
both the borrower and the Lender to be issuers for purposes of their investment
restrictions. In the event of the insolvency of the Lender selling a
Participation, a Fund may be treated as a general creditor of the Lender and may
not benefit from any set-off between the Lender and the
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borrower. Certain Participations may be structured in a manner designed to avoid
purchasers of Participations being subject to the credit risk of the Lender with
respect to the Participations, but even under such a structure, in the event of
the Lender's insolvency, the Lender's servicing of the Participations may be
delayed and the assignability of the Participations impaired. A Fund will
acquire Participations only if the Lender interpositioned between the Fund and
the borrower is a Lender having total assets of more than $25 billion and whose
senior unsecured debt is rated investment grade or higher (i.e., Baa/BBB or
higher). A Fund's investments in Loans are considered to be debt obligations for
purposes of its investment restrictions. In addition, for purposes of a Fund's
investment restriction on investment in illiquid securities, the Fund will treat
loans as illiquid securities unless the staff of the SEC concludes that a market
in these instruments has developed sufficiently such that they may be treated as
liquid.
When the Capital Value Fund purchases Assignments from Lenders it will acquire
direct rights against the borrower on the Loan. Because Assignments are arranged
through private negotiations between potential assignees and potential
assignors, however, the rights and obligations acquired by the Capital Value
Fund as the purchaser of an Assignment may differ from, and be more limited
than, those held by the assigning Lender. The assignability of certain Sovereign
Debt Obligations is restricted by the governing documentation as to the nature
of the assignee such that the only way in which the Capital Value Fund may
acquire an interest in a Loan is through a Participation and not an Assignment.
The Funds may have difficulty disposing of Assignments and Participations
because to do so it will have to assign such securities to a third party.
Because there is no established secondary market for such securities, the Funds
anticipate that such securities could be sold only to a limited number of
institutional investors. The lack of an established secondary market may have an
adverse impact on the value of such securities and the Funds' ability to dispose
of particular Assignments or Participations when necessary to meet the Funds'
liquidity needs or in response to a specific economic event such as a
deterioration in the creditworthiness of the borrower. The lack of an
established secondary market for Assignments and Participations also may make it
more difficult for a Fund to assign a value to these securities for purposes of
valuing the Fund's portfolio and calculating its net asset value. A Fund will
not invest more than 15% of the value of its net assets in Participations and
(in the case of the Capital Value Fund) Assignments that are illiquid, and in
other illiquid securities.
LEVERAGE THROUGH BORROWING (CAPITAL VALUE FUND ONLY)
The Capital Value Fund may borrow for investment purposes up to 33 1/3% of the
value of its total assets. This borrowing, which is known as leveraging,
generally will be unsecured, except to the extent the Fund enters into reverse
repurchase agreements, described below. Leveraging will exaggerate the effect on
net asset value of any increase or decrease in the market value of the Capital
Value Fund's portfolio. Money borrowed for leveraging will be subject to
interest costs which may or may not be recovered by appreciation of the
securities purchased; in certain cases, interest costs may exceed the return
received on the securities purchased.
Among the forms of borrowing in which the Capital Value Fund may engage is the
entry into reverse repurchase agreements with banks, brokers or dealers. These
transactions involve the transfer by the Fund of an underlying debt instrument
in return for cash proceeds based on a percentage of the value of the security.
The Fund retains the right to receive interest and principal payments on the
security. At an agreed upon future date, the Fund repurchases the security at
principal, plus accrued interest.
For borrowings for investment purposes, the 1940 Act requires the Capital Value
Fund to maintain continuous asset coverage (that is, total assets including
borrowings, less liabilities exclusive of borrowings) of 300% of the amount
borrowed. If the 300% asset coverage should decline as a result of market
fluctuations or other reasons, the Capital Value Fund may be required to sell
some of its portfolio holdings within three days to reduce the debt and restore
the 300% asset coverage, even though it may be disadvantageous from an
investment standpoint to sell securities at that time. The Capital Value Fund
also may be required to maintain minimum average balances in connection with
such borrowing or to pay a commitment or other fee to maintain a line of credit;
either of these requirements would increase the cost of borrowing over the
stated interest rate. To the extent the Capital Value Fund enters into a reverse
repurchase agreement, the Capital Value Fund will maintain in a segregated
custodial account liquid assets at least equal to the aggregate amount of its
reverse repurchase obligations, plus accrued interest, in certain
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cases, in accordance with releases promulgated by the SEC. The SEC views reverse
repurchase transactions as collateralized borrowings by the Capital Value Fund.
LENDING PORTFOLIO SECURITIES
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 331/3% of the value of the
relevant Fund's total assets. 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. A Fund continues to be entitled to payments in amounts equal to the
interest, dividends or other distributions payable on the loaned security and
receives interest on the amount of the loan. Such loans will be terminable at
any time upon specified notice. From time to time, a Fund may return to the
borrower or a third party which is unaffiliated with that 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 SEC currently requires that the following conditions must be met whenever
portfolio securities are loaned: (i) the relevant Fund must receive at least
100% cash collateral from the borrower; (ii) the borrower must increase such
collateral whenever the market value of the securities rises above the level of
such collateral; (iii) the Fund must be able to terminate the loan at any time;
(iv) the Fund must receive reasonable interest on the loan, as well as any
dividends, interest or other distributions payable on the loaned securities, and
any increase in market value; (v) the Fund may pay only reasonable custodian
fees in connection with the loan; and (vi) while voting rights on the loaned
securities may pass to the borrower, the Company's Directors 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.
FORWARD COMMITMENTS
The Funds may purchase securities on a when-issued or forward commitment basis,
which means that delivery and payment take place a number of days after the date
of the commitment to purchase. The payment obligation and the interest rate that
will be received on a when-issued security are fixed at the time a Fund enters
into the commitment. The Funds will make commitments to purchase such securities
only with the intention of actually acquiring the securities, but the Funds may
sell these securities before the settlement date if it is deemed advisable. The
Funds will not accrue income in respect of a security purchased on a when-issued
or forward commitment basis prior to its stated delivery date.
Securities purchased on a when-issued or forward commitment 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 forward commitment basis may expose the Funds to risks because
they may experience such fluctuations prior to their actual delivery. Purchasing
securities on a when-issued or forward commitment basis can involve the
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 liquid assets at least equal at all
times to the amount of the when-issued or forward commitments will be
established and maintained at such Fund's custodian bank. Purchasing securities
on a when-issued or forward commitment basis when that Fund is fully or almost
fully invested may result in greater potential fluctuations in the value of that
Fund's net assets and its net asset value per share.
CONCENTRATION
As a "non-diversified" investment company, the Strategy Fund is not limited by
the 1940 Act in the proportion of its assets that may be invested in the
securities of a single issuer. In addition, each Fund may invest up to 25% of
its total assets, measured at the time of investment, in a single industry,
subject to
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certain exceptions. Accordingly, the Funds may be more susceptible to any single
economic, political or regulatory occurrence than more widely diversified funds.
DESCRIPTION OF BOND AND COMMERCIAL PAPER RATINGS
A rating by a rating service represents the service's opinion as to the credit
quality of the security being rated. However, the ratings are general and are
not absolute standards of quality or guarantees as to the creditworthiness of an
issuer. Consequently, the Investment Adviser believes that the quality of debt
securities in which a Fund invests should be continuously reviewed and that
individual analysts give different weightings to the various factors involved in
credit analysis. A rating is not a recommendation to purchase, sell or hold a
security, because it does not take into account market value or suitability for
a particular investor. When a security has received a rating from more than one
service, each rating is evaluated independently. Ratings are based on current
information furnished by the issuer or obtained by the rating services from
other sources that they consider reliable. Ratings may be changed, suspended or
withdrawn as a result of changes in or unavailability of such information, or
for other reasons. The Investment Adviser will utilize Moody's and/or S&P for
determining the applicable ratings.
BONDS
Bonds rated Aa by Moody's are judged by Moody's to be of high quality by all
standards. Together with bonds rated Aaa (Moody's highest rating), they comprise
what are generally known as high-grade bonds. Aa bonds are rated lower than Aaa
bonds because margins of protection may not be as large as those of Aaa bonds,
or fluctuations 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 those applicable to Aaa securities. Bonds which are rated A by Moody's
possess many favorable investment attributes and are considered 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.
Moody's Baa rated bonds are considered 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.
Bonds which are rated Ba are judged to have speculative elements because their
future cannot be considered as well assured. Uncertainty of position
characterizes bonds in this class, because the protection of interest and
principal payments may be very moderate and not well safeguarded.
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 security over any long period of time may be small. Bonds
which are rated Caa are of poor standing. Such securities may be in default or
there may be present elements of danger with respect to principal or interest.
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.
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.
Bonds rated AA by S&P have a very strong capacity to pay interest and principal
and differ only in a small degree from issues rated AAA (S&P's highest rating).
Bonds rated AAA are considered by S&P to be the highest grade obligations and
have an extremely strong capacity to pay interest and principal. Bonds rated A
by S&P have a strong capacity to pay principal and interest, although they are
somewhat more susceptible to the adverse effects of changes in circumstances and
economic conditions.
S&P's BBB rated bonds are regarded as having adequate capacity to pay interest
and principal. Although these bonds normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and principal.
Bonds rated -BB, B, CCC, CC and C are regarded, on balance, as predominantly
speculative with respect to the issuer's capacity to pay interest and principal
in accordance with the terms of the obligation. BB indicates the lowest degree
of speculation and C the highest degree of speculation. While such bonds may
26
<PAGE>
have some quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions. Bonds rated D are
in default, and payment of interest and/or principal is in arrears.
COMMERCIAL PAPER
Moody's: The rating Prime-1 is the highest commercial paper rating assigned by
Moody's. Issuers (or related supporting institutions) rated Prime-1 are
considered to have a superior capacity for repayment of short-term promissory
obligations. Issuers (or related supporting institutions) rated Prime-2 have a
strong capacity for repayment of short-term promissory obligations. Issuers (or
related supporting institutions) rated Prime-3 have an acceptable capacity for
repayment of short-term promissory obligations.
S&P: Commercial paper rated 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 overwhelmingly safe characteristics are denoted A-l+.
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. Issues carrying an A-3 designation have a satisfactory capacity for timely
payment. They are, however, somewhat more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher designations.
INVESTMENT RESTRICTIONS
THE CAPITAL VALUE FUND
The Capital Value Fund has adopted the following fundamental investment
restrictions which may not be changed without the affirmative vote of the
holders of a majority of the Capital Value Fund's outstanding voting securities,
as defined under "Capital Stock."
The Capital Value Fund may not:
1. Borrow money or issue senior securities, except to the extent
permitted under the 1940 Act, which currently limits borrowing, except for
certain temporary purposes, to no more than 33 1/3% of the value of the Capital
Value Fund's total assets. (For purposes of this investment restriction, the
entry into futures contracts, including those related to indices, and options on
futures contracts or indices shall not constitute borrowing.)
2. Invest more than 25% of its total assets in any one industry.
(Securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities are not considered to represent industries.)
3. Make loans to others, except through the purchase of debt
obligations or the entry into repurchase agreements. However, the Fund may lend
its portfolio securities in any 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 SEC and the Fund's Board of Directors.
4. Purchase securities on margin, but the Fund may obtain such
short-term credit as may be necessary for the clearance of purchases and sales
of securities.
5. Purchase or sell commodities or commodity contracts.
6. Pledge, mortgage or hypothecate its assets, except to the extent
necessary to secure permitted borrowings and to the extent related to the
deposit of assets in escrow or similar arrangements in connection with portfolio
transactions, such as in connection with writing covered options and the
purchase of securities on a when-issued or delayed-delivery basis and collateral
and initial or variation margin arrangements with respect to options, futures
contracts, including those relating to indices, and options on futures contracts
or indices, or in connection with the purchase of any securities on margin for
purposes of
27
<PAGE>
Investment Restriction No. 4 above. (The deposit of assets in escrow in
connection with portfolio transactions is not deemed to be a pledge or
hypothecation for this purpose.)
7. Purchase the obligations 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, except that up to 25% of the value of the Fund's total assets may
be invested, and obligations issued or guaranteed by the U.S. Government or its
agencies or instrumentalities may be purchased, without regard to such
limitations.
8. Purchase, hold or deal in real estate, but this shall not prohibit
the Fund from investing in securities of companies engaged in real estate
activities or investments.
9. Underwrite securities of other issuers, except insofar as the Fund
may be deemed an underwriter under the Securities Act of 1933 in selling
portfolio securities.
In addition to the fundamental investment restrictions set forth above, the
Company's Board of Directors has adopted the following investment restrictions
with respect to the Capital Value Fund in order to comply with certain legal
requirements. The following restrictions are not fundamental policies of the
Capital Value Fund and may be changed by the Company's Board of Directors
without the approval of shareholders of the Capital Value Fund.
The Capital Value Fund may not:
1. 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 the Fund's assets.
2. Invest in interests in oil, gas or mineral exploration or
development programs.
3. Enter into repurchase agreements providing for settlement in more
than seven days after notice or purchase securities which are illiquid, if, in
the aggregate, more than 15% of the value of the Fund's net assets would be so
invested.
4. Invest more than 15% of its net assets in illiquid securities.
THE STRATEGY FUND
The Strategy Fund has adopted the following fundamental investment restrictions
which may not be changed without the affirmative vote of the holders of a
majority of the Strategy Fund's outstanding voting securities, as defined under
"Capital Stock."
The Strategy Fund may not:
1. Invest more than 25% of its total assets in any one industry.
(Securities issued or guaranteed by the United States Government, its agencies
or instrumentalities are not considered to represent industries.)
2. Borrow money or issue senior securities (as defined in the 1940 Act)
except from banks for temporary or emergency purposes, including the meeting of
redemption requests which might require the untimely disposition of securities,
in amounts not exceeding 15% of its total assets.
3. Pledge, mortgage or hypothecate its assets other than to secure
borrowings permitted by Investment Restriction (2) above. (The deposit in escrow
of securities in connection with the writing of put and call options,
collateralized loans of securities and collateral arrangements with respect to
margin requirements for futures transactions are not deemed to be pledges or
hypothecations for this purpose.)
28
<PAGE>
4. Make loans of securities to other persons in excess of 33 1/3% of
its total assets; provided the Fund may invest without limitation in short-term
obligations (including repurchase agreements) and publicly distributed
obligations.
5. Underwrite securities of other issuers, except insofar as the Fund
may be deemed an underwriter under the Securities Act of 1933 in selling
portfolio securities.
6. Purchase or sell real estate or any interest therein, except
securities issued by companies (including partnerships and real estate
investment trusts) that invest in real estate or interests therein.
7. Purchase securities on margin, or make short sales of securities,
except for the use of short-term credit necessary for the clearance of purchases
and sales of portfolio securities, but it may make margin deposits in connection
with transactions in options, futures and options on futures.
8. Purchase or sell commodities or commodity contracts, except that,
for the purpose of hedging, it may enter into (i) contracts for the purchase or
sale of debt and/or equity securities for future delivery, including futures
contracts and options on domestic and foreign securities indices and (ii)
forward foreign currency exchange contracts and foreign currency futures
contracts, as well as option contracts on foreign currencies.
In addition to the fundamental investment restrictions set forth above, the
Company's Board of Directors has adopted the following investment restrictions
with respect to the Strategy Fund in order to comply with certain legal
requirements. The following restrictions are not fundamental policies of the
Strategy Fund and may be changed by the Company's Board of Directors without the
approval of shareholders of the Strategy Fund.
The Strategy Fund may not:
1. Invest in oil, gas or other mineral exploration development programs
or leases.
2. Purchase or sell securities issued by companies (including
partnerships and real estate investment trusts) that invest in real estate or
interests therein, except readily marketable interests in real estate investment
trusts or readily marketable securities of companies (including partnerships)
which invest in real estate.
3. Enter into repurchase agreements providing for settlement in more
than seven days after notice or purchase securities which are illiquid if, in
the aggregate, more than 15% of the value of the Fund's net assets would be so
invested.
4. Invest more than 15% of its net assets in illiquid securities.
The Capital Value Fund adopted restriction 5 above, and the Strategy Fund
adopted restriction number 8 above, in order to comply with certain state
securities laws no longer applicable to the Funds. In these laws, the term
"commodity contract" was defined as a "contract or option providing for the
delivery or receipt at a future date of a specified amount and grade of a traded
commodity at a specified price and delivery point." None of the Fund's
derivative and currency transactions involves the delivery or receipt of a
commodity; all such transactions are settled by means of cash payments.
Accordingly, such transactions are not subject to the restrictions set forth
above.
If a percentage restriction set forth above or elsewhere in this SAI with
respect to a Fund is adhered to at the time a transaction is effected, later
changes in percentage resulting from changes in value or in the number of
outstanding securities of an issuer will not be considered a violation. However,
in the event that a Fund's asset coverage on any borrowing falls below the level
required by Section 18 of the 1940 Act, the Fund will reduce its borrowings to
the extent it is required to do so by Section 18(f)(1) of the 1940 Act. In
addition, in the event that a Fund's aggregate holdings of illiquid securities
exceed 15% of its net assets and
29
<PAGE>
are not expected to be reduced through purchases of liquid securities in the
ordinary course of business, the Fund will take steps to reduce in an orderly
fashion its holdings of illiquid securities.
DIRECTORS AND OFFICERS
Under Maryland law, the Company's Board of Directors is responsible for
establishing the Company's policies and for overseeing the management of the
Fund. The Board elects the Fund's officers who conduct the daily business of the
Company. The Directors and executive officers of the Company, their ages and
their principal occupations during the last five years and their affiliations,
if any, with the Adviser, are set forth below. Directors deemed to be
"interested persons" of the Company for purposes of the 1940 Act are indicated
by an asterisk. [Unless otherwise specified, the address of each such person is
One Corporate Center, Rye, New York 10580-1434.]
<TABLE>
<CAPTION>
POSITION BUSINESS EXPERIENCE;
NAME WITH THE COMPANY OTHER DIRECTORSHIPS
---- ---------------- -------------------
<S> <C> <C>
Henry G. van der Eb* - Age: 54 Chairman and Director President and Chief Executive Officer of The Gabelli Mathers
Fund; prior to October 1999, Chairman and Chief Executive Officer
of Mathers Fund, Inc. and President of Mathers & Company,
Inc. (1)
Charles L. Minter* - Age: 58 Director Prior to May 2000, Director, Chairman of the Board of Directors
and Chief Executive Officer of Comstock Partners, Inc., and,
prior to November 1996, Vice Chairman, President and Secretary of
Comstock Partners, Inc.
M. Bruce Adelberg - Age: 62 Director Consultant, MBA Research Group since November 1995; Director,
Oakwood Counselors Inc. (investments); and Director, Southern Sun
Propagation Systems Inc.
Robert M. Smith - Age: 69 Director President and Director, Smith Advisors, Ltd. (investments) since
November 1995; President and Director of Ansbacher (Dublin) Asset
Management Ltd. from January 1983 to November 1995.
Anthony J. Colavita - Age: 64 Director President and Attorney at Law in the law firm of Anthony J.
Colavita, P.C. since 1961. (1) (2) (3) (4) (5) (6) (7) (8) (9)
(10) (11) (12) (13) (14) (16) (17) (18) (19)
Vincent D. Enright - Age: 55 Director Former Senior Vice President and Chief Financial Officer of
KeySpan Energy Corp. (6) (7)(8) (9) (10) (11)
Anthony R. Pustorino - Age: 74 Director Certified Public Accountant; Professor of Accounting, Pace
University. (1) (2) (3) (4) (5) (6) (11) (13) (15) (16) (17)
Werner J. Roeder, M.D. - Age: 59 Director Medical Director, Lawrence Hospital and practicing private
physician. (6) (7) (8) (9) (10) (11) (12) (13) (14) (18) (19)
Gus Coutsouros - Age: Assistant Treasurer Vice President and Chief Financial Officer of Gabelli Funds, LLC
and Vice President
Bruce N. Alpert - Age: 48 Executive Vice Executive Vice President and Chief Operating Officer of Gabelli
President and Funds, LLC since 1988; President and Director of Gabelli
Treasurer Advisers, Inc. and an Officer of all mutual funds managed by
Gabelli Funds, LLC and its affiliates.
James E. McKee - Age: 36 Secretary Secretary of Gabelli Funds, LLC; Vice President, Secretary and
General Counsel of GAMCO Investors, Inc. since 1993 and of
Gabelli Asset Management, Inc. since 1999; Secretary of all
mutual funds advised by Gabelli Funds, LLC and Gabelli Advisers,
Inc. since August 1995.
Carolyn Maitlin - Age: Vice President
-----------------
</TABLE>
30
<PAGE>
* These directors are interested persons of the Investment Adviser and of the
Company, as defined in the 1940 Act.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
(1) Trustee of The Gabelli Mathers Fund (11) Director of Gabelli Capital Series Funds, Inc.
(2) Trustee of The Gabelli Asset Fund (12) Director of Gabelli International Growth Fund, Inc.
(3) Trustee of The Gabelli Growth Fund (13) Director of the Treasurer's Fund, Inc.
(4) Director of The Gabelli Value Fund Inc. (14) Trustee of the Gabelli Westwood Funds
(5) Director of The Gabelli Convertible Securities Fund, Inc. (15) Director of The Gabelli Multimedia Trust Inc.
(6) Director of Gabelli Equity Series Funds, Inc. (16) Director of The Gabelli Equity Trust Inc.
(7) Trustee of The Gabelli Money Market Funds (17) Trustee of The Gabelli Utility Trust
(8) Director of Gabelli Investor Funds, Inc. (18) Trustee of The Gabelli Blue Chip Value Fund
(9) Director of Gabelli Global Series Funds, Inc. (19) Trustee of The Gabelli Utilities Fund
(10) Director of Gabelli Gold Fund, Inc.
</TABLE>
The Company, its investment adviser and principal underwriter have adopted a
code of ethics (the "Code of Ethics") under Rule 17j-1 of the 1940 Act. The Code
of Ethics permits personnel, subject to the Code of Ethics and its restrictive
provisions, to invest in securities, including securities that may be purchased
or held by the Company.
Prior to May 22, 2000, the Company paid each Non-Interested Director an annual
retainer of $20,000 (consisting of $10,000 for each Fund). Subsequent to May 22,
2000, the Company will pay each director that is not an affiliated person of the
Investment Adviser (as defined in the 1940 Act) an annual retainer of $5,000,
plus $1,000 for each Board of Directors meeting actually attended, in each case
together with the Director's actual out-of-pocket expenses relating to
attendance at meetings. All committee members are expected to receive $500 per
meeting for meetings that take place on days when the Board of Directors does
not meet. Directors are reimbursed for any expenses incurred in attending
meetings. Directors of the Company who are "affiliated persons" as defined in
the 1940 Act receive no direct remuneration from the Company. The Company pays a
fee to the Adviser as investment adviser to the Company, and certain of the
directors and officers of the Company are directors, officers and shareholders
of the Adviser.
None of the Company's officers, nor any affiliated persons of the Company,
received aggregate compensation in excess of $60,000 from the Company during the
fiscal year ended April 30, 2000. For the fiscal year ended April 30, 2000, the
aggregate amount of fees and expenses received by each Director from the Company
were as follows:
<TABLE>
<CAPTION>
PENSION OR
RETIREMENT
BENEFITS TOTAL COMPENSATION
AGGREGATE ACCRUED AS PART ESTIMATED ANNUAL FROM COMPANY PAID
COMPENSATION FROM OF COMPANY BENEFITS UPON TO BOARD
COMPANY EXPENSES RETIREMENT MEMBER
NAME OF BOARD MEMBER
<S> <C> <C> <C> <C>
Charles L. Minter $ 0 $ 0 $ 0 $ 0
M. Bruce Adelberg $ ______ $ 0 $ 0 $ _____
Robert M. Smith $ ______ $ 0 $ 0 $ _____
</TABLE>
--------------------------------------------------------------------------------
The following table sets forth certain information regarding the aggregate
compensation of those of the Directors who received compensation from mutual
funds in the Gabelli fund complex for the calendar year ended December 31, 1999:
AGGREGATE COMPENSATION
NAME OF PERSON FROM GABELLI FUND COMPLEX*
---------------------------------------------
Anthony J. Colavita $ 94,875 (18)
31
<PAGE>
Vincent D. Enright $ 25,500 (6)
Anthony R. Pustorino $ 107,250 (18)
Werner J. Roeder $ 32,859 (11)
Henry G. Van der Eb $ 0 (1)
-------------------
* Represents the total compensation paid to each such person during the
calendar year ended December 31, 1999 by investment companies from
which such person receives compensation that are expected to be
considered part of the same fund complex as the Company because they
have common or affiliated investment advisers. The number in
parenthesis represents the number of such investment companies or
portfolios thereof.
CONTROL PERSONS AND PRINCIPAL SHAREHOLDERS
As of August 1, 2000, as a group, the Directors and officers of the Company
owned less than 1% of each class of the Funds.
As of August 1, 2000, the following persons owned of record or beneficiary 5% or
more of the Fund's outstanding shares:
<TABLE>
<CAPTION>
NAME AND ADDRESS % OF CLASS NATURE OF OWNERSHIP
<S> <C>
CAPITAL VALUE FUND: Merrill Lynch, Pierce, Fenner
& Smith Incorporated
Westcliff Capital Management
USAA Investment Management Co.
Key Trust Co.
Trustee
Freeman Welwood & Co., Inc.
STRATEGY FUND: Merrill Lynch, Pierce, Fenner
& Smith Incorporated
NFSC
J.C. Bradford & Co.
Custodian
</TABLE>
A shareholder who beneficially owns, directly or indirectly, more than 25% of a
Fund's voting securities may be deemed a "control person" (as defined in the
1940 Act) of the Fund.
INVESTMENT ADVISORY AND OTHER SERVICES
The Investment Adviser is a New York limited liability company which serves as
an investment adviser to 16 open-end investment companies and 4 closed-end
investment companies with aggregate assets in excess of $10.6 billion as of
December 31, 1999. The Investment Adviser is a registered investment adviser
under the Investment Advisers Act of 1940, as amended. Mr. Mario J. Gabelli may
be deemed a "controlling
32
<PAGE>
person" of the Investment Adviser on the basis of his controlling interest of
the ultimate parent company of the Investment Adviser. The Investment Adviser
has several affiliates that provide investment advisory services: GAMCO
Investors, Inc. ("GAMCO"), a wholly-owned subsidiary of the Investment Adviser,
acts as investment adviser for individuals, pension trusts, profit-sharing
trusts and endowments, and had assets under management of approximately $9.4
billion as of December 31, 1999; Gabelli Advisers, Inc. acts as investment
adviser to the Gabelli Westwood Funds with assets under management of
approximately $390 million as of December 31, 1999; Gabelli Securities, Inc.
acts as investment adviser to certain alternative investments products,
consisting primarily of risk arbitrage and merchant banking limited partnerships
and offshore companies, with assets under management of approximately $230
million as of December 31, 1999; and Gabelli Fixed Income LLC acts as investment
adviser for the five portfolios of The Treasurer's Fund, Inc. having assets
under management of approximately $1.4 billion as of December 31, 1999. The
Investment Adviser has served as investment adviser to each of the Funds since
May 22, 2000. The principal business address of the Investment Advisor is One
Corporate Center, Rye, New York 10580-1434. The Company, on behalf of the
Capital Value Fund, and the Strategy Fund, has engaged the Investment Adviser to
provide professional investment management for each Fund pursuant to separate
Investment Advisory Agreements, dated as of May 22, 2000 between each Fund and
the Investment Adviser.
The Investment Advisory Agreements provide that the Investment Adviser will act
as investment adviser to each Fund, 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 Investment Adviser will be
responsible for maintaining certain of each Fund's books and records and
performing other administrative aspects of each Fund's operations to the extent
not performed by such Fund's custodian, transfer agent and dividend disbursing
agent. The Investment Adviser will be permitted to subcontract at its own
expense these administrative responsibilities to persons it believes are
qualified to perform such services and has subcontracted certain of these
administrative responsibilities to PFPC Inc. (the "Sub-Administrator") pursuant
to a Sub-Administration Agreement (the "Sub-Administration Agreement").
As compensation for the Investment Adviser's services and related expenses, the
Strategy Fund will pay the Investment Adviser a fee computed daily and payable
monthly in an amount equal on an annualized basis to .85% of such Fund's daily
average net assets and the Capital Value Fund will pay the Investment Adviser a
fee computed daily and payable monthly in an amount equal on an annualized basis
to 1.00% of such Fund's daily average net assets. However, the Investment
Adviser agrees in the Investment Advisory Agreement to waive a portion of each
such fee for the first two years to the extent necessary to maintain expense
ratios for the Fund at 1999 levels (other than extraordinary expenses) with
respect to the amount of assets held by the Fund at the time each Investment
Advisory Agreement went into effect, which was $31,205,502 million for the
Strategy Fund and $49,594,859 million for the Capital Value Fund. This waiver
will not apply to (i) assets greater than the amount of assets held by the Fund
at the time the Investment Advisory Agreement goes into effect or (ii) increases
in the Fund's expense ratio attributable to a reduction in assets after the time
the Investment Advisory Agreement goes in effect. As a consequence, the Fund's
expense ratio could increase in certain circumstances despite the waiver. Based
on expense levels for 1999 and current assets as of April 30, 2000, it is
expected that the Investment Adviser [would not waive any fees for the Strategy
Fund] and would waive [0.19%] for the Capital Value Fund.
The Investment Adviser (not the Company or either Fund) will pay the
Sub-Administrator an administration fee based on the aggregate net assets of
each Fund and all other administered funds subject to the Sub-Administration
Agreement of .0275% per annum of net assets up to $10 billion, 0.0125% per annum
of the next $5 billion of net assets, and .01% per annum of net assets over $15
billion.
The Investment Adviser will bear all costs and expenses incurred in connection
with its duties under the Investment Advisory Agreements, including the fees or
salaries of directors or officers of the Company who are affiliated persons of
the Investment Adviser. Subject to the foregoing, each Fund will be responsible
for the payment of all of its expenses including (i) payment of the fees payable
to the Investment Adviser under the Investment Advisory Agreements; (ii)
organizational expenses; (iii) brokerage fees and commissions; (iv) taxes; (v)
interest charges on borrowings; (vi) the cost of liability insurance or fidelity
bond coverage for the Company's officers and employees, and directors' and
officers'
33
<PAGE>
errors and omissions insurance coverage; (vii) legal, auditing and accounting
fees and expenses; (viii) charges of the Fund's custodian, transfer agent and
dividend disbursing agent; (ix) the Fund's pro rata portion of dues, fees and
charges of any trade association of which the Company is a member; (x) the
expenses of printing, preparing and mailing proxies, stock certificates and
reports, including the prospectus and SAI, and notices to shareholders; (xi)
filing fees for the registration or qualification of the Fund as a separate
portfolio of an open-end investment company and its shares under federal or
state securities laws; (xii) the fees and expenses involved in registering and
maintaining the registration of the Fund's shares with the SEC; (xiii) the
expenses of holding shareholder meetings; (xiv) the compensation, including
fees, of any of the Company's directors, officers or employees who are not
affiliated persons of the Investment Adviser; (xv) all expenses of computing the
Fund's net asset value per share, including any equipment or services obtained
solely for the purpose of pricing shares or valuing the Fund's investment
portfolio; (xvi) expenses of personnel performing shareholder servicing
functions and all other distribution expenses payable by the Fund pursuant to
any 12b-1 plan or otherwise legally payable by the Fund; and (xvii) litigation
and other extraordinary or non-recurring expenses and other expenses properly
payable by the Fund.
The Investment Advisory Agreements provide that in the course of the Investment
Adviser's execution of portfolio transactions for the Funds, the Investment
Adviser may, subject to conditions as may be specified by the Company's Board of
Directors, (i) place orders for the purchase or sale of the Funds' portfolio
securities with the Investment Adviser's affiliate, Gabelli & Company, Inc. (the
"Distributor"); (ii) pay commissions to brokers other than its affiliate which
are higher than might be charged by another qualified broker to obtain brokerage
and/or research services considered by the Investment Adviser to be useful or
desirable in the performance of its duties thereunder and for the investment
management of other advisory accounts over which it or its affiliates exercise
investment discretion; and (iii) consider sales by brokers (other than its
affiliate distributor) of shares of the Company and any other mutual fund for
which it or its affiliates act as investment adviser, as a factor in its
selection of brokers and dealers for Fund portfolio transactions.
The Investment Advisory Agreements provide that absent willful misfeasance, bad
faith, gross negligence or reckless disregard of its obligations and duties
under such agreements, the Investment Adviser and its employees, officers,
directors, agents or controlling persons will not be liable for any act or
omission or for any loss sustained by the Company with respect to either Fund.
However, the Investment Advisory Agreements provide that the Company is not
waiving any rights that it may not waive under applicable law. The Investment
Advisory Agreements also provide that the Company, on behalf of each Fund, will
indemnify the Investment Adviser and each of such persons against any
liabilities and expenses incurred in the defense or disposition of any action or
proceeding arising out of the Investment Advisory Agreements unless a court
finds that the person seeking indemnification did not act in good faith in the
reasonable belief that his or her action was in the best interest of the
applicable Fund (and, in a criminal case, that the person had no reasonable
cause to believe that his or her conduct was unlawful). The Investment Advisory
Agreements provide specific procedures and standards for making advance payments
relating to indemnification and permit the Board of Directors to disallow
indemnification in certain situations.
The Investment Advisory Agreements expressly permit the Investment Adviser to
act as investment adviser to others and provides that the word "Gabelli" in the
Company's and each Fund's name is derived from the name of Mr. Mario J. Gabelli
and that such name may freely be used by the Investment Adviser for other
investment companies, entities or products. The Investment Advisory Agreements
also provide that in the event that the Investment Adviser ceases to be the
Company's investment adviser with respect to the Funds, the Company and each
Fund will, unless the Investment Adviser otherwise consents in writing, promptly
take all steps necessary to change its name to a new name which does not include
"Gabelli."
The Investment Advisory Agreements are terminable without penalty by the Company
on not more than 60 days' written notice when authorized by the directors or by
the holders of the same proportion of shares required to authorize the
Investment Advisory Agreements, or by the Investment Adviser on not more than 60
days' written notice. The Investment Advisory Agreements will automatically
terminate in the event of their assignment, as defined in the 1940 Act and the
rules thereunder. The Investment Advisory Agreements provide that unless
terminated they will remain in effect for a period of two years, and from
34
<PAGE>
year to year thereafter, so long as continuation of the Investment Advisory
Agreements is approved annually by the directors of the Company or the
shareholders of the Company and, in either case, by a majority of the directors
who are not parties to the Investment Advisory Agreements or "interested
persons" as defined in the 1940 Act of any such person. The Investment Advisory
Agreements also provide that, without the consent of shareholders, nonmaterial
terms of the Investment Advisory Agreements may be modified with the approval of
a majority of the directors who are not interested persons of the Company or the
Investment Adviser.
Prior to May 22, 2000, Comstock Partners, Inc. ("Comstock Partners") located at
993 Lenox Drive, Suite 106, Lawrenceville, NJ 08648 served as investment adviser
to the Funds.
The investment advisory fees paid by the Strategy Fund to Comstock Partners for
the fiscal years ended April 30, 1998, April 30, 1999 and April 30, 2000
amounted to $817,706, $460,751 and $______, respectively. The investment
advisory fees paid by the Capital Value Fund to Comstock Partners for the fiscal
years ended April 30, 1998, April 30, 1999 and April 30, 2000 amounted to
$616,951, $329,277 and $_______, respectively.
Prior to August 31, 1999, The Dreyfus Corporation ("Dreyfus") served as
sub-investment adviser to the Funds.
For the fiscal years ended April 30, 1998, April 30, 1999 and April 30, 2000 the
Sub-Investment Adviser received fees from the Comstock Partners with respect to
the Strategy Fund in the amounts of $204,426, $115,188 and $______,
respectively, from the Comstock Partners. For the fiscal years ended April 30,
1998, April 30, 1999, and April 30, 2000, the Sub-Investment Adviser received
fees from the Capital Value Fund for sub-investment advisory and administration
services in the amount of $539,832, $343,244 and $_______, respectively.
TRANSFER AND DIVIDEND DISBURSING AGENT
State Street Bank and Trust Company, 225 Franklin Street, Boston, Massachusetts
02108, is the transfer and dividend disbursing agent for each Fund. Its
affiliate, Boston Financial Data Service, Inc. is each Fund's shareholder
servicing agent.
THE DISTRIBUTOR
Gabelli & Company, Inc. (the "Distributor"), One Corporate Center, Rye, New York
10580-1434, serves as each Fund's distributor pursuant to an agreement that is
renewable annually. The Distributor's ultimate parent is Gabelli Group Capital
Partners Inc., which is controlled by Mr. Mario J. Gabelli. The Distributor also
acts as distributor for other funds in the Gabelli family of funds.
DISTRIBUTION PLANS
The following information supplements and should be read in conjunction with the
section in the Funds' Prospectus entitled "Management of the Funds - Classes of
Shares." Class A, Class B and Class C shares of the Funds are subject to Service
and Distribution Plans adopted pursuant to Rule 12b-1 under the 1940 Act ("Rule
12b-1"). Potential investors should read the Prospectus and this SAI in light of
the terms governing the agreement between their Service Agents and the
Distributor. A Service Agent entitled to receive compensation for selling and
servicing the Funds' shares may receive different levels of compensation with
respect to different classes of shares.
SERVICE AND DISTRIBUTION PLAN - CLASS A SHARES
[Rule 12b-1, adopted by the SEC under the 1940 Act provides, among other things,
that an investment company may bear expenses of distributing its shares only
pursuant to a plan adopted in accordance with the Rule. Because some or all of
the fees paid for advertising or marketing the Class A shares of the Company and
the fees paid to the Distributor and to certain banks, brokers, dealers or other
financial institutions (collectively, "Service Agents") could be deemed to be
payment of distribution expenses, the Company's Board of Directors has adopted
such a plan with respect to the Class A shares of each Fund (the "Class A
Service and Distribution Plan"). The Company's Board of Directors believes that
there is a
35
<PAGE>
reasonable likelihood that the Class A Service and Distribution Plan will
benefit each Fund and its Class A shareholders. In some states, banks or other
financial institutions effecting transactions in Class A shares may be required
to register as dealers pursuant to state law.]
[Under the Class A Service and Distribution Plan, as amended and restated and
approved by the Board of Directors on June 27, 2000, the Company, at the expense
of the Class A shares of each Fund pays the Distributor at an aggregate annual
rate of .25 of 1% of the value of the average daily net assets of Class A of
such Fund. The Distributor may utilize such amounts to, among other things, pay
advertising and marketing expenses, defray internal marketing and sales expenses
or to pay one or more Service Agents a fee in respect of the Capital Value
Fund's or the Strategy Fund's Class A shares, as the case may be, owned by
shareholders for whom the Service Agent provides shareholder services or for
whom the Service Agent is the dealer or holder of record. The Distributor
determines the amounts, if any, to be paid to Service Agents under the Class A
Service and Distribution Plan and the basis on which such payments are made. The
Class A Service and Distribution Plan also provides that the Investment Adviser
may pay Service Agents out of its investment advisory fees, past profits or any
other source available to it. From time to time, the Distributor may defer or
waive receipt of fees under the Class A Service and Distribution Plan while
retaining the ability to be paid under the Class A Service and Distribution Plan
thereafter. The foregoing fees payable under the Class A Service and
Distribution Plan are payable without regard to actual expenses incurred.][Long
term investors may pay more than the economic equivalent of the maximum
front-end sales charge permitted by the National Association of Securities
Dealers.]
[Under the Class A Service and Distribution Plan, servicing shareholder accounts
with respect to the Class A shares may include, among other things, one or more
of the following: answering client inquiries regarding the Fund; assisting
clients in changing dividend options, account designations and addresses;
performing subaccounting; establishing and maintaining shareholder accounts and
records; processing purchase and redemption transactions; investing client cash
account balances automatically in Fund shares; providing periodic statements
showing a client's account balance and integrating such statements with those of
other transactions and balances in the client's other accounts serviced by the
Service Agent; arranging for bank wires; and such other services as the Fund may
request, to the extent the Service Agent is permitted by applicable statute,
rule or regulation.]
For the fiscal year ended April 30, 2000 the Strategy Fund and Capital Value
Fund made distribution payments pursuant to the Class A Service and Distribution
Plan totaling $______and $______, respectively (formerly known as the "Account
Maintenance Plan").
SERVICE AND DISTRIBUTION PLANS-CLASS B SHARES AND CLASS C SHARES
In addition to the Class A Service and Distribution Plan described above, the
Company's Board of Directors has adopted a Class B Service and Distribution Plan
and a Class C Service and Distribution Plan under Rule 12b-1 with respect to
Class B shares of the Capital Value Fund and Class C shares of each Fund,
pursuant to which the Company, on behalf of the relevant Fund, pays the
Distributor for distributing such Fund's Class B shares (in the case of the
Capital Value Fund) and Class C shares, respectively, and for the provision of
certain services to the holders of such Class B and Class C shares. The
Company's Board of Directors believes that there is a reasonable likelihood that
the Class B Service and Distribution Plan will benefit the Capital Value Fund
and its Class B shareholders and that the Class C Service and Distribution Plan
will benefit each Fund and its Class C shareholders. The Plans are intended to
benefit the Funds by increasing their assets and thereby reducing each Fund's
expense ratio.
Under the Class B and Class C Service and Distribution Plans, the Company, at
the expense of the Class B shares of the Capital Value Fund and Class C shares
of each Fund, as the case may be, (a) pays the Distributor for distributing the
Capital Value Fund's Class B shares and each Fund's Class C shares at an annual
rate of .75 of 1% of the value of the average daily net assets of Class B or
Class C of the applicable Fund, and (b) pays the Distributor for the provision
of certain services to the holders of Class B shares and Class C shares, as the
case may be, a fee at the annual rate of .25 of 1% of the value of the average
daily net assets of Class B or Class C of the applicable Fund. The services
provided may include personal services relating to shareholder accounts, such as
answering shareholder inquiries regarding the Funds and providing reports and
other information, and providing services related to the maintenance of such
shareholder accounts. The Distributor may pay one or more Service Agents a fee
in respect of distribution
36
<PAGE>
and other services for Class B and Class C shares. The Distributor determines
the amounts, if any, to be paid to Service Agents under the Class B and Class C
Service and Distribution Plans and the basis on which such payments are made.
The Class B and Class C Service and Distribution Plans also provides that the
Investment Adviser may pay Service Agents out of its investment advisory fees,
past profits or any other source available to it. From time to time the
Distributor may defer or waive receipt of fees under the Class B and Class C
Service and Distribution Plans while retaining the ability to be paid under the
Class B and Class C Service and Distribution Plans thereafter. The foregoing
fees payable under the Class B and Class C Service and Distribution Plans are
payable without regard to actual expenses incurred.[Long term investors may pay
more than the economic equivalent of the maximum front-end sales charge
permitted by the National Association of Securities Dealers.]
For the fiscal year ended April 30, 2000 the Capital Value Fund made
distribution payments pursuant to the Class B Service and Distribution Plan
totaling $_______ and were charged for shareholder servicing for the Capital
Value Fund's Class B shares. For the fiscal year ended April 30, 2000 the
Capital Value Fund and Strategy Fund made distribution payments pursuant to the
Class C Service and Distribution Plan totaling $_______ and $_______,
respectively and were charged for shareholder servicing for the Capital Value
Fund and Strategy Fund Class C shares.
Such distribution payments funded expenditures for the Strategy Fund and the
Capital Value Fund, respectively, of approximately: $_____ and $______ for
advertising, $_____ and $______ for printing, postage and stationary, $______
and $______ for overhead support expenses and $______ and $_______ for salaries
of personnel of the Distributor. Quarterly reports of the amounts expended under
each of the Class A, Class B and Class C Service and Distribution Plans, and the
purposes for which such expenditures were incurred, must be made to the Board of
Directors for its review. In addition, the Class A, Class B and Class C Service
and Distribution Plans each provide that it may not be amended to increase
materially the cost which the Class A, Class B or Class C shares of a Fund,
respectively, may bear pursuant to such plan without the approval of such Class
A, Class B or Class C shareholders, respectively, and that other material
amendments of the Class A, Class B or Class C Service and Distribution Plan must
be approved by the Board of Directors, and by the Directors who are neither
interested persons of the Company nor have any direct or indirect financial
interest in the operation of such plans or in any agreements entered into in
connection with such plans, by vote cast in person at a meeting called for the
purpose of considering such amendments. The Class A, Class B and Class C Service
and Distribution Plans and the related service agreements are subject to annual
approval by such vote of the Board of Directors cast in person at a meeting
called for the purpose of voting on the Class A, Class B and Class C Service and
Distribution Plans. The Class A, Class B and Class C Service and Distribution
Plans may each be terminated at any time, with respect to a Fund, by vote of a
majority of the Directors who are not interested persons and have no direct or
indirect financial interest in the operation of such plans or in any agreements
entered into in connection with such plans or by vote of a majority of the Class
A, Class B or Class C shares of a Fund, respectively. Any related service
agreement may be terminated without penalty at any time, by such vote. Each
service agreement will terminate automatically in the event of its assignment
(as defined in the 1940 Act).
PORTFOLIO TRANSACTIONS AND BROKERAGE
[The Strategy Fund's portfolio turnover rate for the fiscal years ended April
30, 1999 and April 30, 2000 was ___% and ___%, respectively. The Capital Value
Fund's portfolio turnover rate for the fiscal years ended April 30, 1999 and
April 30, 2000 was ___% and ___%, respectively. The portfolio turnover rate for
each of the Funds has increased in recent years. These increases may be
attributed to investment techniques employed by the adviser which have involved
active trading of portfolio securities as well as investments in many short-term
instruments which require frequent reinvestment as they mature.]
The Investment Adviser has discretion to select brokers and dealers to execute
portfolio transactions initiated by the Investment Adviser and to select the
markets in which such transactions are to be executed. Each Investment Advisory
Agreement provides, in substance, that in executing portfolio transactions and
selecting brokers or dealers, the primary responsibility of the Investment
Adviser is to seek the best
37
<PAGE>
combination of net price and execution for the relevant Fund. It is expected
that securities will ordinarily be purchased in the primary markets, and that in
assessing the best net price and execution available to a Fund, the Investment
Adviser will consider all factors it deems relevant, including the breadth of
the market in the security, the size of the transaction, the price of the
security, the financial condition and execution capability of the broker or
dealer and the reasonableness of the commission, if any (for the specific
transaction and on a continuing basis). Transactions in foreign securities
markets may involve the payment of fixed brokerage commissions, which are
generally higher than those in the United States. The purchase by a Fund of
participations may be pursuant to privately negotiated transactions pursuant to
which that Fund may be required to pay fees to the seller or forego a portion of
payments in respect of the participation.
In selecting brokers to execute particular transactions and in evaluating the
best net price and execution available, the Investment Adviser is authorized to
consider "brokerage and research services" (as those terms are defined in
Section 28(e) of the Securities Exchange Act of 1934). The Investment Adviser is
also authorized to cause a Fund to pay to a broker who provides such brokerage
and research services a commission for executing a portfolio transaction which
is in excess of the amount of commission another broker would have charged for
effecting that transaction. The Investment Adviser must determine in good faith,
however, that such commission was reasonable in relation to the value of the
brokerage and research services provided, viewed in terms of that particular
transaction or in terms of all the accounts over which the Investment Adviser
exercises investment discretion. The Investment Adviser may also have
arrangements with brokers pursuant to which such brokers provide research
services to the Investment Adviser in exchange for the placement of transactions
with such brokers. Research services furnished by brokers through whom a Fund
effects securities transactions may be used by the Investment Adviser in
servicing all of the accounts of the Fund for which investment discretion is
exercised by the Investment Adviser, and not all such services may be used by
the Investment Adviser in connection with the Funds. The research services
provided may include, among other things, market quotation and news services,
portfolio analytic systems and support, access to economic databases and
analyses of macroeconomic and financial trends.
Each Investment Advisory Agreement requires the Investment Adviser to provide
fair and equitable treatment to the relevant Fund in the selection of portfolio
investments and the allocation of investment opportunities as between that Fund
and the Investment Adviser's other investment management clients, but does not
obligate the Investment Adviser to give that Fund exclusive or preferential
treatment. It is likely that from time to time the Investment Adviser may make
similar investment decisions for a Fund and its other clients. In some cases,
the simultaneous purchase or sale of the same security by a Fund and another
client of the Investment Adviser could have a detrimental effect on the price or
volume of the security to be purchased or sold, as far as that Fund is
concerned. In other cases, coordination with transactions for other clients and
the ability to participate in volume transactions could benefit the Fund
engaging in the transaction.
REDEMPTION OF SHARES
Payment of the redemption price for shares redeemed may be made either in cash
or in portfolio securities (selected at the discretion of the Board of Directors
and taken at their value used in determining each Fund's NAV per share as we
described under "Determination of Net Asset Value"), or partly in cash and
partly in portfolio securities. However, payments will be made wholly in cash
unless the Board of Directors believes that economic conditions exist which
would make such a practice detrimental to the best interest of a Fund. If
payment for shares redeemed is made wholly or partly in portfolio securities,
brokerage costs may be incurred by the investor in converting the securities to
cash. A Fund will not distribute in-kind portfolio securities that are not
readily marketable. The Company has filed a formal election with the SEC
pursuant to which the Company will only effect a redemption in portfolio
securities where the particular shareholder of record is redeeming more than
$250,000 or 1.00% of a Fund's total net assets, whichever is less, during any
90-day period. In the opinion of the Company's management, however, the amount
of a redemption request would have to be significantly greater than $250,000
before a redemption wholly or partly in portfolio securities would be made.
38
<PAGE>
Cancellation of purchase orders for shares of any Fund (as, for example, when
checks submitted to purchase shares are returned unpaid) cause a loss to be
incurred when the NAV of that Fund's shares on the date of cancellation is less
than on the original date of purchase. The investor is responsible for such
loss, and that Fund may reimburse shares from any account registered in that
shareholder's name, or by seeking other redress. If that 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 that Fund whole.
To minimize expenses, a Fund reserves the right to redeem, upon not less than 30
days' notice, all shares of a Fund in an account (other than an IRA) which as a
result of shareholder redemption has a value below $500 and has reserved the
ability to raise this amount to up to $10,000. However, a shareholder will be
allowed to make additional investments prior to the date fixed for redemption to
avoid liquidation of the account.
DETERMINATION OF NET ASSET VALUE
The net asset value of a share of each Class of each Fund, for the purpose of
pricing purchase orders and redemption orders, is generally determined as of the
close of the regular trading session on the New York Stock Exchange (generally
4:00 p.m., New York time) on each business day by dividing the value of the
relevant Fund's assets attributable to that Class, less the liabilities
attributable to that Class, by the number of shares of that Class outstanding.
"Business day" refers to those days when the New York Stock Exchange is open for
business, which is Monday through Friday, except for holidays. As of the date of
this SAI, such holidays are: New Year's Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving and Christmas. For
purposes of determining net asset value, options and futures contracts will be
valued 15 minutes after the close of trading on the floor of the New York Stock
Exchange. With the exception of certain fees and expenses borne pursuant to the
Class A, B and C Service and Distribution Plans and other expenses attributable
solely to a particular Class, all expenses of the respective Fund will be borne
on a pro rata basis by each Class of such Fund on the basis of the relative net
assets of the respective Classes.
Securities which are traded over-the-counter and on a stock exchange will be
valued according to the broadest and most representative market, and it is
expected that for many debt securities this ordinarily will be the
over-the-counter market. Notwithstanding the above, debt securities may be
valued on the basis of prices provided by an independent pricing service when
such prices are believed to reflect the fair market value of such securities.
The prices provided by a pricing service are determined without regard to bid or
last sale prices but take into account institutional size trading in similar
groups of securities and any developments related to specified securities.
Securities not priced in this manner are valued at the mean of the most recent
bid and asked quotations, or when available, at the latest quoted sale price on
the date of valuation. When a Fund writes a call option, the amount of the
premium received is recorded on the books of the Fund as an asset and an
equivalent liability. The amount of the liability is subsequently valued to
reflect the current market value of the option written, based upon the last
asked price. Options purchased by a Fund are valued at the last bid price in the
case of exchange-traded options or, in the case of options traded in the
over-the-counter market, the average of the last bid price as obtained from two
or more dealers. Other investments, including futures contracts and related
options, are stated at market value or otherwise at the fair value at which it
is expected they may be resold, as determined in good faith by the Board of
Directors. In valuing assets, prices denominated in foreign currencies are
converted to U.S. dollar equivalents at the exchange rates prevailing as of
11:30 a.m., New York time. Short-term debt securities having a maturity of 60
days or less from the valuation date are valued on an amortized cost basis. The
values of other assets and securities for which no current quotations are
readily available are determined in good faith at fair value using methods
determined by the Board of Directors.
INVESTMENT PERFORMANCE INFORMATION
39
<PAGE>
Advertisements and communications to shareholders may contain various measures
of a Fund's performance, including various expressions of total return and
current distribution rate. They may occasionally cite statistics to reflect a
Fund's volatility or risk. Performance for each Class may be calculated on the
basis of average annual total return and/or total return. These total return
figures reflect changes in the price of the shares and assume that any income
dividends and/or capital gains distributions made by the Fund during the
measuring period were reinvested in shares of the same Class. These figures also
take into account any applicable service and distribution fees.
The Strategy Fund presents performance information for each Class of shares
commencing with the Strategy Fund's inception. Performance information for the
period prior to August 1, 1991 reflects the performance of the Strategy Fund as
a closed-end fund and does not reflect payment of the underwriting discount paid
in connection with the initial public offering of the Strategy Fund's shares as
a closed-end fund. In addition, as an open-end fund, the Strategy Fund incurs
certain additional expenses as a result of the continuous offering and
redemption of its shares. Because Strategy Fund Class O shares have not been
issued by the Strategy Fund since July 15, 1992 except in connection with the
reinvestment of dividends on outstanding Strategy Fund Class O shares,
performance information in any advertisements (other than reports to
shareholders) with respect to the period commencing July 15, 1992 does not
contain information with respect to the performance of Strategy Fund Class O
shares for such period. In addition, because the Strategy Fund no longer sells
its Class O shares, any information relating to Strategy Fund Class O shares
listed in newspaper or similar listings of the Strategy Fund's net asset value
and public offering price is only for informational purposes of the existing
Class O shareholders.
Performance information for the Capital Value Fund includes the performance of
the Dreyfus Capital Value Fund, the Fund's predecessor, and performance
information for each Class of shares is presented commencing with the inception
of the Dreyfus Capital Value Fund.
Performance information for each Class of shares of the Company will reflect
performance for time periods prior to the introduction of such Class, and
performance for such time periods will not reflect any fees and expenses payable
by such Class that were not borne by the Fund (or its predecessor) prior to the
introduction of such Class. Class A average annual return figures for both Funds
reflect the maximum initial sales charge and Class B and Class C average annual
return figures reflect any applicable CDSC. As a result, at any given time, the
performance of Class B and Class C of a Fund should be expected to be lower than
that of Class A of that Fund and the performance of Class A, Class B and Class C
of a Fund should be expected to be lower than that of Class R. Performance for
each Class will be calculated separately.
Average annual total return is calculated pursuant to a standardized formula
which assumes that an investment in a Fund was purchased with an initial payment
of $1,000 and that the investment was redeemed at the end of a stated period of
time, after giving effect to the reinvestment of dividends and distributions
during the period. The return is expressed as a percentage rate which, if
applied on a compounded annual basis, would result in the redeemable value of
the investment at the end of the period. Advertisements of a Fund's performance
will include the Fund's average annual total return for one, five and ten year
periods (if available), or for shorter time periods depending upon the length of
time during which the Fund has operated.
Total return is computed on a per share basis and assumes the reinvestment of
dividends and distributions. Total return generally is expressed as a percentage
rate which is calculated by combining the income and principal changes for a
specified period and dividing by the net asset value (or maximum offering price
in the case of Class A) per share at the beginning of the period. Advertisements
may include the percentage rate of total return or may include the value of a
hypothetical investment at the end of the period which assumes the application
of the percentage rate of total return. Total return also may be calculated by
using the net asset value per share at the beginning of the period instead of
the maximum offering price per share at the beginning of the period for Class A
shares of a Fund or without giving effect to any applicable CDSC at the end of
the period for Class B or Class C shares of a Fund. Calculations based on the
net asset value per share do not reflect the deduction of the applicable sales
charge on Class A shares of the Funds, which, if reflected, would reduce the
performance quoted.
40
<PAGE>
Performance will vary from time to time 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.
The Company's annual report to shareholders, which is available without charge
upon request, contains a discussion of the performance of the Strategy Fund and
the Capital Value Fund for the fiscal year ended April 30, 2000.
For purposes of quoting and comparing the performance of each Class of a Fund to
that of other mutual funds and to other relevant market indices in
advertisements or in reports to shareholders, performance may be stated in terms
of total return and yield. Total return and yield quotations are computed
separately for each Class of shares of a Fund. Under the rules of the SEC
("Commission Rules"), funds advertising performance must include average annual
total return quotes calculated according to the following formula:
P(1+T)n = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years (1, 5 or 10)
ERV = ending redeemable value of a
hypothetical $1,000 payment made at
the beginning of the 1, 5 or 10
year periods at the end of the 1, 5
or 10 year period (or fractional
portion thereof).
Under the foregoing formula, the time periods used in advertising will be based
on rolling calendar quarters, updated to the last day of the most recent quarter
prior to submission of the advertising for publication.
A Class' average annual total return figures calculated in accordance with the
foregoing formula assume that in the case of Class A shares the maximum sales
load has been deducted from the hypothetical initial investment at the time of
purchase, and in the case of Class B or Class C shares the maximum applicable
CDSC has been paid upon redemption at the end of the period. Total return or "T"
in the formula above, is computed by finding the average annual compounded rates
of return over the 1, 5 and 10 year periods (or fractional portion thereof)
presented that would equate the initial amount invested to the ending redeemable
value.
Each Fund presents performance information for each of its Classes since the
commencement of investment operations, rather than since the date each Class was
introduced. For the Capital Value Fund, performance is presented since the
commencement of investment operations of the Dreyfus Capital Value Fund, the
predecessor of the Capital Fund. Performance information for each Class of each
Fund introduced after the commencement of investment operations therefore
includes the performance history of a predecessor Class or Classes. The
historical operating expenses of the predecessor Class or Classes, including
distribution and service fees and other operating expenses, are not restated to
reflect the ongoing expenses of the Class whose performance is being shown.
However, sales loads of the predecessor Class or Classes are restated, when
presenting performance inclusive of sales loads, to reflect the current
applicable sales load for the Class whose performance is being shown and not the
sales charges paid on the predecessor class. This means that in presenting the
performance of Class A shares inclusive of sales loads, the current maximum
front-end sales load for Class A shares is reflected, and in presenting the
performance of Class B or Class C shares inclusive of sales loads, the current
applicable CDSC is reflected.
41
<PAGE>
CAPITAL VALUE FUND - CERTAIN DIFFERENCES IN THE HISTORICAL OPERATING EXPENSES OF
PREDECESSOR CLASSES. Prior to January 15, 1993, the Dreyfus Capital Value Fund
(the Capital Value Fund's predecessor) did not offer Class B shares and, prior
to August 24, 1995, the Dreyfus Capital Value Fund did not offer Class C or
Class R shares. Because Class B shares of the Dreyfus Capital Value Fund were
not actually introduced until January 15, 1993, the total return for Class B
shares for the period prior to their introduction reflects the annual service
and distribution fees and other expenses actually paid by Class A, and therefore
does not reflect the higher distribution and service fees and additional
incremental shareholder administrative expenses payable by Class B because such
higher fees and expenses were not paid during that period. Because Class C
shares of the Dreyfus Capital Value Fund were not actually introduced until
August 22, 1995, Class C performance information for the period prior to their
introduction reflects the annual service and distribution fees and other
expenses for Class B (which, prior to its introduction, reflects the annual
service and distribution fees and other expenses borne by Class A) and,
therefore, with respect to the period prior to the introduction of Class B, does
not reflect the higher distribution and service fees and additional incremental
shareholder administrative expenses payable by Class C. Class R performance
information for the period prior to the introduction of Class R shares reflects
the annual service and distribution fees and other expenses borne by Class A.
STRATEGY FUND - CERTAIN DIFFERENCES IN THE HISTORICAL OPERATING EXPENSES OF
PREDECESSOR CLASSES. Prior to August 1, 1995, the Strategy Fund did not offer
Class C shares. Performance information for Class C for the period from July 15,
1992 to August 1, 1995 reflects the annual distribution fees paid by Class A,
and therefore does not reflect the higher distribution and service fees and
additional incremental shareholder administrative expenses payable by Class C
because such higher fees and expenses were not paid during that period.
Performance information presented by the Strategy Fund for Class O is restated
to reflect the maximum front end sales load payable at the time the Fund last
offered Class O shares, and not the underwriting discount paid in connection
with the initial offering of the Strategy Fund's shares as a closed-end fund.
Performance information for all Classes prior to August 1, 1991 reflects
performance of the Strategy Fund as a closed-end fund (assuming dividend
reinvestment pursuant to the Strategy Fund's Dividend Reinvestment Plan as then
in effect); as an open-end fund the Strategy Fund incurs certain additional
expenses as a result of the continuous offering and redemption of its shares.
The following tables set forth the aggregate and average annual total return for
Class A, Class B, Class C and Class R shares of the Capital Value Fund for
certain periods of time each ending April 30, 2000, and include the performance
of the Dreyfus Capital Value Fund, the Fund's predecessor. Investors should note
that information presented in the tables for Class B, Class C and Class R Shares
prior to their inception is based on the historical operating expenses and
performance of a predecessor class and does not reflect the relative expenses
that an investor would incur as a holder of Class B, Class C or Class R Shares
of the Capital Value Fund. Accordingly, the Table should not be utilized in
evaluating whether Class A, Class B, Class C or Class R Shares would best suit
an investor's needs. In evaluating the relative merits of such shares, investors
should refer to the "Fees and Expenses" and "How Your Account Works" sections in
the Funds' Prospectus.
<TABLE>
<CAPTION>
GABELLI COMSTOCK CAPITAL VALUE FUND (1)
CLASS A CLASS B(3)
TOTAL AGGREGATE RETURN AVERAGE ANNUAL RETURN TOTAL AGGREGATE RETURN AVERAGE ANNUAL RETURN
AT NAV WITH LOAD AT NAV WITH LOAD AT NAV WITH CDSC AT NAV WITH CDSC
------ --------- ------ --------- ------ --------- ------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Inception (October 10, 1985)
9.30% 4.40% 0.66% 0.32% 4.02% 0.29%
Policy Inception
(April 28, 1987)(2) -31.08% -34.17% -3.42% -3.42% -34.41% -3.45%
10 Year -46.39% -48.81% -6.04% -6.48% -48.98% -6.51%
5 Year -57.03% -58.98% -15.55% -16.32% -58.57% -59.17% -16.16% -16.40%
1 Year -25.80% -29.16% -25.80% -29.16% -26.19% -28.97% -26.19% -28.97%
</TABLE>
CLASS C(4) CLASS R(5)
42
<PAGE>
<TABLE>
<CAPTION>
TOTAL AGGREGATE RETURN AVERAGE ANNUAL RETURN TOTAL AGGREGATE RETURN AVERAGE ANNUAL RETURN
WITH CDSC AT NAV AT NAV AT NAV WITH CDSC AT NAV
--------- ------ ------ ------ --------- ------
<S> <C> <C> <C> <C> <C> <C>
Inception (October 10, 1985)
3.95% 0.29% 10.27% 0.72%
Policy Inception (April 28, 1987)
-34.45% -3.45% -30.47% -2.98*
10 Year -49.02% -6.52% -45.92% -5.96%
5 Year -58.59% -16.17% -56.65% -15.39%
1 Year -26.22% -26.91% -26.22% -26.91% -25.67% -25.67%
<FN>
------------------
(1) Performance information assumes dividend reinvestment.
(2) On April 28, 1987, Comstock Partners, Inc., the Capital Value Fund's
Investment Adviser, became the Dreyfus Capital Value Fund's Sub-Investment
Adviser.
(3) Because Class B shares were not introduced until January 15, 1993, the total
return for Class B shares for the period prior to their introduction is based
upon the performance of Class A shares from the commencement of investment
operations through January 15, 1993. As a result, total return for Class B
shares for the period prior to January 15, 1993 does not reflect the higher
level of service and distribution fees and certain administrative expenses borne
by Class B shares which, if reflected, would reduce the total return presented.
(4) Because Class C shares were not introduced until August 22, 1995, the total
return for Class C shares for the period prior to their introduction is based
upon the performance of Class A shares from the commencement of investment
operations through January 15, 1993, and Class B shares from January 15, 1993
through August 22, 1995. As a result, total return for Class C shares for the
period prior to January 15, 1993, does not reflect the higher level of service
and distribution fees and certain administrative expenses borne by Class C
shares which, if reflected, would reduce the total return presented.
(5) Because Class R shares were not introduced until August 22, 1995, the total
return for Class R shares for the period prior to their introduction is based on
the performance of Class A shares.
</FN>
</TABLE>
The following tables set forth the average annual total returns for Class O,
Class A and Class C shares of the Strategy Fund for certain periods of time each
ending April 30, 2000. Class O shares are no longer issued by the Fund except in
connection with the reinvestment of dividends on outstanding Class O shares.
Investors should note that information presented in the Tables for Class A and
Class C Shares is based upon historical operating expenses of the Strategy Fund
which do not reflect the relative expenses that an investor would incur as a
holder of Class A or Class C Shares of the Strategy Fund. Accordingly, the Table
should not be utilized in evaluating whether Class A or Class C Shares would
best suit an investor's needs. In evaluating the relative merits of Class A and
Class C shares of the Strategy Fund, investors should refer to the "Fees and
Expenses" and "How Your Account Works" sections in the Funds' Prospectus.
GABELLI COMSTOCK STRATEGY FUND
AVERAGE ANNUAL TOTAL RETURN
WITH DEDUCTION OF APPLICABLE SALES CHARGES(1)
<TABLE>
<CAPTION>
SINCE
COMMENCEMENT
OF OPERATIONS ONE YEAR FIVE YEARS TEN YEARS
------------- -------- ---------- ---------
<S> <C> <C> <C> <C>
Class O (2) -15.31% -6.33% 1.23% 2.29%
Class A (3)(4) -15.54% -6.61% 1.03% 2.11%
Class C (5)(6) -13.23% -6.29% 1.21% 2.27%
AVERAGE ANNUAL TOTAL RETURN
WITHOUT DEDUCTION OF APPLICABLE SALES CHARGES(1)
SINCE
COMMENCEMENT
OF OPERATIONS ONE YEAR FIVE YEARS TEN YEARS
------------- -------- ---------- ---------
Class O -11.32% -5.47% 1.70% 2.72%
Class A (4) -11.56% -5.74% 1.50% 2.54%
Class C (6) -12.42% -6.29% 1.21% 2.27%
</TABLE>
------------------
43
<PAGE>
(1) Performance information assumes dividend reinvestment. Performance
information for the period prior to August 1, 1991 reflects performance of the
Strategy Fund as a closed-end fund (assuming dividend reinvestment pursuant to
the Strategy Fund's Dividend Reinvestment Plan as then in effect); as an
open-end fund the Strategy Fund incurs certain additional expenses as a result
of the continuous offering and redemption of its shares.
(2) Performance information reflects the maximum initial sales charge payable on
Class O shares when the Strategy Fund last offered such shares.
(3) Performance information has been restated to reflect the maximum initial
sales charge payable on Class A shares of the Strategy Fund.
(4) Because Class A shares of the Strategy Fund were not introduced until July
15, 1992, the total return for Class A shares for the period prior to their
introduction is based on the performance of Class O shares. As a result, total
return for Class A shares for the period prior to July 15, 1992 does not reflect
service and distribution fees borne by Class A shares which, if reflected, would
reduce the total return presented.
(5) Performance information has been restated to reflect any applicable CDSC
with respect to Class C shares of the Strategy Fund in lieu of the maximum
initial sales charge payable on Class A shares.
(6) Because Class C shares were not introduced until August 1, 1995, the total
return for Class C shares for the period prior to their introduction is based on
the performance of Class O shares from the Fund's inception through July 15,
1992 and Class A shares from July 15, 1992 through August 1, 1995. As a result,
total return for Class C shares for the period prior to August 1, 1995 does not
reflect the higher level of service and distribution fees and certain
administrative expenses borne by Class C shares which, if reflected, would
reduce the total return presented.
Each Fund may also from time to time include in such advertising a total return
figure that is not calculated according to the formula set forth above in order
to compare more accurately the performance of the Fund with other measures of
investment return. For example, in comparing a Fund's total return with data
published by Lipper Analytical Services, Inc., or similar independent services
or financial publications, each Fund calculates its aggregate total return for
the specified periods of time by assuming the investment of $10,000 in each
Class of Fund shares at the Fund's commencement of operations (and assuming the
reinvestment of each dividend or other distribution pursuant to the Strategy
Fund's Dividend Reinvestment Plan for the period when the Strategy Fund was a
closed-end fund) and, thereafter, at net asset value on the reinvestment date.
Percentage increases are determined by subtracting the initial value of the
investment from the ending value and by dividing the remainder by the beginning
value.
The Funds may from time to time include discussions or illustrations of the
potential investment goals of a prospective investor (including materials that
describe general principles of investing, such as asset allocation,
diversification, risk tolerance, and goal setting, questionnaires designed to
help create a personal financial profile, worksheets used to project savings
needs based on assumed rates of inflation and hypothetical rates of return and
action plans offering investment alternatives), investment management
techniques, policies or investment suitability of a Fund (such as value
investing, market timing, dollar cost averaging, asset allocation, constant
ratio transfer, automatic account rebalancing, the advantages and disadvantages
of investing in tax-deferred and taxable investments), economic and political
conditions and the relationship between sectors of the economy and the economy
as a whole, the effects of inflation and historical performance of various asset
classes, including but not limited to, stocks, bonds and Treasury bills. From
time to time advertisements, sales literature, communications to shareholders or
other materials may summarize the substance of information contained in
shareholder reports (including the investment composition of a Fund), as well as
the views of the Funds' Investment Adviser as to current market, economy, trade
and interest rate trends, legislative, regulatory and monetary developments,
investment strategies and related matters believed to be of relevance to a Fund.
In addition, selected indices may be used to illustrate historic performance of
select asset classes. The Funds may also include in advertisements, sales
literature, communications to shareholders or other materials, charts, graphs or
drawings which illustrate the potential risks and rewards of investment in
various investment vehicles, including but not limited to, stocks, bonds,
treasury bills and shares of a Fund. In addition, advertisements, shareholder
communications or other materials may include a discussion of certain attributes
or benefits to be derived by an investment in a Fund and/or other mutual funds,
shareholder profiles and hypothetical investor scenarios, timely information on
financial management, tax and retirement planning and investment alternative to
certificates of deposit and other financial instruments. Such advertisements or
communicators may include symbols, headlines or other material which highlight
or summarize the information discussed in more detail therein. Materials may
include lists of representative clients of the
44
<PAGE>
Investment Adviser. Materials may refer to the CUSIP numbers of the various
classes of the Funds and may illustrate how to find the listings of the Funds in
newspapers and periodicals.
Past performance is not predictive of future performance. All advertisements
containing performance data of any kind will include a legend disclosing that
such performance data represents past performance and that the investment return
and principal value of an investment will fluctuate so that an investor's
shares, when redeemed, may be worth more or less than their original cost.
Advertisements and communications of a Fund may compare the performance of that
Fund's shares with that of other mutual funds, as reported by Lipper Analytical
Services, Inc. or similar independent services or financial publications, and
may also contrast the Fund's investment policies and portfolio flexibility with
other mutual funds. From time to time, advertisements and other materials and
communications of the Funds may cite statistics to reflect the performance over
time of a Fund's shares, utilizing comparisons to indexes such as the Lehman
Brothers Government Bond Index, the Lehman Brothers Corporate Bond Index, the
Lehman Brothers Government/Corporate Bond Index, the Salomon Brothers High Grade
Corporate Bond Index and the S&P 500 Index. The Funds' advertising materials
also may refer to the integration of the world's securities markets, discuss the
investment opportunities available worldwide and mention the increasing
importance of an investment strategy including foreign investments. In addition,
advertising materials for the Funds may include the Investment Adviser's
analysis of, or outlook for, the economy or financial markets, compare the
Investment Adviser's analysis or outlook with the views of others in the
financial community, and refer to the expertise of the Investment Adviser's
personnel and their reputation in the financial community. From time to time
advertising materials for the Funds also may refer to Morningstar ratings and
related analyses supporting the rating.
ADDITIONAL INFORMATION CONCERNING TAXES
GENERAL
The Strategy Fund and the Capital Value Fund each intend to qualify and elect to
be treated as a regulated investment company (a "RIC") under Subchapter M of the
Internal Revenue Code of 1986, as amended (the "Code"). To so qualify, a Fund
must, among other things, (a) derive in each taxable year at least 90% of its
gross income from dividends, interest, payments with respect to securities loans
and gains from the sale or other disposition of stock or securities, foreign
currencies, or other income (including gains from options, futures or forward
contracts) derived with respect to its business of investing in such stock,
securities or currencies; and (b) diversify its holdings so that, at the end of
each quarter of each taxable year, (i) at least 50% of the market value of the
Fund's assets is represented by cash, cash items, United States government
securities, securities of other RICs and other securities with such other
securities limited, in respect of any one issuer, to an amount not greater than
5% of the value of the Fund's assets and 10% of the outstanding voting
securities of such issuer, and (ii) not more than 25% of the value of its assets
is invested in the securities of any one issuer (other than United States
government securities or the securities of other RICs).
As a RIC, a Fund will not be subject to federal income tax on its net investment
income (i.e., its investment company taxable income, as that term is defined in
the Code, determined without regard to the deduction for dividends paid) and
"net capital gain" (i.e., the excess of a Fund's long-term capital gain over net
short-term capital loss), if any, that it distributes in each taxable year to
its shareholders, provided that the Fund distributes at least 90% of its net
investment income for such taxable year. However, a fund would be subject to
corporate income tax (currently at a rate of 35%) on any undistributed net
investment income and net capital gain. Each Fund expects to designate amounts
retained as undistributed net capital gain in a notice to its shareholders who
will be (i) required to include in income for United States federal income tax
purposes, as long-term capital gain, their proportionate share of the
undistributed amount, (ii) entitled to credit their proportionate share of the
35% tax paid by the Fund on the undistributed amount, against their federal
income tax liabilities and to claim refunds to the extent such credits exceed
their liabilities and (iii) entitled to increase their tax basis, for federal
income tax purposes, in their shares by an amount equal to 65% of the amount of
undistributed net capital gain included in their income.
45
<PAGE>
Each Fund will be subject to a nondeductible 4% federal excise tax to the extent
that the Fund does not distribute by the end of each calendar year: (a) at least
98% of its ordinary income for such year, (b) at least 98% of its capital gain
net income (generally the excess, if any, of its capital gains over its capital
losses) for the one-year period ending, as a general rule, on October 31 of that
year, and (c) 100% of undistributed ordinary income and capital gain net income
from the preceding calendar year (if any) pursuant to the calculations on (a)
and (b). For this purpose, any income or gain retained by that Fund that is
subject to a corporate tax will be considered to have been distributed by
year-end.
INCOME PRIOR TO RECEIPT OF CASH
Each Fund may make investments that produce income that is not matched by a
corresponding cash distribution to the Fund, such as investments in obligations
such as certain Brady Bonds or zero coupon securities having original issue
discount (i.e., an amount equal to the excess of the stated redemption price of
the security at maturity over its issue price) or market discount (i.e., an
amount equal to the excess of the stated redemption price of the security at
maturity over the basis of the security immediately after it was acquired) if
the Fund elects to accrue market discount on a current basis. In addition,
income may continue to accrue for federal income tax purposes with respect to a
non-performing investment. Any of the foregoing income would be treated as
income earned by the Fund and therefore would be subject to the distribution
requirements of the Code. Because such income may not be matched by a
corresponding cash distribution to the Fund, the Fund may be required to dispose
of other securities to be able to make distributions to its investors.
FOREIGN WITHHOLDING TAXES
A Fund may be subject to certain taxes imposed by foreign countries with respect
to its income and capital gain. If a Fund qualifies as a RIC, certain
distribution requirements are met and more than 50% in value of a Fund's total
assets at the close of any taxable year consists of stocks or securities of
foreign corporations, the Fund may elect to treat any foreign income taxes paid
by it as paid by its shareholders. If eligible, each Fund intends to make this
election. If a Fund makes this election, its shareholders will be required to
include in income their respective pro rata portions of foreign income taxes
paid by the Fund and, if they itemize their deductions, will be entitled to
deduct such respective pro rata portions in computing their taxable incomes or,
alternatively, to claim foreign tax credits subject to applicable limitations in
the Code. Each year that the Fund makes this election, it will report to its
shareholders the amount per share of foreign income taxes it has elected to have
treated as paid by its shareholders.
The rules governing the foreign tax credit are complex. Because the availability
of a credit or deduction depends on the particular circumstances of each
shareholder, shareholders are advised to consult their own tax advisers.
DERIVATIVES AND FOREIGN CURRENCY TRANSACTIONS
A Fund's transactions in foreign currencies, forward contracts, options and
futures contracts (including options and futures contracts on foreign
currencies) will be subject to special provisions of the Code that, among other
things, may affect the character of gains and losses realized by the Fund (i.e.,
may affect whether gains or losses are ordinary or capital), accelerate
recognition of income to the Fund, defer Fund losses, and affect the
determination of whether capital gains and losses are characterized as long-term
or short-term capital gains or losses. These rules could therefore affect the
character, amount and timing of distributions to stockholders. These provisions
also may require a fund to mark-to-market certain types of the positions in its
portfolio (i.e., treat them as if they were closed out at the end of each
taxable year) which may cause the Fund to recognize income without receiving
cash with which to make distributions in amounts necessary to satisfy the 90%
and 98% distribution requirements for avoiding income and excise taxes. Each
Fund will monitor its transactions, will make the appropriate tax elections, and
will make the appropriate entries in its books and records when it acquires any
foreign currency, option, future contract, forward contract, or hedge investment
in order to mitigate the effect of these rules and prevent disqualification of
the Fund as a RIC and minimize the imposition of income and excise taxes.
DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES
46
<PAGE>
The Company's charter, as amended, authorizes the issuance of separate series of
shares corresponding to shares of multiple investment portfolios of the Company.
As of the date this SAI, the Company consists of two investment portfolios: the
Strategy Fund and the Capital Value Fund.
The authorized capital stock of the Company consists of 1,000,000,000 shares,
par value $.001 per share. The Company is authorized to issue 150,000,000
Strategy Fund Class O shares, 200,000,000 Strategy Fund Class A shares and
200,000,000 Strategy Fund Class C shares. In addition, the Company is authorized
to issue 125,000,000 Capital Value Fund Class A shares, 125,000,000 Capital
Value Fund Class B shares, 125,000,000 Capital Value Fund Class C shares and
125,000,000 Capital Value Fund Class R shares. Each Class A, Class B, Class C
and Class R share represents an interest in the Strategy Fund or the Capital
Value Fund, as the case may be, in proportion to its net asset value, and has
identical rights except that Class A, B and C shares bear fees and expenses on
an ongoing basis pursuant to the Fund's Class A, Class B and Class C Service and
Distribution Plans, respectively, and Class B and C shares bear additional
incremental shareholder administrative expenses resulting from deferred sales
charge arrangements. In addition, only the holders of Class A, Class B and Class
C shares have voting rights with respect to matters pertaining to the Class A,
Class B and Class C Service and Distribution Plans, respectively.
The Company's Board of Directors may reclassify unissued shares of the Company
into additional classes of Common Stock at a future date. The Company's Board of
Directors may, in the future, authorize the issuance of shares of additional
classes of capital stock representing different investment portfolios.
Except as described above with respect to the Company's Service and Distribution
Plans, all shares of the Company have equal voting rights and will be voted in
the aggregate and not by class, except where voting by class is required by law.
Under the corporate law of Maryland, the Company's state of incorporation, and
the Company's By-Laws (except as required under the 1940 Act), the Company is
not required and does not currently intend to hold annual meetings for the
election of directors. Shareholders, however, will have the right to call for a
special meeting of shareholders if such a request is made, in writing, by
shareholders entitled to cast at least 10% of the votes entitled to be cast at
the meeting (or by shareholders entitled to cast at least 10% of the Class A,
Class B or Class C votes entitled to be cast with respect to matters relating to
the Class A, Class B or Class C Service and Distribution Plans, respectively).
In such cases, the Company will assist in calling the meeting as required under
the 1940 Act.
All shares of the Company, when issued, will be fully paid and nonassessable.
All shares of the Company have equal voting rights and will be voted in the
aggregate, and not by series or class, except where voting by series or class is
required by law or where the matter involved affects only one series or class
(for example, matters pertaining to the service and distribution plan for Class
A shares of the Company shall be voted on only by holders of Class A shares of
the relevant Fund). Under the 1940 Act, the term "majority," when referring to
the approvals to be obtained from shareholders in connection with general
matters affecting a Fund, means the vote of the lesser of (i) 67% of that Fund's
shares represented at a meeting if the holders of more than 50% of the
outstanding shares are present in person or by proxy or (ii) more than 50% of
that Fund's outstanding shares. Shareholders are entitled to one vote for each
full share held and fractional votes for fractional shares held.
Each share of a portfolio of the Company is entitled to such dividends and
distributions out of the assets belonging to that portfolio as are declared in
the discretion of the Company's Board of Directors. In determining the Fund's
net asset value, assets belonging to the Fund are credited with a proportionate
share of any general assets of the Company not belonging to the Fund and are
charged with the direct liabilities in respect of that Fund and with a share of
the general liabilities of the Company. The general liabilities of the Company
are normally allocated in proportion to the relative net asset values of the
respective portfolios of the Company at the time of distribution.
Shareholders are not entitled to any preemptive rights. All shares, when issued,
will be fully paid, non-assessable, fully transferable and redeemable at the
option of the holder.
47
<PAGE>
Under the Company's Articles of Incorporation and Maryland law, directors and
officers of the Company are not liable to a Fund or its stockholders except for
(i) receipt of an improper personal benefit by a director or officer or (ii)
active and deliberate dishonesty of a director or officer that is material to a
cause of action in which a judgment is entered against such person. The
Company's Articles of Incorporation require that it indemnify its directors and
officers made party to any proceedings by reason of service in such capacities
unless it is proven that (i) the act or omission of a director or officer was
material to the matter giving rise to the proceeding and was committed in bad
faith or with active and deliberate dishonesty, (ii) a director or officer
received an improper personal benefit or (iii) in the case of a criminal
proceeding, a director or officer had reasonable cause to believe that his act
or omission was unlawful. These provisions are subject to the limitation under
the 1940 Act that no director or officer may be protected against liability to
the Company for willful misfeasance, bad faith, gross negligence or reckless
disregard for the duties of his office.
DIVIDENDS AND DISTRIBUTIONS
The Strategy Fund intends to pay dividends monthly and to distribute
substantially all of its net investment income. Net capital gain, if any, will
be distributed at least annually. The Capital Value Fund ordinarily pays
dividends from net investment income and distributes net capital gain, if any,
once a year. Each Fund may make distributions on a more frequent basis to comply
with the distribution requirements of the Code, in all events in a manner
consistent with the provisions of the 1940 Act. The Capital Value Fund will not
make distributions from net capital gain unless capital loss carryovers, if any,
have been utilized or have expired.
Shareholders of each Fund will receive dividends and distributions on their
shares of a Fund in additional shares of the same Class of that Fund (without a
sales charge) or may elect to receive all dividends and distributions in cash.
[See "Additional Information Concerning Taxes--Distributions."]
GENERAL INFORMATION
CUSTODIAN
The Bank of New York acts as the U.S. and international custodian for the
Capital Value Fund and U.S. custodian for the Strategy Fund. Under the Custodian
Agreement, The Bank of New York is authorized to establish accounts for foreign
securities owned by the relevant Fund to be held with foreign branches of United
States banks as well as with certain foreign banks and securities depositaries.
The custodians do not determine the investment policies of the Funds, nor decide
which securities the Funds will buy or sell.
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT
State Street Bank and Trust Company, 225 Franklin Street, Boston, Massachusetts
02108, is the transfer and dividend disbursing agent for each Fund. Its
affiliate, Boston Financial Data Service, Inc. is each Fund's shareholder
servicing agent.
COUNSEL
Skadden, Arps, Slate, Meagher & Flom LLP, Four Times Square, New York, New York
10036, serves as the Fund's legal counsel.
INDEPENDENT AUDITORS
Ernst & Young LLP serves as the independent auditors for the Funds. The
financial statements of the Funds included in this SAI have been so included in
reliance upon the report of Ernst & Young LLP, independent auditors, given on
the authority of that firm as experts in auditing and accounting.
OTHER INFORMATION
The Prospectus and this SAI do not contain all the information included in the
Company's Registration Statement filed with the SEC under the Securities Act
with respect to the securities offered by the Prospectus. Certain portions of
the Registration Statement have been omitted from the Prospectus and this SAI
pursuant to the rules and regulations of the SEC. The Registration Statement
including the exhibits filed therewith may be examined at the office of the SEC
in Washington, D.C.
48
<PAGE>
Statements contained in the Prospectus or in this SAI as to the contents of any
contract or other document referred to are not necessarily complete, and, in
each instance, reference is made to the copy of such contract or other document
filed as an exhibit to the Registration Statement of which the Prospectus and
this SAI form a part, each such statement being qualified in all respect by such
reference.
REPORTS TO SHAREHOLDERS
The Company will send unaudited reports at least semi-annually, and annual
reports containing audited financial statements, to all of its shareholders.
FINANCIAL STATEMENTS
The audited financial statements for the Strategy Fund and the Capital Value
Fund are incorporated by reference to the Company's 2000 Annual Report to
Shareholders. You may request a copy of the Annual Report at no charge by
calling 1-800-GABELLI.
49
<PAGE>
PART C: OTHER INFORMATION
Item 23. EXHIBITS
(a)(1) Articles of Amendment and Restatement of the Registrant are
incorporated by reference to Post-Effective Amendment No. 8 to
the Registration Statement as filed with the SEC via EDGAR on
February 14, 1996 ("Post-Effective Amendment No. 8").
(2) Form of Articles Supplementary, with respect to Class B
Shares, are incorporated by reference to Post-Effective
Amendment No. 8.
Form of Articles Supplementary, with respect to Class C
Shares, are incorporated by reference to Post-Effective
Amendment No. 8.
Form of Articles of Amendment, with respect to the
Registrant's name change from Comstock Partners Strategy Fund,
Inc. to Comstock Partners Funds, Inc., are incorporated by
reference to Post-Effective Amendment No. 8.
Form of Articles Supplementary, with respect to the increase
of Shares of Capital Stock, are incorporated by reference to
Post-Effective Amendment No. 8.
Articles of Amendment, with respect to the Registrant's
name change from Comstock Partners Funds, Inc. to Gabelli
Comstock Funds, Inc., will be filed by Amendment.
(b) By-laws of the Registrant are incorporated by reference to
Post-Effective Amendment No. 8.
(c) Article 5 of Registrant's Articles of Amendment and
Restatement are incorporated by reference to Post-Effective
Amendment No. 8.
Article II and V of Registrant's By-laws are incorporated by
reference to Post-Effective Amendment No. 8.
(d)(1) Form of Investment Advisory Agreement between the
Registrant and Gabelli Funds, LLC, on behalf of the Gabelli
Comstock Strategy Fund, is filed herewith.
(2) Form of Investment Advisory Agreement between the
Registrant and Gabelli Funds, LLC, on behalf of the Gabelli
Comstock Capital Value Fund, is filed herewith.
(e) Form of Distribution Agreement between the Registrant and
Gabelli & Company, Inc. will be filed by Amendment.
(f) Not Applicable.
(g) Form of Custodian Contract, between the Registrant and The
Bank of New York will be filed by Amendment.
50
<PAGE>
(h) Form of Transfer Agency and Service Agreement between the
Registrant and State Street Bank and Trust Company will be
filed by Amendment.
(i) Consent of Counsel will be filed by Amendment.
(j) Not Applicable.
(k) Not Applicable.
(l) Not Applicable.
(m) (1) Amended and Restated Class A Service and Distribution Plan
is filed herewith.
(2) Form of Class B Service and Distribution Plan is incorporated
by reference to Post-Effective Amendment No. 8.
(3) Form of Amended and Restated Class C Service and Distribution
Plan is incorporated by reference to Post-Effective Amendment
No. 8.
(n) Form of Amended and Restated Multiclass Plan is incorporated
by reference to Post-Effective Amendment No. 8.
(o) Not Applicable.
(p) Code of Ethics for Registrant, Gabelli Funds, LLC, and Gabelli
& Company, Inc. is filed herewith.
Item 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
None.
Item 25. INDEMNIFICATION
Reference is made to Article VII of Registrant's Articles of
Incorporation, Article VI of Registrant's By-laws, and
[subsection 1.10] of the Distribution Agreement between
Registrant and Gabelli & Company, Inc.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933, as amended (the "Securities Act"), may
be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant understands that in the opinion of
the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a
director, officer or controlling person of the Registrant in
the successful defense of any action, suit or proceeding) is
asserted by such director, officer of controlling person in
connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such
51
<PAGE>
indemnification by it is against public policy as expressed in
the Securities Act and will be governed by the final
adjudication of such issue.
Item 26. BUSINESS AND OTHER CONNECTIONS OF THE INVESTMENT ADVISER
Gabelli Funds, LLC (the "Adviser") is a registered investment
adviser providing investment management and administrative
services to the Registrant. The Adviser also provides similar
services to other mutual funds.
The information required by this Item 26 with respect to any
other business, profession, vocation or employment of a
substantial nature engaged in by directors and officers of the
Adviser during the past two years is incorporated by reference
to Form ADV filed by the Adviser pursuant to the Investment
Advisers Act of 1940 (SEC File No. 801-37706).
Item 27. PRINCIPAL UNDERWRITERS
(a) Gabelli & Company, Inc. ("Gabelli & Company") currently acts
as distributor for Gabelli Comstock Funds, Inc., Gabelli
Investor Funds, Inc., The Gabelli Asset Fund, The Gabelli Blue
Chip Value Fund, Gabelli Capital Series Funds, Inc., The
Gabelli Convertible Securities Fund, Inc., Gabelli Equity
Series Funds, Inc., The Gabelli Equity Trust Inc., Gabelli
Global Series Funds, Inc., The Gabelli Global Multimedia Trust
Inc., Gabelli Gold Fund, Inc., The Gabelli Growth Fund,
Gabelli International Growth Fund, Inc., The Gabelli Mathers
Fund, The Gabelli Money Market Funds, The Gabelli Utilities
Fund, The Gabelli Utility Trust, The Gabelli Value Fund Inc.
and The Gabelli Westwood Funds.
(b) The information required by this Item 27 with respect to each
director, officer or partner of Gabelli & Company is
incorporated by reference to Schedule A of Form BD filed by
Gabelli & Company pursuant to the Securities Exchange Act of
1934, as amended (SEC File No. 8-21373).
(c) Not Applicable.
Item 28. LOCATION OF ACCOUNTS AND RECORDS
All such accounts, books and other documents required by
Section 31(a) of the Investment Company Act of 1940, as
amended, Rules 31a-1 through 31a-3 thereunder are maintained
at the offices of the Adviser, Gabelli Funds, LLC, One
Corporate Center, Rye, New York 10580-1434, PFPC Inc., 101
Federal Street, Boston, Massachusetts 02110, State Street Bank
and Trust Company, 225 Franklin Street, Boston, Massachusetts,
02110 and Boston Financial Data Services, Inc., Two Heritage
Drive, North Quincy, Massachusetts, 02171.
Item 29. MANAGEMENT SERVICES
Not Applicable.
Item 30. UNDERTAKINGS
Not Applicable.
52
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, and the
Investment Company Act of 1940, as amended, the Registrant, GABELLI COMSTOCK
FUNDS, INC., certifies that it meets all the requirements for effectiveness of
this Post-Effective Amendment to its Registration Statement pursuant to Rule
485(a) under the Securities Act of 1933, as amended, and has duly caused this
Post-Effective Amendment to its Registration Statement to be signed on its
behalf by the undersigned, thereto duly authorized, in the City of Rye and State
of New York on the 29th day of June, 2000.
GABELLI COMSTOCK FUNDS, INC.
By: /S/Bruce N. Alpert
Bruce N. Alpert
Executive Vice President and Treasurer
--------------------------------------------------------------------------------
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Post-Effective Amendment No. 16 to its Registration Statement has been signed
below by the following persons in the capacities and on the dates indicated.
SIGNATURES TITLE DATE
* Chairman of the Board June 29, 2000
-----------------------------
Henry van der Eb
* President June 29, 2000
-----------------------------
Martin Weiner
/S/BRUCE N. ALPERT Executive Vice President June 29, 2000
----------------------------- and Treasurer
Bruce N. Alpert
* Vice President and June 29, 2000
----------------------------- Assistant Treasurer
Gus A. Coutsouros
* Director June 29, 2000
-----------------------------
Charles L. Minter
* Director June 29, 2000
-----------------------------
M. Bruce Adelberg
* Director June 29, 2000
-----------------------------
Robert M. Smith
* Director June 29, 2000
-----------------------------
Anthony J. Colavita
* Director June 29, 2000
-----------------------------
Vincent D. Enright
* Director June 29, 2000
-----------------------------
Anthony R. Pustorino
* Director June 29, 2000
-----------------------------
Werner J. Roeder
53
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*By: /S/Bruce N. Alpert
Bruce N. Alpert
Attorney-in-fact
54
<PAGE>
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION OF EXHIBIT
(d)(1) Investment Advisory Agreement with respect to the Strategy Fund
(d)(2) Investment Advisory Agreement with respect to the Capital Value
Fund
(m)(1) Amended and Restated Class A Service and Distribution Plan
(p) Code of Ethics
55
