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The
Gabelli
ABC
Fund
PROSPECTUS
October 10, 1995
GABELLI FUNDS, INC.
Investment Adviser
GABELLI & COMPANY, INC.
Distributor
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The Gabelli ABC Fund
One Corporate Center
Rye, New York 10580-1434
Telephone: 1-800-GABELLI (1-800-422-3554)
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PROSPECTUS
October 10, 1995
The Gabelli ABC Fund's investment objective is to achieve total returns that are
attractive to investors in various market conditions without excessive risk of
capital loss. The Fund seeks to achieve its investment objective through
investment in securities that the Fund's investment adviser believes provide
attractive opportunities for appreciation or investment income. The Fund is an
open-end nondiversified series of Gabelli Investor Funds, Inc., a Maryland
corporation registered as a management investment company.
As a special one-year Performance Guaranty Program for investments made on
January 2, 1996, the Adviser has arranged an irrevocable collateralized standby
letter of credit issued by State Street Bank and Trust Company (the "Bank").
This program is offered to new and existing shareholders on a first-come
first-served basis up to a maximum of $50 million. The Program applies only to
investments made on January 2, 1996, only to the first $5,000 invested on that
date and only if the stockholder reinvests all distributions and does not redeem
any of his covered shares or reinvested distributions during the guaranty
period. The Letter of Credit provides that if the net asset value of the covered
investment (including reinvested dividends) on December 31, 1996 is less than
105% of such investment on January 2, 1996, the Bank will pay the entire
shortfall to the stockholder. The Letter of Credit is an obligation of the Bank
and not of the Fund or the Adviser. In certain circumstances considered by the
Adviser to be highly unlikely, the Bank may terminate the Letter of Credit prior
to December 31, 1996 provided it pays over the entire shortfall at that time. In
addition, in the unlikely event that the Bank (whose long-term deposits are
rated Aa2 by Moody's and AA by S&P) becomes insolvent, investors might not be
able to collect any shortfall in the Fund's performance. The Performance
Guaranty Program is described in more detail on pages 8 through 10.
The minimum initial investment is $1,000. Investors may invest more than the
covered amount although any investment beyond the covered amount ($5,000) will
not be eligible to participate in the Performance Guaranty Program and will be
subject to a 2% sales charge, which is waived for investments up to the covered
amount and accrued dividends on an exchange from Gabelli U.S. Treasury Money
Market Fund. The Fund has a distribution plan which permits it to pay up to .25%
per year of its average daily net assets for marketing and shareholder services
and expenses.
The Performance Guaranty Program is offered to new and existing shareholders on
a first-come first-served basis up to an aggregate amount expected to be $50
million. In order to reserve a spot in the Program, investors must (1) send in
an application requesting that an investment in a specified amount be made in
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the Fund on January 2, 1996 at the net asset value computed on that day and (2)
send a check or bank wire in the requisite amount to arrive on or before January
2, 1996. Money received early will be invested in The Gabelli U.S. Treasury
Money Market Fund and all such money plus accrued dividends will be exchanged on
January 2, 1996 for shares of the Fund. The Fund's net asset value will be
available daily through The Wall Street Journal under the Gabelli Funds listing
or by calling 1-800-GABELLI (1-800-422-3554). Applications to invest may be
cancelled at any time prior to January 2, 1996. During any performance guaranty
program period, the Fund will only be offered to existing shareholders.
Participation in the Program is on a first-come first-served basis. After
January 2, 1996, the Fund is closed to new investors.
This Prospectus sets forth concisely the information a prospective investor
should know before investing in the Fund.
A Statement of Additional Information dated October 10, 1995 (the "Additional
Statement") containing additional information about the Fund has been filed with
the Securities and Exchange Commission and is incorporated by reference into
this Prospectus and may be received free of charge by writing or calling Gabelli
& Company, Inc. at the address or telephone number set forth above.
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This Prospectus should be retained
by investors for future reference.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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2
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information appearing elsewhere in this Prospectus.
The Fund: The Gabelli ABC Fund (the "Fund") is an open-end nondiversified series
of Gabelli Investor Funds, Inc., a Maryland corporation (the "Corporation")
registered with the Securities and Exchange Commission as a management
investment company.
Investment Objective: The Fund's investment objective is to achieve total
returns that are attractive to investors in various market conditions without
excessive risk of capital loss. It seeks to achieve its investment objective
through investment in securities that the Adviser believes provide attractive
opportunities for appreciation or investment income. The Fund may invest in
all types of securities, including common stock, preferred stock, convertible
securities, depository receipts, bonds, debentures, notes, mortgage and
asset-backed securities, warrants, options and futures contracts on
securities and securities indices. Such securities may be issued by domestic
or foreign corporations or other entities, governmental units or
supranational organizations.
There is no assurance that the Fund will achieve its investment objective.
The investment objective of the Fund and the investment restrictions
described in the Additional Statement are fundamental and may not be changed
without shareholder approval. Its other investment policies may be changed by
the Corporation's Board of Directors without shareholder approval.
Management and Fees: Gabelli Funds, Inc. (the "Adviser") serves as the Fund's
investment adviser and is compensated for its services and its related
expenses at an annual rate of 1.00% of the Fund's average daily net assets.
This fee is higher than that paid by most mutual funds. Gabelli & Company,
Inc. (the "Distributor"), will act as distributor for Fund shares. The Fund
has a distribution plan which permits it to pay the Distributor and others up
to .25% per year of its average daily net assets for marketing and
shareholder services and expenses.
Performance Guaranty Program: As a special one-year performance guaranty program
for amounts invested on January 2, 1996, the Adviser has arranged the Letter
of Credit issued by State Street Bank and Trust Company (the "Bank"). The
Letter of Credit is an obligation of the Bank and not of the Fund or the
Adviser. The Letter of Credit is a separate security from the shares of the
Fund and is exempt from registration with the Securities and Exchange
Commission. The Letter of Credit provides that if the net asset value of the
covered investment (including reinvested dividends) on the expiration date of
the applicable program (December 31, 1996, in the case of the Performance
Guaranty Program for amounts invested on January 2, 1996) is less than 105%
of such investment made as of the start of the Performance Guaranty Program,
the Bank will pay such stockholder the entire shortfall.
The new program is offered to new and existing shareholders on a first-come
first-served basis and applies only to investments made and maintained in
accordance with certain conditions. If the net asset value of the covered
shares or the collateral posted by the Adviser or any combination thereof
declines by more than 15% from the initial net asset value of the covered
shares and the Adviser fails to post additional collateral equal to at least
the amount of the excess decline or if the Adviser violates certain covenants
(such as pledging its assets or becoming bankrupt), the Bank will have the
right to terminate the Letter of Credit before the end of the performance
guaranty period and pay out the entire shortfall at that time. This is the
difference between the guaranteed amount and the net asset value of the
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3
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covered shares next determined after the Bank terminates the Letter of
Credit.The Adviser will post only high quality securities with low market
volatility as collateral for the Letter of Credit and believes that the
events required for early termination are highly unlikely to occur. In
addition, however, unless a stockholder participating in the Performance
Guaranty Program has affirmatively chosen to retain his investment in the
Fund in such circumstances, his covered investment will be redeemed on the
early termination date of the Letter of Credit. In this way participants in
the program can be assured of receiving the entire amount even in the
unlikely event that the Letter of Credit is terminated prior to December 31,
1996.
The maximum amount of initial net assets that is expected to be covered by
the Performance Guaranty Program is $50 million. The minimum investment is
$1,000. Investors may invest more than the covered amount although any
investment beyond the covered amount will not be eligible to participate in
the Performance Guaranty Program and any investment in excess of the covered
amount will be subject to a 2% sales charge. See "Performance Guaranty
Program" below. Although the Adviser retains the right to renew the
Performance Guaranty Program after its initial expiration, it has no
obligation to do so. Participation in the Performance Guaranty Program is
available on a first-come first-served basis.
Current shareholders of the Fund are covered by a prior performance guaranty
program that is scheduled to terminate on December 31, 1995, covering
approximately $18,000,000 of initial shares purchased. The new program will
not affect or be affected by the prior program, which may be terminated at
its scheduled termination date. Participants in the current program are
eligible to invest in the new program on the same basis as any other
investors.
How to Purchase Shares: On or prior to January 2, 1996 investors are eligible to
reserve a spot in the Performance Guaranty Program by (1) sending in an
application requesting that an investment in a specified amount be made in
the Fund on January 2, 1996 at the net asset value on that day and (2)
sending a check or bank wire in the requisite amount to arrive on or before
January 2, 1996. Money received early will be invested in The Gabelli U.S.
Treasury Money Market Fund and all such money plus accrued dividends would be
exchanged on January 2, 1996 for shares of the Fund. The Fund's net asset
value will be available daily through The Wall Street Journal under the
Gabelli Funds listing or by calling 1-800-GABELLI (1-800-422-3554). Shares of
the Fund may be purchased through the Distributor and shareholder agents by
participants in any of the performance guaranty programs at the public
offering price based on the net asset value per share next determined after
receipt of an order by the Fund's Distributor or transfer agent in proper
form with accompanying check, bank wire or other guaranteed payment
arrangements satisfactory to the Fund. It is the responsibility of the
shareholder agents to establish procedures which would assure that their
customers' purchase orders will be received by the Distributor before the
time when the price applicable to the order expires. There is a 2% sales
charge in the case of any investment on January 2, 1996 in excess of $5,000
or in the case of any investment after January 2, 1996.
Roll-Overs: Current shareholders of the Fund who do not redeem or otherwise
dispose of their shares prior to January 2, 1996, automatically, and without
any action on their part, will participate in the Performance Guaranty
Program up to the $5,000 maximum covered amount.
How to Sell Shares: Shares of the Fund may be redeemed through the Distributor
and shareholder agents and the transfer agent by the shareholder at any time
at the net asset value per share next determined after the redemption request
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4
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is received by the Fund's Distributor or transfer agent in proper order. It
is the responsiblity of the shareholder agents to establish procedures which
would assure that their customers' redemption orders will be received by the
Distributor before the time when the price applicable to the order expires.
See "Redemption of Shares."
Dividends and Reinvestment: Each dividend and capital gains distribution, if
any, declared by the Fund on its outstanding shares will, unless a
shareholder elects otherwise, be paid on the payment date in additional
shares of the Fund having an aggregate net asset value as of the ex-dividend
date of such dividend or distribution equal to the cash amount of such
distribution. An election may be changed by notifying the Fund in writing at
any time prior to the record date for a particular dividend or distribution.
There are no sales or other charges in connection with the reinvestment of
dividends and capital gains distributions. There is no fixed dividend rate,
and there can be no assurance that the Fund will pay any dividends or realize
any capital gains. The Fund currently intends to pay dividends and capital
gains distributions, if any, on an annual basis. See "Dividends,
Distributions and Taxes."
Risk Factors: A particular risk of the Fund is that the guaranty feature of the
performance guaranty programs could cause the Adviser to manage the Fund more
conservatively than would otherwise be the case in an effort to avoid losses
to the Adviser that would occur under the Adviser's agreement to reimburse
the Bank for any payments made by the Bank under the Letter of Credit. The
Adviser will seek to manage the Fund without regard to this potential
conflict of interest. However, investors should understand that the Fund has
a more conservative objective than, for example, a growth fund. Accordingly,
the Adviser expects that, consistent with the Fund's investment objective, it
will invest the Fund's assets in a more conservative manner than it would in
a small capitalization growth fund, for example, and may utilize fixed income
securities and hedging strategies to preserve capital or to reduce the risk
of capital loss to a greater extent than it does in other equity funds
managed by the Adviser. As a result, the Fund's total return is not expected
to be as high as pure equity funds in periods of significant appreciation in
the equity markets.
Investors should consider various risks associated with the Fund's investment
objectives and investment policies, including investing in foreign
securities, common stocks, convertible securities, various types of debt
securities, junk bonds, defaulted bonds, securities of bankrupt companies,
short sales, hedging techniques and the non-diversified status of the Fund.
See "Investment Objective and Policies and Related Risk Factors." The Fund
has reserved the right to borrow money from time to time to provide greater
liquidity for redemptions or to clear transactions.
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TABLE OF FEES AND EXPENSES
Shareholder Transaction Expenses:
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<TABLE>
<S> <C>
Maximum Sales Load Imposed on Purchases (as a percentage of offering price) (a) .................... 2%
Maximum Sales Load Imposed on Reinvested Dividends ................................................. None
Deferred Sales Load ................................................................................ None
Redemption Fees .................................................................................... None
Exchange Fees (b) .................................................................................. None
</TABLE>
Annual Fund Operating Expenses
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(as a percentage of average net assets):
<TABLE>
<S> <C>
Management Fees .................................................................................... 1.00%
12b-1 Expenses ..................................................................................... .25
Other Expenses (c) ................................................................................. .85%
----
Total Operating Expenses (d) ................................................................... 2.10%
====
</TABLE>
<TABLE>
<CAPTION>
Example: 1 year 3 years 5 years 10 years
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<S> <C> <C> <C> <C>
If you pay the maximum sales load,you would pay the following expenses on
a $1,000 investment assuming a 5% annual return (a) ........................ 40.88 89.47 130.62 258.25
If you do not pay a sales load, you would pay the following expenses on a
$1,000 investment assuming a 5% annual return (a) .......................... 21.53 66.91 114.97 247.86
</TABLE>
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The amounts listed in this example should not be considered as representative of
future expenses and actual expenses may be greater or less than those indicated.
Moreover, while the example assumes a 5% annual return, the Fund's actual
performance will vary and may result in an actual return greater or less than
5%. The amounts shown are based on the annualized expenses incurred during the
six month period ended June 30, 1995.
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The foregoing table is to assist you in understanding the various direct and
indirect costs and expenses that an investor in the Fund would bear.
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(a) The Fund does not impose a sales charge on purchases qualifying for the
Performance Guaranty Program.
(b) Upon exchange of shares of the Fund to another Gabelli fund with a sales
charge, credit will be given for any sales charge previously paid.
(c) Such expenses include custodian and transfer agency fees and other
customary Fund expenses.
(d) Based on the six month period ended June 30, 1995. Actual expenses may be
higher or lower in future periods.
Management's Discussion and Analysis of the Fund's performance during the fiscal
year ended December 31, 1994 is included in the Fund's Annual Report to
Shareholders dated December 31, 1994. The Fund's Annual Report to Shareholders
may be obtained upon request and without charge by writing or calling the Fund
at the address or telephone number listed on the Prospectus cover.
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FINANCIAL HIGHLIGHTS
The following information for 1994 and 1993 has been audited by Grant Thornton
LLP, independent accountants, whose unqualified report appears in the Additional
Statement.
Selected per share data and capital stock outstanding throughout the period:
<TABLE>
<CAPTION>
From May 14, 1993
Six Months (Commencement of
Ended Year Ended Operations) through
June 30, 1995 December 31, 1994 December 31, 1993
------------- ----------------- -----------------
(unaudited)
<S> <C> <C> <C>
Operating Performance:
Net asset value, beginning of period ................................ $ 9.57 $ 10.03 $ 10.00
------- ------- -------
Net investment income ............................................... 0.10 0.33 0.29
Net realized and unrealized gain on investments ..................... 0.47 0.12 0.62
------- ------- -------
Total from investment operations .................................... 0.57 0.45 0.91
Less Distributions:
Dividends from net investment income ................................ -- (0.33) (0.29)
Distributions from net realized gain on investments ................. -- (0.58) (0.59)
------- ------- -------
Total distributions ................................................. -- (0.91) (0.88)
------- ------- -------
Net asset value, end of period ...................................... $ 10.14 $ 9.57 $ 10.03
======= ======= =======
Total Return (not reflecting sales load) ............................ 5.96% 4.49% 9.10%
Ratios to average net assets/supplemental data:
Net assets, end of period (in thousands) ............................ $21,871 $24,419 $ 8,847
Ratio of operating expenses to average net assets+ .................. 2.10%* 2.09% 2.75%*
Ratio of net investment income to average net assets+ ............... 1.97%* 2.95% 2.96%*
Portfolio turnover rate ............................................. 307.85% 489.54% 232.33%
</TABLE>
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* Annualized.
+ Net of expenses assumed by the Advisor equivalent to 0.0%, 0.14% and 0.82%,
respectively.
INVESTMENT OBJECTIVE AND POLICIES AND RELATED RISK FACTORS
The Fund's investment objective is to achieve total returns that are attractive
to investors in various market conditions without excessive risk of capital
loss. The Fund will seek to achieve this objective through investment in
securities that the Adviser believes provide attractive opportunities for
appreciation or investment income. The Fund is not restricted as to the types
and quantities of securities it may buy except as described below.
In selecting securities for investment, the Adviser normally will consider the
following factors, among others: (1) the Adviser's own evaluations of the
private market value of the underlying assets and business of the company; (2)
the interest or dividend income generated by the securities; (3) the potential
for capital appreciation of the securities; (4) the prices of the securities
relative to other comparable securities; (5) whether the securities are entitled
to the benefits of sinking funds or other protective conditions; (6) the
existence of any anti-dilution protections or guarantees of the security; and
(7) the diversification of the Fund's portfolio as to issuers. The Adviser's
investment philosophy with respect to equity securities hinges on identifying
assets that are selling in the public market at a discount to the private market
value, which the Adviser defines as the value informed purchasers are willing to
pay to acquire assets with similar characteristics. The Adviser also evaluates
the issuers' free cash flow and long-term earnings trends. Finally, the Adviser
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looks for a catalyst: something in the company's industry or indigenous to the
company or country itself that will surface additional value.
The Fund may invest without limit in common stock, preferred stock, convertible
securities, depository receipts, bonds, notes and other debt obligations of any
maturity, mortgage-backed and asset-backed securities, warrants, options and
futures contracts on securities and securities indices, and securities of
companies in bankruptcy or reorganization. Such securities may be issued by
domestic or foreign corporations or other types of entities, governments or
agencies or instrumentalities of governments or supranational agencies. There is
no minimum rating or credit quality of fixed income securities in which the Fund
may invest. The Fund may also utilize other investment strategies such as short
selling, buying when-issued securities, entering into forward commitments,
buying securities of unseasoned companies and engaging in various hedging
strategies such as the use of futures and options and repurchase agreements, and
foreign currency transactions.
The Fund may invest up to 25% of its assets in fixed income securities rated, at
the time of investment, lower than BBB by S&P or Baa by Moody's, or unrated but
determined by the investment adviser to be of equivalent quality. The Fund does
not expect to invest in excess of 10% of its assets in such securities.
Securities rated below BBB or Baa are typically referred to as "junk bonds" and
have speculative characteristics.
The Fund may invest without limit in securities for which a tender offer or
exchange offer has been made or announced and in securities of companies for
which a merger, consolidation, liquidation or similar proposal has been
announced. The Fund also may invest up to 10% of its assets in options and up to
5% of its assets in warrants to buy securities, with no more than 2% invested in
unlisted warrants. The Fund may invest up to 10% of its assets in securities
issued by real estate investment trusts. The Fund may also invest up to 10% of
its assets in securities issued by other investment companies.
The Fund may invest in repurchase agreements with respect to any securities it
may own. Repurchase agreements are considered loans to the counterparty, and
will be fully collateralized at all times with liquid high grade securities and
will only be entered into with financial institutions approved by the Board of
Directors.
The Fund may also lend securities to dealers or others and may borrow from banks
for temporary or emergency purposes or to satisfy redemption requests in amounts
not in excess of 15% of the Fund's total assets, with such borrowing not to
exceed 5% of the Fund's total assets for purposes other than satisfying
redemption requests. The Fund will not purchase securities when borrowings
exceed 5%.
The Fund may invest up to 10% of its assets in securities with resale
restrictions or illiquid securities as to which market quotations are not
readily available.
See the Additional Statement for more information about these securities and
investment practices.
LIMITED PERFORMANCE GUARANTY PROGRAM OF THE FUND
The Performance Guaranty Program is designed to ensure that an investor in the
Fund will earn at least 5% on the portion of his investment covered by the
Program during the year. The Program seeks to achieve this goal through an
irrevocable collateralized Standby Letter of Credit issued by the Bank in favor
of any of the Corporation's Directors for the benefit of each investor that
participates in the Program. The Letter of Credit will provide that if an
investor's investment covered by the Program has a net asset value at December
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31, 1996, less than 105% of the net asset value of such investment on January 2,
1996, the Bank will pay the entire shortfall to the investor. The amount of any
one investment eligible to participate in the Performance Guaranty Program (the
"covered amount") is limited to $5,000. The Program is offered to new and
existing shareholders on a first-come first-served basis and applies only to
investments made as of January 2, 1996, and only if the investor reinvests all
distributions and does not redeem any of his covered shares during the guaranty
period. The maximum amount of initial net assets that will be covered by the
Program is $50 million.
The following examples illustrate the operation of the Program. If an investor
purchases 1,000 shares at $10.00 per share for $10,000 on January 2, 1996, 500
shares (with an initial net asset value of $5,000) will be eligible to
participate in the Program and the balance will not. If during the calendar year
1996 the net asset value per share of the Fund (including reinvestment of any
distributions) increases by 10%, the investor will not be entitled to receive
any payment on the Letter of Credit. If, on the other hand, such net asset value
per share decreases by 5%, the investor will be entitled to a payment of $500
because the return on the $5,000 covered amount was 10% short of the minimum 5%
return, ($5,000 x 10% = $500). The investor would not receive any payment with
respect to the additional $5,000 invested that was not covered by the Program.
In addition, if during the course of the one year guaranty period the investor
failed to reinvest any distributions or redeemed any of the 500 shares covered
by the Program, or any shares purchased with distributions on the 500 shares,
the investor would be ineligible to receive any part of the $500 payment.
If the net asset value of the total number of covered shares or the collateral
posted by the Adviser or any combination thereof declines by more than 15% from
the initial net asset value of the covered shares and the Adviser fails to post
additional collateral equal to at least the amount of the excess decline or if
the Adviser violates certain covenants (such as pledging its assets or becoming
bankrupt), the Bank will have the right to terminate the Letter of Credit before
the end of the Performance Guaranty Period and pay out the entire shortfall.
This is the difference between the guaranteed amount and the net asset value of
the covered shares next determined after the Bank terminates the Letter of
Credit. The Adviser will post only high quality securities with low market
volatility as collateral for the Letter of Credit and believes that the events
required for early termination are highly unlikely to occur. In addition,
however, unless a stockholder participating in the Performance Guaranty Program
has affirmatively chosen to retain his investment in the Fund in such
circumstances, the application provides that his covered investment will be
redeemed on the early termination date of the Letter of Credit. In this way
investors can be assured of receiving the entire amount even in the unlikely
event that the Letter of Credit is terminated early.
No person may participate in the Program through more than one account (except
that spouses can each participate in a separate account and in a joint account).
The Adviser has arranged an irrevocable collateralized standby Letter of Credit
issued by the Bank. See Appendix A for summary financial information related to
the Bank and its credit rating, which is AA by Standard & Poor's Rating Group
and Aa2 by Moody's Investor Services, Inc. on long-term deposits. The Letter of
Credit is an obligation of the Bank and not of the Fund or the Adviser. The
Letter of Credit is a separate security from the shares of the Fund and is
exempt from registration with the Securities and Exchange Commission. The Letter
of Credit is payable upon presentation of a Drawing Certificate by any member of
the Fund's Board of Directors, acting as agent on behalf of the participants.
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The Letter of Credit contains no restrictions on the Adviser's management of the
Fund's assets. The Letter of Credit provides that any assignment by the Bank of
its obligations under the Letter of Credit will not relieve the Bank of any of
its obligations under the Letter of Credit. The form of the Letter of Credit has
been filed with the SEC as an exhibit to the Corporation's registration
statement. Pursuant to a Reimbursement Agreement, the Bank can collect any
amounts paid under the Letter of Credit from the Adviser out of the collateral
posted by the Adviser or directly from the Adviser.
In the unlikely event that the Bank were to become insolvent during the
Performance Guaranty Program period, the Bank's receiver would be required
either to affirm or disaffirm the Letter of Credit. If the receiver were to
affirm the Letter of Credit, the Bank's insolvency would not affect its
performance. If the receiver were to disaffirm the Letter of Credit, the
directors of the Corporation would become general creditors of the Bank and
might not be able to collect the full amount of any performance shortfall.
However, in that event the Adviser would receive its collateral back from the
Bank and would seek to provide a substitute Letter of Credit or make comparable
arrangements. During any interim period and if the Adviser were unable to make
alternative arrangements, investors participating in the Performance Guaranty
Program would not be entitled to collect any shortfall in the Fund's performance
from any person other than the Bank, whose performance would be in doubt.
The Letter of Credit is not an asset of the Fund. Its existence will have no
impact on the Fund's net asset value or investment performance. All expenses
related to arranging the Letter of Credit will be borne by the Adviser. The fees
paid to affiliates of the Adviser have not been increased to compensate for the
risk and expense of the Letter of Credit and are set at rates substantially the
same as other funds advised by the Adviser. At its option the Adviser may renew
the program on such terms and conditions as it deems appropriate and if it does
so will make an announcement at least 30 days prior to the expiration date.
There can be no assurance that the program will continue or that if continued,
it will be in the same form.
Related Risks
A particular risk of the Fund is that the guaranty feature of the Performance
Guaranty Programs could cause the Adviser to manage the Fund more conservatively
than would otherwise be the case in an effort to avoid losses to the Adviser
that would occur under the Adviser's agreement to reimburse the Bank for any
payments made by the Bank under the Letter of Credit. The Adviser will seek to
manage the Fund without regard to this potential conflict of interest. However,
investors should understand that the Fund has a more conservative objective
than, for example, a growth fund. The Adviser expects that, in accordance with
the Fund's investment objective, it will invest the Fund's assets in a more
conservative manner than it would in a small capitalization growth fund, for
example, and may utilize fixed income securities and hedging strategies to
reduce the risk of capital loss to a greater extent than it does in other equity
funds managed by the Adviser. As a result, the Fund's total return is not
expected to be as high as equity funds in periods of significant appreciation in
the equity markets.
The Adviser understands and shareholders should be aware that the Fund may be
susceptible to greater than normal redemptions of shares should the Performance
Guaranty Programs not be renewed. However, the Adviser does not expect such
higher levels of redemption as the Fund will still be managed in accordance with
the same investment objective and policies that originally made the Fund
attractive to investors who participated in the Performance Guaranty Programs.
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All securities investments are subject to risks. The equity securities in which
the Fund may invest are generally subordinated to the claims of creditors and
market prices are subject to the performance of the issuer, its financial health
and market perceptions. The value of securities of an issuer engaged in a tender
offer, restructuring or exchange offer may decline substantially if the
transaction fails to occur. Ratings of debt securities generally are intended to
reflect the rating agency's analysis of the strength of the issuer and the
likelihood of timely payment of principal and interest. Because the Fund may
invest in lower rated or unrated securities, it bears a substantially greater
risk of loss of the purchase price as a result of bankruptcy, default or
reorganization of the issuer than funds that own higher rated debt securities
and it is more dependent upon the adviser's evaluations of the security and the
issuer. Many of these lower rated securities are considered speculative and thus
the Fund should not be considered to be a balanced investment but rather only as
a component of an investment program. The market values of lower quality fixed
income securities tend to be less sensitive to changes in prevailing interest
rates and more sensitive to individual corporate developments and economic
conditions than higher rated securities. The secondary market for lower rated
securities is generally not as liquid as that for higher rated securities, which
may adversely affect the Fund's liquidity or net asset valuation process.
Mortgage backed securities may be more volatile than other fixed-income
securities and are subject to prepayment risk, which can result in the Fund
failing to recoup all of its investment or achieving lower than expected
returns. With respect to short sales, if a security sold short increases in
value the Fund could incur additional costs in covering its obligation greater
than any income otherwise obtained or could lose the opportunity for gain.
Repurchase agreements have the risk that collateral may not be able to be
disposed of at a desirable price, delays as a result of bankruptcy of the
counterparty or encumbrances of collateral or restrictions on its disposition.
Lending of securities can result in a failure to deliver the original security
by the borrower, and similar risks with respect to disposition of the
collateral. When issued and delayed delivery securities transactions and forward
commitments involve potential loss to the Fund if the counterparty to the
transaction fails to perform. Hedging transactions also have certain risks
including imperfect market correlations, dependence on the credit of the
counterparty, possible inability to enter into offsetting transactions and
market fluctuations that can result in the Fund being in a worse position than
if the hedging had not occurred. Currency transactions also include the risk
securities losses could be magnified by changes in the value of the currency in
which a security is denominated relative to the U.S. dollar. While the Adviser
may try to hedge such risks, entering into hedging transactions can result in
even greater losses. The Adviser will attempt to manage these risks so that such
strategies and investments benefit the Fund, but no assurance can be given that
they will be successfully managed.
Disposition of illiquid securities often takes more time than for more liquid
securities and may result in higher selling expenses and may not be able to be
made at desirable prices.
The Fund's investments in foreign securities involve certain risks not
ordinarily associated with investments in securities of domestic issuers,
including fluctuations in foreign exchange rates, future political and economic
developments, and the possible imposition of exchange controls or other foreign
governmental laws or restrictions. In addition, with respect to certain
countries, there is the possibility of expropriation of assets, confiscatory
taxation, political or social instability or diplomatic developments which could
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adversely affect investments in those countries.
There may be less publicly available information about a foreign company than
about a U.S. company, and accounting, auditing and financial reporting standards
and requirements may not be comparable. Securities of many foreign companies are
less liquid and their prices more volatile than securities of comparable U.S.
companies. Transaction costs of investing in non-U.S. securities markets are
generally higher than in the U.S. There is generally less government supervision
and regulation of exchanges, brokers and issuers than there is in the U.S. The
Fund might have greater difficulty taking appropriate legal action in non-U.S.
courts.
Dividend and interest income from non-U.S. securities will generally be subject
to withholding taxes by the country in which the issuer is located and may not
be recoverable by the Fund or the investor.
These risks are more fully described in the Additional Statement.
MANAGEMENT OF THE FUND
The Corporation's Board of Directors (who, with its officers, are described in
the Additional Statement) has overall responsibility for the management of the
Fund. The Board of Directors decides upon matters of general policy and reviews
the actions of Gabelli & Company, Inc. (the "Distributor") and the Adviser.
Pursuant to an Investment Advisory Contract with the Corporation on behalf of
the Fund, the Adviser under the supervision of the Corporation's Board of
Directors, provides a continuous investment program for the Fund's portfolio;
provides investment research and makes and executes recommendations for the
purchase and sale of securities; provides facilities and personnel, and the
exercise of all voting and other rights appertaining thereto required for the
Fund's administrative management, supervises the performance of administrative
and professional services provided by others and pays the compensation of the
Administrator and all officers and directors of the Fund who are its affiliates.
Mario J. Gabelli, Portfolio Manager, will be primarily responsible for the
day-to-day management of The Gabelli ABC Fund. Mr. Gabelli is Chairman,
President and Chief Executive Officer of the Adviser since its organization in
1980. As compensation for its services and the related expenses borne by the
Adviser, the Fund pays the Adviser a fee, computed daily and payable monthly,
equal, on an annual basis, to 1.00% of the Fund's average daily net assets,
which is higher than that paid by most mutual funds. The Adviser is located at
One Corporate Center, Rye, New York 10580-1434.
The Adviser was formed in 1980 and as of August 31, 1995, acts as investment
adviser to the following investment companies with aggregate assets in excess of
$3.9 billion:
Net Assets
8/31/95
Open-end investment companies: -------------
- ------------------------------ (in millions)
Gabelli Asset Fund $1,109
Gabelli Growth Fund 505
Gabelli Value Fund Inc. 494
Gabelli Small Cap Growth Fund 230
Gabelli Equity Income Fund 54
Gabelli ABC Fund 22
Gabelli Global Telecommunications Fund 128
Gabelli Global Interactive Couch Potato(TM)(C) Fund 32
Gabelli Global Convertible Securities Fund 17
Gabelli Gold Fund, Inc. 20
Gabelli U.S. Treasury Money Market Fund 238
Gabelli International Growth Fund 1
Gabelli Capital Asset Fund 18
Closed-end investment companies:
- --------------------------------
Gabelli Convertible Securities Fund, Inc. 95
Gabelli Equity Trust Inc. 933
Gabelli Global Multimedia Trust Inc. 73
The Distributor of the Fund for the sale of its shares is an indirect majority
owned subsidiary of the Adviser. GAMCO Investors, Inc. ("GAMCO"), a majority
owned subsidiary of the Adviser, acts as investment adviser for individuals,
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pension trusts, profit sharing trusts and endowments. As of August 31, 1995,
GAMCO had aggregate assets in excess of $4.9 billion under its management. Teton
Advisers LLC, an affiliate of the Adviser, acts as Investment Adviser of the
Westwood Funds with assets under management in excess of $33 million. Mr. Mario
J. Gabelli may be deemed a "controlling person" of the Adviser and the
Distributor on the basis of his ownership of stock of the Adviser.
In addition to the fees of the Adviser, the Fund is responsible for the payment
of all its other expenses incurred in the operation of the Fund, which include,
among other things, expenses for legal and independent auditor's services, costs
of printing all materials sent to shareholders, charges of State Street Bank and
Trust Company (the "Custodian", "Transfer Agent" and "Dividend Disbursing
Agent") and any other persons hired by the Fund, securities registration fees,
fees and expenses of unaffiliated directors, accounting and printing costs for
reports and similar materials sent to shareholders, membership fees in trade
organizations, fidelity bond and liability coverage for the Corporation's
directors, officers and employees, interest, brokerage and other trading costs,
taxes, expenses of qualifying the Fund for sale in various jurisdictions,
expense of the Fund's distribution plan adopted under Rule 12b-1, expenses of
personnel performing shareholder servicing functions, litigation and other
extraordinary or non-recurring expenses and other expenses properly payable by
the Fund.
The Additional Statement contains further information about the Investment
Advisory Contract including a more complete description of the advisory and
expense arrangements, and administrative provisions.
The Adviser has entered into an Administration Contract with Furman Selz
Incorporated (the "Administrator") pursuant to which the Administrator provides
certain administrative services necessary for the Fund's operations. These
services include the preparation and distribution of materials for meetings of
the Corporation's Board of Directors, compliance testing of Fund activities and
assistance in the preparation of proxy statements, reports to shareholders and
other documentation. The Adviser pays the Administrator a monthly fee at the
annual rate of .10% of the average net assets of the Fund (with a minimum annual
fee of $40,000 and subject to reduction to .075% on assets of the Gabelli Funds
under its administration in excess of $350 million up to $600 million and .06%
in excess of $600 million) which, together with the services to be rendered are
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 Administrator has its principal office at 230 Park Avenue, New York, New
York 10169.
DISTRIBUTION PLAN
The Board of Directors of the Corporation has approved on behalf of the Fund as
being in the best interests of the Fund and its shareholders a Distribution Plan
which authorizes payments by the Fund in connection with the distribution of its
shares at an annual rate, as determined from time to time by the Board of
Directors, of up to .25% of the Fund's average daily net assets. Payments may be
made in subsequent years for expenses incurred in prior years. The potential for
such subsequent payments is a contingent liability for which no amount is
currently being recorded because the Fund does not have a reasonable basis on
which to conclude that the Board of Directors will approve such payments.
Interest, carrying or other financing charges on unreimbursed amounts could also
be considered a distribution expense if the Board so determined and would in
such event also potentially be subject to carryover to a future year upon
specific approval by the Board.
Payments may be made by the Fund under the Distribution Plan for the purpose of
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financing any activity primarily intended to result in the sale of shares of the
Fund as determined by the Board of Directors. Such activities typically include
advertising; compensation for sales and sales marketing activities of the
Distributor and other banks, broker-dealers and service providers; shareholder
account servicing; production and dissemination of prospectus and sales and
marketing materials; and capital or other expenses of associated equipment,
rent, salaries, bonuses, interest and other overhead. To the extent any activity
is one which the Fund may finance without a Distribution Plan, the Fund may also
make payments to finance such activity outside of the Plan and not be subject to
its limitations.
The Plan was implemented by written agreements between the Fund and/or the
Distributor and each person (including the Distributor) to which payments may be
made. Administration of the Plan is regulated by Rule 12b-1 under the Investment
Company Act of 1940 (the "Act"), which includes requirements that the Board of
Directors receive and review at least quarterly reports concerning the nature
and qualification of expenses for which payments are made, that the Board of
Directors approve all agreements implementing the Plan and that the Plan may be
continued from year to year only if the Board of Directors concludes at least
annually that continuation of the Plan is likely to benefit shareholders.
The Board of Directors has initially implemented the Plan by having the
Corporation enter into an agreement with the Distributor authorizing
reimbursement of expenses (including overhead) incurred by the Distributor and
its affiliates up to the .25% rate authorized by the Plan for distribution
activities of the types listed above. To the extent any of these payments are
based on allocations by the Distributor, the Fund may be considered to be
participating in joint distribution activities with other funds distributed by
the Distributor. Any such allocations would be subject to approval by the Fund's
non-interested Directors and would be based on such factors as the net assets of
each Fund, the number of shareholder inquiries and similar pertinent criteria.
PURCHASE OF SHARES
On or prior to January 2, 1996 investors will be eligible to reserve a spot in
the Performance Guaranty Program by (1) sending in an application requesting
that an investment for a specified amount be made in the Fund on January 2, 1996
at the net asset value on that day and (2) sending a check or bank wire in the
requisite amount to arrive on or before January 2, 1996. Money received early
will be invested in The Gabelli U.S. Treasury Money Market Fund and all such
money plus accrued dividends will be exchanged on January 2, 1996 for shares of
the Fund. Accrued dividends on principal amounts exchanged up to $5,000 will not
be subject to the 2% sales charge. The Fund's net asset value will be available
daily through the Wall Street Journal under the Gabelli Funds listing or by
calling 1-800-GABELLI (1-800-422-3554). As of January 3, 1996, shares of the
Fund may be purchased by shareholders at the public offering price per share
(which includes any applicable sales charge) next determined after receipt of an
order by the Fund's Distributor or transfer agent in proper form with
accompanying check, bank wire or other guaranteed payment arrangements
satisfactory to the Fund. Investments eligible to participate in the Performance
Guaranty Program (i.e., $5,000 or less) are sold at net asset value without a
sales load and investments not covered by the Program (i.e., more than $5,000
excluding dividends on the Gabelli U.S. Treasury Money Market Fund) are subject
to a 2% sales load. Although most shareholders elect not to receive stock
certificates, certificates for whole shares only can be obtained on specific
written request to the Transfer Agent. The Letter of Credit is an obligation of
the Bank and not of the Fund or the Adviser. The Letter of Credit is a separate
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security from the shares of the Fund and is exempt from registration with the
Securities and Exchange Commission.
Shares of the Fund may be purchased by shareholders who have participated in one
of the Performance Guaranty Programs through shareholder agents that are not
affiliated with the Fund or the Distributor. There is no sales or service charge
imposed by the Fund other than as described, but agents who do not receive
distribution payments or sales charges may impose a charge to the investor for
their services. Such fees may vary among agents, and such agents may impose
higher initial or subsequent investment requirements than those established by
the Fund. Services provided by agents may include allowing the investor to
establish a margin account and to borrow on the value of the Fund's shares in
that account. It is the responsibility of the shareholder's agent to establish
procedures which would assure that any purchase order received by it will be
received by the Distributor before the time when the price applicable to the buy
order expires.
Prospectuses, sales material and applications may be obtained from the
Distributor. The Fund and its Distributor reserve the right in their sole
discretion (1) to suspend the offerings of the Fund's shares and (2) to reject
purchase orders when, in the judgment of the Fund's management, such rejection
is in the best interest of the Fund.
To invest, send a completed subscription order form to:
THE GABELLI FUNDS
P.O. Box 8308
Boston, MA 02266-8308
If you are paying for your shares by check, your check for the amount of the
investment (plus any applicable sales charge) should be mailed to the same
address and be made payable to "The Gabelli ABC Fund".
The exact name and number of the shareholder's account should be clearly
indicated.
Checks will be accepted if drawn in U.S. currency on a domestic bank for less
than $100,000. U.S. dollar checks drawn against a non-U.S. bank may be subject
to collection delays and will be accepted only upon actual receipt of funds by
the Transfer Agent. Bank collection fees may apply.
If you are paying for your shares by bank wire, you should first telephone the
Fund at 1-800-422-3554. You should 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
Attn: Custody and Shareholder Services
Re: "The Gabelli ABC Fund"
A/C #
---------------------------------------------------------------------------
Account of (Registered Owner)
----------------------------------------------------------------------
Tax ID number:
------------------------------------------------------------------
225 Franklin Street, Boston, MA 02110
There may be a charge by your bank for transmitting the money by bank wire but
State Street Bank and Trust Company does not charge investors in the Fund for
the receipt of wire transfers. If you are planning to wire funds, it is
suggested that you instruct your bank early in the day so the wire transfer can
be accomplished the same day.
If you are delivering your check by overnight or personal delivery, send them
to:
The Gabelli Funds
The BFDS Building, 6th Floor
Two Heritage Drive
North Quincy, MA 02171
Telephone Investment Plan
You may purchase additional shares of the Fund by telephone through the
Automated Clearinghouse (ACH) system as long as your bank is a member of the ACH
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system and you have a completed, approved Investment Plan application on file
with our Transfer Agent. The funding for your purchase will be automatically
deducted from the ACH eligible account you designate on the application. Your
investment will normally be credited to your Mutual Fund account on the first
business day following your telephone request. Your request must be received no
later than 4:00 p.m. eastern time. There is a minimum of $100 for each telephone
investment. Any subsequent changes in banking information must be submitted in
writing and accompanied by a sample voided check. To initiate an ACH purchase,
please call 1-800-GABELLI (422-3554) or 1-800-872-5365. Fund shares purchased
through the Telephone or Automatic Investment Plan will not be available for
redemption for up to fifteen (15) days following the purchase date.
Automatic Investment Plan
The Fund offers an automatic monthly investment plan, details of which can be
obtained from the Distributor. There is no minimum initial investment for
accounts establishing an automatic investment plan.
Other Investors
No minimum initial investment in the Fund or sales charge on any such investment
is required for officers, directors or full-time employees of the Fund, the
Adviser, the Administrator, the Distributor or their affiliates, including
members of the "immediate family" of such individuals and retirement plans and
trusts for their benefit. The term "immediate family" refers to spouses,
children and grandchildren (adopted or natural), parents, grandparents,
siblings, a spouse's siblings, a sibling's spouse and a sibling's children.
Shares issued pursuant to the automatic reinvestment of income dividends or
capital gains are not subject to any sales charges. The Distributor's commission
is the sales charge shown below.
The following table indicates the sales charges applicable to purchase of
shares:
Discount or
Sales Charge as Commission to
a Percentage of Dealers or
--------------------------------- Agents as a
Net Amount Public Offering % of Public
Amount Invested Invested Price Offering Price
--------------- -------- ----- --------------
All amounts ............. 2.04% 2.00% 1.5%
REDEMPTION OF SHARES
Upon receipt by the Distributor or the Transfer Agent of a redemption request in
proper form, shares of the Fund will be redeemed at their next determined net
asset value. Redemption requests received after the time as of which the Fund's
net asset value is determined on a particular day will be redeemed at the net
asset value of the Fund determined on the next day that net asset value is
determined. Checks for redemption proceeds will normally be mailed to the
shareholder's address of record within seven days, but will not be mailed until
all checks in payment for the purchase of the shares to be redeemed have been
honored, which may take up to 15 days. Redemption requests may be made by letter
to the Transfer Agent, specifying the name of the Fund, the dollar amount or
number of shares to be redeemed, and the account number. The letter must be
signed in exactly the same way the account is registered (if there is more than
one owner of the shares, all must sign) and, if any certificates for the shares
to be redeemed are outstanding, presentation of such certificates properly
endorsed is also required. Signatures on a redemption request and/or
certificates must be guaranteed by an "eligible guarantor institution" which
includes certain banks, brokers, dealers, credit unions, securities exchanges
and associations, clearing agencies and savings associations (signature
guarantees by notaries public are not acceptable). Shareholders may also redeem
Fund shares through shareholder agents, who have made arrangements with the Fund
permitting them to redeem shares by telephone or facsimile transmission and who
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may charge shareholders a fee for this service if they have not received any
payments under the Distribution Plan. It is the responsibility of the
shareholder's agent to establish procedures which would assure that upon receipt
of a shareholder's order to redeem shares of the Fund the order will be
transmitted so that it will be received by the Distributor before the time when
the price applicable to the order expires.
Further documentation, such as copies of corporate resolutions and instruments
of authority, are normally requested from corporations, administrators,
executors, personal representatives, trustees or custodians to evidence the
authority of the person or entity making the redemption request.
If the Board of Directors should determine that it would be detrimental to the
remaining shareholders of the Fund to make payment wholly or partly in cash, the
Fund may pay the redemption price in whole or in part by a distribution in kind
of securities from the portfolio of the Fund, in lieu of cash, in conformity
with applicable rules of the Securities and Exchange Commission. Under such
circumstances, shareholders of the Fund receiving distributions in kind of
securities will incur brokerage commissions when they dispose of the securities.
The Fund may suspend the right of redemption or postpone the date of payment for
more than seven days during any period when (1) trading on the New York Stock
Exchange is restricted or the Exchange is closed, other than customary weekend
and holiday closings; (2) the Securities and Exchange Commission has by order
permitted such suspension or (3) an emergency, as defined by rules of the
Securities and Exchange Commission, exists making disposal of portfolio
investments or determination of the value of the net assets of the Fund not
reasonably practicable.
To minimize expenses, the Fund reserves the right to redeem, upon not less than
30 days' notice, all shares of the Fund in an account (other than an IRA) which
as a result of shareholder redemption has a value below $500. However, a
shareholder will be allowed to make additional investments prior to the date
fixed for redemption to avoid liquidation of the account.
Telephone Redemption By Check
The Fund accepts telephone requests for redemption of unissued shares from
shareholders provided the check is mailed to the address of record on the
account and such address has not been changed within thirty (30) days prior to
the request.
By Bank Wire
The Fund accepts telephone requests for wire redemption in excess of $1,000 (but
subject to a $25,000 limitation) to a predesignated bank either on the
subscription order form or in a subsequent written authorization with the
signature guaranteed. The Fund accepts signature guaranteed written requests for
redemption by bank wire without limitation. The proceeds are normally wired on
the following business day. Your bank must be either a member of the Federal
Reserve System or have a correspondent bank which is a member. Any change to the
banking information made at a later date must be submitted in writing with a
signature guarantee.
Requests for telephone redemption must be received between 9:00 a.m. and 4:00
p.m. eastern time. If your telephone call is received after this time or on a
day when the New York Stock Exchange is not open, a new request will be required
the following business day. Shares are redeemed at the net asset value next
determined following your request. Fund shares purchased by check or through the
automatic purchase plan will not be available for redemption for fifteen (15)
days following the purchase. Shares held in certificate form must be returned to
the Transfer Agent for redemption of shares. Telephone redemption is not
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available for IRAs. The proceeds of a telephone redemption may be directed to an
account in another mutual fund advised by Gabelli Funds, Inc., provided the
account is registered in the redeeming shareholder's name. Such purchase will be
made at the respective net asset value plus applicable sales charge, if any,
with credit for any sales charge previously paid to the Distributor.
The Fund and its transfer agent will not be liable for following telephone
instructions reasonably believed to be genuine. In this regard the Fund and its
transfer agent require personal identification information before accepting a
telephone redemption. If the Fund or its transfer agent fail to use reasonable
procedures, the Fund might be liable for losses due to fraudulent instructions.
RETIREMENT PLANS
The Fund has available a form of Individual Retirement Account ("IRA") for
investment in Fund shares which may be obtained from the Distributor. The
minimum investment required to open an IRA for investment in shares of the Fund
is $1,000 for an individual except that both the individual and his or her
spouse may establish separate IRAs if their combined investment is $1,250. There
is no minimum for additional investment in an IRA account.
Investors who are self-employed may purchase shares of the Fund through
tax-deductible contributions to retirement plans for self-employed persons,
known as Keogh or H.R. 10 plans. The Fund does not currently act as Sponsor for
such plans. Fund shares may also be a suitable investment for other types of
qualified pension or profit- sharing plans which are employer-sponsored,
including deferred compensation or salary reduction plans known as "401(k)
Plans" which give participants the right to defer portions of their compensation
for investment on a tax-deferred basis until distributions are made from the
plans. The minimum initial investment for an individual under such plans is
$1,000 and there is no minimum for additional investments. Under the Internal
Revenue Code of 1986, (the "Code") individuals may make wholly or partly tax
deductible 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 maximum of $2,250 annually to either
or both IRAs provided that no more than $2,000 may be contributed to the IRA of
either spouse.
Persons desiring information concerning investments through IRA accounts or
other retirement plans should write or telephone the Distributor.
DIVIDENDS, DISTRIBUTIONS AND TAXES
Each dividend and capital gains distribution, if any, declared by the Fund on
its outstanding shares will, unless the shareholder elects otherwise, be paid on
the payment date fixed by the Board of Directors in additional shares of the
Fund having an aggregate net asset value as of the ex-dividend date of such
dividend or distribution equal to the cash amount of such distribution. An
election to receive dividends and distributions may be changed by notifying the
Fund in writing at any time prior to the record date for a particular dividend
or distribution. There are no sales or other charges in connection with the
reinvestment of dividends and capital gains distributions. There is no fixed
dividend rate, and there can be no assurance that the Fund will pay any
dividends or realize any capital gains. However, the Fund currently intends to
pay dividends and capital gains distributions, if any, on an annual basis.
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The Fund intends to qualify for tax treatment as a "Regulated Investment
Company" under the Internal Revenue Code in order to be relieved of Federal
income tax on that part of its net investment income and realized capital gains
which it pays out to its shareholders.
To qualify, the Fund must meet certain relatively complex tests, including the
requirement that less than 30% of its gross income (exclusive of losses) may be
derived from the sale or other disposition of securities held for less than
three months. The loss of such status would result in the Fund being subject to
Federal income tax on its taxable income and gains.
Dividends out of net investment income and distributions of realized short-term
capital gains are taxable to the recipient shareholders as ordinary income. In
the case of corporate shareholders, such distributions are eligible for the
dividends received deduction subject to proportionate reduction if the aggregate
qualifying dividends received by the Fund from domestic corporations in any year
are less than its "gross income" as defined by the Code. Distributions out of
long- term capital gains are taxable to the recipient as long-term capital
gains. Amounts received by shareholders with respect to the Performance Guaranty
Programs will be taxable as ordinary income, but will not generally be eligible
for the dividends received deduction. The shareholder's calculation of capital
gain or loss on a redemption of shares will not be affected by amounts received
with respect to the Performance Guaranty Programs. Dividends and distributions
declared by the Fund, and amounts received with respect to the Performance
Guaranty Programs, may also be subject to state and local taxes. Prior to
investing in shares of the Fund, prospective shareholders may wish to consult
their tax advisers concerning the Federal, state and local tax consequences of
such investment.
GENERAL INFORMATION
Description of Shares, Voting Rights and Liabilities
The Fund is a series of Gabelli Investor Funds, Inc., (the "Corporation") which
was incorporated in Maryland on October 30, 1992. The authorized capital stock
consists of one billion shares of stock having a par value of one tenth of one
cent ($.001) per share, all of which have been initially classified as Fund
shares. The Corporation is not required, and does not intend, to hold regular
annual shareholder meetings, but may hold special meetings for consideration of
proposals requiring shareholder approval, such as changing fundamental policies
or upon the written request of 10% of the Fund's shares to replace its
Directors.
The Corporation's Board of Directors is authorized to divide the unissued shares
into separate series of stock, each series representing a separate, additional
portfolio. 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 Articles 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.
There are no conversion or preemptive rights in connection with any shares of
the Fund. All shares, when issued in accordance with the terms of the offering,
will be fully paid and nonassessable. Shares will be redeemed at net asset
value, at the option of the shareholder.
The Fund sends semi-annual and annual reports to all of its shareholders which
include a list of portfolio securities and the Fund's financial statements which
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shall be audited annually. Unless it is clear that a shareholder is a nominee
for the account of an unrelated person or a shareholder otherwise specifically
requests in writing, the Fund may send a single copy of semi-annual, annual and
other reports to shareholders to all accounts at the same address and all
accounts of any person at that address.
The shares of the Fund have noncumulative voting rights which means that the
holders of more than 50% of the shares can elect 100% of the directors if the
holders choose to do so, and, in that event, the holders of the remaining shares
will not be able to elect any person or persons to the Board of Directors.
Unless specifically requested by an investor who is a shareholder of record, the
Fund does not issue certificates evidencing Fund shares.
Portfolio Turnover
The investment policies of the Fund may lead to frequent changes in investments,
particularly in periods of rapidly fluctuating interest or currency exchange
rates. The portfolio turnover may be higher than that of other investment
companies. For the fiscal year ended December 31, 1994 the portfolio turnover
rate was 490%. The higher than expected portfolio turnover rate for 1994 is
attributable to the investment in securities subject to a tender offer for which
the holding period was relatively short. Accordingly, the Fund experienced a
large amount of purchases and sales of investment securities relative to the
average value of its long term holdings.
Portfolio turnover generally involves some cost to the Fund, including brokerage
commissions or dealer mark-ups and other transaction costs on the sale of
securities and reinvestment in other securities. Rapid turnover makes it more
difficult to qualify as a passthrough entity for Federal tax purposes in view of
a requirement that the Fund obtain less than 30% of its gross income in any tax
year from gains on the sale of securities held less than three months. Failure
to qualify as a passthrough entity would result in Federal taxation of the Fund
at the standard corporate rate of 34% and may adversely affect returns to
shareholders. The portfolio turnover rate is computed by dividing the lesser of
the amount of the securities purchased or securities sold by the average monthly
value of securities owned during the year (excluding securities whose maturities
at acquisition were one year or less).
Performance Information
The Fund may furnish data about its 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, five and ten year periods (if applicable) and the
life of the Fund through the most recent calendar quarter, assuming reinvestment
of all dividends and distributions. 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, with the remainder being divided by the
maximum offering price per share on the last day of the period. The Fund may
also furnish total return and yield calculations for other periods and/or based
on investments at various sales charge levels or net asset values. Any
performance data which is based on the Fund's net asset value per share would be
reduced if a sales charge were taken into account.
Custodian, Transfer Agent and Dividend Disbursing Agent
State Street Bank and Trust Company is the Custodian for the Fund's cash and
securities as well as the Transfer and Dividend Disbursing Agent for its shares.
Boston Financial Data Services, Inc., an affiliate of State Street Bank and
Trust Company performs the shareholder services on behalf of State Street and is
located at The BFDS Building, Two Heritage Drive, North Quincy, MA 02171. State
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20
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Street Bank and Trust Company does not assist in and is not responsible for
investment decisions involving assets of the Fund.
Independent Auditors
Grant Thornton LLP has been appointed independent auditors for the Fund, and is
located at 7 Hanover Square, 6th Floor, New York, New York 10004.
Information for Shareholders
All shareholder inquiries regarding administrative procedures including the
purchase and redemption of shares should be directed to the Distributor, Gabelli
& Company, Inc., One Corporate Center, Rye, New York 10580-1434. For assistance,
call 1-800-GABELLI (1-800-422-3554).
This Prospectus omits certain information contained in the Registration
Statement filed with the Securities and Exchange Commission. Copies of the
Registration Statement including items omitted herein, may be obtained from the
Commission by paying the charges prescribed under its rules and regulations. The
Statement of Additional Information included in such Registration Statement may
be obtained without charge from the Fund or its Distributor.
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21
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APPENDIX A
Summary Financial Information of State Street Bank and Trust Company
State Street Bank and Trust Company (the "Bank") is a commercial bank that
provides banking, securities processing and investment management services to a
broad base of customers world wide. The bank is the largest mutual fund
custodian in the United States and a leading global custodian. According to
industry rankings, the Bank is the largest U.S. master trust / master custody
bank, the second largest bank money manager in the U.S. and the largest manager
of global assets for U.S. pension funds. The Bank's long-term deposits are rated
Aa2 by Moody's Investors Services, Inc. and AA by Standard & Poor's Corporation.
The Bank or an affiliate serves as the Fund's custodian, transfer agent and
dividend disbursing agent and receives customary fees therefor.
The following summary financial information regarding the Bank is derived from
filings made with U.S. bank regulatory authorities and has been prepared in
accordance with regulatory accounting principles, which differ in some respects
from generally accepted accounting principles. The following information is not
audited but is used in the preparation of the Bank's parent company's audited
financial statements.
Balance Sheet Items ($ millions)
Six Months
Dec. 31, Dec. 31, Dec. 31, ended
1992 1993 1994 June 30, 1995
---- ---- ---- -------------
Cash Items $ 6,075 $ 6,650 $ 5,786 $ 6,753
Securities 4,061 5,671 8,510 7,381
Loans & Leases 1,963 2,644 3,200 3,529
(net)
Total Assets 16,543 18,784 21,611 25,201
Deposits 11,033 12,994 14,093 15,490
Total Liabilities 15,611 17,717 20,402 23,877
Total Equity Capital 932 1,067 1,209 1,394
Income Statement Items ($ millions)
Year Year Year Six Months
ended ended ended ended
Dec. 31, Dec. 31, Dec. 31, June 30,
1992 1993 1994 1995
---- ---- ---- ----
Net interest income $ 284 $ 329 $ 374 $ 196
Noninterest income 663 785 951 502
Noninterest expense 693 843 1,000 535
Net income before
taxes 254 275 312 164
Net income 160 179 199 109
- ----------
Note to Summary Financial Information -- Off-Balance Sheet Financial Instruments
The Bank uses various off-balance sheet financial instruments to satisfy the
financing needs of customers, manage balance sheet risk and conduct trading
activities. These instruments generate fee, interest or trading revenue.
Associated with these instruments are market and credit risks which could expose
the Bank to potential losses. Market risk relates to the possibility that
financial instruments may change in value due to future fluctuations in market
prices. Credit risk relates to the possibility that a loss may occur from the
failure of another party to perform according to the terms of a contract. The
credit risk associated with off-balance sheet financial instruments is managed
in conjunction with the Bank's balance sheet activities. Historically, the
credit losses experienced with respect to these instruments have been
immaterial.
The following is a summary of the contractual or notional amount of the Bank's
off-balance sheet financial instruments:
Six Months
ended
Dec. 31, Dec. 31, Dec. 31, June 30,
($ millions) 1992 1993 1994 1995
---- ---- ---- ----
Financial instruments
whose contractual
amounts represent
credit risk:
Loan commitments $ 1,595 $ 2,356 $ 2,536 $ 2,828
Standby letter of credit 471 799 929 963
Letters of credit 115 140 168 202
Indemnified securities
lent 9,582 12,432 22,300 22,822
Financial instruments
whose contractual or
notional amount
exceeds the amount
of credit risk:
Foreign exchange
commitments 16,737 36,179 43,126 44,758
Interest-rate contracts:
Futures and options 72 686 598 1,624
Swap agreements 265 158 255 433
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TABLE OF CONTENTS
Page
----
Prospectus Summary ........................................................ 3
Table of Fees and Expenses ................................................ 6
Financial Highlights ...................................................... 7
Investment Objective and Policies and
Related Risk Factors ................................................... 7
Limited Performance Guaranty Program ...................................... 8
Management of the Fund .................................................... 12
Distribution Plan ......................................................... 13
Purchase of Shares ........................................................ 14
Redemption of Shares ...................................................... 16
Retirement Plans .......................................................... 18
Dividends, Distributions and Taxes ........................................ 18
General Information ....................................................... 19
Appendix to Prospectus .................................................... 22
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No dealer, salesman or other person has been authorized to give any information
or to make any representation other than those contained in this Prospectus, and
if given or made, such information and representation may not be relied upon as
being authorized by the Fund, the Adviser, the Administrator, the Distributor or
any affiliate thereof. This Prospectus does not constitute an offer to sell or a
solicitation of any offer to buy in any state to any person to whom it is
unlawful to make such offer in such state.
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THE GABELLI ABC FUND
One Corporate Center
Rye, New York 10580-1434
Telephone 1-800-GABELLI (1-800-422-3554)
STATEMENT OF ADDITIONAL INFORMATION
October 10, 1995
This Statement of Additional Information ("Additional Statement") relates to The
Gabelli ABC Fund (the "Fund") which is a series of Gabelli Investor Funds, Inc.,
a Maryland corporation (the "Corporation"), and is not a prospectus and is only
authorized for distribution when preceded or accompanied by the Fund's
prospectus dated October 10, 1995, as supplemented from time to time (the
"Prospectus"). This Statement of Additional Information contains information in
addition to that set forth in the Prospectus into which this document is
incorporated by reference and should be read in conjunction with the Prospectus.
Additional copies of this document may be obtained without charge by writing or
telephoning the Fund at the address and telephone number set forth above.
TABLE OF CONTENTS
Page
----
Investments ...................................................... B-2
The Adviser ...................................................... B-11
The Distributor .................................................. B-13
Directors and Officers ........................................... B-13
Investment Restrictions .......................................... B-16
Portfolio Transactions and Brokerage ............................. B-17
Purchase and Redemption of Shares ................................ B-19
Dividends, Distributions and Taxes ............................... B-19
Determination of Net Asset Value ................................. B-21
Investment Performance Information ............................... B-22
Appendix-- Description of Ratings of Bonds
and Preferred Stock ............................................ B-24
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The following Information supplements that in the Prospectus
INVESTMENTS
Equity Securities
Because the Fund may invest without limit in the common stocks of both
domestic and foreign issuers, an investment in the Fund should be made with an
understanding of the risks inherent in any investment in common stocks including
the risk that the financial condition of the issuers of the Fund's portfolio
securities may become impaired or that the general condition of the stock market
may worsen (both of which may contribute directly to a decrease in the value of
the securities and thus in the value of the Fund's Shares). Additional risks
include risks associated with the right to receive payments from the issuer
which is generally inferior to the rights of creditors of, or holders of debt
obligations or preferred stock issued by, the issuer.
Moreover, common stocks do not represent an obligation of the issuer and
therefore do not offer any assurance of income or provide the degree of
protection of debt securities. The issuance of debt securities or even preferred
stock by an issuer will create prior claims for payment of principal, interest
and dividends which could adversely affect the ability and inclination of the
issuer to declare or pay dividends on its common stock or the economic interest
of holders of common stock with respect to assets of the issuer upon liquidation
or bankruptcy. Further, unlike debt securities which typically have a stated
principal amount payable at maturity (which value will be subject to market
fluctuations prior thereto), common stocks have neither a fixed principal amount
nor a maturity and have values which are subject to market fluctuations for as
long as the common stocks remain outstanding. Common stocks are especially
susceptible to general stock market movements and to volatile increases and
decreases in value as market confidence in and perceptions of the issuers
change. These perceptions are based on unpredictable factors including
expectations regarding government, economic, monetary and fiscal policies,
inflation and interest rates, economic expansion or contraction, and global or
regional political, economic or banking crises. The value of the common stocks
in the Fund's portfolio thus may be expected to fluctuate.
Preferred stocks are usually entitled to rights on liquidation which are
senior to those of common stocks. For these reasons, preferred stocks generally
entail less risk than common stocks. Such securities may pay cumulative
dividends. Because the dividend rate is pre-established, and they are senior to
common stocks, such securities tend to have less possibility of capital
appreciation.
Some of the securities in the Fund may be in the form of depository
receipts. Depository receipts usually represent common stock or other equity
securities of non-U.S. issuers deposited with a custodian in a depository. The
underlying securities are usually withdrawable at any time by surrendering the
depository receipt. Depository receipts are usually denominated in U.S. dollars
and dividends and other payments from the issuer are converted by the custodian
into U.S. dollars before payment to receipt holders. In other respects
depository receipts for foreign securities have the same characteristics as the
underlying securities. Depository receipts that are not sponsored by the issuer
may be less liquid and there may be less readily available public information
about the issuer.
Nonconvertible Fixed Income Securities
The category of fixed income securities which are not convertible or
exchangeable for common stock includes preferred stocks, bonds, debentures,
notes, asset and mortgage backed securities and money market instruments such as
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B-2
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commercial paper and bankers acceptances. There is no minimum credit rating for
these securities in which the Fund may invest. Accordingly, the Fund could
invest in securities in default although the Fund will not invest more than 5%
of its assets in such securities.
Up to 25% of the Fund's assets may be invested in lower quality debt
securities although the Fund does not expect to invest more than 10% of its
assets in such 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 Fund 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.
Factors adversely affecting the market value of high yield and other
securities will adversely affect the Fund's net asset value. In addition, the
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
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
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B-3
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market may have an adverse impact on market price and the 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 the 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 Fund'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.
Asset-Backed and Mortgage-Backed Securities
Prepayments of principal may be made at any time on the obligations
underlying asset and mortgage backed securities and are passed on to the holders
of the asset and mortgage backed securities. As a result, if the Fund purchases
such a security at a premium, faster than expected prepayments will reduce and
slower than expected prepayments will increase yield to maturity. Conversely, if
the Fund purchases these securities at a discount, faster than expected
prepayments will increase, while slower than expected prepayments will reduce,
yield to maturity.
Convertible Securities
The Adviser believes that opportunities for capital appreciation may also
be found in convertible securities and the Fund may invest without limit in
convertible securities. This is particularly true in the case of companies that
have performed below expectations at the time the convertible security was
issued. If the company's performance has been poor enough, its convertible debt
securities will trade more like common stock than like a fixed-income security
and may result in above average appreciation once it becomes apparent that
performance is improving. Even if the credit quality of the company is not in
question, the market price of the convertible security will often reflect little
or no element of conversion value if the price of its common stock has fallen
substantially below the conversion price. This leads to the possibility of
capital appreciation if the price of the common stock recovers.
Many convertible securities are not investment grade, that is, not rated
BBB or better by Standard & Poor's Rating Group ("S&P") or Baa or better by
Moody's Investors Service, Inc. ("Moody's") and not considered by the Adviser to
be of equivalent credit quality.
The Fund may invest up to 25% of its assets in convertible securities
rated, at the time of investment, less than BBB by S&P or Baa by Moody's or are
unrated but of equivalent credit quality in the judgment of the Adviser.
Securities which are not investment grade are viewed by the rating agencies as
being predominantly speculative in character and are characterized by
substantial risk concerning payments of interest and principal, sensitivity to
economic conditions and changes in interest rates, as well as by market price
volatility and/or relative lack of secondary market trading among other risks
and may involve major risk exposure to adverse conditions or be in default.
However, the Fund does not expect to invest more than 5% of its assets in
securities which are in default at the time of investment and will invest in
such securities only when the Adviser expects that the securities will
appreciate in value. There is no minimum rating of securities in which the Fund
may invest. Securities rated less than BBB by S&P or Baa by Moody's or
comparable unrated securities are typically referred to as "junk bonds." For
further information regarding lower rated securities and the risk associated
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B-4
<PAGE>
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therewith, see the Description of Corporate Bond and Corporate Debt Ratings
attached hereto as an Appendix.
Some of the convertible securities in the Fund portfolio may be
"Pay-In-Kind" securities. During a designated period from original issuance, the
issuer of such a security may pay dividends or interest to the holder by issuing
additional fully paid and nonassessable shares or units of the same or another
specified security.
Sovereign Debt Securities
The Fund may invest in securities issued by any country and denominated in
any currency, but expects that it generally will invest in developed countries
including Australia, Canada, Finland, France, Germany, Hong Kong, Italy, Japan,
New Zealand, Norway, Spain, Sweden, the United Kingdom and the United States.
The obligations of governmental entities have various kinds of government
support and include obligations issued or guaranteed by governmental entities
with taxing power. These obligations may or may not be supported by the full
faith and credit of a government. The Fund will invest in government securities
of issuers considered stable by the Adviser, based on its analysis of factors
such as general political or economic conditions relating to the government and
the likelihood of expropriation, nationalization, freezes or confiscation of
private property. The Adviser does not believe that the credit risk inherent in
the obligations of one stable government is necessarily significantly greater
than that of another. Except for the fact that the Fund may invest up to 100% of
its assets in U.S. government securities for temporary defensive purposes and
except for the absence of currency exchange volatility, the Fund would utilize
the same factors in determining whether and to what extent to invest in U.S.
government securities as with respect to debt securities of other sovereign
issuers.
The Fund may also purchase securities issued by semi-governmental or
supranational agencies such as the Asian Development Bank, the International
Bank for Reconstructional Development, the Export-Import Bank and the European
Investment Bank. The governmental members, or "stockholders," usually make
initial capital contributions to the supranational entity and in many cases are
committed to make additional capital contributions if the supranational entity
is unable to repay its borrowings.
The Fund may invest in securities denominated in a multi-national currency
unit. An illustration of a multi-national currency unit is the European Currency
Unit (the "ECU"), which is a "basket" consisting of specified amounts of the
currencies of the member states of the European Community, a Western European
economic cooperative organization that includes France, Germany, The
Netherlands, the United Kingdom and other countries. The specific amounts of
currencies comprising the ECU may be adjusted by the Council of Ministers of the
European Community to reflect changes in relative values of the underlying
currencies. Such investments involve credit risks associated with the issuer and
currency risks associated with the currency in which the obligation is
denominated.
Securities Subject to Reorganization
The 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 high total return significantly greater than the
brokerage and other transaction expenses involved.
In general, securities which are the subject of such an offer or proposal
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B-5
<PAGE>
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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. Since such investments are ordinarily
short-term in nature, they will tend to increase the turnover ratio of the Funds
thereby increasing its brokerage and other transaction expenses as well as make
it more difficult for the Fund to meet the tests for favorable tax treatment as
a "Regulated Investment Company" under the Internal Revenue Code of 1986, as
amended (the "Code") (see "Dividends, Distributions and Taxes" in the
Prospectus). The Adviser intends to select investments of the type described
which, in its view, have a reasonable prospect of capital appreciation which is
significant in relation to both risk involved and the potential of available
alternate investments as well as to monitor the effect of such investments on
the tax qualification test of the Code.
Options
The Fund may purchase or sell options on individual securities as well as
on indices of securities as a means of achieving additional return or of hedging
the value of the Fund's portfolio.
A call option is a contract that gives the holder of the option the right,
in return for a premium paid, to buy from the seller the security underlying the
option at a specified exercise price at any time during the term of the option
or, in some cases, only at the end of the term of the option. The seller of the
call option has the obligation upon exercise of the option to deliver the
underlying security upon payment of the exercise price. A put option is a
contract that gives the holder of the option the right in return for a premium
to sell to the seller the underlying security at a specified price. The seller
of the put option, on the other hand, has the obligation to buy the underlying
security upon exercise at the exercise price. The Fund's transactions in options
may be subject to specific segregation requirements.
See "Hedging Transactions" below.
If the Fund has sold 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 sold. There can be no
assurance that a closing purchase transaction can be effected when the Fund so
desires.
The purchaser of an option risks a total loss of the premium paid for the
option if the price of the underlying security does not increase or decrease
sufficiently to justify exercise. The seller of an option, on the other hand,
will recognize the premium as income if the option expires unexercised but
foregoes any capital appreciation in excess of the exercise price in the case of
a call option and may be required to pay a price in excess of current market
value in the case of a put option. Options purchased and sold other than on an
exchange in private transactions also impose on the fund the credit risk that
the counterparty will fail to honor its obligations. The Fund will not purchase
options if, as a result, the aggregate cost of all outstanding options exceeds
10% of the Fund's assets. To the extent that puts, straddles and similar
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B-6
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investment strategies involve instruments regulated by the Commodity Futures
Trading Commission the Fund is limited to an investment not in excess of 5% of
its total assets.
Warrants and Rights
The Fund may invest up to 5% of its total assets in warrants or rights
(other than those acquired in units or attached to other securities) which
entitle the holder to buy equity securities at a specific price for or at the
end of a specific period of time. The Fund will not invest more than 2% of its
total assets in warrants or rights which are not listed on the New York or
American Stock Exchanges.
When Issued, Delayed Delivery Securities and Forward Commitments
The Fund may enter into forward commitments for the purchase or sale of
securities, including on a "when issued" or "delayed delivery" basis in excess
of customary settlement periods for the type of security involved. In some
cases, a forward commitment may be conditioned upon the occurrence of a
subsequent event, such as approval and consummation of a merger, corporate
reorganization or debt restructuring, i.e., a when, as and if issued security.
When such transactions are negotiated, the price is fixed at the time of the
commitment, with payment and delivery taking place in the future, generally a
month or more after the date of the commitment. While the Fund will only enter
into a forward commitment with the intention of actually acquiring the security,
the Fund may sell the security before the settlement date if it is deemed
advisable.
Securities purchased under a forward commitment are subject to market
fluctuation, and no interest (or dividends) accrues to the Fund prior to the
settlement date. The Fund will segregate with its custodian cash or liquid
high-grade debt securities with the Fund's custodian in an aggregate amount at
least equal to the amount of its outstanding forward commitments.
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.
Short Sales
The Fund may make short sales of securities. A short sale is a transaction
in which the Fund sells a security it does not own in anticipation that the
market price of that security will decline. The Fund expects to make short sales
both to obtain capital gains from anticipated declines in securities and as a
form of hedging to offset potential declines in long positions in the same or
similar securities. The short sale of a security is considered a speculative
investment technique.
When the Fund makes a short sale, it must borrow the security sold short
and deliver it to the broker-dealer through which it made the short sale in
order to satisfy its obligation to deliver the security upon conclusion of the
sale. The Fund may have to pay a fee to borrow particular securities and is
often obligated to pay over any payments received on such borrowed securities.
The Fund's obligation to replace the borrowed security will be secured by
collateral deposited with the broker-dealer, usually cash, U.S. government
securities or other highly liquid securities. The Fund will also be required to
deposit similar collateral with its Custodian to the extent, if any, necessary
so that the value of both collateral deposits in the aggregate is at all times
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B-7
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equal to the greater of the price at which the security is sold short or 100% of
the current market value of the security sold short. Depending on arrangements
made with the broker-dealer from which it borrowed the security regarding
payment over of any payments received by the Fund on such security, the Fund may
not receive any payments (including interest) on its collateral deposited with
such broker-dealer. If the price of the security sold short increases between
the time of the short sale and the time the Fund replaces the borrowed security,
the Fund will incur a loss; conversely, if the price declines, the Fund will
realize a capital gain. Any gain will be decreased, and any loss increased, by
the transaction costs described above. Although the Fund's gain is limited to
the price at which it sold the security short, its potential loss is
theoretically unlimited.
The market value of the securities sold short of any one issuer will not
exceed either 5% of the Fund's total assets or 5% of such issuer's voting
securities. The Fund will not make a short sale, if, after giving effect to such
sale, the market value of all securities sold short exceeds 25% of the value of
its assets or the Fund's aggregate short sales of a particular class of
securities exceeds 25% of the outstanding securities of that class. The Fund may
also make short sales "against the box" without respect to such limitations. In
this type of short sale, at the time of the sale, the Fund owns or has the
immediate and unconditional right to acquire at no additional cost the identical
security.
Restricted and Illiquid Securities
The Fund may invest up to a total of 10% of its net assets in securities
that are subject to restrictions on resale and securities the markets for which
are illiquid. Illiquid securities include most of the securities the disposition
of which is subject to substantial legal or contractual restrictions. The sale
of illiquid securities often requires more time and results in higher brokerage
charges or dealer discounts and other selling expenses than does the sale of
securities eligible for trading on national securities exchanges or in the
over-the-counter markets. Restricted securities may sell at a price lower than
similar securities that are not subject to restrictions on resale. Securities
freely salable among qualified institutional investors under special rules
adopted by the Securities and Exchange Commission or otherwise determined to be
liquid 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. The Board will review pertinent factors
such as trading activity, reliability of price information and trading patterns
of comparable securities in determining whether to treat any such security as
liquid for purposes of the foregoing 10% test. To the extent the Board treats
such securities as liquid, temporary impairments to trading patterns of such
securities may adversely affect the Fund's liquidity.
Repurchase Agreements
The Fund may invest in repurchase agreements, which are agreements pursuant
to which securities are acquired by the Fund from a third party with the
understanding that they will be repurchased by the seller at a fixed price on an
agreed date. These agreements may be made with respect to any of the portfolio
securities in which the Fund is authorized to invest. Repurchase agreements may
be characterized as loans secured by the underlying securities. The Fund may
enter into repurchase agreements with (i) member banks of the Federal Reserve
System having total assets in excess of $500 million and (ii) securities
dealers, provided that such banks or dealers meet the creditworthiness standards
established by the Fund's board of directors ("Qualified Institutions"). The
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<PAGE>
- --------------------------------------------------------------------------------
Adviser will monitor the continued creditworthiness of Qualified Institutions,
subject to the supervision of the Fund's board of directors. The resale price
reflects the purchase price plus an agreed upon market rate of interest which is
unrelated to the coupon rate or date of maturity of the purchased security. The
collateral is marked to market daily. Such agreements permit the Fund to keep
all its assets earning interest while retaining "overnight" flexibility in
pursuit of investments of a longer-term nature.
The use of repurchase agreements involves certain risks. For example, if
the seller of securities under a repurchase agreement defaults on its obligation
to repurchase the underlying securities, as a result of its bankruptcy or
otherwise, the Fund will seek to dispose of such securities, which action could
involve costs or delays. If the seller becomes insolvent and subject to
liquidation or reorganization under applicable bankruptcy or other laws, the
Fund's ability to dispose of the underlying securities may be restricted.
Finally, it is possible that the Fund may not be able to substantiate its
interest in the underlying securities. To minimize this risk, the securities
underlying the repurchase agreement will be held by the Fund's custodian at all
times in an amount at least equal to the repurchase price, including accrued
interest. If the seller fails to repurchase the securities, the Fund may suffer
a loss to the extent proceeds from the sale of the underlying securities are
less than the repurchase price. 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 total
assets would be so invested.
Loans of Portfolio Securities
To increase income, the Fund may lend its portfolio securities to
securities broker-dealers or financial institutions if (1) the loan is
collateralized in accordance with applicable regulatory requirements including
collaterization continuously at no less than 100% by marking to market daily,
(2) the loan is subject to termination by the Fund at any time, (3) the Fund
receives reasonable interest or fee payments on the loan, (4) the Fund is able
to exercise all voting rights with respect to the loaned securities and (5) the
loan will not cause the value of all loaned securities to exceed 33% of the
value of the Fund's assets.
If the borrower fails to maintain the requisite amount of collateral, the
loan automatically terminates and the Fund could use the collateral to replace
the securities while holding the borrower liable for any excess of replacement
cost over the value of the collateral. As with any extension of credit, there
are risks of delay in recovery and in some cases even loss of rights in
collateral should the borrower of the securities fail financially.
Borrowing
The Fund may not borrow money except for (1) short-term credits from banks
as may be necessary for the clearance of portfolio transactions, and (2)
borrowings from banks for temporary or emergency purposes, including the meeting
of redemption requests, which would otherwise require the untimely disposition
of its portfolio securities. Borrowing may not, in the aggregate, exceed 15% of
assets after giving effect to the borrowing and borrowing for purposes other
than meeting redemptions may not exceed 5% of the value of the Fund's assets
after giving effect to the borrowing. The Fund will not make additional
investments when borrowings exceed 5% of assets. The Fund may mortgage, pledge
or hypothecate assets to secure such borrowings.
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<PAGE>
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Hedging Transactions
Futures Contracts. The Fund may enter into futures contracts only for
certain bona fide hedging, yield enhancement and risk management purposes. The
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 the 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. The 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 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. The 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 the 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. The 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.
Although the Adviser has no current intention of using such instruments on
behalf of the Fund, it may choose to do so at a future date depending upon
market conditions prevailing at such time and the perceived investment needs of
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<PAGE>
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the Fund. Futures contracts, interest rate swaps, options on securities, indices
and futures contracts and certain currency contracts sold by the Fund are
generally subject to segregation and coverage requirements with the result that,
if the Trust does not hold the security or futures contract underlying the
instrument, the Fund will be required to segregate on an ongoing basis with its
custodian, cash, U.S. government securities, or other high grade liquid debt
obligations in an amount at least equal to the Fund's obligations with respect
to such instruments. Such amounts fluctuate as the obligations increase or
decrease. The segregation requirement can result in the Fund maintaining
securities positions it would otherwise liquidate or segregating assets at a
time when it might be disadvantageous to do so.
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 the
Fund's sole shareholder on March 12, 1993 the Adviser furnishes a continuous
investment program for the Fund's portfolio, makes the day-to-day investment
decisions for the Fund, arranges the portfolio transactions for the Fund and
generally manages the Fund's investments in accordance with the stated policies
of the Fund, subject to the general supervision of the Board of Directors of the
Corporation.
Under the 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
Fund'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 an Administration Contract with Furman Selz
Incorporated (the "Administrator") pursuant to which the 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 borne by the
Administrator, the Adviser pays a monthly fee at the annual rate of .10% of the
average net assets of the Fund (minimum annual fee of $40,000 and subject to
reduction to .075% on assets of the Gabelli funds under its administration from
$350 million up to $600 million and .06% in excess of $600 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
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<PAGE>
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its employees, officers, directors and controlling persons are not liable to the
Fund or any of its investors for any act or omission by the Adviser or for any
error of judgment or for losses sustained by the Fund. However, the Contract
provides that the Fund is not waiving any rights it may have with respect to any
violation of law which cannot be waived. The Contract also provides
indemnification for the Adviser and each of these persons for any conduct for
which they are not liable to the Fund. The Investment Advisory Contract in no
way restricts the Adviser from acting as adviser to others. The Fund has 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
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 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." The Investment Advisory Contract provides in effect, that
unless terminated it will remain in effect so long as continuance of the
Investment Advisory Contract is approved annually by the Directors of the Fund,
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 Investment Advisory Contract also provides that the Adviser is
obligated to reimburse to the Fund any amount up to the amount of its advisory
fee by which its aggregate expenses including advisory fees payable to the
Adviser (but excluding interest, taxes, Rule 12b-1 expenses, brokerage
commissions, extraordinary expenses and any other expenses not subject to any
applicable expense limitation) during the portion of any fiscal year in which
the Contract is in effect exceed the most restrictive expense limitation imposed
by the securities law of any jurisdiction in which the shares of the Fund are
registered or qualified for sale. Such limitation is currently believed to be
2.5% of the first $30 million of average net assets, 2.0% of the next $70
million of average net assets and 1.5% of average net assets in excess of $100
million. For the period from May 14, 1993 (Commencement of Operations) through
December 31, 1993, the Adviser was entitled to fees of $78,527; however, $63,852
of these fees were waived by the Adviser. For the fiscal year ended December 31,
1994, the Adviser was entitled to fees of $275,496; however, $39,102 of these
fees were voluntarily used by the Adviser to assume expenses of the Fund. For
the six month period ended June 30, 1995, the Adviser was entitled to fees of
$114,452. For purposes of this expense limitation Fund expenses are accrued
monthly and the monthly fee otherwise payable to the Adviser will be postponed
to the extent that the includable Fund expenses to date exceed the proportionate
amount of such limitation to date.
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THE DISTRIBUTOR
The Corporation on behalf of the 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 Fund 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
Corporation, 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.
During the fiscal year ended December 31, 1994, the Fund paid distribution
expenses under the Distribution Plan of $68,879. Of this amount paid by the
Fund, pursuant to the Distribution Plan, $1,838 was spent on advertising,
$24,015 on printing, postage and stationery, $8,161 on overhead support expenses
and $34,865 on salaries of personnel of 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 be
"interested persons" of the Fund for purposes of the Investment Company Act of
1940 are indicated by an asterisk.
Principal Occupations During Last Five
Year; Affiliations
Name, Position with Fund and Address with the Adviser or Administrator.
- ------------------------------------ ----------------------------------------
Mario J. Gabelli* Chairman, President, Chief Executive
President, Director and Officer and a Director of Gabelli Funds,
Chief Investment Officer Inc., the Adviser and the indirect
One Corporate Center parent of Gabelli & Company, Inc., the
Rye, New York 10580 Distributor; Chairman, Chief Executive
Age: 52 Officer, Chief Investment Officer of
GAMCO Investors, Inc.; President and
Chairman of The Gabelli Equity Trust,
Inc.; President, Chief Investment
Officer and Director of Gabelli Equity
Series Funds, Inc., Gabelli Global
Series Funds, Inc., The Gabelli Capital
Series Funds, Inc. and The Gabelli Value
Fund Inc., The Gabelli Convertible
Securities Fund, Inc. and Trustee of The
Gabelli Asset Fund; The Gabelli Growth
Fund and The Gabelli Money Market Funds;
Chairman and Director of Lynch
Corporation and The Gabelli Global
Governments Fund; Director and Adviser
of Gabelli International Ltd.; Director
of the Morgan Group, Inc.
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B-13
<PAGE>
Principal Occupations During Last Five
Year; Affiliations
Name, Position with Fund and Address with the Adviser or Administrator.
- ------------------------------------ ----------------------------------------
Anthony J. Colavita President and Attorney at law in the law
Director firm of Anthony J. Colavita, P.C. since
575 White Plains Road 1961; Former member of the New York
Eastchester, New York 10709 State Thruway Authority; Former counsel,
Age: 59 New York State Assembly; Director of The
Gabelli Value Fund Inc., Gabelli Global
Series Funds, Inc., The Gabelli
Convertible Securities Fund, Inc., The
Gabelli Capital Series Funds, Inc., The
Gabelli Global Governments Fund and
Gabelli Equity Series Funds, Inc.;
Trustee of The Gabelli Asset Fund, The
Gabelli Money Market Funds, The Gabelli
Growth Fund and The Westwood Funds.
Vincent D. Enright Senior Vice President of Brooklyn Union
Director Gas Company; Director of Gabelli Equity
One Metro Tech Center Series Funds, Inc.; Trustee of The
Brooklyn, New York 11201 Gabelli Money Market Funds.
Age: 51
Karl Otto Pohl* Partner of Sal Oppenheim Jr. & Cie.
Director (private investment bank); Former
One Corporate Center President of the Deutsche Bundesbank
Rye, New York 10580 (Germany's Central Bank) and Chairman of
Age: 64 its Central Bank Council (1980-1991);
Currently board member of IBM World
Trade Europe/Middle East/Africa Corp.;
Bertelsmann AG; Zurich
Versicherungs-Gesellshaft (insurance);
the International Advisory Board of
General Electric Company; the
International Council for JP Morgan &
Co.; the Board of 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 Funds managed by
the Adviser.
Werner Roeder, M.D. Director of Surgery, Lawrence Hospital
Director and practicing private physician.
One Corporate Center Director of Gabelli Global Series Funds,
Rye, New York 10580 Inc., The Gabelli Capital Series Fund,
Age: 54 Inc., The Gabelli Global Governments
Fund and Gabelli Gold Fund, Inc.
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Principal Occupations During Last Five
Year; Affiliations
Name, Position with Fund and Address with the Adviser or Administrator.
- ------------------------------------ ----------------------------------------
Bruce N. Alpert Vice President, Treasurer and Chief
Vice President and Financial and Administrative Officer of
Treasurer the investment advisory division of the
One Corporate Center Adviser, Treasurer of The Gabelli Equity
Rye, New York 10580 Trust Inc., and the Gabelli Global
Age: 43 Multimedia Trust Inc. Vice President and
Treasurer of The Gabelli Convertible
Securities Fund, Inc.; Gabelli Equity
Series Funds, Inc.; Gabelli Gold Fund,
Inc.; Gabelli Capital Series Funds;
Gabelli Global Series Funds, Inc.; The
Gabelli Money Market Funds; The Gabelli
Value Fund Inc.; President and Treasurer
of The Gabelli Asset Fund and The
Gabelli Growth Fund. Vice President of
The Westwood Funds and Manager of Teton
Advisers LLC.
James E. McKee Vice President and General Counsel of
Secretary GAMCO Investors, Inc. since 1993 and of
One Corporate Center Gabelli Funds, Inc. since August 1995;
Rye, New York 10580 Secretary of all Funds advised by
Age: Gabelli Funds, Inc., and Teton Advisers
LLC since August 1995. Branch Chief with
the U.S. Securities and Exchange
Commission in New York 1992 through
1993. Staff attorney with the U.S.
Securities and Exchange Commission in
New York from 1989 through 1992.
The Fund pays each Director who is not an employee of the Adviser or an
affiliated company an annual fee of $1,000 and $250 for each 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 Fund who are
employed by the Adviser or an affiliated company receive no compensation or
expense reimbursement from the Corporation.
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 from
the Fund for the calendar year ended December 31, 1994 in excess of $60,000.
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COMPENSATION TABLE
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
Name of Person, Aggregate Compensa- Pension or Retirement Estimated Annual Ben- Total Compensation
Position tion from the Fund Benefits Accrued as efits Upon Retirement From the Fund and
Part of Fund Expenses Fund Complex Paid to
Directors*
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Mario J. Gabelli $ 0 0 N/A $ 0
Chairman of the Board
Vincent D. Enright $2,000 0 N/A $17,000(4)
Director
Anthony J. Colavita $2,000 0 N/A $59,500(10)
Director
Karl Otto Pohl $1,250 0 N/A $64,750(12)
Director
Werner Roeder, M.D. $2,000 0 N/A $ 6,000(3)
Director
</TABLE>
- -------------
* Represents the total compensation paid to such persons during the calendar
year ending December 31, 1994 (and, with respect to the Fund, estimated to
be paid during a full calendar year). The parenthetical number represents
the number of investment companies (including the Fund) from which such
person receives compensation that are considered part of the same fund
complex as the Fund, because, among other things, they have a common
investment adviser.
As of the date of this Statement of Additional Information, the Officers
and Directors of the Fund as a group owned less than 1% of the outstanding
shares.
As of September 15, 1995, there were no 5% or greater shareholders of the
Fund.
INVESTMENT RESTRICTIONS
The 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 by the Fund 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 the Fund will not be considered a deviation from policy. The Fund may
not:
(1) invest 25% or more of the value of its total assets in any one industry
or issuer;
(2) issue senior securities, except that the Fund may borrow money,
including on margin if margin securities are owned and enter into reverse
repurchase agreements in an amount up to 331/3% of its total assets (including
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the amount of such enumerated senior securities issued but excluding any
liabilities and indebtedness not constituting senior securities) and except that
the 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. The Fund's
obligations under the foregoing types of transactions and investment strategies
are not treated as senior securities;
(3) 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;
(4) 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.
(5) invest for the purpose of exercising control over management of any
company;
(6) purchase real estate or interests therein, including limited
partnerships that invest primarily in real estate equity interests, other than
mortgage-backed securities, publicly traded real estate investment trusts and
similar instruments;
or
(7) 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 the Fund to employ brokers to effect
the purchase or sale of portfolio securities with the objective of obtaining
prompt, efficient and reliable execution and clearance of such transactions at
the most favorable price obtainable ("best execution") at reasonable expense.
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. 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 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. It is the
practice of the Adviser and its affiliates to cause purchase and sale
transactions to be allocated among the Fund and others whose assets they manage
in such manner as it deems equitable. 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 policy of the 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
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seeking to implement the 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 Fund or
the Adviser of the type described in Section 28(e) of the Exchange Act of 1934.
In doing so, the Fund 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. For the period from May 14, 1993 (Commencement of Operations)
through December 31, 1993 and for the fiscal year ended December 31, 1994 and
for the six month period ended June 30, 1995, the Adviser spent a total of
$14,811, $66,827 and $63,597, respectively, in brokerage commissions.
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 Fund 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 Fund.
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. For the period from May 14,
1993 (Commencement of Operations) through December 31, 1993, and for the fiscal
year ended December 31, 1994 and for the six month period ended June 30, 1995,
the Fund paid a total of $3,755, $11,397 and $6,012, respectively, in brokerage
commissions to Gabelli & Company, Inc. These amounts represent 25.4%, 17.1% and
22.2%, respectively, of the Fund's aggregate brokerage commissions and 28.2%,
26.0% and 25.9%, respectively, of the Fund's aggregate dollar amount of
transactions involving the payment of commissions.
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 Fund 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.
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B-18
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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.
To minimize expenses, the Fund reserves the right to redeem, upon not less
than 30 days notice, all shares of the Fund in an account (other than an IRA)
which as a result of shareholder redemption has a value below $500 and has
reserved the ability to raise this amount to up to $10,000. However, a
shareholder will be allowed to make additional investments prior to the date
fixed for redemption to avoid liquidation of the account.
DIVIDENDS, DISTRIBUTIONS AND TAXES
General
The Fund will determine either to distribute or to retain all or part of
any net long-term capital gains in any year for reinvestment. If any such gains
are retained, the Fund will be subject to a tax of 34% of such amount. In that
event, the Fund expects to designate the retained amount as undistributed
capital gains in a notice to its shareholders, each of whom (1) will be required
to include in income for tax purposes as long-term capital gains, 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 66% of the amount of
undistributed capital gains included in such shareholder's gross income.
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, an amount equal to, at the minimum, 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. 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 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.
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 intends 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 capital
gains, if any, realized during any fiscal year in which it distributes such
income and capital gains to its shareholders.
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B-19
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Hedging Transactions
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 Fund at the end of each
taxable year are "marked-to-market" with the result that unrealized gains or
losses are treated as though they were realized and the resulting gain or loss
is treated as 60/40 gain or loss.
Generally, the heding transactions undertaken by the Fund 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 Fund 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 Fund 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. Because only a few
regulations implementing the straddle rules have been promulgated, the tax
consequences of hedging transactions to the Fund are not entirely clear.
The Fund may make one or more of the elections available under the Code
which are applicable to straddles. If the Fund makes any of the elections, the
amount, character and timing of the recognition of gains or losses from the
affected straddle positions will be determined under rules that vary according
to the election(s) made. The rules applicable under certain of the elections
accelerate the recognition of gains or losses from the affected straddle
positions.
Because application of the straddle rules may affect the character of gains
or losses, defer losses and/or accelerate the recognition of gains or losses
from the affected straddle positions, and require the capitalization of interest
expense, 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 heding transactions.
The 30% limitation and the diversification requirements applicable to the
Fund's assets may limit the extent to which the 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 shares. Dividends paid by the 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 gains (which consists of the excess of 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, 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 will be taxable even though it represents a return
of invested capital. The price of shares purchased at this time may reflect the
amount of the forthcoming distribution. Those purchasing just prior to a
distribution will receive a distribution which will nevertheless be taxable to
them.
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B-20
<PAGE>
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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. Such 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 net capital gains
received by the shareholder with respect to such shares.
Backup Withholding
The Corporation may be required to withhold Federal income tax at the rate
of 31% of all taxable distributions payable to shareholders who fail to provide
the Fund with 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 withholding. Backup withholding is not an additional
tax. Any amounts withheld may be credited against a shareholder's Federal income
tax liability.
Foreign Withholding Taxes
Income received by the Fund 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 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. Shareholders are urged to consult their
attorneys or tax advisers regarding specific questions as to Federal, state or
local taxes.
DETERMINATION OF NET ASSET VALUE
For purposes of determining the Fund's net asset value per share, readily
marketable portfolio securities listed on the New York Stock Exchange are
valued, except as indicated below, at the last sale price reflected at the close
of the regular trading session of the New York Stock Exchange 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 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. Readily marketable securities not
listed on the New York Stock Exchange but listed on other national securities
exchanges or admitted to trading on the National Association of Securities
Dealers Automated Quotations, Inc. ("NASDAQ") National List are valued in like
manner. Portfolio securities traded on more than one national securities
exchange are valued at the last sale price on the business day as of which such
value is being determined as reflected on the tape at the close of the exchange
representing the principal market for such securities.
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
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B-21
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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.
United States Government obligations and other debt instruments having
sixty 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.
As indicated in the Prospectus, the net asset value per share of the Fund's
shares will be determined on each day that the New York Stock Exchange is open
for trading. That Exchange annually announces the days on which it will not be
open for trading; the most recent announcement indicates that it will not be
open on the following days: New Year's Day, President's Birthday, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
However, that Exchange may close on days not included in that announcement.
INVESTMENT PERFORMANCE INFORMATION
The Fund may furnish data about its 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 Fund may also furnish total return calculations for these
and other periods, based on investments at various sales charge levels or net
asset value. Any performance data which is based on the Fund's net asset value
per share would be reduced if a sales charge were taken into account.
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/CD + 1)^6 - 1]
where A = dividends and interest earned during the period, B = expenses accrued
for the period (net of any reimbursements), C = the average daily number of
shares outstanding during the period that were entitled to receive dividends,
and D = the maximum offering price per share on the last day of the period. For
the 30 day period ended December 31, 1994, the Fund's yield was 0.38%.
Quotations of total return will reflect only the performance of a
hypothetical investment in the Fund during the particular time period shown. The
Fund's total return and current yield may vary from time to time depending on
market conditions, the compositions of the Fund's portfolio and operating
expenses. These factors and possible differences in the methods used in
calculating yield should be considered when comparing the 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 Fund's shares and the risks associated with with 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.
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B-22
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From time to time evaluations of performance are made by independent
sources that may be used in advertisements concerning the fund. These sources
include: Lipper Analytical Services, Weisenberger Investment Company Service,
Barron's, Business Week, Kiplinger's Personal Financial Report, 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
other unmanaged indexes which may assume reinvestment of dividends but generally
do not reflect deductions for administrative and management costs.
Quotations of the Fund's total return will represent the average annual
compounded rate of return of a hypothetical investment in the Fund over periods
of 1, 5, and 10 years (up to the life of the Fund), and are calculated pursuant
to the following formula:
T = (ERV/P)^(1/n) - 1
(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). All
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.
For the period from May 14, 1993 (Commencement of Operations) through
December 31, 1993, and for the fiscal year ended December 31, 1994 and for the
six month period ended June 30, 1995, the Fund's average annual total return was
9.1%, 4.49% and 6.0% (not annualized), respectively.
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B-23
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APPENDIX TO ADDITIONAL STATEMENT
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
Rating Group ("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
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B-24
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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.
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 forseeable 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
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B-25
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Description of Moody'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.
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B-26
