<PAGE> 1
GABELLI EQUITY SERIES FUNDS, INC.
THE GABELLI EQUITY INCOME FUND
THE GABELLI SMALLCAP GROWTH FUND
One Corporate Center
Rye, New York 10580-1434
Telephone 1-800-GABELLI (1-800-422-3554)
STATEMENT OF ADDITIONAL INFORMATION
January 28, 1998
as amended June 4, 1998
This Statement of Additional Information ("Additional Statement") relates
to The Gabelli Equity Income Fund (the "Equity Income Fund") and The Gabelli
Small Cap Growth Fund (the "Small Cap Fund") (each a "Fund" collectively the
"Funds") which are series of Gabelli Equity Series Funds, Inc., a Maryland
corporation (the "Corporation"), and is not a prospectus and is only authorized
for distribution when preceded or accompanied by the relevant Fund's prospectus
dated January 28, 1998, as supplemented from time to time (the "Prospectus").
This Statement of Additional Information contains additional and more detailed
information than that set forth in the Prospectus and should be read in
conjunction with the Prospectus, additional copies of which may be obtained
without charge by writing or telephoning the Fund at the address and telephone
number set forth above.
TABLE OF CONTENTS
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PAGE
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Other Investment Techniques B-2
The Adviser B-4
The Distributor B-5
Directors and Officers B-5
Investment Restrictions B-8
Portfolio Transactions and Brokerage B-9
Purchase and Redemption of Shares B-10
Determination of Net Asset Value B-11
Dividends, Distributions and Taxes B-11
Investment Performance Information B-13
Appendix to Statement of Additional Information B-15
Financial Statements B-16
</TABLE>
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OTHER INVESTMENT TECHNIQUES
Securities Subject to Reorganization
Subject to each Fund's policy of investing at least 65% of its total assets
in income producing equity securities (Equity Income Fund) or small company
equity securities (Small Cap Fund) each Fund may invest without limit 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 if, in the judgment of Gabelli Funds,
Inc. (the "Adviser"), there is a reasonable prospect of capital appreciation
significantly greater than the brokerage and other transaction expenses
involved. (See "Other Investment Techniques and Related Risk Factors" in the
Prospectus.)
In general, securities which are the subject of such an offer or proposal
sell at a premium to their historic market price immediately prior to the
announcement of the offer or may also discount what the stated or appraised
value of the security would be if the contemplated transaction were approved or
consummated. Such investments may be advantageous when the discount
significantly overstates the risk of the contingencies involved; significantly
undervalues the securities, assets or cash to be received by shareholders of the
prospective portfolio company as a result of the contemplated transaction; or
fails adequately to recognize the possibility that the offer or proposal may be
replaced or superseded by an offer or proposal of greater value. The evaluation
of such contingencies requires unusually broad knowledge and experience on the
part of the Adviser which must appraise not only the value of the issuer and its
component businesses as well as the assets or securities to be received as a
result of the contemplated transaction but also the financial resources and
business motivation of the offeror and the dynamics and business climate when
the offer of proposal is in process. In making the investments each Fund will
not violate any of its investment restrictions (see below, "Investment
Restrictions") including the requirement that, (a) as to 75% of its total
assets, it will not invest more than 5% of its total assets in the securities of
any one issuer and (b) it will not invest more than 25% of its total assets in
any one industry. Since such investments are ordinarily short-term in nature,
they will tend to increase the turnover ratio of the Fund thereby increasing its
brokerage and other transaction expenses (see "Dividends, Distributions and
Taxes" in the Prospectus).
Nonconvertible Debt Securities
As disclosed in the Prospectus, up to 35% of each Fund's total assets may
be invested in lower quality nonconvertible debt securities. The market values
of lower quality fixed income securities tend to be less sensitive to changes in
prevailing interest rates than higher-quality securities but more sensitive to
individual corporate developments than higher-quality securities. Such
lower-quality securities also tend to be more sensitive to economic conditions
than are higher-quality securities. Accordingly, these lower-quality securities
are considered predominantly speculative with respect to the issuer's capacity
to pay interest and repay principal in accordance with the terms of the
obligation and will generally involve more credit risk than securities in the
higher-quality categories. Even securities rated Baa or BBB by Moody's and S&P
respectively, which ratings are considered investment grade, possess some
speculative characteristics. There are risks involved in applying credit ratings
as a method for evaluating high yield obligations in that credit ratings
evaluate the safety of principal and interest payments, not market value risk.
In addition, credit rating agencies may not change credit ratings on a timely
basis to reflect changes in economic or company conditions that affect a
security's market value. The Funds will rely on the Adviser's judgment, analysis
and experience in evaluating the creditworthiness of an issuer. In this
evaluation, the Adviser will take into consideration, among other things, the
issuer's financial resources and ability to cover its interest and fixed
charges, factors relating to the issuer's industry and its sensitivity to
economic conditions and trends, its operating history, the quality of the
issuer's management and regulatory matters.
The risk of loss due to default by the issuer is significantly greater for
the holders of lower quality securities because such securities are generally
unsecured and are often subordinated to other obligations of the issuer. During
an economic downturn or a sustained period of rising interest rates, highly
leveraged issuers of lower quality securities may experience financial stress
and may not have sufficient revenues to meet their interest payment obligations.
An issuer's ability to service its debt obligations may also be adversely
affected by specific corporate developments, its inability to meet specific
projected business forecasts, or the unavailability of additional financing.
<PAGE> 3
Factors adversely affecting the market value of high yield and other
securities will adversely affect each Fund's net asset value. In addition, each
Fund may incur additional expenses to the extent it is required to seek recovery
upon a default in the payment of principal of or interest on its portfolio
holdings.
From time to time, proposals have been discussed regarding new legislation
designed to limit the use of certain high yield debt securities by issuers in
connection with leveraged buy-outs, mergers and acquisitions, or to limit the
deductibility of interest payments on such securities. Such proposals, if
enacted into law, could reduce the market for such debt securities generally,
could negatively affect the financial condition of issuers of high yield
securities by removing or reducing a source of future financing, and could
negatively affect the value of specific high yield issues and the high yield
market in general. For example, under a provision of the Internal Revenue Code
of 1986 (the "Code") enacted in 1989, a corporate issuer may be limited from
deducting all of the original issue discount on high-yield discount obligations
(i.e., certain types of debt securities issued at a significant discount to
their face amount). The likelihood of passage of any additional legislation or
the effect thereof is uncertain.
The secondary trading market for lower-quality fixed income securities is
generally not as liquid as the secondary market for higher-quality securities
and is very thin for some securities. The relative lack of an active secondary
market may have an adverse impact on market price and a Fund's ability to
dispose of particular issues when necessary to meet the Fund's liquidity needs
or in response to a specific economic event such as a deterioration in the
creditworthiness of the issuer. The relative lack of an active secondary market
for certain securities may also make it more difficult for a Fund to obtain
accurate market quotations for purposes of valuing the Fund's portfolio. Market
quotations are generally available on many high yield issues only from a limited
number of dealers and may not necessarily represent firm bids of such dealers or
prices for actual sales. During such times, the responsibility of the
Corporation's Board of Directors to value the securities becomes more difficult
and judgment plays a greater role in valuation because there is less reliable,
objective data available.
Hedging Transactions
Futures Contracts. Each Fund may enter into futures contracts only for
certain bona fide hedging, yield enhancement and risk management purposes. Each
Fund may enter into futures contracts for the purchase or sale of debt
securities, debt instruments, or indices of prices thereof, stock index futures,
other financial indices, and U.S. Government Securities.
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 are settled on a net cash payment basis rather
than by the sale and delivery of the securities underlying the futures
contracts. U.S. futures contracts have been designed by exchanges that have been
designated as "contract markets" by the Commodity Futures Trading Commission
(the "CFTC"), an agency of the U.S. Government, and must be executed through a
futures commission merchant (i.e., a brokerage firm) which is a member of the
relevant contract market. Futures contracts trade on these contract markets and
the exchange's affiliated clearing organization guarantees performance of the
contracts as between the clearing members of the exchange.
These contracts entail certain risks, including but not limited to the
following: no assurance that futures contracts transactions can be offset at
favorable prices, possible reduction of each Fund's yield due to the use of
hedging, possible reduction in value of both the securities hedged and the
hedging instrument, possible lack of liquidity due to daily limits on price
fluctuation, imperfect correlation between the contracts and the securities
being hedged, and potential losses in excess of the amount invested in the
futures contracts themselves.
Currency Transactions. Each Fund may enter into various currency
transactions, including forward foreign currency contracts, currency swaps,
foreign currency or currency index futures contracts and put and call options on
such contracts or on currencies. A forward foreign currency contract involves an
obligation to purchase or sell a specific currency for a set price at a future
date. A currency swap is an arrangement whereby each party exchanges one
currency for another on a particular date and agrees to reverse the exchange on
a later date at a specific exchange rate. Forward foreign currency contracts and
currency swaps are established in the interbank
<PAGE> 4
market conducted directly between currency traders (usually large commercial
banks or other financial institutions) on behalf of their customers. Futures
contracts are similar to forward contracts except that they are traded on an
organized exchange and the obligations thereunder may be offset by taking an
equal but opposite position to the original contract, with profit or loss
determined by the relative prices between the opening and offsetting positions.
Each Fund expects to enter into these currency contracts and swaps in primarily
the following circumstances: to "lock in" the U.S. dollar equivalent price of a
security a Fund is contemplating to buy or sell that is denominated in a
non-U.S. currency; or to protect against a decline against the U.S. dollar of
the currency of a particular country to which the Fund's portfolio has exposure.
Each Fund anticipates seeking to achieve the same economic result by utilizing
from time to time for such hedging a currency different from the one of the
given portfolio security as long as, in the view of the Adviser, such currency
is essentially correlated to the currency of the relevant portfolio security
based on historic and expected exchange rate patterns.
Unseasoned Companies. The Fund may invest in securities of unseasoned
companies. In view of the limited liquidity, more speculative prospects and
price volatility, the Fund will not invest more than 10% of the Fund's assets
(at the time of purchase) in securities of companies (including predecessors)
that have operated less than three years.
THE ADVISER
The Adviser is a New York corporation with principal offices located at One
Corporate Center, Rye, New York 10580-1434.
Pursuant to an Investment Advisory Contract which was approved by each
Fund's sole shareholder on December 9, 1991 for the Equity Income Fund and
October 2, 1991 for the Small Cap Fund, the Adviser furnishes a continuous
investment program for each Fund's portfolio, makes the day-to-day investment
decisions for each Fund, arranges the portfolio transactions for each Fund and
generally manages each Fund's investments in accordance with the stated policies
of each Fund, subject to the general supervision of the Board of Directors of
the Corporation.
Advisory Fees
For the Year Ended September 30
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Equity Income Fund $640,070 $561,461 $512,370
Small Cap Fund $2,269,141 $2,276,908 $2,112,855
</TABLE>
Under each Investment Advisory Contract, the Adviser also (1) provides the
Fund with the services of persons competent to perform such supervisory,
administrative, and clerical functions as are necessary to provide efficient
administration of the Fund, including maintaining certain books and records and
overseeing the activities of the Fund's Custodian and Transfer Agent; (2)
oversees the performance of administrative and professional services provided to
the Fund by others, including the Fund's Custodian, Transfer Agent and Dividend
Disbursing Agent, as well as legal, accounting, auditing and other services
performed for the Fund; (3) provides the Fund, if requested, with adequate
office space and facilities: (4) prepares, but does not pay for, periodic
updating of the Fund's registration statement, Prospectus and Statement of
Additional Information, including the printing of such documents for the purpose
of filings with the Securities and Exchange Commission; (5) supervises the
calculation of the net asset value of shares of the Fund; (6) prepares, but does
not pay for, all filings under state "Blue Sky" laws of such states or countries
as are designated by the Distributor, which may be required to register or
qualify, or continue the registration or qualification, of the Fund and/or its
shares under such laws; and (7) prepares notices and agendas for meetings of the
Corporation's Board of Directors and minutes of such meetings in all matters
required by the Investment Company Act of 1940 (the "Act") to be acted upon by
the Board.
The Adviser has entered into a Sub-Administration Contract with BISYS Fund
Services ("BISYS" or the "Sub-Administrator") 3435 Stelzer Road, Columbus, Ohio
43219, pursuant to which the Sub-Administrator provides certain administrative
services necessary for the Fund's operations but which do not concern the
investment advisory and portfolio management services provided by the Adviser.
For such services and the related expenses
<PAGE> 5
borne by BISYS, the Adviser pays a prorated monthly fee at the annual rate of
.0625% of the average net assets of the Fund (minimum annual fee of $30,000 per
portfolio) on the first $350 million of all of the funds advised by the Adviser
and its affiliates and administered by BISYS and .0425% of any net assets above
$350 million, and .0225% of any assets above $700 million which together with
the services to be rendered, is subject to negotiation between the parties and
both parties retain the right unilaterally to terminate the arrangement on not
less than 60 days' notice.
The Investment Advisory Contract provides that absent willful misfeasance,
bad faith, gross negligence or reckless disregard of its duty, the Adviser and
its employees, officers, directors and controlling persons are not liable to the
Funds or any of its investors for any act or omission by the Adviser or for any
error of judgment or for losses sustained by the Funds. However, the Contract
provides that each Fund is not waiving any rights it may have with respect to
any violation of law which cannot be waived. The Contract also provides
indemnification for the Adviser and each of these persons for any conduct for
which they are not liable to the Funds. The Investment Advisory Contract in no
way restricts the Adviser from acting as adviser to others. The Funds have
agreed by the terms of the Investment Advisory Contract that the word "Gabelli"
in its name is derived from the name of the Adviser which in turn is derived
from the name of Mario J. Gabelli; that such name is the property of the Adviser
for copyright and/or other purposes; and that therefore, such name may freely be
used by the Adviser for other investment companies, entities or products. The
Funds have further agreed that in the event that for any reason, the Adviser
ceases to be its investment adviser, the Funds 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 Investment Advisory Contract is terminable without penalty by the
Corporation on not more than sixty days' written notice when authorized by the
Directors of the Corporation, by the holders of a majority, as defined in the
Act, of the outstanding shares of the Corporation, or by the Adviser. The
Investment Advisory Contract will automatically terminate in the event of its
assignment, as defined in the Act and rules thereunder except to the extent
otherwise provided by order of the Commission or any rule under the Act and
except to the extent the Act no longer provides for automatic termination, in
which case the approval of a majority of the disinterested directors is required
for any "assignment." Each Investment Advisory Contract provides in effect, that
unless terminated it will remain in effect from year to year so long as
continuance of the Investment Advisory Contract is approved annually by the
Directors of the Corporation, or the shareholders of the Fund and in either
case, by a majority vote of the Directors who are not parties to the Investment
Advisory Contract or "interested persons" as defined in the Act of any such
person cast in person at a meeting called specifically for the purpose of voting
on the continuance of the Investment Advisory Contract.
THE DISTRIBUTOR
Each Fund has entered into a Distribution Agreement with Gabelli & Company,
Inc. (the "Distributor"), a New York corporation which is a subsidiary of
Gabelli Funds, Inc., having principal offices located at One Corporate Center,
Rye, New York 10580-1434. The Distributor acts as agent of the Funds for the
continuous offering of its shares on a best efforts basis.
The Distribution Agreement is terminable by the Distributor or the
Corporation at any time without penalty on not more than sixty nor less than
thirty days' written notice, provided, that termination by the Corporation must
be directed or approved by the Board of Directors of the Corporation, by the
vote of the holders of a majority of the outstanding securities of the Funds or
by written consent of a majority of the directors who are not interested persons
of the Corporation or the Distributor. The Distribution Agreement will
automatically terminate in the event of its assignment, as defined in the
Act.The Distribution Agreement provides that, unless terminated, it will remain
in effect so long as continuance of the Distribution Agreement is approved
annually by the Corporation's Board of Directors or by a majority of the
outstanding voting securities of the Corporation, and in either case, also by a
majority of the Directors who are not interested persons of the Corporation or
the Distributor.
DIRECTORS AND OFFICERS
The Directors and Executive Officers of the Corporation, their principal
business occupations during the last five years and their affiliations, if any,
with the Adviser or the Administrator, are shown below. Directors deemed to
<PAGE> 6
be "interested persons" of the Fund for purposes of the Investment Company Act
of 1940 are indicated by an asterisk.
<TABLE>
<CAPTION>
Principal Occupations During Last Five Years;
Name, Position with the Funds and Address Affiliations with the Adviser or Administrator.
- --------------------------------------------------------------------------------------------
<S> <C>
Mario J. Gabelli* Mr. Gabelli is Chairman, President, Chief Executive Officer,
President, Director and Chief Investment and a Director of Gabelli Funds, Inc., the Adviser and the
Officer indirect parent of the Distributor; Chairman and Chief
Age: 55 Investment Officer of GAMCO Investors, Inc.; President,
Chairman, Director/Trustee, and/or Chief Investment Officer of
substantially all of the funds in the Gabelli family of funds;
Chairman and Director of Lynch Corporation; Director and Adviser
of Gabelli International Ltd. and Gabelli Associates, Ltd.;
Director of East/West Communications, Inc.
James E. McKee Vice President and General Counsel and Secretary of Gabelli Funds,
Secretary Inc.; Secretary of all Funds advised by Gabelli Funds, Inc. and
Age: 34 Teton Advisers LLC. Secretary of The Gabelli Westwood Funds since
August 1995. Vice President and General Counsel of GAMCO Investors,
Inc. since 1993. Formerly Branch Chief with the U.S. Securities
and Exchange Commission in New York from 1992 through 1993. Staff
attorney with the Securities and Exchange Commission in New York
from 1989 through 1992.
Bruce N. Alpert Vice President, Chief Operating Officer of the investment advisory
Vice President and division of the Adviser, President and Treasurer of The Gabelli Asset
Treasurer Fund and The Gabelli Growth Fund; Vice President and Treasurer of all
Age: 46 other funds in the Gabelli family of funds; Vice President of the
Treasurer's Fund, and Vice President and Treasurer of The Gabelli
Westwood Funds; General Manager of Gabelli Advisers LLC.
Felix J. Christiana Formerly Senior Vice President of Dry Dock Savings Bank. Director/
Director Trustee of several of the funds in the Gabelli family of funds.
Age: 72
Anthony J. Colavita President and Attorney at Law in the law firm of Anthony J. Colavita,
Director P.C. since 1961; Director/Trustee of several of the funds in the Gabelli
Age: 61 family of funds.
Vincent D. Enright Senior Vice President and Chief Financial Officer of KeySpan Energy
Director Corporation; Director/Trustee of several of the funds in the Gabelli
Age: 55 family of funds.
John D. Gabelli* Vice President of Gabelli & Company, Inc., Director of Gabelli Investor
Director Funds, Inc., and Gabelli Global Series Funds, Inc. Manager of Gabelli
Age: 52 Advisers LLC.
Robert J. Morrissey Partner in the law firm of Morrissey & Hawkins. Director of The Gabelli
Director Value Fund Inc.
Age: 57
</TABLE>
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<TABLE>
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Principal Occupations During Last Five Years;
Name, Position with the Funds and Address Affiliations with the Adviser or Administrator.
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Anthony R. Pustorino Professor of Accounting at Pace University (1965 - present). Formerly
Director President, consultant, and shareholder, Pustorino Puglisi & Co.,
Age: 71 certified public accountants (1961-1989). Director/Trustee of several of
the funds in the Gabelli family of funds.
Anthonie C. van Ekris Managing Director of Balmac International, Ltd. Director of Stahal
Director Hardmeyer A.Z. and Spinnaker Industries, Inc. Director/Trustee of
Age: 62 several of the funds in the Gabelli family of funds.
Karl Otto Pohl* Partner of Sal Oppenheim Jr. & Cie. (private investment bank); Former
Director President of the Deutsche Bundesbank (Germany's Central Bank)
Age: 65 and Chairman of its Central Bank Council (1980-1991); Currently board
member of IBM World Trade Europe/Middle East/ Africa Corp.; Bertelsmann AG;
Zurich Versicherungs-Gesellschaft (insurance); the International Advisory Board
of General Electric Company; the International Council for JP Morgan & Co.; the
Board of Supervisory Directors of ROBECo/o Group; and the Supervisory Board of
Royal Dutch (petroleum company); Advisory Director of Unilever N.V. and Unilever
Deutschland; German Governor, International Monetary Fund (1980-1991); Board
Member, Bank for International Settlements (1980- 1991); Chairman, European
Economic Community Central Bank Governors (1990-1991); Director/Trustee of all
the funds in the Gabelli family of funds.
</TABLE>
Each Fund pays each Director who is not an employee of the Adviser or an
affiliated company an annual fee of $3,000, $500 for each regular meeting of the
Board of Directors attended by the Director, and reimburses Directors for
certain travel and other out-of-pocket expenses incurred by them in connection
with attending such meetings. Directors and officers of the Funds who are
employed by the Adviser or an affiliated company receive no compensation or
expense reimbursement from the Corporation. Messrs. Mario J. Gabelli and John D.
Gabelli are brothers. Mr. Pohl receives fees from the Adviser but has no
obligation to provide any services to the Adviser. Although this relationship
does not appear to require designation of Mr. Pohl as an interested person, the
Corporation is currently making such designation in order to avoid the
possibility that Mr. Pohl's independence would be questioned.
The following table sets forth certain information regarding the
compensation of the Corporation's directors and officers. Except as disclosed
below, no executive officer or person affiliated with the Funds received
compensation from either Fund for the calendar year ended December 31, 1997 in
excess of $60,000.
<PAGE> 8
COMPENSATION TABLE
<TABLE>
<CAPTION>
Aggregate Compensation
from Registrant
(Fiscal Year) Total Compensation
Equity- Small from Registrant and
Name of Person, Income Cap Fund Complex Paid
Position Fund Fund to Directors*
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<S> <C> <C> <C>
Mario J. Gabelli $ 0 $ 0 $ 0
President, Director and
Chief Investment Officer
Felix J. Christiana
Director 5,000 5,000 84,999(9)
Anthony J. Colavita
Director 5,000 5,000 75,368(10)
Vincent D. Enright
Director 5,000 5,000 17,000(4)
John D. Gabelli
Director 0 0 0
Robert J. Morrissey
Director 5,000 5,000 26,500(3)
Anthony R. Pustorino
Director 5,000 5,000 95,499(8)
Anthonie C.van Ekris
Director 5,000 5,000 55,189(12)
Karl Otto Pohl
DIrector 4,500 4,500 27,619(20)
</TABLE>
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* Represents the total compensation paid to such persons during the
calendar year ended December 31, 1997 (and, with respect to the Funds, estimated
to be paid during a full calendar year). The parenthetical number represents the
number of investment companies (including each Fund) from which such person
receives compensation that are considered part of the same fund complex as the
Funds, because, among other things, they have a common investment adviser.
INVESTMENT RESTRICTIONS
Each Fund's investment objective and the following investment restrictions
are fundamental and cannot be changed without the approval of the holders of a
majority of the Fund's outstanding voting securities (defined in the 1940 Act as
the lesser of (a) more than 50% of the outstanding shares or (b) 67% or more of
the shares represented at a meeting at which more than 50% of the outstanding
shares are represented). All other investment policies or practices are
considered not to be fundamental and accordingly may be changed without
stockholder approval. If a percentage restriction on investment or use of assets
set forth below is adhered to at the time a transaction is effected, later
changes in percentage resulting from changing market values or total assets of a
Fund will not be considered a deviation from policy. Each Fund may not:
(1) with respect to 75% of its total assets, invest more than 5%
of the value of its total assets (taken at market value at time of
purchase) in the outstanding securities of any one issuer or own more
than 10% of the outstanding voting securities of any one issuer, in
each case other than securities issued or guaranteed by the U.S.
Government or any agency or instrumentality thereof;
(2) invest 25% or more of the value of its total assets in any
one industry;
(3) issue senior securities (including borrowing money, including
on margin if margin securities are owned and through entering into
reverse repurchase agreements) in excess of 33-1/3% of its total
assets (including the amount of senior securities issued but excluding
any liabilities and indebtedness not constituting senior securities)
except that a Fund may borrow up to an additional 5% of its total
assets for temporary purposes; or pledge its assets other than to
secure such issuances or in connection with hedging transactions,
short sales, when-issued and forward commitment transactions and
similar investment strategies. A Fund's obligations under the
foregoing types of transactions and investment strategies are not
treated as senior securities;
<PAGE> 9
(4) make loans of money or property to any person, except through
loans of portfolio securities, the purchase of fixed income securities
or the acquisition of securities subject to repurchase agreements;
(5) underwrite the securities of other issuers, except to the
extent that in connection with the disposition of portfolio securities
or the sale of its own shares the Fund may be deemed to be an
underwriter;
(6) invest for the purpose of exercising control over management
of any company;
(7) purchase real estate or interests therein, including limited
partnerships that invest primarily in real estate equity interests,
other than mortgage-backed securities and similar instruments;
or
(8) purchase or sell commodities or commodity contracts except
for hedging purposes or invest in any oil, gas or mineral interests.
PORTFOLIO TRANSACTIONS AND BROKERAGE
The Adviser is authorized on behalf of each Fund to employ brokers to
effect the purchase or sale of portfolio securities with the objective of
obtaining prompt, efficient and reliable execution and clearance of such
transactions at the most favorable price obtainable ("best execution") at
reasonable expense. Transactions in securities other than those for which a
securities exchange is the principal market are generally done through a
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.
Options transactions will usually be effected through a broker and a commission
will be charged. Each 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 the underwriter's concession or discount.
The Adviser currently serves as Adviser to a number of investment company
clients and may in the future act as adviser to others. Affiliates of the
Adviser act as investment adviser to numerous private accounts and adviser to
other investment companies. It is the practice of the Adviser and its affiliates
to cause purchase and sale transactions to be allocated among the Funds and
others whose assets they manage in such manner as it deems equitable. In making
such allocations among the Funds 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 Funds and
other client accounts.
The policy of each Fund regarding purchases and sales of securities and
options for its portfolio is that primary consideration will be given to
obtaining the most favorable prices and efficient execution of transactions. In
seeking to implement each Fund's policies, the Adviser effects transactions with
those brokers and dealers who the Adviser believes provide the most favorable
prices and are capable of providing efficient executions. If the Adviser
believes such price and execution are obtainable from more than one broker or
dealer, it may give consideration to placing portfolio transactions with those
brokers and dealers who also furnish research and other services to the Funds or
the Adviser of the type described in Section 28(e) of the Exchange Act of 1934.
In doing so, the Funds may also pay higher commission rates than the lowest
available when the Adviser believes it is reasonable to do so in light of the
value of the brokerage and research services provided by the broker effecting
the transaction. Such 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
investment; wire services; and appraisals or evaluations of portfolio
securities.
Research services furnished by broker or dealers 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 such other accounts. The purpose of this sharing
of research information is to avoid duplicative charges for research provided by
brokers and dealers.
<PAGE> 10
Neither the Fund nor the Adviser has any agreement or legally binding
understanding with any broker or dealer regarding any specific amount of
brokerage commissions which will be paid in recognition of such services.
However, in determining the amount of porfolio commissions directed to such
brokers or dealers, the Adviser does consider the level of services provided.
Based on such determinations, the Adviser has allocated brokerage commissions of
$121,732 on portfolio transactions in the principal amount of $132,630,126
during fiscal year ended September 30, 1997, to various broker-dealers that have
provided research services to the Adviser. The average commission on these
transactions was $.01 per share.
The Adviser may also place orders for the purchase or sale of portfolio
securities with Gabelli & Company, Inc. ("Gabelli"), a broker-dealer member of
the National Association of Securities Dealers, Inc. and an affiliate of the
Adviser, when it appears that, as an introducing broker or otherwise, Gabelli
can obtain a price and execution which is at least as favorable as that
obtainable by other qualified brokers. The Adviser may also consider sales of
shares of the Funds and any other registered investment companies managed by the
Adviser and its affiliates by brokers and dealers other than the Distributor as
a factor in its selection of brokers and dealers to execute portfolio
transactions for the Funds. The Funds paid the following brokerage commissions
for the year ended September 30, as indicated:
<TABLE>
<CAPTION>
Small Cap Fund Equity Income Fund
-------------- ------------------
1995 1996 1997 1995 1996 1997
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Affiliated Commissions $ 17,243 $ 25,682 $ 43,851 $ 6,176 $10,065 $19,323
Total Commissions 135,080 133,633 $204,515 39,097 25,191 54,306
% of affiliated
Commission to total 12.8% 19.2% 21.4% 15.8% 40.0% 35.5%
% of aggregate dollar
amount of transactions
involving commissions paid
to affiliates -- -- 17.37% -- -- 46.64%
</TABLE>
As required by Rule 17e-1 under the Act, the Board of Directors has adopted
"Procedures" which provide that the commissions paid to Gabelli on stock
exchange transactions may not exceed that which would have been charged by
another qualified broker or member firm able to effect the same or a comparable
transaction at an equally favorable price. Rule 17e-1 and the Procedures contain
requirements that the Board, including its independent Directors, conduct
periodic compliance reviews of such brokerage allocations and review such
schedule at least annually for its continuing compliance with the foregoing
standard. The Adviser and Gabelli are also required to furnish reports and
maintain records in connection with such reviews.
To obtain the best execution of portfolio trades on the New York Stock
Exchange ("Exchange"), Gabelli controls and monitors the execution of such
transactions on the floor of the Exchange through independent "floor brokers" or
through the Designated Order Turnaround ("DOT") System of the Exchange. Such
transactions are then cleared, confirmed to the Fund for the account of Gabelli,
and settled directly with the Custodian of the Funds by a clearing house member
firm which remits the commission less its clearing charges to Gabelli. Gabelli
may also effect Fund portfolio transactions in the same manner and pursuant to
the same arrangements on other national securities exchanges which adopt direct
access rules similar to those of the New York Stock Exchange.
Portfolio turnover may vary from year to year, as well as within a year.
For the fiscal years ended September 30, 1997 and September 30, 1996, the
turnover rates were 43% and 20%, respectively, in the case of the Equity Income
Fund, and 14% and 11%, respectively, in the case of the Small Cap Fund.
PURCHASE AND REDEMPTION OF SHARES
Cancellation of purchase orders for Fund shares (as, for example, when
checks submitted to purchase shares are returned unpaid) cause a loss to be
incurred when the net asset value of the Fund shares on the date of cancellation
is less than on the original date of purchase. The investor is responsible for
such loss, and the Fund may reimburse shares from any account registered in that
shareholder's name, or by seeking other redress. If the Fund is unable to
recover any loss to itself, it is the position of the SEC that the Distributor
will be immediately obligated to make the Fund whole.
<PAGE> 11
DETERMINATION OF NET ASSET VALUE
The net asset value per share of each Fund is determined once daily as of
the close of business of the regular trading session of the New York Stock
Exchange, normally 4:00 p.m. Eastern time, on each day that the New York Stock
Exchange is open and on each other day in which there is a sufficient degree of
trading in the Fund's investments to affect the net asset value, except that the
net asset value may not be computed on a day on which no orders to purchase, or
tenders to sell or redeem, Fund shares have been received, by taking the value
of all assets of the Fund, subtracting its liabilities, dividing by the number
of shares outstanding and adjusting to the nearest cent. The New York Stock
Exchange currently observes the following holidays: New Year's Day; Martin
Luther King Day; President's Day; Good Friday; Memorial Day; Independence Day;
Labor Day; Thanksgiving Day; and Christmas Day.
In the calculation of each Fund's net asset value: (1) a portfolio security
listed or traded on the New York or American Stock Exchanges or quoted by
National Association of Securities Dealers Automated Quotations, Inc. ("NASDAQ")
is valued at its last sale price on that exchange (if there were no sales that
day, the security is valued at the average of the bid and asked price); (2) 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 price;
and (3) when market quotations are not readily available, portfolio securities
are valued at their fair value as determined in good faith under procedures
established by and under the general supervision of the Fund's Directors.
DIVIDENDS, DISTRIBUTIONS AND TAXES
General
Each Fund has qualified and intends to continue to qualify as a regulated
investment company under Subchapter M of the Code. If it so qualifies, the Fund
will not be subject to Federal income tax on its net investment income and net
short-term capital gain, if any, realized during any fiscal year to the extent
that it distributes such income and capital gains to its shareholders.
Each Fund will determine either to distribute, or to retain for
reinvestment, all or part of any net long-term capital gain. If any such gains
are retained, the Fund will be subject to a tax of 35% of such amount. In that
event, the Fund expects to designate the retained amount as undistributed
capital gain in a notice to its shareholders, each of whom (1) will be required
to include in income for tax purposes as long-term capital gain its share of
undistributed amount, (2) will be entitled to credit its proportionate share of
the tax paid by the Fund against its Federal income tax liability and to claim
refunds to the extent the credit exceeds such liability, and (3) will increase
its basis in its shares of the Fund by an amount equal to 65% of the amount of
undistributed capital gain included in such shareholder's gross income.
A distribution will be treated as paid during any calendar year if it is
declared by the Fund in October, November or December of the year, payable to
shareholders of record on a date during such month and 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 received on December 31 of the year the
distributions are declared, rather than when the distributions are received.
Under the Code, amounts not distributed on a timely basis in accordance
with a calendar year distribution requirement are subject to a 4% excise tax. To
avoid the tax, the Fund must distribute during each calendar year, an amount
equal to at least the sum of (1) 98% of its ordinary income (not taking into
account any capital gains or losses) for the calendar year 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, (unless an election is made by a fund with a
November or December year-end to use the fund's fiscal year) and (3) all
ordinary income and net capital gains for previous years that were not
previously distributed.
Gains or losses on the sales of securities by the Funds 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.
Certain options, futures contracts and options on futures contracts are
"section 1256 contracts". Any gains or losses on section 1256 contracts are
generally considered 60% long-term and 40% short-term capital gains or losses
("60/40"). Also, section 1256 contracts held by the Funds at the end of each
taxable year are "marked-to-
<PAGE> 12
market" with the result that unrealized gains or losses are treated as though
they were realized and the resulting gain or loss is treated as 60/40 gain or
loss.
Hedging transactions undertaken by the Funds may result in "straddles" for
U.S. Federal income tax purposes. The straddle rules may affect the character of
gains (or losses) realized by the Fund. In addition, losses realized by the
Funds on positions that are part of a straddle may be deferred under the
straddle rules, rather than being taken into account in calculating the taxable
income for the taxable year in which such losses are realized. Further, the
Funds may be required to capitalize, rather than deduct currently, any interest
expense on indebtedness incurred or continued to purchase or carry any positions
that are part of a straddle. The Funds may make one or more of the elections
available under the Code which are applicable to straddles. If the Funds make
any of the elections, the amount, character and timing of the recognition of
gains or losses from the affected straddle positions will be determined under
rules that vary according to the election(s) made. The rules applicable under
certain of the elections accelerate the recognition of gains or losses from the
affected straddle positions. Because application of the straddle rules may
affect the character and timing of gains, losses or deductions from the affected
straddle positions, the amount which must be distributed to shareholders, and
which will be taxed to shareholders as ordinary income or long-term capital
gain, may be increased or decreased substantially as compared to a fund that did
not engage in such hedging transactions.
The diversification requirements applicable to each Fund's assets may limit
the extent to which a Fund will be able to engage in transactions in options,
futures contracts and options on futures contracts.
Distributions
Distributions of investment company taxable income (which includes taxable
interest income and the excess of net short-term capital gains over long-term
capital losses) are taxable to a U.S. shareholder as ordinary income, whether
paid in cash or in additional Fund shares. Dividends paid by a Fund will qualify
for the 70% deduction 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 gain (which consist of the excess of long-term or
mid-term capital gains over net short-term capital losses), if any, are taxable
as long-term capital gain, whether paid in cash or in 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. If the net asset value of shares is reduced below a
shareholder's cost as a result of a distribution by the Fund, such distribution
may be taxable even though it represents a return of invested capital. The price
of shares purchased at any time may reflect the amount of a forthcoming
distribution. Those purchasing shares just prior to a distribution will receive
a distribution which will be taxable to them, even though the distribution
represents in part a return of invested capital.
Sales of Shares
Upon a sale or exchange of shares, a shareholder will realize a taxable
gain or loss depending upon the basis in the shares. Such gain or loss will be
long-term, mid-term, or short-term, generally depending upon the shareholder's
holding period for the shares. Non-corporate shareholders are subject to tax at
a minimum rate of 28% on capital gains resulting from the disposition of shares
held for more than 12 months but not more than 18 months, and at a maximum rate
of 20% on capital gains from the disposition of shares held for more than 18
months, (10% if the taxpayer is, and would be after accounting for such gains,
subject to the 15% tax bracket for ordinary income). Any loss realized on a sale
or exchange will be disallowed to the extent the shares disposed of are replaced
within a 61-day period beginning 30 days before and ending 30 days after the
date 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 net capital gain
received by the shareholder with respect to such shares.
Backup Withholding
The Corporation may be required to withhold Federal income tax at a rate of
31% on all taxable distributions payable to shareholders who fail to provide
their correct taxpayer identification number or to make required certifications,
or who have been notified by the Internal Revenue Service that they are subject
to backup
<PAGE> 13
withholding. Backup withholding is not an additional tax. Any amounts
withheld may be credited against the shareholder's Federal income tax liability.
Foreign Withholding Taxes
Income received by the Funds from sources within foreign countries may be
subject to withholding and other taxes imposed by such 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 Funds' assets to be invested in various
countries is not known. Because each Fund will not have more than 50% of its
total assets invested in securities of foreign governments or corporations, the
Funds will not be entitled to "pass-through" to shareholders the amount of
foreign taxes paid by the Funds.
Corporate Matters
The Corporation reserves the right to create and issue a number of series
shares, in which case the shares of each series would participate equally in the
earnings, dividends, and assets of the particular series and would vote
separately to approve management agreements or changes in investment policies,
but shares of all series would vote together in the election or selection of
Directors, principal underwriters and auditors and on any proposed material
amendment to the Corporation's Certificate of Incorporation.
Upon liquidation of the Corporation or any series, shareholders of the
affected series would be entitled to share pro rata in the net assets of their
respective series available for distribution to such shareholders.
INVESTMENT PERFORMANCE INFORMATION
The Funds may furnish data about their investment performance in
advertisements, sales literature and reports to shareholders. "Total return"
represents the annual percentage change in value of $1,000 invested at the
maximum public offering price for the one year period and the life of the Fund
through the most recent calendar quarter, assuming reinvestment of all dividends
and distributions. The Funds may also furnish total return calculations for
these and other periods, based on investments at various sales charge levels or
net asset value.
Quotations of yield will be based on the investment income per share earned
during a particular 30 day period, less expenses accrued during the period ("net
investment income") and will be computed by dividing net investment income by
the maximum offering price per share on the last day of the period, according to
the following formula:
YIELD = 2[( A-B + 1) 6 - 1]
---
CD
where A = dividends and interest earned during the period, B = expenses accrued
for the period (net of any reimbursements), C = the average daily number of
shares outstanding during the period that were entitled to receive dividends,
and D = the maximum offering price per share on the last day of the period.
Quotations of total return will reflect only the performance of a
hypothetical investment in a Fund during the particular time period shown. A
Fund's total return and current yield may vary from time to time depending on
market conditions, the compositions of the Funds' portfolio and operating
expenses. These factors and possible differences in the methods used in
calculating yield should be considered when comparing a Fund's current yield to
yields published for other investment companies and other investment vehicles.
Total return and yield should also be considered relative to change in the value
of the Funds' shares and the risks associated with each Fund's investment
objectives and policies. At any time in the future, total returns and yield may
be higher or lower than past total returns and yields and there can be no
assurance that any historical return or yield will continue.
From time to time evaluations of performance are made by independent
sources that may be used in advertisements concerning the Funds. These sources
include: Lipper Analytical Services, Weisenberger Investment Company Service,
Barron's, Business Week, Financial World, Forbes, Fortune, Money, Personal
Investor, Sylvia Porter's Personal Finance, Bank Rate Monitor, Morningstar and
The Wall Street Journal.
In connection with communicating its yield or total return to current or
prospective shareholders, the Fund may also compare these figures to the
performance of other mutual funds tracked by mutual fund rating services or to
<PAGE> 14
other unmanaged indexes which may assume reinvestment of dividends but generally
do not reflect deductions for administrative and management costs.
Quotations of the Funds' total return will represent the average annual
compounded rate of return of a hypothetical investment in the Fund over periods
of 1, 5, and 10 years (up to the life of the Fund), and are calculated pursuant
to the following formula:
P(1+T)n = ERV
(where P = a hypothetical initial payment of $1,000, T = the average annual
total return, n = the number of years, and ERV = the redeemable value at the end
of the period of a $1,000 payment made at the beginning of the period). Total
return figures will reflect the deduction of Fund expenses (net of certain
expenses reimbursed by the Adviser) on an annual basis, and will assume that all
dividends and distributions are reinvested and will deduct the maximum sales
charge, if any is imposed.
Total Return
for the period ended September 30, 1997
<TABLE>
<CAPTION>
Small Cap Fund* Equity Income Fund*
<S> <C> <C>
Cumulative Total Return (since commencement of operations of the 239.49% 145.50%
Fund)
Average Annual Total Return (since commencement of operations of 22.80% 16.90%
the Fund)
Average Annual Total Return (5 years) 20.80% 18.30%
Average Annual Total Return (12 months) 42.20% 34.00%
</TABLE>
* Commencement of operations for the Small Cap Fund and the Equity Income Fund
took place on October 22, 1991 and January 2, 1992, respectively.
SHARES OF BENEFICIAL INTEREST
As of the date of this Statement of Additional Information, the Directors
of the Corporation as a group owned less than 1% of the outstanding shares of
each Fund.
The following persons were known to own of record 5% or more of the
outstanding voting securities of the indicated funds as of January 2, 1998:
<TABLE>
<CAPTION>
SMALL CAP FUND
<S> <C>
NAME AND ADDRESS OF
HOLDER OF RECORD PERCENTAGE OF FUND
---------------- ------------------
Charles Schwab & Co., Inc. 9.94%
101 Montgomery Street
San Francisco, CA 94104
EQUITY INCOME FUND
NAME AND ADDRESS OF
HOLDER OF RECORD PERCENTAGE OF FUND
---------------- ------------------
Charles Schwab & Co., Inc. 10.07%
101 Montgomery Street
San Francisco, CA 94104
</TABLE>
<PAGE> 15
APPENDIX TO STATEMENT OF ADDITIONAL INFORMATION
Description of Moody's Investors Service, Inc.'s ("Moody's") Corporate Bond
Ratings
- --------------------------------------------------------------------------------
AAA: Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues. Aa: Bonds which are rated Aa
are judged to be of high quality by all standards. Together with the Aaa group
they comprise what are generally known as high grade bonds. They are rated lower
than the best bonds because margins of protection may not be as large as in Aaa
securities or fluctuation of protective elements may be of greater amplitude or
there may be other elements present which made 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 the desirable investment. Assurance of
interest and principal payments or of maintenance of other terms of the contract
over any long period of time may be small. Caa: Bonds which are rated Caa are of
poor standing. Such issues may be in default or there may be present elements of
danger with respect to principal or interest. Ca: Bonds which are rated Ca
represent obligations which are speculative in a high degree. Such issues are
often in default or have other marked shortcomings. C: Bonds which are rated C
are the lowest rated class of bonds and issues so rated can be regarded as
having extremely poor prospects of ever attaining any real investment standing.
Note: Moody's may apply numerical modifiers, 1, 2 and 3 in each generic
rating classification from Aa through B in its corporate bond rating system.The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.
Description of Standard & Poor's Corporation's ("S&P's") Corporate Debt Ratings
- --------------------------------------------------------------------------------
AAA: Debt rated AAA has the highest rating assigned by S&P's. Capacity to
pay interest and repay principal is extremely strong. AA: Debt rated AA has a
very strong capacity to pay interest and repay principal and differs from the
highest rated issues only in small degree. A: Debt rated A has a strong capacity
to pay interest and repay principal although it is somewhat more susceptible to
the adverse effects of changes in circumstances and economic conditions than
debt in higher rated categories. BBB: Debt rated BBB is regarded as having
adequate capacity to pay interest and repay principal. Whereas it normally
exhibits protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay interest and
repay principal for debt in this category than for debt in higher rated
categories. BB, B, CCC, CC, C: Debt rated BB, B, CCC, CC and C is regarded, on
balance, as predominantly speculative with respect to capacity to pay interest
and repay principal in accordance with the terms of the obligation. BB indicates
the lowest degree of speculation and C the highest degree of speculation. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions. CI: The rating CI is reserved for income bonds on which no interest
is being paid. D: Debt rated D is in payment default. The D rating category is
used when interest payments or principal payments are not made on the date due
even if the applicable grace period has not expired, unless S&P's believes that
such payments will be made during such grace period. The D rating also will be
used upon the filing of a bankruptcy petition if debt service payments are
jeopardized.
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.
<PAGE> 16
Description of Moody's Preferred Stock Ratings
- --------------------------------------------------------------------------------
aaa: An issue which is rated aaa is considered to be a top-quality
preferred stock. This rating indicates good asset protection and the least risk
of dividend impairment within the universe of preferred stocks. aa: An issue
which is rated aa is considered a high-grade preferred stock. This rating
indicates that there is reasonable assurance that earnings and asset protection
will remain relatively well maintained in the foreseeable future. a: An issue
which is rated a is considered to be an upper medium grade preferred stock.
While risks are judged to be somewhat greater than in the aaa and aa
classifications, earnings and asset protection are, nevertheless expected to be
maintained at adequate levels. baa: An issue which is rated baa is considered to
be medium grade, neither highly protected nor poorly secured. Earnings and asset
protection appear adequate at present but may be questionable over any great
length of time. ba: An issue which is rated ba is considered to have speculative
elements and its future cannot be considered well assured. Earnings and asset
protection may be very moderate and not well safeguarded during adverse periods.
Uncertainty of position characterizes preferred stocks in this class. b: An
issue which is rated b generally lacks the characteristics of a desirable
investment. Assurance of dividend payments and maintenance of other terms of the
issue over any long period of time may be small. caa: An issue which is rated
caa is likely to be in arrears on dividend payments. This rating designation
does not purport to indicate the future status of payment. ca: An issue which is
rated ca is speculative in a high degree and is likely to be in arrears on
dividends with little likelihood of eventual payment. c: This is the lowest
rated class of preferred or preference stock. Issues so rated can be regarded as
having extremely poor prospects of ever attaining any real investment standing.
Note: Moody's may apply numerical modifiers 1, 2 and 3 in each rating
classification from "aa" through "b" in its preferred stock rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.
Description of S&P's Preferred Stock Ratings
- --------------------------------------------------------------------------------
AAA: This is the highest rating that may be assigned by S&P's to a
preferred stock issue and indicates an extremely strong capacity to pay the
preferred stock obligations. AA: A preferred stock issue rated AA also qualifies
as a high-quality fixed income security. The capacity to pay preferred stock
obligations is very strong, although not as overwhelming as for issues rated
AAA. A: An issue rated A is backed by a sound capacity to pay the preferred
stock obligations, although it is somewhat more susceptible to the adverse
effect of changes in circumstances and economic conditions. BBB: An issue rated
BBB is regarded as backed by an adequate capacity to pay the preferred stock
obligations. Whereas it normally exhibits adequate protection parameters,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity to make payments for a preferred stock in this category than
for issues in the A category. BB, B, CCC: Preferred stock rated BB, B, and CCC
are regarded, on balance, as predominantly speculative with respect to the
issuer's capacity to pay preferred stock obligations. BB indicates the lowest
degree of speculation and CCC the highest degree of speculation. While such
issues will likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major risk exposures to adverse conditions.
CC: The rating CC is reserved for a preferred stock in arrears on dividends or
sinking fund payments but that is currently paying. C: A preferred stock rated C
is a non-paying issue. D: A preferred stock rated D is a non-paying issue with
the issuer in default on debt instruments.
Plus (+) or Minus (-): The ratings from "AA" to "B" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
FINANCIAL STATEMENTS
Each Fund's Financial Statements for the year ended September 30, 1997,
including the Report of Ernst & Young LLP, independent auditors, is incorporated
herein by reference to each Fund's Annual Report. Each Fund's Annual Report is
available upon request and without charge.
