[Logo] The Guardian
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Prospectus for:
Gabelli
Capital
Asset
Fund
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May 1, 1996
[Logo] The Guardian (R) [Logo]
Available through variable insurance products
Issued By:
The Guardian Insurance & Annuity Company, Inc.
Variable Products Administration
P.O. Box 26210
Lehigh Valley, PA 18002-6210
Distributed By:
Guardian Investor Services Corporation(R)
201 Park Avenue South
New York, NY 10003
012131 5/96
<PAGE>
Prospectus May 1, 1996
GABELLI CAPITAL ASSET FUND
One Corporate Center
Rye, New York 10580-1434
Telephone: 1-800-GABELLI (1-800-422-3554)
http://www.gabelli.com
Gabelli Capital Asset Fund (the "Fund") is a series of Gabelli Capital
Series Funds, Inc. (the "Company"), an open-end, diversified management
investment company. The primary investment objective of the Fund is growth of
capital, with current income as a secondary objective. See "Investment
Objectives and Policies."
Shares of the Fund are available to the public only through the purchase of
certain variable annuity and variable life insurance contracts ("Contract(s)")
issued by The Guardian Insurance & Annuity Company, Inc. ("GIAC").
This Prospectus sets forth concisely the information a prospective investor
should know before investing in the Fund. A Statement of Additional Information
dated May 1, 1996 (the "Additional Statement") containing additional information
about the Fund has been filed with the Securities and Exchange Commission and is
incorporated by ref erence into this Prospectus. For a free copy, call or write
the Fund at the telephone number or address set forth above.
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This Prospectus should be retained
by investors for future reference.
Contents
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Section Page
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Financial Highlights 2
Investment Objectives and Policies 2
Special Investment Methods 5
Management of the Fund 6
Purchase and Redemption of Shares 9
Dividends, Distributions and Taxes 9
General Information 10
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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FINANCIAL HIGHLIGHTS
The per share data and ratios in the table below have been audited by Ernst
and Young LLP, independent auditors, whose unqualified report on this
information appears in the Additional Statement. This table should be read in
conjunction with the financial statements and related notes that are included in
the Additional Statement.
Per share amounts for a Fund share outstanding throughout the period.
Period
Ended
12/31/95*
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Operating performance:
Net asset value, beginning of period ........................ $ 10.00
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Net investment income(a) .................................... 0.03
Net realized and unrealized gain on investments ............. 0.80
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Total from investment operations ............................ 0.83
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Distributions to shareholders from:
Net investment income .................................. (0.03)
Net realized gains ..................................... (0.09)
Distributions in excess of net
realized gains ..................................... (0.01)
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Total Distributions ......................................... (0.13)
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Net asset value, end of period .............................. $ 10.70
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Total return** .............................................. 8.4%
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Ratios to average net assets/
supplemental data:
Net assets, end of period (in 000's) ........................ $ 26,364
Ratio of net investment income to
average net assets ................................. 0.75%+
Ratio of operating expenses to
average net assets (b) ............................. 1.78%+
Portfolio turnover rate ..................................... 81.4%
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* The Fund commenced operations on May 1, 1995.
** 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. Total return for the period of less
than one year is not annualized.
+ Annualized.
(a) Net investment income before expenses assumed by the Manager and Adviser
for the period ended December 31, 1995 was $0.03.
(b) Operating expense ratio before expenses assumed by the Manager and Adviser
for the period ended December 31, 1995 was 1.92%.
INVESTMENT OBJECTIVES AND POLICIES
The primary investment objective of the Fund is growth of capital and
investments will be made based on management's perception of their potential for
capital appreciation. Current income is a secondary objective. There is no
assurance that the Fund will achieve its investment objectives. The investment
objectives of the Fund are fundamental and may not be changed without
shareholder approval. The other investment policies described below may be
changed by the Board of Directors without shareholder approval.
The Fund expects that its assets will be invested primarily in a
diversified portfolio of readily marketable equity securities (including common
stock, preferred stock, securities representing the right to acquire common
stock and securities that are convertible into or exchangeable for common
stock). Gabelli Funds, Inc., the investment adviser to the Fund (the "Adviser"),
will invest in companies that are selling in the public market at a significant
discount to their private market value ("PMV"), that is, that value the Adviser
believes an informed
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industrialist would be willing to pay to acquire companies with similar
characteristics. Factors considered by the Adviser include price, earnings
expectations, earnings and price histories, balance sheet characteristics and
perceived management skills. Also considered are changes in economic and
political outlooks as well as individual corporate developments. Fund
investments which lose their perceived value relative to other investment
alternatives are sold.
When deemed appropriate by the Adviser, the Fund may, without limit, invest
temporarily in defensive securities such as high grade debt securities,
obligations of the U.S. Government, its agencies or instrumentalities, or in
short-term (maturing in less than one year) money market instruments, including
commercial paper rated A-1 or better by Standard & Poor's Ratings Service, a
division of McGraw-Hill Companies, Inc. ("S&P") or P-1 or better by Moody's
Investors Services ("Moody's").
It is the Adviser's expectation that most Fund investments will be long
term in nature and that the annual turnover of the Fund's portfolio should not
exceed 100%. A portfolio turnover rate of 100% would occur if all the stocks in
the portfolio were replaced in a one-year period. High turnover involves
correspondingly greater commission expenses and transaction costs. The Fund's
portfolio turnover rate from commencement of operations (May 1, 1995) through
December 31, 1995 was 81.4%.
Convertible Securities. Convertible securities are ordinarily a long-term
debt obligation of the issuer convertible at a stated exchange rate into common
stock of the issuer and may also include short-term debt obligations or
preferred stock. As with all fixed income securities, the market value of
convertible securities tends to decline as interest rates increase and,
conversely, to increase as interest rates decline. Convertible securities
generally offer lower interest or dividend yields than non-convertible
securities of similar quality. However, when the market price of the common
stock underlying a convertible security exceeds the conversion price, the price
of the convertible security tends to reflect the value of the underlying common
stock. As the market price of the underlying common stock declines, the
convertible security tends to trade increasingly on a yield basis, and thus may
not depreciate to the same extent as the underlying common stock. Convertible
securities rank senior to common stock in an issuer's capital structure and are
consequently of higher quality and entail less risk than the issuer's common
stock, although the extent to which such risk is reduced depends in large
measure upon the degree to which the convertible security sells above its value
as a fixed income security.
The Fund may invest in convertible securities when it appears to the
Adviser that it may not be prudent to be fully invested in common stocks. In
evaluating a convertible security, the Adviser places primary emphasis on the
attractiveness of the underlying common stock and the potential for capital
appreciation through conversion. See "Convertible Securities" in the Additional
Statement.
Debt Securities. The Fund will normally purchase only investment grade debt
securities having a rating of, or equivalent to, at least an S&P rating of BBB
(which rating may have speculative characteristics) or, if unrated, judged by
the Adviser to be of comparable quality. However, the Fund may also invest up to
25% of its assets in more speculative debt securities provided, that, as
described in the following paragraph, no more than 5% of the Fund's assets may
be invested in corporate debt securities with a rating of, or equivalent to, a
S&P rating of CCC or lower. Corporate debt obligations having a B rating will
likely have some quality and protective characteristics which, in the judgment
of the rating organization, are outweighed by large uncertainties or major risk
exposures to adverse conditions. Although lower rated debt securities generally
have higher yields, they are also more subject to market price volatility based
on increased sensitivity to changes in interest rates and economic conditions or
the liquidity of their secondary trading market. A description of corporate debt
ratings is contained in the Additional Statement.
The Fund may invest up to 5% of its assets in low rated and unrated
corporate debt securities (often referred to in the financial press as "junk
bonds") which are perceived by the Adviser to present an opportunity for
significant capital appreciation, if, in the judgment of the Adviser, the
ability of the issuer to repay principal and interest when due is underestimated
by the market. For purposes of the foregoing limitation, corporate debt
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securities are "low rated" if they have a rating of, or equivalent to, an S&P
rating of CCC or lower. See "Debt Securities" in the Additional Statement.
Investments in Small, Unseasoned Companies. The Fund may invest up to 5% of
its net assets in small, less well known companies which (including
predecessors) have operated less than three years. The securities of such
companies may have limited liquidity.
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. The Fund will not purchase options if, as a
result, the aggregate cost or proceeds of all outstanding options exceeds 5% of
the Fund's assets.
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.
Warrants and Rights. The Fund may invest up to 5% of its total assets in
warrants or rights (other than those acquired in units or attached to other
securities) which entitle the holder to buy equity securities at a specific
price for a specific period of time but will do so only if such equity
securities are deemed appropriate by the Adviser for inclusion in the Fund's
portfolio. The Fund will not invest more than 2% of its total assets in warrants
or rights which are not listed on the New York or American Stock Exchanges.
Foreign Securities. The Fund may invest up to 25% of its total assets in
the securities of non-U.S. issuers. These investments involve certain risks not
ordinarily associated with investments in securities of domestic issuers. These
risks include fluctuations in foreign exchange rates, future political and
economic developments, and the possible imposition of exchange controls or other
foreign governmental laws or restrictions. In addition, with respect to certain
countries, there is the possibility of expropriation of assets, confiscatory
taxation, political or social instability or diplomatic developments which could
adversely affect investments in those countries.
There may be less publicly available information about a foreign company
than about a U.S. company, and foreign companies may not be subject to
accounting, auditing and financial reporting standards and requirements
comparable to or as uniform as those of U.S. companies. Non-U.S. securities
markets, while growing in volume, have, for the most part, substantially less
volume than U.S. markets, and securities of many foreign companies are less
liquid and their prices more volatile than securities of comparable U.S.
companies. Transaction costs of investing in non-U.S. securities markets are
generally higher than in the U.S. There is generally less government supervision
and regulation of exchanges, brokers and issuers than there is in the U.S. The
Fund might have greater difficulty taking appropriate legal action in non-U.S.
courts. Non-U.S. markets also have different clearance and settlement procedures
which in some markets have at times failed to keep pace with the volume of
transactions, thereby creating substantial delays and settlement failures that
could adversely affect the Fund's performance.
Dividend and interest income from non-U.S. securities will generally be
subject to withholding taxes by the country in which the issuer is located and
may not be recoverable by the Fund or the investor.
Other Investment Companies. The Fund does not intend to purchase the shares
of other open-end investment companies and reserves the right to invest up to
10% of its total assets in the securities of closed-end investment companies
including small business investment companies (not more than 5% of its total
assets may be invested in not more than 3% of the voting securities of any
investment company). To the extent that the Fund invests in the securities of
other investment companies, shareholders in the Fund may be subject to
duplicative advisory and administrative fees.
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SPECIAL INVESTMENT METHODS
The Fund will not in the aggregate invest more than 15% of its net assets
in illiquid securities. These securities include securities which are restricted
for public sale, securities for which market quotations are not readily
available, and repurchase agreements maturing or terminable in more than seven
days. Securities freely salable among qualified institutional investors under
special rules adopted by the Securities and Exchange Commission ("SEC") may be
treated as liquid if they satisfy liquidity standards established by the Board
of Directors. The continued liquidity of such securities is not as well assured
as that of publicly traded securities, and accordingly, the Board of Directors
will monitor their liquidity. Further information on the investment methods and
policies of the Fund is set forth in the Additional Statement.
The Fund may purchase and sell securities on a "when, as and if issued
basis" under which the issuance of the security depends upon the occurrence of a
subsequent event, such as approval of a merger, corporate reorganization or debt
restructuring. For further information, see "When Issued, Delayed Delivery
Securities and Forward Commitments" in the Additional Statement.
Corporate Reorganizations. Subject to the diversification requirements of
its investment restrictions, the Fund may invest not more than 35% of its total
assets in securities for which a tender or exchange offer has been made or
announced and in the securities of companies for which a merger, consolidation,
liquidation or similar reorganization proposal has been announced if, in the
judgment of the Adviser, there is a reasonable prospect of capital appreciation
significantly greater than the added portfolio turnover expenses inherent in the
short-term nature of such transactions. The 35% limitation does not apply to the
securities of companies which may be involved in simply consummating an approved
or agreed upon merger, acquisition, consolidation, liquidation or
reorganization. The principal risk is that such offers or proposals may not be
consummated within the time and under the terms contemplated at the time of the
investment in which case, unless replaced by an equivalent or increased offer or
proposal which is consummated, the Fund may sustain a loss. For further
information on such investments, see "Corporate Reorganizations" in the
Additional Statement.
Repurchase Agreements. The Fund may enter into repurchase agreements with
"primary dealers" in U.S. Government securities and member banks of the Federal
Reserve System which furnish collateral at least equal in value or market price
to the amount of their repurchase obligation. In a repurchase agreement, an
investor (e.g., 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 (ordinarily a week or less). 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 principal risk is that, if the
seller defaults, the Fund might suffer a loss to the extent that the proceeds
from the sale of the underlying securities and other collateral held by the Fund
are less than the repurchase price. Except for repurchase agreements with a
duration of seven days or less, not more than 5% of the Fund's total assets may
be so invested.
Borrowing. The Fund may not borrow money except for (i) short-term credits
from banks as may be necessary for the clearance of portfolio transactions, and
(ii) borrowings from banks for temporary or emergency purposes, including the
meeting of redemption requests, which would otherwise require the untimely
disposition of its portfolio securities. Borrowing for any purpose, including
redemptions, may not, in the aggregate, exceed 15%, and borrowing for purposes
other than meeting redemptions may not exceed 5%, of the value of the Fund's
total assets at the time a borrowing is made. The Fund will not make any
additional purchases of portfolio securities at any time its borrowings exceed
5% of its assets. The Fund will not mortgage, pledge or hypothecate any of its
assets except that, in connection with the foregoing, not more than 20% of the
assets of the Fund may be used as collateral.
Short Sales. The Fund may make short sales of securities. A short sale is a
transaction in which a Fund sells a security it does not own in anticipation
that the market price of that security will decline. 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
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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 10%
of the value of its assets or the Fund's aggregate short sales of a particular
class of securities exceeds 10% of the outstanding securities of that class.
Short sales may only be made in securities listed on a national securities
exchange. The Fund may also make short sales "against the box" without respect
to such limitations. In this type of short sale, at the time of the sale, the
Fund owns or has the immediate and unconditional right to acquire at no
additional cost the identical security.
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. Although the Fund's gain is limited to the price at which it sold the
security short, its potential loss is theoretically unlimited.
Forward Currency Exchange Contracts. The Fund may enter into forward
currency exchange contracts to protect against the effects of fluctuating rates
of currency exchange and exchange control regulations. Forward currency exchange
contracts provide for the purchase or sale of an amount of a specified currency
at a future date. Purposes for which such currency transactions may be used
include protecting against a decline in a foreign currency against the U.S.
dollar between the trade date and settlement date when the Fund purchases or
sells non-U.S. dollar-denominated securities, locking in the U.S. dollar value
of dividends and interest on securities held by the Fund and generally
protecting the U.S. dollar value of securities held by the Fund against exchange
rate fluctuation. While such forward contracts may limit losses to the Fund as a
result of exchange rate fluctuation, they will also limit any gains that may
otherwise have been realized. Currency transactions include the risk securities
losses could be magnified by changes in the value of the currency in which a
security is denominated relative to the U.S. dollar.
Derivative Transactions. As described above, the Fund may invest in options
and warrants, forward foreign currency exchange contracts, futures contracts,
options on futures and other transactions using derivative instruments.
Derivative transactions have certain risks, including imperfect market
correlations, dependence on the credit of the counterparty, possible inability
to enter into offsetting transactions and market fluctuations, that can result
in the Fund being in a worse position than if the transaction had not occurred.
The loss from the Fund's investing in futures and other derivative transactions
is potentially unlimited.
MANAGEMENT OF THE FUND
The Company's Board of Directors (the members of which, together with the
Company's officers, are described in the Additional Statement) has overall
responsibility for the management of the Fund. The Board of Directors decides
upon matters of general policy and reviews the actions of Guardian Investor
Services Corporation, the manager of the Fund (the "Manager"), the Adviser and
Gabelli & Company, Inc., the distributor of the Fund's shares (the
"Distributor").
Pursuant to a Management Agreement with the Fund, the Manager, under the
supervision of the Board of Directors, supervises the performance of
administrative and professional services provided to the Fund by others
including the Adviser and First Data Investor Services Group, Inc., the
sub-administrator of the Fund (the "Sub-Administrator"), and pays the fees of
the Adviser. As compensation for its services and the related expenses borne by
the Manager, the Fund pays the Manager a fee, computed daily and payable
monthly, equal, on an annual basis, to 1.00% of the Fund's average daily net
assets. The management fee paid by the Fund is higher than that paid by most
mutual funds. Pursuant to an Investment Advisory Agreement among the Fund, the
Manager and the Adviser, the Adviser, under the supervision of the Company's
Board of Directors and the Manager, manages the Fund's assets in accordance with
the Fund's investment objectives and policies, makes investment decisions for
the Fund, places purchase and sale orders on behalf of the Fund, provides
investment research and provides facilities and personnel required for the
Fund's administrative needs. The Adviser may delegate its administrative role
and currently has done so to the Sub-Administrator. The Adviser supervises the
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performance of administrative and professional services provided by others and
pays the compensation of the Sub-Administrator and all officers and directors of
the Fund who are its affiliates. As compensation for its services and the
related expenses borne by the Adviser, the Manager pays the Adviser a fee,
computed daily and payable monthly, equal, on an annual basis, to .75% of the
Fund's average daily net assets.
Mario J. Gabelli, CFA has been designated by the Adviser to be primarily
responsible for the day-to-day management of the Fund. Mr. Gabelli has been
Chairman and Chief Investment Officer of the Adviser since its inception in
1980. The Adviser relies to a considerable extent on the expertise of Mr.
Gabelli, who may be difficult to replace in the event of his death, disability
or resignation.
The management discussion and analysis of the Fund's performance during the
fiscal period from the Fund's commencement of operations on May 1, 1995 through
December 31, 1995 is included in the Fund's Annual Report to Shareholders dated
December 31, 1995. The Fund's Annual Report may be obtained upon request without
charge by writing or calling the Fund at the address or telephone number listed
on page one of this Prospectus.
The Company, the Manager, GIAC, the Adviser and the Distributor have
entered into a Participation Agreement regarding the marketing of the Fund's
shares as an investment option for variable annuity and variable life contracts
issued by GIAC.
The Manager. The Manager is located at 201 Park Avenue South, New York, New
York 10003 and as of April 1, 1996 serves as investment adviser to eight funds
with aggregate assets of over $3.5 billion and as co-adviser of a separate
account of GIAC. The Manager is also the underwriter and distributor of all
mutual funds sponsored by The Guardian Life Insurance Company of America
("Guardian Life") and of the variable annuity and variable life insurance
contracts issued by GIAC. The Manager is a wholly owned subsidiary of GIAC,
which is, in turn, a wholly owned subsidiary of Guardian Life, a mutual life
insurance company organized in the State of New York in 1860.
The Adviser. The Adviser, which is located at One Corporate Center, Rye,
New York 10580-1435, was formed in 1980 and as of April 1, 1996 acts as
investment adviser to the following funds with aggregate assets of approximately
$4.3 billion:
Net Assets
Open-end funds: 4/1/96
(in millions)
The Gabelli Asset Fund ......................................... $1,140
The Gabelli Growth Fund ........................................ 582
The Gabelli Value Fund Inc. .................................... 417
The Gabelli Small Cap Growth Fund .............................. 230
The Gabelli Equity Income Fund ................................. 58
The Gabelli U.S. Treasury Money Market Fund .................... 282
The Gabelli ABC Fund ........................................... 25
The Gabelli Global Telecommunications Fund ..................... 125
The Gabelli Global Interactive Couch Potato(R)Fund ............. 37
The Gabelli Global Convertible Securities Fund ................. 16
Gabelli Gold Fund, Inc. ........................................ 20
Gabelli Capital Asset Fund ..................................... 35
Gabelli International Growth Fund, Inc. ........................ 4
Closed-end funds:
The Gabelli Equity Trust Inc. .................................. 1,059
The Gabelli Global Multimedia Trust Inc. ....................... 94
The Gabelli Convertible Securities Fund, Inc. .................. 91
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The Distributor is an indirect majority-owned subsidiary of the Adviser.
GAMCO Investors, Inc. ("GAMCO"), a majority-owned subsidiary of the Adviser,
acts as investment adviser for individuals, pension trusts, profit sharing
trusts and endowments. As of April 1, 1996, GAMCO had aggregate assets in excess
of $5.4 billion under its management. Teton Advisers LLC, an affiliate of the
Adviser, acts as adviser to the Westwood Funds with aggregate assets in excess
of $50 million under its management as of April 1, 1996. Mr. Mario J. Gabelli
may be deemed a "controlling person" of the Adviser and the Distributor on the
basis of his ownership of stock of the Adviser.
Affiliates of the Adviser may, in the ordinary course of their business,
acquire for their own accounts or for the accounts of their advisory clients,
significant (and possibly controlling) positions in the securities of companies
that may also be suitable for investment by the Fund. Although such activities
may limit to some extent the ability of the Fund to make such investments, the
Adviser does not believe that any such limitations 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 substantial
pecuniary interests. The Adviser may on occasion give advice or take action with
respect to other clients that differs from the actions taken with respect to the
Fund. The Fund may invest in the securities of companies which are investment
management clients of GAMCO, a subsidiary of the Adviser. In addition, portfolio
companies or their officers or directors may be minority shareholders of the
Adviser or its affiliates.
The Investment Advisory Agreement contains provisions relating to the
selection of securities brokers to effect the portfolio transactions of the
Fund. Under those provisions, subject to applicable law and procedures adopted
by the Directors, the Adviser may (1) direct Fund portfolio brokerage to the
Distributor or any other broker-dealer affiliates of the Adviser; (2) pay
commissions to brokers other than the Distributor which are higher than what
might be charged by another qualified broker to obtain brokerage and/or research
services considered by the Adviser to be useful or desirable for its investment
management of the Fund and/or other advisory accounts of itself and any
investment adviser affiliated with it; and (3) 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.
Expenses. In addition to the fees of the Manager, the Fund is responsible
for the payment of all its other expenses incurred in the operation of the Fund,
which include, among other things, expenses for legal and independent auditor's
services, charges of State Street Bank and Trust Company (the Fund's custodian,
transfer agent and dividend paying agent) and any persons hired by the Fund, SEC
fees, compensation including fees of the Fund's unaffiliated directors, officers
and employees, accounting costs for reports sent to owners of the Contracts
which provide for investment in the Fund ("Contractowner(s)"), the Fund's pro
rata portion of membership fees in trade organizations, fidelity bond coverage
for the Fund's officers and employees, interest, brokerage and other trading
costs, taxes, all expenses of computing the Fund's net asset value per share,
expenses involved in registering and maintaining the registration of the Fund's
shares with the SEC and qualifying the Fund for sale in various jurisdictions
and maintaining such qualification, litigation and other extraordinary or
non-recurring expenses. However, other typical Fund expenses such as
Contractowner servicing, distribution of reports to Contractowners and
prospectus printing and postage will be borne by GIAC.
Sub-Administrator. The Adviser has entered into a Sub-Administration
Agreement with the Sub-Administrator covering the Fund and certain other funds
advised by the Adviser. Under the Sub-Administration Agreement, the
Sub-Administrator provides certain administrative services necessary for the
Fund's operations, including the preparation and distribution of materials for
meetings of the Company's Board of Directors relating to the Fund, compliance
testing of Fund activities and assistance in the preparation of proxy
statements, reports
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to Contractowners and other documentation. The Sub-Administrator, which is a
subsidiary of First Data Corp., has its principal office at One Exchange Place,
Boston, Massachusetts 02109. The Adviser pays the compensation of the
Sub-Administrator from the fees which are paid to the Adviser by the Manager. No
additional amount will be paid by the Fund for services by the
Sub-Administrator.
Distributor. The Distributor, located at One Corporate Center, Rye, New
York 10580-1435, serves as distributor of the Fund's shares to separate accounts
of GIAC, for which it receives no separate fee from the Fund.
PURCHASE AND REDEMPTION OF SHARES
Fund shares are continuously offered to GIAC's separate accounts at the net
asset value per share next determined after a proper purchase request has been
received by GIAC. GIAC then offers to its Contractowners units in its separate
accounts which directly correspond to shares in the Fund. GIAC submits purchase
and redemption orders to the Fund based on allocation instructions for premium
payments, transfer instructions and surrender or partial withdrawal requests
which are furnished to GIAC by such Contractowners. Contractowners can send such
instructions and requests to GIAC at P.O. Box 26210, Lehigh Valley, PA 18002 by
first class mail or 3900 Burgess Place, Bethlehem, PA 18017 by overnight or
express mail. The net asset value per share of the Fund is determined as of the
close of the regular session of the New York Stock Exchange, which is currently
4:00 p.m., New York City time, on each day that trading is conducted on the New
York Stock Exchange 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
number of shares outstanding at the time the determination is made. Portfolio
securities for which market quotations are readily available are valued at
market value as determined by the last quoted sale price prior to the valuation
time in the case of securities traded on securities exchanges or other markets
for which such information is available. Other readily marketable securities are
valued at the average of the latest bid and asked quotations for such securities
prior to the valuation time. Debt securities with remaining maturities of 60
days or less are valued at amortized cost. All other assets are valued at fair
value as determined by or under the supervision of the Board of Directors of the
Fund. See "Determination of Net Asset Value" in the Additional Statement.
Payments for redeemed shares will ordinarily be made within three (3) days after
the Fund receives a redemption order from GIAC. The redemption price will be the
net asset value per share next determined after GIAC receives the
Contractowner's request in proper form.
The Fund may suspend the right of redemption or postpone the date of
payment during any period when trading on the New York Stock Exchange is
restricted, or such Exchange is closed for other than weekends and holidays;
when an emergency makes it not reasonably practicable for the Fund to dispose of
assets or calculate its net asset value; or as permitted by the SEC.
The accompanying prospectus for a GIAC variable annuity or variable life
insurance policy describes the allocation, transfer and withdrawal provisions of
such annuity or policy.
DIVIDENDS, DISTRIBUTIONS AND TAXES
All dividends and capital gains distributions paid by the Fund will be
automatically reinvested, at net asset value, by GIAC's separate accounts in
additional shares of the Fund. There is no fixed dividend rate, and there can be
no assurance that the Fund will pay any dividends or realize any capital gains.
However, the Fund currently intends to pay dividends and capital gains
distributions, if any, on an annual basis. Contractowners who own units in a
separate account which correspond to shares in the Fund will be notified when
distributions are made.
The Fund is treated as a separate entity for federal income tax purposes.
The Fund has qualified and intends to continue to qualify as a "regulated
investment company" under the Internal Revenue Code of 1986, as
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amended (the "Code"), in order to be relieved of federal income tax on that part
of its net investment income and realized capital gains which it distributes to
GIAC's separate accounts. To qualify, the Fund must meet certain relatively
complex income and diversification tests, including the requirement that less
than 30% of its gross income (exclusive of losses) may be derived from the sale
or other disposition of securities held for less than three months. The loss of
such status would result in the Fund being subject to federal income tax on its
taxable income and gains.
The Code and Treasury Department regulations promulgated thereunder require
that mutual funds that are offered through insurance company separate accounts
must meet certain diversification requirements to preserve the tax-deferral
benefits provided by the variable contracts which are offered in connection with
such separate accounts. The Adviser intends to diversify the Fund's investments
in accordance with those requirements. The prospectuses for GIAC's variable
annuities and variable life insurance policies describe the federal income tax
treatment of distributions from such contracts to Contractowners.
The foregoing is only a summary of important federal tax law provisions
that can affect the Fund. Other federal, state, or local tax law provisions may
also affect the Fund and its operations. Anyone who is considering allocating,
transferring or withdrawing monies held under a GIAC variable contract to or
from this Fund should consult a qualified tax adviser.
GENERAL INFORMATION
Descriptions of Shares and Voting Rights. The Fund is currently the only
series of the Company, which was incorporated in Maryland on April 8, 1993 and
is registered with the SEC as an open-end, diversified investment company. The
Company has authorized capital stock consisting of one billion shares having a
par value of one-tenth of one cent ($.001) per share. Of these authorized
shares, five hundred million are designated as shares of the Fund. The Company's
Board of Directors has the authority to create additional series funds without
obtaining stockholder approval. The Company 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. There
are no conversion or preemptive rights in connection with any shares of the
Fund. All shares, when issued, will be fully paid and nonassessable. Semi-annual
and annual reports will be sent to all Contractowners which include a list of
the Fund's portfolio securities and its financial statements which shall be
audited annually.
Through its separate accounts, GIAC is the Fund's sole stockholder of
record, so, under the Investment Company Act of 1940, as amended, GIAC is deemed
to be in control of the Fund. Nevertheless, when a stockholders' meeting occurs,
GIAC solicits and accepts voting instructions from its Contractowners who have
allocated or transferred monies for an investment in the Fund as of the record
date of the meeting. GIAC then votes the Fund's shares that are attributable to
its Contractowners' interests in the Fund in accordance with their instructions.
GIAC will vote any shares that it is entitled to vote directly due to amounts it
has contributed or accumulated in its separate accounts in the manner described
in the prospectuses for its variable annuities and variable life insurance
policies.
Each share of the Fund is entitled to one vote, and fractional shares are
entitled to fractional votes. Fund shares have non-cumulative voting rights, so
the vote of more than 50% of the shares can elect 100% of the directors.
The Fund is only available to owners of variable annuities or variable life
insurance policies issued by GIAC through its separate accounts. The Fund does
not currently foresee any disadvantages to Contractowners arising from offering
its shares to variable annuity and variable life insurance policy separate
accounts simultaneously, and the Board of Directors monitors events for the
existence of any material irreconcilable conflict between or among
Contractowners. If a material irreconcilable conflict arises, one or more
separate accounts may withdraw their investments in the Fund. This could
possibly force the Fund to sell portfolio securities at disadvantageous prices.
GIAC will bear the expenses of establishing separate portfolios for variable
annuity and variable life
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insurance separate accounts if such action becomes necessary; however, ongoing
expenses that are ultimately borne by Contractowners will likely increase due to
the loss of the economies of scale benefits that can be provided to mutual funds
with substantial assets.
Performance Information. The Fund may, from time to time, provide
performance information in advertisements, sales literature or other materials
furnished to existing or prospective owners of GIAC's variable contracts. When
performance information is provided in advertisements, it will include the
effect of all charges deducted under the terms of the specified contract, as
well as all recurring and non-recurring charges incurred by the Fund. All
performance results are historical and are not representative of future results.
Total return and average annual total return reflect the change in value of
an investment in the Fund over a specified period, assuming the reinvestment of
all capital gains distributions and income dividends. Average annual total
returns show the average change in value for each annual period within a
specified period. Total returns, which are not annualized, show the total
percentage or dollar change in value over a specified period. Promotional
materials relating to the Fund's performance will always at least provide
average annual total returns for one, five and ten years (if applicable).
The Fund may also compare its performance to other investment vehicles or
other mutual funds which have similar investment objectives or programs. Also,
the Fund may quote information from securities indices or financial and industry
or general interest publications in its promotional materials. Additionally, the
Fund's promotional materials may contain references to types and characteristics
of certain securities; features of its portfolio; financial markets; or
historical, current or prospective economic trends. Topics of general interest,
such as personal financial planning, may also be discussed. More information
about the Fund's performance is contained in the Additional Statement.
Custodian, Transfer Agent and Dividend Disbursing Agent. State Street Bank
and Trust Company, 1776 Heritage Drive, North Quincy, Massachusetts 02171, is
the Custodian for the Fund's cash and securities. Foreign securities purchased
by the Fund will be maintained in the custody of either foreign banks or trust
companies that are members of State Street Bank and Trust Company's Global
Custody Network, or foreign depositories used by such members. State Street Bank
and Trust Company is the Transfer Agent for the Fund's shares as well. Boston
Financial Data Services, Inc., an affiliate of State Street Bank and Trust
Company, performs the shareholder services on behalf of State Street and is
located at The BFDS Building, Two Heritage Drive, Quincy, Massachusetts 02171.
Gabelli Capital Asset Fund
One Corporate Center
Rye, New York 10580-1434
Telephone 1-800-GABELLI (1-800-422-3554)
http//www.gabelli.com
STATEMENT OF ADDITIONAL INFORMATION
May 1, 1996
This Statement of Additional Information ("Additional Statement") relates to
Gabelli Capital Asset Fund (the "Fund"), a series of Gabelli Capital Series
Funds, Inc., a Maryland corporation (the "Company"). The Additional Statement is
not a prospectus and is only authorized for distribution when preceded or
accompanied by the Fund's prospectus dated May 1, 1996, as supplemented from
time to time (the "Prospectus"). This Additional Statement contains additional
and more detailed information than that set forth in the Prospectus and should
be read in conjunction with the Prospectus. Additional copies of the Prospectus
and Additional Statement may be obtained without charge by writing or
telephoning the Fund at the address and telephone number set forth above.
Please retain this document for future reference.
TABLE OF CONTENTS
Page
Investment Policies..................................................... 2
Special Investment Methods.............................................. 2
Investment Restrictions................................................. 9
The Manager............................................................. 10
The Adviser............................................................. 11
The Distributor......................................................... 13
Directors and Officers.................................................. 13
Portfolio Transactions and Brokerage.................................... 19
Purchase and Redemption of Shares....................................... 21
Determination of Net Asset Value........................................ 21
Dividends, Distributions and Taxes...................................... 22
Investment Performance Information...................................... 24
Counsel and Independent Auditors........................................ 25
Financial Statements.................................................... 26
Appendix A - Bond and Preferred Stock Ratings........................... A-1
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INVESTMENT POLICIES
The Fund expects that, for most periods, a substantial portion, if not all,
of its assets will be invested in a diversified portfolio of common stocks
judged by Gabelli Funds, Inc., the investment adviser to the Fund (the
"Adviser"), to have favorable value to price characteristics. The Fund may also
invest in U.S. Government or Government Agency obligations, investment grade
corporate bonds, preferred stocks, convertible securities, foreign securities,
debt securities and/or short term money market instruments when deemed
appropriate by the Adviser.
SPECIAL INVESTMENT METHODS
Convertible Securities
The Fund may, as an interim alternative to investment in common stocks,
purchase investment grade convertible debt securities having a rating of, or
equivalent to, at least "BBB" by Standard & Poor's Ratings Service, a division
of McGraw-Hill Companies, Inc. ("Standard & Poor's") or, if unrated, judged by
the Adviser to be of comparable quality. Securities rated less than "A" by
Standard & Poor's may have speculative characteristics. The Fund may also invest
up to 25% of its assets in convertible debt securities which have a lesser
rating or are unrated, provided, however, that the Fund may only invest up to 5%
of its assets in corporate debt securities with a rating of, or equivalent to, a
Standard & Poor's rating of CCC or lower. Unrated convertible securities which,
in the judgement of the Adviser, have equivalent credit worthiness may also be
purchased for the Fund. Although lower rated bonds generally have higher yields,
they are more speculative and subject to a greater risk of default with respect
to the issuer's capacity to pay interest and repay principal than are higher
rated debt securities.
In selecting convertible securities for the Fund, the Adviser relies
primarily on its own evaluation of the issuer and the potential for capital
appreciation through conversion. It does not rely on the rating of the security
or sell because of a change in rating absent a change in its own evaluation of
the underlying common stock and the ability to the issuer to pay principal and
interest or dividends when due without disrupting its business goals. Interest
or dividend yield is a factor only to the extent it is reasonably consistent
with prevailing rates for securities of similar quality and thereby provides a
support level for the market price of the security. The Fund will purchase the
convertible securities of highly leveraged issuers only when, in the judgment of
the Adviser, the risk of default is outweighed by the potential for capital
appreciation.
The issuers of debt obligations having speculative characteristics may
experience difficulty in paying principal and interest when due in the event of
a downturn in the economy or unanticipated corporate developments. The market
prices of such securities may become increasingly volatile in periods of
economic uncertainty. Moreover, adverse publicity or the perceptions of
investors over which the Adviser has no control, whether or not based on
fundamental analysis, may decrease the market price and liquidity of such
investments. Although the Adviser will attempt to avoid exposing the Fund to
such risks, there is no assurance that it will
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be successful or that a liquid secondary market will continue to be available
for the disposition of such securities.
Debt Securities
Corporate debt securities which are either unrated or have a predominantly
speculative rating (often referred to in the financial press as "junk bonds")
may present opportunities for significant long-term capital appreciation if the
ability of the issuer to repay principal and interest when due is underestimated
by the market or the rating organizations. Because of its perceived credit
weakness, the issuer is generally required to pay a higher interest rate and/or
its debt securities may be selling at a significantly lower market price than
the debt securities of issuers actually having similar strength. When the
inherent value of such securities is recognized, the market value of such
securities may appreciate significantly. The Adviser believes that its research
on the credit and balance sheet strength of certain issuers may enable it to
select a limited number of corporate debt securities, which in certain markets,
will better serve the objective of capital appreciation than alternative
investments in common stocks. Of course, there can be no assurance that the
Adviser will be successful. In its evaluation, the Adviser will not rely on
ratings and the receipt of income is only an incidental consideration.
As in the case of the convertible debt securities discussed above, low
rated and unrated corporate debt securities are generally considered to be more
subject to default and therefore significantly more speculative than those
having an investment grade rating. They also are more subject to market price
volatility based on increased sensitivity to changes in interest rates and
economic conditions or the liquidity of their secondary trading market. The Fund
does not intend to purchase debt securities for which a liquid trading market
does not exist but there can be no assurance that such a market will exist for
the sale of such securities.
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.
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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 unrecognized but
forgoes 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 or proceeds of all outstanding
options exceeds 5% of the Fund's assets. To the extent that puts, straddles and
similar investment strategies involve instruments regulated by the Commodity
Futures Trading Commission, the Fund is limited to investments not in excess of
5% of its total assets.
Investments in Warrants and Rights
Warrants basically are options to purchase equity securities at a specified
price valid for a specific period of time. Their prices do not necessarily move
parallel to the prices of the underlying securities. Rights are similar to
warrants, but normally have a short duration and are distributed directly by the
issuer to its shareholders. Rights and warrants have no voting rights, receive
no dividends and have no rights with respect to the assets of the issuer.
Investment in Small, Unseasoned Companies
The securities of small, unseasoned companies may have a limited trading
market, which may adversely affect their disposition and can result in their
being priced lower than might otherwise be the case. If 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 obtained.
Corporate Reorganizations
The Fund may invest up to 35% of its total assets in securities for which a
tender or exchange offer has been made or announced and in securities of
companies for which a merger, consolidation, liquidation or reorganization
proposal has been announced if, in the judgement of the Adviser, there is
reasonable prospect of capital appreciation significantly greater than the
brokerage and other transaction expenses involved. The 35% limitation does not
apply to the securities of companies which may be involved in simply
consummating an approved or agreed upon merger, acquisition, consolidation,
liquidation or reorganization. The primary risk of such investments is that if
the contemplated transaction is abandoned, revised, delayed or becomes
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subject to unanticipated uncertainties, the market price of the securities may
decline below the purchase price paid by the Fund.
In general, securities which are the subject of such an offer or proposal
sell at a premium to their historic market place immediately prior to the
announcement of the offer or proposal. However, the increased market price of
such securities may also discount what the stated or appraised value of the
security would be if the contemplated transaction were approved or consummated.
Such investments may be advantageous when the discount significantly overstates
the risk of the contingencies involved; significantly undervalues the
securities, assets or cash to be received by shareholders of the prospective
portfolio company as a result of the contemplated transaction; or fails
adequately to recognize the possibility that the offer or proposal may be
replaced or superseded by an offer or proposal of greater value. The evaluation
of such contingencies requires unusually broad knowledge and experience on the
part of the Adviser which must appraise not only the value of the issuer and its
component businesses as well as the assets or securities to be received as a
result of the contemplated transaction, but also the financial resources and
business motivation of the offerer as well as the dynamic of the business
climate when the offer or proposal is in process.
In making such investments, the Fund will not violate any of its
diversification requirements or investment restrictions (see below, "Investment
Restrictions") including the requirements that, except for the investment of up
to 25% of its assets in any one company or industry, not more than 5% of its
assets may be invested in the securities of any issuer. Since such investments
are ordinarily short term in nature, they will tend to increase the turnover
ratio of the Fund thereby increasing its brokerage and other transaction
expenses as well as make it more difficult for the Fund to meet the test for
favorable tax treatment as a "regulated investment company" specified by the
Internal Revenue Code of 1986, as amended ("Code") (see the Prospectus,
"Dividends, Distributions and Taxes"). 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 the risk involved and the
potential of available alternate investments as well as monitor the effect of
such investments on the tax qualification tests of the Code.
When Issued, Delayed Delivery Securities and Forward Commitments
The Fund is authorized to buy and sell when issued securities as an
additional investment strategy in furtherance of its investment objectives.
In utilizing this strategy, the Fund may enter into forward commitments for
the purchase or sale of securities, including on a "when issued" or "delayed
delivery" basis in excess of customary settlement periods for the type of
security involved. In some cases, a forward commitment may be conditioned upon
the occurrence of a subsequent event, such as approval and consummation of a
merger, corporate reorganization or debt restructuring, i.e., a when, as and if
issued security. When such transactions are negotiated, the price is fixed at
the time of the commitment, with payment and delivery taking place in the
future, generally a month or more after the date of the commitment. While the
Fund will only enter into a forward commitment with
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the intention of actually acquiring the security, the Fund may sell the security
before the settlement date if it is deemed advisable.
Securities purchased under a forward commitment are subject to market
fluctuation and no interest (or dividends) accrues to the Fund prior to the
settlement date. The Fund will segregate with its custodian cash or liquid
high-grade debt securities with the Fund's custodian in an aggregate amount at
least equal to the amount of its outstanding forward commitments.
Short Sales
The Fund may make short sales of securities. A short sale is a transaction
in which the Fund sells a security it does not own in anticipation that the
market price of that security will decline. The Fund expects to make short sales
both to obtain capital gains from anticipated declines in securities and as a
form of hedging to offset potential declines in long positions in the same or
similar securities. The short sale of a security is considered a speculative
investment technique.
When the Fund makes a short sale, it must borrow the security sold short
and deliver it to the broker-dealer through which it made the short sale in
order to satisfy its obligation to deliver the security upon conclusion of the
sale. The Fund may have to pay a fee to borrow particular securities and is
often obligated to pay over any payments received on such borrowed securities.
The Fund's obligation to replace the borrowed security will be secured by
collateral deposited with the broker-dealer, usually cash, U.S. Government
securities or other highly liquid debt 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 over of any payments received by the Fund on such security,
the Fund may not receive any payments (including interest) on its collateral
deposited with such broker-dealer. If the price of the security sold short
increases between the time of the short sale and the time the Fund replaces the
borrowed security, the Fund will incur a loss; conversely, if the price
declines, the Fund will realize a capital gain. Any gain will be decreased, and
any loss increased, by the transaction costs described above. Although the
Fund's gain is limited to the price at which it sold the security short, its
potential loss is theoretically unlimited.
The market value of the securities sold short of any one issuer will not
exceed either 5% of the Fund's total assets or 5% of such issuer's voting
securities. The Fund will not make a short sale if, after giving effect to such
sale, the market value of all securities sold short exceeds 10% of the value of
its assets or the Fund's aggregate short sales of a particular class of
securities exceeds 10% 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
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owns or has the immediate and unconditional right to acquire at no additional
cost the identical security.
Repurchase Agreements
The Fund may engage in repurchase agreements as set forth in the
Prospectus. A repurchase agreement is an instrument under which the purchaser
(i.e., the Fund) acquires a debt security and the seller agrees, at the time of
the sale, to repurchase the obligation at a mutually agreed upon time and price,
thereby determining the yield during the purchaser's holding period. This
results in a fixed rate of return insulated from market fluctuations during such
period. The underlying securities are ordinarily U.S. Treasury or other
government obligations or high quality money market instruments. The Fund will
require that the value of such underlying securities, together with any other
collateral held by the Fund, always equals or exceeds the amount of the
repurchase obligations of the vendor. While the maturities of the underlying
securities in repurchase agreement transactions may be more than one year, the
term of each repurchase agreement will always be less than one year. 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 "Act"), repurchase agreements are
considered loans. Repurchase agreements usually are for short periods, such as
one week or less, but could be longer. The Fund will not enter into repurchase
agreements of a duration of more than seven days if, taken together with
illiquid securities and other securities for which there are no readily
available quotations, more than 15% of its total assets would be so invested.
Hedging Transactions
Futures Contracts. The Fund may enter into futures contracts only for
certain bona fide hedging and risk management purposes. The Fund may enter into
futures contracts for the purchase or sale of debt securities, debt instruments,
or indices of prices thereof, stock index futures, other financial indices, and
U.S. Government securities.
A "sale" of a futures contract (or a "short" futures position) means the
assumption of a contractual obligation to deliver the securities underlying the
contract at a specified price at a specified future time. A "purchase" of a
futures contract (or a "long" futures position) means the assumption of a
contractual obligation to acquire the securities underlying the contract at a
specified price at a specified future time.
Certain futures contracts are settled on a net cash payment basis rather
than by the sale and delivery of the securities underlying the futures
contracts. U.S. futures contracts have been designed by exchanges that have been
designated as "contract markets" by the Commodity Futures Trading Commission, an
agency of the U.S. Government, and must be executed through a futures commission
merchant (i.e., a brokerage firm) which is a member of the relevant contract
market. Futures contracts trade on these contract markets and the exchange's
affiliated clearing
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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, 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. Forward
foreign currency contracts 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 in primarily the following
circumstances: to "lock in" the U.S. dollar equivalent price of a security the
Fund is contemplating to buy or sell that is denominated in a non-U.S. currency;
or to protect against a decline against the U.S. dollar of the currency of a
particular country to which the Fund's portfolio has exposure. The Fund
anticipates seeking to achieve the same economic result by utilizing from time
to time for such hedging a currency different from the one of the given
portfolio security as long as, in the view of the Adviser, such currency is
essentially correlated to the currency of the relevant portfolio security based
on historic and expected exchange rate patterns.
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, and 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 high grade liquid debt
obligations in an amount at least equal to the Fund's obligations with respect
to such instruments. Such amounts fluctuate as the obligations increase or
decrease. The segregation requirement can result in the Fund maintaining
securities positions it would otherwise liquidate or segregating assets at a
time when it might be disadvantageous to do so. The swap market has grown
substantially in recent years with a large number of banks and investment
banking firms acting both as principals and as agents utilizing standardized
swap documentation. As a result, the swap market has become relatively broad and
deep as compared to the markets for similar instruments which are established in
the interbank market. In accordance with the current position of the staff of
the Securities and Exchange
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Commission (the "Commission"), the Fund will treat swap transactions as illiquid
for purposes of the Fund's policy regarding illiquid securities.
INVESTMENT RESTRICTIONS
The Fund has adopted the following investment restrictions which may not be
changed without the approval of the Fund's shareholders. Under such
restrictions, the Fund may not:
1. Purchase the securities of any one issuer, other than the U.S. Government,
or any of its agencies or instrumentalities, if immediately after such
purchase more than 5% of the value of its total assets would be invested in
such issuer or the Fund would own more than 10% of the outstanding voting
securities of such issuer, except that up to 25% of the value of the Fund's
total assets may be invested without regard to such 5% and 10% limitations;
2. Invest more than 25% of the value of its total assets in any particular
industry;
3. Purchase securities on margin, but it may obtain such short term credits
from banks as maybe necessary for the clearance of purchase and sales of
securities;
4. Make loans of its assets except for the purchase of debt securities;
5. Borrow money except subject to the restrictions set forth in the prospectus
under "Borrowing";
6. Mortgage, pledge or hypothecate any of its assets except (a) that, in
connection with permissible borrowings mentioned in paragraph 5 above, not
more than 20% of the assets of the Fund (not including amounts borrowed)
may be used as collateral and (b) in connection with hedging transactions,
short sales, when-issued and forward commitment transactions and similar
investment strategies;
7. Invest more than 5% of its total assets in more than 3% of the securities
of another investment company or invest more than 10% of its total assets
in the securities of other investment companies, nor make any such
investments other than through purchase in the open market where to the
best information of the Fund no commission or profit to a sponsor or dealer
(other than the customary broker's commission) results from such purchase;
8. Act as an underwriter of securities of other issuers;
9. Invest, in the aggregate, more than 15% of the value of its total assets in
securities for which market quotations are not readily available,
securities which are restricted for public sale, or in repurchase
agreements maturing or terminable in more than seven days;
9
<PAGE>
10. Purchase or otherwise acquire interests in real estate, real estate
mortgage loans or interests in oil, gas or other mineral exploration or
development programs;
11. Issue senior securities, except insofar as the Fund may be deemed to have
issued a senior security in connection with any permitted borrowing,
hedging transaction, short sale, when-issued or forward commitment
transaction or similar investment strategy;
12. Participate on a joint, or a joint and several, basis in any securities
trading account; or
13. Invest in companies for the purpose of exercising control.
THE MANAGER
Guardian Investor Services Corporation, the manager of the Fund (the
"Manager"), has its principal offices at 201 Park Avenue South, New York, New
York 10003.
Pursuant to a Management Agreement with the Company, the Manager, subject
to the supervision of the Board of Directors of the Company and in conformity
with the stated policies of the Fund, supervises the performance of
administrative and professional services provided by others to the Fund
including the Adviser and First Data Investor Services Group, Inc., the
sub-administrator of the Fund (the "Sub-Administrator"). The management services
provided to the Fund are not exclusive under the terms of the Management
Agreement and the Manager is free to, and does, render management or investment
advisory services to others.
The Manager bears all expenses in connection with the services it renders
under the Management Agreement and the costs and expenses payable to the Adviser
pursuant to the Investment Advisory Agreement among the Manager, the Adviser and
the Company. The Guardian Insurance & Annuity Company, Inc. ("GIAC"), the parent
of the Manager, has agreed to advance all costs in connection with the
organization of the Fund including legal and auditing fees, Commission
registration fees and the cost of printing the registration statement filed with
Commission. The Fund has agreed to reimburse GIAC for such costs when the Fund's
total assets exceed $50 million or when the Fund has completed one year of
operations, whichever is sooner.
The Management Agreement provides that absent willful misfeasance, bad
faith, gross negligence or reckless disregard of its duty ("Disabling Conduct"),
the Manager will not be liable for any error of judgment or mistake of law or
for losses sustained by the Fund in connection with the matters relating to the
Management Agreement. However, the Management Agreement provides that the Fund
is not waiving any rights it may have which cannot be waived. The Management
Agreement also provides indemnification for the Manager and its directors,
officers, employees and controlling persons for any conduct that does not
constitute Disabling Conduct.
10
<PAGE>
The Management Agreement is terminable without penalty on sixty days'
written notice by the Manager or by the Fund when authorized by the Directors of
the Company or a majority, as defined in the Act, of the outstanding shares of
the Fund. The Management Agreement will automatically terminate in the event of
its assignment, as defined in the Act and rules thereunder. The Management
Agreement provides that, unless terminated, it will remain in effect for two
years following the date of the Agreement and thereafter from year to year, so
long as such continuance of the Management Agreement is approved annually by the
Directors of the Company or a vote by a majority of the outstanding shares of
the Fund and in either case, by a majority vote of the Directors who are not
interested persons of the Fund within the meaning of the Act ("Disinterested
Directors") cast in person at a meeting called specifically for the purpose of
voting on the continuance.
The Management Agreement also provides that the Manager is obligated to
reimburse to the Fund any amount up to the amount of its management fee, by
which its aggregate expenses including management fees payable to the Manager
(but excluding interest, taxes, brokerage commissions, extraordinary expenses
and any other expenses not subject to the applicable expense limitation), during
the portion of any fiscal year in which the Agreement is in effect, exceed the
most restrictive expense limitation imposed by the securities law of any
jurisdiction in which the Fund's shares are offered for sale. Such limitation is
currently believed to be 2.5% of the first $30 million of average net assets,
2.0% of the next $70 million of average net assets and 1.5% of average net
assets in excess of $100 million. For purposes of this expense limitation, Fund
expenses are accrued monthly and the monthly fee otherwise payable to the
Manager is postponed to the extent that the includable Fund expenses exceed the
proportionate amount of such limitation to date.
During the period ended December 31, 1995 the Manager received fees
totaling $104,276, of which the Manager paid $78,207 to the Adviser. During the
same period, the Manager and the Adviser assumed certain expenses of the Fund in
the amount of $14,377.
THE ADVISER
The Adviser is a New York corporation with principal offices located at One
Corporate Center, Rye, New York 10580-1434.
Pursuant to an Investment Advisory Agreement, 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 Company and the Manager.
Under the Investment Advisory Agreement, the Adviser also provides, or
arranges for others to provide at the Adviser's cost, the following
administrative services: (1) providing the Fund with the services of persons
competent to perform such supervisory, administrative, and
11
<PAGE>
clerical functions as are necessary to provide efficient administration of the
Fund, including maintaining certain books and records and overseeing the
activities of the Fund's Custodian and Transfer Agent; (2) overseeing the
performance of administrative and professional services provided to the Fund by
others, including the Fund's Custodian, Transfer Agent and Dividend Disbursing
Agent, as well as legal, accounting, auditing and other services performed for
the Fund; (3) providing the Fund, if requested, with adequate office space and
facilities; (4) preparing, but not paying 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
Commission; (5) supervising the calculation of the net asset value of shares of
the Fund; (6) preparing, but not paying for, any filings under state law; and
(7) preparing notices and agendas for meetings of the Fund's Board of Directors
and minutes of such meetings in all matters required by the Act to be acted upon
by the Board.
The Adviser has delegated its administrative duties to the
Sub-Administrator pursuant to a Sub-Administration Agreement between the Adviser
and the Sub-Administrator relating to the Fund and certain other funds advised
by the Adviser. Under the Sub-Administration Agreement, the Sub-Administrator,
subject to the supervision of the Adviser, provides certain administrative
services necessary for the Fund's operations. The Adviser and not the Fund pays
the fees of the Sub-Administrator. For its services to the Fund, the
Sub-Administrator receives an annual fee calculated at the following rates based
on the aggregate daily net assets of all funds that are advised by the Adviser
and administered by the Sub-Administrator: .10% for aggregate assets up to $1
billion, .08% for aggregate assets over $1 billion to $1.5 billion, .03% for
aggregate assets over $1.5 billion to $3 billion and .02% thereafter.
The Investment Advisory Agreement provides that absent Disabling Conduct,
the Adviser will not be liable for any error of judgment or mistake of law or
for losses sustained respectively by the Fund or the Manager. However, the
Investment Advisory Agreement provides that the Fund is not waiving any rights
it may have which cannot be waived. The Investment Advisory Agreement also
provides indemnification for the Adviser and its directors, officers, employees
and controlling persons for any conduct that does not constitute Disabling
Conduct. The Investment Advisory Agreement permits the Adviser to act as
investment adviser to others, provided that whenever the Fund and one or more
other portfolios of or investment companies advised by the Adviser have
available funds for investment, investments suitable and appropriate for each
will be allocated in a manner believed to be equitable to each entity. In some
cases, this procedure may adversely affect the size of the position obtainable
for the Fund.
The Investment Advisory Agreement is terminable without penalty on sixty
days' written notice by the Manager, the Adviser or, when authorized by the
Directors of the Company, or a majority, as defined in the Act, of the
outstanding shares of the Fund, by the Fund. The Investment Advisory Agreement
will automatically terminate in the event of its assignment, as defined in the
Act, and rules thereunder. The Investment Advisory Agreement provides that,
unless terminated, it will remain in effect for two years following the date of
the Agreement and thereafter from year to year, so long as such continuance of
the Investment Advisory Agreement is approved annually by the Directors of the
Company or a vote by a majority of the outstanding
12
<PAGE>
shares of the Fund and in either case, by a majority vote of the Disinterested
Directors cast in person at a meeting called specifically for the purpose of
voting on the continuance.
The Investment Advisory Agreement also provides that the Adviser is
obligated to reimburse the Manager 75% of any amount the Manager is obligated to
reimburse the Fund by reason of any state expense limitation described above
under "The Manager;" provided, however, that Adviser is in no event obligated to
pay more than the amount of its advisory fee.
THE DISTRIBUTOR
The Fund has entered into a Distribution Agreement with Gabelli & Company,
Inc. (the "Distributor"), a New York corporation which is a subsidiary of
Gabelli Funds, Inc., having principal offices located at One Corporate Center,
Rye, New York 10580-1434. The Distributor acts as agent of the Fund for the
continuous offering of the Fund's shares to separate accounts of GIAC.
The Distribution Agreement is terminable by the Distributor or the Fund at
any time without penalty on sixty days' written notice, provided, that
termination by the Fund must be directed or approved by the Board of Directors
of the Fund or by the vote of the holders of a majority of the outstanding
securities of the Fund. The Distribution Agreement will automatically terminate
in the event of its assignment, as defined in the Act. The Distribution
Agreement provides that, unless terminated, it will remain in effect for two
years following the date of the Agreement and thereafter from year to year, so
long as continuance of the Distribution Agreement is approved annually by the
Fund's Board of Directors or by a majority of the outstanding voting securities
of the Fund, and in either case, also by a majority of the Disinterested
Directors.
DIRECTORS AND OFFICERS
The Director and Executive Officers of the Company, their principal
business occupations during the last five years and their affiliations, if any,
with the Manager, the Advisor or the Sub-Administrator, are shown below. Unless
otherwise specified, the address of each such person is One Corporate Center,
Rye, New York, 10580-1434. Directors deemed to be "interested persons" of the
Fund for purposes of the Act are indicated by an asterisk.
13
<PAGE>
Principal Occupations During Last Five
Years; Affiliations with the Manager,
Name, Age and Position with Company Adviser or Sub-Administrator
- ----------------------------------- --------------------------------------
Mario J. Gabelli *, 53 Chairman of the Board, President, Chief
Chairman of the Board, Executive Officer and Chief Investment
President and Officer of Gabelli Funds, Inc., Chief
Chief Investment Officer Investment Officer of GAMCO Investors,
Inc.; President and Chairman of The
Gabelli Equity Trust Inc. and Gabelli
Global Multimedia Trust Inc.; President,
Chief Investment Officer and Director of
Gabelli Investor Funds, Inc.,Gabelli
Equity Series Funds, Inc., Gabelli Global
Series Funds, Inc., The Gabelli Value
Fund Inc., The Gabelli Convertible
Securities Fund, Inc.; Trustee of The
Gabelli Asset Fund and The Gabelli Growth
Fund; Chairman and Chief Executive
Officer of Lynch Corporation; Director of
The Morgan Group, Inc. and Spinnaker
Industries, Inc.
Anthony J. Colavita, 60 President and Attorney at Law in the law
Director firm of Anthony J. Colavita, P.C.;
Director of Gabelli Equity Series Funds,
Inc., Gabelli Global Convertible
Securities Fund, Inc., Gabelli Investor
Funds, Inc., The Gabelli Value Fund Inc.,
The Gabelli Convertible Securities Fund,
Inc. and Gabelli Gold Fund, Inc.; Trustee
of The Gabelli Asset Fund, The Gabelli
Growth Fund and the Westwood Funds.
Arthur V. Ferrara *, 65 Retired. ; Director of The Guardian
Director Life Insurance Company of America;
Chairman of the Board and Chief Executive
Officer from January 1993 to December
1995;President, Chief Executive Officer
and a Director prior thereto;
Director of GIAC,
the Manager,
and five mutual funds within the Guardian
Fund Complex.
14
<PAGE>
Karl Otto Pohl*+, 66 Managing Partner of Sal Oppenheim Jr. &
Director Cie. (private investment bank) since
1991; Former President of the Deutsche
Bundesbank (Germany's Central Bank) and
Chairman of its Central Bank Council
(1980-1991); Currently board member of
IBM World Trade Europe/Middle East/Africa
Corp., Bertlesmann AG, Zurich
Versicherungs-Gesellshaft (insurance),
the International Advisory Board of
General Electric Company; the
International Council for JP Morgan &
Co., the Board of Supervisory Directors
of ROBECo/o Group, and the Supervisory
Board of Royal Dutch (petroleum company);
Advisory Director of Unilever N.V. and
Unilever Deutschland; German Governor,
International Monetary Fund (1980-1991);
Board Member, Bank for International
Settlements (1980-1991); Director or
Trustee of all funds advised by Gabelli
Funds, Inc.
Anthony R. Pustorino, 70 Certified Public Accountant. Professor of
Director Accounting, Pace University, since 1965.
Director, President and shareholder of
Pustorino, Puglisi & Co., P.C., certified
public accountants, from 1961 to 1990;
Trustee of The Gabelli Asset Fund, The
Treasurer's Fund, Inc. and The Gabelli
Growth Fund; Director of The Gabelli
Value Fund Inc., The Gabelli Convertible
Securities Fund, Inc., Gabelli Equity
Series Funds, Inc., The Gabelli Equity
Trust Inc., Gabelli Global Multimedia
Trust Inc. and Gabelli Investor Funds,
Inc.
Werner J. Roeder, M.D., 54 Director of Surgery, Lawrence Hospital
Director and practicing private physician.
Director, Gabelli Investor Funds, Inc.,
Gabelli Global Series Funds, Inc.,
Gabelli International Growth Fund, Inc.
and Gabelli Gold Fund, Inc. and Trustee
of the Westwood Funds.
15
<PAGE>
Anthonie C. van Ekris, 61 Managing Director of Balmac
Director International; Director of Stahal
Hardmayer A.G. (through present). Trustee
of The Gabelli Asset Fund and The Gabelli
Growth Fund. Director of Gabelli Equity
Series Funds, Inc., Gabelli Global Series
Funds, Inc., Gabelli Gold Fund Inc, The
Gabelli Convertible Securities Fund, Inc.
and Gabelli International Growth Fund,
Inc.
Bruce N. Alpert*, 44 Vice President, Treasurer and Chief
Vice President and Treasurer Financial and Administrative Officer of
the investment advisory division of the
Adviser; President and Treasurer of The
Gabelli Asset Fundand The Gabelli Growth
Fund; Vice President and Treasurer of
Gabelli International Growth Fund, Inc.,
Gabelli Equity Series Funds, Inc., The
Gabelli Equity Trust Inc., Gabelli Global
Multimedia Trust, Inc., The Gabelli Value
Fund Inc., Gabelli Investor Funds, Inc.,
Gabelli Global Series Funds, Inc., The
Gabelli Convertible Securities Fund, Inc.
and Vice President of the Westwood Funds
and Manager of Teton Advisers LLC.
James E. McKee, 32 Vice President and General Counsel of
Secretary GAMCO Investors, Inc. since 1993 and of
Gabelli Funds, Inc. since August 1995;
Secretary of all Funds advised by Gabelli
Funds, Inc. and Teton Advisers LLC since
August 1995. Branch Chief with the U.S.
Securities and Exchange Commission in New
York 1992 through 1993. Staff attorney
with the U.S. Securities and Exchange
Commission in New York from 1989 through
1992.
16
<PAGE>
Thomas R. Hickey, Jr.*, 42 Vice President, Equity Operations of The
Vice President Guardian Life Insurance Company of
201 Park Avenue South America, from March 1992 to the present;
New York, New York 10003 Second Vice President and Equity Counsel
from July 1989 to February 1992; and
Counsel prior thereto. Vice President,
Administrationof GIAC. Vice President of
the Manager and five Guardian-sponsored
mutual funds.
- ----------
+ Mr. Pohl receives fees from the Advisor but has no obligation to provide
any service to the Adviser. Although this relationship does not appear to
require designation of Mr. Pohl as an interested person, the Fund is
currently making such designation in order to avoid the possibility that
Mr. Pohl's independence would be questioned.
The Company has agreed that GIAC shall have the right to nominate one
person for election to the Company's Board of Directors and Mr. Ferrara was
nominated by GIAC pursuant to this agreement.
The Company pays each Director who is not an employee of the Manager, the
Adviser or an affiliated company an annual fee of $3,000 and $500 for each
meeting of the Board of Directors attended by the Director, and reimburses
Directors for certain travel and other out-of-pocket expenses incurred by them
in connection with attending such meetings. If the net assets of the Fund exceed
$500 million, a non-interested Director will receive an annual fee of $500 for
serving as the chair of a committee of the Board of the Directors and a $250 fee
for each committee meeting attended. For the fiscal period ended December 31,
1995, such fees totaled $15,885. Directors and Officers of the Company who are
employed by the Manager, the Adviser or an affiliated company receive no
compensation or expense reimbursement from the Company.
The following table sets forth certain information regarding the
compensation of the Company's Directors. No Executive Officer or person
affiliated with the Company received compensation from the Company for the
calendar year ending December 31, 1995 in excess of $60,000.
17
<PAGE>
Compensation Table
------------------
<TABLE>
<CAPTION>
Pension or Total Compensation
Aggregate Retirement Benefits Estimated Annual From the Fund
Name of Person Compensation Accrued As Part Benefits Upon and Fund Complex
Position From the Fund* of Fund Expenses* Retirement Paid to Directors**
-------- -------------- ----------------- ---------- -------------------
<S> <C> <C> <C> <C>
Mario J. Gabelli
Chairman of the Board $ 0 $0 N/A $ 0
Anthony J. Colavita
Director $3,002.75 0 N/A $68,253(11)
Arthur V. Ferrara
Director $ 0 0 N/A $ 0
Karl Otto Pohl
Director $3,002.75 0 N/A $80,253(15)
Anthony R. Pustorino
Director $3,002.75 0 N/A $79,381(10)
Werner Roeder, M.D.
Director $3,002.75 0 N/A $11,253(4)
Anthonie C. van Ekris
Director $3,002.75 0 N/A $45,253(10)
</TABLE>
- ----------
* Represents compensation paid to such persons for the period from the Fund's
commencement of operations on May 1, 1995 through December 31, 1995.
** Represents the total compensation paid to such persons during the calendar
year ended December 31, 1995 (andwith respect to the Fundfor the period
from commencement of operations on May 1, 1995 through December 31, 1995.)
The parenthetical number represents the number of investment companies
(including the Fund) from which such person receives compensation that are
considered part of the same fund complex as the Fund, because, among other
things, they have a common investment adviser.
Control Person and Principal Holder of Securities
-------------------------------------------------
The separate accounts of GIAC are the sole shareholders of the Fund and
therefore are considered to be control persons of the Fund.
18
<PAGE>
PORTFOLIO TRANSACTIONS AND BROKERAGE
The Adviser is authorized on behalf of the Fund to employ brokers to effect
the purchases or sale of portfolio securities with the objective of obtaining
prompt, efficient and reliable execution and clearance of such transactions at
the most favorable price obtainable ("best execution") at reasonable expense.
Transactions in securities other than those for which a securities exchange is
the principal market are generally done through a principal market maker.
However, such transactions may be effected through a brokerage firm and a
commission paid whenever it appears that the broker can obtain a more favorable
overall price. In general, there may be no stated commission in the case of
securities traded on the over-the-counter markets, but the prices of those
securities may include undisclosed commissions or markups. Options transactions
will usually be effected through a broker and a commission will be charged. The
Fund also expects that securities will be purchased at times in underwritten
offerings where the price includes a fixed amount of compensation generally
referred to as the underwriter's concession or discount.
The Adviser currently serves as adviser to a number of investment company
clients and may in the future act as adviser to others. Affiliates of the
Adviser act as investment adviser to numerous private accounts. It is the
practice of the Adviser and its affiliates to cause purchase and sale
transactions to be allocated among the Fund and others whose assets they manage
in such manner as it deems equitable. In making such allocations among the Fund
and other client accounts, the main factors considered are the respective
investment objectives, the relative size of portfolio holdings of the same or
comparable securities, the availability of cash for investment, the size of
investment commitments generally held and the opinions of the persons
responsible for managing the portfolios of the Fund and other client accounts.
The policy of the Fund regarding purchases and sales of securities and
options for its portfolio is that primary consideration will be given to
obtaining the most favorable prices and efficient execution of transactions. In
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. 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.
19
<PAGE>
The Adviser may also place orders for the purchase or sale of portfolio
securities with the Distributor, a broker-dealer member of the National
Association of Securities Dealers, Inc. and an affiliate of the Adviser, or any
other broker-dealer affiliate with the Adviser, when it appears that, as an
introducing broker or otherwise, the affiliated broker-dealer can obtain a price
and execution which is at least as favorable as that obtainable by other
qualified brokers.
As required by Rule 17e-1 under the Act, the Board of Directors has adopted
"Procedures" which provide that the commissions paid to the Distributor on stock
exchange transactions may not exceed that which would have been charged by
another qualified broker or member firm able to effect the same or a comparable
transaction at an equally favorable price. Rule 17e-1 and the Procedures contain
requirements that the Board, including its Disinterested Directors, conduct
periodic compliance reviews of such brokerage allocations and review the
Procedures at least annually for its continuing compliance with the foregoing
standard. The Adviser and the Distributor are also required to furnish reports
and maintain records in connection with such reviews.
To obtain the best execution of portfolio trades on the New York Stock
Exchange ("Exchange"), the Distributor controls and monitors the execution of
such transactions on the floor of the Exchange through independent "floor
brokers or through the Designated Order Turnaround ("DOT") System of the
Exchange. Such transactions are then cleared, confirmed to the Fund for the
account of the Distributor, and settled directly with the Custodian of the Fund
by a clearing house member firm which remits the commission less its clearing
charges to the Distributor. The Distributor may also effect Fund portfolio
transactions in the same manner and pursuant to the same arrangements on other
national securities exchanges which adopt direct access rules similar to those
of the Exchange.
The amount of commissions paid by the Fund during the fiscal period ended
December 31, 1995, the percentages as well as the amount of such commissions
paid to the Distributor and the percentage ratio which the aggregate principal
amount of such transactions bears to the aggregate dollar amount of all
portfolio transactions on which commissions were paid are as follows:
Gabelli & Company, Inc.
Total Commissions Percentage of Percentage of
Period Ended Paid Amount Total Commissions Principal Amount
- ------------ ----------------- ------ ----------------- ----------------
12/31/95 $24,828 $4,045 16.3% 14.8%
20
<PAGE>
PURCHASE AND REDEMPTION OF SHARES
Fund shares are continuously offered to GIAC's separate accounts at the net
asset value per share next determined after a proper purchase request has been
received by GIAC. GIAC then offers to its Contractowners units in its separate
accounts which directly correspond to shares in the Fund. GIAC submits purchase
and redemption orders to the Fund based on allocation instructions for premium
payments, transfer instructions and surrender or partial withdrawal requests
which are furnished to GIAC by such Contractowners. Contractowners can send such
instructions and requests to GIAC at P.O. Box 26210, Lehigh Valley, PA 18002 by
first class mail or 3900 Burgess Place, Bethlehem, PA 18017 by overnight or
express mail. The net asset value per share of the Fund is determined as of the
close of the regular session of the Exchange, which is currently 4:00 p.m., New
York City time, on each day that trading is conducted on the Exchange 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 number of shares outstanding at the
time the determination is made. Portfolio securities for which market quotations
are readily available are valued at market value as determined by the last
quoted sale price prior to the valuation time in the case of securities traded
on securities exchanges or other markets for which such information is
available. Other readily marketable securities are valued at the average of the
latest bid and asked quotations for such securities prior to the valuation time.
Debt securities with remaining maturities of 60 days or less are valued at
amortized cost. All other assets are valued at fair value as determined by or
under the supervision of the Board of Directors of the Fund. Payments for
redeemed shares will ordinarily be made within three (3) days after the Fund
receives a redemption order from GIAC. The redemption price will be the net
asset value per share next determined after GIAC receives the Contractowner's
request in proper form.
The Fund may suspend the right of redemption or postpone the date of
payment during any period when trading on the Exchange is restricted, or the
Exchange is closed for other than weekends and holidays; when an emergency makes
it not reasonably practicable for the Fund to dispose of assets or calculate its
net asset value; or as permitted by the Commission.
The prospectus for a GIAC variable annuity or variable life insurance
policy describes the allocation, transfer and withdrawal provisions of such
annuity or policy.
DETERMINATlON OF NET ASSET VALUE
The net asset value per share of the Fund is determined once daily as of
the close of business of the regular trading session of the Exchange, normally
4:00 p.m. New York time, on each day that the Exchange is open and each other
day in which there is a sufficient degree of trading in the Fund's investments
to affect the net asset value, except that the net asset value may not be
computed on a day on which no orders to purchase, or tenders to sell or redeem,
Fund shares have been received, by taking the value of all assets of the Fund,
subtracting its liabilities, dividing by the number of shares outstanding and
adjusting to the nearest cent. The Exchange
21
<PAGE>
currently observes the following holidays: New Year's Day; President's Day; Good
Friday; Memorial Day; Independence Day; Labor Day; Thanksgiving Day; and
Christmas Day.
In the calculation of the Fund's net asset value: (1) a portfolio security
listed or traded on the Exchange or the American Stock Exchange or quoted by
Nasdaq is valued at its last sale price on that exchange or market (if there
were no sales that day, the security is valued at the average of the bid and
asked price): (2) all other portfolio securities for which over-the-counter
market quotations are readily available are valued at the latest average of the
bid and asked price; and (3) when market quotations are not readily available,
portfolio securities are valued at their fair value as determined in good faith
under procedures established by and under the general supervision of the Fund's
Directors.
DIVIDENDS, DISTRIBUTIONS AND TAXES
All dividends and capital gains distributions paid by the Fund will be
automatically reinvested, at net asset value, by GIAC's separate accounts in
additional shares of the Fund. There is no fixed dividend rate, and there can be
no assurance that the Fund will pay any dividends or realize any capital gains.
However, the Fund currently intends to pay dividends and capital gains
distributions, if any, on an annual basis. Contractowners who own units in a
separate account which correspond to shares in the Fund will be notified when
distributions are made.
The Fund is treated as a separate entity for federal income tax purposes.
The Fund has qualified and intends to continue to qualify as a "regulated
investment company" under the Code, in order to be relieved of federal income
tax on that part of its net investment income and realized capital gains which
it distributes to GIAC's separate accounts. To qualify, the Fund must meet
certain relatively complex tests, including the requirement that less than 30%
of its gross income (exclusive of losses) may be derived from the sale or other
disposition of securities held for less than three months. The loss of such
status would result in the Fund being subject to federal income tax on its
taxable income and gains. In addition, the Fund must distribute at least 90% of
its net investment income and 90% of its net tax-exempt interest income each
year.
The Code and Treasury Department regulations promulgated thereunder require
that mutual funds that are offered through insurance company separate accounts
must meet certain diversification requirements to preserve the tax-deferral
benefits provided by the variable contracts which are offered in connection with
such separate accounts. The Adviser intends to diversify the Fund's investments
in accordance with those requirements. The prospectuses for GIAC's variable
annuities and variable life insurance policies describe the federal income tax
treatment of distributions from such contracts.
To comply with regulations under Section 817(h) of the Code, the Fund will
be required to diversify its investments so that on the last day of each
calendar quarter no more than 55% of the value of its assets is represented by
any one investment, no more than 70% is represented by any two investments, no
more than 80% is represented by any three investments and no more than
22
<PAGE>
90% is represented by any four investments. Generally, all securities of the
same issuer are treated as a single investment. For the purposes of Section
817(h) of the Code, obligations of the U.S. Treasury and each U.S. Government
instrumentality are treated as securities of separate issuers. The Treasury
Department has indicated that it may issue future pronouncements addressing the
circumstances in which a variable annuity contract owner's control of the
investments of a separate account may cause the variable contract owner, rather
than the separate account's sponsoring insurance company, to be treated as the
owner of the assets held by the separate account. If the variable annuity
contract owner is considered the owner of the securities underlying the separate
account, income and gains produced by those securities would be included
currently in the variable annuity contract owner's gross income. It is not known
what standards will be set forth in such pronouncements or when, if at all,
these pronouncements may be issued. In the event that rules or regulations are
adopted, there can be no assurance that the Fund will be able to operate as
described currently in the Prospectus or that the Fund will not have to change
its investment policies or goals.
Hedging Transactions
The Fund's transactions in foreign currencies, forward contracts, options,
futures contracts (including options and futures contracts on foreign
currencies) and warrants will be subject to special provisions of the Code that,
among other things, may affect the character of gains and losses realized by the
Fund (i.e., may affect whether gains or losses are ordinary or capital),
accelerate recognition of income to the Fund and defer Fund losses. These rules
could therefore affect the character, amount and timing of distributions to
shareholders. These provisions also (a) will require the Fund to mark-to-market
certain types of the positions in its portfolio (i.e., treat them as if they
were closed out) and (b) may cause the Fund to recognize income without
receiving cash with which to pay dividends or make distributions in amounts
necessary to satisfy the 90% distribution requirement for avoiding income tax.
The Fund will monitor its transactions, will make the appropriate tax elections
and will make the appropriate entries in its books and records when it acquires
any foreign currency, forward contract, option, futures contract, warrant or
hedged investment in order to mitigate the effect of these rules and prevent
disqualification of the Fund as a regulated investment company.
The 30% limitation and the diversification requirements applicable to the
Fund's assets may limit the extent to which the Fund will be able to engage in
transactions in options, futures contracts and options on futures contracts and
in certain other permitted investments.
Foreign Withholding Taxes
Income received by the Fund from sources within foreign countries may be
subject to withholding and other taxes imposed by such countries. Tax
conventions between certain countries and the United States may reduce or
eliminate such taxes. It is impossible to determine the rate of foreign tax in
advance since the amount of the Fund's assets to be invested in various
countries can vary.
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Shareholders are urged to consult their attorneys or tax advisers regarding
specific questions as to Federal, state or local taxes.
INVESTMENT PERFORMANCE INFORMATION
The Fund may, from time to time, provide performance information in
advertisements, sales literature or other materials furnished to existing or
prospective owners of GIAC's variable contracts. When performance information is
provided in advertisements, it will include the effect of all charges deducted
under the terms of the specified contract, as well as all recurring and
non-recurring charges incurred by the Fund. All performance results are
historical and are not representative of future results.
Total return and average annual total return reflect the change in value of
an investment in the Fund over a specified period, assuming the reinvestment of
all capital gains distributions and income dividends. Average annual total
returns show the average change in value for each annual period within a
specified period. Total returns, which are not annualized, show the total
percentage or dollar change in value over a specified period. Promotional
materials relating to the Fund's performance will always at least provide
average annual total returns for one, five and ten years (if applicable).
The Fund may also compare its performance to other investment vehicles or
other mutual funds which have similar investment objectives or programs. Also,
the Fund may quote information from securities indices or financial and industry
or general interest publications in its promotional materials. Additionally, the
Fund's promotional materials may contain references to types and characteristics
of certain securities; features of its portfolio; financial markets; or
historical, current or prospective economic trends. Topics of general interest,
such as personal financial planning, may also be discussed.
Quotations of total return will reflect only the performance of a
hypothetical investment in the Fund during the particular time period shown. The
Fund's total return may vary from time to time depending on market conditions,
the compositions of the Fund's portfolio and operating expenses. Total return
should also be considered relative to changes in the value of the Fund's shares
and the risks associated with the Fund's investment objectives and policies. At
any time in the future, total returns may be higher or lower than past total
returns and there can be no assurance that any historical return will continue.
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 or to
other unmanaged indexes which may assume reinvestment of dividends but generally
do not reflect deductions for administrative and management costs.
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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, if applicable (up to the life of the Fund), and are
calculated pursuant to the following formula:
T = (ERV)^(1/n)/P - 1
(where P = a hypothetical initial payment of $1,000, T = the average annual
total return, n = the number of years, and ERV = the redeemable value at the end
of the period of a $1,000 payment made at the beginning of the period). Total
return figures will reflect the deduction of Fund expenses (net of certain
expenses reimbursed by the Manager or 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. The Fund may also state the total
return figures without a sales charge along with such figures.
The Fund's total return from inception on May 1, 1995 through the year
ended December 31, 1995 was 8.4%.
COUNSEL AND INDEPENDENT AUDITORS
Willkie Farr & Gallagher, 153 East 53rd Street, New York, New York 10022,
serves as counsel for the Fund.
Ernst & Young LLP, 787 Seventh Avenue, New York, New York 10019, has been
appointed independent auditors for the Fund.
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APPENDIX A
BOND AND PREFERRED STOCK RATINGS
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 as 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 midrange ranking; and the modifier 3
indicates that the issue ranks in the lower end of its generic rating category.
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Description of Standard & Poor's Ratings Service, a division of McGraw-Hill
Companies, Inc. ("S&P") 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. C1: The rating C1 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.
r: The "r" symbol is attached to derivative, hybrid and certain other
obligations that S&P believes may experience high volatility or high variability
in expected returns due to non-credit risks created by the terms of the
obligation.
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 then 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 buy 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.
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Earnings and asset protection may be very moderate and not well safeguarded
during adverse periods. Uncertainty of position characterizes preferred stocks
in this class. b: An issue which is rated b generally lacks the characteristics
of a desirable investment. Assurance of dividend payments and maintenance of
other terms of the issue over any long period of time may be small. caa: An
issue which is rated caa is likely to be in arrears on dividend payments. This
rating designation does not purport to indicate the future status of payment. 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 end 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. BBB, B, CCC: Preferred stock rated BB, B, and CCC
are regarded, on balance, as predominantly speculative with respect to the
issuer's capacity to pay preferred stock obligations. BB indicates the lowest
degree of speculation and CCC the highest degree of speculation. While such
issues will likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major risk exposures to adverse conditions.
CC: The rating CC is reserved for a preferred stock in arrears on dividends or
sinking fund payments but that is currently paying. C: A preferred stock rated C
is a non-paying issue. D: A preferred stock rated D is a non-paying issue with
the issuer in default on debt instruments.
Plus (+) or Minus (-): The ratings from "AA" to "B" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
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