THE
GABELLI
ABC
FUND
PROSPECTUS
MAY 1, 2000
A SERIES OF GABELLI INVESTOR FUNDS, INC.
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THE
SHARES DESCRIBED IN THIS PROSPECTUS OR DETERMINED WHETHER THIS PROSPECTUS IS
ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
- --------------------------------------------------------------------------------
INVESTMENT AND PERFORMANCE SUMMARY
INVESTMENT OBJECTIVE:
The Gabelli ABC Fund (the "Fund") seeks to achieve total returns that are
attractive to investors in various market conditions without excessive risk of
capital loss. The Fund's investment objective may not be changed without
shareholder approval.
PRINCIPAL INVESTMENT STRATEGIES:
The Fund invests primarily in securities that the Fund's investment adviser,
Gabelli Funds, LLC (the "Adviser") believes provide attractive opportunities for
appreciation or investment income. The Adviser seeks to limit excessive risk of
capital loss by utilizing various investment strategies including investing in
value-oriented common stocks (i.e., common stocks that trade at a significant
discount to the Adviser's assessment of their "private market value" -- the
value informed investors would be willing to pay to acquire the entire company),
convertible securities (the income component of which makes such securities less
risky than common stocks), and virtually risk-free U.S. Treasury Bills and by
utilizing certain "arbitrage" strategies. The Fund's use of arbitrage may be
described as investing in "event" driven situations such as announced mergers,
acquisitions and reorganizations. When a company agrees to be acquired by
another company, its stock price often quickly rises to just below the stated
acquisition price. If the Adviser, through extensive research, determines that
the acquisition is likely to be consummated on schedule at the stated
acquisition price, then the Fund may purchase the selling company's securities,
offering the Fund the possibility of generous returns relative to cash
equivalents with a limited risk of excessive loss of capital.
PRINCIPAL INVESTMENT RISKS:
The Fund's share price will fluctuate with changes in the market value of the
Fund's portfolio securities. Stocks are subject to market, economic and business
risks that cause their prices to fluctuate. Because the Fund is non-diversified,
the Fund will have the ability to invest a larger portion of its assets in a
single issuer than would be the case if it were diversified. As a result, the
Fund may experience greater fluctuation in net asset value than funds which
invest in a broad range of issuers. The Fund may invest in lower credit quality
securities which may involve major risk exposures such as increased sensitivity
to interest rate and economic changes and limited liquidity. The Fund is also
subject to the risk that an announced merger or acquisition may not be
completed, may be negotiated at a less attractive price or may not close on the
expected date. The investment policies of the Fund may lead to a higher
portfolio turnover rate which could increase the Fund's expenses and could
negatively impact the Fund's performance. When you sell Fund shares, they may be
worth less than what you paid for them. Consequently, you can lose money by
investing in the Fund. The Fund is also subject to the risk that the potential
private market value of the Fund's stocks will never be realized or that the
portfolio securities' prices will decline.
WHO MAY WANT TO INVEST:
The Fund's shares offered herein are offered only to investors who acquire them
directly through Gabelli & Company, Inc., the Fund's distributor (the
"Distributor"), or through a select number of financial intermediaries with whom
the Distributor has entered into selling agreements specifically authorizing
them to offer shares of the Fund.
The Fund may appeal to you if:
o you favor a conservative approach to investments and returns
o you seek stability of principal more than growth and long-term returns
- --------------------------------------------------------------------------------
2
<PAGE>
- --------------------------------------------------------------------------------
You may not want to invest in the Fund if:
o you are seeking monthly income
o you are seeking aggressive capital appreciation
PERFORMANCE
The bar chart and table shown below provide an indication of the risks of
investing in the Fund by showing changes in the Fund's performance from year to
year (since 1994), and by showing how the Fund's average annual returns for one
year, five years and the life of the Fund compare to those of a broad-based
securities market index. As with all mutual funds, the Fund's past performance
does not predict how the Fund will perform in the future. Both the chart and the
table assume reinvestment of dividends and distributions.
THE GABELLI ABC FUND
[GRAPHIC OMITTED]
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
1994 4.5%
1995 11.2%
1996 7.8%
1997 12.8%
1998 11.1%
1999 9.0%
During the period shown in the bar chart, the highest quarterly return was 11.9%
(quarter ended December 31, 1998), and the lowest quarterly return was (4.9)%
(quarter ended September 30, 1998).
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS PAST PAST SINCE
(FOR THE PERIODS ENDED DECEMBER 31, 1999) ONE YEAR FIVE YEARS MAY 14, 1993*
- ------------------------------------------------- --------- --------- -------------
<S> <C> <C> <C>
The Gabelli ABC Fund ............................ 9.00% 10.36% 9.86%
S&P 500 Index** ................................. 21.03% 28.54% 22.28%
Lipper U.S. Treasury Money Market
Average*** ................................... 4.26% 4.76% 4.33%
<FN>
- ------------------------
* Commencement of operations.
** The S&P 500 Composite Stock PriceIndex is a widely recognized, unmanaged
index of common stock prices. The performance of the Index does not include
expenses or fees.
*** The Lipper U.S. Treasury Money Market Average represents the average
performance of U.S. Treasury money market mutual funds as tracked by
Lipper, Inc.
</FN>
</TABLE>
- --------------------------------------------------------------------------------
3
<PAGE>
- --------------------------------------------------------------------------------
FEES AND EXPENSES OF THE FUND:
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund.
ANNUAL FUND OPERATING EXPENSES (expenses that are deducted from Fund assets):
Management Fees .................................................. 1.00%
Distribution (Rule 12b-1) Fees. .................................. 0.25%
Other Expenses ................................................... 0.22%
-----
Total Annual Fund Operating Expenses ............................. 1.47%
=====
EXPENSE EXAMPLE:
This example is intended to help you compare the cost of investing in shares of
the Fund with the cost of investing in other mutual funds. The example assumes
(1) you invest $10,000 in the Fund for the time periods shown, (2) you redeem
your shares at the end of those periods, (3) your investment has a 5% return
each year and (4) the Fund's operating expenses remain the same. Although your
actual costs may be higher or lower, based on these assumptions your costs would
be:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
--------- ---------- ---------- -----------
$150 $465 $803 $1,757
INVESTMENT AND RISK INFORMATION
The Fund seeks to achieve total returns that are attractive to investors in
various market conditions without excessive risk of capital loss. The Adviser
seeks to limit excessive risk of capital loss by utilizing various investment
strategies including investing in equity securities of companies selling in the
public market at significant discounts to their private market value, lower risk
convertible securities, virtually risk free U.S. Treasury Bills and utilizing
certain "arbitrage" strategies. The Fund's use of arbitrage may be described as
investing in "event" driven situations such as announced mergers, acquisitions
and reorganizations. When a company agrees to be acquired by another company,
its stock price often quickly rises to just below the stated acquisition price.
If the Adviser, through extensive research, determines that the acquisition is
likely to be consummated on schedule at the stated acquisition price, then the
Fund may purchase the selling company's securities, offering the Fund the
possibility of generous returns relative to cash equivalents with a limited risk
of excessive loss of capital.
In selecting investments for the Fund, the Adviser considers a number of
factors, including:
o the Adviser's own evaluations of the "private market value" of the
underlying assets and business of the company. Private market value is
the value the Adviser believes informed investors would be willing to pay
to acquire the entire company;
o the interest or dividend income generated by the securities;
o the potential for capital appreciation of the securities;
o the prices of the securities relative to other comparable securities;
o whether the securities are entitled to the benefits of sinking funds or
other protective conditions;
o the existence of any anti-dilution protections or guarantees of the
security; and
o the diversification of the Fund's portfolio as to issuers.
- --------------------------------------------------------------------------------
4
<PAGE>
- --------------------------------------------------------------------------------
The Adviser also evaluates the issuer's free cash flow and long-term earnings
trends. Finally, the Adviser looks for a catalyst: something in the company's
industry or indigenous to the company or country itself that will surface
additional value.
Investing in the Fund involves the following risks:
o GENERAL. 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.
o MARKET RISK. The principal risk of investing in the Fund is market risk.
Market risk is the risk that the prices of the securities held by the
Fund will change due to general market and economic conditions,
perceptions regarding the industries in which the companies issuing the
securities participate and the issuer company's particular circumstances.
Because the Fund invests in securities of companies that have agreed to
be sold to another company at a premium over prevailing market prices,
the Fund is subject to the risk that the merger or similar transaction
will not occur or will be renegotiated at a less attractive price and the
price of the company's securities will decline significantly or the
transaction may take longer than expected to be completed.
o 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. Portfolio turnover
generally involves some expense to the Fund, including brokerage
commissions or dealer mark-ups and other transaction costs on the sale of
securities and reinvestment in other securities. As such, a higher
portfolio turnover rate could increase the Fund's expenses which could
negatively impact the Fund's performance.
o NON-DIVERSIFICATION RISK. The Fund is a "non-diversified investment
company" which means that it can concentrate its investments in the
securities of a single company to a greater extent than a diversified
investment company. Because the Fund may invest its assets in the
securities of a limited number of companies, a decline in the value of
the stock of any one of these issuers will have a greater impact on the
Fund's share price. In addition, many companies in the past several years
have adopted so-called "poison pill" and other defensive measures. Such
measures may limit the amount of securities in any one issuer that the
Fund may buy. This may limit tender offers or other non-negotiated offers
for a company and/or prevent competing offers.
o HEDGING RISK. The Fund may use options and futures to hedge the risks of
investing by the Fund. The success of hedging depends on the Adviser's
ability to predict movements in the prices of the hedged securities and
market fluctuations. The Adviser may not be able to perfectly correlate
changes in the market value of securities and the prices of the
corresponding options or futures. The Adviser may have difficulty selling
or buying futures contracts and options when it chooses and there may be
certain restrictions on trading futures contracts and options. The Fund
is not obligated to pursue any hedging strategy. In addition, hedging
practices may not be available, may be too costly to be used effectively
or may be unable to be used for other reasons.
- --------------------------------------------------------------------------------
5
<PAGE>
- --------------------------------------------------------------------------------
o LOWERED RATED SECURITIES. The Fund may invest in lower credit quality
securities, including up to 5% of its assets in securities of issuers
that are in default. These securities may involve major risk exposures
such as increased sensitivity to interest rate and economic changes, and
the market to sell such securities may be limited. These securities are
often referred to in the financial press as "junk bonds."
MANAGEMENT OF THE FUND
THE ADVISER. Gabelli Funds, LLC, with principal offices located at One Corporate
Center, Rye, New York 10580-1434, serves as investment adviser to the Fund. The
Adviser makes investment decisions for the Fund and continuously reviews and
administers the Fund's investment program under the supervision of the Fund's
Board of Directors. The Adviser also manages several other open-end and
closed-end investment companies in the Gabelli family of funds. The Adviser is a
New York limited liability company organized in 1999 as successor to Gabelli
Group Capital Partners, Inc. (formerly named Gabelli Funds, Inc.), a New York
corporation organized in 1980. The Adviser is a wholly-owned subsidiary of
Gabelli Asset Management Inc. ("GAMI"), a publicly traded company listed on the
New York Stock Exchange ("NYSE").
As compensation for its services and the related expenses borne by the Adviser,
for the fiscal year ended December 31, 1999, the Fund paid the Adviser a fee
equal to 1.00% of the value of the Fund's average daily net assets.
THE PORTFOLIO MANAGER. Mr. Mario J. Gabelli, CFA, is responsible for the
day-to-day management of the Fund. Mr. Gabelli has been Chairman, Chief
Executive Officer and Chief Investment Officer of the Adviser and its
predecessor since inception, as well as its parent company, GAMI. Mr. Gabelli
also acts as Chief Executive Officer and Chief Investment Officer of GAMCO
Investors, Inc. ("GAMCO"), a wholly-owned subsidiary of GAMI, and is an officer
or director of various other companies affiliated with GAMI.
RULE 12B-1 PLAN. The Fund has adopted a plan under Rule 12b-1 (the "Plan") which
authorizes payments by the Fund on an annual basis of 0.25% of the Fund's
average daily net assets to finance distribution of the Fund's shares. The Fund
may make payments under the Plan for the purpose of financing any activity
primarily intended to result in the sale of the Fund's shares. To the extent any
activity is one that the Fund may finance without a distribution plan, the Fund
may also make payments to compensate such activity outside of the Plan and not
be subject to its limitations.
PURCHASE OF SHARES
You can purchase the Fund's shares on any day the NYSE is open for trading (a
"Business Day"). You may purchase shares directly through the Distributor,
directly from the Fund through the Fund's transfer agent or through registered
broker-dealers that have entered into selling agreements with the Distributor.
o BY MAIL OR IN PERSON. You may open an account by mailing a completed
subscription order form with a check or money order payable to "The
Gabelli ABC Fund" to:
BY MAIL BY PERSONAL DELIVERY
-------------------- ---------------------
THE GABELLI FUNDS THE GABELLI FUNDS
P.O. BOX 8308 C/O BFDS
BOSTON, MA 02266-8308 66 BROOKS DRIVE
BRAINTREE, MA 02184
- --------------------------------------------------------------------------------
6
<PAGE>
- --------------------------------------------------------------------------------
You can obtain a subscription order form by calling 1-800-GABELLI
(1-800-422-3554). Checks made payable to a third party and endorsed by the
depositor are not acceptable. For additional investments, send a check to the
above address with a note stating your exact name and account number, the name
of the Fund and class of shares you wish to purchase.
o BY BANK WIRE. To open an account using the bank wire transfer system,
first telephone the Fund at 1-800-GABELLI (1-800-422-3554) to obtain a
new account number. Then instruct a Federal Reserve System member bank to
wire funds to:
STATE STREET BANK AND TRUST COMPANY
[ABA #011-0000-28 REF DDA #99046187]
RE: THE GABELLI ABC FUND
ACCOUNT #__________
ACCOUNT OF [REGISTERED OWNERS]
225 FRANKLIN STREET, BOSTON, MA 02110
If you are making an initial purchase, you should also complete and mail
a subscription order form to the address shown under "By Mail." Note that
banks may charge fees for wiring funds, although State Street Bank and
Trust Company ("State Street") will not charge you for receiving wire
transfers.
SHARE PRICE. The Fund sells its shares at the "net asset value" next determined
after the Fund receives your completed subscription order form and your payment.
See "Pricing of Fund Shares" for a description of the calculation of net asset
value.
MINIMUM INVESTMENTS. Your minimum initial investment must be at least $1,000.
See "Retirement Plans" and "Automatic Investment Plan" regarding minimum
investment amounts applicable to such plans. There is no minimum for subsequent
investments. Broker-dealers may have different minimum investment requirements.
RETIREMENT PLANS. The Fund has available a form of IRA, "Roth" IRA and Education
IRA for investment in Fund shares that may be obtained from the Distributor by
calling 1-800-GABELLI (1-800-422-3554). Self-employed investors may purchase
shares of the Fund through tax-deductible contributions to existing retirement
plans for self-employed persons, known as "Keogh" or "H.R.-10" plans. The Fund
does not currently act as a sponsor to such plans. Fund shares may also be a
suitable investment for other types of qualified pension or profit-sharing plans
which are employer sponsored, including deferred compensation or salary
reduction plans known as "401(k) Plans." The minimum initial investment in all
such retirement plans is $250. There is no minimum subsequent investment
requirement for retirement plans.
AUTOMATIC INVESTMENT PLAN. The Fund offers an automatic monthly investment plan.
There is no minimum initial investment for accounts establishing an automatic
investment plan. Call the Distributor at 1-800-GABELLI (1-800-422-3554) for more
details about the plan.
TELEPHONE INVESTMENT PLAN. You may purchase additional shares of the Fund by
telephone and/or over the Internet if your bank is a member of the Automated
Clearing House ("ACH") system. You must also have a completed, approved
Investment Plan application on file with the Fund's Transfer Agent. There is a
minimum of $100 for each telephone or Internet investment. To initiate an ACH
Purchase, please call 1-800-GABELLI (1-800-422-3554) or 1-800-872-5365 or visit
our website at www.gabelli.com.
GENERAL. State Street will not issue share certificates unless requested by you.
The Fund reserves the right to (i) reject any purchase order if, in the opinion
of the Fund's management, it is in the Fund's best interest to do so, (ii)
suspend the offering of shares for any period of time and (iii) waive the Fund's
minimum purchase requirement.
- --------------------------------------------------------------------------------
7
<PAGE>
- --------------------------------------------------------------------------------
REDEMPTION OF SHARES
You can redeem shares of the Fund on any Business Day without a redemption fee.
The Fund may temporarily stop redeeming its shares when the NYSE is closed or
trading on the NYSE is restricted, when an emergency exists and the Fund cannot
sell its shares or accurately determine the value of its assets, or if the
Securities and Exchange Commission orders the Fund to suspend redemptions. The
Fund redeems its shares at the net asset value next determined after the Fund
receives your redemption request. See "Pricing of Fund Shares" below for a
description of the calculation of net asset value. You may redeem shares through
the Distributor or directly from the Fund through the Fund's transfer agent.
o BY LETTER. You may mail a letter requesting redemption of shares to: THE
GABELLI FUNDS, P.O. BOX 8308, BOSTON, MA 02266-8308. Your letter should
state the name of the Fund and the share class, the dollar amount or
number of shares you wish to redeem and your account number. You must
sign the letter in exactly the same way the account is registered and if
there is more than one owner of shares, all must sign. A signature
guarantee is required for each signature on your redemption letter. You
can obtain a signature guarantee from financial institutions such as
commercial banks, brokers, dealers and savings associations. A notary
public cannot provide a signature guarantee.
o BY TELEPHONE. You may redeem your shares in an account directly
registered with State Street by calling either 1-800-GABELLI
(1-800-422-3554) or 1-800-872-5365 (617-328-5000 from outside the United
States) or visiting our website at www.gabelli.com, subject to a $25,000
limitation. YOU MAY NOT REDEEM SHARES HELD THROUGH AN IRA BY TELEPHONE OR
THE INTERNET. If State Street properly acts on telephone or Internet
instructions and follows reasonable procedures to protect against
unauthorized transactions, neither State Street nor the Fund will be
responsible for any losses due to telephone or Internet transactions. You
may be responsible for any fraudulent telephone or Internet order as long
as State Street or the Fund takes reasonable measures to verify the
order. You may request that redemption proceeds be mailed to you by check
(if your address has not changed in the prior 30 days), forwarded to you
by bank wire or invested in another mutual fund advised by the Adviser
(see "Exchange of Shares").
1. TELEPHONE OR INTERNET REDEMPTION BY CHECK. The Fund will make
checks payable to the name in which the account is registered and
normally will mail the check to the address of record within
seven days.
2. TELEPHONE OR INTERNET REDEMPTION BY BANK WIRE. The Fund accepts
telephone or Internet requests for wire redemption in amounts of
at least $1,000. The Fund will send a wire to either a bank
designated on your subscription order form or on a subsequent
letter with a guaranteed signature. The proceeds are normally
wired on the next Business Day.
AUTOMATIC CASH WITHDRAWAL PLAN. You may automatically redeem shares on a
monthly, quarterly or annual basis if you have at least $10,000 in your account
and if your account is directly registered with State Street. Call 1-800-GABELLI
(1-800-422-3554) for more information about this plan.
INVOLUNTARY REDEMPTION. The Fund may redeem all shares in your account (other
than an IRA account) if their value falls below $1,000 as a result of
redemptions (but not as a result of a decline in net asset value). You will be
notified in writing if the Fund initiates such action and allowed 30 days to
increase the value of your account to at least $1,000.
REDEMPTION PROCEEDS. A redemption request received by the Fund will be effected
at the net asset value next determined after the Fund receives the request. If
you request redemption proceeds by
- --------------------------------------------------------------------------------
8
<PAGE>
- --------------------------------------------------------------------------------
check, the Fund will normally mail the check to you within seven days after
receipt of your redemption request. If you purchased your Fund shares by check
or through the Automatic Investment Plan, you may not receive proceeds from your
redemptions until the check clears, which may take up to as many as 15 days
following purchase. While the Fund will delay the processing of the redemption
until the check clears, your shares will be valued at the next determined net
asset value after receipt of your redemption request.
The Fund may pay to you your redemption proceeds wholly or partly in portfolio
securities. Payments would be made in portfolio securities only in the rare
instance that the Fund's Board of Trustees believes that it would be in the
Fund's best interest not to pay redemption proceeds in cash.
EXCHANGE OF SHARES
You may exchange shares of the Fund you hold for shares of the same class of
certain other funds managed by the Adviser or its affiliates based on their
relative net asset values. To obtain a list of the funds whose shares you may
acquire through an exchange call 1-800-GABELLI (1-800-422-3554). You may also
exchange your shares for shares of a money market fund managed by the Adviser or
its affiliates.
In effecting an exchange:
o you must meet the minimum investment requirements for the fund whose
shares you purchase through exchange
o if you are exchanging to a fund with a higher sales charge, you must pay
the difference at the time of exchange
o you may realize a taxable gain or loss
o you should read the prospectus of the fund whose shares you are
purchasing through exchange. Call 1-800-GABELLI (1-800-422-3554) to
obtain the prospectus.
You may exchange shares through the Distributor, directly through the Fund's
transfer agent or through a registered broker-dealer.
o EXCHANGE BY TELEPHONE. You may give exchange instructions by telephone by
calling 1-800-GABELLI (1-800-422-3554). You may not exchange shares by
telephone if you hold share certificates.
o EXCHANGE BY MAIL. You may send a written request for exchanges to: THE
GABELLI FUNDS, P.O. BOX 8308, BOSTON, MA 02266-8308. Your letter should
state your name, your account number, the dollar amount or number of
shares you wish to exchange, the name and class of the fund whose shares
you wish to exchange, and the name of the funds whose shares you wish to
acquire.
o EXCHANGE THROUGH THE INTERNET. You may also give exchange instructions
via the Internet at www.gabelli.com. You may not exchange shares through
the Internet if you hold share certificates.
We may modify or terminate the exchange privilege at any time. You will be given
notice 60 days prior to any material change in the exchange privilege.
PRICING OF FUND SHARES
The Fund's net asset value per share is calculated on each Business Day. The
NYSE is open Monday through Friday, but currently is scheduled to be closed on
New Year's Day, Dr. Martin Luther King, Jr. Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day
and on the preceding Friday or subsequent Monday when a holiday falls on a
Saturday or Sunday, respectively.
- --------------------------------------------------------------------------------
9
<PAGE>
- --------------------------------------------------------------------------------
The Fund's net asset value per share is determined as of the close of regular
trading on the NYSE, normally 4:00 p.m., Eastern Time. Net asset value is
computed by dividing the value of the Fund's net assets (i.e. the value of its
securities and other assets less its liabilities, including expenses payable or
accrued but excluding capital stock and surplus) by the total number of its
shares outstanding at the time the determination is made. The Fund uses market
quotations in valuing its portfolio securities. Short-term investments that
mature in 60 days or less are valued at amortized cost, which the Directors of
the Fund believe represents fair value. The price of Fund shares for purposes of
purchases and redemptions will be based upon the next calculation of net asset
value after the purchase or redemption order is received in proper form.
Because the Fund is not open for business every day that its assets trade, the
net asset value of the Fund's shares may change on days when shareholders will
not be able to purchase or redeem the Fund's shares.
DIVIDENDS AND DISTRIBUTIONS
The Fund intends to pay dividends and capital gain distributions, if any, on an
annual basis. You may have dividends or capital gain distributions that are
declared by the Fund automatically reinvested at net asset value in additional
shares of the Fund. You will make an election to receive dividends and
distributions in cash or Fund shares at the time you purchase your shares. You
may change this election by notifying the Fund in writing at any time prior to
the record date for a particular dividend or distribution. There are no sales or
other charges in connection with the reinvestment of dividends and capital gain
distributions. There is no fixed dividend rate, and there can be no assurance
that the Fund will pay any dividends or realize any capital gains.
TAX INFORMATION
The Fund expects that its distributions will consist primarily of net investment
income and net realized capital gains. Capital gains may be taxed at different
rates depending on the length of time the Fund holds the asset giving rise to
such gains. Dividends out of net investment income and distributions of net
realized short-term capital gains (i.e. gains from assets held by the Fund for
one year or less) are taxable to you as ordinary income. Distributions of net
long-term capital gains are taxable to you at long-term capital gain rates. High
portfolio turnover can indicate a high level of short term capital gains that,
when distributed to shareholders, are taxed as ordinary income rather than at
the lower capital gains tax rate. The Fund's distributions, whether you receive
them in cash or reinvest them in additional shares of the Fund, generally will
be subject to federal, state or local taxes. An exchange of the Fund's shares
for shares of another Fund will be treated for tax purposes as a sale of the
Fund's shares, and any gain you realize on such a transaction may be taxable.
Foreign shareholders generally will be subject to a federal withholding tax.
This summary of tax consequences is intended for general information only. You
should consult a tax adviser concerning the tax consequences of your investment
in the Fund.
- --------------------------------------------------------------------------------
10
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the Fund's
financial performance for the past five fiscal years. The total returns in the
table represent the rate that an investor would have earned or lost on an
investment in the Fund's shares. This information has been audited by Grant
Thornton LLP, independent accountants, whose report, along with the Fund's
financial statements and related notes, is included in the annual report, which
is available upon request.
Per share amounts throughout each fiscal year ended December 31,
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
OPERATING PERFORMANCE:
Net asset value, beginning of period . $ 9.59 $ 10.23 $ 9.84 $ 9.71 $ 9.57
------- ------- ------- ------- -------
Net investment income ................ 0.26 0.22 0.08 0.21 0.21
Net realized and unrealized gain on
investments ........................ 0.59 0.90 1.17 0.54 0.86
------- ------- ------- ------- -------
Total from investment operations ..... 0.85 1.12 1.25 0.75 1.07
------- ------- ------- ------- -------
DISTRIBUTIONS TO SHAREHOLDERS:
Net investment income ................ (0.14) (0.22) (0.08) (0.21) (0.21)
In excess of net investment income ... -- (0.00)(a) (0.01) -- --
Net realized gain on investments ..... (0.86) (1.54) (0.77) (0.41) (0.72)
In excess of net realized gain on
investments ........................ -- (0.00)(a) -- -- --
------- ------- ------- ------- -------
Total distributions .................. (1.00) (1.76) (0.86) (0.62) (0.93)
------- ------- ------- ------- -------
Net asset value, end of period ....... $ 9.44 $ 9.59 $ 10.23 $ 9.84 $ 9.71
======= ======= ======= ======= =======
Total return+ ........................ 9.00% 11.10% 12.80% 7.80% 11.20%
======= ======= ======= ======= =======
RATIOS TO AVERAGE NET ASSETS AND
SUPPLEMENTAL DATA:
Net assets, end of period (in 000's) . $42,783 $39,358 $35,228 $26,801 $19,862
Ratio of net investment income
to average net assets .............. 1.37% 1.00% 0.87% 2.11% 1.83%
Ratio of operating expenses
to average net assets(b) ........... 1.47% 1.69% 2.26% 2.09% 2.10%
Portfolio turnover rate .............. 672% 299% 493% 343% 508%
<FN>
- ----------------
+ Total return represents aggregate total return of a hypothetical $1,000
investment at the beginning of the period and sold at the end of the period
including reinvestment of dividends.
(a) Amount represents less than $0.005 per share.
(b) The ratio of operating expenses to average net assets for the years ended
December 31, 1998 and 1997 do not include a reduction of expenses for
custodian fee credits. Including such credits, the ratios would have been
1.68% and 2.25%, respectively.
</FN>
</TABLE>
- --------------------------------------------------------------------------------
11
<PAGE>
- --------------------------------------------------------------------------------
THE GABELLI ABC FUND
================================================================================
FOR MORE INFORMATION:
For more information about the Fund, the following documents are available free
upon request:
ANNUAL/SEMI-ANNUAL REPORTS:
The Fund's semi-annual and annual reports to shareholders contain additional
detailed information on the Fund's investments. In the Fund's annual report, you
will find a discussion of the market conditions and investment strategies that
significantly affected the Fund's performance during its last fiscal year.
STATEMENT OF ADDITIONAL INFORMATION (SAI):
The SAI provides more detailed information about the Fund, including its
operations and investment policies. It is incorporated by reference, and is
legally considered a part of this prospectus.
- --------------------------------------------------------------------------------
You can get free copies of these documents and prospectuses of other funds in
the Gabelli family, or request other information and discuss your questions
about the Fund by contacting:
The Gabelli ABC Fund
One Corporate Center
Rye, NY 10580
Telephone: 1-800-GABELLI (1-800-422-3554)
www.gabelli.com
- --------------------------------------------------------------------------------
You can review the Fund's reports and SAI at the Public Reference Room of the
Securities and Exchange Commission. Information on the operation of the Public
Reference Room may be obtained by calling the Commission at 1-202-942-8090.
You can get text-only copies:
o For a fee, by writing the Commission's Public Reference Section,
Washington, D.C. 20549-0102, or by calling 1-202-942-8090, or by
electronic request at the following email address: [email protected].
o Free from the Commission's Website at http://www.sec.gov.
(Investment Company Act file no. 811-07326)
- --------------------------------------------------------------------------------
<PAGE>
THE GABELLI ABC FUND
One Corporate Center
Rye, New York 10580-1434
1-800-GABELLI
[1-800-422-3554]
FAX: 1-914-921-5118
HTTP://WWW.GABELLI.COM
EMAIL: [email protected]
(Net Asset Value may be obtained daily by calling
1-800-GABELLI after 6:00 p.m.)
QUESTIONS?
Call 1-800-GABELLI
or your investment representative.
TABLE OF CONTENTS
-----------------
INVESTMENT AND PERFORMANCE SUMMARY ............. 2-4
INVESTMENT AND RISK INFORMATION ................ 4-6
MANAGEMENT OF THE FUND ......................... 6
Purchase of Shares .................... 6
Redemption of Shares .................. 8
Exchange of Shares .................... 9
Pricing of Fund Shares ................ 9
Dividends and Distributions ........... 10
Tax Information ....................... 10
FINANCIAL HIGHLIGHTS ........................... 11
<PAGE>
GABELLI INVESTOR FUNDS, INC.
THE GABELLI ABC FUND
STATEMENT OF ADDITIONAL INFORMATION
May 1, 2000
This Statement of Additional Information ("SAI"), which is not a prospectus,
describes The Gabelli ABC Fund (the "Fund") which is a series of Gabelli
Investor Funds, Inc., a Maryland corporation (the "Corporation"). This SAI
should be read in conjunction with the Prospectus dated May 1, 2000. For a free
copy of the Prospectus, please contact the Fund at the address, telephone number
or Internet web site printed below.
One Corporate Center
Rye, New York 10580-1434
Telephone 1-800-GABELLI (1-800-422-3554)
HTTP://WWW.GABELLI.COM
TABLE OF CONTENTS
PAGE
----
General Information 2
Investment Strategies and Risks 2
Investment Restrictions 11
Directors and Officers 12
Control Persons and Principal Shareholders 15
Investment Advisory and Other Services 15
Distribution Plan 16
Portfolio Transactions and Brokerage 17
Redemption of Shares 20
Determination of Net Asset Value 21
Dividends and Distributions 21
Taxation 21
Investment Performance Information 24
Description of Shares, Voting Rights and Liabilities 25
Financial Statements 26
Appendix 27
<PAGE>
GENERAL INFORMATION
The Corporation is a non-diversified, open-end management investment company.
The Corporation was organized under the laws of the state of Maryland on October
30, 1992. The Fund, a series of the Corporation, commenced operations on May 14,
1993.
INVESTMENT STRATEGIES AND RISKS
The Fund's Prospectus discusses the investment objective of the Fund and the
principal strategies to be employed to achieve that objective. This SAI contains
supplemental information concerning certain types of securities and other
instruments in which the Fund may invest, additional strategies that the Fund
may utilize and certain risks associated with such investments and strategies.
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 as 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 can be withdrawn 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.
<PAGE>
NON-CONVERTIBLE 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
commercial paper and bankers acceptances. There is no minimum credit rating for
these securities in which the Fund may invest.
Up to 25% of the Fund's total assets may be invested in lower quality debt
securities although the Fund does not expect to invest more than 10% of its
total 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 Investors Service, Inc.,
("Moody's") and Standard & Poor's Ratings Group ("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 Gabelli Funds, LLC's (the "Adviser") 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. At
times, adverse publicity regarding lower-quality securities has depressed prices
for such securities to some extent.
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
market may have an adverse impact on market price and the Fund's ability to
dispose of particular issues when necessary to meet 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
<PAGE>
securities may also make it more difficult for the Fund to obtain accurate
market quotations for purposes of valuing its 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 Board of
Directors of the Corporation to value the securities becomes more difficult and
judgment plays a greater role in valuation because there is less reliable,
objective data available.
MORTGAGE-BACKED AND ASSET-BACKED SECURITIES
Mortgage-backed securities are securities that indirectly represent a
participation in, or are secured by and payable from, mortgage loans secured by
real property.
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.
Asset-backed securities are securities which, through the use of trusts and
special purpose vehicles, are securitized with various types of assets such as
automobile receivables, credit card receivables and home equity loans in
pass-through structures similar to mortgage-related securities.
In general, the collateral supporting asset-backed securities is of shorter
maturity than the collateral supporting mortgage loans and is less likely to
experience substantial prepayments. However, asset-backed securities are not
backed by any governmental agency.
Prepayments of principal generally may be made at any time without penalty on
residential mortgages and these prepayments are passed through to holders of one
or more of the classes of mortgage-backed securities. Prepayment rates may
change rapidly and greatly, thereby affecting yield to maturity, reinvestment
risk and market value of the mortgage-backed securities. As a result, the high
credit quality of many of these securities may provide little or no protection
against loss in market value, and there have been periods during which many
mortgage-backed securities have experienced substantial losses in market value.
The Adviser believes that, under certain circumstances, many of these securities
may trade at prices below their inherent value on a risk-adjusted basis and
believes that selective purchases by a Fund may provide high yield and total
return in relation to risk levels.
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 and slower-than-expected prepayments will reduce yield
to maturity.
CONVERTIBLE SECURITIES
Convertible securities are bonds, debentures, notes, preferred stocks of other
securities that may be converted into and exchanged for a prescribed amount of
equity securities (generally common stocks) of the same or a different issuer
within a particular period of time at a specified price or formula.
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
<PAGE>
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 S&P or Baa or better by Moody's and not considered by the Adviser to
be of equivalent credit quality.
The Fund may invest up to 25% of its total 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
therewith, see the Description of Corporate Bond and Corporate Debt Ratings
attached in the Appendix.
Some of the convertible securities in the Fund's 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. While no securities investment is completely without risk,
investments in convertible securities generally entail less risk than common
stock, although the extent to which such risk is reduced depends in large
measure upon the degree to which the convertible securities sells above its
value as a fixed income security
SOVEREIGN DEBT SECURITIES
The Fund may invest in securities issued or guaranteed by any country and
denominated in any currency. The Fund expects that it generally will invest in
developed countries including Australia, Canada, Finland, the Netherlands,
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 also invest in securities denominated in a multi-national currency
unit. An example of a multi-national currency unit is the European Monetary Unit
(the "EURO"), which is a combination of the economic structures of the member
nations of the European Monetary Union into to a single currency. This union
includes France, Germany, the Netherlands and other European countries. The
specific legacy currencies
<PAGE>
rates comprising the ECU were fixed on December 31, 1998 to reflect the relative
values of the underlying currencies to the newly created EURO. 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 in securities of companies 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 Adviser, there is a reasonable prospect of total return
greater than the brokerage and other transaction expenses involved.
In general, securities of issuers which are the subject of such an offer or
proposal sell at a premium to their historic market price immediately prior to
the announcement of the offer or may also discount what the stated or appraised
value of the security would be if the contemplated transaction were approved or
consummated. Such investments may be advantageous when the discount
significantly overstates the risk of the contingencies involved; significantly
undervalues the securities, assets or cash to be received by shareholders of the
prospective portfolio company as a result of the contemplated transaction; or
fails to adequately 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 the proposal is in progress. 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. 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.
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 its 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
investment strategies involve instruments regulated by the Commodity Futures
Trading Commission ("CTFC"), the Fund is limited to an
<PAGE>
investment not in excess of 5% of its total assets.
WARRANTS AND RIGHTS
The Fund may invest without limit in warrants or
rights which entitle the holder to buy equity securities at a specific price for
or at the end of a specific period of time. Investing in rights and warrants can
provide a greater potential for profit or loss than an equivalent investment in
the underlying security, and, thus, can be a speculative investment. The value
of a right or warrant may decline because of a decline in the value of the
underlying security, the passage of time, changes in interest rates or in the
dividend or other policies of the company whose equity underlies the warrant or
a change in the perception as to the future price of the underlying security, or
any combination thereof. Rights and warrants generally pay no dividends and
confer no voting or other rights other than to purchase the underlying
SECURITY.INVESTMENTS IN INVESTMENT COMPANIES
The Fund may invest in securities issued by other unaffiliated investment
companies, although the Fund may not acquire more than 3% of the voting
securities of any investment company. To the extent that the Fund invests in
securities of other investment companies, shareholders in the Fund may be
subject to duplicative advisory and administrative fees.
WHEN ISSUED, DELAYED DELIVERY SECURITIES & 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 securities 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
securities 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 (companies that have
operated less then three years), which, due to their short operating history,
may have less information available and may not be as liquid as other
securities. The securities of such companies may have a limited trading market,
which may adversely affect their disposition and can result in their being
priced lower than might otherwise be the case. If the other investment companies
and investors who invest in such issuers trade the same securities when the Fund
attempts to dispose of its holdings, the Fund may receive lower prices than
might otherwise be attained.
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.
<PAGE>
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
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 of any amount 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 the identical security at no additional cost.
RESTRICTED AND ILLIQUID SECURITIES
The Fund may invest up to a total of 15% of its net assets in securities whose
markets are illiquid. 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
(the "SEC") 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 of Directors 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 15% test. To the extent the Board of
Directors 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 enter into repurchase agreements with banks and non-bank dealers of
U.S. Government securities which are listed as reporting dealers of the Federal
Reserve Bank and which furnish collateral at least equal in value or market
price to the amount of their repurchase obligation. In a repurchase agreement,
the Fund purchases a debt security from a seller which undertakes to repurchase
the security at a specified resale price on an agreed future date. The resale
price generally exceeds the purchase price by an amount which reflects an
agreed-upon market interest rate for the term of the repurchase agreement.
The Fund's risk is primarily that, if the seller defaults, the proceeds from the
disposition of underlying securities and other collateral for the seller's
obligation are less than the repurchase price. If the seller becomes bankrupt,
the Fund might be delayed in selling the collateral. Under the Investment
Company Act of 1940, as amended (the "1940 Act"), repurchase agreements are
considered loans. Repurchase agreements
<PAGE>
usually are for short periods, such as one week or less, but could be longer.
Except for repurchase agreements for a period of a week or less in respect to
obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities, not more than 15% of the Fund's total assets may be invested
in repurchase agreements. In addition, the Fund will not enter into repurchase
agreements of a duration of more than seven days if, taken together with
restricted securities and other securities for which there are no readily
available quotations, more than 15% of its total assets would be so invested.
These percentage limitations are fundamental and may not be changed without
shareholder approval.
LOANS OF PORTFOLIO SECURITIES
The Fund may lend its portfolio securities to broker-dealers or financial
institutions provided that the loans are callable at any time by the Fund. Loans
by the Fund, if and when made, (1) will be collateralized in accordance with
applicable regulatory requirements and (2) will be limited so that the value of
all loaned securities does not exceed 33% of the value of the Fund's total
assets. The Fund, however, currently intends to limit the value of all loaned
securities to no more than 5% of the Fund's total assets.
The Fund lends its portfolio securities in order to generate revenue to defray
certain operating expenses. The advantage of this practice is that the Fund
continues to receive the income on the loaned securities while at the same time
earns interest on the cash amounts deposited as collateral, which will be
invested in short-term obligations.
A loan may generally be terminated by the borrower on one business day's notice,
or by the Fund on five business days' notice. If the borrower fails to deliver
the loaned securities within five days after receipt of notice, the Fund could
use the collateral to replace the securities while holding the borrower liable
for any excess of replacement cost over collateral. As with any extensions of
credit, there are risks of delay in recovery and in some cases even loss of
rights in the collateral should the borrower of the securities fail financially.
However, loans of portfolio securities will only be made to firms deemed by the
Fund's management to be creditworthy and when the income that can be earned from
the loans justifies the attendant risks. The Board of Directors will oversee the
creditworthiness of the contracting parties on an ongoing basis. Upon
termination of the loan, the borrower is required to return the securities to
the Fund. Any gain or loss in the market price during the loan period would
inure to the Fund. The risks associated with loans of portfolio securities are
substantially similar to those associated with repurchase agreements. Thus, if
the party to whom the loan was made petitions for bankruptcy or becomes subject
to the U.S. Bankruptcy Code, the law regarding the rights of the Fund is
unsettled. As a result, under extreme circumstances, there may be a restriction
on the Fund's ability to sell the collateral and the Fund could suffer a loss.
When voting or consent rights that accompany loaned securities pass to the
borrower, the Fund will follow the policy of calling the loaned securities, to
be delivered within one day after notice, to permit the exercise of such rights
if the matters involved would have a material effect on the Fund's investment in
such loaned securities. The Fund will pay reasonable finder's, administrative
and custodial fees in connection with a loan of its securities.
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. Borrowing may not, in the aggregate, exceed 15% of the
Fund's total assets, after giving effect to borrowing, and borrowing for
purposes other than meeting redemptions may not exceed 5% of the Fund's assets
after giving effect to the borrowing. The Fund will not make additional
investments when borrowings exceed 5% of assets.
<PAGE>
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 CFTC, 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 buying or selling which 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 one of the given portfolio
securities 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.
The Adviser may choose to use such instruments on behalf of the Fund depending
upon market conditions prevailing and the perceived investment needs of 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
Fund 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 liquid securities 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.
TEMPORARY DEFENSIVE POSITION
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%. See "Loans of Portfolio Securities" and "Borrowing."
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. As a result, the portfolio turnover may be higher than that of other
investment companies. For the fiscal years ended December 31, 1998 and 1999, the
portfolio turnover rates were 299% and 672%, respectively. The high portfolio
turnover rates for 1998 and 1999 are attributable to the investment in
securities subject to mergers or tender offers 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 expense to the Fund, including
brokerage commissions or dealer mark-ups and other transaction costs on the sale
of securities and reinvestment in other securities. 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).
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 shareholder 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 33 1/3% of its total assets (including 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;
<PAGE>
(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.
DIRECTORS AND OFFICERS
Under Maryland law, the Corporation's Board of Directors is responsible for
establishing the Corporation's policies and for overseeing the management of the
Fund. The Board elects the Fund's officers who conduct the daily business of the
Corporation. The Directors and executive officers of the Corporation, their ages
and their principal occupations during the last five years and their
affiliations, if any, with the Adviser, are set forth below. Directors deemed to
be "interested persons" of the Corporation for purposes of the 1940 Act are
indicated by an asterisk. Unless otherwise specified, the address of each such
person is One Corporate Center, Rye, New York 10580-1434.
<TABLE>
<CAPTION>
NAME, AGE AND POSITION(S) WITH THE FUND PRINCIPAL OCCUPATIONS DURING LAST FIVE YEARS
- --------------------------------------- --------------------------------------------
<S> <C>
Mario J. Gabelli, CFA* Chairman of the Board and Chief Investment Officer of Gabelli Asset
Chairman of the Board and Director Management Inc. and Chief Investment Officer of Gabelli Funds, LLC
Age: 57 and GAMCO Investors, Inc.; Chairman of the Board and Chief Executive
Executive Officer of Lynch Corporation (diversified manufacturing
company) and Chairman of the Board of Lynch Interactive Corporation
(multimedia and services company); Director of Spinnaker Industries,
Inc. (manufacturing company); Director or Trustee of 17 other mutual
funds advised by Gabelli Funds, LLC and its affiliates.
Anthony J. Colavita President and Attorney at Law in the law firm of Anthony J.
Director Colavita, P.C. since 1961; Director or Trustee of 17 other mutual
Age: 64 funds advised by Gabelli Funds, LLC and its affiliates.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
NAME, AGE AND POSITION(S) WITH THE FUND PRINCIPAL OCCUPATIONS DURING LAST FIVE YEARS
- --------------------------------------- --------------------------------------------
<S> <C>
Vincent D. Enright Former Senior Vice President and Chief Financial Officer of Key Span
Director Energy Corp.; Director or Trustee of six other mutual funds advised
Age: 56 by Gabelli Funds, LLC and its affiliates.
Karl Otto Pohl*+ Member of the Shareholder Committee of Sal Oppenheim Jr. & Cie
Director (private investment bank); Director of Gabelli Asset Management Inc.
Age: 70 (investment management), Zurich Allied (insurance company), and
TrizecHahn Corp. (real estate company); Former President of the
Deutsche Bundesbank and Chairman of its Central Bank Council from
1980 through 1991; Director or Trustee of all other mutual funds
advised by Gabelli Funds, LLC and its affiliates.
Werner J. Roeder, M.D. Medical Director, Lawrence Hospital and practicing private
Director physician; Director or Trustee of ten other mutual funds advised by
Age: 59 Gabelli Funds, LLC and its affiliates.
Bruce N. Alpert Executive Vice President and Chief Operating Officer of Gabelli
Executive Vice President and Treasurer Funds, LLC since 1998. President and Director of Gabelli Advisers,
Age: 48 Inc. and an Officer of all mutual funds advised by Gabelli Funds,
LLC and its affiliates.
James E. McKee Secretary of Gabelli Funds, LLC; Vice President, Secretary and
Secretary General Counsel of GAMCO Investors, Inc. since 1993 and Gabelli
Age: 36 Asset Management Inc. since 1999; Secretary of all mutual funds
advised by Gabelli Funds, LLC and Gabelli Advisers, Inc. since
August 1995.
<FN>
- ---------------------------
+ Mr. Pohl is a director of the parent company of the Adviser.
</FN>
</TABLE>
The Corporation, its investment adviser and principal underwriter have adopted a
code of ethics (the "Code of Ethics") under Rule 17j-1 of the 1940 Act. The Code
of Ethics permits personnel, subject to the Code of Ethics and its restrictive
provisions, to invest in securities, including securities that may be purchased
or held by the Corporation.
No director, officer or employee of the Adviser or any affiliate of the Adviser
receives any compensation from the Fund for serving as an officer or Director of
the Fund. The Fund pays each of its Directors who is not a director, officer or
employee of the Adviser or of its affiliates $1,000 per annum plus $250 per
meeting attended in person or by telephone and reimburses each Director for
related travel and other out-of-pocket expenses. The Fund also pays each
Director serving as a member of the Audit Committee a fee of $500 per committee
meeting if held on a day other than a regularly scheduled board meeting.
The following table sets forth certain information regarding the compensation of
the Fund's directors and officers. No executive officer or person affiliated
with the Fund received compensation from the Fund for the calendar year ended
December 31, 1999, in excess of $60,000.
<TABLE>
<CAPTION>
COMPENSATION TABLE
Name of Person Aggregate Compensation Total Compensation from the Fund and Fund
and Position from the Fund Complex Paid to Directors*
<S> <C> <C>
Mario J. Gabelli $ 0 $ 0 (17)
Anthony J. Colavita $ 2,750 $ 94,875 (18)
Director
Vincent D. Enright $ 2,750 $ 25,500 (7)
Director
Karl Otto Pohl $ 0 $ 7,042 (19)
Director
Werner Roeder, M.D. $ 2,750 $ 34,859 (11)
Director
<FN>
- -------------------------
* Represents the total compensation paid to such persons during the calendar
year ending December 31, 1999. The parenthetical number represents the number of
investment companies (including the Fund) from which such person received
compensation that are considered part of the same fund complex as the Fund
because they have common or affiliated investment advisers.
</FN>
</TABLE>
<PAGE>
CONTROL PERSONS AND PRINCIPAL SHAREHOLDERS
As of April 1, 2000, as a group, the Directors and officers of the Fund
owned 4,087,980 or 58.46% of the outstanding shares of the Fund.
As of April 1, 2000, the following persons owned of record or
beneficiary 5% or more of the Fund's outstanding shares:
NATURE OF
NAME AND ADDRESS % OF CLASS OWNERSHIP
---------------- ---------- ---------
Bear Stearns Securities Corp. 36.90% Record
FBO Customers
1 Metrotech Center North
Brooklyn, NY 11201-3870
Gabelli Securities Inc. 8.13% Beneficial
Corporate Center
Rye, NY 10580-1442
Wexford Clearing Services Corp FBO 8.09% Beneficial
Gabelli Foundation Inc
c/o GAMCO Inv
165 W. Liberty St.
Reno, NV 89501-1955
INVESTMENT ADVISORY AND OTHER SERVICES
INVESTMENT ADVISER
The Adviser is a New York limited liability company which serves as an
investment adviser to 13 open-end investment companies and 4 closed-end
investment companies with aggregate assets in excess of $10.6 billion as of
December 31, 1999. The Adviser is a registered investment adviser under the
Investment Advisers Act of 1940, as amended. Mr. Mario J. Gabelli may be deemed
a "controlling person" of the Adviser on the basis of his controlling interest
of the ultimate parent company of the Adviser. The Adviser has several
affiliates that provide investment advisory services: GAMCO Investors, Inc.
("GAMCO"), a wholly-owned subsidiary of the Adviser, acts as investment adviser
for individuals, pension trusts, profit-sharing trusts and endowments, and had
assets under management of approximately $9.4 billion as of December 31, 1999;
Gabelli Advisers, Inc. acts as investment adviser to the Gabelli Westwood Funds
with assets under management of approximately $390 million as of December 31,
1999; Gabelli Securities, Inc. acts as investment adviser to certain alternative
investment products, consisting primarily of risk arbitrage and merchant banking
limited partnerships and offshore companies, with assets under management of
approximately $230 million as of December 31, 1999; and Gabelli Fixed Income LLC
acts as investment adviser for the five portfolios of the Treasurer's Fund,
Inc., having assets under management of approximately $1.4 billion as of
December 31, 1999.
<PAGE>
Affiliates of the Adviser may, in the ordinary course of their business, acquire
for their own account or for the account of their advisory clients, significant
(and possibly controlling) positions in the securities of companies that may
also be suitable for investment by the Fund. The securities in which the Fund
might invest may thereby be limited to some extent. For instance, many companies
in the past several years have adopted so-called "poison pill" or other
defensive measures designed to discourage or prevent the completion of
non-negotiated offers for control of the company. Such defensive measures may
have the effect of limiting the shares of the company which might otherwise be
acquired by the Fund if the affiliates of the Adviser or their advisory accounts
have or acquire a significant position in the same securities. However, the
Adviser does not believe that the investment activities of its affiliates will
have a material adverse effect upon the Fund in seeking to achieve its
investment objectives. Securities purchased or sold pursuant to contemporaneous
orders entered on behalf of the investment company accounts of the Adviser or
the advisory accounts managed by its affiliates for their unaffiliated clients
are allocated pursuant to principles believed to be fair and not disadvantageous
to any such accounts. In addition, all such orders are accorded priority of
execution over orders entered on behalf of accounts in which the Adviser or its
affiliates have a substantial pecuniary interest. The Adviser may on occasion
give advice or take action with respect to other clients that differ from the
actions taken with respect to the Fund. The Fund may invest in the securities of
companies which are investment management clients of GAMCO. In addition,
portfolio companies or their officers or directors may be minority shareholders
of the Adviser or its affiliates.
Pursuant to an Investment Advisory Contract (the "Contract") which was
originally approved by the Fund's sole shareholder on March 10, 1993, and last
approved by the Fund's Board of Directors on February 16, 2000, 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 Fund. For the services it provides,
the Adviser is paid an annual fee based on the value of the Fund's average daily
net assets of 1.00%.
Under the Contract, the Adviser also (i) provides the Fund with the services of
persons competent to perform such supervisory, administrative, and clerical
functions as are necessary to provide effective administration of the Fund,
including maintaining certain books and records and overseeing the activities of
the Fund's Custodian and Transfer Agent; (ii) oversees the performance of
administrative and professional services provided to the Fund by others,
including the Fund's Sub-Administrator, Custodian, Transfer Agent and Dividend
Disbursing Agent, as well as legal, accounting, auditing and other services
performed for the Fund; (iii) provides the Fund with adequate office space and
facilities; (iv) 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
SEC; (v) supervises the calculation of the net asset value of shares of the
Fund; (vi) 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 (vii) prepares
notices and agendas for meetings of the Fund's Board of Directors and minutes of
such meetings in all matters required by the 1940 Act to be acted upon by the
Board.
The Contract provides that absent willful misfeasance, bad faith, gross
negligence or reckless disregard of its duty, the Adviser and its employees,
officers, directors and controlling persons are not liable to the 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 Contract in no way restricts the
Adviser from acting as adviser to others. The Fund has agreed by the terms of
the 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
<PAGE>
necessary to change its name to one which does not include "Gabelli."
The Contract is terminable without penalty by the Corporation on not more than
sixty days' written notice when authorized by the Board of Directors; by the
holders of a majority, as defined in the 1940 Act, of the outstanding shares of
the Corporation; or by the Adviser. The Contract will automatically terminate in
the event of its assignment, as defined in the 1940 Act and rules thereunder
except to the extent otherwise provided by order of the Commission or any rule
under the 1940 Act and except to the extent the 1940 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 Contract provides
in effect, that unless terminated it will remain in effect so long as
continuance of the 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 Contract or "interested persons" as defined
in the 1940 Act of any such person cast in person, at a meeting called
specifically for the purpose of voting on the continuance of the Contract.
For the fiscal years ended December 31, 1997, 1998 and 1999, the Fund
paid the Adviser $281,337, $488,100 and $718,694, respectively.
SUB-ADMINISTRATOR
The Adviser has entered into a Sub-Administration Agreement (the
"Sub-Administration Agreement") with PFPC Inc. (the "Sub-Administrator"), a
majority-owned subsidiary of PNC Bank Corp. The Sub-Administrator is located at
101 Federal Street, Boston, Massachusetts 02110. Under the Sub-Administration
Agreement, the Sub-Administrator (a) assists in supervising all aspects of the
Corporation's operations except those performed by the Adviser under its
advisory agreement with the Fund; (b) supplies the Corporation with office
facilities (which may be in the Sub-Administrator's own offices), statistical
and research data, data processing services, clerical, accounting and
bookkeeping services, including, but not limited to, the calculation of the net
asset value of shares in the Fund, internal auditing and legal services,
internal executive and administrative services, and stationery and office
supplies; (c) prepares and distributes materials for all Corporation Board of
Directors' Meetings including the mailing of all Board materials and collates
the same materials into the Board books and assists in the drafting of minutes
of the Board Meetings; (d) prepares reports to Fund shareholders, tax returns
and reports to and filings with the SEC and state "Blue Sky" authorities; (e)
calculates the Fund's net asset value per share, provides any equipment or
services necessary for the purpose of pricing shares or valuing the Fund's
investment portfolio and, when requested, calculates the amounts permitted for
the payment of distribution expenses under any distribution plan adopted by the
Fund; (f) provides compliance testing of all Fund activities against applicable
requirements of the 1940 Act and the rules thereunder, the Code, and the Fund's
investment restrictions; (g) furnishes to the Adviser such statistical and other
factual information and information regarding economic factors and trends as the
Adviser from time to time may require; and (h) generally provides all
administrative services that may be required for the ongoing operation of the
Corporation in a manner consistent with the requirements of the 1940 Act.
For such services and the related expenses borne by the Sub-Administrator, the
Advisor pays the Sub-Administrator an annual fee at the following rates: .0275%
on aggregate net assets of $0-$10 billion, .0125% on aggregate net assets of
$10-$15 billion and .0100% on aggregate net assets over $15 billion, which
together with the services rendered, is subject to re-negotiation if net assets
exceed $20 billion.
<PAGE>
COUNSEL
Skadden, Arps, Slate, Meagher & Flom LLP, Four Times Square, 30th Floor, New
York, New York 10036, serves as the Fund's legal counsel.
INDEPENDENT AUDITORS
Grant Thornton LLP, independent auditors, has been selected to audit the Fund's
annual financial statements and is located at 60 Broad Street, New York, NY
10004-2616
CUSTODIAN, TRANSFER AGENT AND DIVIDEND DISBURSING AGENT
State Street Bank and Trust Company ("State Street"), 225 Franklin Street,
Boston, Massachusetts 02110 is the Custodian for the Fund's cash and securities.
Boston Financial Data Services, Inc. ("BFDS"), an affiliate of State Street
located at The BFDS Building, 66 Brooks Drive, Braintree, MA 02184, performs the
services of transfer agent and dividend disbursing agent for the Fund. Neither
BFDS nor State Street assists in or is responsible for investment decisions
involving assets of the Fund.
DISTRIBUTOR
To implement the Fund's 12b-1 Plan, the Fund has entered into a Distribution
Agreement with Gabelli & Company, Inc. (the "Distributor"), a New York
corporation which is an indirect majority owned subsidiary of GAMI, 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.
DISTRIBUTION PLAN
Pursuant to the distribution and service plan (the "Plan") adopted by the Fund
pursuant to Rule 12b-1 under the 1940 Act and the Distribution Agreement, the
Fund is authorized to pay the Distributor for expenses it incurs in connection
with the distribution of the Fund's shares. The Plan is intended to benefit the
Fund by increasing its assets and thereby reducing the Fund's expense ratio.
The Plan continues in effect from year to year, provided that each such
continuance is approved at least annually by a vote of the Board of Directors,
including a majority vote of the Directors who are not interested persons of the
Corporation and who have no direct or indirect financial interest in the
operation of the Plan (the "Independent Directors"), cast in person at a meeting
called for the purpose of voting on such continuance. The Plan may be terminated
at any time, without penalty, by the vote of a majority of the Independent
Directors, or by the vote of the holders of a majority of the outstanding shares
of the Fund on not more than 30 days' written notice to any other party to the
Plan. The Plan may not be amended to increase materially the amounts to be spent
for the services described therein without approval by the shareholders and all
material amendments are required to be approved by the Board of Directors in the
manner described above. The Plan will automatically terminate in the event of
its assignment. The Fund will not be contractually obligated to pay expenses
incurred under the Plan if it is terminated or not continued.
Pursuant to the Plan, the Board of Directors will review at least quarterly a
written report of the distribution expenses incurred on behalf of the Fund by
the Distributor. The report includes an itemization of the distribution expenses
and the purposes of such expenditures. In addition, as long as the Plan remains
in effect, the selection and nomination of Independent Directors shall be
committed to the Independent Directors.
Pursuant to the Distribution Agreement, the Fund has agreed to indemnify the
Distributor to the extent permitted by applicable law against certain
liabilities under the federal securities laws.
<PAGE>
During the fiscal year ended December 31, 1999, the Distributor incurred
distribution expenses under the Distribution Plan of $46,600. Of this amount,
$600 was spent on advertising, $17,000 for printing, postage and stationery,
$11,100 for overhead support expenses, $14,900 for salaries of personnel of the
Distributor and $3,000 to third party brokers. Pursuant to the Distribution
Plan, the Fund paid the Distributor $179,687, or 0.25% of its average daily net
assets.
Shares of the Fund may also be purchased 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 broker-dealers 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 upon receipt of an order to purchase 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 buy order expires.
PORTFOLIO TRANSACTIONS AND BROKERAGE
Under the Contract, 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 a
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 is 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 they deem 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 such 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 portfolio securities is
that primary consideration will be given to obtaining the most favorable prices
and efficient execution of transactions. In 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 Securities 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.
<PAGE>
Research services furnished by brokers or dealers through which the Fund effects
securities transactions are used by the Adviser and its advisory affiliates in
carrying out their responsibilities with respect to all of their accounts over
which they exercise investment discretion. Such investment information may be
useful only to one or more of the other accounts of the Adviser and its advisory
affiliates, and research information received for the commissions of those
particular accounts may be useful both to the Fund and one or more of such other
accounts. The purpose of this sharing of research information is to avoid
duplicative charges for research provided by brokers and dealers. Neither the
Fund nor the Adviser has any legally binding agreement with any broker or dealer
regarding any specific amount of brokerage commissions which will be paid in
recognition of such services. However, in determining the amount of portfolio
commissions directed to such brokers or dealers, the Adviser does consider the
level of services provided. Based on such determinations, the Adviser has
allocated brokerage commissions of $53,387 on portfolio transactions in the
principal amount of $28,215,387 during 1999 to various broker-dealers that have
provided research services to the Adviser.
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.
The following table sets forth certain information regarding the brokerage
commissions paid, the brokerage commissions paid to Gabelli affiliates,
percentage of commissions paid to affiliates and percentage of aggregate dollar
amount of transactions involving commissions paid to affiliates for the fiscal
years ended December 31, 1997, 1998 and 1999.
Fiscal Year Ended Commissions
December 31, Paid
------------ ----
Total Brokerage Commissions 1997 $122,600
1998 $127,714
1999 $387,727
Commissions paid to Gabelli & Company 1997 $ 50,270
1998 $ 66,777
1999 $289,027
Commissions paid to Keeley investment Corp. 1997 $ 1,000
1998 $ 0
1999 $ 1,000
% of Total Brokerage Commissions 1999 74.54%
paid to Gabelli & Company
% of Total Brokerage Commissions 1999 .25%
paid to Keeley Investment Corp.
% of Total Transactions involving Commissions 1999 73.40%
paid to Gabelli & Company
% of Total Transactions involving Commissions 1999 0.24%
paid to Keeley Investment Corp.
As required by Rule 17e-1 under the 1940 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 of Directors, including its Independent Directors,
conduct periodic compliance reviews of such brokerage allocations. The Adviser
and Gabelli are also required to furnish reports and maintain records in
connection with such reviews.
To obtain the best execution of portfolio trades on the New York Stock Exchange
("NYSE"), 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 System of the NYSE. 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
portfolio transactions on behalf of the Fund 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 NYSE.
<PAGE>
REDEMPTION OF SHARES
Payment of the redemption price for shares redeemed may be made either in cash
or in portfolio securities (selected at the discretion of the Adviser and taken
at their value used in determining the Fund's net asset value per share as we
described under "Determination of Net Asset Value" below), or partly in cash and
partly in portfolio securities. However, payments will be made wholly in cash
unless the redemptions by the particular shareholder over the prior three months
exceed $250,000 and the Adviser believes that economic conditions exist which
would make payment in cash detrimental to the best interests of the Fund. If
payment for shares redeemed is made wholly or partly in portfolio securities,
brokerage costs may be incurred by the investor in converting the securities to
cash. The Fund will not distribute in-kind portfolio securities that are not
readily marketable.
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.
<PAGE>
DETERMINATION OF NET ASSET VALUE
For purposes of determining the Fund's net asset value per share, readily
marketable portfolio securities listed on the NYSE are valued, except as
indicated below, at the last sale price reflected at the close of the regular
trading session of the NYSE on the business day as of which such value is being
determined. If there has been no sale on such day, the securities are valued at
the average of the closing bid and asked prices on such day. If no asked prices
are quoted on such day, then the security is valued at the closing bid price on
such day. If no bid or asked prices are quoted on such day, then the security is
valued by such method as the Board of Directors shall determine in good faith to
reflect its fair market value. Readily marketable securities not listed on the
NYSE but listed on other national securities exchanges admitted to trading on
the National Association of Securities Dealers Automated Quotations, Inc.
("NASDAQ") national list are valued in like manner.
All other readily marketable securities are valued at the latest average of the
bid and asked price obtained from a dealer maintaining an active market in such
security.
Debt instruments having 60 days or less remaining until maturity are stated at
amortized cost. Debt instruments having a greater remaining maturity will be
valued at the latest bid price obtainable from a dealer which maintains an
active market in the security until the maturity of the instrument is 60 days or
less when it will be valued as if purchased at the valuation established as of
the 61st day of its maturity. Listed debt securities which are actively traded
on a securities exchange may also be valued at the last sale price in lieu of
the quoted bid price of a dealer. All other investment assets, including
restricted and not readily marketable securities, are valued under procedures
established by and under the general supervision and responsibility of the
Fund's Board of Directors designed to reflect in good faith the fair value of
such securities.
DIVIDENDS AND DISTRIBUTIONS
Each dividend and capital gains distribution, if any, declared by the Fund on
its outstanding shares will, unless you have elected otherwise, be paid on the
payment date fixed by the Board of Trustees 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 in cash or in additional shares may be
changed by notifying the Fund in writing at any time prior to the record date
for a particular dividend or distribution. No sales charges or other fees are
imposed on shareholders in connection with the reinvestment of dividends and
capital gains distribution. There is no fixed dividend rate, and there can be no
assurance that the Fund will pay any dividends or realize any capital gains.
TAXATION
GENERAL
Set forth below is a discussion of certain U.S. Federal income tax issues
concerning the Fund and the purchase, ownership and disposition of Fund shares.
This discussion is based upon present provisions of the Internal Revenue Code of
1986, as amended (the "Code"), the regulations promulgated thereunder, and
judicial and administrative ruling authorities, all of which are subject to
change and which may be retroactive. This discussion does not purport to be
complete or to deal with all aspects of U.S. Federal income taxation that may be
relevant to investors in light of their particular circumstances. Prospective
investors should consult their own tax advisers with regard to the U.S. federal
tax consequences of the purchase, ownership, or disposition of Fund shares, as
well as the tax consequences arising under the laws of any state, foreign
country, or other taxing jurisdiction.
TAX STATUS OF THE FUND
The Fund has qualified and intends to remain qualified to be taxed as a
regulated investment company under Subchapter M of the Code. Accordingly, the
Fund must, among other things, (a) derive in each taxable year at least 90% of
its gross income from dividends, interest, payments with respect to certain
securities loans, and gains from the sale or other disposition of stock,
securities or foreign currencies, or other income (including but not limited to
gains from options,
<PAGE>
futures, or forward contracts) derived with respect to its business of investing
in such stock, securities or currencies; and (b) diversify its holdings so that,
at the end of each fiscal quarter (i) at least 50% of the value of the Fund's
total assets is represented by cash and cash items, U.S. Government securities,
the securities of other regulated investment companies and other securities,
with such other securities limited, in respect of any one issuer, to an amount
not greater than 5% of the value of the Fund's total assets and 10% of the
outstanding voting securities of such issuer, and (ii) not more than 25% of the
value of its total assets is invested in the securities (other than U.S.
Government securities and the securities of other regulated investment
companies) of any one issuer or of any two or more issuers that it controls and
that are determined to be engaged in the same or similar trades or businesses or
related trades or businesses.
As a regulated investment company, the Fund generally is not subject to U.S.
Federal income tax on income and gains that it distributes to shareholders, if
at least 90% of the Fund's investment company taxable income (which includes,
among other items, dividends, interest and the excess of any net short-term
capital gains over net long-term capital losses) for the taxable year is
distributed. The Fund intends to distribute substantially all of such income.
Amounts not distributed on a timely basis in accordance with a calendar
year distribution requirement are subject to a nondeductible 4% excise tax at
the Fund level. To avoid the tax, the Fund must distribute during each calendar
year an amount equal to the sum of (1) at least 98% of its ordinary income (not
taking into account any capital gains or losses) for the calendar year, (2) at
least 98% of its capital gains in excess of its capital losses (adjusted for
certain ordinary losses) for a one-year period generally ending on December 31
of the calendar year, and (3) all ordinary income and capital gains for previous
years that were not distributed during such years. To avoid application of the
Excise Tax, the Fund intends to make distributions in accordance with the
calendar year distribution requirement.
A distribution will be treated as paid on December 31 of a calendar year if it
is declared by the Fund in October, November or December of that year with a
record date in such a month and paid by the Fund during January of the following
year. Such a distribution will be taxable to shareholders in the calendar year
in which the distribution is declared, rather than the calendar year in which it
is received.
DISTRIBUTIONS
Distributions of investment company taxable income (which includes taxable
interest and dividend income and the excess of net short-term capital gains over
long-term capital losses) are taxable to U.S. shareholders as ordinary income,
whether paid in cash or shares. Dividends paid by the Fund to a corporate
shareholder, to the extent such dividends are attributable to dividends received
by the Fund from U.S. corporations and to the extent the aggregate amount of
such dividends do not exceed the aggregate dividends received by the Fund for
the taxable year, may, subject to limitations, be eligible for the dividends
received deduction. The alternative minimum tax applicable to corporations,
however, may reduce the value of the dividends received deduction.
Capital gains may be taxed at different rates depending on how long the Fund
held the asset giving rise to such gains. Distributions of the excess of net
long-term capital gains over net short-term capital losses realized, if any,
properly designated by the Fund, whether paid in cash or reinvested in Fund
shares, will generally be taxable to shareholders at the rates applicable to
long-term capital gains, regardless of how long a shareholder has held Fund
shares. Distributions of net capital gains from assets held for one year or less
will be taxable to shareholders at rates applicable to ordinary income.
To the extent that the Fund retains any net long-term capital gains, it may
designate them as "deemed distributions" and pay a tax thereon for the benefit
of its shareholders. In that event, the shareholders report their share of the
Fund's retained realized capital gains on their individual tax returns as if it
had been received, and report a credit for the tax paid thereon by the Fund. The
amount of the deemed distribution net of such tax is then added to the
shareholder's cost basis for his shares. Shareholders who are not subject to
U.S. federal income tax or tax on capital gains should be able to file a return
on the appropriate form or a claim for refund that allows them to recover the
tax paid on their behalf.
Shareholders will be notified annually as to the U.S. Federal tax status of
distributions, and shareholders receiving distributions in the form of newly
issued shares will receive a report as to the net asset value of the shares
received.
Investors should be careful to consider the tax implications of buying shares of
the Fund just prior to the record date of a distribution (including a capital
gain dividend). The price of shares purchased at such a time will reflect the
amount of the forthcoming distribution, but the distribution will generally be
taxable to the shareholder.
<PAGE>
FOREIGN TAXES
The Fund may be subject to certain taxes imposed by the countries in which it
invests or operates. The Fund will not have more than 50% of its total assets
invested in securities of foreign governments or corporations and consequently
will not qualify to elect to treat any foreign taxes paid by the Fund as having
been paid by the Fund's shareholders.
DISPOSITIONS
Upon a redemption, sale or exchange of shares of the Fund, a shareholder will
realize a taxable gain or loss depending upon his basis in the shares. A gain or
loss will be treated as capital gain or loss if the shares are capital assets in
the shareholder's hands, and for noncorporate shareholders the rate of tax will
depend upon the shareholder's holding period for the shares. Any loss realized
on a redemption, sale or exchange will be disallowed to the extent the shares
disposed of are replaced (including through reinvestment of dividends) within a
period of 61 days, beginning 30 days before and ending 30 days after the shares
are disposed of. In such a case, the basis of the shares acquired will be
adjusted to reflect the disallowed loss. If a shareholder holds Fund shares for
six months or less and during that period receives a distribution taxable to the
shareholder as long-term capital gain, any loss realized on the sale of such
shares during such six month period would be a long-term capital loss to the
extent of such distribution.
BACKUP WITHHOLDING
The Fund generally will be required to withhold U.S. Federal income tax at a
rate of 31% ("backup withholding") from dividends paid, capital gain
distributions, and redemption proceeds to shareholders if (1) the shareholder
fails to furnish the Fund with the shareholder's correct taxpayer identification
number or social security number, (2) the IRS notifies the shareholder or the
Fund that the shareholder has failed to report properly certain interest and
dividend income to the IRS and to respond to notices to that effect, or (3) when
required to do so, the shareholder fails to certify that he or she is not
subject to backup withholding. Any amounts withheld may be credited against the
shareholder's U.S. Federal income tax liability.
OTHER TAXATION
Distributions may be subject to additional state, local and foreign taxes,
depending on each shareholder's particular situation. Non-U.S. shareholders may
be subject to U.S. tax rules that differ significantly from those summarized
above, including the likelihood that ordinary income dividends distributed to
them will be subject to withholding of U.S. tax at a rate of 30% (or a lower
treaty rate, if applicable). Non-U.S. investors should consult their own tax
advisers regarding U.S. Federal, state, local and foreign tax considerations.
FUND INVESTMENTS
OPTIONS, FUTURES AND FORWARD CONTRACTS. Any regulated futures contracts and
certain options in which the Fund may invest may be "section 1256 contracts."
Gains (or losses) on these contracts generally are considered to be 60%
long-term and 40% short-term capital gains or losses. Also, section 1256
contracts held by the Fund at the end of each taxable year (and on certain other
dates prescribed in the Code) are "marked to market" with the result that
unrealized gains or losses are treated as though they were realized. Code
section 1092, which applies to certain straddles, may affect the taxation of the
Fund's sales of securities and transactions in financial futures contracts and
related options. Under section 1092, the Fund may be required to postpone
recognition of losses incurred in certain sales of securities and certain
closing transactions in financial futures contracts or related options.
Special Code provisions applicable to Fund investments, discussed above, may
affect characterization of gains and losses realized by the Fund, and may
accelerate recognition of income or defer recognition of losses. The Fund will
monitor these investments and when possible will make appropriate elections in
order to mitigate unfavorable tax treatment.
INVESTMENT PERFORMANCE INFORMATION
The investment performance of the Fund quoted in advertising or sales literature
for the sale of its shares will be calculated on a total return basis which
assumes the reinvestment of all dividends and distributions. Total return is
computed by comparing the value of an assumed investment in Fund shares at the
offering price in effect at the beginning of the period shown with the
redemption price of the same investment at the end of the period (including
share(s) accrued thereon by the reinvestment of dividends and distributions).
Performance quotations given as a percentage will be derived by dividing the
amount of such total return by the amount of the assumed investment. When the
period shown is greater than one year, the result is referred to as cumulative
performance or cumulative total return.
<PAGE>
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 (or for the periods of the Fund's operations), and are
calculated pursuant to the following formula:
P (1 + T) n = ERV
(where P = a hypothetical initial payment of $1,000, T = the average annual
total return, n = the number of years and ERV = the redeemable value at the end
of the period of a $1,000 payment made at the beginning of the period). All
total return figures will reflect the deduction of Fund expenses (net of certain
expenses reimbursed by the Adviser) on an annual basis, and will assume that all
dividends and distributions are reinvested and will deduct the maximum sales
charge, if any is imposed.
Investors are cautioned that past results are not necessarily representative of
future results; that investment returns and principal value will fluctuate; that
investment performance is primarily a function of portfolio management (which is
affected by the economic and market environment as well as the volatility of
portfolio investments) and operating expenses; and that performance information,
such as that described above, may not provide a valid basis of comparison with
other investments and investment companies using a different method of computing
performance data.
In connection with communicating its total return to current or prospective
shareholders, the Fund may also compare these figures to the performance of
other mutual funds tracked by mutual fund rating services to other unmanaged
indexes which may assume reinvestment of dividends but generally do not reflect
deductions for administrative and management costs.
For the fiscal year ended December 31, 1999 the Fund's total return was 9.00%.
The average annual total return since its inception on May 14, 1993 through
December 31, 1999 was 9.86%.
DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES
The Corporation is an open-end management investment company organized as a
Maryland corporation on October 30, 1992. Its authorized capital stock consists
of one billion shares of stock having a par value of one tenth of one cent
($.001) per share. 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 Board of Directors is authorized to divide the
unissued shares into separate series of stock, each series representing a
separate, additional portfolio.
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 Corporation sends semi-annual and audited annual reports to all shareholders
which include lists of portfolio securities and the Fund's financial statements,
which 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 shares.
FINANCIAL STATEMENTS
The Fund's financial statements for the year ended December 31, 1999, including
the report of Grant Thornton LLP, independent auditors, are incorporated by
reference to the Fund's Annual Report. The Fund's Annual Report is available
upon request and without charge. Grant Thornton LLP provides audit services, tax
return preparation and consultation in connection with certain SEC filings.
<PAGE>
APPENDIX TO STATEMENT OF ADDITIONAL INFORMATION
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S ("MOODY'S") CORPORATE BOND
RATINGS
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edge." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which made
the long term risks appear somewhat larger than in Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa: Bonds which are rated Baa are considered as medium grade obligations, i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca: Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
NOTE: Moody's may apply numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through B in its corporate bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.
<PAGE>
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 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 foreseeable future.
a: An issue which is rated a is considered to be an upper medium grade preferred
stock. While risks are judged to be somewhat greater than in the aaa and aa
classifications, earnings and asset protection are, nevertheless expected to be
maintained at adequate levels.
baa: An issue which is rated baa is considered to be medium grade, neither
highly protected nor poorly secured. Earnings and asset protection appear
adequate at present but may be questionable over any great length of time.
ba: An issue which is rated ba is considered to have speculative elements and
its future cannot be considered well assured. Earnings and asset protection may
be very moderate and not well safeguarded during adverse periods. Uncertainty of
position characterizes preferred stocks in this class.
<PAGE>
b: An issue which is rated b generally lacks the characteristics of a desirable
investment. Assurance of dividend payments and maintenance of other terms of the
issue over any long period of time may be small.
caa: An issue which is rated caa is likely to be in arrears on dividend
payments. This rating designation does not purport to indicate the future status
of payment.
ca: An issue which is rated ca is speculative in a high degree and is likely to
be in arrears on dividends with little likelihood of eventual payment.
c: This is the lowest rated class of preferred or preference stock. Issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
NOTE: Moody's may apply numerical modifiers 1, 2 and 3 in each rating
classification from "aa" through "b" in its preferred stock rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.
DESCRIPTION OF S&P'S PREFERRED STOCK RATINGS
AAA: This is the highest rating that may be assigned by S&P's to a preferred
stock issue and indicates an extremely strong capacity to pay the preferred
stock obligations.
AA: A preferred stock issue rated AA also qualifies as a high-quality fixed
income security. The capacity to pay preferred stock obligations is very strong,
although not as overwhelming as for issues rated AAA.
A: An issue rated A is backed by a sound capacity to pay the preferred stock
obligations, although it is somewhat more susceptible to the adverse effect of
changes in circumstances and economic conditions.
BBB: An issue rated BBB is regarded as backed by an adequate capacity to pay the
preferred stock obligations. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to make payments for a preferred stock in
this category than for issues in the A category.
BB, B, CCC: Preferred stock rated BB, B, and CCC are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay preferred
stock obligations. BB indicates the lowest degree of speculation and CCC the
highest degree of speculation. While such issues will likely have some quality
and protective characteristics, these are outweighed by large uncertainties or
major risk exposures to adverse conditions.
CC: The rating CC is reserved for a preferred stock in arrears on dividends or
sinking fund payments but that is currently paying.
C: A preferred stock rated C is a non-paying issue.
D: A preferred stock rated D is a non-paying issue with the issuer in default on
debt instruments.
PLUS (+) OR MINUS (-): The ratings from "AA" to "B" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
