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THE GABELLI VALUE FUND INC.
Supplement to Prospectus dated May 1, 1999
Class B Shares and Class C Shares of the The Gabelli Value Fund Inc. are
not being offered to the public at this time.
INVESTORS SHOULD RETAIN THIS SUPPLEMENT
WITH THE PROSPECTUS FOR FUTURE REFERENCE.
May 1, 1999
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<PAGE>
THE GABELLI VALUE FUND INC.
Class A,B,C Shares
PROSPECTUS
May 1, 1999
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.
==============================================================================
The Gabelli Value Fund 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
e-mail: [email protected]
(Net Asset Value may be obtained daily by calling
(1-800-GABELLI after 6:00 P.M.)
Board of Directors
<TABLE>
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Mario J. Gabelli, CFA Robert J. Morrisey
Chairman and Chief Investment Officer Attorney-at-Law
Gabelli Asset Management Inc. Morrissey, Hawkins & Lynch
Bill Callaghan Karl Otto Pohl
President Former President
Bill Callaghan Associates Deutsche Bundesbank
Felix J. Christiana Anthony R. Pustorino
Former Senior Vice President Certified Public Accountant
Dollar Dry Dock Savings Bank Professor, Pace University
Anthony J. Colavita
Attorney-at-Law
Anthony J. Colavita, P.C.
Officers
Mario J. Gabelli, CFA Bruce N. Alpert
President and Chief Chief Operating Officer,
Investment Officer Vice President and Treasurer
James McKee
Secretary
</TABLE>
Questions?
Call 1-800-GABELLI or your investment representative.
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\\uranus\fsg\shared\boslegal\clients\gabvalue\peas\1999\prosp99b.doc
TABLE OF CONTENTS
Page
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INVESTMENT AND PERFORMANCE SUMMARY................................................................................3
INVESTMENT AND RISK INFORMATION...................................................................................6
MANAGEMENT OF THE FUND............................................................................................8
CLASSES OF SHARES.................................................................................................9
PURCHASE OF SHARES...............................................................................................13
REDEMPTION OF SHARES.............................................................................................15
EXCHANGES OF SHARES..............................................................................................16
PRICING OF FUND SHARES...........................................................................................17
DIVIDENDS AND DISTRIBUTIONS......................................................................................18
TAX INFORMATION..................................................................................................18
FINANCIAL HIGHLIGHTS.............................................................................................19
</TABLE>
<PAGE>
INVESTMENT AND PERFORMANCE SUMMARY
Investment Objective:
The Fund seeks to provide long-term capital appreciation. Capital is
the amount of money you invest in the Fund. Capital appreciation is an increase
in the value of your investment.
Principal Investment Strategies:
The Fund will primarily invest in common stocks. The Fund may also
invest in companies that are involved in corporate reorganizations.
Additionally, the Fund may invest in foreign securities. The Fund focuses on
securities of companies which appear underpriced relative to their "private
market value." Private market value is the value the Fund's adviser believes
informed investors would be willing to pay for a company.
Principal Risks:
The Fund's share price will fluctuate with changes in the market value of the
Fund's portfolio securities. Stocks are subject to market, economic and business
risks that cause their prices to fluctuate. Corporate reorganizations involve
the risk that the anticipated transactions may not be completed at the
anticipated time or upon the expected terms, in which case the Fund may suffer a
loss on its investments. Investments in foreign securities involve risks related
to political, social and economic developments abroad, as well as risks
resulting from the differences between the regulations to which U.S. and foreign
issuers and markets are subject. When you sell Fund shares, they may be worth
less than what you paid for them. Consequently, you can lose money by investing
in the Fund. The Fund is also subject to the risk that the portfolio securities'
private market values may never be realized by the market, or their prices may
go down. The Fund is a "non-diversified investment company" which means that it
can concentrate its investments in the securities of a single company to a
greater extent than a diversified investment company. Because the Fund may
invest its assets in the securities of a limited number of companies, a decline
in the value of the stock of any one of these issuers could have a greater
impact on the Fund's share price.
Who May Want to Invest:
The Fund may appeal to you if:
you are a long-term investor or saver. you seek growth of capital. you
believe that the market will favor value over growth stocks over the long term.
you wish to include a value strategy as a portion of your overall investments.
you prefer to invest in a more concentrated portfolio.
You may not want to invest in the Fund if:
you are seeking a high level of current income.
you are conservative in your investment approach.
you seek to maintain the value of your original investment
more than potential growth of capital.
An investment in the Fund is not a deposit of a bank and is not insured
or guaranteed by the Federal Deposit Insurance Corporation or any other
government agency.
Performance:
The bar chart and table shown below provide an indication of the risks
of investing in the Fund by showing changes in the Fund's performance from year
to year (since 1990 and commencement of operations, respectively), and by
showing how the Fund's average annual returns for one year, five years and the
life of the Fund compared to those of the S&P(R) 500 Stock 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.
BAR CHART* [Graphic Omitted]
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
Calendar Year Total Returns
1990 (5.6)%
1991 15.3%
1992 12.7%
1993 39.4%
1994 0.0%
1995 22.5%
1996 8.7%
1997 48.2%
1998 23.2%
*The bar chart above shows the total returns for Class A shares (not including
sales load). The Class B and Class C shares of the Fund are new classes for
which performance is not yet available. The returns for the Class B and Class
C shares will be substantially similar to those of the Class A shares shown
here because all shares of the Fund are invested in the same portfolio of
securities. The annual returns of the different classes of shares will differ
only to the extent that the expenses of the classes will differ.
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 21.3% (quarter ended June 30, 1997) and the lowest return for a
quarter was (13.2)% (quarter ended September 30, 1998).
<TABLE>
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- ----------------------------------------------- ------------------ ------------------ -------------------------------
Average Annual Total Returns Past One Year Past Five Years Since September 29, 1989*
(for the periods ended December 31, 1998)
- ----------------------------------------------- ------------------ ------------------ -------------------------------
- ----------------------------------------------- ------------------ ------------------ -------------------------------
The Gabelli Value Fund Class A shares+ 16.5% 18.1% 16.2%
- ----------------------------------------------- ------------------ ------------------ -------------------------------
- ----------------------------------------------- ------------------ ------------------ -------------------------------
S&P(R)500 Stock Index** 28.7% 24.1% 17.3%
- ----------------------------------------------- ------------------ ------------------ -------------------------------
* From September 29, 1989, the date that the Fund began operations.
** The S&P(R) 500 Composite Stock Price Index is a widely recognized,
unmanaged index of common stock prices. The performance of the Index
does not include expenses or fees.
+ Includes the effect of the 5.5% initial sales charge.
</TABLE>
<PAGE>
Fees and Expenses of the Fund:
These tables describe the fees and expenses that you may pay if you buy
and hold shares of the Fund.
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Class A Class B Class C
Shareholder Fees (fees paid directly from your investment): Shares Shares Shares
Maximum Sales Charge (Load) Imposed on Purchases
(as a percentage of offering price)........................................ 5.50%1 None None
Maximum Deferred Sales Charge (Load)
(as a percentage of redemption price*) .................................... None2 5.00%2 1.00%2
Annual Fund Operating Expenses (expenses that are deducted from Fund
assets): Management
Fees............................................................ 1.00% 1.00%
1.00% Distribution and Service (Rule 12b-1)
Expenses3............................ 0.25% 1.00% 1.00% Other
Expenses............................................................. 0.15%
0.15% 0.15% ---- ---- ---- Total Annual Operating
Expenses............................................ 1.40% 2.15% 2.15% ==== ====
==== .................. 1 The sales charge declines as a percentage of your
investment as the amount invested increases. 2 The Fund imposes a CDSC, which is
a back-end load, upon redemption if you sell your Class B shares within
approximately eighty-four months after purchase. A CDSC of 1% applies to
redemptions of Class C shares within twenty-four months after purchase and a
CDSC of 1% applies to redemptions of certain Class A shares within twelve months
after purchase. 3 As a result of the payment of sales charges and Rule 12b-1
expenses, long term shareholders may pay more than the maximum permitted
front-end sales charge. * "Redemption price" equals the net asset value at the
time of investment or redemption, whichever is lower.
</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
that (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>
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1 Year 3 Years 5 Years 10 Years
Class A Shares $685 $969 $1,274 $2,137
Class B Shares
-assuming redemption $718 $973 $1,354 $2,483
-assuming no redemption $218 $673 $1,154 $2,483
Class C Shares
-assuming redemption $318 $673 $1,154 $2,483
-assuming no redemption $218 $673 $1,154 $2,483
</TABLE>
INVESTMENT AND RISK INFORMATION
The Fund's investment objective is long-term capital appreciation. The
Fund's investment objective may not be changed without shareholder approval.
The Fund invests primarily in equity securities of companies which the
Fund's adviser, Gabelli Funds, LLC (the "Adviser"), believes are undervalued and
have the potential to achieve significant capital appreciation. The Adviser
invests in companies whose stocks are selling at a significant discount to their
"private market value." Private market value is the value the Adviser believes
informed investors would be willing to pay to acquire the entire company. If
investor attention is focused on the underlying asset value of a company due to
expected or actual developments or other catalysts, an investment opportunity to
realize this private market value may exist.
Undervaluation of a company's stock can result from a variety of
factors, such as a lack of investor recognition of:
the underlying value of a company's fixed assets,
the value of a consumer or commercial franchise,
changes in the economic or financial environment affecting
the company, new, improved or unique products or services,
new or rapidly expanding markets, technological developments
or advancements affecting the company or its products, or
changes in governmental regulations, political climate or
competitive conditions.
The actual events that may lead to a significant increase in the value
of a company's securities include:
a change in the company's management or management policies,
an investor's purchase of a large portion of the company's
stock, a merger or reorganization or recapitalization of the
company, a sale of a division of the company, a tender offer
(an offer to purchase investors' shares), the spin-off to
shareholders of a subsidiary, division or other substantial
assets, or the retirement or death of a senior officer or
substantial shareholder of the company.
In selecting investments, the Adviser also considers the market price
of the issuer's securities, its balance sheet characteristics and the perceived
strength of its management.
The Fund's assets will be invested primarily in common stock. Many of
the common stocks the Fund will buy will not pay dividends; instead, stocks will
be bought for the potential that their prices will increase, providing capital
appreciation for the Fund. The value of equity securities will fluctuate due to
many factors, including the past and predicted earnings of the issuer, the
quality of the issuer's management, general market conditions, the forecasts for
the issuer's industry and the value of the issuer's assets. Holders of equity
securities only have rights to value in the company after all debts have been
paid, and they could lose their entire investment in a company that encounters
financial difficulty. Warrants are rights to purchase securities at a specified
time at a specified price.
The Fund may also use the following investment techniques:
Foreign Securities. The Fund may invest up to 25% of its total assets in
the securities of non-U.S. issuers.
Defensive Investments. When opportunities for capital appreciation do
not appear attractive or when adverse market or economic conditions
occur, the Fund may temporarily invest all or a portion of its assets
in defensive instruments. Such instruments include obligations of the
U.S. Government and its agencies and instrumentalities, and short-term
money market investments maturing in less than one year, including
high-quality commercial paper (rated at least "A-1" by Standard &
Poor's Ratings Service, a division of McGraw-Hill Companies, Inc.
("S&P"), or "P-1" by Moody's Investors Service, Inc. ("Moody's"), bank
certificates of deposit and time deposits, repurchase agreements with
respect to such instruments, and certain money market mutual funds.
When following a defensive strategy, the Fund will be less likely to
achieve its investment goal of capital appreciation.
Corporate Reorganizations. The Fund may invest up to 50% of its total
assets in securities for which a tender or exchange offer has been made
or announced and in securities of companies for which a merger,
consolidation, liquidation or similar reorganization proposal has been
announced ("reorganization securities"). Frequently, the holders of
securities of companies involved in such transactions will receive new
securities ("substituted securities") in exchange therefor. No more
than 30% of the Fund's total assets, however, may be invested in
reorganization securities where the Adviser anticipates selling the
reorganization securities or the substituted securities within six
months or less of the initial purchase of the reorganization
securities. This limitation, however, will not apply to reorganization
securities that have been purchased to supplement a position in such
securities held by the Fund for more than six months.
American Depositary Receipts. The Fund may purchase American
Depositary Receipts ("ADRs") or U.S. dollar-denominated securities of
foreign issuers that are not included in the Fund's 25% limitation on
foreign securities. ADRs are receipts issued by U.S. banks or trust
companies with respect to securities of foreign issuers held on deposit
for use in the U.S. securities markets. While ADRs may not necessarily
be denominated in the same currency as the securities into which they
may be converted, many of the risks associated with foreign securities
may also apply to ADRs.
The Fund may also engage to a limited extent in other investment
practices in order to achieve its investment goal.
Investing in the Fund involves the following risks, listed in the order
of importance:
Market Risk. The principal risk of investing in the Fund is market
risk. Market risk is the risk that the prices of the securities held by
the Fund will change due to general market and economic conditions,
perceptions regarding the industries in which the companies issuing the
securities participate and the issuer company's particular
circumstances. These fluctuations may cause a security to be worth less
than it was worth at an earlier time.
Fund and Management Risk. The Fund invests in stocks issued by
companies believed by the Adviser to be trading at a discount to their
private market value (value stocks). The Fund's price may decline
because the market favors other stocks or small capitalization stocks
over stocks of larger companies. If the Adviser is incorrect in its
assessment of the private market values of the securities it holds,
then the value of the Fund's shares may decline.
Risks of Focusing on Corporate Reorganizations. The Fund may invest a
substantial portion of its assets in securities of companies that are
involved or may become involved in corporate transactions such as
tender offers and corporate reorganizations. The principal risk of this
type of investing is that the anticipated transactions may not be
completed at the anticipated time or upon the expected terms, in which
case the Fund may suffer a loss on its investments. In addition, many
companies in the past several years have adopted so-called "poison
pill" and other defensive measures. This may limit tender offers or
other non-negotiated offers for a company and/or prevent competing
offers. Such measures may also limit the amount of securities in any
one issuer that the Fund may buy.
Foreign Risk. Prices of the Fund's investments in foreign securities
may go down because of unfavorable foreign government actions,
political instability or the absence of accurate information about
foreign issuers. Also, a decline in the value of foreign currencies
relative to the U.S. dollar will reduce the value of securities
denominated in those currencies. Foreign securities are sometimes less
liquid and harder to value than securities of U.S. issuers.
MANAGEMENT OF THE FUND
The Adviser. Gabelli Funds, LLC, with principal offices located at One
Corporate Center, Rye, New York 10580-1434, serves as investment adviser to the
Fund. The Adviser makes investment decisions for the Fund and continuously
reviews and administers the Fund's investment program under the supervision of
the Fund's Board of Directors. The Adviser and its affiliates also manage
several other open-end and closed-end investment companies in the Gabelli family
of funds. The Adviser is a New York limited liability company organized in 1999
as successor to Gabelli 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, Inc.
("NYSE").
As compensation for its services and the related expenses borne by the
Adviser, for the fiscal year ended December 31, 1998, the Fund paid the Adviser
an annual fee equal to 1.00% of the value of the Fund's average daily net
assets.
The Portfolio Manager. Mario J. Gabelli, CFA, is responsible for the
day-to-day management of the Fund. Mr. Gabelli has been Chairman, Chief
Executive Officer and Chief Investment Officer of the Adviser and its
predecessor since inception and of its parent company, GAMI, since 1999. Mr.
Gabelli also acts as Chief Executive Officer and Chief Investment Officer of
GAMCO, a wholly-owned subsidiary of GAMI, and is an officer or director of
various other companies affiliated with GAMI. The Adviser relies to a
considerable extent on the expertise of Mr. Gabelli, who may be difficult to
replace in the event of his death, disability or resignation.
Year 2000. As the year 2000 approaches, an issue has emerged regarding
how the software used by the Fund's service providers can accommodate the date
"2000." Failure to adequately address this issue could result in major systems
or process failures which could disrupt the Fund's operations. The Adviser is
working with the Fund's service providers to prepare for the year 2000. Based on
information currently available, the Adviser does not expect that the Fund will
incur significant operating expenses or be required to incur material costs to
be year 2000 compliant. The Fund cannot guarantee, however, that all year 2000
issues will be identified and corrected by January 1, 2000, and any
non-compliant computer system could hurt key Fund operations, such as
shareholder servicing, pricing and trading. In addition, the Year 2000 problem
may adversely affect the companies in which the Fund invests, particularly
companies in foreign countries. For example, these companies may incur
substantial costs to correct the Year 2000 problem, which could lower the value
of such companies' securities and negatively affect the Fund's performance.
CLASSES OF SHARES
Three classes of the Fund's shares are offered in this prospectus -
Class A shares, Class B shares, and Class C shares. Class B and Class C shares
are newly offered. The table below summarizes the differences among the classes
of shares.
a "front-end sales load," or sales charge, is a one-time fee charged
at the time of purchase of shares. a "contingent deferred sales
charge" ("CDSC") is a one-time fee charged at the time of redemption.
a "Rule 12b-1 fee" is a recurring annual fee for distributing shares
and servicing shareholder accounts
based on the Fund's average daily net assets attributable to the
particular class of shares.
<PAGE>
<TABLE>
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Class A Shares Class B Shares Class C Shares
Front-End Sales Load? Yes. The percentage No. No.
declines as the amount
invested increases.
Contingent Deferred Sales No. Yes, for shares redeemed Yes, for shares redeemed
Charge? within eighty-four within twenty-four
months after purchase. months after purchase.
Declines over time.
Rule 12b-1 Fee 0.25% 1.00% 1.00%
Convertible to Another No. Yes. Automatically No.
Class? converts to Class A
shares approximately
eighty-four months after
purchase.
Fund Expense Levels Lower annual expenses Higher annual expenses Higher annual expenses
than Class B or Class C than Class A shares. than Class A shares.
shares.
</TABLE>
In selecting a class of shares in which to invest, you should consider:
the length of time you plan to hold the shares.
the amount of sales charge and Rule 12b-1 fees.
whether you qualify for a reduction or waiver of the Class A sales
charge. that Class B shares convert to Class A shares approximately
eighty-four months after purchase.
<TABLE>
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- ------------------------------------------------------ -----------------------------------------------------
If you . . . then you should consider . . .
- ------------------------------------------------------ -----------------------------------------------------
- ------------------------------------------------------ -----------------------------------------------------
o intend to hold your shares for less than purchasing Class C shares instead of either Class A
eighty-four months or Class B shares
o do not qualify for a reduced or waived front-
end sales load
- ------------------------------------------------------ -----------------------------------------------------
- ------------------------------------------------------ -----------------------------------------------------
o intend to hold your shares for seven years or purchasing Class B shares
instead of either Class A more shares or Class C shares
o do not qualify for a reduced or waived front-
end sales load
- ------------------------------------------------------ -----------------------------------------------------
- ------------------------------------------------------ -----------------------------------------------------
o qualify for a reduced or waived front-end purchasing Class A shares no
matter how long you sales load intend to hold your shares
- ------------------------------------------------------ -----------------------------------------------------
</TABLE>
<PAGE>
Sales Charge - Class A Shares
The sales charge is imposed on Class A shares in accordance with the
following schedule:
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Sales Charge Sales Charge Reallowance
as % of the as % of to Soliciting
Amount of Investment Offering Price* Amount Invested Broker-Dealers
Less than $100,000................................... 5.50% 5.82% 4.50%
$100,000 but under $250,000.......................... 4.50% 4.71% 3.75%
$250,000 but under $500,000.......................... 3.50% 3.63% 3.00%
$500,000 but under $1 million........................ 2.75% 2.83% 2.50%
$1 million or more................................... 2.00% 2.04% 1.75%
*Includes front-end sales load
</TABLE>
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 and agree to make purchases over time.
Certain types of investors are eligible for sales charge waivers.
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 the Fund and other
funds advised by Gabelli Funds, LLC 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 the 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 4.50%,
rather than the 5.50% normally charged on a $4,000 purchase. If you want more
information on volume discounts, call the Distributor at 1-800-GABELLI
(1-800-422-3554) or your broker.
Letter of Intent. If you initially invest at least $1,000 in Class A shares of
the Fund and submit a Letter of Intent to 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. For more information on the Letter of Intent,
call 1-800-GABELLI (1-800-422-3554).
Investors Eligible for Sales Charge Waivers. Class A shares of the Fund may be
offered without a sales charge to (1) employees of Gabelli & Company, Inc.,
Boston Safe Deposit and Trust Company ("Boston Safe"), BFDS, State Street, First
Data Investor Services Group, Inc. and Soliciting Broker-Dealers, employee
benefit plans for those employees and the spouses and minor children of such
employees when orders on their behalf are placed by such employees (the minimum
initial investment for such purchases is $500); (2) the Adviser, GAMCO,
officers, directors, trustees, general partners, directors and employees of
other investment companies managed by the Adviser, employee benefit plans for
such persons and their spouses and minor children when orders on their behalf
are placed by such persons (with no required minimum initial investment), the
term "immediate family" for this purpose refers to a person's spouse, children
and grandchildren (adopted or natural), parents, grandparents, siblings, a
spouse's siblings, a sibling's spouse and a sibling's children; (3) any other
investment company in connection with the combination of such company with the
Fund by merger, acquisition of assets or otherwise; (4) shareholders who have
redeemed shares in the Fund and who wish to reinvest their redemption proceeds
in the Fund, provided the reinvestment is made within 30 days of the redemption;
(5) tax-exempt organizations enumerated in Section 501(c)(3) of the Internal
Revenue Code of 1986 (the "Code") and private, charitable foundations that in
each case make lump-sum purchases of $100,000 or more; (6) qualified employee
benefit plans established pursuant to Section 457 of the Code that have
established omnibus accounts with the Fund; (7) 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
Fund's distributor when they first satisfy these requirements); (8) any unit
investment trusts registered under the Investment Company Act of 1940 (the "1940
Act") which have shares of the Fund as a principal investment; (9) investment
advisory clients of GAMCO and their immediate families; (10) employee
participants of organizations adopting the 401(k) Plan sponsored by the Adviser;
(11) 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 (12) 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 the categories described above should
contact their brokerage firm or the Distributor.
Contingent Deferred Sales Charges
You will pay a CDSC when you redeem:
Class B shares within eighty-four months of buying them.
Class C shares within twenty-four months of buying them.
The CDSC schedule for Class B shares is set forth below. The CDSC
payable upon redemption of Class C shares redeemed within twenty-four months of
purchase is 1%. The CDSC is based on the net asset value at the time of your
investment or the net asset value at the time of redemption, whichever is lower.
<TABLE>
<CAPTION>
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Class B Shares
Years Since Purchase CDSC
- -------------------- ----
First.................................................................. 5.00%
Second................................................................. 4.00%
Third.................................................................. 3.00%
Fourth................................................................. 3.00%
Fifth.................................................................. 2.00%
Sixth.................................................................. 1.00%
Seventh and thereafter................................................. 0.00%
</TABLE>
The Distributor pays sales commissions of 4.00% of the purchase price
of Class B shares of the Fund to brokers at the time of sale that initiate and
are responsible for purchases of such Class B 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.
capital appreciation of shares redeemed.
When you redeem shares, we will assume that you are redeeming first
shares representing reinvestment of dividends and capital gains distributions,
then any appreciation on shares redeemed, and then remaining shares held 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:
redemptions and distributions from retirement plans made after the death or
disability of a shareholder. minimum required distributions made from an IRA or
other retirement plan account after you reach age 59 1/2. involuntary
redemptions made by the Fund. a distribution from a tax-deferred retirement plan
after your retirement. returns of excess contributions to retirement plans
following the shareholder's death or disability.
Conversion Feature - Class B Shares
Class B shares automatically convert to Class A shares of the Fund on
the first business day of the eighty-fifth month following the
month in which you acquired such shares.
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.
You will not pay any sales charge or fees when your shares convert,
nor will the transaction be subject to any tax.
If you exchange Class B shares of one fund for Class B shares of
another fund (See "Exchanges of Shares"), your holding period will
be calculated 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 dollar value of Class A shares you receive will equal the dollar
value of the B shares converted.
The Board of Directors may suspend the automatic conversion of
Class B 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.
The Fund has adopted a plan under Rule 12b-1 (the "Plan") for each of
its classes of shares. Under the Plan, the Fund may use its assets to finance
activities relating to the sale of its shares and the provision of certain
shareholder services.
Rule 12b-1 Fees
The Rule 12b-1 fees vary by class as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Class A Class B Class C
Service Fees None 0.25% 0.25%
Distribution Fees 0.25% 0.75% 0.75%
</TABLE>
These are annual rates based on the value of each Class' average daily net
assets. Because the Rule 12b-1 fees are higher for Class B and Class C shares
than Class A shares, Class B and Class C shares will have higher annual
expenses. Because Rule 12b-1 fees are paid out of the Fund's 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.
PURCHASE OF SHARES
You can purchase the Fund's shares on any day the NYSE is open for
trading (a "Business Day"). You may purchase shares through Gabelli & Company,
Inc. (the "Distributor"), directly from the Fund through the Fund's transfer
agent or through broker-dealers that have entered into selling agreements with
the Distributor ("Soliciting Broker-Dealers").
From a Soliciting Broker-Dealer. You may purchase shares from
Soliciting Broker-Dealers. The Soliciting Broker-Dealer will transmit a
purchase order and payment to State Street Bank and Trust Company
("State Street") on your behalf. Soliciting Broker-Dealers may send you
confirmations of your transactions and periodic account statements
showing your investments in the Fund.
By Mail or In Person. You may open an account by mailing a completed
subscription order form with a check or money order payable to "The
Gabelli Value Fund" to:
By Mail By Personal Delivery
The Gabelli Funds The Gabelli Funds
P.O. Box 8308 The BFDS Building, 7th Floor
Boston, MA 02266-8308 Two Heritage Drive
Quincy, MA 02171
You can obtain a subscription order form by calling 1-800-422-3554.
Checks made payable to a third party and endorsed by the depositor are
not acceptable. For additional investments, send a check to the above
address with a note stating your exact name and account number, the
name of the Fund and class of shares you wish to purchase.
By Bank Wire. To open an account using the bank wire system, first
telephone the Fund at 1-800-422-3554 to obtain a new account number.
Then instruct a Federal Reserve System member bank to wire funds to:
State Street Bank and Trust Company
ABA #011-0000-28 REF DDA #99046187
Re: The Gabelli Value Fund
Class A, B or C Shares
Account #__________
Account of [Registered Owners]
225 Franklin Street, Boston, MA 02110
If you are making an initial purchase, you should also complete and
mail a subscription order form to the address shown under "By Mail."
Note that banks may charge fees for wiring funds, although State Street
will not charge you for receiving wire transfers.
Minimum Investments. Your minimum initial investment must be at least $1,000.
See "Retirement Plans" and "Automatic Investment Plan" regarding minimum
investment amounts applicable to such plans. There is no minimum for subsequent
investments. Soliciting Broker-Dealers may have different minimum investment
requirements.
Share Price. The Fund sells its shares at the "net asset value" next determined
after the Fund receives your completed subscription order form and your payment
in Federal funds, subject to a sales charge in the case of Class A shares. See
"Pricing of Fund Shares" for a description of the calculation of net asset value
and "Class of Shares -- Sales Charge - Class A Shares" for a description of the
sales charges.
Retirement Plans. The Fund has available a form of 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 Fund
through tax-deductible contributions to existing retirement plans for
self-employed persons, known as Keogh or H.R. 10 plans. The Fund does not
currently act as 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" which give participants the right to defer
portions of their compensation for investment on a tax-deferred basis until
distributions are made from the plans. The minimum initial investments for all
such retirement plans is $250. The minimum for all subsequent investments is
$100.
Automatic Investment Plan. The Fund offers 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 Fund reserves the right to (i) reject any purchase order if, in the opinion
of Fund management, it is in the Fund's best interest to do so and (ii) suspend
the offering of shares for any period of time.
REDEMPTION OF SHARES
You can redeem shares on any Business Day without a redemption fee. The
Fund may temporarily stop redeeming its shares when the NYSE is closed or
trading on the NYSE is restricted, when an emergency exists and the Fund cannot
sell its shares or accurately determine the value of its assets, or if the
Securities and Exchange Commission ("SEC") orders the Fund to suspend
redemptions.
The Fund redeems its shares at the net asset value next determined
after the Fund receives your redemption request, subject in some cases to a CDSC
as described under "Classes of Shares - Contingent Deferred Sales Charges"
above. See "Pricing of Fund Shares" for a description of the calculation of net
asset value.
You may redeem shares through the Distributor, directly from the Fund
through its transfer agent or through Soliciting Broker-Dealers.
Through a Broker-Dealer. You may redeem shares through a
broker-dealer which will transmit a redemption order to State
Street on your behalf. A redemption request received from a
broker-dealer 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 to the broker-dealer endorsed for
transfer. A broker-dealer may charge you fees for effecting
redemptions for you.
By Letter. You may mail a letter requesting redemption of
shares to: The Gabelli Funds, P.O. Box 8308, Boston, MA
02266-8308. Your letter should state the name of the Fund and
the share class, the dollar amount or number of shares you are
redeeming and your account number. You must sign the letter in
exactly the same way the account is registered and if there is
more than one owner of 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.
By Telephone. You may redeem your shares in a direct
registered account by calling either 1-800-422-3554 or
1-800-872-5365 (617-328-5000 from outside the United States),
subject to a $25,000 limitation. You may not redeem shares
held through an IRA by telephone. If State Street properly
acts on telephone instructions and follows reasonable
procedures to protect against unauthorized transactions,
neither State Street nor the Fund will be responsible for any
losses due to telephone transactions. You may be responsible
for any fraudulent telephone order as long as State Street or
the Fund takes reasonable measures to verify the order. You
may request that redemption proceeds be mailed to you by check
(if your address has not changed in the prior 30 days),
forwarded to you by bank wire or invested in another mutual
fund advised by the Adviser (see "Exchange of Shares" below).
1. Telephone Redemption By Check. The Fund will make
checks payable to the name in which the account is
registered and normally will mail the check to the
address of record within seven days.
2. Telephone Redemption By Wire. The Fund accepts
telephone requests for wire redemption in amounts of
at least $1,000. The Fund will send a wire to either
a bank designated on your subscription order form or
on a subsequent letter with a guaranteed signature.
The proceeds are normally wired on the next Business
Day.
Through the Automatic Cash Withdrawal Plan. You may
automatically redeem shares on a monthly, quarterly or annual
basis if you have at least $10,000 in your account and if your
account is directly registered with State Street. If you
redeem Class B or Class C shares under this plan, you must pay
the applicable CDSC. Please call the Distributor at
1-800-422-3554 for more information.
Through Involuntary Redemption. The Fund may redeem all
shares in your account (other than an IRA account) if their
value falls below $1,000 as a result of redemptions (but not
as a result of a decline in net asset value). You will be
notified in writing and allowed 30 days to increase the value
of your shares to at least $1,000.
Redemption Proceeds
If you request redemption proceeds by check, the Fund will normally
mail the check to you within seven days after it receives your redemption
request. If you purchased your Fund shares by check, you may not redeem shares
until the check clears, which may take up to 15 days following purchase.
The Fund may pay to you your redemption proceeds wholly or partly in
portfolio securities. Payments would be made in portfolio securities, however,
only in the rare instance that the Fund's Board of Directors believes that it
would be in the Fund's best interest not to pay redemption proceeds in cash.
EXCHANGES OF SHARES
You may exchange shares of the Fund you hold for shares of the same
class of another fund managed by the Adviser or its affiliates based on their
relative net asset values. To obtain a list of the funds whose shares you may
acquire through exchange call 1-800-GABELLI (1-800-422-3554). You may also
exchange your shares for shares of a money market fund managed by the Adviser or
its affiliates. Except for shares exchanged into a money market fund, 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 they had at the time of exchange.
In effecting an exchange:
you must meet the minimum purchase requirements for the fund whose shares
you purchase through exchange. if you are exchanging into Class A shares of a
fund with a higher sales charge, you must pay the difference at the time of
exchange. you may realize a taxable gain or loss. you should read the prospectus
of the fund whose shares you are purchasing (call 1-800-GABELLI (1-800-422-3554)
to obtain the prospectus). you should be aware that brokers may charge a fee for
handling an exchange for you.
<PAGE>
You may exchange share by telephone, by mail or through a broker.
Exchanges 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.
Exchanges by Mail. You may send a written request for exchanges to:
The Gabelli Funds, P.O. Box 8308, Boston, MA 02266-8308. State
your name, your account number, the dollar value or number of
shares you wish to exchange, the name and class of the funds whose
shares you wish to exchange, and the name of the fund whose shares
you wish to acquire.
We may modify or terminate the exchange privilege at any time. You will be
given notice 60 days prior to any material change in the exchange privilege.
PRICING OF FUND SHARES
The Fund's net asset value per share is calculated on each Business
Day. The NYSE is currently scheduled to be closed on New Year's Day, Dr. Martin
Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence
Day, Labor Day, Thanksgiving Day and Christmas Day and on the preceding Friday
or subsequent Monday when a holiday falls on a Saturday or Sunday, respectively.
The Fund's net asset value is calculated separately for each class. It
is determined as of the close of regular trading on the NYSE, normally 4:00
p.m., New York time, and is computed by dividing the value of the Fund's net
assets (i.e. the value of its securities and other assets less its liabilities,
including expenses payable or accrued but excluding capital stock and surplus)
by the total number of its shares outstanding at the time the determination is
made. The Fund uses market quotations in valuing its portfolio securities.
Short-term investments that mature in 60 days or less are valued at amortized
cost, which the Directors of the Fund believe represents fair value.
The Fund may from time to time hold securities that are primarily
listed on foreign exchanges. Such securities may trade on days when the Fund
does not price its shares. Therefore, the Fund's net asset value may change on
days when you are not able to purchase or redeem the Fund's shares.
DIVIDENDS AND DISTRIBUTIONS
Dividends and distributions may differ for different classes of shares.
They will be automatically reinvested for your account at net asset value in
additional shares of the Fund, unless you instruct the Fund to pay all dividends
and distributions in cash. If you elect cash distributions, you must instruct
the Fund either to credit the amounts to your brokerage account or to pay the
amounts to you by check. Dividends from net investment income and distributions
of net realized capital gains earned by the Fund, if any, will be paid annually.
There are no sales or other charges in connection with the reinvestment of
dividends and capital gains distributions. There is no fixed dividend rate, and
there can be no assurance that the Fund will pay any dividends or realize any
capital gains.
<PAGE>
TAX INFORMATION
The Fund expects that its distributions will consist primarily of net
investment income and capital gains, which may be taxable at different rates
depending on the length of time the Fund holds its assets. Dividends out of net
investment income and distributions of realized short-term capital gains are
taxable to you as ordinary income. Distributions of net long-term capital gains
are taxable to you at long-term capital gain rates. The Fund's distributions,
whether you receive them in cash or reinvest them in additional shares of the
Fund, may be subject to federal, state or local taxes. An exchange of the Fund's
shares for shares of another fund will be treated for tax purposes as a sale of
the Fund's shares; therefore, any gain you realize on such a transaction may be
taxable.
Foreign shareholders may be subject to special withholding
requirements.
This summary of tax consequences is intended for general information
only. You should consult a tax adviser concerning the tax consequences of your
investment in the Fund.
<PAGE>
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the
Fund's financial performance for the past five fiscal years of the Fund. The
total returns in the table represent the rate that an investor would have earned
or lost on an investment in the Fund's Class A shares. The Class B and Class C
shares have not previously been offered and therefore do not have a previous
financial history. This information has been audited by PricewaterhouseCoopers
LLP, independent accountants, whose report, along with the Fund's financial
statements and related notes are included in the annual report, which is
available upon request.
Per share amounts for the Fund's Class A shares outstanding throughout each year
ended December 31,
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Operating performance:
Net asset value, beginning of year.... $14.30 $11.52 $11.61 $ 10.49 $ 12.09
----- ------ ------ ------- -------
Net investment income/(loss).......... (0.06) (0.05) (0.02) 0.05 0.09
Net realized and unrealized gain/(loss) on
investments......................... 3.33 5.55 1.04 2.30 (0.09)
------ ---- ---- ----- -------
Total from investment operations..... 3.27 5.50 1.02 2.35 0.00
Distributions to shareholders:
Net investment income............... --- --- --- (0.05) (0.09)
In excess of net investment income--- --- --- --- (0.00)(a)
Net realized gain on investments.... (1.49) (2.72) (1.10) (1.18) (1.50)
In excess of net realized gains....... --- --- --- --- (0.01)
Paid-in capital....................... --- --- (0.01) --- ---
Total distributions................... (1.49) (2.72) (1.11) (1.23) (1.60)
Net asset value, end of year.......... $16.08 $14.30 $11.52 $ 11.61 $ 10.49
===== ====== ====== ======= =======
Total return+ ...................... 23.2% 48.2% 8.7% 22.5% 0.0%
Ratios to average net assets and supplemental data:
Net assets, end of year (in 000's).... $798,812 $596,547 $460,836 $486,144 $436,629
Ratio of net investment income
to average net assets/(loss)...... (0.41)% (0.45)% (0.12)% 0.42% 0.73%
Ratio of operating expenses to
average net assets................ 1.40% 1.42% 1.40% 1.50% 1.50%
Portfolio turnover rate............... 46% 44% 37% 65% 67%
.........
+ Total return represents aggregate total return of a hypothetical $1,000
investment at the beginning of the period and sold at the end of the period,
including reinvestment of dividends, and does not reflect any applicable
sales charge.
(a) Amount represents less than $0.005 per share.
</TABLE>
<PAGE>
THE GABELLI VALUE FUND
Class A,B,C Shares
For More Information:
For more information about the Fund, the following documents are
available free upon request:
Annual/Semi-annual Reports:
The Fund's semi-annual and audited annual reports to shareholders
contain detailed information on the Fund's investments. In the annual
report, you will find a discussion of the market conditions and
investment strategies that significantly affected the Fund's
performance during its last fiscal year.
Statement of Additional Information (SAI):
The SAI provides more detailed information about the Fund, including
its operations and investment policies. It is incorporated by
reference, and is legally considered a part of this prospectus.
You can get free copies of these documents and prospectuses of other
Funds in the Gabelli Family, or request other information and discuss
your questions about the Fund by contacting:
The Gabelli Value Fund Inc.
One Corporate Center
Rye, NY 10580
Telephone 1-800-GABELLI (1-800-422-3554)
www.gabelli.com
You can review the Fund's reports and SAIs at the Public Reference Room
of the Securities and Exchange Commission. You can get text-only
copies:
- For a fee, by writing the Public Reference Section of the Commission,
Washington, D.C. 20549-6009 or calling 1-800-SEC-0330.
- Free from the Commission's Website at http://www.sec.gov.
Investment Company Act File Number: 811-05848.
<PAGE>
THE GABELLI VALUE FUND INC.
Statement of Additional Information
May 1, 1999
This Statement of Additional Information (the "SAI"), which is not a
prospectus, describes The Gabelli Value Fund Inc. The SAI should be read in
conjunction with the Fund's Prospectus for Class A, Class B and Class C shares
dated May 1, 1999, and is incorporated by reference in its entirety into the
Prospectus. For a free copy of the Prospectus, please contact the Fund at the
address, telephone number or Internet web site printed below.
One Corporate Center
Rye, New York 10580-1434
Telephone: 1-800-GABELLI (1-800-422-3554)
http://www.gabelli.com
<PAGE>
P:\SHARED\BOSLEGAL\CLIENTS\GABVALUE\PEAS\1999\SAI99B.DOC
-i-
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
Page
GENERAL INFORMATION...............................................................................................1
INVESTMENT STRATEGIES AND RISKS...................................................................................1
INVESTMENT RESTRICTIONS..........................................................................................11
DIRECTORS AND OFFICERS...........................................................................................12
CONTROL PERSONS AND PRINCIPAL SHAREHOLDERS.......................................................................15
INVESTMENT ADVISORY AND OTHER SERVICES...........................................................................16
DISTRIBUTION PLAN................................................................................................19
PORTFOLIO TRANSACTIONS AND BROKERAGE.............................................................................19
PURCHASE OF SHARES...............................................................................................22
RETIREMENT PLANS.................................................................................................22
REDEMPTION OF SHARES.............................................................................................23
COMPUTATION OF NET ASSET VALUE...................................................................................24
DIVIDENDS, DISTRIBUTIONS AND TAXES...............................................................................24
CALCULATION OF INVESTMENT PERFORMANCE............................................................................27
DESCRIPTION OF THE FUND'S SHARES.................................................................................29
FINANCIAL STATEMENTS.............................................................................................31
APPENDIX A......................................................................................................A-1
</TABLE>
<PAGE>
P:\SHARED\BOSLEGAL\CLIENTS\GABVALUE\PEAS\1999\SAI99B.DOC
- 7 -
GENERAL INFORMATION
The Fund is a non-diversified, open-end, management investment company
and commenced investment operations on September 29, 1989. The Fund was
organized as a corporation under the laws of the State of Maryland on July 20,
1989.
INVESTMENT STRATEGIES AND RISKS
The Prospectus discusses the investment objective of the Fund and the
principal strategies to be employed to achieve that objective. This section
contains supplemental information concerning certain types of securities and
other instruments in which the Fund may invest, additional strategies that the
Fund may utilize and certain risks associated with such investments and
strategies.
Corporate Reorganizations
The Fund may invest up to 50% of its total assets in securities for
which a tender or exchange offer has been made or announced and in securities of
companies for which a merger, consolidation, liquidation or reorganization
proposal has been announced. The primary risk of this type of investing is that
if the contemplated transaction is abandoned, revised, delayed or becomes
subject to unanticipated uncertainties, the market price of the securities may
decline below the purchase price paid by the Fund.
In general, securities that are the subject of such an offer or
proposal sell at a premium to their historic market price immediately prior to
the announcement of the offer or proposal. The increased market price of these
securities may also discount what the stated or appraised value of the security
would be if the contemplated transaction were approved or consummated. These
investments may be advantageous when the discount significantly overstates the
risk of the contingencies involved; significantly undervalues the securities,
assets or cash to be received by shareholders of the prospective portfolio
company as a result of the contemplated transactions; or fails adequately to
recognize the possibility that the offer or proposal may be replaced or
superseded by an offer or proposal of greater value. The evaluation of these
contingencies requires unusually broad knowledge and experience on the part of
the Fund's adviser, Gabelli Funds, LLC (the "Adviser"). The Adviser must
appraise not only the value of the issuer and its component businesses as well
as the assets or securities to be received as a result of the contemplated
transaction, but also the financial resources and business motivation of the
offeror as well as the dynamics of the business climate when the offer or
proposal is in progress.
Although the Fund limits its investments in corporate reorganization
securities that it expects to hold for less than six months, such transactions
may tend to increase the Fund's portfolio turnover ratio thereby increasing its
brokerage and other transaction expenses. The Adviser intends to select
investments of the type described that, in its view, have a reasonable prospect
of capital appreciation that is significant in relation to both the risk
involved and the potential of available alternate investments.
Convertible Securities
The Fund may invest up to 35% of its assets in convertible securities
having a rating lower than "CCC" by Standard & Poor's Rating Service, a division
of McGraw-Hill Companies ("S&P"), "Caa" by Moody's Investors Service, Inc. or,
if unrated, judged by the Adviser to be of comparable quality. A convertible
security entitles the holder to exchange the security for a fixed number of
shares of common stock or other equity security, usually of the same company, at
fixed prices within a specified period of time. A convertible security entitles
the holder to receive the fixed income of a bond or the dividend preference of a
preferred stock until the holder elects to exercise the conversion privilege.
A convertible security's position in a company's capital structure
depends upon its particular provisions. In the case of subordinated convertible
debentures, the holders' claims on assets and earnings are subordinated to the
claims of others and are senior to the claims of common shareholders.
To the degree that the price of a convertible security rises above its
investment value because of a rise in price of the underlying common stock, it
is influenced more by price fluctuations of the underlying common stock and less
by its investment value. The price of a convertible security that is supported
principally by its conversion value will rise along with any increase in the
price of the common stock, and the price generally will decline along with any
decline in the price of the common stock except that the convertible security
will receive additional support as its price approaches investment value. A
convertible security purchased or held at a time when its price is influenced by
its conversion value will produce a lower yield than nonconvertible senior
securities with comparable investment values. Convertible securities may be
purchased by the Fund at varying price levels above their investment values
and/or their conversion values in keeping with the Fund's investment objective.
Many convertible securities in which the Fund will invest have call
provisions entitling the issuer to redeem the security at a specified time and
at a specified price. This is one of the features of a convertible security that
affects valuation. Calls may vary from absolute calls to provisional calls.
Convertible securities with superior call protection usually trade at a higher
premium. If long-term interest rates decline, the interest rates of new
convertible securities will also decline. Therefore, in a falling interest rate
environment companies may be expected to call convertible securities with high
coupons and the Fund would have to invest the proceeds from such called issues
in securities with lower coupons. Thus, convertible securities with superior
call protection will permit the Fund to maintain a higher yield than issues
without call protection.
Investments in Warrants and Rights
Warrants basically are options to purchase equity securities at a
specified price valid for a specific period of time. Their prices do not
necessarily move parallel to the prices of the underlying securities. Rights are
similar to warrants, but normally have a short duration and are distributed
directly by the issuer to its shareholders. Rights and warrants have no voting
rights, receive no dividends and have no rights with respect to the assets of
the issuer. Investing in rights and warrants can provide a greater potential for
profit or loss than an equivalent investment in the underlying security, and,
thus, can be a speculative investment. The value of a right or warrant may
decline because of a decline in the value of the underlying security, the
passage of time, changes in interest rates or in the dividend or other policies
of the company whose equity underlies the warrant or a change in the perception
as to the future price of the underlying security, or any combination thereof.
The Fund may invest up to 5% of its net assets in warrants or rights
(other than those acquired in units or attached to other securities) but will do
so only if the underlying equity securities are deemed appropriate by the
Adviser for inclusion in the Fund's portfolio.
Investments in Foreign Securities
The Fund may invest up to 25% of the value of its total assets in
foreign securities (not including American Depositary Receipts). Foreign
securities investments may be affected by changes in currency rates or exchange
control regulations, changes in governmental administration or economic or
monetary policy (in the United States and abroad) or changed circumstances in
dealings between nations. Dividends paid by foreign issuers may be subject to
withholding and other foreign taxes that may decrease the net return on these
investments as compared to dividends paid to the Fund by domestic corporations.
In addition, there may be less publicly available information about foreign
issuers than about domestic issuers, and foreign issuers are not subject to
uniform accounting, auditing and financial reporting standards and requirements
comparable to those of domestic issuers. Securities of some foreign issuers are
less liquid and more volatile than securities of comparable domestic issuers and
foreign brokerage commissions are generally higher than in the United States.
Foreign securities markets may also be less liquid, more volatile and less
subject to government supervision than those in the United States. Investments
in foreign countries could be affected by other factors not present in the
United States, including expropriation, confiscatory taxation and potential
difficulties in enforcing contractual obligations. Securities purchased on
foreign exchanges may be held in custody by a foreign branch of a domestic bank.
Other Investment Companies
The Fund reserves the right to invest up to 10% of its total assets in
the securities of money market mutual funds, which are open-end investment
companies, and closed-end investment companies, including small business
investment companies, none of which are affiliated with the Fund, Lehman
Brothers Inc. ("Lehman Brothers") or Gabelli & Company, Inc. ("Gabelli &
Company"). No more than 5% of the Fund's total assets may be invested in the
securities of any one investment company, and the Fund may not own more than 3%
of the securities of any investment company. Money market mutual funds are
investment companies that are regulated under the Investment Company Act of
1940, as amended (the "1940 Act"). As open-end management companies like the
Fund, money market mutual funds make continuous offerings of redeemable shares
to the public and stand ready to sell and redeem these shares daily. Generally
speaking, these mutual funds offer investors the opportunity to invest in a
professionally managed diversified portfolio of short-term debt obligations,
including U.S. Treasury bills and notes and other U.S. Government securities,
certificates of deposits, bankers' acceptances, repurchase agreements and
commercial paper. Many of the costs, including the investment advisory fee,
attendant with the operation of money market mutual funds and other management
investment companies are borne by shareholders. When the Fund holds shares of a
money market mutual fund (or other management investment company) it, like other
shareholders, will bear its proportionate share of the fund's costs. These costs
will be borne indirectly by shareholders of the Fund resulting in the payment by
shareholders of duplicative fees, including investment advisory fees.
Investments in Small, Unseasoned Companies and Other Illiquid Securities
The Fund may invest in small, less well-known companies (including
predecessors) which have operated less than three years. The securities of
small, unseasoned companies may have a limited trading market, which may
adversely affect their disposition and can result in their being priced lower
than what might otherwise be the case. If other investment companies and
investors who invest in these issuers trade the same securities when the Fund
attempts to dispose of its holdings, the Fund may receive lower prices than what
might otherwise be obtained. These companies may have limited product lines,
markets or financial resources and may lack management depth. In addition, these
companies are typically subject to a greater degree of changes in earnings and
business prospects than are larger, more established companies. Although
investing in securities of these companies offers potential for above-average
returns if the companies are successful, the risk exists that the companies will
not succeed and the prices of the companies' shares could significantly decline
in value.
The Fund will not invest, in the aggregate, more than 10% of its net
assets in securities for which market quotations are not readily available,
securities which are restricted for public sale, repurchase agreements maturing
or terminable in more than seven days and all other illiquid securities.
Securities freely salable among qualified institutional investors pursuant to
Rule 144A under the Securities Act of 1933, as amended, and as adopted by the
SEC, may be treated as liquid if they satisfy liquidity standards established by
the Board of Directors. The continued liquidity of such securities is not as
well assured as that of publicly traded securities, and accordingly, the Board
of Directors will monitor their liquidity.
Repurchase Agreements
The Fund may enter into repurchase agreements with primary government
securities dealers recognized by the Federal Reserve Bank of New York and member
banks of the Federal Reserve System that furnish collateral at least equal in
value or market price to the amount of their repurchase obligation. In a
repurchase agreement, the Fund purchases a debt security from a seller who
undertakes to repurchase the security at a specified resale price on an agreed
future date. Repurchase agreements are generally for one business day and
generally will not have a duration of longer than one week. The SEC has taken
the position that, in economic reality, a repurchase agreement is a loan by the
Fund to the other party to the transaction secured by securities transferred to
the Fund. The resale price generally exceeds the purchase price by an amount
which reflects an agreed upon market interest rate for the term of the
repurchase agreement. The Fund's risk is primarily that, if the seller defaults,
the proceeds from the disposition of the underlying securities and other
collateral for the seller's obligation may be less than the repurchase price. If
the seller becomes insolvent, the Fund might be delayed in or prevented from
selling the collateral. In the event of a default or bankruptcy by a seller, the
Fund will promptly seek to liquidate the collateral. To the extent that the
proceeds from any sale of the collateral upon a default in the obligation to
repurchase is less than the repurchase price, the Fund will experience a loss.
If the financial institution that is a party to the repurchase agreement
petitions for bankruptcy or becomes subject to the U.S. Bankruptcy Code, the law
regarding the rights of the Fund is unsettled. As a result, under extreme
circumstances, there may be a restriction on the Fund's ability to sell the
collateral and the Fund could suffer a loss.
The Fund may not enter into repurchase agreements which would cause
more than 5% of the value of its total assets to be so invested. This percentage
limitation does not apply to repurchase agreements involving U.S. Government
obligations, or obligations of its agencies or instrumentalities, for a period
of a week or less. The term of each of the Fund's repurchase agreements will
always be less than one year and the Fund will not enter into repurchase
agreements of a duration of more than seven days if, taken together with all
other illiquid securities in the Fund's portfolio, more than 10% of its net
assets would be so invested.
Borrowing. The Fund may borrow money (1) for short-term credits from
banks as may be necessary for the clearance of portfolio transactions, and (2)
from banks for temporary or emergency purposes, including the meeting of
redemption requests. Borrowing for any purpose (including redemptions) may not,
in the aggregate, exceed 15% of the value of the Fund's total assets. Borrowing
for purposes other than meeting redemptions may not exceed 5% of the value of
the Fund's total assets at the time the borrowing is made. The Fund will not
purchase any portfolio securities at any time its borrowings exceed 5% of its
assets. Not more than 20% of the total assets of the Fund may be used as
collateral in connection with the borrowings described above.
Corporate Debt Obligations
The Fund may invest up to 35% of its assets in corporate debt
obligations having a rating lower than a S&P rating of "CCC", a Moody's rating
of "Caa" or, if unrated, judged by the Adviser to be of comparable quality.
Corporate debt obligations include securities such as bonds, debentures, notes
or other similar securities issued by corporations.
The Fund believes that investing in corporate debt obligations is
consistent with the Fund's investment objective of seeking securities of
companies in the public market that can provide significant long-term capital
appreciation. For example, an issuer's ability to repay principal and interest
when due may be underestimated by the market; as a result, that issuer may be
required to pay a higher interest rate or its debt securities may be selling at
a lower market price than issuers of similar strength. When the market
recognizes their inherent value, the Fund anticipates that the price of such
securities will appreciate. In the case of convertible debt securities, the
market's recognition of a company's real value and, in turn, the market value of
its convertible securities, may not occur until some anticipated development or
other catalyst emerges to cause an increase in the market value of the company's
common stock. In the case of any corporate debt obligation under evaluation by
the Adviser for purchase by the Fund, the receipt of income is an incidental
consideration.
The Fund may invest up to 5% of its total assets in securities of
issuers in default. The Fund will invest in securities of issuers in default
only when the Adviser believes that such issuers will honor their obligations or
emerge from bankruptcy protection and the value of these securities will
appreciate. By investing in securities of issuers in default, the Fund bears the
risk that such issuers will not continue to honor their obligations nor emerge
from bankruptcy protection or that the value of such securities will not
appreciate.
The ratings of Moody's and S&P generally represent the opinions of
those organizations as to the quality of the securities that they rate. Such
ratings, however, are relative and subjective, are not absolute standards of
quality and do not evaluate the market risk of the securities. Although the
Adviser uses these ratings as a criterion for the selection of securities for
the Fund, the Adviser also relies on its independent analysis to evaluate
potential investments for the Fund. See Appendix A - "Description of Corporate
Bond Ratings."
Subsequent to its purchase by the Fund, an issue of securities may
cease to be rated or its ratings may be reduced below the minimum required for
purchase by the Fund. In addition, it is possible that Moody's and S&P might not
timely change their ratings of a particular issue to reflect subsequent events.
None of these events will require the sale of the securities by the Fund,
although the Adviser will consider these events in determining whether the Fund
should continue to hold the securities. To the extent that the ratings given by
Moody's or S&P for securities may change as a result of changes in the ratings
systems or due to a corporate reorganization of Moody's and/or S&P, the Fund
will attempt to use comparable ratings as standards for its investments in
accordance with the investment objectives and policies of the Fund.
Low-rated and comparable unrated securities (a) will likely have some
quality and protective characteristics that, in the judgment of the rating
organization, are outweighed by large uncertainties or major risk exposures to
adverse conditions and (b) are predominantly speculative with respect to the
issuer's capacity to pay interest and repay principal in accordance with the
terms of the obligation.
While the market values of low-rated and comparable unrated securities
tend to react less to fluctuations in interest rate levels than the market
values of higher-rated securities, the market values of certain low-rated and
comparable unrated securities also tend to be more volatile and sensitive to
individual corporate developments and changes in economic conditions than
higher-rated securities. In addition, low-rated securities and comparable
unrated securities generally present a higher degree of credit risk. Issuers of
low-rated and comparable unrated securities are often highly leveraged and may
not have more traditional methods of financing available to them so that their
ability to service their debt obligations during an economic downturn or during
sustained periods of rising interest rates may be impaired. The risk of loss due
to default by such issuers is significantly greater because low-rated and
comparable unrated securities generally are unsecured and frequently are
subordinated to the prior payment of senior indebtedness. The Fund may incur
additional expenses to the extent that it is required to seek recovery upon a
default in the payment of principal or interest on its portfolio holdings. The
existence of limited markets for low-rated and comparable unrated securities may
diminish the Fund's ability to obtain accurate market quotations for purposes of
valuing such securities and calculating its net asset value. Moreover, because
not all dealers maintain markets in all low-rated and comparable unrated
securities, there is no established retail secondary market for many of these
securities and the Fund does not anticipate that those securities could be sold
other than to institutional investors.
Fixed-income securities, including low-rated securities and comparable
unrated securities, frequently have call or buy-back features that permit their
issuers to call or repurchase the securities from their holders, such as the
Fund. If an issuer exercises these rights during periods of declining interest
rates, the Fund may have to replace the security with a lower-yielding security,
thus resulting in a decreased return to the Fund.
Short Sales Against the Box
The Fund may, from time to time, make short sales of securities it owns
or has the right to acquire through conversion or exchange of other securities
it owns. A short sale is "against the box" to the extent that the Fund
contemporaneously owns or has the right to obtain, at no added cost, securities
identical to those sold short. In a short sale, the Fund does not immediately
deliver the securities sold or receive the proceeds from the sale. The Fund may
not make short sales or maintain a short position if it would cause more than
25% of the Fund's total assets, taken at market value, to be held as collateral
for the sales.
The Fund may make a short sale in order to hedge against market risks
when it believes that the price of a security may decline, causing a decline in
the value of a security owned by the Fund or security convertible into, or
exchangeable for, the security.
To secure its obligations to deliver the securities sold short, the
Fund will deposit in escrow in a separate account with the Fund's custodian,
Boston Safe Deposit and Trust Company ("Boston Safe"), an amount at least equal
to the securities sold short or securities convertible into, or exchangeable
for, the securities. The Fund may close out a short position by purchasing and
delivering an equal amount of securities sold short, rather than by delivering
securities already held by the Fund, because the Fund may want to continue to
receive interest and dividend payments on securities in its portfolio that are
convertible into the securities sold short.
Options
The Fund may, from time to time, purchase or sell (that is, write)
listed call or put options on securities as a means of achieving additional
return or of hedging the value of the Fund's portfolio. The Fund may write
covered call options in an amount not to exceed 25% of total assets. The Fund
will not purchase options if, as a result, the aggregate cost of all outstanding
options exceeds 10% of the Fund's total assets. A call option is a contract
that, in return for a premium, gives the holder of the option the right to buy
from the writer of the call option the security underlying the option at a
specified exercise price at any time during the term of the option. The writer
of the call option has the obligation, upon exercise of the option, to deliver
the underlying security upon payment of the exercise price during the option
period. A put option is the reverse of a call option, giving the holder the
right to sell the security to the writer and obligating the writer to purchase
the underlying security from the holder.
A call option is "covered" if the Fund owns the underlying security
covered by the call or has an absolute and immediate right to acquire that
security without additional cash consideration (or for additional cash
consideration held in a segregated account by its custodian) upon conversion or
exchange of other securities held in its portfolio. A call option is also
covered if the Fund holds a call on the same security as the call written where
the exercise price of the call held is (1) equal to or less than the exercise
price of the call written or (2) greater than the exercise price of the call
written if the difference is maintained by the Fund in cash, U.S. Government
securities or other high grade short-term obligations in a segregated account
held with its custodian. A put option is "covered" if the Fund maintains cash or
other liquid portfolio securities with a value equal to the exercise price in a
segregated account held with its custodian, or else holds a put on the same
security as the put written where the exercise price of the put held is equal to
or greater than the exercise price of the put written.
If the Fund has written an option, it may terminate its obligation by
effecting a closing purchase transaction. This is accomplished by purchasing an
option of the same series as the option previously written. However, once the
Fund has been assigned an exercise notice, the Fund will be unable to effect a
closing purchase transaction. Similarly, if the Fund is the holder of an option
it may liquidate its position by effecting a closing sale transaction. This is
accomplished by selling an option of the same series as the option previously
purchased. There can be no assurance that either a closing purchase or sale
transaction can be effected when the Fund so desires.
The Fund will realize a profit from a closing transaction if the price
of the transaction is less than the premium received from writing the option or
is more than the premium paid to purchase the option; the Fund will realize a
loss from a closing transaction if the price of the transaction is more than the
premium received from writing the option or is less than the premium paid to
purchase the option. Since call option prices generally reflect increases in the
price of the underlying security, any loss resulting from the repurchase of a
call option may also be wholly or partially offset by unrealized appreciation of
the underlying security. Other principal factors affecting the market value of a
put or a call option include supply and demand, interest rates, the current
market price and price volatility of the underlying security and the time
remaining until the expiration date.
An option position may be closed out only on an exchange which provides
a secondary market for an option of the same series. Although the Fund will
generally purchase or write only those options for which there appears to be an
active secondary market, there is no assurance that a liquid secondary market on
an exchange will exist for any particular option. In such event it might not be
possible to effect closing transactions in particular options, so that the Fund
would have to exercise its options in order to realize any profit and would
incur brokerage commissions upon the exercise of call options and upon the
subsequent disposition of underlying securities for the exercise of put options.
If the Fund, as a covered call option writer, is unable to effect a closing
purchase transaction in a secondary market, it will not be able to sell the
underlying security until the option expires or it delivers the underlying
security upon exercise or otherwise covers the position.
In addition to options on securities, the Fund may also purchase and
sell call and put options on securities indexes. A stock index reflects in a
single number the market value of many different stocks. Relative values are
assigned to the stocks included in an index and the index fluctuates with
changes in the market values of the stocks. The options give the holder the
right to receive a cash settlement during the term of the option based on the
difference between the exercise price and the value of the index. By writing a
put or call option on a securities index, the Fund is obligated, in return for
the premium received, to make delivery of this amount. The Fund may offset its
position in stock index options prior to expiration by entering into a closing
transaction on an exchange or it may let the option expire unexercised.
The fund may write put and call options on stock indexes for the
purposes of increasing its gross income and protecting its portfolio against
declines in the value of the securities it owns or increases in the value of
securities to be acquired. In addition, the Fund may purchase put and call
options on stock indexes in order to hedge its investments against a decline in
value or to attempt to reduce the risk of missing a market or industry segment
advance. Options or stock indexes are similar to options on specific securities.
However, because options on stock indexes do not involve the delivery of an
underlying security, the option represents the holder's right to obtain from the
writer cash in an amount equal to a fixed multiple of the amount by which the
exercise price exceeds (in the case of a put) or is less than (in the case of a
call) the closing value of the underlying stock index on the exercise date.
Therefore, while one purpose of writing such options is to generate additional
income for the Fund, the Fund recognizes that it may be required to deliver an
amount of cash in excess of the market value of a stock index at such time as an
option written by the Fund is exercised by the holder. The writing and
purchasing of options is a highly specialized activity which involves investment
techniques and risks different from those associated with ordinary portfolio
securities transactions. The successful use of protective puts for hedging
purposes depends in part on the Adviser's ability to predict future price
fluctuations and the degree of correlation between the options and securities
markets.
Use of options on securities indexes entails the risk that trading in
the options may be interrupted if trading in certain securities included in the
index is interrupted. The Fund will not purchase these options unless the
Adviser is satisfied with the development, depth and liquidity of the market and
the Adviser believes the options can be closed out.
Price movements in the Fund's portfolio may not correlate precisely
with movements in the level of an index and, therefore, the use of options on
indexes cannot serve as a complete hedge and will depend, in part, on the
ability of the Adviser to predict correctly movements in the direction of the
stock market generally or of a particular industry. Because options on
securities indexes require settlement in cash, the Adviser may be forced to
liquidate portfolio securities to meet settlement obligations.
Although the Adviser will attempt to take appropriate measures to
minimize the risks relating to the Fund's writing of put and call options, there
can be no assurance that the Fund will succeed in any option-writing program it
undertakes.
Lending of Portfolio Securities
The Fund may lend its portfolio securities to broker-dealers or
financial institutions provided that the loans are callable at any time by the
Fund. Loans by the Fund, if and when made, (1) will be collateralized in
accordance with applicable regulatory requirements and (2) will be limited so
that the value of all loaned securities does not exceed 33% of the value of the
Fund's total assets. The Fund, however, currently intends to limit the value of
all loaned securities to no more than 5% of the Fund's total assets.
The Fund lends its portfolio securities in order to generate revenue to
defray certain operating expenses. The advantage of this practice is that the
Fund continues to receive the income on the loaned securities while at the same
time earns interest on the cash amounts deposited as collateral, which will be
invested in short-term obligations.
A loan may generally be terminated by the borrower on one business
day's notice, or by the Fund on five business days' notice. If the borrower
fails to deliver the loaned securities within five days after receipt of notice,
the Fund could use the collateral to replace the securities while holding the
borrower liable for any excess of replacement cost over collateral. As with any
extensions of credit, there are risks of delay in recovery and in some cases
even loss of rights in the collateral should the borrower of the securities fail
financially. However, loans of portfolio securities will only be made to firms
deemed by the Fund's management to be creditworthy and when the income that can
be earned from the loans justifies the attendant risks. The Board of Directors
will oversee the creditworthiness of the contracting parties on an ongoing
basis. Upon termination of the loan, the borrower is required to return the
securities to the Fund. Any gain or loss in the market price during the loan
period would inure to the Fund. The risks associated with loans of portfolio
securities are substantially similar to those associated with repurchase
agreements. Thus, if the party to whom the loan was made petitions for
bankruptcy or becomes subject to the U.S. Bankruptcy Code, the law regarding the
rights of the Fund is unsettled. As a result, under extreme circumstances, there
may be a restriction on the Fund's ability to sell the collateral and the Fund
could suffer a loss.
When voting or consent rights that accompany loaned securities pass to
the borrower, the Fund will follow the policy of calling the loaned securities,
to be delivered within one day after notice, to permit the exercise of such
rights if the matters involved would have a material effect on the Fund's
investment in such loaned securities. The Fund will pay reasonable finder's,
administrative and custodial fees in connection with a loan of its securities.
When Issued, Delayed Delivery Securities and Forward Commitments
The Fund may enter into forward commitments for the purchase of
securities. Such transactions may include purchases on a "when issued" or
"delayed delivery" basis. In some cases, a forward commitment may be conditioned
upon the occurrence of a subsequent event, such as approval and consummation of
a merger, corporate reorganization of debt restructuring, i.e., a when, as and
if issued security. When such transactions are negotiated, the price is fixed at
the time of the commitment, with payment and delivery taking place in the
future, generally a month or more after the date of the commitment. While the
Fund will only enter into a forward commitment with the intention of actually
acquiring the security, the Fund may sell the security before the settlement
date if it is deemed advisable. Securities purchased under a forward commitment
are subject to market fluctuation, and no interest or dividends accrue to the
Fund prior to the settlement date.
The commitment for the purchase of a "when, as and if issued security"
will not be recognized in the portfolio of the Fund until the Adviser determines
that issuance of the security is probable. At such time, the Fund will record
the transaction and, in determining its net asset value, will reflect the value
of the security daily. The Fund will also establish at that time a segregated
account with Boston Safe in which it will maintain cash or liquid portfolio
securities at least equal in value to the amount of its commitments.
Futures Contracts and Options on Futures
The Fund has authorized the Adviser to enter into futures contracts
that are traded on a U.S. exchange or board of trade, provided, however, that
the Fund will not enter into futures contacts for which the aggregate initial
margins and premiums would exceed 5% of the fair market value of the Fund's
assets. Although the Fund has no current intention of using options on futures
contracts, the Fund may at some future date authorize the Adviser to enter into
options on futures contracts, subject to the limitations stated in the preceding
sentence. These investments will be made by the Fund solely for the purpose of
hedging against changes in the value of its portfolio securities and in the
value of securities it intends to purchase. Such investments will only be made
if they are economically appropriate to the reduction of risks involved in the
management of the Fund. In this regard, the Fund may enter into futures
contracts or options on futures for the purchase or sale of securities indices
or other financial instruments including but not limited to U.S. Government
securities. Futures exchanges and trading in the United States are regulated
under the Commodity Exchange Act by the Commodity Futures Trading Commission.
A "sale" of a futures contract (or a "short" futures position) means
the assumption of a contractual obligation to deliver the securities underlying
the contract at a specified price at a specified future time. A "purchase" of a
futures contract (or a "long" futures position) means the assumption of a
contractual obligation to acquire the securities underlying the contract at a
specified price at a specified future time. Certain futures contracts, including
stock and bond index futures, are settled on a net cash payment basis rather
than by the sale and delivery of the securities underlying the futures
contracts.
No consideration will be paid or received by the Fund upon the purchase
or sale of a futures contract. Initially, the Fund will be required to deposit
with the broker an amount of cash or cash equivalents equal to approximately 1%
to 10% of the contract amount (this amount is subject to change by the exchange
or board of trade on which the contract is traded and brokers or members of such
board of trade may charge a higher amount). This amount is known as "initial
margin" and is in the nature of a performance bond or good faith deposit on the
contract. Subsequent payments, known as "variation margin," to and from the
broker will be made daily as the price of the index or security underlying the
futures contract fluctuates. At any time prior to the expiration of a futures
contract, the portfolio may elect to close the position by taking an opposite
position, which will operate to terminate the Fund's existing position in the
contract.
An option on a futures contract gives the purchaser the right, in
return for the premium paid, to assume a position in a futures contract at a
specified exercise price at any time prior to the expiration of the option. Upon
exercise of an option, the delivery of the futures position by the writer of the
option to the holder of the option will be accompanied by delivery of the
accumulated balance in the writer's futures margin account attributable to that
contract, which represents the amount by which the market price of the futures
contract exceeds, in the case of a call, or is less than, in the case of a put,
the exercise price of the option on the futures contract. The potential loss
related to the purchase of an option on futures contracts is limited to the
premium paid for the option (plus transaction costs). Because the value of the
option purchased is fixed at the point of sale, there are no daily cash payments
by the purchaser to reflect changes in the value of the underlying contract;
however, the value of the option does change daily and that change would be
reflected in the net asset value of the portfolio.
As noted above, the Fund may authorize the Adviser to use such
instruments depending upon market conditions prevailing at such time and the
perceived investment needs of the Fund. However, in no event may the Fund enter
into futures contracts or options on futures contracts if, immediately
thereafter, the sum of the amount of margin deposits on the Fund's existing
futures contracts and premiums paid for options would exceed 5% of the value of
the Fund's total assets after taking into account unrealized profits and losses
on any existing contracts. In the event the Fund enters into long futures
contracts or purchases call options, an amount of cash, obligations of the U.S.
Government and its agencies and instrumentalities or other high grade debt
securities equal to the market value of the contract will be deposited and
maintained in a segregated account with the Fund's custodian to collateralize
the positions, thereby insuring that the use of the contract is unleveraged.
The success of hedging depends on the Adviser's ability to predict
movements in the prices of the hedged securities and market fluctuations. The
Adviser may not be able to perfectly correlate changes in the market value of
securities and the prices of the corresponding options or futures. The Adviser
may have difficulty selling or buying futures contracts and options when it
chooses and there may be certain restrictions on trading futures contracts and
options. The Fund is not obligated to pursue any hedging strategy. While hedging
can reduce or eliminate losses, it can also reduce or eliminate gains. In
addition, hedging practices may not be available, may be too costly to be used
effectively or may be unable to be used for other reasons.
INVESTMENT RESTRICTIONS
The Fund's investment objective and the following investment
restrictions are fundamental and may not be changed without the approval of a
majority of the Fund's shareholders, defined as the lesser of (1) 67% of the
Fund's shares present at a meeting if the holders of more than 50% of the
outstanding shares are present in person or by proxy, or (2) more than 50% of
the Fund's outstanding shares. Under these restrictions, the Fund may not:
1. Invest more than 25% of the value of its total assets in
any particular industry (this restriction does not apply to obligations
issued or guaranteed by the U.S. Government or its agencies or
instrumentalities);
2. Purchase securities on margin, but it may obtain short-term
credits from banks as may be necessary for the clearance of purchase
and sales of portfolio securities;
3. Make loans of its assets except for: (a) purchasing debt
securities, (b) engaging in repurchase agreements as set forth in the
Prospectus, and (c) lending its portfolio securities consistent with
applicable regulatory requirements and as set forth in the Prospectus;
4. Borrow money except subject to the restrictions set forth in the
Prospectus;
5. Mortgage, pledge or hypothecate any of its assets except
that, in connection with permissible borrowings mentioned in
restriction (4) above, not more than 20% of the assets of the Fund (not
including amounts borrowed) may be used as collateral and that
collateral arrangements with respect to the writing of options or any
other hedging activity are not deemed to be pledges of assets and these
arrangements are not deemed to be the issuance of a senior security as
set forth below in restriction (11);
6. Except to the extent permitted by restriction (14) below,
invest in any investment company affiliated with the Fund, Lehman
Brothers or Gabelli & Company, invest more than 5% of its total assets
in the securities of any one investment company, own more than 3% of
the securities of any investment company or invest more than 10% of its
total assets in the securities of all other investment companies;
7. Engage in the underwriting of securities, except insofar as
the Fund may be deemed an underwriter under the Securities Act of 1933,
as amended (the "1933 Act"), in disposing of a portfolio security;
8. Invest, in the aggregate, more than 10% of the value of its
net assets in securities for which market quotations are not readily
available, securities which are restricted for public sale, in
repurchase agreements maturing or terminable in more than seven days
and all other illiquid securities;
9. Purchase or otherwise acquire interests in real estate,
real estate mortgage loans or interests in oil, gas or other mineral
exploration or development programs;
10. Purchase or acquire commodities or commodity contracts
except that the Fund may purchase or sell futures contracts and related
options thereon if thereafter no more than 5% of its total assets are
invested in margin and premiums;
11. Issue senior securities, except insofar as the Fund may be
deemed to have issued a senior security in connection with: (a)
borrowing money in accordance with restriction (4) above, (b) lending
portfolio securities, (c) entering into repurchase agreements, (d)
purchasing or selling options contracts, (e) purchasing or selling
futures contracts and related options thereon, or (f) acquiring when
issued or delayed delivery securities and forward commitments;
12. Sell securities short, except transactions involving
selling securities short "against the box";
13. Purchase warrants if, thereafter, more than 5% of the
value of the Fund's net assets would consist of such warrants, but
warrants attached to other securities or acquired in units by the Fund
are not subject to this restriction; or
14. Invest in companies for the purpose of exercising control,
except transactions involving investments in investment companies for
the purpose of effecting mergers and other corporate reorganizations
involving the Fund and such other investment companies.
If any percentage limitation is adhered to at the time of an
investment, a later increase or decrease in the percentage of assets resulting
from a change in the values of portfolio securities or in the amount of the
Fund's assets will not constitute a violation of such restriction.
DIRECTORS AND OFFICERS
Under Maryland law, the Fund's Board of Directors is responsible for
establishing the Fund's policies and for overseeing the management of the Fund.
The Board also elects the Fund's officers who conduct the daily business of the
Fund. The Directors and principal officers of the Fund, their ages, and their
principal occupations for the past five years, are listed below. Unless
otherwise specified, the address of each such person is One Corporate Center,
Rye, New York 10580-1434. Directors deemed to be "interested persons" of the
Fund for purposes of the 1940 Act are indicated by an asterisk.
<PAGE>
Name, Address, Age and
Position(s) with Fund Principal Occupations During Last Five Years
<TABLE>
<CAPTION>
<S> <C>
Mario J. Gabelli, CFA,* 56 Chairman of the Board, Chief Executive Officer and Chief Investment
Chairman, President and Officer of Gabelli Asset Management Inc. (since 1999) and Gabelli
Chief Investment Officer Funds, Inc.; Director or Trustee and Officer of various other
mutual funds advised by Gabelli Funds,
LLC and it affiliates; and Chairman of
the Board and Chief Executive Officer
of Lynch Corporation (diversified
manufacturing and communications
services company); and Director of
East/West Communications Inc.
Bill Callaghan, 54 President of Bill Callaghan Associates Ltd. (executive search
Director company); Director of various other mutual funds advised by Gabelli
Funds, LLC and its affiliates.
Felix J. Christiana, 73 Formerly Senior Vice President of Dollar Dry Dock Savings Bank;
Director Director or Trustee of various other mutual funds advised by
Gabelli Funds, LLC and its affiliates.
Anthony J. Colavita, 64 President and Attorney at Law in the law firm of Anthony J.
Director Colavita, P.C. since 1961; Director or Trustee of various other
mutual funds advised by Gabelli Funds, LLC and its affiliates.
Robert J. Morrissey, 58 Partner in the law firm of Morrissey, Hawkins & Lynch; Director of
Director one other mutual fund advised by Gabelli Funds, LLC
Karl Otto Pohl, * + 69 Member of the Shareholder Committee of Sal Oppenheim Jr. & Cie
Director (private investment bank); Board Member of Gabelli Asset Management
Inc. (investment management), Zurich
Allied (insurance), and TrizecHahn
Corp.; former President of the Deutsche
Bundesbank and Chairman of its Central
Bank Council from 1980 through 1991;
Director or Trustee of all other mutual
funds advised by Gabelli Funds, LLC and
its affiliates.
Anthony R. Pustorino, CPA, 73 Certified Public Accountant; Professor of Accounting, Pace
Director University since 1965. Director or Trustee of various other mutual
funds advised by Gabelli Funds, LLC and its affiliates.
<PAGE>
Name, Address, Age and
Position(s) with Fund Principal Occupations During Last Five Years
Bruce N. Alpert, 47 Executive Vice President and Chief Operating Officer of the
Chief Operating Officer, Adviser; Director and President of Gabelli Advisers, Inc. and an
Vice President and Treasurer officer of all funds advised by Gabelli Funds, LLC and its
affiliates.
James E. McKee, 35 Vice President, General Counsel and Secretary of the Adviser; Vice
Secretary President and General Counsel of GAMCO Investors, Inc. since 1993
and Gabelli Asset Management Inc. since 1999; Secretary of all
Funds advised by Gabelli Funds, LLC and Gabelli Advisers, Inc.
since August 1995.
- ---------------------
+ Mr. Pohl is a director of the parent company of the Adviser.
</TABLE>
No director, officer or employee of Gabelli & Company or the Adviser or
of any affiliate of Gabelli & Company or the Adviser will receive any
compensation from the Fund for serving as an officer or director of the Fund.
The Fund pays each of its Directors who is not a director, officer or employee
of the Adviser or any of their affiliates, $10,000 per annum plus $1,000 per
meeting attended in person and reimburses each Director for related travel and
out-of-pocket expenses. The Fund also pays each Director serving as Chairman of
the Audit, Investment, Proxy or Nominating Committees $2,500 per annum. For the
year ended December 31, 1998, such paid fees amounted to $95,000.
Mr. Morrissey (Chairman) and Mr. Callaghan are members of the Fund's
Investment Committee. The Investment Committee reviews investment related
matters as needed.
Each Director serves as a director or trustee of certain other mutual
funds for which Gabelli Funds, LLC serves as Adviser and Gabelli & Company
serves as Distributor.
The following table sets forth certain information regarding the
compensation of the Fund's Directors and officers. Except as disclosed below, no
executive officer or person affiliated with the Fund received compensation in
excess of $60,000 from the Fund for the fiscal year ended December 31, 1998.
<PAGE>
Compensation Table
<TABLE>
<CAPTION>
<S> <C> <C>
Total Compensation
Aggregate Compensation from the From the Fund and
Name of Person and Position Fund Fund Complex *
- --------------------------- ---- -------------
Mario J. Gabelli $ 0 $ 0
Chairman of the Board
Bill Callaghan $14,000 $39,000 (3)
Director
Felix J. Christiana $15,000 $88,500 (10)
Director
Anthony J. Colavita $16,500 $81,500 (14)
Director
Robert J. Morrissey $15,500 $24,500 (3)
Director
Karl Otto Pohl $14,000 $102,466 (15)
Director
Anthony R. Pustorino $20,000 $100,500 (10)
Director
* Represents the total compensation paid to such persons during the fiscal
year ending December 31, 1998 by investment companies (including the Fund)
from which such person receives compensation that are part of the same fund
complex as the Fund because they have common or affiliated investment
advisers. The number in parentheses represents the number of such
investment companies.
</TABLE>
CONTROL PERSONS AND PRINCIPAL SHAREHOLDERS
As of April 1, 1999, the following persons owned of record or beneficially
5% or more of the Fund's outstanding Shares:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Name and Address % of Class Nature of
Ownership
Stephen Nordholdt, Trustee 8.6% Beneficial
ICMA Retirement Trust
U/A DTD 12-31-83
c/o Nancy Martin
777 North Capital Street, N.E. Ste. 600
Washington, DC 20002-4240
</TABLE>
As of April 1, 1999, as a group the Directors and officers of the Fund
owned less than 1% of the outstanding shares of common stock of the Fund.
<PAGE>
INVESTMENT ADVISORY AND OTHER SERVICES
Investment Adviser
The Adviser is a New York limited liability company with principal
offices located at One Corporate Center, Rye, New York 10580-1434. The Adviser
also serves as investment adviser to three closed-end investment companies and
twelve open-end investment companies. The Adviser is a registered investment
adviser under the Investment Advisers Act of 1940, as amended. Mr. Mario J.
Gabelli may be deemed a controlling person of the Adviser on the basis of his
controlling interest of the parent company of the Adviser. GAMCO Investors, Inc.
("GAMCO"), an affiliate of the Adviser, acts as investment adviser for
individuals, pension trusts, profit-sharing trusts and endowments, and had
aggregate assets in excess of $8.0 billion under its management as of December
31, 1998.
The Adviser and its affiliates act as investment advisers to other
clients that may invest in the same securities. As a result, clients of the
Adviser and its affiliates hold substantial positions in the same issuers of
securities. If a substantial position in an issuer is held, liquidity and
concentration considerations may limit the ability of the Adviser to add to the
position on behalf of the Fund or other clients or to readily dispose of the
position. Although the availability at acceptable prices of such securities may
from time to time be limited, it is the policy of the Adviser and its affiliates
to allocate purchases and sales of such securities in a manner believed by the
Adviser to be equitable to all clients, including the Fund. The Adviser may on
occasion give advice or take action with respect to other clients that differs
from the actions taken with respect to the Fund. The Fund may invest in the
securities of companies which are investment management clients of GAMCO. In
addition, portfolio companies or their officers or directors may be minority
shareholders of the Adviser or its affiliates.
The Adviser currently serves as investment adviser to the Fund pursuant
to an investment advisory agreement dated February 17, 1999 (the "Advisory
Agreement"), which was most recently approved by the Fund's Board of Directors,
including a majority of the Directors who are not "interested persons" of the
Fund, at a Board Meeting held on February 17, 1999. Pursuant to the Advisory
Agreement, the Fund employs the Adviser to act as its investment adviser and to
oversee the administration of all aspects of the Fund's business affairs and to
provide, or arrange for others whom it believes to be competent to provide
certain services. The Adviser generally is responsible for the investment and
management of the Fund's assets, subject to and in accordance with the Fund's
investment objective, policies, and restrictions as stated in the Prospectus and
herein. In discharging its responsibility, the Adviser determines and monitors
the investments of the Fund. In addition, the Adviser has full authority to
implement its determinations by selecting and placing individual transactions on
behalf of the Fund.
Under the Advisory Agreement, the Adviser also provides or arranges for
the following services: (i) maintains the Fund's books and records, such as
journals, ledger accounts and other records in accordance with applicable laws
and regulations to the extent not maintained by the Fund's custodian, transfer
agent or dividend disbursing agent; (ii) transmitting purchase and redemption
orders for Fund shares to the extent not transmitted by the Fund's distributor
or others who purchase and redeem shares; (iii) initiating all money transfers
to the Fund's custodian and from the Fund's custodian for the payment of the
Fund's expenses, investments, dividends and share redemptions; (iv) reconciling
account information and balances among the Fund's custodian, transfer agent,
distributor, dividend disbursing agent and the Adviser; (v) providing the Fund,
upon request, with such office space and facilities, utilities and office
equipment as are adequate for the Fund's needs; (vi) preparing, but not paying
for, all reports by the Fund to its shareholders and all reports and filings
required to maintain the registration and qualification of the Fund's shares
under federal and state law including periodic updating of the Fund's
registration statement and Prospectus (including its SAI); (vii) supervising the
calculation of the net asset value of the Fund's shares; and (viii) preparing
notices and agendas for meetings of the Fund's shareholders and the Fund's Board
of Directors as well as minutes of such meetings in all matters required by
applicable law to be acted upon by the Board of Directors.
The Advisory Agreement provides that, absent willful misfeasance, bad
faith, gross negligence or reckless disregard of duty, the Adviser shall not be
liable to the Fund for any error of judgment or mistake of law or for any loss
sustained by the Fund. The Fund has agreed by the terms of the Advisory
Agreement that the word "Gabelli" in its name is derived from the name of the
Adviser that in turn is derived from the name of Mario J. Gabelli; that the name
is the property of the Adviser for copyright and other purposes; and that,
therefore, the name may freely be used by the Adviser for other investment
companies, entities or products. The Fund has further agreed that in the event
that for any reason, the Adviser ceases to be its investment adviser, the Fund
will, unless the Adviser otherwise consents in writing, promptly take all steps
necessary to change its name to one which does not include "Gabelli."
The Advisory Agreement is terminable without penalty by the Fund on 60
days' written notice when authorized either by majority vote of its outstanding
voting shares or by vote of a majority of its Board of Directors, or by the
Adviser on 60 days' written notice, and will automatically terminate in the
event of its "assignment" as defined by the 1940 Act. The Advisory Agreement
provides that, unless terminated, it will remain in effect from year to year as
long as such continuance is annually approved by the Board of Directors or by
majority vote of its outstanding voting shares and, in either case, by a
majority vote of the Directors who are not parties to the Advisory Agreement or
"interested persons," as defined by the 1940 Act, of any such party cast in
person at a meeting called specially for the purpose of voting on the
continuance of the Advisory Agreement.
As compensation for its services and the related expenses borne by the
Adviser, the Adviser is paid a fee computed and payable monthly, equal, on an
annual basis, to 1.00% of the value of the Fund's average daily net assets,
which is higher than that paid by most mutual funds. For the fiscal years ended
December 31, 1996, December 31, 1997 and December 31, 1998, the Fund paid
investment advisory fees to the Adviser amounting to $4,983,647, $5,036,742 and
$7,237,856, respectively.
Sub-Administrator
First Data Investor Services Group, Inc. (the "Sub-Administrator"), a
subsidiary of First Data Corporation, serves as Sub-Administrator to the Fund
pursuant to a Sub-Administration Agreement with the Adviser (the
"Sub-Administration Agreement"). Under the Sub-Administration Agreement, the
Sub-Administrator (a) assists in supervising all aspects of the Fund's
operations except those performed by the Adviser under its advisory agreement
with the Fund; (b) supplies the Fund with office facilities (which may be in the
Sub-Administrator's own offices), statistical and research data, data processing
services, clerical, accounting and bookkeeping services, including, but not
limited to, the calculation of the net asset value of shares in the Fund,
internal auditing and legal services, internal executive and administrative
services, and stationery and office supplies; (c) prepares and distributes
materials for all Fund Board of Directors' Meetings including the mailing of all
Board materials and collates the same materials into the Board books and assists
in the drafting of minutes of the Board Meetings; (d) prepares reports to Fund
shareholders, tax returns and reports to and filings with the SEC and state
"Blue Sky" authorities; (e) calculates the Fund's net asset value per share,
provides any equipment or services necessary for the purpose of pricing shares
or valuing the Fund's investment portfolio and, when requested, calculates the
amounts permitted for the payment of distribution expenses under any
distribution plan adopted by the Fund; (f) provides compliance testing of all
Fund activities against applicable requirements of the 1940 Act and the rules
thereunder, the Internal Revenue Code of 1986, as amended (the "Code"), and the
Fund's investment restrictions; (g) furnishes to the Adviser such statistical
and other factual information and information regarding economic factors and
trends as the Adviser from time to time may require; and (h) generally provides
all administrative services that may be required for the ongoing operation of
the Fund in a manner consistent with the requirements of the 1940 Act.
For the services it provides, the Advisor pays the Sub-Administrator an
annual fee based on the value of the aggregate average daily net assets of all
funds under its administration managed by the Adviser as follows: up to $1
billion - 0.10%; $1 billion to $1.5 billion - 0.08%; $1.5 billion to $3 billion
- - 0.03%; over $3 billion - 0.02%.
Distributor
The Fund has entered into a distribution agreement with Gabelli &
Company, Inc. the Fund's Distributor, and may enter into substantially identical
arrangements with other firms. Gabelli & Company, a New York corporation which
is a majority owned subsidiary of the Adviser, has its principal offices at One
Corporate Center, Rye, New York 10580. Gabelli & Company continuously solicits
offers for the purchase of shares of the Fund on a best efforts basis. Expenses
normally attributable to the sale of Fund shares which are not paid by the Fund
(see "Management of the Fund" and "Purchase of Share - Distribution Plan" in the
Prospectus) are paid by Gabelli & Company. Gabelli & Company may enter into
selling agreements with registered broker-dealers ("Soliciting Broker-Dealers")
pursuant to which Gabelli & Company may reallow the sales charge to Soliciting
Broker-Dealers in accordance with the schedule set forth in the Prospectus under
"Purchase of Shares."
For the fiscal years ended December 31, 1996, December 31, 1997, and
December 31, 1998, commissions (sales charges) on sales of the Fund's shares
received by Gabelli & Company were $227,803, $303,952 and $483,819,
respectively.
Counsel
Willkie Farr & Gallagher, 787 Seventh Avenue, New York, New York 10019,
serves as the Fund's legal counsel.
Independent Accountants
The financial statements included in the SAI have been so included in
reliance on the report of PricewaterhouseCoopers LLP, independent accountants,
given on the authority of that firm as experts in auditing and accounting.
PricewaterhouseCoopers LLP serves as the Fund's independent accountants and in
that capacity audits the Fund's annual financial statements.
Custodian, Transfer Agent and Dividend Disbursing Agent
Boston Safe, an indirect wholly owned subsidiary of Mellon Bank
Corporation, is located at One Boston Place, Boston, Massachusetts 02108, and
acts as custodian of the Fund's cash and securities. Boston Financial Data
Services, Inc. ("BFDS"), an affiliate of State Street Bank and Trust Company
("State Street"), is located at the BFDS Building, Two Heritage Drive, Quincy,
Massachusetts 02171 and acts as the Fund's transfer agent and dividend
disbursing agent. Neither Boston Safe, BFDS nor State Street assists in or is
responsible for investment decisions involving assets of the Fund.
<PAGE>
DISTRIBUTION PLAN
The Fund has adopted a plan of distribution (the "Plan") pursuant to
Rule 12b-1 under the 1940 Act. Under the Plan, the Fund will make monthly
payments to registered broker-dealers, including Gabelli & Company, who have
entered into an agreement with the Fund (each, a "Designated Dealer") for
activities intended to result in the distribution of Fund shares as described
below.
Payments under the Plan are not tied exclusively to the distribution
expenses actually incurred by Designated Dealers and such payments may exceed
their distribution expenses. Expenses incurred in connection with the offering
and sale of shares may include, but are not limited to, payments to the
Designated Dealer's (or its affiliates') sales personnel for selling shares of
the Fund; costs of printing and distributing the Fund's Prospectus, SAI and
sales literature; an allocation of overhead and other Designated Dealer branch
office distribution-related expenses; payments to and expenses of persons who
provide support services in connection with the distribution of shares of the
Fund; and financing costs on the amount of the foregoing expenses.
The Board of Directors will evaluate the appropriateness of the Plan
and its payment terms on a continuing basis and in doing so will consider all
relevant factors, including expenses borne by Designated Dealers in the current
year and in prior years and amounts received under the Plan.
Under its terms, the Plan remains in effect so long as its continuance
is specifically approved at least annually by vote of the Fund's Board of
Directors, including a majority of the Directors who are not interested persons
of the Fund and who have no direct or indirect financial interest in the
operation of the Fund ("Independent Directors"). The Plan may not be amended to
increase materially the amount to be spent for the services provided by the
Designated Dealers thereunder without shareholder approval, and all material
amendments of the Plan must also be approved by the Directors in the manner
described above. The Plan may be terminated at any time, without penalty, by
vote of a majority of the Independent Directors, or by a vote of a majority of
the outstanding voting securities of the Fund (as defined in the 1940 Act).
Under the Plan, Designated Dealers will provide the Directors periodic reports
of amounts expended under the Plan and the purpose for which such expenditures
were made. For the fiscal year ended December 31, 1998, the Fund made aggregate
distribution payments of approximately $1,814,756 to Designated Dealers pursuant
to the Plan. Such payments funded expenditures of approximately $350,356 for
support services, $174,100 to sales personnel of Designated Dealers, $21,200 for
advertising expenses and $104,700 for printing and mailing expenses and also
payments of $1,164,400 to selected dealers.
PORTFOLIO TRANSACTIONS AND BROKERAGE
Under the Advisory Agreement, the Adviser is authorized on behalf of
the Fund to employ brokers to effect the purchase or sale of portfolio
securities with the objective of obtaining prompt, efficient and reliable
execution and clearance of such transactions at the most favorable price
obtainable at reasonable expense ("best execution"). The Adviser is permitted to
(1) direct Fund portfolio brokerage to Gabelli & Company, a broker-dealer
affiliate of the Adviser; (2) pay commissions to brokers other than Gabelli &
Company which are higher than might be charged by another qualified broker to
obtain brokerage and/or research services considered by the Adviser to be useful
or desirable for its investment management of the Fund and/or other advisory
accounts under the management of the Adviser and any investment adviser
affiliated with it; and (3) consider the sales of shares of the Fund by brokers
other than Gabelli & Company as a factor in its selection of brokers for Fund
portfolio transactions.
Transactions on U.S. stock exchanges involve the payment of negotiated
brokerage commissions, which may vary among different brokers. Transactions in
securities other than those for which a securities exchange is the principal
market are generally executed through the principal market maker. However, such
transactions may be effected through a brokerage firm and a commission paid
whenever it appears that the broker can obtain a more favorable overall price.
In general, there may be no stated commission in the case of securities traded
on the over-the-counter markets, but the prices of those securities may include
undisclosed commissions or markups. Option transactions will usually be effected
through a broker and a commission will be charged. The Fund also expects that
securities will be purchased at times in underwritten offerings where the price
includes a fixed amount of compensation generally referred to as a concession or
discount.
The Adviser and its affiliates currently serve as investment adviser to
a number of investment companies and private account clients and may in the
future act as advisers to others. It is the policy of the Adviser and its
affiliates to allocate investments suitable and appropriate for each such client
in a manner believed by the Adviser to be equitable to each client. In making
such allocations among the Fund and other client accounts, the main factors
considered are the respective investment objectives, the relative size of
portfolio holdings of the same or comparable securities, the availability of
cash for investment, the size of investment commitments generally held and the
opinions of the persons responsible for managing the portfolios of the Fund and
other client accounts.
The following table sets forth certain information regarding the Fund's
payment of brokerage commissions to Gabelli & Company and Keeley Investment
Corp. ("Keeley"). A significant shareholder of Keeley is a director of a company
that is an affiliate of the Adviser.
<TABLE>
<CAPTION>
<S> <C> <C>
Fiscal Year Ended
December 31, Commissions Paid
Total Brokerage Commissions 1996 $ 418,636
1997 $611,283
1998 $721,108
Commissions paid to Gabelli & Company 1996 $ 110,275
1997 $226,899
1998 $381,995
Commissions paid to Keeley Investment Corp. 1996 $ 5,110
1997 $ 900
1998 $ 9,755
% of Total Brokerage Commissions paid to Gabelli & Company 1998 52.97%
<PAGE>
Fiscal Year Ended
December 31, Commissions Paid
% of Total Brokerage Commissions paid to Keeley Investment Corp. 1998 1.35%
% of Total Transactions involving Commissions paid to 1998 49.25%
Gabelli & Company
% of Total Transactions involving Commissions paid to 1998 0.48%
Keeley Investment Corp.
</TABLE>
The policy of the Fund regarding purchases and sales of securities and
options for its portfolio is that primary consideration will be given to
obtaining best execution. The Adviser may also give consideration to placing
portfolio transactions with those brokers and dealers who also furnish research
and other services to the Fund or the Adviser of the type described in Section
28(e) of the Securities Exchange Act of 1934, as amended. In doing so, the Fund
may also pay higher commission rates than the lowest available to obtain
brokerage and research services provided by the broker effecting the transaction
for the Fund and for other advisory accounts over which the Adviser or its
affiliates exercise investment discretion. These services may include, but are
not limited to, any one or more of the following: information as to the
availability of securities for purchase or sale; statistical or factual
information or opinions pertaining to investments; wire services; and appraisals
or evaluations of portfolio securities. Since it is not feasible to do so, the
Adviser does not attempt to place a specific dollar value on such services or
the portion of the commission which reflects the amount paid for such services
but must be prepared to demonstrate a good faith basis for its determination.
Investment research obtained by allocations of Fund brokerage is used
to augment the scope and supplement the internal research and investment
strategy capabilities of the Adviser but does not reduce the overall expenses of
the Adviser to any material extent. Such investment research may be in written
form or through direct contact with individuals and includes information on
particular companies and industries as well as market, economic or institutional
activity areas. Research services furnished by brokers through which the Fund
effects securities transactions are used by the Adviser and its advisory
affiliates in carrying out their responsibilities with respect to all of their
accounts over which they exercise investment discretion. Such investment
information may be useful only to one or more of the other accounts of the
Adviser and its advisory affiliates, and research information received for the
commissions of those particular accounts may be useful both to the Fund and one
or more of such other accounts.
Neither the Fund nor the Adviser has any agreement or legally binding
understanding with any broker regarding any specific amount of brokerage
commissions which will be paid in recognition of such services. However, in
determining the amount of portfolio commissions directed to such brokers, the
Adviser does consider the level of services provided and, based on such
determinations, has allocated brokerage commissions of $721,108 on portfolio
transactions in the principal amounts of $506,087,023 during 1998.
The Adviser may also place orders for the purchase or sale of portfolio
securities with Gabelli & Company or other affiliates of the Adviser, when it
appears that Gabelli & Company can obtain a price and execution which is at
least as favorable as that obtainable by other qualified brokers. As required by
Rule 17e-1 under the 1940 Act, the Board of Directors has adopted "Procedures"
that provide that the commissions paid to Gabelli & Company or affiliated
brokers on stock exchange transactions must be consistent with those charged by
such firms in similar transactions to unaffiliated clients that are comparable
to the Fund. Rule 17e-1 under the 1940 Act and the Procedures contain
requirements that the Board, including those directors who are not "interested
persons" of the Fund, conduct periodic compliance reviews of such brokerage
allocations and the Procedures to determine their continuing appropriateness.
The Adviser is also required to furnish reports and maintain records in
connection with the reviews.
To obtain the best execution of portfolio trades on The New York Stock
Exchange, Inc. ("NYSE"), Gabelli & Company controls and monitors the execution
of such transactions on the floor of the NYSE through independent "floor
brokers" or the Designated Order Turnaround System of the NYSE. These
transactions are then cleared, confirmed to the Fund for the account of Gabelli
& Company, and settled directly with the custodian of the Fund by a clearing
house member firm which remits the commission less its clearing charges to
Gabelli & Company. Pursuant to an agreement with the Fund, Gabelli & Company
pays all charges incurred for these services and reports at least quarterly to
the Board of Directors the amount of the expenses and commissions for its
brokerage services, which is subject to review and approval of the Board of
Directors including those directors who are not "interested persons" of the
Fund. Gabelli & Company may also effect Fund portfolio transactions in the same
manner and pursuant to the same arrangements on other national securities
exchanges that adopt direct access rules similar to those of the NYSE. In
addition, Gabelli & Company may directly execute transactions for the Fund on
the floor of any exchange, provided: (i) the Board of Directors has expressly
authorized Gabelli & Company to effect such transactions; and (ii) Gabelli &
Company annually advises the Fund of the aggregate compensation it earned on
such transactions.
PURCHASE OF SHARES
Payment for shares purchased through a brokerage firm is
generally due on the third business day after purchases are effected (each such
day being a "Settlement Date"). When payment is made to a brokerage firm before
a Settlement Date, unless otherwise directed by the investor, the monies may be
held as a free credit balance in the investor's brokerage account and the
brokerage firm may benefit from the temporary use of these monies. The investor
may designate another use for the monies prior to the Settlement Date, such as
investment in a money market fund. If the investor instructs a brokerage firm to
invest the monies in a money market fund, the amount of the investment will be
included as part of the average daily net assets of both the Fund and the money
market fund, and any affiliates of Gabelli & Company which serve the funds in an
investment advisory, administrative or other capacity will benefit from the fact
that they are receiving fees from both investment companies computed on the
basis of their average daily net assets. The Board of Directors of the Fund is
advised of the benefits to Gabelli & Company resulting from three-day settlement
procedures and will take such benefits into consideration when reviewing the
distribution agreement for continuance.
.........Gabelli & Company imposes no restrictions on the transfer of
shares held by it for clients in "street name" in either certificate or
uncertificated form. The Fund has agreed to indemnify Gabelli & Company against
certain liabilities, including liabilities arising under the 1933 Act.
RETIREMENT PLANS
Under the Code, individuals may make wholly or partly tax-deductible
IRA contributions of up to $2,000 annually, depending on whether they are active
participants in an employer-sponsored retirement plan and on their income level.
However, dividends and distributions held in the account are not taxed until
withdrawn in accordance with the provisions of the Code. An individual with a
non-working spouse may establish a separate IRA for the spouse under the same
conditions and contribute a combined maximum of $4,000 annually to both IRAs
provided that no more than $2,000 may be contributed to the IRA of either
spouse.
Investors may be eligible to make contributions to a new type of
individual retirement account (a "Roth IRA"). An investor can open a Roth IRA if
he or she meets certain income limits specified in the Code. Any contributions
made by an investor to a Roth IRA are nondeductible for U.S. Federal income tax
purposes. Distributions from a Roth IRA are not included in the investor's gross
income and are not subject to a 10% penalty for early withdrawal if the
distributions are made after the end of the five-year period beginning with the
first tax year in which the investor made a contribution to the Roth IRA and the
distributions meet other criteria set forth in the Code. The maximum annual
aggregate contribution that can be made to IRAs and Roth IRAs is $2,000. In
addition, certain low and middle-income investors may open an education
individual retirement account (an "Education IRA"). Eligible individuals are
permitted to contribute up to $500 per year per beneficiary under 18 years old
to an Education IRA. The minimum initial investment for an Education IRA through
the Fund is $250. A distribution from an Education IRA is generally excludable
from gross income to the extent that such distribution does not exceed qualified
higher education expenses incurred by the beneficiary during the year in which
the distribution is made.
Investors should be aware that they may be subject to penalties or
additional tax on contributions to or withdrawals from IRAs or other retirement
plans which are not permitted by the applicable provisions of the Code. Persons
desiring information concerning investments through IRAs or other retirement
plans should write or telephone their brokerage firm or Gabelli & Company.
REDEMPTION OF SHARES
Redemption requests received after the close of trading on the NYSE
will be effected at the net asset value per share as next determined. The Fund
normally transmits redemption proceeds with respect to redemption requests made
through a brokerage firm for credit to the shareholder's account at no charge
within seven days after receipt of a redemption request or by check directly to
the shareholder. Generally, these funds will not be invested for the
shareholder's benefit without specific instruction, and the brokerage firm will
benefit from the use of temporarily uninvested funds. Redemption proceeds with
respect to redemption requests made through Gabelli & Company normally will be
transmitted by the Fund's transfer agent to the shareholder by check within
seven days after receipt of a redemption request or to a shareholder's brokerage
account maintained by Gabelli & Company. A shareholder who anticipates the need
for more immediate access to his or her investment should purchase shares with
federal funds, bank wire or by a certified or cashier's check.
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 of the Fund and taken at their value used in determining the Fund's
net asset value per share as described below under "Computation of Net Asset
Value"), 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
interests of the Fund. If payment for shares redeemed is made wholly or partly
in portfolio securities, brokerage costs may be incurred by the investor in
converting the securities to cash. The Fund will not distribute in-kind
portfolio securities that are not readily marketable. The Fund has filed a
formal election with the SEC pursuant to which the Fund will only effect a
redemption in portfolio securities where the particular shareholder of record is
redeeming more than $250,000 or 1% of the Fund's total net assets, whichever is
less, during any 90 day period. In the opinion of the Fund's management,
however, the amount of a redemption request would have to be significantly
greater than $250,000 or 1% of total net assets before a redemption wholly or
partly in portfolio securities was made.
Cancellation of purchase orders for Fund shares (as, for example, when
checks submitted to purchase shares are returned unpaid) causes a loss to be
incurred when the net asset value of the Fund shares on the date of cancellation
is less than on the original date of purchase. The investor is responsible for
the loss, and the Fund, to the extent permissible by law, may reimburse itself
or Gabelli & Company for the loss by automatically redeeming shares from any
account registered at any time in that shareholder's name, or by seeking other
redress. In the event shares held in the account of the shareholder are not
sufficient to cover such loss, Gabelli & Company will promptly reimburse the
Fund for the amount of such unrecovered loss.
COMPUTATION OF NET ASSET VALUE
For purposes of determining the Fund's net asset value per share,
readily marketable portfolio securities listed on the NYSE are valued, except as
indicated below, at the last sale price reflected at the close of the regular
trading session of the NYSE on the business day as of which such value is being
determined. If there has been no sale on such day, the securities are valued at
the mean of the closing bid and asked prices on such day. If no asked prices are
quoted on such day, then the security is valued at the closing bid price on such
day. If no bid or asked prices are quoted on such day, then the security is
valued by such method as the Board of Directors shall determine in good faith to
reflect its fair market value, although the actual calculation may be done by
others. Options are priced at 4:15 p.m. and are generally valued at the last
sale price or, in the absence of a last sale price, the last offer price.
Readily marketable securities not listed on the NYSE but listed on other
national securities exchanges or admitted to trading on the Nasdaq National List
are valued in like manner.
Readily marketable securities traded in the over-the-counter market,
including listed securities whose primary market is believed by the Adviser to
be over-the-counter but excluding securities admitted to trading on the Nasdaq
National List, are valued at the mean of the current bid and asked prices as
reported by Nasdaq or, in the case of securities not quoted by Nasdaq, the
National Quotation Bureau or such other comparable sources as the Board of
Directors deems appropriate to reflect their fair value. If no asked prices are
quoted on such day, then the security is valued by such method as the Board of
Directors shall determine in good faith to reflect its fair market value.
Portfolio securities traded on more than one national securities
exchange or market are valued according to the broadest and most representative
market as determined by the Adviser. Securities traded primarily on foreign
exchanges are valued at the closing price on such foreign exchange immediately
prior to the close of the NYSE.
United States Government obligations and other debt instruments having
60 days or less remaining until maturity are stated at amortized cost. Debt
instruments having a greater remaining maturity will be valued at the highest
bid price obtained from a dealer maintaining an active market in that security
or on the basis of prices obtained from a pricing service approved as reliable
by the Board of Directors. All other investment assets, including restricted and
not readily marketable securities, are valued under procedures established by
and under the general supervision and responsibility of the Fund's Board of
Directors designed to reflect in good faith the fair value of such securities.
DIVIDENDS, DISTRIBUTIONS AND TAXES
General
Dividends and distributions will be automatically reinvested for each
shareholder's account at net asset value in additional shares of the Fund,
unless the shareholder instructs the Fund to pay all dividends and distributions
in cash and to credit the amounts to his or her brokerage account or to pay the
amounts by check. Fractional shares may be paid in cash. Dividends from net
investment income, if any, and distributions of any net realized capital gains
earned by the Fund will be paid annually.
Under the Code, amounts not distributed on a timely basis in accordance
with a calendar year distribution requirement are subject to a nondeductible 4%
excise tax. To avoid the tax, the Fund must distribute during each calendar
year, at least the sum of (1) 98% of its ordinary income (not taking into
account any capital gains or losses) for the calendar year, (2) 98% of its
capital gains in excess of its capital losses for the twelve-month period ending
on October 31 of the calendar year or, upon election, during the calendar year
and (3) all ordinary income and net capital gains for previous years that were
not previously distributed. A distribution will be treated as paid during the
calendar year if it is paid during the calendar year or declared by the Fund in
October, November or December of the year, payable to shareholders of record as
of a specified date in such a month and actually paid by the Fund during January
of the following year. Any such distributions paid during January of the
following year will be deemed to be paid and received on December 31 of the year
the distributions are declared.
Gains or losses on the sales of securities by the Fund will be
long-term capital gains or losses if the securities have been held by the Fund
for more than twelve months. Gains or losses on the sale of securities held for
twelve months or less will be short-term capital gains or losses.
The Fund has qualified and intends to continue to qualify as a
"Regulated Investment Company" under Subchapter M of the Code. If so qualified,
the Fund will not be subject to federal income tax on its net investment income
and net short-term and long-term capital gains, if any, realized during any
taxable year in which it distributes such income and capital gains to its
shareholders. Although the Fund is non-diversified for purposes of the 1940 Act,
the Fund nevertheless is subject to diversification requirements under
Subchapter M. In general, the Code requires the Fund to diversify its holdings
so that, at the close of each quarter of its taxable year, (1) at least 50% of
the value of its total assets consist of cash, cash items, U.S. Government
securities, securities of other regulated investment companies, and other
securities limited generally with respect to any one issuer to not more than 5%
of the total assets of the Fund and not more than 10% of the outstanding voting
securities of each issuer, and (2) not more than 25% of the value of its assets
is invested in the securities of any issuer (other than U.S. Government
securities or the securities of other regulated investment companies).
If the Fund is the holder of record of any stock on the record date for
any dividends payable with respect to such stock, such dividends shall be
included in the Fund's gross income as of the later of (a) the date such stock
became ex-dividend with respect to such dividends (i.e., the date on which a
buyer of the stock would not be entitled to receive the declared, but unpaid,
dividends) or (b) the date the Fund acquired such stock. Accordingly, in order
to satisfy its income distribution requirements, the Fund may be required to pay
dividends based on anticipated earnings, and shareholders may receive dividends
in an earlier year than would otherwise be the case.
The Fund's short sales against the box and transactions in futures
contracts and options 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), may
accelerate recognition of income to the Fund and may defer Fund losses. These
rules could therefore affect the character, amount and timing of distributions
to shareholders. These provisions also (a) will require the Fund to
mark-to-market certain types of the positions in its portfolio (i.e., treat them
as if they were closed out), and (b) 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 described above. The Fund will monitor its transactions, will make the
appropriate tax elections and will make the appropriate entries in its books and
records when it engages in short sales against the box or acquires any futures
contract, option or hedged investment in order to mitigate the effect of these
rules and prevent disqualification of the Fund as a regulated investment
company.
Foreign Withholding Taxes
Income received by the Fund from investments in foreign securities may
be subject to withholding and other taxes imposed by foreign countries. Tax
conventions between certain countries and the United States may reduce or
eliminate such taxes. It is impossible to determine the rate of foreign tax in
advance since the amount of the Fund's assets to be invested in various
countries is not known. Because the Fund will not have more than 50% of its
total assets invested in securities of foreign governments or corporations, the
Fund will not be entitled to "pass-through" to shareholders the amount of
foreign taxes paid by the Fund.
Passive Foreign Investment Companies
If the Fund purchases shares in certain foreign investment entities,
called "passive foreign investment companies" (a "PFIC"), it may be subject to
United States federal income tax on a portion of any "excess distribution" or
gain from the disposition of such shares even if such income is distributed as a
taxable dividend by the Fund to its shareholders. Additional charges in the
nature of interest may be imposed on the Fund in respect of deferred taxes
arising from such distributions or gains. If the Fund were to invest in a PFIC
and elected to treat the PFIC as a "qualified electing fund" under the Code, in
lieu of the foregoing requirements, the Fund might be required to include in
income each year a portion of the ordinary earnings and net capital gains of the
qualified electing fund, even if not distributed to the Fund, and such amounts
would be subject to the 90% and excise tax distribution requirements described
above. In order to make this election, the Fund would be required to obtain
certain annual information from the passive foreign investment companies in
which it invests, which may be difficult or not possible to obtain.
Alternatively, the Fund may make a mark-to-market election that will
result in the Fund being treated as if it had sold and repurchased all of the
PFIC stock at the end of each year. In this case, the Fund would report gains as
ordinary income and would deduct losses as ordinary losses to the extent of
previously recognized gains. The election, once made, would be effective for all
subsequent taxable years of the Fund, unless revoked with the consent of the
IRS. By making the election, the Fund could potentially ameliorate the adverse
tax consequences with respect to its ownership of shares in a PFIC, but in any
particular year may be required to recognize income in excess of the
distributions it receives from PFICs and its proceeds from dispositions of PFIC
company stock. The Fund may have to distribute this "phantom" income and gain to
satisfy its distribution requirement and to avoid imposition of the 4% excise
tax. The Fund will make the appropriate tax elections, if possible, and take any
additional steps that are necessary to mitigate the effect of these rules.
Distributions
Distributions of investment company taxable income (which includes
interest and dividends and the excess of net short-term capital gains over
long-term capital losses, but not the excess of net long-term capital gains over
net short-term capital losses) are taxable to a U.S. shareholder as ordinary
income, whether paid in cash or shares. Dividends paid by the Fund will qualify
for the 70% deduction generally available for dividends received by corporations
to the extent the Fund's income consists of qualified dividends received from
U.S. corporations. Distributions of net capital gains (which consists of the
excess of net long-term capital gains over net short-term capital losses), if
any, are taxable as long-term capital gains, whether paid in cash or in shares,
regardless of how long the shareholder has held the Fund's shares, and are not
eligible for the dividends received deduction. Shareholders receiving
distributions in the form of newly issued shares will have a basis in such
shares of the Fund equal to the fair market value of such shares on the
distribution date.
The price of shares purchased just prior to a distribution by the Fund
may reflect the amount of the forthcoming distribution. Those purchasing at that
time will receive a distribution that represents a return of investment, but
that will nevertheless be taxable to them.
Sales of Shares
Upon a sale or exchange of his or her shares, a shareholder will
realize a taxable gain or loss depending upon his or her basis in the shares.
The gain or loss will be treated as a long-term capital gain or loss if the
shares have been held for more than one year. Any loss realized on a sale or
exchange will be disallowed to the extent the shares disposed of are replaced
within a period of 61 days beginning 30 days before and ending 30 days after the
shares are disposed of. In such case, the basis of the shares acquired will be
adjusted to reflect the disallowed loss. Any loss realized by a shareholder on
the sale of Fund shares held by the shareholder for six months or less will be
treated for tax purposes as a long-term capital loss to the extent of any
distributions of long-term capital gains received by the shareholder with
respect to such shares. However, capital losses are deductible only against
capital gains plus, for individuals, up to $3,000 of ordinary income.
Backup Withholding
The Fund may be required to withhold federal income tax at the rate of
31% with respect to (1) taxable dividends and distributions and (2) proceeds of
any redemptions of Fund shares if a shareholder fails to provide the Fund with
his or her correct taxpayer identification number or to make required
certifications, or who has been notified by the Internal Revenue Service that he
or she is subject to backup withholding. Backup withholding is not an additional
tax. Any amounts withheld may be credited against a shareholder's federal income
tax liability.
Shareholders are urged to consult their attorneys or tax advisers
regarding specific questions as to federal, state, local or foreign taxes.
CALCULATION OF INVESTMENT PERFORMANCE
From time to time, the Fund may quote its performance in advertisements
or in reports and other communications to shareholders.
Average Annual Total Return
The Fund may advertise its "average annual total return" over various
periods of time. Total return figures show the average percentage change in
value of an investment in the Fund from the beginning date of the measuring
period to the end of the measuring period. These figures reflect changes in the
price of the Fund's shares and assume that any income dividends and/or capital
gains distributions made by the Fund during the period were reinvested in shares
of the Fund. Figures will be given for the recent one-, five- and ten-year
periods, or for the life of the Fund to the extent it has not been in existence
for any such periods, and may be given for other periods as well, such as on a
year-by-year basis. When considering "average" total return figures for periods
longer than one year, it is important to note that the Fund's annual total
return for any one year in the period might have been greater or less than the
average for the entire period. The Fund's "average annual total return" figures
are computed according to a formula prescribed by the SEC. The formula can be
expressed as follows:
P(1+T)n = ERV
Where: P = a hypothetical initial payment of $1,000.
T = average annual total return.
n = number of years.
ERV = Ending Redeemable Value of a hypothetical
$1,000 investment made at the beginning of a
1-, 5- or 10-year period at the end of a 1-,
5- or 10-year period (or fractional portion
thereof), assuming reinvestment of all
dividends and distributions.
The following average annual total return figures for the
Fund's Class A shares, calculated in accordance with the above formula, assume
that the maximum 5.5% sales load has been deducted from the hypothetical $1,000
initial investment at the time of purchase.
16.5% for the one year period from January 1, 1998 through December 31,
1998
18.1% for the five year period from January 1, 1994 through December
31, 1998
16.2% for the period from the Fund's inception on September 29,
1989 through December 31, 1998
Aggregate Total Return
The Fund may also use "aggregate" total return figures for various
periods, representing the cumulative change in value of an investment in the
Fund for the specific period (again reflecting changes in Fund share prices and
assuming reinvestment of dividends and distributions). Aggregate total return
may be calculated either with or without the effect of the maximum 5.5% sales
load and may be shown by means of schedules, charts, or graphs, and may indicate
subtotals of the various components of total return (that is, change in value of
initial investment, income dividends, and capital gains distributions). The
Fund's aggregate total return figures represent the cumulative change in the
value of an investment in the Fund for the specified period and are computed
according to the following formula:
AGGREGATE TOTAL RETURN = ERV-P
P
Where: P = a hypothetical initial payment of $10,000.
ERV = Ending Redeemable Value of a hypothetical
$10,000 investment made at the beginning of
a 1-, 5-, or 10-year period (or fractional
portion thereof) at the end of the 1-, 5-,
or 10-year period (or fractional portion
thereof), assuming reinvestment of all
dividends and distributions.
<PAGE>
The Fund's aggregate total return for Class A shares was as follows for
the periods indicated:
23.2% for the one year fiscal period from January 1, 1998 through
December 31, 1998
143.2% for the five year period from January 1, 1994 through December
31, 1998
325.0% for the period from the Fund's inception on September 29, 1989
through December 31, 1998
The above aggregate total return figures do not assume that the maximum
5.5% sales load has been deducted from the investment at the time of purchase.
If the maximum sales charge had been deducted at the time of purchase, the Class
A shares' aggregate total returns for the same periods would have been 16.5%,
129.9% and 301.6%, respectively.
The Fund's performance will vary from time to time depending upon
market conditions, the composition of its portfolio and its operating expenses.
Consequently, any given performance quotation should not be considered
representative of the Fund's performance for any specified period in the future.
In addition, because the performance will fluctuate, it may not provide a basis
for comparing an investment in the Fund with certain bank deposits or other
investments that pay a fixed yield for a stated period of time. Investors
comparing the Fund's performance with that of other mutual funds should give
consideration to the quality and maturity of the respective investment
companies' portfolio securities.
In reports or other communications to shareholders or in advertising
material, the Fund may compare its performance with that of other mutual funds
as listed in the rankings prepared by Lipper Analytical Services, Incorporated,
Morningstar, Inc. or similar independent services that monitor the performance
of mutual funds or other industry or financial publications. It is important to
note that the total return figures are based on historical earnings and are not
intended to indicate future performance. Shareholders may make inquiries
regarding the Fund's total return figures to Gabelli and Company.
In its reports, investor communications or advertisements, the Fund may
also include: (i) descriptions and updates concerning its strategies and
portfolio investments; (ii) its goals, risk factors and expenses compared with
other mutual funds; (iii) analysis of its investments by industry, country,
credit quality and other characteristics; (iv) a discussion of the risk/return
continuum relating to different investments; (v) the potential impact of adding
foreign stocks to a domestic portfolio; (vi) the general biography or work
experience of the portfolio manager of the Fund; (vii) portfolio manager
commentary or market updates; (viii) discussion of macroeconomic factors
affecting the Fund and its investments; and (ix) other information of interest
to investors.
DESCRIPTION OF THE FUND'S SHARES
Voting Rights
As a Maryland corporation, the Fund is not required, and does not
intend, to hold regular annual shareholder meetings. It will hold an annual
meeting if Directors are required to be elected under the 1940 Act and may hold
special meetings for the consideration of proposals requiring shareholder
approval such as changing fundamental policies. A meeting will be called to
consider replacing the Fund's Directors upon the written request of the holders
of 10% of the Fund's shares. When matters are submitted for shareholder vote,
each shareholder will have one vote for each full share owned and proportionate,
fractional votes for fractional shares held, except as described below with
respect to class voting in certain circumstances. All shareholders of the Fund
in each class, upon liquidation, will participate ratably in the Fund's net
assets. The Board of Directors has authority, without a vote of shareholders, to
increase the number of shares the Fund is authorized to issue and to authorize
and issue additional classes of stock by reclassifying unissued shares. There
are no conversion or preemptive rights in connection with any shares of the
Fund, with the exception that Class B shares will automatically convert into
Class A shares approximately eighty-four months after purchase. All shares, when
issued in accordance with the terms of the offering, will be fully paid and
non-assessable.
Liabilities; Separate Classes of Shares
The Fund's Articles of Incorporation provides that to the fullest
extent that limitations on the liability of Directors and officers are permitted
by the Maryland General Corporation Law, the 1933 Act and the 1940 Act,
Directors and officers shall be indemnified by the Fund against judgments,
penalties, fines, excise taxes, settlements and reasonable expenses actually
incurred in connection with any action, suit or other proceeding. To the fullest
extent permitted by Maryland General Corporation Law, as amended from time to
time, the Fund's Articles of Incorporation also provide that no Director or
officer of the Fund shall be personally liable to the Fund or its shareholders
for money damages, except to the extent such exemption from liability or
limitation thereof is not permitted by the 1940 Act. Nothing in the Articles of
Incorporation protects a Director against any liability to which he would
otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence or reckless disregard of duty involved in the conduct of his office.
Shareholders are entitled to one vote for each full share held and
fractional votes for fractional votes held. Shareholders will vote in the
aggregate except where otherwise required by law and except that each class will
vote separately on certain matters pertaining to its distribution and
shareholder servicing arrangements.
The Adviser's investment personnel may invest in securities for their
own account pursuant to a Code of Ethics that establishes procedures for
personal investing and restricts certain transactions.
<PAGE>
FINANCIAL STATEMENTS
THE GABELLI VALUE FUND INC.
PORTFOLIO OF INVESTMENTS -- DECEMBER 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MARKET
SHARES COST VALUE
------ ---- ------
<C> <S> <C> <C>
COMMON STOCKS -- 95.4%
AGRICULTURE--0.9%
440,000 Archer-Daniels-Midland
Co. ..................... $ 7,486,501 $ 7,562,500
------------ ------------
AUTOMOTIVE: PARTS AND
ACCESSORIES--2.0%
320,000 Dana Corp................. 13,373,002 13,080,000
90,700 Modine Manufacturing
Co. ..................... 3,198,459 3,287,875
------------ ------------
16,571,461 16,367,875
------------ ------------
AVIATION: PARTS AND SERVICES--1.1%
30,000 Barnes Group Inc.......... 839,781 881,250
200,000 Coltec Industries Inc..... 2,984,627 3,900,000
242,000 Fairchild Corp., Cl. A+... 4,694,927 3,811,500
12,000 Precision Castparts
Corp..................... 586,944 531,000
------------ ------------
9,106,279 9,123,750
------------ ------------
BROADCASTING--5.7%
160,000 Ackerley Group Inc........ 2,481,450 2,920,000
532,020 Chris-Craft Industries
Inc+..................... 14,432,238 25,636,714
165,000 Gray Communications
Systems Inc., Cl. B...... 2,336,155 2,258,437
250,000 Grupo Televisa SA, GDR+... 5,440,829 6,171,875
122,000 Liberty Corp.............. 3,230,519 5,993,250
275,000 Paxson Communications
Corp., Cl. A+............ 2,227,090 2,526,562
------------ ------------
30,148,281 45,506,838
------------ ------------
BUSINESS SERVICES--1.0%
148,900 Berlitz International
Inc., New+............... 2,619,820 4,318,100
200,000 Cendant Corp.............. 3,468,100 3,812,500
------------ ------------
6,087,920 8,130,600
------------ ------------
CABLE--18.5%
1,100,000 Cablevision Systems Corp.,
Cl. A+................... 13,122,474 55,206,250
1,000,000 MediaOne Group Inc. ...... 25,374,115 47,000,000
720,000 TCI Ventures Group........ 5,192,986 16,965,000
520,000 Tele-Communications Inc.,
Cl. A New+............... 7,098,661 28,762,500
------------ ------------
50,788,236 147,933,750
------------ ------------
COMMUNICATIONS EQUIPMENT--0.3%
30,000 Northern Telecom Ltd. .... 561,375 1,503,750
30,000 Scientific-Atlanta
Inc. .................... 545,488 684,375
------------ ------------
1,106,863 2,188,125
------------ ------------
CONSUMER PRODUCTS--2.4%
499,400 Carter-Wallace Inc. ...... 7,468,996 9,800,725
161,000 General Cigar Holdings
Inc. .................... 2,082,704 1,398,688
168,000 General Cigar Holdings
Inc., Cl. B+(a).......... 1,414,002 1,459,500
</TABLE>
<TABLE>
<CAPTION>
MARKET
SHARES COST VALUE
------ ---- ------
<C> <S> <C> <C>
125,000 Hartmarx Corp.+........... $ 963,262 $ 703,125
170,000 Ralston Purina Group...... 2,968,479 5,503,750
41,700 Syratech Corp.+........... 983,310 667,200
------------ ------------
15,880,753 19,532,988
------------ ------------
CONSUMER SERVICES--1.5%
500,000 Loewen Group Inc.......... 7,823,809 4,218,750
445,000 Rollins Inc............... 7,847,076 7,787,500
------------ ------------
15,670,885 12,006,250
------------ ------------
DIVERSIFIED INDUSTRIAL--1.6%
50,000 Ampco-Pittsburgh Corp. ... 250,017 543,750
78,000 Honeywell Inc. ........... 4,961,384 5,874,375
219,000 Katy Industries Inc. ..... 1,863,784 3,846,187
60,000 Lamson & Sessions Co.+.... 355,813 307,500
234,000 Tyler Corp.+.............. 533,750 1,433,250
110,000 WHX Corp. ................ 1,372,882 1,106,875
------------ ------------
9,337,630 13,111,937
------------ ------------
ENERGY AND UTILITIES--2.0%
581,881 Citizens Utilities Co.,
Cl. B+................... 5,686,477 4,727,780
25,000 Global Marine Inc. ....... 350,569 229,687
225,000 PennzEnergy Co.+.......... 6,599,240 3,670,313
225,000 Pennzoil-Quaker State
Co.+..................... 6,760,197 3,332,813
135,000 Southwest Gas Corp. ...... 2,471,679 3,628,125
------------ ------------
21,868,162 15,588,718
------------ ------------
ENTERTAINMENT--15.2%
180,660 Ascent Entertainment Group
Inc.+.................... 1,859,301 1,332,367
75,000 GC Companies Inc.+........ 3,225,056 3,121,875
82,000 Tele-Communications Inc./
Liberty Media Group, Cl.
A........................ 3,110,118 3,777,125
785,000 USA Networks Inc.+........ 10,226,703 26,003,125
1,182,000 Viacom Inc., Cl. A+....... 38,028,497 86,950,875
------------ ------------
56,449,675 121,185,367
------------ ------------
EQUIPMENT AND SUPPLIES--9.4%
320,000 Aeroquip-Vickers Inc. .... 12,032,162 9,580,000
200,000 AMP Inc. ................. 7,949,424 10,412,500
40,000 Deere & Co. .............. 968,254 1,325,000
180,000 Flowserve Corp. .......... 4,720,835 2,981,250
130,000 Gerber Scientific Inc. ... 1,111,661 3,095,625
235,000 Hussmann International
Inc. .................... 1,899,947 4,553,125
970,000 Navistar International
Corp. ................... 25,705,000 27,645,000
263,600 Pittway Corp., Cl. A...... 541,880 8,715,275
75,000 Sequa Corp., Cl. A+....... 2,704,459 4,490,625
24,500 Sequa Corp., Cl. B+....... 1,203,320 1,800,750
7,500 Smith (A.O.) Corp. ....... 208,100 182,578
------------ ------------
59,045,042 74,781,728
------------ ------------
</TABLE>
See accompanying notes to financial statements.
14
<PAGE>
THE GABELLI VALUE FUND INC.
PORTFOLIO OF INVESTMENTS (CONTINUED) -- DECEMBER 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MARKET
SHARES COST VALUE
------ ---- ------
<C> <S> <C> <C>
COMMON STOCKS (CONTINUED)
FINANCIAL SERVICES--1.8%
200,000 American Bankers Insurance
Group Inc. .............. $ 11,910,501 $ 9,675,000
20,000 BA Merchant Services
Inc. .................... 401,000 402,500
5,000 Bankers Trust Corp. ...... 426,812 427,186
5,000 Chase Manhattan Corp. .... 207,425 340,312
8,000 Donaldson, Lufkin &
Jenrette Inc. ........... 199,250 328,000
29,000 Lehman Brothers Holdings
Inc. .................... 602,074 1,277,813
10,000 Merrill Lynch & Co. ...... 625,031 667,500
77,200 Pioneer Group Inc. ....... 1,755,222 1,524,700
------------ ------------
16,127,315 14,643,011
------------ ------------
FOOD AND BEVERAGE--4.5%
33,739 Advantica Restaurant Group
Inc.+.................... 315,000 208,760
100,000 Corn Products
International Inc. ...... 3,140,399 3,037,500
250,000 PepsiCo Inc. ............. 8,762,129 10,234,375
90,000 Quaker Oats Co. .......... 3,168,057 5,355,000
45,000 Seagram Co. .............. 1,491,525 1,710,000
606,500 Whitman Corp. ............ 7,093,618 15,389,938
------------ ------------
23,970,728 35,935,573
------------ ------------
HEALTH CARE--0.5%
300,000 IVAX Corp.+............... 2,829,106 3,731,250
------------ ------------
HOTELS AND GAMING--2.5%
530,000 Aztar Corp.+.............. 3,726,948 2,683,125
175,000 Circus Circus Enterprises
Inc.+.................... 4,050,062 2,001,563
220,301 Gaylord Entertainment Co.,
Cl. A.................... 6,362,950 6,636,568
260,000 Hilton Hotels Corp.(b).... 5,650,416 4,972,500
250,000 Mirage Resorts Inc.+...... 3,914,193 3,734,375
------------ ------------
23,704,569 20,028,131
------------ ------------
METALS AND MINING--0.4%
32,000 Barrick Gold Corp. ....... 722,074 624,000
150,000 Echo Bay Mines Ltd+....... 937,791 262,500
70,000 Homestake Mining Co. ..... 861,938 643,125
55,000 Placer Dome Inc. ......... 651,512 632,500
365,000 Royal Oak Mines Inc.+..... 533,236 91,250
300,000 TVX Gold Inc.+............ 845,911 543,750
------------ ------------
4,552,462 2,797,125
------------ ------------
PUBLISHING--14.0%
58,000 McGraw-Hill Companies
Inc. .................... 2,530,138 5,908,750
1,678,000 Media General Inc., Cl.
A(c)..................... 34,018,852 88,934,000
145,000 Meredith Corp. ........... 2,875,207 5,491,875
170,000 Penton Media Inc. ........ 730,046 3,442,500
</TABLE>
<TABLE>
<CAPTION>
MARKET
SHARES COST VALUE
------ ---- ------
<C> <S> <C> <C>
60,000 Reader's Digest
Association Inc., Cl.
A........................ $ 1,540,326 $ 1,511,250
200,000 Reader's Digest
Association Inc., Cl.
B........................ 4,830,612 4,825,000
22,000 Tribune Co. .............. 1,324,538 1,452,000
------------ ------------
47,849,719 111,565,375
------------ ------------
REAL ESTATE--1.5%
700,000 Catellus Development
Corp.+................... 8,760,036 10,018,750
130,000 Griffin Land & Nurseries
Inc.+.................... 1,463,689 1,657,500
------------ ------------
10,223,725 11,676,250
------------ ------------
RETAIL--1.6%
17,100 Burlington Coat Factory
Warehouse Corp. ......... 242,094 278,944
120,000 Food Lion Inc., Cl. A..... 1,264,234 1,275,000
50,000 Ingles Markets Inc., Cl.
A........................ 654,178 546,875
130,000 Lillian Vernon Corp. ..... 1,856,440 2,145,000
252,400 Neiman Marcus Group
Inc.+.................... 5,150,219 6,294,225
120,000 Republic Industries
Inc. .................... 2,071,514 1,770,000
------------ ------------
11,238,679 12,310,044
------------ ------------
SATELLITE--0.8%
150,000 COMSAT Corp. ............. 3,501,997 5,400,000
50,000 Loral Space &
Communications Ltd.+..... 703,875 890,625
180,000 TCI Satellite
Entertainment Inc., Cl.
A+....................... 1,374,860 258,750
------------ ------------
5,580,732 6,549,375
------------ ------------
SPECIALTY CHEMICALS--0.5%
150,000 Ferro Corp. .............. 1,952,269 3,900,000
------------ ------------
TELECOMMUNICATIONS--1.8%
168,462 Commonwealth Telephone
Enterprises Inc.+........ 2,991,361 5,643,477
185,000 Frontier Corp. ........... 5,798,072 6,290,000
134,000 RCN Corp.+................ 729,739 2,370,125
------------ ------------
9,519,172 14,303,602
------------ ------------
WIRELESS COMMUNICATIONS--3.9%
90,000 Century Telephone
Enterprises Inc. ........ 1,308,054 6,075,000
90,000 Rogers Cantel Mobile
Communications Inc., Cl.
B........................ 1,053,629 1,096,875
250,000 Telecom Italia Mobile
SpA...................... 332,242 1,844,628
500,000 Telephone & Data Systems
Inc...................... 20,601,199 22,468,750
------------ ------------
23,295,124 31,485,253
------------ ------------
TOTAL COMMON STOCKS....... 480,391,288 761,945,415
------------ ------------
</TABLE>
See accompanying notes to financial statements.
15
<PAGE>
THE GABELLI VALUE FUND INC.
PORTFOLIO OF INVESTMENTS (CONTINUED) -- DECEMBER 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MARKET
SHARES COST VALUE
------ ---- ------
<C> <S> <C> <C>
PREFERRED STOCK -- 0.5%
PUBLISHING--0.5%
155,500 News Corp. Ltd., ADR
Preference Shares........ $ 2,390,998 $ 3,838,906
------------ ------------
<CAPTION>
PRINCIPAL
AMOUNT
- -----------
CORPORATE BONDS -- 0.1%
ENTERTAINMENT--0.1%
$ 497,000 Viacom Inc., Sub. Deb.
8.00%, 07/07/06.......... 322,429 518,123
------------ ------------
REPURCHASE AGREEMENT -- 0.2%
2,105,000 Agreement with J.P. Morgan
& Co. Inc., 4.70%, due
01/04/99(d).............. 2,105,000 2,105,000
------------ ------------
U.S. GOVERNMENT OBLIGATIONS -- 3.1%
25,105,000 U.S. Treasury Bills, 4.44%
to 4.54%++, due
02/04/99................. 25,001,342 25,001,342
------------ ------------
TOTAL INVESTMENTS --
99.3%.................... $510,211,057* 793,408,786
============
OTHER ASSETS AND
LIABILITIES (NET)--0.7%................ 5,403,475
------------
NET ASSETS -- 100.0% (49,692,065 shares
outstanding)........................... $798,812,261
============
NET ASSET VALUE AND REDEMPTION PRICE PER
SHARE.................................. $16.08
-----
-----
MAXIMUM OFFERING PRICE PER SHARE
($16.08/.945, based on maximum sales
charge of 5.5% of the offering price at
December 31, 1998.).................... $17.02
-----
-----
SHARES VALUE
------------ ------------
SECURITY SOLD SHORT
<C> <S> <C> <C>
COMMON STOCK
Park Place Entertainment Corp.
(Proceeds $69,873)..................... 10,000 $63,750
------
------
* For Federal tax purposes:
Aggregate cost.................. $510,754,549
============
Gross unrealized appreciation... $311,426,990
Gross unrealized depreciation... (28,772,753)
------------
Net unrealized appreciation..... $282,654,237
============
</TABLE>
- ---------------
<TABLE>
<C> <S> <C> <C> <C>
(a) Security fair valued as determined by the Board of
Directors.
(b) Security pledged as collateral for short sale.
(c) Security considered an affiliated holding because the
Fund owns at least 5% of the outstanding shares. (See
Note 8.)
(d) Agreement dated 12/31/98 to be repurchased at
$2,106,099. Collateralized by $2,105,000 U.S.
Treasury Bond, 6.88% due 03/31/00 (value $2,147,162).
+ Non-income producing security.
++ Represents annualized yield at date of purchase.
ADR -- American Depositary Receipt.
GDR -- Global Depositary Receipt.
</TABLE>
See accompanying notes to financial statements.
16
<PAGE>
THE GABELLI VALUE FUND INC.
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1998
- ----------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Investments, at value (Cost $510,211,057)............... $793,408,786
Cash.................................................... 440,736
Dividends and interest receivable....................... 201,778
Receivable for investments sold......................... 6,214,457
Receivable for Fund shares sold......................... 2,250,293
Variation margin........................................ 5,835
------------
TOTAL ASSETS.......................................... 802,521,885
------------
LIABILITIES:
Payable for investments purchased....................... 1,714,691
Payable for Fund shares redeemed........................ 617,047
Payable for investment advisory fees.................... 640,397
Payable for distribution fees........................... 365,854
Payable for shareholder servicing fees.................. 102,000
Security sold short, at value (Proceeds $69,873)........ 63,750
Payable to custodian.................................... 45,000
Other accrued expenses.................................. 160,885
------------
TOTAL LIABILITIES..................................... 3,709,624
------------
NET ASSETS applicable to 49,692,065 shares
outstanding.......................................... $798,812,261
============
NET ASSETS CONSIST OF:
Shares of capital stock, at par value................... $ 49,692
Additional paid-in capital.............................. 514,550,399
Accumulated net realized gain on investments, futures
contracts and foreign currency transactions........... 1,008,318
Net unrealized appreciation on investments.............. 283,203,852
------------
TOTAL NET ASSETS...................................... $798,812,261
============
NET ASSET VALUE and redemption price per share
($798,812,261 / 49,692,065 shares outstanding;
300,000,000 shares authorized of $0.001 par value)... $16.08
------
------
Maximum offering price per share ($16.08 / .945, based
on maximum sales charge of 5.5% of the offering price
at December 31, 1998)................................ $17.02
------
------
</TABLE>
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
- ----------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME:
Dividends (net of foreign withholding taxes of
$9,818)............................................... $ 4,726,696
Interest................................................ 2,392,736
------------
TOTAL INVESTMENT INCOME............................... 7,119,432
------------
EXPENSES:
Investment advisory fees................................ 7,237,856
Distribution fees....................................... 1,814,756
Shareholder services fees............................... 515,559
Shareholder communications expenses..................... 109,435
Custodian fees.......................................... 178,294
Directors' fees......................................... 69,231
Legal and audit fees.................................... 39,800
Miscellaneous expenses.................................. 158,047
------------
TOTAL EXPENSES........................................ 10,122,978
------------
NET INVESTMENT LOSS................................... (3,003,546)
------------
NET REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS
AND FOREIGN CURRENCY TRANSACTIONS:
Net realized gain on investments, futures contracts and
foreign currency transactions......................... 65,087,664
Net realized gain on investments in securities of
affiliated issuers.................................... 6,035,057
Net change in unrealized appreciation on investments and
foreign currency transactions......................... 78,651,758
------------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS, FUTURES
CONTRACTS AND FOREIGN CURRENCY TRANSACTIONS........... 149,774,479
------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS..... $146,770,933
============
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997
----------------- -----------------
<S> <C> <C>
OPERATIONS:
Net investment loss...................................... $ (3,003,546) $ (2,253,147)
Net realized gain on investments, futures contracts and
foreign currency transactions........................... 71,122,721 99,629,391
Net change in unrealized appreciation on investments and
foreign currency transactions........................... 78,651,758 103,506,441
------------ ------------
Net increase in net assets resulting from
operations........................................... 146,770,933 200,882,685
------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS:
Net realized gain on investments......................... (67,357,159) (96,768,357)
------------ ------------
Total distributions to shareholders................... (67,357,159) (96,768,357)
------------ ------------
CAPITAL SHARE TRANSACTIONS:
Net increase in net assets from capital share
transactions............................................ 122,851,446 31,596,675
------------ ------------
Net increase in net assets............................ 202,265,220 135,711,003
NET ASSETS:
Beginning of period...................................... 596,547,041 460,836,038
------------ ------------
End of period............................................ $798,812,261 $596,547,041
============ ============
</TABLE>
See accompanying notes to financial statements.
17
<PAGE>
THE GABELLI VALUE FUND INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. ORGANIZATION. The Gabelli Value Fund Inc. (the "Fund") was organized on July
20, 1989 as a Maryland corporation. The Fund is a non-diversified, open-end
management investment company registered under the Investment Company Act of
1940, as amended (the "1940 Act"). The Fund's primary objective is long term
capital appreciation. The Fund commenced investment operations on September 29,
1989.
2. SIGNIFICANT ACCOUNTING POLICIES. The preparation of financial statements in
accordance with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts and disclosures
in the financial statements. Actual results could differ from those estimates.
The following is a summary of significant accounting policies followed by the
Fund in the preparation of its financial statements.
SECURITY VALUATION. Portfolio securities listed or traded on a nationally
recognized securities exchange, quoted by the National Association of Securities
Dealers Automated Quotations, Inc. ("Nasdaq") or traded on foreign exchanges are
valued at the last sale price on that exchange as of the close of business on
the day the securities are being valued (if there were no sales that day, the
security is valued at the average of the closing bid and asked prices or, if
there were no asked prices quoted on that day, then the security is valued at
the closing bid price on that day, except for open short positions, which are
valued at the last asked price). All other portfolio securities for which
over-the-counter market quotations are readily available are valued at the
latest average of the bid and asked prices. Portfolio securities traded on more
than one national securities exchange or market are valued according to the
broadest and most representative market, as determined by Gabelli Funds, Inc.
(the "Adviser"). Securities and assets for which market quotations are not
readily available are valued at their fair value as determined in good faith
under procedures established by and under the general supervision of the Board
of Directors. Short term debt securities with remaining maturities of 60 days or
less are valued at amortized cost, unless the Directors determine such does not
reflect the securities' fair value, in which case these securities will be
valued at their fair value as determined by the Directors. Short term debt
instruments having a greater maturity are valued at the highest bid price
obtained from a dealer maintaining an active market in those securities. Options
are valued at the last sale price on the exchange on which they are listed. If
no sales of such options have taken place that day, they will be valued at the
mean between their closing bid and asked prices.
REPURCHASE AGREEMENTS. The Fund may enter into repurchase agreements with
primary government securities dealers recognized by the Federal Reserve Bank of
New York, with member banks of the Federal Reserve System or with other brokers
or dealers that meet credit guidelines established by the Directors. Under the
terms of a typical repurchase agreement, the Fund takes possession of an
underlying debt obligation subject to an obligation of the seller to repurchase,
and the Fund to resell, the obligation at an agreed-upon price and time, thereby
determining the yield during the Fund's holding period. The Fund will always
receive and maintain securities as collateral whose market value, including
accrued interest, will be at least equal to 100% of the dollar amount invested
by the Fund in each agreement. The Fund will make payment for such securities
only upon physical delivery or upon evidence of book entry transfer of the
collateral to the account of the custodian. To the extent that any repurchase
transaction exceeds one business day, the value of the collateral is
marked-to-market on a daily basis to maintain the adequacy of the collateral. If
the seller defaults and the value of the collateral declines or if bankruptcy
proceedings are
18
<PAGE>
THE GABELLI VALUE FUND INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
commenced with respect to the seller of the security, realization of the
collateral by the Fund may be delayed or limited.
FUTURES CONTRACTS. The Fund may engage in futures contracts for the purpose of
hedging against changes in the value of its portfolio securities and in the
value of securities it intends to purchase. Upon entering into a futures
contract, the Fund is required to deposit with the broker an amount of cash or
cash equivalents equal to a certain percentage of the contract amount. This is
known as the "initial margin." Subsequent payments ("variation margin") are made
or received by the Fund each day, depending on the daily fluctuation of the
value of the contract. The daily changes in the contract are included in
unrealized gains or losses. The Fund recognizes a realized gain or loss when the
contract is closed. At December 31, 1998, there were no open futures contracts.
There are several risks in connection with the use of futures contracts as a
hedging device. The change in value of futures contracts primarily corresponds
with the value of their underlying instruments, which may not correlate with the
change in value of the hedged investments. In addition, there is the risk that
the Fund may not be able to enter into a closing transaction because of an
illiquid secondary market.
SECURITIES SOLD SHORT. A short sale involves selling a security which the Fund
does not own. The proceeds received for short sales are recorded as liabilities
and the Fund records an unrealized gain or loss to the extent of the difference
between the proceeds received and the value of the open short position on the
day of determination. The Fund records a realized gain or loss when the short
position is closed out. By entering into a short sale, the Fund bears the market
risk of an unfavorable change in the price of the security sold short. Dividends
on short sales are recorded as an expense by the Fund on the ex-dividend date
and interest expense is recorded on the accrual basis.
FOREIGN CURRENCY TRANSLATION. The books and records of the Fund are maintained
in United States (U.S.) dollars. Foreign currencies, investments and other
assets and liabilities are translated into U.S. dollars at the exchange rates
prevailing at the end of the period, and purchases and sales of investment
securities, income and expenses are translated at the exchange rate prevailing
on the respective dates of such transactions. Unrealized gains and losses, which
result from changes in foreign exchange rates and/or changes in market prices of
securities, have been included in unrealized appreciation/depreciation on
investments and foreign currency transactions. Net realized foreign currency
gains and losses resulting from changes in exchange rates include foreign
currency gains and losses between trade date and settlement date on investment
securities transactions, foreign currency transactions and the difference
between the amounts of interest and dividends recorded on the books of the Fund
and the amounts actually received. The portion of foreign currency gains and
losses related to fluctuation in exchange rates between the initial trade date
and subsequent sale trade date is included in realized gain/(loss) on
investments.
SECURITIES TRANSACTIONS AND INVESTMENT INCOME. Securities transactions are
accounted for on the trade date with realized gain or loss on investments
determined by using the identified cost method. Interest income (including
amortization of premium and accretion of discount) is recorded as earned.
Dividend income is recorded on the ex-dividend date.
19
<PAGE>
THE GABELLI VALUE FUND INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS. Dividends and distributions to
shareholders are recorded on the ex-dividend date. Income distributions and
capital gain distributions are determined in accordance with income tax
regulations which may differ from generally accepted accounting principles.
These differences are primarily due to differing treatments of income and gains
on various investment securities held by the Fund, timing differences and
differing characterization of distributions made by the Fund.
Permanent differences incurred during the year ended December 31, 1998 resulting
from different book and tax accounting policies for currency gains and losses
and certain distributions received by the Fund are reclassified between net
investment income (loss) and net realized gain (loss) on investments at year
end. For the year ended December 31, 1998, reclassifications were made to
increase accumulated net investment loss for $3,003,546 and decrease accumulated
net realized gain on investments, futures contracts and foreign currency
transactions for $3,003,546.
PROVISION FOR INCOME TAXES. The Fund has qualified and intends to continue to
qualify as a regulated investment company under Subchapter M of the Internal
Revenue Code of 1986, as amended. As a result, a Federal income tax provision is
not required.
Dividends and interest from non-U.S. sources received by the Fund are generally
subject to non-U.S. withholding taxes at rates ranging up to 30%. Such
withholding taxes may be reduced or eliminated under the terms of applicable
U.S. income tax treaties, and the Fund intends to undertake any procedural steps
required to claim the benefits of such treaties.
3. INVESTMENT ADVISORY AGREEMENT. The Fund has entered into an investment
advisory agreement (the "Advisory Agreement") with the Adviser which provides
that the Fund will pay the Adviser a fee, computed daily and paid monthly, at
the annual rate of 1.00% of the value of the Fund's average daily net assets. In
accordance with the Advisory Agreement, the Adviser provides a continuous
investment program for the Fund's portfolio, oversees the administration of all
aspects of the Fund's business and affairs and pays the compensation of all
Officers and Directors of the Fund who are its affiliates.
4. DISTRIBUTION PLAN. The Fund's Board of Directors has adopted a distribution
plan (the "Plan") pursuant to Rule 12b-1 under the 1940 Act. For the year ended
December 31, 1998, the Fund incurred distribution costs payable to Gabelli &
Company, Inc., an indirect wholly-owned subsidiary of the Adviser, of
$1,814,756, or 0.25% of average daily net assets, the annual limitation under
the Plan. Such payments are accrued daily and paid monthly.
5. PORTFOLIO SECURITIES. Purchases and sales of securities for the year ended
December 31, 1998, other than short term securities, aggregated $346,992,822 and
$313,139,326, respectively.
6. TRANSACTIONS WITH AFFILIATES. During the year ended December 31, 1998, the
Fund paid brokerage commissions of $391,750 to Gabelli & Company, Inc. and its
affiliates. During the year ended December 31, 1998, Gabelli & Company, Inc.
informed the Fund that it received $367,320 from investors representing
commissions (sales charges and underwriting fees) on sales of Fund shares.
20
<PAGE>
THE GABELLI VALUE FUND INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
7. CAPITAL STOCK TRANSACTIONS. Transactions in shares of capital stock were as
follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997
------------------------------ ----------------------------
SHARES AMOUNT SHARES AMOUNT
------------ -------------- ----------- -------------
<S> <C> <C> <C> <C>
Shares sold................................................. 27,523,248 $ 432,994,065 1,973,979 $ 29,851,529
Shares issued upon reinvestment of dividends................ 3,911,560 60,786,193 6,078,762 85,160,680
Shares redeemed............................................. (23,466,641) (370,928,812) (6,348,961) (83,415,534)
----------- ------------- ---------- ------------
Net increase........................................ 7,968,167 $ 122,851,446 1,703,780 $ 31,596,675
=========== ============= ========== ============
</TABLE>
8. TRANSACTIONS IN SECURITIES OF AFFILIATED ISSUERS. The 1940 Act defines
affiliated issuers as those in which the Fund's holdings of an issuer represent
5% or more of the outstanding voting securities of the issuer. A summary of the
Fund's transactions in the securities of these issuers during the year ended
December 31, 1998, is set forth below:
<TABLE>
<CAPTION>
PERCENT
VALUE AT OWNED
BEGINNING SHARES ENDING REALIZED DIVIDEND DECEMBER 31, OF SHARES
SHARES SOLD SHARES GAIN INCOME 1998 OUTSTANDING
--------- -------- --------- ---------- -------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Media General Inc., Cl. A........... 2,030,000 (352,000) 1,678,000 $6,035,057 $955,920 $88,934,000 6.40%
========== ======== ===========
</TABLE>
9. SUBSEQUENT EVENT. On February 9, 1999, the Adviser reorganized its
operations and corporate structure by transferring a portion of its assets and
liabilities to a successor adviser, Gabelli Funds, LLC, which is wholly owned by
Gabelli Asset Management Inc., a newly formed publicly traded company that is
80% owned by the former Adviser. Counsel to the former Adviser has concluded
that the ownership change does not constitute an assignment as defined by the
1940 Act.
21
<PAGE>
THE GABELLI VALUE FUND INC.
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
Selected data for a share of capital stock outstanding throughout each period:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
OPERATING PERFORMANCE:
Net asset value, beginning of period...................... $ 14.30 $ 11.52 $ 11.61 $ 10.49 $ 12.09
-------- -------- -------- -------- --------
Net investment income/(loss).............................. (0.05) (0.05) (0.02) 0.05 0.09
Net realized and unrealized gain/(loss) on investments.... 3.32 5.55 1.04 2.30 (0.09)
-------- -------- -------- -------- --------
Total from investment operations.................... 3.27 5.50 1.02 2.35 0.00
-------- -------- -------- -------- --------
DISTRIBUTIONS TO SHAREHOLDERS:
Net investment income..................................... -- -- -- (0.05) (0.09)
In excess of net investment income........................ -- -- -- -- (0.00)(a)
Net realized gain on investments.......................... (1.49) (2.72) (1.10) (1.18) (1.50)
In excess of net realized gain on investments............. -- -- -- -- (0.01)
Paid-in capital........................................... -- -- (0.01) -- --
-------- -------- -------- -------- --------
Total distributions................................. (1.49) (2.72) (1.11) (1.23) (1.60)
-------- -------- -------- -------- --------
NET ASSET VALUE, END OF PERIOD...................... $ 16.08 $ 14.30 $ 11.52 $ 11.61 $ 10.49
======== ======== ======== ======== ========
Total return+....................................... 23.2% 48.2% 8.7% 22.5% 0.0%
======== ======== ======== ======== ========
RATIOS TO AVERAGE NET ASSETS AND SUPPLEMENTAL DATA:
Net assets, end of period (in 000's)...................... $798,812 $596,547 $460,836 $486,144 $436,629
Ratio of net investment income/(loss) to average net
assets.................................................. (0.41)% (0.45)% (0.12)% 0.42% 0.73%
Ratio of operating expenses to average net assets......... 1.40% 1.42% 1.40% 1.50% 1.50%
Portfolio turnover rate................................... 46% 44% 37% 65% 67%
</TABLE>
- ---------------
+ Total return represents aggregate total return of a hypothetical $1,000
investment at the beginning of the period and sold at the end of the period
including reinvestment of dividends and does not reflect any applicable
sales charges.
(a) Amount represents less than $0.005 per share.
See accompanying notes to financial statements.
22
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
- --------------------------------------------------------------------------------
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF
THE GABELLI VALUE FUND INC.
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of The Gabelli Value Fund Inc. (the
"Fund") at December 31, 1998, the results of its operations for the year then
ended, the changes in its net assets for each of the two years in the period
then ended and the financial highlights for each of the five years in the period
then ended, in conformity with generally accepted accounting principles. These
financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at
December 31, 1998 by correspondence with the custodian, provide a reasonable
basis for the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
1177 Avenue of the Americas
New York, New York
February 25, 1999
1998 TAX NOTICE TO SHAREHOLDERS (UNAUDITED)
For the year ended December 31, 1998, the Fund paid to shareholders, on December
28, 1998, an ordinary income dividend (comprised of net investment income and
short term capital gains) totaling $0.421 per share and long term capital gains
totaling $1.069 per share. For the year ended December 31, 1998, 24.20% of the
ordinary income dividend qualifies for the dividend received deduction available
to corporations.
U.S. GOVERNMENT INCOME:
The percentage of the ordinary income dividend paid by the Fund during fiscal
year 1998 which was derived from U.S. Treasury securities was 0.00%. Due to the
diversity in state and local tax law, it is recommended that you consult your
personal tax advisor for the applicability of the information provided as to
your specific situation.
23
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G:\shared\clients\gabvalue\supplement\050199.doc
APPENDIX A
DESCRIPTION OF CORPORATE BOND RATINGS
MOODY'S INVESTORS SERVICE, INC.
Aaa: Bonds which are rated Aaa are judged to be the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or 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 in Aaa
securities.
A: Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment sometime in the future.
Baa: Bonds which are rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of a
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca: Bonds which are rated Ca represent obligations which are speculative in
a high degree. Such issues are often in default or have other market
shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds, and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Unrated: Where no rating has been assigned or where a rating has been
suspended or withdrawn, it may be for reasons unrelated to the quality of the
issue.
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Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities that are not rated as a
matter of policy.
3. There is a lack of essential data pertaining to the issue or issuer.
4. The issue was privately based, in which case the rating is not published in
Moody's Investors Service, Inc.'s publications.
Suspension or withdrawal may occur if new and material circumstances
arise, the effects of which preclude satisfactory analysis; if there is no
longer available reasonable up-to-date data to permit a judgment to be formed;
if a bond is called for redemption; or for other reasons.
Note: Those bonds in the Aa, A, Baa, Ba and B groups which Moody's
believe possess the strongest investment attributes are designated by the
symbols Aa-1, A-1, Baa-1, and B-1.
STANDARD & POOR'S RATINGS SERVICE
AAA: Bonds rated AAA have the highest rating assigned by S&P. Capacity to
pay interest and repay principal is extremely strong.
AA: Bonds rated AA have a very strong capacity to pay interest and
repay principal and differ from the higher rated issues only in small degree.
A: Bonds rated A have a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than bonds in the highest rated
categories.
BBB: Bonds rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
bonds in this category than in higher rated categories.
BB, B, CCC, CC, C: Bonds rated BB, B, CCC, CC and C are regarded, on
balance, as predominantly speculative with respect to capacity to pay interest
and repay principal in accordance with the terms of this obligation. BB
indicates the lowest degree of speculation and C the highest degree of
speculation. While such bonds will likely have some quality and protective
characteristics, they are outweighed by large uncertainties of major risk
exposures to adverse conditions.
C1: The rating C1 is reserved for income bonds on which no interest is
being paid.
D: Bonds rated D are in default, and payment of interest and/or repayment
of principal is in arrears.
Plus (+) or Minus (-): The ratings from AA to CCC may be modified by
the addition of a plus or minus sign to show relative standing within the major
rating categories.
NR: Indicates that no rating has been requested, that there is
insufficient information on which to base a rating, or that S&P does not rate a
particular type of obligation as a matter of policy.
