Gabelli International Growth Fund, Inc.
STATEMENT OF ADDITIONAL INFORMATION
March 9, 2000
This Statement of Additional Information ("SAI"), which is not a prospectus,
describes the Gabelli International Growth Fund, Inc. (the "Fund"), a Maryland
corporation. The SAI should be read in conjunction with the Fund's Prospectuses
for Class A Shares, Class B Shares and Class C Shares and Class AAA Shares, each
dated March 9, 2000. For a free copy of the Prospectuses, please contact the
Fund at the address, telephone number or Internet Web site printed below.
One Corporate Center
Rye, New York 10580-1434
Telephone 1-800-GABELLI (1-800-422-3554)
http://www.gabelli.com
TABLE OF CONTENTS
Page
General Information.......................................................2
Investment Strategies and Risks...........................................2
Investment Restrictions...................................................9
Directors and Officers...................................................10
Control Persons and Principal Shareholders...............................12
Investment Advisory and Other Services...................................13
Distribution Plans.......................................................15
Portfolio Transactions and Brokerage............................. .......16
Redemption of Shares.....................................................18
Determination of Net Asset Value.........................................18
Dividends, Distributions and Taxes.......................................19
Investment Performance Information.......................................21
Description of Shares, Voting Rights and Liabilities.....................22
Financial Statements.....................................................23
Appendix A..............................................................A-1
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GENERAL INFORMATION
The Fund is diversified, open-end, management investment company organized under
the laws of the State of Maryland on May 25, 1994. The Fund commenced operations
on June 30, 1995.
The Fund's Prospectuses discuss the investment objective of the Fund and the
principal strategies to be employed to achieve that objective. This SAI contains
supplemental information concerning certain types of securities and other
instruments in which the Fund may invest, additional strategies that the Fund
may utilize and certain risks associated with such investments and strategies.
INVESTMENT STRATEGIES AND RISKS
Investments
Subject to the Fund's policy of investing at least 65% of its total assets in
the equity securities of foreign companies, the Fund may invest in any of the
securities described below.
Equity Securities
Because the Fund in seeking to achieve its investment objective may invest in
the common stocks of both foreign and domestic issuers, an investment in the
Fund should be made with an understanding of the risks inherent in any
investment in common stocks, including the risk that the financial condition of
the issuers of the Fund's portfolio securities may become impaired or that the
general condition of the stock market may worsen (both of which may contribute
directly to a decrease in the value of the securities and thus in the value of
the Fund's shares). Additional risks include risks associated with the right to
receive payments from the issuer which is generally inferior to the rights of
creditors of, or holders of debt obligations or preferred stock issued by, the
issuer. The Fund does not expect to invest in excess of 5% of its assets in
securities of unseasoned issuers (companies that have operated less than three
years), which, due to their short operating history, may have less information
available and may not be as liquid as other securities.
Moreover, common stocks do not represent an obligation of the issuer and
therefore do not offer any assurance of income or provide the degree of
protection of debt securities. The issuance of debt securities or even preferred
stock by an issuer will create prior claims for payment of principal, interest
and dividends which could adversely affect the ability and inclination of the
issuer to declare or pay dividends on its common stock or the economic interest
of holders of common stock with respect to assets of the issuer upon liquidation
or bankruptcy. Further, unlike debt securities, which typically have a stated
principal amount payable at maturity (which value will be subject to market
fluctuations prior thereto), common stocks have neither a fixed principal amount
nor a maturity and have values which are subject to market fluctuations for as
long as the common stocks remain outstanding. Common stocks are especially
susceptible to general stock market movements and to volatile increases and
decreases in value as market confidence in and perceptions of the issuers
change. These perceptions are based on unpredictable factors, including
expectations regarding government, economic, monetary and fiscal policies,
inflation and interest rates, economic expansion or contraction, and global or
regional political, economic or banking crises. The value of the common stocks
in the Fund's portfolio thus may be expected to fluctuate.
Preferred stocks are usually entitled to rights on liquidation which are senior
to those of common stocks. For these reasons, preferred stocks generally entail
less risk than common stocks. Such securities may pay cumulative dividends.
Because the dividend rate and liquidation or redemption value is usually
pre-established, such securities tend to have less possibility of capital
appreciation.
Some of the securities in the Fund may be in the form of depository receipts.
Depository receipts usually represent common stock or other equity securities of
non-U.S. issuers deposited with a custodian in a depository. The underlying
securities are usually withdrawable at any time by surrendering the depository
receipt. Depository receipts are usually denominated in U.S. dollars and
dividends and other payments from the issuer are converted by the custodian into
U.S. dollars before payment to receipt holders. In other respects depository
receipts for foreign securities have the same characteristics as the underlying
securities. Depository receipts that are not sponsored by the issuer may be less
liquid and there may be less readily available public information about the
issuer.
Sovereign Debt Securities
The Fund may invest in securities issued or guaranteed by any country and
denominated in any currency. The Fund expects to invest in the securities of
companies located in developed countries, and to a lesser extent, those located
in emerging markets. Developed markets include Australia, Austria, Belgium,
Canada, Denmark, Finland, France, Germany, Ireland, Italy, Japan, Luxembourg,
the Netherlands, New Zealand, Norway, Spain, Sweden, Switzerland, the United
Kingdom and the United States. An emerging country is any country which is
generally considered to be an emerging or developing country by the
International Bank for Reconstruction and Development (more commonly referred to
as the World Bank) and the International Finance Corporation, as well as
countries that are classified by the United Nations or otherwise regarded by its
authorities as emerging or developing, at the time of the Fund's investment. The
obligations of governmental entities have various kinds of government support
and include obligations issued or guaranteed by governmental entities with
taxing power. These obligations may or may not be supported by the full faith
and credit of a government. Debt securities issued or guaranteed by foreign
governmental entities have credit characteristics similar to those of domestic
debt securities but include additional risks. These additional risks include
those resulting from devaluation of currencies, future adverse political and
economic developments and other foreign governmental laws. The Fund may have
limited legal recourse in the event of default. Also, the Fund may have
difficulty disposing of certain sovereign debt obligations because there may be
a limited trading market for such securities.
The Fund may also purchase securities issued by quasi-governmental or
supranational agencies such as the Asian Development Bank, the International
Bank for Reconstruction and Development, the Export-Import Bank and the European
Investment Bank. The governmental members, or "stockholders," usually make
initial capital contributions to the supranational entity and in many cases are
committed to make additional capital contributions if the supranational entity
is unable to repay its borrowings. The Fund will not invest more than 25% of its
assets in the securities of such supranational entities.
Nonconvertible Fixed Income Securities
The category of fixed income securities which are not convertible or
exchangeable for common stock includes preferred stocks, bonds, debentures,
notes and money market instruments such as commercial paper and bankers
acceptances. There is no minimum credit rating for these securities in which the
Fund may invest. Accordingly, the Fund could invest in securities in default,
although the Fund will not invest more than 5% of its assets in such securities.
Up to 25% of the Fund's total assets may be invested in lower-quality debt
securities, although the Fund currently does not expect to invest more than 5%
of its assets in such securities. The market values of lower-quality fixed
income securities tend to be less sensitive to changes in prevailing interest
rates than higher-quality securities but more sensitive to individual corporate
developments than higher-quality securities. Such lower-quality securities also
tend to be more sensitive to economic conditions than are higher-quality
securities. Accordingly, these lower-quality securities are considered
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligation and will
generally involve more credit risk than securities in the higher-quality
categories. Even securities rated Baa or BBB by Moody's Investors Service, Inc.
("Moody's") and Standard and Poor's Ratings Services ("S&P"), respectively,
which ratings are considered investment grade, possess some speculative
characteristics, and changes in economic conditions or other circumstances are
more likely to lead to a weakened capacity to make principal and interest
payments than is the case with higher-grade bonds. See "Appendix - Description
of Ratings." There are risks involved in applying credit ratings as a method of
evaluating high yield obligations in that credit ratings evaluate the safety of
principal and interest payments, not market value risk. In addition, credit
rating agencies may not change credit ratings on a timely basis to reflect
changes in economic or company conditions that affect a security's market value.
The Fund will rely on the judgment, analysis and experience of its adviser,
Gabelli Funds, LLC (the "Adviser"), in evaluating the creditworthiness of an
issuer. In this evaluation, the Adviser will take into consideration, among
other things, the issuer's financial resources and ability to cover its interest
and fixed charges, factors relating to the issuer's industry and its sensitivity
to economic conditions and trends, its operating history, the quality of the
issuer's management and regulatory matters.
The risk of loss due to default by the issuer is significantly greater for the
holders of lower quality securities because such securities are generally
unsecured and are often subordinated to other obligations of the issuer. During
an economic downturn or a sustained period of rising interest rates, highly
leveraged issuers of lower quality securities may experience financial stress
and may not have sufficient revenues to meet their interest payment obligations.
An issuer's ability to service its debt obligations may also be adversely
affected by specific corporate developments, its inability to meet specific
projected business forecasts, or the unavailability of additional financing.
Factors adversely affecting the market value of high yield and other fixed
income securities will adversely affect the Fund's net asset value. In addition,
the Fund may incur additional expenses to the extent that it is required to seek
recovery upon a default in the payment of principal of or interest on its
portfolio holdings. At times, adverse publicity regarding lower-quality
securities has depressed prices for such securities to some extent.
From time to time, proposals have been discussed regarding new legislation
designed to limit the use of certain high yield debt securities by issuers in
connection with leveraged buy-outs, mergers and acquisitions, or to limit the
deductibility of interest payments on such securities. Such proposals, if
enacted into law, could reduce the market for such debt securities generally,
could negatively affect the financial condition of issuers of high yield
securities by removing or reducing a source of future financing, and could
negatively affect the value of specific high yield issues and the high yield
market in general. For example, under a provision of the Internal Revenue Code
(the "Code") enacted in 1989, a corporate issuer may be limited from deducting
all of the original issue discount on high-yield discount obligations (i.e.,
certain types of debt securities issued at a significant discount to their face
amount). The likelihood of passage of any additional legislation or the effect
thereof is uncertain.
The secondary trading market for lower-quality fixed income securities is
generally not as liquid as the secondary market for higher-quality securities
and is very thin for some securities. The relative lack of an active secondary
market may have an adverse impact on market price and the Fund's ability to
dispose of particular issues when necessary to meet liquidity needs or in
response to a specific economic event such as a deterioration in the
creditworthiness of the issuer. The relative lack of an active secondary market
for certain securities may also make it more difficult for the Fund to obtain
accurate market quotations for purposes of valuing its portfolio. Market
quotations are generally available on many high yield issues only from a limited
number of dealers and may not necessarily represent firm bids of such dealers or
prices for actual sales. During such times, the responsibility of the Board of
Directors to value the securities becomes more difficult and judgment plays a
greater role in valuation because there is less reliable, objective data
available.
Convertible Securities
The Fund may invest up to 25% of its total assets in convertible securities
rated, at the time of investment, less than BBB by S&P or Baa by Moody's or
unrated but of equivalent credit quality in the judgment of the Adviser,
although the Fund currently does not expect to invest in excess of 5% of its
assets in such securities.
Some of the convertible securities in the Fund's portfolio may be "Pay-in-Kind"
securities. During a designated period from original issuance, the issuer or
such a security may pay dividends or interest to the holder by issuing
additional fully paid and nonassessable shares or units of the same or another
specified security. While no securities investment is completely without risk,
investments in convertible securities generally entail less risk than common
stock, although the extent to which such risk is reduced depends in large
measure upon the degree to which the convertible security sells above its value
as a fixed-income security.
Securities Subject To Reorganization
The Fund may invest in securities for which a tender or exchange offer has been
made or announced and in securities of companies for which a merger,
consolidation, liquidation or reorganization proposal has been announced if, in
the judgment of the Adviser, there is a reasonable prospect of capital
appreciation significantly greater than the brokerage and other transaction
expenses involved.
In general, securities which are the subject of such an offer or proposal sell
at a premium to their historic market price immediately prior to the
announcement of the offer or may also discount what the stated or appraised
value of the security would be if the contemplated transaction were approved or
consummated. Such investments may be advantageous when the discount
significantly overstates the risk of the contingencies involved; significantly
undervalues the securities, assets or cash to be received by shareholders of the
prospective portfolio company as a result of the contemplated transaction; or
fails adequately to recognize the possibility that the offer or proposal may be
replaced or superseded by an offer or proposal of greater value. The evaluation
of such contingencies requires unusually broad knowledge and experience on the
part of the Adviser, which must appraise not only the value of the issuer and
its component businesses as well as the assets or securities to be received as a
result of the contemplated transaction but also the financial resources and
business motivation of the offeror and the dynamics and business climate when
the offer or proposal is in process. 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 risk involved and the potential of available alternate investments.
Options
The Fund may purchase or sell options on individual securities as well as on
indices of securities as a means of achieving additional return or of hedging
the value of its portfolio.
A call option is a contract that gives the holder of the option the right, in
return for a premium paid, to buy from the seller the security underlying the
option at a specified exercise price at any time during the term of the option
or, in some cases, only at the end of the term of the option. The seller of the
call option has the obligation upon exercise of the option to deliver the
underlying security upon payment of the exercise price. A put option is a
contract that gives the holder of the option the right in return for a premium
to sell to the seller the underlying security at a specified price. The seller
of the put option, on the other hand, has the obligation to buy the underlying
security upon exercise at the exercise price. The Fund's transactions in options
may be subject to specific segregation requirements. See "Hedging Transactions"
below.
If the Fund has sold an option, it may terminate its obligation by effecting a
closing purchase transaction. This is accomplished by purchasing an option of
the same series as the option previously sold. There can be no assurance that a
closing purchase transaction can be effected when the Fund so desires.
The purchaser of an option risks a total loss of the premium paid for the option
if the price of the underlying security does not increase or decrease
sufficiently to justify exercise. The seller of an option, on the other hand,
will recognize the premium as income if the option expires unrecognized but
foregoes any capital appreciation in excess of the exercise price in the case of
a call option, and may be required to pay a price in excess of current market
value in the case of a put option. Options purchased and sold other than on an
exchange in private transactions also impose on the Fund the credit risk that
the counterparty will fail to honor its obligations. The Fund will not purchase
options if, as a result, the aggregate cost of all outstanding options exceeds
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, other than for hedging purposes, the aggregate initial
margin and premiums required to establish such positions will not exceed 5% of
the Fund's total assets after taking into account unrealized profits and
unrealized losses on any such contracts it has entered into.
Warrants and Rights
The Fund may invest up to 5% of its total assets in warrants or rights (other
than those acquired in units or attached to other securities) which entitle the
holder to buy equity securities at a specific price for or at the end of a
specific period of time.
Investing in rights and warrants can provide a greater potential for profit or
loss than an equivalent investment in the underlying security, and, thus, can be
a speculative investment. The value of a right or warrant may decline because of
a decline in the value of the underlying security, the passage of time, changes
in interest rates or in the dividend or other policies of the company whose
equity underlies the warrant or a change in the perception as to the future
price of the underlying security, or any combination thereof. Rights and
warrants generally pay no dividends and confer no voting or other rights other
than to purchase the underlying security.
Investments in Investment Companies
The Fund may invest up to 10% of its total assets (5% per issuer) in securities
issued by other unaffiliated investment companies, although the Fund may not
acquire more than 3% of the voting securities of any investment company.
When Issued, Delayed Delivery Securities and Forward Commitments
The Fund may enter into forward commitments for the purchase or sale of
securities, including on a "when issued" or "delayed delivery" basis. In such
transactions, instruments are bought with payment and delivery taking place in
the future in order to secure what is considered to be an advantageous yield or
price at the time of the transaction. In some cases, a forward commitment may be
conditioned upon the occurrence of a subsequent event, such as approval and
consummation of a merger, corporate reorganization or debt restructuring, i.e.,
a when, as and if issued security. When such transactions are negotiated, the
price is fixed at the time of the commitment, with payment and delivery taking
place in the future, generally a month or more after the date of the commitment.
While the Fund will only enter into a forward commitment with the intention of
actually acquiring the security, the Fund may sell the security before the
settlement date if it is deemed advisable.
Securities purchased under a forward commitment are subject to market
fluctuation, and no interest (or dividends) accrues to the Fund prior to the
settlement date. The Fund will segregate with its custodian cash or liquid
securities in an aggregate amount at least equal to the amount of its
outstanding forward commitments. 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 a price considered to be
advantageous.
Short Sales
The Fund may make short sales of securities. A short sale is a transaction in
which the Fund sells a security it does not own in anticipation that the market
price of that security will decline. The Fund expects to make short sales both
to obtain capital gains from anticipated declines in securities and as a form of
hedging to offset potential declines in long positions in the same or similar
securities. The short sale of a security is considered a speculative investment
technique.
When the Fund makes a short sale, it must borrow the security sold short and
deliver it to the broker-dealer through which it made the short sale in order to
satisfy its obligation to deliver the security upon conclusion of the sale. The
Fund may have to pay a fee to borrow particular securities and is often
obligated to pay over any payments received on such borrowed securities.
The Fund's obligation to replace the borrowed security will be secured by
collateral deposited with the broker-dealer, usually cash, U.S. government
securities or other 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.
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 5% of the value of its assets
or the Fund's aggregate short sales of a particular class of securities exceeds
5% of the outstanding securities of that class. The Fund may also make short
sales "against the box" without respect to such limitations. In this type of
short sale, at the time of the sale, the Fund owns or has the immediate and
unconditional right to acquire at no additional cost the identical security.
Restricted and Illiquid Securities
The Fund may invest up to a total of 15% of its net assets in securities the
markets for which are illiquid, including repurchase agreements with more than
seven days to maturity. Within this 15% limitation, the Fund may invest up to 5%
of its net assets in the securities of unseasoned issuers. Illiquid securities
include securities the disposition of which is subject to substantial legal or
contractual restrictions. The sale of illiquid securities often requires more
time and results in higher brokerage charges or dealer discounts and other
selling expenses than does the sale of securities eligible for trading on
national securities exchanges or in the over-the-counter markets. Restricted
securities may sell at a price lower than similar securities that are not
subject to restrictions on resale. Unseasoned issuers are companies (including
predecessors) that have operated less than three years. The continued liquidity
of such securities is not as well assured as that of publicly traded securities,
and accordingly the Board of Directors will monitor their liquidity. The Board
will review pertinent factors such as trading activity, reliability of price
information and trading patterns of comparable securities in determining whether
to treat any such security as liquid for purposes of the foregoing 15% test. To
the extent the Board treats such securities as liquid, temporary impairments to
trading patterns of such securities may adversely affect the Fund's liquidity.
To the extent it can do so consistent with the foregoing limitations, the Fund
may invest in non-publicly traded securities, including securities that are not
registered under the Securities Act of 1933, as amended, but that can be offered
and sold to qualified institutional buyers under Rule 144A under that Act. The
Board of Directors has adopted guidelines and delegated to the Adviser, subject
to the supervision of the Board of Directors, the daily function of determining
and monitoring the liquidity of Rule 144A securities. Rule 144A securities may
become illiquid if qualified institutional buyers are not interested in
acquiring the securities.
Repurchase Agreements
The Fund may invest in repurchase agreements, which are agreements pursuant to
which securities are acquired by the Fund from a third party with the
understanding that they will be repurchased by the seller at a fixed price on an
agreed date. These agreements may be made with respect to any of the portfolio
securities in which the Fund is authorized to invest. Repurchase agreements may
be characterized as loans secured by the underlying securities. The Fund may
enter into repurchase agreements with (i) member banks of the Federal Reserve
System having total assets in excess of $500 million and (ii) securities
dealers, provided that such banks or dealers meet the creditworthiness standards
established by the Fund's Adviser ("Qualified Institutions"). The Adviser will
monitor the continued creditworthiness of Qualified Institutions. The resale
price reflects the purchase price plus an agreed upon market rate of interest
which is unrelated to the coupon rate or date of maturity of the purchased
security. The collateral is marked to market daily. Such agreements permit the
Fund to keep all its assets earning interest while retaining "overnight"
flexibility in pursuit of investment of a longer-term nature.
The following information supplements that in the Prospectus.
The use of repurchase agreements involves certain risks. For example, if the
seller of securities under a repurchase agreement defaults on its obligation to
repurchase the underlying securities, as a result of its bankruptcy or
otherwise, the Fund will seek to dispose of such securities, which action could
involve costs or delays. If the seller becomes insolvent and subject to
liquidation or reorganization under applicable bankruptcy or other laws, the
Fund's ability to dispose of the underlying securities may be restricted.
Finally, it is possible that the Fund may not be able to substantiate its
interest in the underlying securities. To minimize this risk, the securities
underlying the repurchase agreement will be held by the Fund's custodian at all
times in an amount at least equal to the repurchase price, including accrued
interest. If the seller fails to repurchase the securities, the Fund may suffer
a loss to the extent proceeds from the sale of the underlying securities are
less than the repurchase price. The Fund will not enter into repurchase
agreements of a duration of more than seven days if, taken together with all
other illiquid securities in the Fund's portfolio, more than 15% of its net
assets would be so invested.
Loans of Portfolio Securities
To increase income, the Fund may lend its portfolio securities to securities
broker-dealers or financial institutions if (1) the loan is collateralized in
accordance with applicable regulatory requirements including collateralization
continuously at no less than 100% by marking to market daily, (2) the loan is
subject to termination by the Fund at any time, (3) the Fund receives reasonable
interest or fee payments on the loan, (4) the Fund is able to exercise all
voting rights with respect to the loaned securities and (5) the loan will not
cause the value of all loaned securities to exceed 33 1/3% of the value of the
Fund's assets.
If the borrower fails to maintain the requisite amount of collateral, the loan
automatically terminates and the Fund could use the collateral to replace the
securities while holding the borrower liable for any excess of replacement cost
over the value of the collateral. As with any extension of credit, there are
risks of delay in recovery and in some cases even loss of rights in collateral
should the borrower of the securities fail financially.
Borrowing
The Fund may not borrow money except for (1) short-term credits from banks as
may be necessary for the clearance of portfolio transactions, and (2) borrowings
from banks for temporary or emergency purposes, including the meeting of
redemption requests, which would otherwise require the untimely disposition of
its portfolio securities. Borrowing may not, in the aggregate, exceed 15% of the
Fund's total assets after giving effect to the borrowing, and borrowing for
purposes other than meeting redemptions may not exceed 5% of the Fund's assets
after giving effect to the borrowing. The Fund will not make additional
investments when borrowings exceed 5% of assets. The Fund may mortgage, pledge
or hypothecate assets to secure such borrowings.
Hedging Transactions
Futures and Forward Contracts. The Fund may enter into futures and forward
contracts only for certain bona fide hedging and risk management purposes. The
Fund may enter into futures and forward 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, currency swaps, foreign currency
or currency index futures contracts and put and call options on such contracts
or on currencies. A forward foreign currency contract involves an obligation to
purchase or sell a specific currency for a set price at a future date. A
currency swap is an arrangement whereby each party exchanges one currency for
another on a particular day and agrees to reverse the exchange on a later date
at a specific exchange rate. Forward foreign currency contracts and currency
swaps are established in the interbank market conducted directly between
currency traders (usually large commercial banks or other financial
institutions) on behalf of their customers. Futures contracts are similar to
forward contracts except that they are traded on an organized exchange and the
obligations thereunder may be offset by taking an equal but opposite position to
the original contract, with profit or loss determined by the relative prices
between the opening and offsetting positions. The Fund expects to enter into
these currency contracts and swaps in primarily the following circumstances: to
"lock in" the U.S. dollar equivalent price of a security the Fund is
contemplating to buy or sell that is denominated in a non-U.S. currency; or to
protect against a decline against the U.S. dollar of the currency of a
particular country to which the Fund's portfolio has exposure. The Fund
anticipates seeking to achieve the same economic result by utilizing from time
to time for such hedging a currency different from the one of the given
portfolio security as long as, in the view of the Adviser, such currency is
essentially correlated to the currency of the relevant portfolio security based
on historic and expected exchange rate patterns.
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. The swap market has grown substantially in recent years with a large
number of banks and investment banking firms acting both as principals and as
agents utilizing standardized swap documentation. As a result, the swap market
has become relatively broad and deep as compared to the markets for similar
instruments which are established in the interbank market. In accordance with
the current position of the staff of the Securities and Exchange Commission (the
"SEC"), the Fund will treat swap transactions as illiquid for purposes of the
Fund's policy regarding illiquid securities. 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 Fund expects that its investments in these currency transactions and the
futures and forward contracts described above will be less than 5% of its net
assets.
Portfolio Turnover
The investment policies of the Fund may lead to frequent changes in investments,
particularly in periods of rapidly fluctuating interest or currency exchange
rates. The portfolio turnover may be higher than that of other investment
companies. While it is impossible to predict with certainty the portfolio
turnover, the Adviser expects that the annual turnover rate of the Fund will not
exceed 75%. Portfolio turnover generally involves some expense to the Fund,
including brokerage commissions or dealer mark-ups and other transaction costs
on the sale of securities and reinvestment in other securities. The portfolio
turnover rate is computed by dividing the lesser of the amount of the securities
purchased or securities sold by the average monthly value of securities owned
during the year (excluding securities whose maturities at acquisition were one
year or less).
INVESTMENT RESTRICTIONS
The Fund's investment objective and the following investment restrictions are
fundamental and cannot be changed without the approval of the holders of a
majority of the Fund's outstanding voting securities (defined in the Act as the
lesser of (a) more than 50% of the outstanding shares or (b) 67% or more of the
shares represented at a meeting at which more than 50% of the outstanding shares
are represented). All other investment policies or practices are considered by
the Fund not to be fundamental and accordingly may be changed without
stockholder approval. If a percentage restriction on investment or use of assets
set forth below is adhered to at the time a transaction is effected, later
changes in percentage resulting from changing market values or total assets of
the Fund will not be considered a deviation from policy. The Fund may not:
(1) invest more than 25% of the value of its total assets in any particular
industry (this restriction does not apply to obligations issued or
guaranteed by the U.S. government or its agencies or instrumentalities);
(2) issue senior securities, except that the Fund may borrow money from a bank,
including on margin if margin securities are owned, in an amount up to 33
1/3% of its total assets (including the amount of such enumerated senior
securities issued but excluding any liabilities and indebtedness not
constituting senior securities) and except that the Fund may borrow up to
an additional 5% of its total assets for temporary purposes; or pledge its
assets other than to secure such issuances or in connection with hedging
transactions, short sales, when-issued and forward commitment transactions
and similar investment strategies;
(3) make loans of money or property to any person, except through loans of
portfolio securities, the purchase of fixed income securities or the
acquisition of securities subject to repurchase agreements;
(4) underwrite the securities of other issuers, except to the extent that in
connection with the disposition of portfolio securities or the sale of its
own shares the Fund may be deemed to be an underwriter;
(5) invest for the purpose of exercising control over management of any company;
(6) purchase real estate or interests therein, including limited partnerships
that invest primarily in real estate equity interests, other than publicly
traded real estate investment trusts and publicly traded master limited
partnership interests; or
(7) purchase or sell commodities or commodity contracts except for certain bona
fide hedging, yield enhancement and risk management purposes or invest in
any oil, gas or mineral leases.
In addition, as a diversified investment company, the Fund is subject to the
following limitations as to 75% of its total assets: (a) the Fund may not invest
more than 5% of its total assets in the securities of any one issuer, except
obligations of the U.S. Government and its agencies and instrumentalities, and
(b) the Fund may not own more than 10% of the outstanding voting securities of
any one issuer.
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 executive officers of the Fund, their ages and their
principal occupations for the past five years and their affiliations, if any,
with the Adviser or the Sub-Administrator, are shown below. Directors deemed to
be "interested persons" of the Fund for purposes of the 1940 Act are indicated
by an asterisk.
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
- ---------------------------------------------- ---------------------------------------------------------------
Name, Address, Age and Position(s) with the Principal Occupations During Last Five Years; Affiliations
Fund with the Adviser
- ---------------------------------------------- ---------------------------------------------------------------
- ---------------------------------------------- ---------------------------------------------------------------
Mario J. Gabelli* Chairman of the Board and President of the Fund, Chief
President, Director and Chief Investment Executive Officer and Chief Investment Officer of Gabelli
Officer Asset Management Inc., (Since 1999) and of Gabelli Funds, LLC
Age: 57 (the "Adviser"). Director or Trustee and officer of various
other investment companies
advised by the Adviser. Chairman
of the Board and Chief Executive
Officer of Lynch Corporation, a
(diversified manufacturing
company); and Lynch Interactive
Corporation (a communications
services company).
- ---------------------------------------------- ---------------------------------------------------------------
- ---------------------------------------------- ---------------------------------------------------------------
Cesar M.P. Bryan Senior Vice President of and Portfolio manager with GAMCO
President and Portfolio Manager Investors, Inc., wholly owned subsidiary of the Adviser,
Age: 44 since May 1994 and President of Gabelli Gold Fund, Inc.;
Co-Portfolio Manager of Gabelli
Global Opportunity Fund; Formerly
Senior Vice President and
Portfolio Manager of Lexington
Management Corporation (until May
1994).
- ---------------------------------------------- ---------------------------------------------------------------
- ---------------------------------------------- ---------------------------------------------------------------
Anthony J. Colavita President and Attorney at Law in the law firm of Anthony J.
Director Colavita, P.C. since 1961; Director or Trustee of various
Age: 64 other mutual funds advised by the Adviser and its affiliates.
- ---------------------------------------------- ---------------------------------------------------------------
- ---------------------------------------------- ---------------------------------------------------------------
Karl Otto Pohl* Member of the Shareholder Committee of Sal Oppenheim Jr. &
Director Cie (private investment bank); Director of Gabelli Asset
Age: 70 Management Inc. (investment management), Zurich Allied
(insurance), and TrizecHahn Corp. (real estate); Former
President of the Deutsche Bundesbank and Chairman of its
Central Bank Council from 1980 through 1991; and Director or
Trustee of all other mutual funds
advised by the Adviser and its
affiliates.
- ---------------------------------------------- ---------------------------------------------------------------
- ---------------------------------------------- ---------------------------------------------------------------
Werner Roeder, M.D. Medical Director, Lawrence Hospital and practicing private
Director physician. Director of various other Gabelli Funds.
Age: 59
- ---------------------------------------------- ---------------------------------------------------------------
- ---------------------------------------------- ---------------------------------------------------------------
Anthonie C. van Ekris Managing Director of Balmac International, Ltd.; Director of
Director Spinnaker Industries, Inc. and Stahel Mardmeyer A.Z.; and
Age: 65 Director or Trustee of various other mutual funds advised by
the Adviser and its affiliate.
- ---------------------------------------------- ---------------------------------------------------------------
- ---------------------------------------------- ---------------------------------------------------------------
Bruce N. Alpert Executive Vice President and Chief Operating Officer of the
Vice President and Treasurer Adviser since 1988; Director and President of Gabelli
Age: 48 Advisers, Inc.; and an officer of all funds managed by the
Adviser or its affiliates.
- ---------------------------------------------- ---------------------------------------------------------------
- ---------------------------------------------- ---------------------------------------------------------------
James E. McKee Vice President and General Counsel of Gabelli Asset
Secretary Management, Inc. and GAMCO Investors, Inc. since 1993;
Age: 36 Secretary of all mutual funds managed by the Adviser or its
affiliates; U.S. SEC, New York (Branch Chief, 1992-1993,
Staff Attorney, 1989-1992).
- ---------------------------------------------- ---------------------------------------------------------------
</TABLE>
The Corporation, its investment adviser and principal underwriter have adopted a
code of ethics (the "Code of Ethics") under Rule 17j-1 of the 1940 Act. The Code
of Ethics permits personnel, subject to the Code of Ethics and their provisions,
to invest in securities, including securities that may be purchased or held by
the Corporation.
The Fund pays each Director who is not an employee of the Adviser or an
affiliated company an annual fee of $250 and $250 for each meeting of the Board
of Directors attended by the Director, and reimburses Directors for certain
travel and other out-of-pocket expenses incurred by them in connection with
attending such meetings. Directors and officers of the Fund who are employed by
the Adviser or an affiliated company receive no compensation or expense
reimbursement from the Fund.
The following table sets forth certain information regarding the compensation of
the Fund's directors and officers. No executive officer or person affiliated
with the Fund received compensation from the Fund for the calendar year ended
December 31, 1999 in excess of $60,000.
Compensation Table
<TABLE>
<CAPTION>
<S> <C> <C>
Total Compensation
from the Fund
Aggregate Compensation and Fund Complex
Name of Person, Position from the Fund Paid to Directors*
Mario J. Gabelli, Chariman of the Board $ 0 $ 0
Anthony J. Colavita, Director $ 2,250 $ 95,375
Karl Otto Pohl, Director $ 500 $ 25,250
Werner J. Roeder, M.D., Director $ 2,250 $ 32,734
Anthony C. van Ekris, Director $ 2,000 $ 59,750
* Represents the total compensation paid to such persons during the calendar
year ended December 31, 1999. The parenthetical number represents the
number of investment companies (including the Fund) from which such person
received compensation that are considered part of the same fund complex as
the Fund because they have common or affiliated investment advisers.
</TABLE>
CONTROL PERSONS AND PRINCIPAL SHAREHOLDERS
- -------------------------------------------------------------------------------
As of March 1, 2000, the following persons owned of record or beneficially 5% or
more of the Fund's outstanding shares:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NAME AND ADDRESS OF HOLDER OF RECORD PERCENTAGE OF FUND
Charles Schwab & Co., Inc. 8.86%
Special Custody Acct.
FBO BEN OF CUSTS
Attn: Mutual Funds
101 Montgomery Street
San Francisco, CA 94104-4122
C/O W Frewin-Cable Systems 7.23%
Wexford Clearing Services Corp.
Charles Dolan
One Media Cross Ways
Woodbury, NY 11797-2062
* Beneficial ownership is disclaimed.
Beneficial ownership of shares representing 25% or more of the outstanding
shares of each class of the Fund may be deemed to have control, as that
term is defined in the 1940 Act.
- --------------------------------------------------------------------------------
As of February 28, 2000, as a group, the Directors and officers of the Fund
owned less than 1% of the outstanding shares of the Fund.
INVESTMENT ADVISORY AND OTHER SERVICES
The Investment Adviser
- --------------------------------------------------------------------------------
The Adviser is a New York limited liability company which also serves as an
investment adviser to 15 other open-end investment companies, and 4 closed-end
investment companies with aggregate assets in excess of $10.6 billion as of
December 31, 1999. The Adviser is a registered investment adviser under the
Investment Advisers Act of 1940, as amended. Mr. Mario J. Gabelli may be deemed
a "controlling person" of the Adviser on the basis of his controlling interest
of the ultimate parent company of the Adviser. The Adviser has several
affiliates that provide investment advisory services: GAMCO Investors, Inc.
("GAMCO"), a wholly-owned subsidiary of the Adviser, acts as investment adviser
for individuals, pension trusts, profit-sharing trusts and endowments, and had
assets under management of approximately $9.4 billion under its management as of
December 31, 1999; Gabelli Advisers, Inc. acts as investment adviser to the
Gabelli Westwood Funds with assets under management of approximately $390
million as of December 31, 1999; Gabelli Securities, Inc. acts as investment
adviser to certain alternative investments products, consisting primarily of
risk arbitrage and merchant banking limited partnerships and offshore companies,
with assets under management of approximately $230 million as of December 31,
1999; and Gabelli Fixed Income LLC acts as investment adviser for the three
portfolios of The Treasurer's Fund and separate accounts having assets under
management of approximately $1.4 billion as of December 31, 1999.
- --------------------------------------------------------------------------------
Affiliates of the Adviser may, in the ordinary course of their business, acquire
for their own account 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. The securities in which the Fund
might invest may thereby be limited to some extent. For instance, many companies
in the past several years have adopted so-called "poison pill" or other
defensive measures designed to discourage or prevent the completion of
non-negotiated offers for control of the company. Such defensive measures may
have the effect of limiting the shares of the company which might otherwise be
acquired by the Fund if the affiliates of the Adviser or their advisory accounts
have or acquire a significant position in the same securities. However, the
Adviser does not believe that the investment activities of its affiliates will
have a material adverse effect upon the Fund in seeking to achieve its
investment objectives. Securities purchased or sold pursuant to contemporaneous
orders entered on behalf of the investment company accounts of the Adviser or
the advisory accounts managed by its affiliates for their unaffiliated clients
are allocated pursuant to principles believed to be fair and not disadvantageous
to any such accounts. In addition, all such orders are accorded priority of
execution over orders entered on behalf of accounts in which the Adviser or its
affiliates have a substantial pecuniary interest. The Adviser may on occasion
give advice or take action with respect to other clients that differ from the
actions taken with respect to the Fund. The Fund may invest in the securities of
companies which are investment management clients of GAMCO. In addition,
portfolio companies or their officers or directors may be minority shareholders
of the Adviser or its affiliates.
- --------------------------------------------------------------------------------
Pursuant to an Investment Advisory Contract (the "Contract"), which was
initially approved by the Fund's sole shareholder on June 28, 1995, and last
approved by the Board of Directors on May 19, 1999, 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 of 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
Trustees of the Fund. For the services it provides, the Adviser is paid an
annual fee based on the value of the Fund's average daily net assets of 1.00%.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Under the Contract, the Adviser also (i) provides the Fund with the services of
persons competent to perform such supervisory, administrative, and clerical
functions as are necessary to provide effective administration of the Fund,
including maintaining certain books and records and overseeing the activities of
the Fund's Custodian and Transfer Agent; (ii) oversees the performance of
administrative and professional services to the Fund by others, including the
Fund's Sub-Administrator, Custodian, Transfer Agent and Dividend Disbursing
Agent, as well as accounting, auditing and other services performed for the
Fund; (iii) provides the Fund with adequate office space and facilities; (iv)
prepares, but does not pay for, the periodic updating of the Fund's registration
statement, Prospectus and Additional Statement, including the printing of such
documents for the purpose of filings with the SEC and state securities
administrators, the Fund's tax returns, and reports to the Fund's shareholders
and the SEC; (v) calculates the net asset value of shares in the Fund; (vi)
prepares, but does not pay for, all filings under the securities or "Blue Sky"
laws of such states or countries as are designated by the Distributor, which may
be required to register or qualify, or continue the registration or
qualification, of the Fund and/or its shares under such laws; and (vii) prepares
notices and agendas for meetings of the Fund's Board of Trustees and minutes of
such meetings in all matters required by the Act to be acted upon by the Board.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The Contract provides that absent willful misfeasance, bad faith, gross
negligence or reckless disregard of its duty, the Adviser and its employees,
officers, directors and controlling persons are not liable to the Fund or any of
its investors for any act or omission by the Adviser or for any error of
judgment or for losses sustained by the Fund. However, the Contract provides
that the Fund is not waiving any rights it may have with respect to any
violation of law which cannot be waived. The Contract also provides
indemnification for the Adviser and each of these persons for any conduct for
which they are not liable to the Fund. The Contract in no way restricts the
Adviser from acting as adviser to others. The Fund has agreed by the terms of
the Contract that the word "Gabelli" in its name is derived from the name of the
Adviser which in turn is derived from the name of Mario J. Gabelli; that such
name is the property of the Adviser for copyright and/or other purposes; and
that, therefore, such name may freely be used by the Adviser for other
investment companies, entities or products. The Fund has further agreed that in
the event that for any reason, the Adviser ceases to be its investment adviser,
the Fund will, unless the Adviser otherwise consents in writing, promptly take
all steps necessary to change its name to one which does not include "Gabelli."
- --------------------------------------------------------------------------------
By its terms, the Contract will remain in effect for a period of two years and
thereafter from year to year,provided each such annual continuance is
specifically approved by the Fund's Board of Trustees or by a "majority" (as
defined in the 1940 Act) vote of its shareholders and, in either case, by a
majority vote of the Trustees who are not parties to the Contract or interested
persons of any such party, cast in person at a meeting called specifically for
the purpose of voting on the Contract. The Contract is terminable without
penalty by the Fund on sixty days' written notice when authorized either by
majority vote of its outstanding voting shares or by a vote of a majority of its
Board of Trustees, or by the Adviser on sixty days' written notice, and will
automatically terminate in the event of its "assignment" as defined by the 1940
Act.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
As compensation for its services and the related expenses borne by the Adviser,
the Fund pays the adviser a fee, computed daily and payable monthly, equal, on a
annual basis, to 1.00% of the Fund's average daily net assets, payable out of
the Fund's net assets. For the fiscal years ended December 31, 1999, 1998, and
1997, the Fund incurred in investment advisory fees $318,448, $276,379 and
$193,382, respectively.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The Sub-Administrator
- --------------------------------------------------------------------------------
The Adviser has entered into a Sub-Administration Agreement (the
"Sub-Administration Agreement") with PFPC Inc.(formerly known as First Data
Investor Services Group, Inc.) (the "Sub-Administrator"), a majority-owned
subsidiary of PNC Bank Corp., which is located at 101 Federal Street, Boston,
Massachusetts 02110. Under the Sub-Administration Agreement, the
Sub-Administrator (a) assists in supervising all aspects of the Fund's
operations except those performed by the Adviser under its advisory agreement
with the Fund; (b) supplies the Fund with office facilities (which may be in the
Sub-Administrator's own offices), statistical and research data, data processing
services, clerical, accounting and bookkeeping services, including, but not
limited to, the calculation of the net asset value of shares in the Fund,
internal auditing and legal services, internal executive and administrative
services, and stationery and office supplies; (c) prepares and distributes
materials for all Fund Board of Trustees' Meetings including the mailing of all
Board materials and collates the same materials into the Board books and assists
in the drafting of minutes of the Board Meetings; (d) prepares reports to Fund
shareholders, tax returns and reports to and filings with the SEC and state
"Blue Sky" authorities; (e) calculates the Fund's net asset value per share,
provides any equipment or services necessary for the purpose of pricing shares
or valuing the Fund's investment portfolio and, when requested, calculates the
amounts permitted for the payment of distribution expenses under any
distribution plan adopted by the Fund; (f) provides compliance testing of all
Fund activities against applicable requirements of the 1940 Act and the rules
thereunder, the Code, and the Fund's investment restrictions; (g) furnishes to
the Adviser such statistical and other factual information and information
regarding economic factors and trends as the Adviser from time to time may
require; and (h) generally provides all administrative services that may be
required for the ongoing operation of the Fund in a manner consistent with the
requirements of the 1940 Act.
- --------------------------------------------------------------------------------
For the services it provides, the Adviser pays the Sub-Administrator an annual
fee based on the value of the aggregate average daily net assets of all funds
under its administration managed by the Adviser as follows: up to $10 billion -
.0275%; over $10 billion to $15 billion - .0125%; over $15 billion - .01%. The
Sub-Administrator's fee is paid by the Adviser and will result in no additional
expenses to the Fund.
Counsel
Willkie Farr & Gallagher, 787 Seventh Avenue, New York, New York 10019, serves
as the Fund's legal counsel.
Independent Auditors
- --------------------------------------------------------------------------------
Ernst & Young LLP, independent auditors, have been selected to audit the Fund's
annual financial statements, and is located at 787 Seventh Ave., New York, New
York 10019.
- -------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Custodian, Transfer Agent and Dividend Disbursing Agent
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
State Street, 225 Franklin Street, Boston, MA 02110 is the Custodian for the
Fund's cash and securities. Boston Financial Data Services, Inc. ("BFDS"), an
affiliate of State Street located at the BFDS Building, Two Heritage Drive,
Quincy, Massachusetts 02171, performs the services of transfer agent and
dividend disbursing agent for the Fund. Neither BFDS nor State Street assists in
or is responsible for investment decisions involving assets of the Fund.
- --------------------------------------------------------------------------------
Distributor
To implement the Fund's 12b-1 Plan, the Fund has entered into a Distribution
Agreement with Gabelli & Company, Inc. (the "Distributor"), a New York
corporation which is an indirect majority owned subsidiary of GAMI, having
principal offices located at One Corporate Center, Rye, New York 10580-1434. The
Distributor acts as agent of the Fund for the continuous offering of its shares
on a best efforts basis.
DISTRIBUTION PLANS
Pursuant to separate distribution and service plans (the Class A Plan, the Class
B Plan, the Class C Plan and the Class AAA Plan, collectively, the Plans)
adopted by the Fund pursuant to Rule 12b-1 under the Act and the Distribution
Agreement, the Distributor incurs the expenses of distributing the Fund's Class
A, Class B, Class C and Class AAA shares. In addition, the Distributor receives
the proceeds of contingent deferred sales charges paid by investors upon certain
redemptions of Class B and Class C shares. The Plans are intended to benefit the
Fund by increasing its assets and thereby reducing the Fund's expense ratio.
The Class A, Class B, Class C and Class AAA Plans continue in effect from year
to year, provided that each such continuance is approved at least annually by a
vote of the Board of Directors, including a majority vote of the Directors who
are not interested persons of the Fund and who have no direct or indirect
financial interest in the operation of the Class A, Class B, Class C or Class
AAA Plans (the Independent Directors), cast in person at a meeting called for
the purpose of voting on such continuance. The Plans may each be terminated at
any time, without penalty, by the vote of a majority of the Independent
Directors, or by the vote of the holders of a majority of the outstanding shares
of the applicable class of the Fund on not more than 30 days' written notice to
any other party to the Plans. The Plans may not be amended to increase
materially the amounts to be spent for the services described therein without
approval by the shareholders of the applicable class (by both Class A and Class
B shareholders, voting separately, in the case of material amendments to the
Class A Plan), and all material amendments are required to be approved by the
Board of Directors in the manner described above. Each Plan will automatically
terminate in the event of its assignment. The Fund will not be contractually
obligated to pay expenses incurred under any Plan if it is terminated or not
continued.
Pursuant to each Plan, the Board of Directors will review at least quarterly a
written report of the distribution expenses incurred on behalf of each class of
shares of the Fund by the Distributor. The report includes an itemization of the
distribution expenses and the purposes of such expenditures. In addition, as
long as the Plans remain in effect, the selection and nomination of Independent
Directors shall be committed to the Independent Directors.
Pursuant to the Distribution Agreement, the Fund has agreed to indemnify the
Distributor to the extent permitted by applicable law against certain
liabilities under the federal securities laws.
Pursuant to rules of the NASD, the Distributor is required to limit aggregate
initial sales charges, deferred sales charges and asset-based sales charges to
6.25% of total gross sales of each class of shares. Interest charges on
unreimbursed distribution expenses equal to the prime rate plus one percent per
annum may be added to the 6.25% limitation. Additional shares resulting from the
reinvestment of dividends and distributions are not included in the calculation
of the 6.25% limitation. The annual asset-based sales charge on shares of the
Fund may not exceed .75 of 1% per class. The 6.25% limitation applies to each
class of the Fund rather than on a per shareholder basis. If aggregate sales
charges were to exceed 6.25% of total gross sales of any class, all sales
charges on shares of the class would be suspended.
During the fiscal year ended December 31, 1999, the Distributor incurred
distribution expenses under the Distribution Plan for Class AAA of $85,600. Of
this amount $6,900 was spent on advertising, $27,600 was spent on printing,
postage and stationery, $14,500 on overhead support expenses, $24,600 on
salaries of personnel of the Distributor and $12,000 to third party brokers.
Pursuant to the Distribution Plan, the Fund paid the Distributor $54,900, or
.25% of its average daily net assets. The Plan compensates the Distributor
regardless of its expenses.
Shares of the Fund may also be purchased through shareholder agents that are not
affiliated with the Fund or the Distributor. There is no sales or service charge
imposed by the Fund other than as described in the Class A, B, C Shares
Prospectus under the "Classes of Shares" section, but agents who do not receive
distribution payments or sales charges may impose a charge to the investor for
their services. Such fees may vary among agents, and such agents may impose
higher initial or subsequent investment requirements than those established by
the Fund. Services provided by broker-dealers may include allowing the investor
to establish a margin account and to borrow on the value of the Fund's shares in
that account. It is the responsibility of the shareholder's agent to establish
procedures which would assure that upon receipt of an order to purchase shares
of the Fund the order will be transmitted so that it will be received by the
Distributor before the time when the price applicable to the buy order expires.
PORTFOLIO TRANSACTIONS AND BROKERAGE
Under the Investment Advisory Contract, the Adviser is authorized on behalf of
the Fund to employ brokers to effect the purchase or sale of portfolio
securities with the objective of obtaining prompt, efficient and reliable
execution and clearance of such transactions at the most favorable price
obtainable ("best execution") at reasonable expense. Transactions in securities
other than those for which a securities exchange is the principal market are
generally done through a principal market maker. However, such transactions may
be effected through a brokerage firm and a commission paid whenever it appears
that the broker can obtain a more favorable overall price. In general, there may
be no stated commission in the case of securities traded on the over-the-counter
markets, but the prices of those securities may include undisclosed commissions
or markups. Options transactions will usually be effected through a broker and a
commission will be charged. The Fund also expects that securities will be
purchased at times in underwritten offerings where the price includes a fixed
amount of compensation, generally referred to as the underwriter's concession or
discount.
The Adviser currently serves as Adviser to a number of investment company
clients and may in the future act as adviser to others. Affiliates of the
Adviser act as investment adviser to numerous private accounts and adviser to
other investment companies. It is the practice of the Adviser and its affiliates
to cause purchase and sale transactions to be allocated among the Fund and
others whose assets they manage in such manner as it deems equitable. In making
such allocations among the Fund and other client accounts, the main factors
considered are the respective investment objectives, the relative size of
portfolio holdings of the same or comparable securities, the availability of
cash for investment, the size of investment commitments generally held and the
opinions of the persons responsible for managing the portfolios of the Fund and
other client accounts.
The policy of the Fund regarding purchases and sales of securities and options
for its portfolio is that primary consideration will be given to obtaining the
most favorable prices and efficient execution of transactions. In seeking to
implement the Fund's policies, the Adviser effects transactions with those
brokers and dealers who the Adviser believes provide the most favorable prices
and are capable of providing efficient executions. If the Adviser believes such
price and execution are obtainable from more than one broker or dealer, it may
give consideration to placing portfolio transactions with those brokers and
dealers who also furnish research and other services to the Fund or the Adviser
of the type described in Section 28(e) of the 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.
Research services furnished by brokers or dealers through which the Fund effect
securities transactions are used by the Adviser and its advisory affiliates in
carrying out their responsibilities with respect to all of their accounts over
which they exercise investment discretion. Such investment information may be
useful only to one or more of such other accounts. The purpose of this sharing
of research information is to avoid duplicative charges for research provided by
brokers and dealers. Neither the Fund nor the Adviser has any agreement or
legally binding understanding with any broker or dealer regarding any specific
amount of brokerage commissions which will be paid in recognition of such
services. However, in determining the amount of portfolio commissions directed
to such brokers or dealers, the Adviser does consider the level of services
provided. Based on such determinations, the Adviser has allocated brokerage
commissions of $0 on portfolio transactions in the principal amount of $0 during
1999 to various broker-dealers that have provided research services to the
Adviser.
The Adviser may also place orders for the purchase or sale of portfolio
securities with Gabelli & Company, Inc. ("Gabelli"), a broker-dealer member of
the National Association of Securities Dealers, Inc. and an affiliate of the
Adviser, when it appears that, as an introducing broker or otherwise, Gabelli
can obtain a price and execution which is at least as favorable as that
obtainable by other qualified brokers. The Adviser may also consider sales of
shares of the Fund and any other registered investment companies managed by the
Adviser and its affiliates by brokers and dealers other than the Distributor as
a factor in its selection of brokers and dealers to execute portfolio
transactions for the Fund. The Fund paid the following brokerage commissions for
the year ended December 31, 1999 as indicated:
TOTAL BROKERAGE BROKERAGE COMMISSIONS
PERIOD COMMISSIONS PAID PAID TO GABELLI
1997 $ 99,463 $ 0
1998 $ 104,828 $ 300
1999 $ 133,853 $ 170
For the fiscal year ended December 31, 1999 0.13% of aggregate brokerage
commissions paid by the Fund were paid to Gabelli & Company, Inc., or 0.73% of
the Fund's aggregate dollar amount of transactions involving the payment of
commissions.
As required by Rule 17e-1 under the Act, the Board of Directors has adopted
procedures which provide that the commissions paid to Gabelli on stock exchange
transactions may not exceed that which would have been charged by another
qualified broker or member firm able to effect the same or a comparable
transaction at an equally favorable price. Rule 17e-1 and the procedures contain
requirements that the Board, including its independent Directors, conduct
periodic compliance reviews of such brokerage allocations and review such
schedule at least annually for its continuing compliance with the foregoing
standard. The Adviser and Gabelli are also required to furnish reports and
maintain records in connection with such reviews.
To obtain the best execution of portfolio trades on the New York Stock Exchange
("NYSE"), Gabelli controls and monitors the execution of such transactions on
the floor of the NYSE through independent "floor brokers" or through the
Designated Order Turnaround ("DOT") System of the NYSE. Such transactions are
then cleared, confirmed to the Fund for the account of Gabelli, and settled
directly with the Custodian of the Fund by a clearing house member firm which
remits the commission less its clearing charges to Gabelli. Gabelli may also
effect 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.
REDEMPTION OF SHARES
Cancellation of purchase orders for Fund shares (as, for example, when checks
submitted to purchase shares are returned unpaid) cause a loss to be incurred
when the net asset value of the Fund shares on the date of cancellation is less
than on the original date of purchase. The investor is responsible for such
loss, and the Fund may reimburse shares from any account registered in that
shareholder's name, or by seeking other redress. If the Fund is unable to
recover any loss to itself, it is the position of the SEC that the Distributor
will be immediately obligated to make the Fund whole.
Other Investors
No minimum initial investment is required for officers, directors or full-time
employees of the Fund, other investment companies managed by the Adviser, the
Adviser, the Sub-Administrator, the Distributor or their affiliates, including
members of the "immediate family" of such individuals and retirement plans and
trusts for their benefit. The term "immediate family" refers to spouses,
children and grandchildren (adopted or natural), parents, grandparents,
siblings, a spouse's siblings, sibling's spouse and a sibling's children.
DETERMINATION OF NET ASSET VALUE
- --------------------------------------------------------------------------------
Net asset value is calculated separately for each class of the Fund. The net
asset value of Class B Shares and Class C Shares of the Fund will generally be
lower than the net asset value of Class A Shares or Class AAA Shares as a result
of the larger distribution-related fee to which Class B Shares and Class C
Shares are subject. It is expected, however, that the net asset value per share
of each class will tend to converge immediately after the recording of
dividends, if any, which will differ by approximately the amount of the
distribution and/or service fee expense accrual differential among the classes.
- --------------------------------------------------------------------------------
For purposes of determining the Fund's net asset value per share, readily
marketable portfolio securities listed on a market subject to governmental
regulation on which trades are reported contemporaneously are valued, except as
indicated below, at the last sale price reflected at the close of the regular
trading session of the principal market for such security on the business day as
of which such value is being determined. If there has been no sale on such day,
the securities are valued at the average of the closing bid and asked prices on
the principal market for such security on such day. If no asked prices are
quoted on such day, then the security is valued at the closing bid price on the
principal market for such security on such day. If no bid or asked prices are
quoted on such day, then the security is valued by such method as the Board of
Directors shall determine in good faith to reflect its fair market value.
All other readily marketable securities are valued at the latest average of the
bid and asked price obtained from a dealer maintaining an active market in such
security.
Debt instruments having 60 days or less remaining until maturity are stated at
amortized cost. Debt instruments having a greater remaining maturity will be
valued at the latest bid price obtainable from a dealer which maintains an
active market in the security until the maturity of the instrument is 60 days or
less when it will be valued as if purchased at the valuation established as of
the 61st day of its maturity. Listed debt securities which are actively traded
on a securities exchange may also be valued at the last sale price in lieu of
the quoted bid price of a dealer. All other investment assets, including
restricted and not readily marketable securities, are valued under procedures
established by and under the general supervision and responsibility of the
Fund's Board of Directors designed to reflect in good faith the fair value of
such securities.
DIVIDENDS, DISTRIBUTIONS AND TAXES
General
The Fund has qualified and intends to continue to qualify as a regulated
investment company under Subchapter M of the Code. If it so qualified, the Fund
will not be subject to Federal income tax on its net investment income and net
short-term capital gain, if any, realized during any fiscal year to the extent
that it distributes such income and capital gains to its shareholders.
The Fund will determine either to distribute, or to retain for reinvestment, all
or part of any net long-term capital gain. If any such gains are retained, the
Fund will be subject to a tax of 35% of such amount. In that event, the Fund
expects to designate the retained amount as undistributed capital gain in a
notice to its shareholders, each of whom (1) will be required to include in
income for tax purposes as long-term capital gain its share of undistributed
amount, (2) will be entitled to credit its proportionate share of the tax paid
by the Fund against its Federal income tax liability and to claim refunds to the
extent the credit exceeds such liability, and (3) will increase its basis in its
shares of the Fund by an amount equal to 65% of the amount of undistributed
capital gain included in such shareholder's gross income.
A distribution will be treated as paid during the calendar year if it is paid
during the calendar year or declared by the Fund in October, November or
December of the year, payable to shareholders of record on a date during such
month and paid by the Fund during January of the following year. Any such
distributions paid during January of the following year will be deemed to be
received on December 31 of the year the distributions are declared, rather than
when the distributions are received.
Under the Code, amounts not distributed on a timely basis in accordance with a
calendar year distribution requirement are subject to a 4% excise tax. To avoid
the tax, the Fund must distribute during each calendar year, an amount equal to
at least the sum of (1) 98% of its ordinary income (not taking into account any
capital gains or losses) for the calendar year, (2) 98% of its capital gains in
excess of its capital losses for the twelve-month period ending on October 31 of
the calendar year, (unless an election is made by a fund with a November or
December year-end to use the Fund's fiscal year) and (3) all ordinary income and
net capital gains for previous years that were not previously distributed.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Gains or losses on the sales of securities by the Fund will be long-term capital
gains or losses if the securities have been held by the Fund for more than
twelve months. Gains or losses on the sale of securities held for twelve months
or less will be short-term capital gains or losses.
Certain options, futures contracts and options on futures contracts are "section
1256 contracts". Any gains or losses on section 1256 contracts are generally
considered 60% long-term and 40% short-term capital gains or losses ("60/40").
Also, section 1256 contracts held by the Fund at the end of each taxable year
are "marked-to-market" with the result that unrealized gains or losses are
treated as though they were realized and the resulting gain or loss is treated
as 60/40 gain or loss.
Hedging transactions undertaken by the Fund may result in "straddles" for U.S.
Federal income tax purposes. The straddle rules may affect the character of
gains (or losses) realized by the Fund. In addition, losses realized by the Fund
on positions that are part of a straddle may be deferred under the straddle
rules, rather than being taken into account in calculating the taxable income
for the taxable year in which such losses are realized. Further, the Fund may be
required to capitalize, rather than deduct currently, any interest expense on
indebtedness incurred or continued to purchase or carry any positions that are
part of a straddle. The Fund may make one or more of the elections available
under the Code which are applicable to straddles. If the Fund makes any of the
elections, the amount, character and timing of the recognition of gains or
losses from the affected straddle positions will be determined under rules that
vary according to the election(s) made. The rules applicable under certain of
the elections accelerate the recognition of gains or losses from the affected
straddle positions. Because application of the straddle rules may affect the
character of gains or losses, defer losses and/ or accelerate the recognition of
gains or losses from the affected straddle positions, and require the
capitalization of interest expense, the amount which must be distributed to
shareholders, and which will be taxed to shareholders as ordinary income or
long-term capital gain, may be increased or decreased substantially as compared
to a fund that did not engage in such hedging transactions.
The diversification requirements applicable to the Fund's assets may limit the
extent to which the Fund will be able to engage in transactions in options,
futures contracts and options on futures contracts.
Distributions
Distributions of investment company taxable income (which includes taxable
interest income and the excess of net short-term capital gains over long-term
capital losses) are taxable to a U.S. shareholder as ordinary income, whether
paid in cash or in additional Fund shares. Dividends paid by a Fund will qualify
for the 70% deduction for dividends received by corporations to the extent the
Fund's income consists of qualified dividends received from U.S. corporations.
Distributions of net capital gain (which consist of the excess of long-term
capital gains over net short-term capital losses), if any, are taxable as
long-term capital gain, whether paid in cash or in shares, and are not eligible
for the dividends received deduction. Shareholders receiving distributions in
the form of newly issued shares will have a basis in such shares of the Fund
equal to the fair market value of such shares on the distribution date. If the
net asset value of shares is reduced below a shareholder's cost as a result of a
distribution by the Fund, such distribution may be taxable even though it
represents a return of invested capital. The price of shares purchased at any
time may reflect the amount of a forthcoming distribution. Those purchasing
shares just prior to a distribution will receive a distribution which will be
taxable to them, even though the distribution represents in part a return of
invested capital.
Sales of Shares
Upon a sale or exchange of shares, a shareholder will realize a taxable gain or
loss depending upon the basis in the shares. Such gain or loss will be
long-term, or short-term, generally depending upon the shareholder's holding
period for the shares. Non-corporate shareholders are subject to tax at a
maximum rate of 20% on capital gains resulting from the disposition of shares
held for more than 12 months (10% if the taxpayer is, and would be after
accounting for such gains, subject to the 15% tax bracket for ordinary income).
Any loss realized on a sale or exchange will be disallowed to the extent the
shares disposed of are replaced within a 61-day period beginning 30 days before
and ending 30 days after the date the shares are disposed of. In such case, the
basis of the shares acquired will be adjusted to reflect the disallowed loss.
Any loss realized by a shareholder on the sale of Fund shares held by the
shareholder for six months or less will be treated for tax purposes as a
long-term capital loss to the extent of any distributions of net capital gain
received by the shareholder with respect to such shares.
If a shareholder (i) incurs a sales load charge in acquiring shares in a Fund
and, by reason of incurring such charge or acquiring the shares, acquires the
right to acquire shares of one or more regulated investment companies without
the payment of a load charge or with the payment of a reduced load charge (a
"reinvestment right") and (ii) disposes of the Fund shares before the 91st day
after the date on which the shares were acquired and subsequently acquires
shares in the Fund or in another regulated investment company whereby the
otherwise applicable load charge is reduced by reason of the reinvestment right,
then the original load charge will not be taken into account for the purposes of
determining the shareholder's gain or loss on the disposition (to the extent the
original load charge does not exceed the reduction in the subsequent load
charge). To the extent such charge is not taken into account in determining the
amount of gain or loss, the charge will be treated as incurred in connection
with the subsequently acquired shares and will have a corresponding effect on
the shareholder's basis in such shares.
Backup Withholding
The Fund may be required to withhold Federal income tax at a rate of 31% on all
taxable distributions payable to shareholders who fail to provide their correct
taxpayer identification number or to make required certifications, or who have
been notified by the Internal Revenue Service that they are subject to backup
withholding. Backup withholding is not an additional tax. Any amounts withheld
may be credited against the shareholder's Federal income tax liability.
Foreign Withholding Taxes
Income received by the Fund from sources within foreign countries may be subject
to withholding and other taxes imposed by such countries. Tax conventions
between certain countries and the United States may reduce or eliminate such
taxes. It is impossible to determine the rate of foreign tax in advance since
the amount of the Fund's assets to be invested in various countries is not
known. Because the Fund will not have more than 50% of its total assets invested
in securities of foreign governments or corporations, the Fund will not be
entitled to "pass-through" to shareholders the amount of foreign taxes paid by
the Fund.
Fund Matters
The Fund reserves the right to create and issue a number of portfolios, in which
case the shares of each portfolio would participate equally in the earnings,
dividends, and assets of the particular portfolio and would vote separately to
approve management agreements or changes in investment policies, but shares of
all portfolios would vote together in the election or selection of Directors,
principal underwriters and auditors and, generally, on any proposed amendment to
the Fund's Articles of Incorporation. Upon liquidation of the Fund or any
portfolio, shareholders of the affected portfolio would be entitled to share pro
rata in the net assets of their respective portfolio available for distribution
to such shareholders.
INVESTMENT PERFORMANCE INFORMATION
Performance Information
The Fund may furnish data about its investment performance in advertisements,
sales literature and reports to shareholders. "Total return" represents the
annual percentage change in value of $1,000 invested at the maximum public
offering price for the one, five and ten year periods (if applicable) and the
life of the Fund through the most recent calendar quarter, assuming reinvestment
of all dividends and distributions. Quotations of "yield" will be based on the
investment income per share earned during a particular 30 day period, less
expenses accrued during the period, with the remainder being divided by the
maximum offering price per share on the last day of the period. Each Fund may
also furnish total return and yield calculations for other periods based on
investments at various sales charge levels or net asset values.
Quotations of yield will be based on the investment income per share earned
during a particular 30 day period, less expenses accrued during the period ("net
investment income") and will be computed by dividing net investment income by
the maximum offering price per share on the last day of the period, according to
the following formula:
YIELD = 2[(a-b + 1) 6 - 1]
cd
where a = dividends and interest earned during the period, b = expenses accrued
for the period (net of any reimbursements), c = the average daily number of
shares outstanding during the period that were entitled to receive dividends,
and d = the maximum offering price per share on the last day of the period.
Quotations of total return will reflect only the performance of a hypothetical
investment in the Fund during the particular time period shown. The Fund's total
return and current yield may vary from time to time depending on market
conditions, the compositions of the its portfolio and operating expenses. These
factors and possible differences in the methods used in calculating yield should
be considered when comparing a Fund's current yield to yields published for
other investment companies and other investment vehicles. Total return and yield
should also be considered relative to change in the value of the Fund's shares
and the risks associated with the Fund's investment objectives and policies. At
any time in the future, total returns and yield may be higher or lower than past
total returns and yields and there can be no assurance that any historical
return or yield will continue.
From time to time evaluations of performance are made by independent sources
that may be used in advertisements concerning the Fund. These sources include:
Lipper Analytical Services, Weisenberger Investment Company Service, Barron's,
Business Week, Financial World, Forbes, Fortune, Money, Personal Investor,
Sylvia Porter's Personal Finance, Bank Rate Monitor, Morningstar and The Wall
Street Journal.
In connection with communicating its yield or total return to current or
prospective shareholders, the Fund may also compare these figures to the
performance of other mutual funds tracked by mutual fund rating services or to
other unmanaged indexes which may assume reinvestment of dividends but generally
do not reflect deductions for administrative and management costs.
Quotations of the Fund's total return will represent the average annual
compounded rate of return of a hypothetical investment in the Fund over periods
of 1, 5, and 10 years (up to the life of the Fund), and are calculated pursuant
to the following formula:
P(1+T)n = ERV
(where P = a hypothetical initial payment of $1,000, T = the average annual
total return, n = the number of years, and ERV = the redeemable value at the end
of the period of a $1,000 payment made at the beginning of the period). Total
return figures will reflect the deduction of Fund expenses (net of certain
expenses reimbursed by the Adviser) on an annual basis, and will assume that all
dividends and distributions are reinvested and will deduct the maximum sales
charge, if any is imposed.
For the year ended December 31, 1999, the Fund's total return for Class AAA
shares was 52.4%. The average annual total return since its inception on June
30, 1995 is 23.35%.
As of December 31, 1999, the Fund had not commenced offering Class A, Class B
and Class C Shares to the public.
DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES
Description of Shares, Voting Rights and Liabilities
The Fund is an open-end management investment company that was organized as a
Maryland corporation on May 25, 1994. Its authorized capital stock consists of
one billion shares of stock having a par value of one tenth of one cent ($.001)
per share. The Fund is not required, and does not intend, to hold regular annual
shareholder meetings, but may hold special meetings for consideration of
proposals requiring shareholder approval, such as changing fundamental policies,
or upon the written request of 10% of the Fund's shares. The Fund's Board of
Directors is authorized to divide the unissued shares into separate portfolios
of stock, each portfolio representing a separate, additional portfolio.
There are no conversion or preemptive rights in connection with any shares of
the Fund, except that the series B shares may convert into series A shares as
described in the prospectus. All shares, when issued in accordance with the
terms of the offering, will be fully paid and nonassessable. Shares will be
redeemed at net asset value, at the option of the shareholder.
The Fund sends semi-annual and audited annual reports to all shareholders which
include lists of portfolio securities and the Fund's financial statements, which
shall be audited annually. Unless it is clear that a shareholder is a nominee
for the account of an unrelated person or a shareholder otherwise specifically
requests in writing, the Fund may send a single copy of semi-annual, annual and
other reports to shareholders to all accounts at the same address and all
accounts of any person at that address.
The shares of the Fund have noncumulative voting rights which means that the
holders of more than 50% of the shares can elect 100% of the directors if the
holders choose to do so, and, in that event, the holders of the remaining shares
will not be able to elect any person or persons to the Board of Directors.
Unless specifically requested by an investor who is a shareholder of record, the
Fund does not issue certificates evidencing Fund shares.
Shareholder Approval
Other than elections of Directors, which is by plurality, any matter for which
shareholder approval is required by the Act requires the affirmative vote of at
least a "majority" (as defined by the Act) of the outstanding voting securities
of the Fund at a meeting called for the purpose of considering such approval. A
majority of the Fund's outstanding securities is the lesser of (1) 67% of the
shares represented at a meeting at which more than 50% of the outstanding shares
are present in person or by proxy or (2) more than 50% of the outstanding
shares.
Information for Shareholders
All shareholder inquiries regarding administrative procedures including the
purchase and redemption of shares should be directed to the Distributor, Gabelli
& Company, Inc., One Corporate Center, Rye, New York 10580-1434. For assistance,
call 1-800-GABELLI (1-800-422-3554) or through the internet at
http://www.gabelli.com.
FINANCIAL STATEMENTS
The Fund's Financial Statements for the year ended December 31, 1999, including
the Report of Ernst & Young LLP, independent auditors, is incorporated herein by
reference to the Fund's Annual Report. The Fund's Annual Report is available
upon request and without charge. Ernst & Young LLP provides audit services, tax
return preparation and assistance and consultation in connection with certain
SEC filings.
<PAGE>
A-4
APPENDIX A
Description of Moody's Investors Service, Inc.'s ("Moody's") Corporate Bond
Ratings
AAA: Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edge." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues. Aa: Bonds which are rated Aa are
judged to be of high quality by all standards. Together with the Aaa group they
comprise what are generally known as high grade bonds. They are rated lower than
the best bonds because margins of protection may not be as large as in Aaa
securities or fluctuation of protective elements may be of greater amplitude or
there may be other elements present which made the long term risks appear
somewhat larger than in Aaa securities. A: Bonds which are rated A possess many
favorable investment attributes and are to be considered as upper medium grade
obligations. Factors giving security to principal and interest are considered
adequate but elements may be present which suggest a susceptibility to
impairment sometime in the future. Baa: Bonds which are rated Baa are considered
as medium grade obligations, i.e., they are neither highly protected nor poorly
secured. Interest payments and principal security appear adequate for the
present but certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such bonds lack
outstanding investment characteristics and in fact have speculative
characteristics as well. Ba: Bonds which are rated Ba are judged to have
speculative elements; their future cannot be considered as well assured. Often
the protection of interest and principal payments may be very moderate and
thereby not well safeguarded during both good and bad times over the future.
Uncertainty of position characterizes bonds in this class. B: Bonds which are
rated B generally lack characteristics of the desirable investment. Assurance of
interest and principal payments or of maintenance of other terms of the contract
over any long period of time may be small. Caa: Bonds which are rated Caa are of
poor standing. Such issues may be in default or there may be present elements of
danger with respect to principal or interest. Ca: Bonds which are rated Ca
represent obligations which are speculative in a high degree. Such issues are
often in default or have other marked shortcomings. C: Bonds which are rated C
are the lowest rated class of bonds and issues so rated can be regarded as
having extremely poor prospects of ever attaining any real investment standing.
Note: Moody's may apply numerical modifiers, 1, 2 and 3 in each generic rating
classification from Aa through B in its corporate bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.
Description of Standard & Poor's Corporation's ("S&P's") Corporate Debt Ratings
AAA: Debt rated AAA has the highest rating assigned by S&P's. Capacity to pay
interest and repay principal is extremely strong. AA: Debt rated AA has a very
strong capacity to pay interest and repay principal and differs from the highest
rated issues only in small degree. A: Debt rated A has a strong capacity to pay
interest and repay principal although it is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than debt in
higher rated categories. BBB: Debt rated BBB is regarded as having adequate
capacity to pay interest and repay principal. Whereas it normally exhibits
protection parameters, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to pay interest and repay principal
for debt in this category than for debt in higher rated categories. BB, B, CCC,
CC, C: Debt rated BB, B, CCC, CC and C is regarded, on balance, as predominantly
speculative with respect to capacity to pay interest and repay principal in
accordance with the terms of the obligation. BB indicates the lowest degree of
speculation and C the highest degree of speculation. While such debt will likely
have some quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions. CI: The rating CI
is reserved for income bonds on which no interest is being paid. D: Debt rated D
is in payment default. The D rating category is used when interest payments or
principal payments are not made on the date due even if the applicable grace
period has not expired, unless S&P's believes that such payments will be made
during such grace period. The D rating also will be used upon the filing of a
bankruptcy petition if debt service payments are jeopardized.
Plus (+) or Minus (-): The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
Description of Moody's Preferred Stock Ratings
aaa: An issue which is rated aaa is considered to be a top-quality preferred
stock. This rating indicates good asset protection and the least risk of
dividend impairment within the universe of preferred stocks. aa: An issue which
is rated aa is considered a high-grade preferred stock. This rating indicates
that there is reasonable assurance that earnings and asset protection will
remain relatively well maintained in the foreseeable future. a: An issue which
is rated a is considered to be an upper medium grade preferred stock. While
risks are judged to be somewhat greater than in the aaa and aa classifications,
earnings and asset protection are, nevertheless expected to be maintained at
adequate levels. baa: An issue which is rated baa is considered to be medium
grade, neither highly protected nor poorly secured. Earnings and asset
protection appear adequate at present but may be questionable over any great
length of time. ba: An issue which is rated ba is considered to have speculative
elements and its future cannot be considered well assured. Earnings and asset
protection may be very moderate and not well safeguarded during adverse periods.
Uncertainty of position characterizes preferred stocks in this class. b: An
issue which is rated b generally lacks the characteristics of a desirable
investment. Assurance of dividend payments and maintenance of other terms of the
issue over any long period of time may be small. caa: An issue which is rated
caa is likely to be in arrears on dividend payments. This rating designation
does not purport to indicate the future status of payment. ca: An issue which is
rated ca is speculative in a high degree and is likely to be in arrears on
dividends with little likelihood of eventual payment. c: This is the lowest
rated class of preferred or preference stock. Issues so rated can be regarded as
having extremely poor prospects of ever attaining any real investment standing.
Note: Moody's may apply numerical modifiers 1, 2 and 3 in each rating
classification from "aa" through "b" in its preferred stock rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.
Description of S&P's Preferred Stock Ratings
AAA: This is the highest rating that may be assigned by S&P's to a preferred
stock issue and indicates an extremely strong capacity to pay the preferred
stock obligations. AA: A preferred stock issue rated AA also qualifies as a
high-quality fixed income security. The capacity to pay preferred stock
obligations is very strong, although not as overwhelming as for issues rated
AAA. A: An issue rated A is backed by a sound capacity to pay the preferred
stock obligations, although it is somewhat more susceptible to the adverse
effect of changes in circumstances and economic conditions. BBB: An issue rated
BBB is regarded as backed by an adequate capacity to pay the preferred stock
obligations. Whereas it normally exhibits adequate protection parameters,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity to make payments for a preferred stock in this category than
for issues in the A category. BB, B, CCC: Preferred stock rated BB, B, and CCC
are regarded, on balance, as predominantly speculative with respect to the
issuer's capacity to pay preferred stock obligations. BB indicates the lowest
degree of speculation and CCC the highest degree of speculation. While such
issues will likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major risk exposures to adverse conditions.
CC: The rating CC is reserved for a preferred stock in arrears on dividends or
sinking fund payments but that is currently paying. C: A preferred stock rated C
is a non-paying issue. D: A preferred stock rated D is a non-paying issue with
the issuer in default on debt instruments.
Plus (+) or Minus (-): The ratings from "AA" to "B" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
<PAGE>
