STATEMENT OF ADDITIONAL INFORMATION
May 1, 1999
This Statement of Additional Information (the "SAI"), which is not a prospectus,
describes the Gabelli Capital Asset Fund, a series of Gabelli Capital Series
Funds, Inc. (the "Company"). The SAI should be read in conjunction with the
Fund's Prospectus dated May 1, 1999, and is incorporated by reference in its
entirety into the Prospectus. For a free copy of the Prospectus, please contact
the Fund at the address, telephone number or Internet Web site printed below.
One Corporate Center
Rye, New York 10580-1434
Telephone 1-800-GABELLI (1-800-422-3554)
http://www.gabelli.com
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TABLE OF CONTENTS
Page
General Information............................................................................................3
Investment Strategies and Risks................................................................................3
Investment Restrictions.......................................................................................11
Directors and Officers........................................................................................13
Control Persons and Principal Shareholders....................................................................16
Investment Advisory and Other Services........................................................................17
Portfolio Transactions and Brokerage..........................................................................20
Purchase and Redemption of Shares.............................................................................23
Computation of Net Asset Value................................................................................23
Dividends, Distributions and Taxes............................................................................24
Investment Performance Information............................................................................26
Description of the Fund's Shares and Voting Rights............................................................27
Financial Statements..........................................................................................29
Appendix A - Bond and Preferred Stock Ratings................................................................A-1
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GENERAL INFORMATION
.........The Fund is a diversified, open-end, management investment company
and commenced operations on May 1, 1995. The Fund is currently the only series
of Gabelli Capital Series Funds, Inc., a corporation organized under the laws of
the State of Maryland on April 8, 1993.
INVESTMENT STRATEGIES AND RISKS
.........The Prospectus discusses the investment objective of the Fund and
the principal strategies to be employed to achieve that objective. This section
contains supplemental information concerning certain types of securities and
other instruments in which the Fund may invest, additional strategies that the
Fund may utilize and certain risks associated with such investments and
strategies.
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 S&P Ratings Service, a division of
McGraw Hill Companies ("S&P") or, if unrated, judged by the Adviser to be of
comparable quality. Securities rated less than "A" by S&P 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, an S&P rating of CCC or lower.
Unrated convertible securities which, in the judgment of Gabelli Funds, LLC (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. See Appendix A - "Bond and Preferred Stock Ratings."
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.
.........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 be successful or that a liquid
secondary market will continue to be available for the disposition of such
securities.
Debt Securities
The Fund may purchase debt securities. The Fund will normally purchase
only investment grade debt securities having a rating of, or equivalent to, at
least BBB (which rating may have speculative characteristics) by S&P 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.
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. The Fund may invest up to 5% of its assets in corporate debt
securities having a rating of, or equivalent to, an S&P rating of CCC or lower
(often referred to in the financial press as "junk bonds") which the Adviser
believes present an opportunity for significant capital appreciation.
.........Corporate debt securities which are either unrated or have a
predominantly speculative rating 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. 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 aggregate initial margin and premiums required to establish such
positions, other than for hedging purposes, will not exceed 5% of the Fund's net
asset value after taking into account unrealized profits and unrealized losses
on any such contracts it has entered into.
.........A call option is a contract that gives the holder of the option
the right, in return for a premium paid, to buy from the seller the security
underlying the option at a specified exercise price at any time during the term
of the option or, in some cases, only at the end of the term of the option. The
seller of the call option has the obligation upon exercise of the option to
deliver the underlying security upon payment of the exercise price. A put option
is a contract that gives the holder of the option the right in return for a
premium to sell to the seller the underlying security at a specified price. The
seller of the put option, on the other hand, has the obligation to buy the
underlying security upon exercise at the exercise price. The Fund's transactions
in options may be subject to specific segregation requirements. See "Hedging
Transactions" below.
.........If the Fund has sold an option, it may terminate its obligation by
effecting a closing purchase transaction. This is accomplished by purchasing an
option of the same series as the option previously sold. There can be no
assurance that a closing purchase transaction can be effected when the Fund so
desires.
.........The purchaser of an option risks a total loss of the premium paid for
the option if the price of the underlying security does not increase or decrease
sufficiently to justify exercise. The seller of an option, on the other hand,
will recognize the premium as income if the option expires 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.
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Investments in Warrants and Rights
.........Warrants basically are options to purchase equity securities at a
specified price valid for a specific period of time. Their prices do not
necessarily move parallel to the prices of the underlying securities. Rights are
similar to warrants, but normally have a short duration and are distributed
directly by the issuer to its shareholders. Rights and warrants have no voting
rights, receive no dividends and have no rights with respect to the assets of
the issuer. Investing in rights and warrants can provide a greater potential for
profit or loss than an equivalent investment in the underlying security, and,
thus, can be a speculative investment. The value of a right or warrant may
decline because of a decline in the value of the underlying security, the
passage of time, changes in interest rates or in the dividend or other policies
of the company whose equity underlies the warrant or a change in the perception
as to the future price of the underlying security, or any combination thereof.
.........The Fund may invest in warrants and rights (other than those
acquired in units or attached to other securities) but will do so only if the
underlying equity securities are deemed appropriate by the Adviser for inclusion
in the Fund's portfolio.
Investments in Small, Unseasoned Companies and Other Illiquid Securities
.........The Fund may invest in small, less well-known companies (including
predecessors) which have operated for less than three years. The securities of
small, unseasoned companies may have a limited trading market, which may
adversely affect their disposition and can result in their being priced lower
than 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 have to lower the price, sell other
securities instead or forego an investment opportunity. These companies may have
limited product lines, markets or financial resources and may lack management
depth. In addition, these companies are typically subject to a greater degree of
changes in earnings and business prospects than are larger, more established
companies. Although investing in securities of these companies offers potential
for above-average returns if the companies are successful, the risk exists that
the companies will not succeed and the prices of the companies' shares could
significantly decline in value. This risk could have a negative impact on Fund
management or performance.
.........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 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.
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Corporate Reorganizations
.........In general, securities of companies engaged in reorganization
transactions sell at a premium to their historic market price immediately prior
to the announcement of the tender offer or reorganization 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 offer or as well as the dynamics of the business
climate when the offer or proposal is in progress.
.........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. 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.
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 the intention of actually
acquiring the security, the Fund may sell the security before the settlement
date if it is deemed advisable.
.........Securities purchased under a forward commitment are subject to
market fluctuation and no interest (or dividends) accrues to the Fund prior to
the settlement date. The Fund will segregate with its Custodian cash or liquid
securities with the Fund's Custodian in an aggregate amount at least equal to
the amount of its outstanding forward commitments. When the Fund engages in
when-issued , delayed-delivery or forward commitment transactions, it relies on
the other party to consummate the trade. Failure of the other party to do so may
result in the Fund incurring a loss or missing an opportunity to obtain an
advantageous price.
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.
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 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. 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.
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 or liquid
securities. The Fund will also be required to deposit similar collateral with
its Custodian to the extent, if any, necessary so that the value of both
collateral deposits in the aggregate is at all times equal to the greater of the
price at which the security is sold short or 100% of the current market value of
the security sold short. Depending on arrangements made with the broker-dealer
from which it borrowed the security regarding payment 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.
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 Fund's risk is primarily that, if the seller defaults, the
proceeds from the disposition of underlying securities and other collateral for
the seller's obligation are less than the repurchase price. If the seller
becomes bankrupt, the Fund might be delayed in selling the collateral. Under the
Investment Company Act of 1940, as amended (the "1940 Act"), repurchase
agreements are considered loans. Repurchase agreements 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.
Borrowing
.........The Fund may borrow money from banks (1) as may be necessary for
the clearance of portfolio transactions, and (2) for temporary or emergency
purposes, including the meeting of redemption requests. Borrowing for any
purpose (including redemptions) may not, in the aggregate, exceed 15% of the
value of the Fund's total assets. Borrowing for purposes other than meeting
redemptions may not exceed 5% of the value of the Fund's total assets at the
time the borrowing is made. The Fund will not purchase any portfolio securities
at any time its borrowings exceed 5% of its assets. Not more than 20% of the
total assets of the Fund may be used as collateral in connection with the
borrowings described above.
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 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.
.........While currency transactions may limit losses to the Fund as a
result of exchange rate fluctuation they will also limit any gains that might
otherwise have been realized. Currency transactions include the risk that
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.
.........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 liquid
securities in an amount at least equal to the Fund's obligations with respect to
such instruments. Such amounts fluctuate as the obligations increase or
decrease. The segregation requirement can result in the Fund maintaining
securities positions it would otherwise liquidate or segregating assets at a
time when it might be disadvantageous to do so. 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 SEC, the Fund will treat swap transactions as illiquid for purposes of the
Fund's policy regarding illiquid securities.
The Fund may use options and futures to hedge the risks of investing in
the Fund. The success of hedging depends on the Adviser's ability to predict
movements in the prices of the hedged securities and market fluctuations. The
Adviser may not be able to perfectly correlate changes in the market value of
securities and the prices of the corresponding options or futures. The Adviser
may have difficulty selling or buying futures contracts and options when it
chooses and there may be certain restrictions on trading futures contracts and
options. While hedging can reduce or eliminate losses, it can also reduce or
eliminate gains. At times, hedging strategies may not be available, may be too
costly to be used effectively or may be unable to be used for other reasons.
The Fund may also 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 currencies. Such
currency transactions may limit losses to the Fund due to changes in exchange
rates, but they also limit gains the Fund may have realized otherwise. If the
Adviser wrongly predicts the direction of the change in the value of a foreign
currency, the losses the Fund suffers on a foreign security denominated in that
security could be magnified.
INVESTMENT RESTRICTIONS
.........The Fund has adopted the following investment restrictions which
may not be changed without the approval of a majority of the Fund's
shareholders, defined as the lesser of (1) 67% of the Fund's shares present at a
meeting if the holders of more than 50% of the outstanding shares are present in
person or by proxy, or (2) more than 50% of the Fund's outstanding shares. Under
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 may be necessary for the clearance of purchases
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;
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.
There will be no violation of any investment restriction if that
restriction is complied with at the time the relevant action is taken
notwithstanding a later change in the market value of an investment, in the net
or total assets of the Fund, in the securities rating of the investment, or any
other later change.
DIRECTORS AND OFFICERS
Under Maryland law, the Fund's Board of Directors is responsible for
establishing the Fund's policies and for overseeing the management of the Fund.
The Board also elects the Fund's officers who conduct the daily business of the
Fund. The Directors and principal officers of the Company, their ages and their
principal business occupations during the last five years 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 1940 Act are indicated by an asterisk.
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Name, Address, Age and Principal Occupations
Position(s) with Company During Last Five Years
Mario J. Gabelli, CFA, * 56 Chairman of the Board, Chief Executive Officer and Chief
Chairman of the Board, Investment Officer of Gabelli Asset Management Inc. (since
President and Chief Investment Officer 1999) and Gabelli Funds, Inc.; Director or Trustee and
Officer of various other
mutual funds advised by
Gabelli Funds, LLC and
its affiliates; Chairman
of the Board and Chief
Executive Officer of
Lynch Corporation
(diversified
manufacturing and
communications services
company); and Director of
East/West Communications
Inc.
Anthony J. Colavita, 64 President and Attorney at Law in the law firm of Anthony J.
Director Colavita, P.C. since 1961. Director or Trustee of various
other mutual funds advised by Gabelli Funds, LLC and its
affiliates.
Arthur V. Ferrara, * 69 Director of The Guardian Life Insurance Company of America;
Director formerly, 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 The
Guardian Insurance &
Annuity Company, Inc.,
Guardian Investor
Services Corporation, and
five mutual funds within
the Guardian Fund
Complex.
<PAGE>
Name, Address, Age and Principal Occupations
Position(s) with Company During Last Five Years
Karl Otto Pohl, *+ 69 Member of the Shareholder Committee of Sal Oppenheim Jr. &
Director Cie (private investment bank) since 1991; Board Member of
Gabelli Asset Management
Inc. (investment
management), Zurich
Allied (insurance), and
TrizecHahn Corp.; former
President of the Deutsche
Bundesbank and Chairman
of its Central Bank
Council from 1980 through
1991. Director or Trustee
of all other mutual funds
advised by Gabelli Funds,
LLC and its affiliates.
Anthony R. Pustorino, CPA, 73 Certified Public Accountant; Professor of Accounting, Pace
Director University; Director or Trustee of various other mutual
funds advised by Gabelli Funds, LLC and its affiliates.
Werner J. Roeder, M.D., 58 Director of Surgery, Lawrence Hospital and practicing
Director private physician; Director or Trustee of various other
mutual funds advised by Gabelli Funds, LLC and its
affiliates.
Anthonie C. van Ekris, 65 Managing Director of Balmac International; Director of
Director Stahal Hardmayer A.G.; Director or Trustee of various other
mutual funds advised by Gabelli Funds, LLC and its
affiliates.
Bruce N. Alpert, 47 Executive Vice President and Chief Operating Officer of the
Vice President and Treasurer Adviser; President and Director of Gabelli Advisers, Inc.
and an officer of all funds advised by Gabelli Funds, LLC
and its affiliates.
James E. McKee, 35 Vice President, General Counsel and Secretary of the
Secretary Adviser; Vice President and General Counsel of GAMCO
Investors, Inc. since 1993 and Gabelli Asset Management
Inc. since 1999; Secretary of all Funds advised by Gabelli
Funds, LLC and Gabelli Advisers, Inc. since August 1995.
<PAGE>
Name, Address, Age and Principal Occupations
Position(s) with Company During Last Five Years
Ryan W. Johnson, 38 Vice President, Equity Marketing, The Guardian Life Vice
President Insurance Company of America, 3/98 - present; Second Vice 201 Park
Avenue South President, Equity Sales, 3/95 - 3/98; Regional Sales New York, New
York 10003 Director for Equity Products, Western Division prior
thereto. Vice President, Equity Sales, The Guardian
Insurance & Annuity Company, Inc., Senior Vice President
and National Sales Director of Guardian Investor Services
Corporation.
.........
+ Mr. Pohl is a director of the parent company of the Adviser.
</TABLE>
The Company has agreed that The Guardian Insurance & Annuity Company,
Inc. ("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 year ended December 31,
1998, such paid fees amounted to $27,000. 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 ended December 31, 1998 in excess of $60,000.
<PAGE>
Compensation Table
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Total Compensation From the Fund
Aggregate and Fund Complex
Name of Person Compensation Paid to Directors*
Position From the Fund
Mario J. Gabelli
Chairman of the Board $ 0 $ 0 (13)
Anthony J. Colavita
Director $ 5,000 $ 81,500 (14)
Arthur V. Ferrara
Director $ 0 $ 0 (1)
Karl Otto Pohl
Director $ 5,000 $ 102,466 (15)
Anthony R. Pustorino
Director $ 6,000 $ 100,500 (10)
Werner Roeder, M.D.
Director $ 6,000 $ 25,000 (7)
Anthonie C. van Ekris
Director $ 5,000 $ 57,500 (11)
* Represents the total compensation paid to such persons during the
calendar year ended December 31, 1998. 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
common or affiliated investment advisers.
</TABLE>
CONTROL PERSONS AND PRINCIPAL SHAREHOLDERS
The separate accounts of GIAC hold the majority of the Fund's shares
and therefore are considered to be control persons of the Fund.
As of April 1, 1999, as a group the Directors and officers of the Fund
owned less than 1% of the outstanding shares of common stock of the Fund.
<PAGE>
INVESTMENT ADVISORY AND OTHER SERVICES
The Manager. Pursuant to a Management Agreement with the Company,
Guardian Investor Services Corporation, (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 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.
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 1940 Act, of the outstanding shares
of the Fund. The Management Agreement will automatically terminate in the event
of its assignment, as defined in the 1940 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
1940 Act ("Disinterested Directors") cast in person at a meeting called
specifically for the purpose of voting on the continuance.
During the fiscal years ended December 31, 1998, 1997 and 1996, the
Manager received management fees from the Fund totaling $1,392,897, $700,568 and
$433,279, respectively, of which the Manager paid $1,044,673, $525,426 and
$329,959 to the Adviser, respectively, for the same periods.
The Adviser. 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 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 SAI, including the printing of such documents for the
purpose of filings with the SEC; (5) supervising the calculation of the Fund's
net asset value per share; (6) preparing, but not paying for, any filings under
state law; and (7) preparing notices and agendas for meetings of the Company's
Board of Directors and minutes of such meetings in all matters required by the
1940 Act to be acted upon by the Board. The Adviser has delegated its
administrative duties to the Sub-Administrator as described below under
"Sub-Administrator."
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 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. 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 1940 Act, of the
outstanding shares of the Fund. The Investment Advisory Agreement will
automatically terminate in the event of its assignment, as defined in the 1940
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 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.
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 the Custodian, Transfer Agent and
Dividend Disbursing 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 The Guardian Insurance Annuity
Company, Inc. ("GIAC").
Sub-Administrator. The Adviser has entered into a Sub-Administration
Agreement with First Data Investor Services Group, Inc. (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 to Contractowners
and other documentation. The Sub-Administrator, which is a subsidiary of First
Data Corporation, has its principal office at One Exchange Place, Boston,
Massachusetts 02109. 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 Distributor. The Fund has entered into a Distribution Agreement
with Gabelli & Company, Inc. (the "Distributor"), a New York corporation which
is a majority owned subsidiary of Gabelli Funds, LLC, 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 Company 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 1940 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
Company'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.
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's Global Custody Network, or
foreign depositories used by such members. State Street is the Transfer Agent
for the Fund's shares as well. Boston Financial Data Services, Inc., an
affiliate of State Street, performs the shareholder services on behalf of State
Street and is located at The BFDS Building, Two Heritage Drive, Quincy,
Massachusetts 02171.
Counsel. Willkie Farr & Gallagher, 787 Seventh Avenue, New York, New York
10019, serves as counsel for the Fund.
Independent Auditors. Ernst & Young LLP, 787 Seventh Avenue, New York, New
York 10019, has been appointed independent auditors for the Fund.
PORTFOLIO TRANSACTIONS AND BROKERAGE
Under the Advisory Agreement, the Adviser is authorized on behalf of
the Fund to employ brokers to effect the purchase or sale of portfolio
securities with the objective of obtaining prompt, efficient and reliable
execution and clearance of such transactions at the most favorable price
obtainable ("best execution") at reasonable expense. 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.
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 is deemed 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.
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 1940 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 their 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, Inc. ("NYSE"), the Distributor controls and monitors the execution of
such transactions on the floor of the NYSE through independent "floor brokers or
through the Designated Order Turnaround System of the NYSE. Such transactions
are then cleared, confirmed to the Fund for the account of 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 NYSE.
The following table sets forth certain information regarding the Fund's
payment of brokerage commissions including commissions paid to the Distributor:
<TABLE>
<CAPTION>
<S> <C> <C>
Fiscal Year Ended Commissions
December 31, Paid
Total Brokerage Commissions 1996 $ 98,352
1997 $128,605
1998 $225,587
Commissions paid to Gabelli & Company 1996 $ 66,310
1997 $ 99,105
1998 $187,764
% of Total Brokerage Commissions paid to Gabelli & Company 1998 83.23%
% of Total Transactions involving Commissions paid to Gabelli 1998 82.14%
& Company
</TABLE>
<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.
The prospectus for a GIAC variable annuity or variable life insurance
policy describes the allocation, transfer and withdrawal provisions of such
annuity or policy.
COMPUTATION OF NET ASSET VALUE
In the calculation of the Fund's net asset value: (1) a portfolio
security listed or traded on the NYSE 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 mean of the closing bid
and asked prices; if there were no asked prices quoted on that day, the security
is valued at the closing bid price); (2) all other portfolio securities for
which over-the-counter market quotations are readily available are valued at the
mean of the current bid and asked prices (if there were no asked prices quoted
on that day, the security is valued at the closing bid 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 Company's Directors.
Portfolio securities traded on more than one national securities
exchange or market are valued according to the broadest and most representative
market as determined by the Adviser. Securities traded primarily on foreign
exchanges are valued at the closing price on such foreign exchange immediately
prior to the close of the NYSE.
U.S. Government obligations and other debt instruments having 60 days
or less remaining until maturity are stated at amortized cost. Debt instruments
having more than 60 days remaining until maturity are valued at the highest bid
price obtained from a dealer maintaining an active market in that security or on
the basis of prices obtained from a pricing service approved as reliable by the
Board of Directors. All other investment assets, including restricted and not
readily marketable securities, are valued by the Fund under procedures
established by and under the general supervision and responsibility of the
Company's Board of Directors designed to reflect in good faith the fair value of
such securities.
<PAGE>
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
amended ("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. 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 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), short sales against the box 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 engages in a short sale against the box or 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.
Foreign Withholding Taxes
Income received by the Fund from investments in foreign securities may
be subject to withholding and other taxes imposed by foreign countries. Tax
conventions between certain countries and the United States may reduce or
eliminate such taxes. It is impossible to determine the rate of foreign tax in
advance since the amount of the Fund's assets to be invested in various
countries can vary.
Passive Foreign Investment Companies
If the Fund purchases shares in certain foreign investment entities,
called "passive foreign investment companies" (a "PFIC"), it may be subject to
United States federal income tax on a portion of any "excess distribution" or
gain from the disposition of such shares even if such income is distributed as a
taxable dividend by the Fund to its shareholders. Additional charges in the
nature of interest may be imposed on the Fund in respect of deferred taxes
arising from such distributions or gains. If the Fund were to invest in a PFIC
and elected to treat the PFIC as a "qualified electing fund" under the Code, in
lieu of the foregoing requirements, the Fund might be required to include in
income each year a portion of the ordinary earnings and net capital gains of the
qualified electing fund, even if not distributed to the Fund, and such amounts
would be subject to the 90% and excise tax distribution requirements described
above. In order to make this election, the Fund would be required to obtain
certain annual information from the passive foreign investment companies in
which it invests, which may be difficult or not possible to obtain.
Alternatively, the Fund may make a mark-to-market election that will
result in the Fund being treated as if it had sold and repurchased all of the
PFIC stock at the end of each year. In this case, the Fund would report gains as
ordinary income and would deduct losses as ordinary losses to the extent of
previously recognized gains. The election, once made, would be effective for all
subsequent taxable years of the Fund, unless revoked with the consent of the
IRS. By making the election, the Fund could potentially ameliorate the adverse
tax consequences with respect to its ownership of shares in a PFIC, but in any
particular year may be required to recognize income in excess of the
distributions it receives from PFICs and its proceeds from dispositions of PFIC
company stock. The Fund may have to distribute this "phantom" income and gain to
satisfy its distribution requirement and to avoid imposition of the 4% excise
tax. The Fund will make the appropriate tax elections, if possible, and take any
additional steps that are necessary to mitigate the effect of these rules.
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.
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.
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:
P(1+T)n =ERV
(where P = a hypothetical initial payment of $1,000, T = the average annual
total return, n = the number of years, and ERV = the redeemable value at the end
of the period of a $1,000 payment made at the beginning of the period). Total
return figures will reflect the deduction of Fund expenses (net of certain
expenses reimbursed by the Manager or the Adviser) on an annual basis, and will
assume that all dividends and distributions are reinvested and will deduct the
maximum sales charge, if any is imposed. The Fund may also state the total
return figures without a sales charge along with such figures.
The Fund's average annual total returns for the one year period ended
December 31, 1998 and the period from inception on May 1, 1995 through the
fiscal year ended December 31, 1998 were 11.67% and 19.40%, respectively.
In its reports, investor communications or advertisements, the Fund may
also include: (1) descriptions and updates concerning its strategies and
portfolio investments; (2) its goals, risk factors and expenses compared with
other mutual funds; (3) analysis of its investments by industry, country, credit
quality and other characteristics; (4) a discussion of the risk/return continuum
relating to different investments; (5) the potential impact of adding foreign
stocks to a domestic portfolio; (6) the general biography or work experience of
the portfolio manager of the Fund; (7) portfolio manager commentary or market
updates; (8) discussion of macroeconomic factors affecting the Fund and its
investments; and (9) other information of general interest to investors such as
personal financial planning.
DESCRIPTION OF THE FUND'S SHARES AND VOTING RIGHTS
The Company has authorized capital stock consisting of one billion
shares having a par value of one-tenth of one cent ($.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 1940 Act, 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.
<PAGE>
FINANCIAL STATEMENTS
=============
- ---------------
Gabelli Capital
Asset Fund
- ---------------
5
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Gabelli Capital Asset Fund
- --------------------------
SCHEDULE OF INVESTMENTS
December 31, 1998
- -----------------------
COMMON STOCKS -- 100.1%
- -----------------------
Market
Shares Cost Value
- --------------------------------------------------------------------------------
Aerospace--0.2%
10,000 Boeing Co. $ 387,613 $ 326,250
------------ ------------
Agriculture--1.0%
88,550 Archer-Daniels-Midland
Co. 1,559,532 1,521,953
------------ ------------
Automotive: Parts and Accessories--4.2%
10,000 Dana Corp. 330,161 408,750
52,000 GenCorp Inc. 851,619 1,296,750
60,000 Modine Manufacturing Co. 2,081,405 2,175,000
53,000 Standard Motor
Products Inc. 1,168,013 1,285,250
22,000 TransPro Inc. 182,530 107,250
60,000 Wynn's International Inc. 719,079 1,327,500
------------ ------------
5,332,806 6,600,500
------------ ------------
Aviation: Parts and Services--4.1%
16,500 AAR Corp. 223,738 389,812
27,500 Barnes Group Inc. 770,907 807,812
25,000 Coltec Industries Inc. + 370,173 487,500
16,000 Curtiss-Wright Corp. 470,869 610,000
80,000 Fairchild Corp., Cl. A 1,623,662 1,260,000
7,500 Hi-Shear Industries Inc. 21,717 19,453
31,000 Hudson General Corp. 1,227,562 1,953,000
10,000 Kaman Corp., Cl. A 150,871 160,625
17,000 Moog Inc., Cl. A + 435,250 665,125
------------ ------------
5,294,750 6,353,327
------------ ------------
Broadcasting--5.1%
70,000 Ackerley Communications
Inc. 598,717 1,277,500
34,235 Chris-Craft Industries Inc. 1,422,761 1,649,699
18,000 Gray Communications
Systems Inc. 326,825 329,625
80,000 Gray Communications
Systems Inc., Cl. B 1,015,413 1,095,000
33,000 Liberty Corp. 1,614,146 1,621,125
16,500 United Television Inc. 1,394,455 1,897,500
------------ ------------
6,372,318 7,870,449
------------ ------------
Building and Construction--1.0%
25,000 CalMat Co. 773,125 771,875
30,500 Nortek Inc. 909,275 842,563
------------ ------------
1,682,400 1,614,438
------------ ------------
Business Services--0.9%
30,000 Cendant Corp. + 418,463 571,875
37,000 Nashua Corp. + 526,796 492,563
25,000 Republic Industries Inc. + 495,733 368,750
------------ ------------
1,440,992 1,433,188
------------ ------------
Cable--7.9%
150,000 Cablevision Systems
Corp., Cl. A + 1,551,661 7,528,125
70,000 MediaOne Group Inc. 2,047,177 3,290,000
17,000 Tele-Communications
Inc., Cl. A + 502,219 940,313
22,000 United International
Holdings Inc., Cl. A + 298,391 423,500
------------ ------------
4,399,448 12,181,938
------------ ------------
Consumer Products--2.9%
105,000 Carter-Wallace Inc. 1,693,052 2,060,625
18,000 Gallaher Group plc 310,807 489,375
57,000 General Cigar Holdings
Inc. + 570,016 495,188
18,000 General Cigar Holdings
Inc., Cl. B (a) 164,172 156,375
35,000 General Housewares Corp. 365,088 420,000
21,000 National Presto Industries
Inc. 824,315 895,125
------------ ------------
3,927,450 4,516,688
------------ ------------
Consumer Services--3.2%
175,000 Loewen Group Inc. 2,503,272 1,476,563
200,000 Rollins Inc. 3,862,912 3,500,000
------------ ------------
6,366,184 4,976,563
------------ ------------
Diversified Industrial--3.8%
40,000 Ampco-Pittsburgh Corp. 639,126 435,000
9,000 Crane Co. 139,950 271,688
43,000 GATX Corp. 1,214,549 1,628,625
20,000 Honeywell Inc. 1,266,661 1,506,250
58,000 Katy Industries Inc. 848,600 1,018,625
17,500 Thomas Industries Inc. 290,747 343,438
35,000 Tyler Corp.+ 76,475 214,375
50,000 WHX Corp. 625,488 503,125
------------ ------------
5,101,596 5,921,126
------------ ------------
See notes to financial statements.
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Gabelli Capital
Asset Fund
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5
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- --------------------------------------------------------------------------------
Market
Shares Cost Value
- --------------------------------------------------------------------------------
Energy and Utilities--3.4%
30,000 BJ Services Co. + $ 460,465 $ 468,750
3,000 Cilcorp Inc. 183,150 183,563
224,073 Citizens Utilities Co., Cl. B 2,217,435 1,820,593
3,000 Commonwealth Energy
System 117,240 121,500
15,000 Eastern Enterprises 589,250 656,250
90,000 Kaneb Services Inc. + 274,500 365,625
7,000 New England Electric
System 337,864 336,875
42,000 PennzEnergy Co. + 1,114,089 685,125
37,000 Pennzoil-Quaker State
Co. + 971,747 548,063
5,000 Southwest Gas Corp. 132,834 134,375
------------ ------------
6,398,574 5,320,719
------------ ------------
Entertainment--11.9%
84,664 Ascent Entertainment
Group Inc. + 915,974 624,397
24,000 Fisher Companies Inc. 1,631,566 1,644,000
40,000 GC Companies Inc. + 1,588,242 1,665,000
104,000 Tele-Communications Inc./
Liberty Media Group,
Cl. A + 1,452,465 4,790,500
45,000 Time Warner Inc. 911,719 2,792,813
77,000 USA Networks Inc. + 1,026,532 2,550,625
60,000 Viacom Inc., Cl. A + 2,005,843 4,413,750
------------ ------------
9,532,342 18,481,085
------------ ------------
Environmental Services--0.2%
63,000 EnviroSource Inc. + 638,073 322,875
------------ ------------
Equipment and Supplies--11.3%
100,000 Aeroquip-Vickers Inc. 3,610,928 2,993,750
36,000 AMETEK Inc. 634,245 803,250
36,000 CLARCOR Inc. 686,041 720,000
15,000 CTS Corp. 219,200 652,500
22,000 Daniel Industries Inc. 320,856 266,750
3,000 Eastern Co. 74,750 76,125
115,500 Fedders Corp. 682,345 671,344
63,000 Flowserve Corp. 1,588,451 1,043,438
12,500 Franklin Electric Co. Inc. 409,386 843,750
100,000 Hussmann International Inc. 1,364,427 1,937,500
40,000 IDEX Corp. 1,189,388 980,000
25,000 Interlake Corp. + 175,000 175,000
10,000 Kollmorgen Corp. 173,432 152,500
28,000 Navistar International
Corp. + 499,200 798,000
28,000 Pittway Corp. 527,107 946,750
30,000 Sequa Corp., Cl. A + 1,048,823 1,796,250
48,000 SPS Technologies Inc. + 2,053,163 2,670,000
------------ ------------
15,256,742 17,526,907
------------ ------------
Financial Services--5.3%
62,000 American Bankers
Insurance Group Inc. 3,763,691 2,999,250
62,000 Argonaut Group Inc. 1,910,351 1,519,000
20,000 Block (H & R) Inc. 864,643 900,000
10,000 Mellon Bank Corp. 620,920 687,500
55,000 Midland Co. 836,172 1,326,875
42,000 Pioneer Group Inc. 1,091,116 829,500
------------ ------------
9,086,894 8,262,125
------------ ------------
Food and Beverage--10.1%
4,000 Bestfoods Inc. 193,171 213,000
85,000 Celestial Seasonings Inc. 950,273 2,364,063
38,000 Corn Products
International Inc. 1,223,226 1,154,250
20,000 General Mills Inc. 1,370,594 1,555,000
15,000 Heinz (H.J.) Co. 809,650 849,375
4,000 Keebler Foods Co. 108,399 150,500
52,000 Kellogg Co. 1,991,795 1,774,500
50,000 PepsiCo Inc. 1,900,172 2,046,875
15,000 Quaker Oats Co. 652,458 892,500
45,000 Seagram Co. 1,543,720 1,710,000
22,000 Tootsie Roll Industries Inc. 400,141 860,750
8,000 Twinlab Corp. 151,916 105,000
78,000 Whitman Corp. 1,228,673 1,979,250
------------ ------------
12,524,188 15,655,063
------------ ------------
Health Care--1.0%
120,000 IVAX Corp. + 1,171,880 1,492,500
------------ ------------
See notes to financial statements.
- --------------------------------------------------------------------------------
71
<PAGE>
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Gabelli Capital
Asset Fund
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5
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- --------------------------------------------------------------------------------
Gabelli Capital Asset Fund
- --------------------------
SCHEDULE OF INVESTMENTS (Continued)
December 31, 1998
Market
Shares Cost Value
- --------------------------------------------------------------------------------
Hotels and Gaming--4.1%
140,000 Aztar Corp. + $ 1,035,984 $ 708,750
100,000 Gaylord Entertainment
Co., Cl. A 2,735,008 3,012,500
80,000 Hilton Hotels Corp. 1,995,189 1,529,999
100,000 Jackpot Enterprises Inc. 1,095,401 943,749
55,000 Trump Hotels & Casino
Resorts Inc. + 470,188 206,249
------------ ------------
7,331,770 6,401,247
------------ ------------
Publishing--7.5%
15,000 Harcourt General Inc. 702,375 798,750
24,000 Lee Enterprises Inc. 591,706 744,000
20,500 McClatchy Newspapers
Inc., Cl. A 559,269 725,188
6,000 McGraw-Hill Companies
Inc. 453,419 611,250
65,000 Media General Inc., Cl. A 2,626,046 3,444,999
15,000 Meredith Corp. 303,454 568,125
28,000 Penton Media Inc. 367,285 567,000
15,000 Pulitzer Publishing Co. 754,543 1,299,375
50,000 Reader's Digest Association
Inc., Cl. B 1,230,094 1,206,250
82,000 Thomas Nelson Inc. 987,793 1,107,000
7,000 Times Mirror Co., Cl. A 425,038 392,000
3,000 Tribune Co. 164,400 198,000
------------ ------------
9,165,422 11,661,937
------------ ------------
Real Estate--1.3%
35,000 Griffin Land & Nurseries
Inc. 493,263 446,250
110,000 Catellus Development
Corp. 1,826,901 1,574,375
------------ ------------
2,320,164 2,020,625
------------ ------------
Retail--1.4%
5,000 Aaron Rents Inc. 100,625 75,624
10,000 Aaron Rents Inc., Cl. A 199,750 149,375
33,000 Lillian Vernon Corp. 525,813 544,500
53,000 Neiman Marcus Group
Inc. + 1,230,033 1,321,688
25,000 Scheib (Earl) Inc. 196,312 137,500
------------ ------------
2,252,534 2,228,687
------------ ------------
Satellite--1.0%
43,000 COMSAT Corp. 944,715 1,548,000
------------ ------------
Specialty Chemicals--0.8%
20,000 Ferro Corp. 337,263 520,000
54,000 Sybron Chemicals Inc. 1,487,651 729,000
------------ ------------
1,824,914 1,249,000
------------ ------------
Telecommunications--1.8%
62,000 Frontier Corp. 1,923,865 2,108,000
20,000 GST Telecommunications
Inc. + 267,013 131,250
55,000 Rogers Communications
Inc., Cl. B + 317,794 488,125
------------ ------------
2,508,673 2,727,375
------------ ------------
Wireless Communications--4.7%
35,000 Centennial Cellular Corp.,
Cl. A + 776,012 1,435,000
70,000 Rogers Cantel Mobile
Communications Inc.,
Cl. B + 796,366 853,125
110,000 Telephone & Data
Systems Inc. 4,737,299 4,943,125
------------ ------------
6,309,677 7,231,250
------------ ------------
TOTAL
INVESTMENTS--100.1% $ 129,131,651 155,445,815
============
OTHER ASSETS AND
LIABILITIES (Net)--(0.1)% (84,848)
------------
NET ASSETS-- 100.0% $155,360,967
============
SECURITIES SOLD SHORT
Common Stock Shares Value
------ -----
Park Place Entertainment Corp
(Proceeds $68,248) 10,000 $ 63,750
============
For Federal tax purposes:
Aggregate cost $129,859,115
============
Gross unrealized appreciation $ 36,484,188
Gross unrealized depreciation (10,897,488)
------------
Net unrealized appreciation $ 25,586,700
============
(a) Security fair valued as determined by the Board of Directors.
+ Non-income producing security.
See accompanying notes to financial statements.
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72
<PAGE>
---------------
Gabelli Capital
Asset Fund
---------------
5
---------------
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS
AND LIABILITIES
December 31, 1998
Assets:
Investments, at value (Cost $129,131,651) $ 155,445,815
Cash 158,405
Dividends and interest receivable 87,247
Receivable for investments sold 512,570
Receivable for capital shares sold 6,734
Deferred organizational expenses 26,576
-------------
Total Assets 156,237,347
-------------
Liabilities:
Payable for investments purchased 106,915
Payable for capital shares redeemed 494,045
Payable for investment advisory fees 122,803
Security sold short, at value (Proceeds $68,248) 63,750
Other accrued expenses 88,867
-------------
Total Liabilities 876,380
-------------
Net Assets applicable to 9,592,144 shares
outstanding $ 155,360,967
=============
Net Assets consist of:
Capital stock, at par value $ 9,592
Additional paid-in capital 129,718,686
Distributions in excess of net realized gain
on investments (685,973)
Net unrealized appreciation on investments 26,318,662
-------------
Total Net Assets $ 155,360,967
=============
Net Asset Value, offering and redemption
price per share (155,360,967 / 9,592,144
shares outstanding; 500,000,000 shares
authorized of $0.001 par value) $ 16.20
=============
STATEMENT OF OPERATIONS
For the Year Ended December 31, 1998
Investment Income:
Dividends (net of foreign taxes of $2,523) $ 1,308,604
Interest 504,810
-------------
Total Investment Income 1,813,414
-------------
Expenses:
Management fees 1,392,897
Custodian fees 41,740
Legal and audit fees 33,000
Directors' fees 26,400
Organizational expenses 20,000
Shareholder services fees 11,161
Miscellaneous expenses 30,440
-------------
Total Expenses 1,555,638
-------------
Net Investment Income 257,776
-------------
Net Realized and Unrealized Gain on
Investments:
Net realized gain on investments 7,189,741
Net change in unrealized
appreciation on investments
and security sold short 5,528,146
-------------
Net realized and unrealized gain on
investments 12,717,887
-------------
Net increase in net assets resulting from
operations $ 12,975,663
=============
See accompanying notes to financial statements.
- --------------------------------------------------------------------------------
73
<PAGE>
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Gabelli Capital
Asset Fund
- ---------------
5
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Gabelli Capital Asset Fund
- --------------------------
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, December 31,
1998 1997
------------- -------------
<S> <C> <C>
Operations:
Net investment income $ 257,776 $ 118,286
Net realized gain on investments 7,189,741 7,046,284
Net change in unrealized appreciation on investments
and security sold short 5,528,146 17,681,316
------------- -------------
Net increase in net assets resulting from operations 12,975,663 24,845,886
------------- -------------
Distributions to shareholders:
Net investment income (257,776) (118,286)
In excess of net investment income -- (8,067)
Net realized gain on investments (7,198,434) (7,046,284)
In excess of net realized gain on investments (626,865) (29,472)
------------- -------------
Total distributions to shareholders (8,083,075) (7,202,109)
------------- -------------
Capital share transactions:
Net increase in net assets from capital share transactions 45,118,114 36,244,957
------------- -------------
Net increase in net assets 50,010,702 53,888,734
Net Assets:
Beginning of period 105,350,265 51,461,531
------------- -------------
End of period $ 155,360,967 $ 105,350,265
============= =============
</TABLE>
See accompanying notes to financial statements.
- --------------------------------------------------------------------------------
74
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Gabelli Capital
Asset Fund
---------------
5
---------------
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
- ------------------
1. -- Organization
- ------------------
The Gabelli Capital Asset Fund (the "Fund"), a series of Gabelli Capital
Series Funds, Inc. (the "Company"), was organized on April 8, 1993 as a Maryland
corporation. The Company is a diversified, open-end management investment
company registered under the Investment Company Act of 1940, as amended (the
"1940 Act"). The Fund's primary objective is growth of capital. The Fund
commenced investment operations on May 1, 1995. Shares of the Fund are available
to the public only through the purchase of certain variable annuity and variable
life insurance contracts issued by The Guardian Insurance & Annuity Company,
Inc.
- -------------------------------------
2. -- Significant Accounting Policies
- -------------------------------------
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts and disclosures in the financial
statements. Actual results could differ from those estimates. The following is a
summary of significant accounting policies followed by the Fund in the
preparation of its financial statements.
Security Valuation
Portfolio securities listed or traded on a nationally recognized
securities exchange, quoted by the National Association of Securities Dealers
Automated Quotations, Inc. ("Nasdaq") or traded on foreign exchanges are valued
at the last sale price on that exchange as of the close of business on the day
the securities are being valued (if there were no sales that day, the security
is valued at the average of the closing bid and asked prices or, if there were
no asked prices quoted on that day, then the security is valued at the closing
bid price on that day). All other portfolio securities for which
over-the-counter market quotations are readily available are valued at the
latest average of the bid and asked prices. Portfolio securities traded on more
than one national securities exchange or market are valued according to the
broadest and most representative market, as determined by Gabelli Funds, Inc.
(the "Adviser"). Securities and assets for which market quotations are not
readily available are valued at their fair value as determined in good faith
under procedures established by and under the general supervision of the Board
of Directors. Short term debt securities with remaining maturities of 60 days or
less are valued at amortized cost, unless the Directors determine such does not
reflect the securities' fair value, in which case these securities will be
valued at their fair value as determined by the Directors. Debt instruments
having a greater maturity are valued at the highest bid price obtained from a
dealer maintaining an active market in those securities. Options are valued at
the last sale price on the exchange on which they are listed. If no sales of
such options have taken place that day, they will be valued at the mean between
their closing bid and asked prices.
Short Sales
The Fund is authorized to engage in short-selling, which obligates the
Fund to replace the security borrowed by purchasing the security at the current
market value sometime in the future. The Fund would incur a loss if the price of
security increases between the date of the short sale and the date on which the
Fund replaces the borrowed security. The Fund would realize a gain if the price
of the security declines between those dates. Until the Fund replaces the
borrowed security,
- --------------------------------------------------------------------------------
75
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Gabelli Capital
Asset Fund
- ---------------
5
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- --------------------------------------------------------------------------------
Gabelli Capital Asset Fund
- --------------------------
NOTES TO FINANCIAL STATEMENTS (Continued)
December 31, 1998
the Fund will maintain a segregated account with cash and/or U.S. Government
securities sufficient to cover its short position on a daily basis.
Securities Transactions and Investment Income
Securities transactions are accounted for on the trade date with realized
gain or loss on investments determined by using the identified cost method.
Interest income (including amortization of premium and accretion of discount) is
recorded as earned. Dividend income is recorded on the ex-dividend date.
Dividends and Distributions to Shareholders.
Dividends and distributions to shareholders are recorded on the
ex-dividend date. Income distributions and capital gain distributions are
determined in accordance with income tax regulations which may differ from
generally accepted accounting principles. These differences are primarily due to
differing treatments of income and gains on various investment securities held
by the Fund, timing differences and differing characterization of distributions
made by the Fund.
Provision for Income Taxes.
The Fund has qualified and intends to continue to qualify as a regulated
investment company under Subchapter M of the Internal Revenue Code of 1986, as
amended. As a result, a Federal income tax provision is not required.
Organizational Expenses.
A total of $100,000 in expenses was incurred in connection with the
organization of the Fund. These costs were advanced by the Guardian Insurance &
Annuity Company Inc. and will be reimbursed by the Fund. These organizational
costs were deferred and are being amortized on a straight-line basis over a
period of 60 months from the date the Fund commenced investment operations.
- ----------------------------------------
3. -- Agreements with Affiliated Parties
- ----------------------------------------
Pursuant to a management agreement (the "Management Agreement"), the Fund
will pay Guardian Investor Services Corporation (the "Manager") a fee, computed
daily and paid monthly, at the annual rate of 1.00% of the value of the Fund's
average daily net assets. Pursuant to an Investment Advisory Agreement among the
Fund, the Manager and Gabelli Funds, Inc. (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 First Data Investor
Services Group, Inc., the Fund's Sub-Administrator (the "Sub-Administrator").
The Adviser will supervise the performance of administrative and professional
services provided by others and pays the compensation of the Sub-Administrator
and all Officers and Directors of the Company 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 paid monthly, at the annual
rate of 0.75% of the value of the Fund's average daily net assets.
- --------------------------
4. -- Portfolio Securities
- --------------------------
Purchases and sales of securities for the year ended December 31, 1998,
other than short term securities, aggregated $108,006,193 and $56,865,560,
respec-
- --------------------------------------------------------------------------------
76
<PAGE>
---------------
Gabelli Capital
Asset Fund
---------------
5
---------------
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (Continued)
December 31, 1998
tively. For the year ended December 31, 1998, the purchases and proceeds from
the security sold short were $0 and $68,248, respectively.
- ----------------------------------
5. -- Transactions with Affiliates
- ----------------------------------
During the year ended December 31, 1998, the Fund paid brokerage
commissions of $187,764 to Gabelli & Company, Inc. and its affiliates.
- --------------------------------
6. -- Capital Stock Transactions
- --------------------------------
Transactions in shares of capital stock were as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, 1998 December 31, 1997
----------------- -----------------
Shares Amount Shares Amount
------ ------ ------ ------
<S> <C> <C> <C> <C>
Shares sold 4,460,537 $ 73,364,220 3,454,754 $ 50,227,654
Shares issued upon re-
investment of dividends 512,885 8,083,075 478,228 7,202,109
Shares redeemed (2,262,453) (36,329,181) (1,507,694) (21,184,806)
---------- ------------ ---------- ------------
Net increase 2,710,969 $ 45,118,114 2,425,288 $ 36,244,957
========== ============ ========== ============
</TABLE>
- -----------------------
7. -- Subsequent Event:
- -----------------------
On February 10, 1999, the Adviser reorganized its operations and corporate
structure by transferring a portion of its assets and liabilities to a successor
adviser, Gabelli Funds, LLC, which is wholly owned by Gabelli Asset Management
Inc., a newly formed publicly traded company that is 80% owned by the former
adviser. Counsel to the former Adviser has concluded that the ownership change
does not constitute an assignment as defined by the Investment Company Act of
1940.
- --------------------------------------------------------------------------------
77
<PAGE>
- ---------------
Gabelli Capital
Asset Fund
- ---------------
5
- ---------------
- --------------------------------------------------------------------------------
Gabelli Capital Asset Fund
- --------------------------
FINANCIAL HIGHLIGHTS
Selected data for a share of capital stock outstanding throughout each
period:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------
1998 1997 1996 1995+
--------- --------- -------- --------
<S> <C> <C> <C> <C>
Operating performance:
Net asset value, beginning of period ........... $ 15.31 $ 11.55 $ 10.70 $ 10.00
--------- --------- -------- --------
Net investment income .......................... 0.03 0.02 0.02 0.03(a)
Net realized and unrealized gain on investments 1.74 4.88 1.16 0.80
--------- --------- -------- --------
Total from investment operations ............... 1.77 4.90 1.18 0.83
--------- --------- -------- --------
Distributions to shareholders:
Net investment income .......................... (0.03) (0.02) (0.02) (0.03)
Net realized gain on investments ............... (0.78) (1.12) (0.31) (0.09)
In excess of net realized gain on investments .. (0.07) (0.00)(b) -- (0.01)
--------- --------- -------- --------
Total distributions ............................ (0.88) (1.14) (0.33) (0.13)
--------- --------- -------- --------
Net asset value, end of period .................... $ 16.20 $ 15.31 $ 11.55 $ 10.70
========= ========= ======== ========
Total return++ ................................. 11.7% 42.6% 11.0% 8.4%
========= ========= ======== ========
Ratios to average net assets and supplemental data:
Net assets, end of period (in 000's) .............. $ 155,361 $ 105,350 $ 51,462 $ 26,364
Ratio of net investment income to average
net assets ...................................... 0.19% 0.17% 0.21% 0.75%(c)
Ratio of operating expenses to average
net assets ...................................... 1.12% 1.17% 1.31% 1.78%(d)
Portfolio turnover rate ........................... 43% 65% 53% 81%
</TABLE>
- ------------
+ From commencement of 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.
(a) Net investment income before expenses assumed by the Manager and Adviser
was $0.03.
(b) Amount represents less than $0.005 per share.
(c) Annualized.
(d) The ratio of operating expenses to average net assets before reimbursement
of expenses assumed by the Manager and Adviser would have been 1.92% for
the period ended December 31, 1995.
See accompanying notes to financial statements.
- --------------------------------------------------------------------------------
78
<PAGE>
---------------
Gabelli Capital
Asset Fund
---------------
5
---------------
- --------------------------------------------------------------------------------
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Shareholders and Board of Directors of Gabelli Capital Asset Fund
(a series of Gabelli Capital Series Funds, Inc.)
We have audited the accompanying statement of assets and liabilities,
including the schedules of investments, and security sold short of Gabelli
Capital Asset Fund (the Fund) (a series of Gabelli Capital Series Funds, Inc.)
as of December 31, 1998, and the related statement of operations for the year
then ended, and the statement of changes in net assets for the two years in the
period then ended and the financial highlights for the periods indicated
therein. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of mate-rial misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and financial highlights. Our procedures included confirmation of
securities owned as of December 31, 1998 by correspondence with the custodian
and broker. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of
Gabelli Capital Asset Fund at December 31, 1998, and the results of its
operations for the year then ended, and the changes in its net assets for the
two years in the period then ended and the financial highlights for the periods
indicated therein, in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
New York, New York
February 3, 1999
<PAGE>
A-5
g:\shared\boslegal\clients\gabcapas\peas\1999\sai99.doc
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.
Unrated: Where no rating has been assigned or where a rating has been
suspended or withdrawn, it may be for reasons unrelated to the quality of the
issue.
Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities that are not rated as a
matter of policy. 3. There is a lack of essential data pertaining to the issue
or issuer. 4. The issue was privately based, in which case the rating is not
published in Moody's Investors Service,
Inc.'s publications.
Suspension or withdrawal may occur if new and material circumstances
arise, the effects of which preclude satisfactory analysis; if there is no
longer available reasonable up-to-date data to permit a judgment to be formed;
if a bond is called for redemption; or for other reasons.
Description of S&P's Corporate Debt Ratings
AAA: Debt rated AAA has the highest rating assigned by S&P's. Capacity to
pay interest and repay principal is extremely strong.
AA: Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small degree.
A: Debt rated A has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher rated
categories.
BBB: Debt rated BBB is regarded as having adequate capacity to pay
interest and repay principal. Whereas it normally exhibits protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than for debt in higher rated categories.
<PAGE>
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 than in the aaa
and aa classifications, earnings and asset protection are, nevertheless expected
to be maintained at adequate levels.
baa: An issue which is rated baa is considered to be medium grade,
neither highly protected nor poorly secured. Earnings and asset protection
appear adequate at present but may be questionable over any great length of
time.
ba: An issue which is rated ba is considered to have speculative
elements and its future cannot be considered well assured. Earnings and asset
protection may be very moderate and not well safeguarded during adverse periods.
Uncertainty of position characterizes preferred stocks in this class.
b: An issue which is rated b generally lacks the characteristics of a
desirable investment. Assurance of dividend payments and maintenance of other
terms of the issue over any long period of time may be small.
caa: An issue which is rated caa is likely to be in arrears on dividend
payments. This rating designation does not purport to indicate the future status
of payment.
c: This is the lowest rated class of preferred or preference stock.
Issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Note: Moody's may apply numerical modifiers 1, 2 and 3 in each rating
classification from "aa" through "b" in its preferred stock rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.
Description of S&P's Preferred Stock Ratings
AAA: This is the highest rating that may be assigned by S&P's to a
preferred stock issue and indicates an extremely strong capacity to pay the
preferred stock obligations.
AA: A preferred stock issue rated AA also qualifies as a high-quality
fixed income security. The capacity to pay preferred stock obligations is very
strong, although not as overwhelming as for issues rated AAA.
A: An issue rated A is backed by a sound capacity to pay the preferred
stock obligations, although it is somewhat more susceptible to the adverse
effect of changes in circumstances and economic conditions.
BBB: An issue rated BBB is regarded as backed by an adequate capacity
to pay the preferred stock obligations. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to make payments for a preferred
stock in this category than for issues in the A category.
BB, B, CCC: Preferred stock rated BB, B, and CCC are regarded, on
balance, as predominantly speculative with respect to the issuer's capacity to
pay preferred stock obligations. BB indicates the lowest degree of speculation
and CCC the highest degree of speculation. While such issues will likely have
some quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.
CC: The rating CC is reserved for a preferred stock in arrears on dividends
or sinking fund payments but that is currently paying.
C: A preferred stock rated C is a non-paying issue.
D: A preferred stock rated D is a non-paying issue with the issuer in
default on debt instruments.
Plus (+) or Minus (-): The ratings from "AA" to "B" may be modified by
the addition of a plus or minus sign to show relative standing within the major
rating categories.
