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The Gabelli
Equity Trust Inc.
Annual Report
December 31, 1997
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The Gabelli
Equity Trust Inc.
Our cover icon represents the underpinnings of Gabelli. The Teton
mountains in Wyoming represent what we believe in in America -- that
creativity, ingenuity, hard work and a global uniqueness provide
enduring values. They also stand out in an increasingly complex,
interconnected and interdependent economic world.
[Flags of The United States omitted]
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Investment Objective:
The Gabelli Equity Trust Inc. is a closed-end, non-diversified
management investment company whose primary objective is long-term
growth of capital, with income as a secondary objective.
This report is printed on recycled paper.
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To Our Shareholders,
Driven by low inflation, low interest rates, good corporate earnings
gains, deals, stock repurchase programs and liquidity (the continuing strong
flow of cash into U.S. equities funds), stocks posted strong gains in 1997.
Until correcting in late December, large cap growth stocks continued to lead the
market parade. However, second tier large cap and mid and small cap indices also
posted solid gains.
In the fourth quarter of 1997, the U.S. stock market suffered repeated
bouts of the Asian Flu. As we write, the patient remains unstable. While the
International Monetary Fund is ministering to ailing Asian economies, the ever
vigilant Dr. Greenspan is carefully monitoring the U.S. economy's vital signs.
As we head into 1998, we will be making our rounds as well. We are relatively
pleased with the patient's condition, but as always, are on the lookout for any
symptoms of a relapse.
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The Gabelli
Equity Trust Inc.
Investment Performance
For the fourth quarter ended December 31, 1997, The Gabelli Equity Trust
Inc.'s ("Equity Trust" or "Fund") net asset value per share increased 3.1% to
$11.56, after adjusting for the $0.29 distribution on December 26, 1997,
compared to the Value Line Composite Index's (1.1)% and Russell 2000 Index's
(3.4)% returns over the same time period. The Standard & Poor's 500 Index (S&P
500) returned 2.9%. Each is an unmanaged indicator of stock market performance.
For the twelve months concluding December 31, 1997, the Equity Trust appreciated
30.5% after adjusting for $1.04 per share in distributions, versus 28.5%, 22.4%
and 33.4% gains for the Value Line Composite, Russell 2000 and S&P 500
respectively.
For the five-year period ended December 31, 1997, the Equity Trust's
return averaged 16.1% annually, compared to average annual returns of 17.8%,
16.4% and 20.3% for the Value Line Composite, Russell 2000 and S&P 500. Total
return includes adjustments of $6.91 per share for the reinvestment of dividends
and distributions, rights offerings and the spin-off of the Gabelli Global
Multimedia Trust.
For the ten years ended December 31, 1997, the Equity Trust achieved a
total return of 295.8%, including adjustments of $12.88 per share in
distributions, which equates to an average annual return of 14.7%. This compares
to 15.9%, 15.8% and 18.0% average annual returns over the same time period for
the Value Line Composite, Russell 2000 and S&P 500.
Since its inception on March 3, 1986 through December 31, 1997, the Equity
Trust has had a total return of 366.6%, including adjustments of $13.96 per
share in distributions, which equates to an average annual return of 14.5%.
The Equity Trust's common shares ended the quarter at $11.6875 per share
on the New York Stock Exchange, an increase of 10.2% for the quarter. For the
twelve months ended December 31, 1997, the common shares are up 37.5%, after
adjusting for all distributions.
Our long-term performance goal is to grow our net asset value by a real
rate of return of 10% per year. In addition, our goal is to have the publicly
traded market price track the net asset value. We are tracking both goals.
What We Do
The success of momentum investing in recent years and investors' desire
for instant gratification have combined to make value investing appear dull. At
the risk of being dull, we will once again describe the "boring" value approach
that has seen us through both good and bad markets over the last 11 years at The
Gabelli Equity Trust and for over 20 years at Gabelli Asset Management Company.
In past reports, we have tried to articulate our investment philosophy and
methodology. The following graphic further illustrates the interplay among the
four components of our valuation approach.
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Our focus is on free cash flow; earnings before interest, taxes,
depreciation and amortization (EBITDA) minus the capital expenditures necessary
to grow the business. We believe free cash flow is the best barometer of a
business' value. Rising free cash flow often foreshadows net earnings
improvement. We also look at earnings per share trends. Unlike Wall Street's
ubiquitous earnings momentum players, we do not try to forecast earnings with
accounting precision and then trade stocks based on quarterly expectations and
realities. We simply try to position ourselves in front of long-term earnings
uptrends. In addition, we analyze on and off balance sheet assets and
liabilities such as plant and equipment, inventories, receivables, and legal,
environmental and health care issues. We want to know everything and anything
that will add to or detract from our private market value (PMV) estimates.
Finally, we look for a catalyst; something happening in the company's industry
or indigenous to the company itself that will surface value. In the case of the
independent telephone stocks, the catalyst is a regulatory change. In the
agricultural equipment business, it is the increasing world-wide demand for
American food and feed crops. In other instances, it may be a change in
management, sale or spin-off of a division or the development of a profitable
new business.
Once we identify stocks that qualify as fundamental and conceptual
bargains, we then become patient investors. This has been a proven long-term
method for preserving and enhancing wealth in the U.S. equities market. At the
margin, our new investments are focused on businesses that are well-managed and
will benefit from sustainable long-term economic dynamics. These include macro
trends, such as the globalization of the market in filmed entertainment and
telecommunications, and micro trends, such as an increased focus on productivity
enhancing goods and services.
Shareholder Survey
In our Third Quarter Report to Shareholders, the Board of Directors and
the Adviser of the Gabelli Equity Trust asked for your opinions and thoughts. We
wanted to know what our shareholders think about the operations of the Fund.
Specifically, we wanted your opinions on the following issues:
o 10% Distribution Policy
o Rights Offerings
o Use of Leverage such as issuing preferred stock
o Stock Repurchase Plan
In regard to these issues, we included a shareholder response card. To
date we have received 3,069 responses. A summary of our shareholders' opinions
is set forth below:
Q1. 10% Distribution Policy - Should the Equity Trust continue its 10%
Distribution Policy?
Well over 90% of those who responded said we should continue this policy.
Q2. Rights Offerings - Should the Equity Trust continue to have Rights
Offerings to acquire additional shares of common stock without a
commission?
Nearly 80% of those responding were in favor of the Equity Trust having
future Rights Offerings.
Q3. Use of Leverage - Are you in favor of the Equity Trust using leverage such
as the issuance of preferred stock?
55.0% of those responding were either in favor or wanted more information
regarding a preferred stock offering. If we did not use the word "leverage",
management believes this number would have been even higher.
Q4. Stock Repurchase Plan - Should the Equity Trust employ a stock repurchase
plan?
80% of those responding were in favor of the Trust employing a stock
repurchase plan when the Trust's shares are trading at a discount to NAV.
2
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Management thanks you for your overwhelming response. We are trying to
respond to all of your comments personally and we are available to answer any
additional questions you may have. While all of your responses were too numerous
to list here, below are examples (edited) of some of the comments we received.
First some of the negatives:
"More timely information and earlier quarterlies is desirable/beneficial" (D.B.,
Deerfield Beach, FL)
"In my opinion, better results could be achieved by a more 'concentrated'
portfolio in what your analysis says are the most likely winners." (J.C.,
Dearborn, Ml)
"Never cancel a quarterly dividend as you did approximately a year and a half
ago." (D.H., Dewen, AZ)
"The rights offerings are the main reason I no longer buy closed-end funds."
(F.B., Toms River, NJ)
"Let's keep the Equity Trust a simple one - let's not get complicated." (N.V.,
Westfield, MA)
"Preferred stock would be a joke." (J.W., Clinton, MO)
"I don't understand why the fund's long term performance is less than the S&P
500. Stated long term performance goals don't seem very ambitious." (R.K.,
Hillsboro, TX)
"I am glad to see the fund doing a little better. I do not like receiving a
return of capital. This to me means the fund did not earn 10%." (G.B., Houston,
TX)
"If the 10% distribution were discontinued I would have to sell my shares."
(M.U., Kerrville, TX)
"The fund should strive to be 100% invested in equities at all times. Shorting
S&P futures should be stopped. It is a form of market timing and is beyond the
responsibility of the fund manager." (T.C., Naples, FL)
"Tortoise and hare philosophy is OK but if tortoise wins 500 years hence it
doesn't do me much good." (M.O., Honolulu, Hl)
"Leave the fund as it is. Preferred stock is of no value." (J.W., Clinton, MO)
"Please cut back on capital gains." (B.B., Towson, MD)
"If the 10% policy is ended I will have to sell my shares. Many other
stockholders will also sell, leaving the fund at a big discount to NAV." (J.M.,
Interlaken, NJ)
"No distributions!! Accumulate a la BRK.A [Berkshire Hathaway]. Worth much more
later, with your history." (H.D., Clark, SD)
"Business today is very uncertain - no time for radical changes." (H.L., Valley
Stream, NY)
"Rights offerings and preferred stock benefit Gabelli management far more than
the fund owners." (R.R., Cincinnati, OH)
"Less gimmickry and devote attention to stock picking. This is the perfect fund
for retired people." (D.B., Stockton, CA)
"No more rights offerings!!!" (Anon.)
"Don't rock the boat. We don't need preferred stock." (L.R., Miami Beach, FL)
"Share appreciation from initial offering to present not good in view of bull
market in this period. This makes 10% distribution more important." (A.C.,
Ramsey, NJ)
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"I'm not convinced that items 2 [rights offerings] and 3 [preferred stock] are
in the best interest of shareholders; smaller is better." (D.W., San Francisco,
CA)
"We are retired. We bought this fund for income as I believe most retirees did
that made purchases of this fund. If you abandon the 10% distribution, you will
lose my account." (J.S., Demopolis, AL)
"Higher dividend. Tone down Mr. Gabelli on TV." (D.D., New Orleans, LA)
"Solidly against rights offerings as coercion of shareholders." (A.C.,
Stroudsburg, PA)
"Offerings increase net assets and management fees. You should lower fee % to
benefit shareholders." (D.O., Greensboro, GA)
"With the top 10 holdings representing more than 20% of total assets, the number
of holdings should be reduced." (D.G., Ross, CA)
"The stock price has been low. This [stock repurchase plan] could help to
increase shareholder value. I've been with you since the initial offering. Would
like to see shareholder value increase." (L.C., Glendale, AZ)
"The Trust holds too many different stocks." (L.P., Rye Brook, NY)
"If you end the 10% distribution policy, I will have to sell my shares because I
depend on the income." (B.M., Interlaken, NJ)
"Please do not become seduced by the allure of unrealistic high returns - slow
and steady wins in the end." (K.B., Kennett Square, PA)
On the positive side:
"We are in favor of anything the company does that insures a safe, steady income
and is beneficial to the operation" (D.H. & E.H., Santa Barbara, CA)
"I like it the way it is, except maybe more capital gains." (R.H., Syracuse, NY)
"As a shareholder I would like to use this Fund as a long term investment. The
more stable the better." (W.S., Punta Gorda, FL)
"Most of my clients that are retired or in a few years of retirement want and
need the 10% cash payout." (G.G., Hartford, CT)
"One of the main reasons I purchased Equity Trust was the 10% distribution."
(G.B., Clarkeston, Ml)
"The 10% distribution was the reason I bought the Trust." (M.M., Des Plaines,
IL)
"We have been participants since 6/89 and we are pleased. Please continue
conservative policy." (G.G. & A.G., Northbrook, IL)
"Keep up the good work! Congratulations!" (B.B., Springfield, VA)
"We're new with you and for two months like what we see. Your third quarter
report reads like an op-ed page. Pretty neat. Easy." (H.S., San Antonio, TX)
"In favor of rights offerings if you can place the funds profitably, but not
every year (E.S., Portland, OR)
"The combination of the 10% Distribution Policy with the Automatic Dividend
Reinvestment and Voluntary Cash Purchase Plan is a more effective and equitable
method for the average shareholder to acquire shares than the rights offerings."
(K.W., Fort Worth, TX)
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"There are many small investors like me who like your 10% distribution policy.
Mutual funds fill the paper. Besides you are Italian." (B.P., Fresno, CA)
"Keep up the good work. Thanks." (Anon.)
"Rights offerings are a great bargain." (J.B., Mt. Lebanon, PA)
"To invest for growth and have it turned into income effortlessly - that's the
great service of the Trust to an individual investor." (D.X., Reno, NV)
"If a company buys its own stock people know its a sound company. I keep on
buying your stock every quarter. My dividends are reinvested also." (C.L., River
Grove, IL)
"I got in at the IPO and have not sold 1 share. Very confident in the Trust and
especially its management." (R.M., Covington, KY)
"I believe Gabelli Equity Trust has done pretty well with its policies in the
past. I'm not really sure they need to be changed, but if M.J.G. believes we
need to change he could be right as he is most times." (C.G. & A.G., Pittsburgh,
PA)
"I bought GAB about 2 years ago based on the expectation of a 10% dividend. It
has performed above expectations. I am very pleased." (J.S., Englewood Cliffs,
NJ)
"As a senior citizen I need the income!" (S.M., Winfield, PA)
"Very happy with fund and extras." (J.L. & H.L., Fairfield, NJ)
"Please continue doing what you're doing - good job!" (B.M. & P.M., Cherry
Valley, MA)
"Keep up the good work Mario." (W.B., Waterford, CT)
"Very pleased with my investments in GAB and GGT." (J.L., Tamarac, FL)
"Soliciting the shareholders' opinions is a good idea." (L.G., New York, NY)
"Keep up the good work! I like your quarterly reports - well written and logical
content. Very educational." (R.T., Kirkwood, MO)
"Continue to operate as you have in the past." (H.B., Montgomery, AL)
"We are pleased with this stock. Keep up the good work." (D.L., Saltillo, PA)
"I like the established current operation." (H.C., Washington, PA)
"I have owned Gabelli stock for five years and I am very pleased with your stock
picks. I keep buying more." (A.B., Miami Beach, FL)
"I prefer rights offerings to preferred stock." (V.F., Annandale, VA)
"I look to your stock for income more than growth. You have been doing a good
job." (P. H. , Wallingfort, CT)
"I find the quarterly reports extremely interesting - well written, informative,
lively." (J.M., Cincinnati, OH)
"When the discount is 7% or more a repurchase plan should be in effect,
otherwise do not purchase." (C.B., Abilene, TX)
"Receiving a generous distribution is important to me, a retired person, as well
as having the rights offerings." (E.R., Bothell, WA)
5
<PAGE>
"Mario, your fundamental value approach is 'best' choice for investing." (R.S.,
Atlanta, GA)
"Keep up the good returns." (W.B. & L.B., Milwaukee, Wl)
"Love the Trust. Holders since initial. Feel strongly against rights offerings."
(W.M., Portola Valley, CA)
"The 10% Annual distribution policy is most important to me. It is the main
reason I own your fund." (G.H., Fort Meyers, FL)
"I like adding to our holdings this way [rights offerings]" (J.D. & D.D.,
Lancaster, PA)
"I like watching grass grow. Keep up the value investing approach." (H.K.,
Fostoria, OH)
"Loyalty to the present small stockholder is admirable and may help other
funds." (J.K., Atlantic Beach, FL)
"Your quarterly reports are educational as well as informative." (P.S.,
Tunganoxie, KS)
"Thank you for your solid, consistent, intelligent performance over the years!"
(H.S., Nesconset, NY)
Finally, below is a reprint of one of the many letters we received:
Dear Mario J. Gabelli,
On behalf of myself and the dozen or so friends whose investments I manage
(for free), I'd like to take this opportunity to say that the Gabelli
Equity Trust, as presently constituted, is a most satisfactory investment
for all of us. I particularly like the diversification it provides; its
portfolio is distinctly different from that of other General Equity
closed-end funds.
10% Annual Distribution Policy? Emphatically yes. All of us appreciate the
regular, generous income. Further, I suspect that this policy may help to
keep the discount narrow, and thus discourage any group that might try to
open-end the Fund for a quick profit.
Rights offerings? Another emphatic yes! Of the shares I own, 34% have been
acquired in the four rights offerings, at a favorable price and very
attractive yield. The Wall Street Journal rewrites its standard carping
commentary every time there is a rights offering: if it's not in the best
interest of a tiny minority, let them look elsewhere for any investment.
No investment is perfect for everyone. Please continue the rights
offerings!
Preferred Stock? Yes, by all means. Leverage should be beneficial to
common holders most years. I think most of the time it will add to the
income available for the common. If there's occasionally a negative year,
so be it. We're all in this for the long term.
Stock Repurchase? Equivocal. I recognize that Stock Repurchase will
increase the NAV, and thus the 10% of it that is paid to common holders.
But I think the money might better be used to buy stock - for example, to
add to the Fund's' holdings of the stock mentioned in your Let's Talk
Stocks section of the quarterly reports. Incidentally, I think your
quarterly reports, including those of the Convertible Fund and the Global
Multimedia Fund are the most interesting and informative of the goodly
number that I read.
Thank you for a very satisfactory investment.
Very truly yours ,
/s/ Athol A. Dawson
Athol A. Dawson
Equity Trust Shareholder.
6
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In reading your comments, however, it became clear to us that we needed to
more fully describe each of the policies and explain the benefits in more
detail. To this end we thought we would revisit some questions about each issue.
DIVIDENDS / 10% DISTRIBUTION POLICY - Q & A
Q: Why Does the Equity Trust pay dividends?
A mutual fund pays dividends to satisfy one of the requirements to qualify
as a Regulated Investment Company. To avoid paying income tax at the corporate
level, a mutual fund, whether open-end or closed-end like the Gabelli Equity
Trust, must distribute at least 90% of its ordinary income and realized capital
gains but will generally distribute all of its income for the year and thereby
act as a conduit. As a Regulated Investment Company, the tax benefits of net
long-term capital gains can be passed through to shareholders.
Q: What is the history of the Equity Trust's dividends?
The Fund paid out only its income and capital gains through 1988. In
August of 1988, in response to the discount which persisted early in the Equity
Trust's life, we instituted our 10% Distribution Policy. Since then, the Equity
Trust has paid distributions equivalent to 10% of its average net assets every
year. The following chart summarizes the total distributions made or declared by
the Equity Trust each year since inception. Stated another way, our Fund has
paid out $954.6 million or $13.96 per share from inception (including the value
of rights distributed and the spin-off of the Gabelli Global Multimedia Trust)
- -- an exceptional and considerable payout considering we started with $374
million on August 21, 1986
<TABLE>
<CAPTION>
1987 1988 1989 1990 1991(a) 1992(b) 1993(c) 1994(d) 1995(e) 1996 1997
---- ---- ---- ---- ------- ------- ------- ------- ------- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$1.082 $0.55 $1.31 $1.18 $1.09 $1.06 $1.11 $1.89 $1.00 $1.00 $1.04
</TABLE>
(a) On October 21, 1991, the Fund distributed Rights equivalent to $0.42 per
share upon full subscription of all issued shares.
(b) On September 28, 1992, the Fund distributed Rights equivalent to $0.36 per
share upon full subscription of all issued shares.
(c) On July 14, 1993, the Fund distributed Rights equivalent to $0.50 per
share upon full subscription of all issued shares.
(d) On November 15, 1994, the Fund distributed shares of the Gabelli Global
Multimedia Trust Inc. valued at $0.80625 per GAB share.
(e) On October 19, 1995, the Fund distributed Rights equivalent to $0.37 per
share upon full subscription of all issued shares.
Q: What are the "mechanics" of the 10% Distribution Policy?
The Equity Trust currently pays out 10% of its average net asset value per
share. The Fund's normal policy is to make quarterly distributions of $0.25 per
share at the end of each of the first three calendar quarters of each year. The
Fund's distribution in December for each calendar year is an adjusting
distribution. The amount is equal to the greater of 10% of the average of the
net asset value per share of the Fund as of the last day of the four preceding
calendar quarters or the taxable income requirements of the Internal Revenue
Code.
Q: How are long-term capital gains distributed?
Rule 19b-1 of the Investment Company Act of 1940, as amended, permits a
fund to pay capital gains only once a year. The Equity Trust applied for and has
received an exemption from the Securities and Exchange Commission to allow the
Fund to distribute long-term capital gains more frequently than once per year.
The Fund can now distribute capital gains up to four times per year. This allows
the Directors to maintain the Fund's regular quarterly distribution schedule and
allocate capital gains to prior quarterly distributions.
Q: How do the new tax laws affect the distributions?
The Taxpayer Relief Act of 1997 reduced the tax rates that apply to net
capital gains. The Act reclassified capital gains as "20% Rate Gains" and "28%
Rate Gains". "20% Rate Gains", subject to a maximum tax rate of 20% (or 10%
depending on an individual's tax bracket), are gains on assets held for more
than one year that are sold after May 6, 1997 and before July 29, 1997 or held
for more than 18 months that are sold after July 28, 1997. "28% Rate Gains",
subject to a maximum tax rate of 28% (or 15% depending on an individual's tax
bracket), are gains on assets held for more than one year that are sold before
May 7, 1997 or held for more than one year but not more than 18 months that are
sold after July 28, 1997.
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In 1997, the percentage of long-term capital gains paid by the Equity
Trust that was classified as "20% Rate Gains" was 88.59%. The percentage that
was classified as "28% Rate Gains" was 11.41%. Our investment style has not only
provided solid returns, but also tax-advantaged returns.
Q: Why are a portion of the distributions sometimes classified as non-taxable
distributions (non-taxable return of capital)?
In the event the Fund distributes cash over and above net investment
income and realized capital gains for any year, the cash received may be viewed
as a tax-free return of capital. In this instance, shareholders pay no tax and
reduce their cost basis by the amount of the distribution equal to the return of
capital. We are sensitive to the complication this creates in shareholders'
bookkeeping. We try to minimize this.
Q: How do I reinvest my dividends?
All directly registered shareholders are eligible to participate in the
Fund's Automatic Dividend Reinvestment Plan which gives the shareholder the
option of having all distributions reinvested. Distributions will be reinvested
automatically unless the shareholder elects to receive cash. Distributions to
shareholders who hold their shares in "street name" with a broker are reinvested
by the broker in additional shares under the Plan if the broker participates in
the Plan. Otherwise your distributions are paid in cash. Such shareholders
should check with their broker to see if their brokerage firm participates in
the Plan.
RIGHTS -101
Q. What are rights?
Rights are privileges granted to existing shareholders of a corporation
(in our case the Equity Trust) to subscribe to shares of a new issue of common
stock.
Q. What is the history of rights offerings?
Rights offerings have been used in Europe since the late 17th century
after the commencement of the London Stock Exchange. In England, rights
offerings are commonplace and represent an integral part of its capital markets
and are well-regarded by shareholders. Under U.K. law, any new shares (for cash)
have to be offered first to existing shareholders on a pro rata basis. While
underwritten public offerings have been the preferred method of raising capital
in the U.S., rights offerings have become more understood and more widely used.
Today, rights offerings are more common in the U.S. and we expect that their
frequency will increase.
Q. What is a rights offering as it relates to closed-end funds?
A rights offering is an opportunity for shareholders to purchase
additional shares of a publicly traded company or mutual fund at a specified
price - the "subscription price" - and in our case, with no commission. Although
shareholders are not required to purchase additional shares, they are given the
opportunity, or "right", to purchase shares based on the number of underlying
shares they own on the record date. Rights may either be transferable or
non-transferable and the offering may or may not be underwritten with a
commitment by the underwriter to buy those shares which are not subscribed.
Q. How was the rights offering beneficial to Equity Trust shareholders?
The Gabelli Equity Trust shareholder benefits from the opportunity to
purchase additional shares with no commission. Thus, an investor is able to put
more financial assets to work in an investment discipline in which she or he
believes and which has performed well over an extended period of time. The
additional capital raised by the Trust is used to position the portfolio to more
fully take advantage of new investment opportunities.
Q. What are transferable rights versus non-transferable rights?
Non-transferable rights have no market value other than that they may be
exercised and are not tradable on any exchange.
8
<PAGE>
Transferable rights may trade on an exchange and afford the
non-subscribing shareholder the option of selling their rights on the exchange
or through the transfer agent. Selling the rights allows a non-subscribing
shareholder to recoup much of the dilution which would otherwise occur. A
non-transferable rights offering does not permit such an offset so that
non-subscribing shareholders would experience full dilution. The rights in all
four of the Equity Trust's offerings have been transferable. This means that you
may trade them on the New York Stock Exchange.
Q. How have the Equity Trust's rights offerings been structured?
The Equity Trust has had four transferable rights offerings, each with a
subscription period lasting approximately 30 days. Shareholders were entitled to
subscribe to additional shares only during the subscription period. The
subscription ratio relates to the number of rights which are required to
purchase one additional share of the Fund. In our case each was a 6:1 ratio,
which permitted shareholders to purchase one share for every six rights held.
Stated another way, a shareholder with 600 shares received 600 rights (one right
per share) and was able to subscribe to an additional 100 shares (six rights are
required to purchase one share). The subscription price in each offering was
$8.00, which was the price at which additional shares could be purchased.
The oversubscription privilege was available to shareholders who fully
subscribed to their primary shares and wished to purchase additional shares.
Since all of the rights initially issued were not exercised, any shares for
which subscriptions had not been received were offered to shareholders who had
exercised all of the rights initially issued to them and had oversubscribed for
more. As sufficient shares were not available to honor all over-subscription
requests, the available shares were allocated among those who over-subscribed
based on the number of shares they originally owned on the record date.
Q. How are the Equity Trust's rights offering better than other rights offerings
by closed-end funds?
There are two types of rights offerings a closed-end fund can use to raise
additional capital: the direct offering method and the firm-underwritten method.
In the past, the Equity Trust has utilized a direct offering method to realize
the relative cost advantages associated with this method as compared to a
firm-underwritten method. A direct offering avoids costly underwriting and
distribution services which lessen shareholder value.
Q. How has the Fund fared in its previous rights offerings?
The following compares the total subscriptions received with the amount
sought for each of the GAB offerings:
[The following table was depicted as a bar graph in the printed material.]
1991 1992 1993 1995
---- ---- ---- ----
Proceeds sought (In millions) $ 63 $ 76 $ 93 $119
Subscriptions Remitted (In millions) $136 $160 $176 $200
Q. Why do members of the news media say that a rights offering is dilutive?
There is no dilution if all shareholders fully participate in the rights
offering. The dilution is the result of issuing new shares below the then
current net asset value. This causes the number of shares outstanding to
increase at a percentage rate greater than the increase in the size of the
Fund's assets. To avoid dilution, a shareholder should fully
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subscribe to all shares made available based on the subscription ratio. If a
shareholder does not exercise his or her rights, and sells the rights at their
intrinsic value, the shareholder will not experience dilution. However, a
failure to sell rights or a sale below intrinsic value will result in dilution.
Dilution is experienced only by shareholders who do not fully exercise their
rights.
Q. Were shareholders able to sell their rights in past rights offerings?
Registered shareholders of the Equity Trust had the option of selling all
or a portion of their rights by designating this desire on the Subscription
Certificate which accompanied the Prospectus. The certificate was required to
have been returned to State Street Bank and Trust Company by the end of the
offering period at the designated address.
Those who held shares through a broker could simply have made the broker
aware of their desire to sell the rights. The broker should fulfill the
remainder of the order.
Q. What were the transaction costs on the sale of the GAB rights?
Equity Trust rights were sold through State Street Bank and Trust with no
fees and only a nominal commission, however, certain brokerage firms may have
charged a transaction fee or commission to sell rights.
PREFERRED STOCK 101 - Q&A
Q. What is a common stock?
A common stock is a unit of ownership (equity) of a public corporation.
Owners of common stock typically are entitled to vote on the selection of
directors and other important matters as well as to receive dividends on their
holdings.
Q. What is a bond?
A bond is any interest-bearing or discounted government or corporate
security that obligates the issuer to pay the bondholder a specified sum of
money, usually at specific intervals, and to repay the principal amount of the
loan at maturity. Bondholders do not have corporate ownership privileges, as
stockholders do.
Q. What is a preferred stock?
Preferred stock is a form of equity investment which has certain rights
that differ from those of common stock. In our case, the Preferred Stock would
typically be issued at $25 per share with a fixed dividend rate. The Trust is
obligated to pay this dividend to the Preferred Shareholders before any
dividends are paid to the common shares. Thereafter, any return earned in excess
of this dividend rate would work to benefit the Common Shareholders.
The Board of Directors of The Gabelli Equity Trust Inc. continues to
consider an offering of preferred stock. The actual amount of capital to be
raised, the dividend rate and the timing of the offering have not been
determined and would be announced at a later date. The proceeds raised would be
used for investment purposes and the offering would be made only by means of a
prospectus.
Q: How would Preferred Shares benefit Common Shareholders?
Through December 31, 1997, the Equity Trust has earned a 14.5% average
annual return. The only obligation that the Trust would have to the Preferred
Shareholders is to pay the stated dividend rate. Given the current market
environment, we feel that there is an opportunity to take advantage of
relatively low long-term interest rates and to earn an excess return for our
Common Shareholders consistent with our conservative investment approach. We
expect that the Preferred Shares will be issued with a dividend rate which is
less than the Trust's 14.5% average annual return. Any return earned in excess
of the stated dividend rate would directly benefit Common Shareholders; however,
any shortfall from the stated rate would impact the Common Shareholder in the
opposite fashion. Therefore, by taking advantage of the current relatively low
interest rate environment and achieving our investment objectives, a Preferred
Share issuance offers what we believe is a conservative method of adding wealth
for our Common Shareholders.
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Furthermore, Common Shareholders stand to receive certain tax benefits as
a result of a Preferred Stock offering. Since taxable income is allocated to the
Preferred Shareholders before Common Shareholders, taxable distributions to
Common Shareholders would not be required to the extent they would be if the
Preferred Shares were not outstanding.
Q: Does the issuance of Preferred Shares affect the 10% Distribution Policy?
The issuance of Preferred Shares does not affect the 10% Distribution
Policy. Under present conditions, there are no plans to change the 10%
Distribution Policy. If the Equity Trust were to issue Preferred Shares, the
Board of Directors would continue to review the 10% Policy on a regular basis.
Q: Why is the Equity Trust considering Preferred Shares right now?
Right now, long-term interest rates are at relatively low levels. The
dividend rate that the Equity Trust would be required to pay on the Preferred
Shares is directly related to long-term rates. In this environment, we have a
great opportunity to create value by earning a return in excess of the
Preferred's dividend rate over the long term. Therefore, we believe this
represents an opportunistic time for the Equity Trust to take advantage of these
low rates at a relatively low cost.
In addition, the Adviser does not intend to receive a management fee on
the incremental assets raised unless the total return of the Equity Trust
exceeds the stated dividend rate of the Preferred Stock.
STOCK REPURCHASE PLAN - Q & A
Q: What is a stock repurchase plan?
A stock repurchase plan is a plan that allows a company to buy back its
own shares in the open market (in our case, the NYSE). This reduces the total
number of shares outstanding and increases the earnings per share.
Q: When did the Equity Trust use a stock repurchase plan? Why?
The Equity Trust traded at a discount to net asset value early in its
life, particularly after the market correction on October 19, 1987. On that
date, we were the first company on the New York Stock Exchange to announce a
stock repurchase plan which resulted in the purchase of 800,000 shares in the
open market from 1987 to 1988.
Q: What is the benefit of a stock repurchase plan?
The advantage of a stock repurchase plan is that the Equity Trust is able
to purchase its own shares when they are trading at a discount to NAV. This
reduces the number of shares outstanding and allows the savings from the
discounted purchases to be credited to the net assets of the remaining shares,
thus boosting the NAV. The larger the discount, the greater the effect on the
NAV.
COMMENTARY
1997 Revisited
Year ends are always time for reflection. We look back over the last
twelve months and assess what went right and what went wrong. To borrow from
Joseph Heller's classic novel Catch 22, we tally the "feathers in our cap" and
"black eyes". In 1997, the former vastly outnumbered the latter. Heading our
"feathers in cap" list is deals. We were among the first on Wall Street to
proclaim the beginning of the third great wave of takeovers since World War II.
During 1997, the Equity Trust bid a cheerful farewell to five portfolio holdings
which found new homes under other corporate roofs. Cable television stocks
gained significantly over the course of the year thanks to better than generally
expected cash flow growth and Bill Gates' decision that coaxial cable will be
the most effective digital highway into the home. Telecommunications stocks
including AirTouch Communications (ATI - $41.5625 - NYSE), Sprint (FON - $58.625
- - NYSE), Century Telephone (CTL - $49.8125 - NYSE), Telecom Italia Mobile (TLEBF
- - $4.616 - Nasdaq), Telecom Argentina (TEO - $35.75 - NYSE), and Telefonos de
Mexico (TMX - $56.0625 - NYSE) buoyed returns. Industrial niche companies like
Navistar (NAV -
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$24.8125 - NYSE), Tyler Corp. (TYL - $5.50 - NYSE) and Ampco-Pittsburgh (AP -
$19.5625 - NYSE) also appeared on our leader board.
Our "black eyes" list was dominated by several relatively small positions
in gold stocks, which lost their glitter as gold prices collapsed. Auto and auto
parts stocks like General Motors (GM - $60.625 - NYSE), Genuine Parts (GPC -
$33.9375 - NYSE), Johnson Controls (JCI - $47.75 - NYSE) and Echlin (ECH -
$36.1875 - NYSE) also disappointed despite, in our opinion, offering excellent
fundamental value. Among our larger holdings, Viacom (VIA - $40.875 - ASE),
Seagrams (VO - $32.3125 - NYSE) and Boeing (BA - $48.9375 - NYSE) disappointed.
We view all three as loaded laggards capable of making substantial performance
contributions in the year ahead.
1998: Will it be Another Good Year
Despite a roller coaster ride featuring some breathtaking ascents and
declines, equities investors enjoyed themselves in 1997. Will 1998 be equally
thrilling? We expect to continue to experience considerable market volatility as
investors react to economic and market developments overseas and attempt to
assess the impact on the U.S. economy and corporate earnings.
Looking ahead, many of the favorable economic factors that have propelled
stocks in recent years will likely remain intact. Asian currency devaluation
will very probably diminish inflationary pressure on the U.S. economy and delay
the need for a Federal Reserve rate hike. Long interest rates should remain low
and perhaps trend lower. Deals, restructurings and share repurchase programs
should continue to buoy stocks.
- --------------------------------------------------------------------------------
Flow of Funds
($ Billions)
<TABLE>
<CAPTION>
Sources 1993 1994 1995 1996 1997E
- ------- ---- ---- ---- ---- -----
<S> <C> <C> <C> <C> <C>
U.S. Deals $ 234 $ 340 $ 511 $ 652 $ 919
Stock Buybacks 37 46 99 176 179
Equity Mutual Funds Net 130 119 128 222 231
Dividends 204 230 274 309 333
------ ------ ------ ------ ------
Sources: 605 735 1,012 1,359 1,662
------ ------ ------ ------ ------
Uses
IPOs 103 62 82 115 118
U.S./International Equity Capital Flow
U.S. Purchases of Non-U.S. Equities 309 434 396 514 734
International Purchases of U.S. Equities 246 387 346 457 679
------ ------ ------ ------ ------
Net Flow: 63 47 50 57 55
------ ------ ------ ------ ------
Uses: 166 109 132 172 173
------ ------ ------ ------ ------
Net Flow of Funds: $ 439 $ 626 $ 880 $1,187 $1,489
====== ====== ====== ====== ======
</TABLE>
Sources: Securities Data Corp, Investment Company Institute, Birinyi Associates.
- --------------------------------------------------------------------------------
The wild cards are corporate earnings and investor psychology. In general,
we believe corporate earnings from U.S. operations will be relatively strong--in
the 8% to 9% range. However, the non-U.S. portion of earnings is likely to be as
much as 10% lower in 1998. With earnings expectations high across the board, we
suspect we will see more earnings disappointments in the year ahead.
Other issues on our "Bear Watch" include:
o The Asian Flu spreading to Latin American currencies and economies.
o An upswing in wage inflation not offset by productivity gains.
o The emergence of trade barriers causing a global political backlash.
o A disruption of oil flow from the Mid-east.
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o The lame duck administration. Will Greenspan and Rubin retire before
2000, causing a crisis in confidence, if not in the economy?
o Last, but not least, the level of the market--valuations are high
and the margin of safety relatively low.
How will investors react if any or all of our concerns prove justified? We
will just have to wait and see. Investors have become conditioned to buying on
market dips. That's understandable--it's worked quite well ever since this bull
market began in 1982. Indeed, we saw the market rebound strongly from the sharp
correction we experienced in late October. However, if the problems in Asia
continue to escalate and we see more widespread earnings disappointments from
U.S. companies, investors may be somewhat more reluctant to view each market dip
as a buying opportunity. Bear in mind, liquidity itself does not drive markets
higher. It is liquidity combined with favorable investor psychology. In other
words, if greed turns to fear, we could see a more substantial and prolonged
market slump than we are accustomed to.
Our conclusion after all this conjecture is that in 1998, the market will
be up 5% to down 15%. We doubt the Equity Trust will be able to duplicate its
terrific 1997 returns in what should be a much more challenging market. However,
we believe we can achieve our 10% real rate of return objective in the year
ahead.
Our Response
While we hope our concerns over earnings and the market prove unfounded,
we believe in the boy scout motto, "be prepared". While value stocks will not
likely be immune to a substantial market correction, we believe they will
perform significantly better than the more fully valued market darlings.
Consequently, we are carefully monitoring the Equity Trust's portfolio, trimming
or eliminating holdings that have become more fully priced in this market
advance and adding to positions that offer better fundamental value. We are also
being more patient in re-deploying cash reserves.
Deals, Deals, Deals
There was an estimated $919 billion in domestic mergers and acquisition
activity during 1997. We do not believe a market correction will materially slow
deal activity in the year ahead. While we will probably continue to see some big
companies being taken over, much of the action will likely be in smaller, family
dominated public companies, as owner/managers take advantage of reduced
long-term capital gains taxes to monetize their investments.
- --------------------------------------------------------------------------------
Deals - "Third Wave of Takeovers"
($ Billions)
1993 1994 1995 1996 1997E
------ ------ ------ ------ ------
Worldwide Deals $ 452 $ 575 $ 950 $1,140 $1,600
U.S. Deals 234 340 511 652 919
52% 59% 54% 57% 57%
U.S. Deals $ 234 $ 340 $ 511 $ 652 $ 919
Cash Deals 131 212 254 356 414
56% 62% 50% 55% 45%
Sources: Securities Data Corp, Investment Company Institute, Birinyi Associates.
- --------------------------------------------------------------------------------
And the Winner Is?
Despite giving up a lot of financial weight and reach to its better known
opponent, little Starwood Lodging (HOT - $57.875 - NYSE) upset Hilton (HLT -
$29.75 - NYSE) in the battle for ITT (ITT - $82.875 - NYSE). The deal, which is
scheduled to close on February 1, 1998, is for 30% in cash and the balance in
Starwood stock--currently about an $85 per share value. We had sided with the
heavily favored Hilton, primarily due to the higher cash component of its offer.
However, since the cost per share of the Equity Trust's ITT holdings was
approximately $43.00 per share, we are hardly distraught over the outcome.
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Bottoms Up
We believe the biblical adage "those that are last shall be first" may be
prophetic for several of the laggards in the Fund's portfolio. Seagram stock
declined 16.6% in 1997. Investors appear to think Seagram will have a tough time
competing against the new Grand Metropolitan/Guiness, a global spirits
powerhouse. The fact that 20% of Seagram's spirits sales are from Asia is
another justifiable concern. Problems duly noted, we see a company that is
making some good moves. Seagram bought out partner Viacom's 50% stake in the USA
Network and then repackaged it in a deal with Home Shopping Network's Barry
Diller, a terrific entertainment programmer. We believe Diller will further
energize USA and that Seagram will put the $1.2 billion in cash received in the
transaction to good use by making an acquisition to bolster its spirits business
and/or funding another round of share repurchases. In fiscal 1997 (June 30) the
company repurchased 11 million shares and thus far in fiscal 1998, it has bought
in another 10 million. Its other businesses are doing relatively well. Under
Frank Biondi's leadership, MCA is coming back. Tropicana is generating lots of
cash. Seagram still has 26.8 million shares of Time Warner (TWX - $62.00 - NYSE)
worth around $1.5 billion, and over 70 million shares of HSN Inc, (HSNI - $51.50
- - Nasdaq), a stock we like. While Seagram's short-term earnings prospects are
cloudy, we believe the stock is trading well below the company's increasing
economic value.
A Loaded Laggard
Viacom is the portfolio's most prominent loaded laggard. We think the new
management is making progress at Blockbuster Video and can re-invigorate cash
flows from this troubled division. Simon & Schuster and Prentice Hall are well
positioned in the educational publishing business, but we believe Viacom will
liquidate these assets. Paramount is doing just fine. And, the value of the MTV,
VH1 and Nickelodeon cable networks just keeps growing. Chairman Sumner Redstone
is a proud and competitive man--this is a fellow who survived a hotel fire by
hanging by his finger tips from a balcony. We don't think he will give up until
he gets Viacom stock back up to where it belongs.
Pumping the Brakes
Echlin, a leading auto aftermarket parts manufacturer, is changing its
primary business strategy. New CEO Larry McCurdy, a former Echlin President and
most recently, a senior executive at Cooper Industries (CBE - $49.00 - NYSE),
was brought in to beef up the organizational structure and to fix or sell
businesses that are not providing an adequate return. Echlin is currently
looking for a buyer for their heavy duty brake operations. We think Echlin will
become a much more focused company with better profit margins and more
consistent earnings growth. The stock is currently trading at just thirteen
times our fiscal 1998 earnings projections. We think that's cheap for a company
with improving earnings prospects.
Mr. Market
Every year, we like to leave our shareholders with something to think
about. This year, we chose to quote verbatim from Professor Benjamin Graham's
classic, The Intelligent Investor.
"Let us close this section with something in the nature of a parable.
Imagine that in some private business you own a small share which cost you
$1,000. One of your partners, named Mr. Market, is very obliging indeed. Every
day he tells you what he thinks your interest is worth and furthermore offers
either to buy you out or to sell you an additional interest on that basis.
Sometimes his idea of value appears plausible and justified by business
developments and prospects as you know them. Often, on the other hand, Mr.
Market lets his enthusiasm or his fears run away with him, and the value he
proposes seems to you a little short of silly."
At Gabelli Funds, we want to take advantage of Mr. Market's
generosity--buying shares of businesses he offers us at prices below our
appraisal of their true worth, and selling back to him (or someone else) when
prices equal or exceed true value. It is this simple philosophy that guides us
in good markets and bad.
International Segment
A portion of the Equity Trust's portfolio is managed by Caesar Bryan and
is invested in international securities. Caesar also manages the Gabelli
International Growth Fund. Below are Caesar's thoughts on international markets
and global economies:
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During the fourth quarter, financial markets across the world continued to
be dominated by news emanating from South East Asia. Most of that news was not
good, as it became apparent that a number of countries would default on their
debt without external assistance. International equity investors voted with
their feet and sold. The magnitude of the decline in the stock markets were
probably as large and took place as rapidly as any bear market in history. For
example, just in the last six months of 1997, the equity markets of Indonesia,
Malaysia, Korea and Thailand declined, in dollar terms, between 65% and 75%.
These dramatic declines obviously impacted investors everywhere and during
the fourth quarter only a handful of equity markets had a positive return. Apart
from the U.S., all these markets were located in Europe. The best performing
equity market was Switzerland which returned 7.2% for the quarter.
The Japanese market fell by 21% during the quarter reflecting her
weakening economic performance and close economic ties to South East Asia.
The dollar strengthened a little against the deutschemark, but
significantly against the yen during the quarter.
Market Outlook
It is still too early to forecast with confidence the full implication of
the South East Asian debacle on the major developed countries in which the Fund
mostly invests. However, two observations can be made. These concern interest
rates and earnings, the two most important factors that determine equity prices.
First, the events in South East Asia appear to be deflationary. Demand
from that region will decline and exports from Asia will be lower priced and
more competitive. This will tend to reduce inflationary expectations in
developed countries, which is positive for interest rates. Most of this effect
has already been seen as bond yields have declined to new lows in most markets.
For example, by the end of 1997 the ten-year government bond yield was 5.35% in
Germany and 1.85% in Japan.
The second observation concerns corporate earnings. For the most part, the
impact is likely to be negative and will depend upon the severity of the
economic downturn in the Far East. Companies that compete with South East Asian
based-companies or sell directly to those countries will likely suffer most. Of
course, the market has been quick to discount this effect. The best-performing
sectors, on a global basis, in the fourth quarter were telephone systems,
entertainment, utilities and household products. The tradable goods sector
performed the worst.
Benefiting from lower interest rates and corporate activity, the Fund's
financial stocks in Europe performed well during the quarter. These included
Bank of Scotland, Bank of Ireland, Banca Commerciale Italiana and Banco Pastor
in Spain. All these stocks appreciated by more than ten percent. The Fund's
insurance holdings such as Skandia in Sweden and UAF and Scor in France also did
well. One of the best performing international holdings during the quarter was
Vodafone; the U.K.- based cellular telephone company, which rose by over 30%.
Investors were quick to punish any company thought to be vulnerable to the
"Asian flu". Some will be adversely impacted but others have little exposure.
Companies with sales in developing markets and the Far East such as Richemont
and Christian Dior performed poorly. However, other companies with very limited
exposure fell sharply for no apparent reason.
In an environment of continuing low inflation and moderate growth,
companies that can demonstrate earnings growth will probably be well rewarded by
the market. In Europe, a recovering economy will help top line revenue growth
and stocks will continue to be bolstered by restructuring efforts. Also merger
activity should remain strong as companies prepare for the introduction of the
single currency.
Despite continuing problems in the financial sector in Japan, we expect
further measures to spur economic growth which should positively impact the
stock market. In this environment, more domestically oriented sectors of the
market might recover. The challenge in the Japanese market will be to find
companies with shareholder friendly management, a leading market position and
the ability to grow earnings.
15
<PAGE>
South East Asian markets are likely to rebound from very oversold levels
but the economic adjustment process is likely to be painful and unpredictable.
Therefore, we would rather wait until earnings visibility has improved before
making any significant commitments to Asian markets.
"The Tigers' Currency Crisis and Six Months to the EMU"
On Wednesday, November 19 we were privileged to have the
distinguished Karl Otto Pohl, the former President of Germany's Bundesbank
and a Director of the Equity Trust, give an address on subjects ranging
from the currency crisis in Southeast Asia to the establishment of
European Monetary Union. We wanted to share Mr. Pohl's comments with you.
Karl Otto Pohl:
Thank you for inviting me to speak to you today. Foremost on
everyone's minds is probably the situation in Southeast Asia and its
impact on the rest of the world. I will begin by confessing that I was
surprised by the currency crisis and attendant economic problems in the
region. I suppose most economists and market observers were accustomed to
strong growth in these countries and overlooked the speculative excesses
that had built up in these economies. I was in Indonesia in July and at
that time, the consensus was that Thailand was an isolated incident and
the rest of the Asian Tigers' currencies and economies were secure. We now
know the consensus was quite wrong. The brush fire in Thailand spread
quickly throughout the region destroying currencies and threatening
economic growth in almost every Southeast Asian nation. Currency
speculators played a role in the process, but they are not the cause of
the problems. Over-capacity, over-borrowing and euphoria in the regions'
equities and real estate markets deserve much of the blame with regional
currencies' ties to the strong U.S. dollar also fanning the flames.
Is the crisis now over?
I'm not sure. I am skeptical of the long-term benefits of financial
bailouts by the International Monetary Fund like the $40 billion package
put together to rescue Indonesia, a very small economic entity on the
global stage. This strategy, which is supported by the U.S., may dampen
volatility by discouraging currency speculation and limiting immediate
economic disruption. However, in the long run, I believe problems are
better solved by letting the markets do their job. Burned fingers make
people more careful around the fire. Will the currency crisis in Southeast
Asia spread to other parts of the world? One has to be concerned by the
high current account deficit and overvalued currency in Brazil.
What happens to the Hong Kong Dollar?
Generally, I question the benefit of pegging currencies to the
world's strongest. However, I believe Hong Kong may be justified in doing
everything in its power to defend its currency peg to the U.S. dollar.
Failure to preserve the peg would threaten Hong Kong's position as the
region's financial center. As much as Singapore would like to see its
rival's demise, support from mainland China and Hong Kong's substantial
U.S. dollar reserves should allow it to successfully defend the peg.
The Spillover to Japan
I am less concerned about what may happen to the economies of
smaller countries like Thailand, Indonesia, and Malaysia, than the impact
economic weakness in the Pacific Rim will have on larger economic entities
like Korea and particularly Japan. With substantial over-capacity and a
still vulnerable currency, Korea is in trouble. I have never seen the
Japanese so frustrated. The Japanese government and Japanese corporate
leaders are at a loss as to how to get out of the current economic
quagmire. At 0.5%, the discount rate is already quite low. Dropping
short-term rates even lower is not likely to accomplish much. Budget
deficits prevent the government from spending much to bolster the
economy--it is interesting to note that because of a deficit that equals
7% of GDP, Japan would not qualify for entry into the European Monetary
Union. This summer, I had lunch with the Board of Nippon Life
16
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and met with the Chairman of Fuji Bank. They didn't seem to have any
answers. Recently, a major commercial bank was allowed to go under.
Interestingly, the Japanese stock market rallied on the news. I don't
believe any of the Japanese money center banks are in serious trouble, but
I can't fully discount the possibility. Perhaps the long-term solution for
Korea and Japan is to run companies with a view to increasing share of
profits rather than just share of markets.
For every cloud, there's . . .
The silver lining in the economic cloud hanging over Southeast Asia
and Japan is its favorable impact on inflation in the U.S. and Europe.
Over-capacity and weaker currencies in Asia will translate into more
imports and lower prices in the developed nations. U.S. Federal Reserve
Chairman Alan Greenspan has already acknowledged that the problems in
Southeast Asia will likely help eliminate inflationary pressure in the
U.S. economy. I believe Mr. Greenspan is also concerned that any increase
in U.S. rates may have a very negative effect on world-wide financial
markets. So, I doubt we will see the Fed raise short-term rates for the
foreseeable future. As I predicted, long-term U.S. bond rates are already
coming down. Supply/demand factors in the bond market are favorable and
the federal budget deficit is shrinking dramatically. I expect we will see
the 30-year Treasury Bond yield dropping below 6% relatively soon and
perhaps trending even lower over the next year. As the yield curve
flattens, the Fed may be more inclined to reduce short-term rates rather
than raise them. This, of course, will be good for U.S. stocks and bonds.
The Status on the EMU
The second subject of great interest to most economists and
investors is European Monetary Union. It is going to happen ahead of
schedule in May 1998 with 11 nations including Italy, Spain and Portugal
participating. Greece is not ready and for many reasons, the UK does not
wish to join at this time, nor will Sweden or Denmark. Part of the process
of monetary union is to establish fixed exchange rates for all European
currencies--in essence, creating one currency with many different names.
For this to work, Europe must have a single monetary policy, which will be
accomplished by the creation of an independent European central bank in
1998. For the time being, Germany's Bundesbank will fill that role. That
is why the Bundesbank is pushing up short-term rates in Germany despite an
economy that is just now gaining some momentum and an inflation rate under
2%. Concurrently, interest rates will have to come down in countries like
Italy, Spain and Ireland despite a robust economy. These changes in
short-term interest rates are being instituted solely to make monetary
union easier to effectuate.
What does European Monetary Union mean for global exchange rates? I
believe the united European currencies will prove to be an alternative to
the U.S. dollar as a strong and stable currency. If I am right, the dollar
will weaken versus the D-mark. I think the U.S. dollar will strengthen to
as much as 135-140 against the Japanese Yen. There has been a lot of
speculation that Japanese financial institutions will be forced to abandon
the U.S. bond market. This is not likely to happen. Japanese banks and
insurance companies need to generate a 5-6% return on investment to meet
their financial obligations. Right now, the U.S. bond market is the only
safe place they can get these kind of returns.
Mergers & Acquisitions and the EURO
In the year ahead, I expect European economies to continue to grow,
albeit not as rapidly as consensus estimates. For example, I am seeing
projections of 3% GDP growth for Germany. With weaker Asian currencies
restraining German exports, I suspect GDP growth will come in closer to
2.5%. European Monetary Union will spawn more cross-border mergers and
acquisitions. Consolidation will benefit European companies as it has
American companies in recent years. To date, cross-border corporate
transactions have been difficult to accomplish. It will get easier and
corporate combinations that make economic sense will be realized.
I have now taken enough of your time ruminating on current events. I
hope my comments have given you some beneficial insight on global
financial markets. Now, let's go back to work.
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Let's Talk Stocks
The following are stock specifics on selected holdings of the Equity
Trust. Favorable EBITDA prospects do not necessarily translate into higher stock
prices, but they do express a positive trend which we believe will develop over
time.
American Express Co. (AXP - $89.25 - NYSE), founded in 1850, is a diversified
travel and financial services company operating in 160 countries around the
world. The company is best known for its American Express charge card and its
travel-related services. Minneapolis-based American Express Financial Advisors
(formerly IDS Financial Services) sells financial products ranging from mutual
funds to annuities. Harvey Golub, Chairman and CEO, has refocused AXP on its
core charge card and investment management businesses. The company has
significantly expanded the range of merchants who welcome its cards and its
cards in use worldwide grew almost three percent to 42.7 million. Management's
objective is virtual parity with bankcard networks. American Express has joined
forces with Microsoft to start an online corporate travel service. As evidenced
by a 15% increase in per share earnings in 1997 and over 16% in 1997, we believe
that American Express has been repositioned to enjoy double digit earnings
growth over the balance of this decade.
BCE Inc. (BCE - $33.3125 - NYSE), the holding company for Bell Canada, is
Canada's largest telecommunications company. BCE has controlling interests in
Northern Telecom (NT - $89.00 - NYSE) and BCEMobile Communications (BCX - $25.16
- - TSE). There are substantial values in BCE. For example, "behind" each share of
BCE there are 0.2 shares of Northern Telecom. This NT interest, marked to
market, is worth over $18 per BCE share. The company is a possible candidate for
break-up. In the interim, the Canadian Radio and Television Commission is
providing a more attractive operating environment in which BCE is becoming more
competitive.
Chris-Craft Industries Inc. (CCN - $52.3125 - NYSE), through its 78% ownership
of BHC Communications (BHC - $130.25 - ASE), is primarily a television
broadcaster. BHC owns and operates UPN affiliated TV stations in New York
(WWOR), Los Angeles (KCOP) and Portland (KPTV). BHC also owns 59% of United
Television (UTVI - $103.875 - NASDAQ), which operates an NBC affiliate, an ABC
affiliate and three UPN affiliates. United Television has announced plans to
purchase WRBW, a UPN affiliate in Orlando, for approximately $60 million and
WHSW in Baltimore for $80 million. Chris-Craft's television stations constitute
one of the nation's largest television station groups, reaching approximately
22% of U.S. households. The Chris-Craft complex is debt free and strongly
positioned to expand its operations with roughly $1.5 billion in cash and
marketable securities.
----------------------
Chris-Craft Industries
----------------------
78%
----------------------
BHC Communications
----------------------
59%
----------------------
United Television
----------------------
Deere & Co. (DE - $58.3125 - NYSE) is the world's largest manufacturer of farm
equipment. The company's products include tractors and planting, harvesting and
crop handling equipment. With the U.S. government no longer restricting
plantings, additional acreage is likely to be cultivated by the nation's
farmers. If weather is accommodating, bountiful harvests are likely and farm
incomes should show substantial increases. Global demand for U.S. wheat and
other crops would further increase farm incomes. Long term prospects for farm
equipment manufacturers like Deere are attractive as global incomes, diets and
standards of living improve. Deere also makes industrial equipment used in the
construction and forestry industries and a range of consumer products, including
lawn and garden tractors and outdoor power equipment. Overseas sales account for
roughly one-quarter of Deere's revenues.
Telecomunicacoes Brasileiras SA (Telebras) (TBR - $116.4375 - NYSE) is the
Brazilian, government-controlled, monopoly telecommunications holding company
consisting of 28 subsidiaries serving more than 14 million telephone lines and
two million cellular customers in a country with a population of 160 million.
The penetration rate is less than 9% for telephone and 1% for cellular. The
stock is attractively priced at less than five times our estimate of 1997 cash
flow. Future opportunities include the prospects of privatization, strong line
growth and improvements in efficiency. In October, the Brazilian Ministry of
Communications announced the breakup of the company into three regional, nine
cellular and one long distance company.
18
<PAGE>
Time Warner Inc. (TWX - $62.00 - NYSE), having completed its acquisition of
Turner Broadcasting in the fourth quarter of 1996, is the world's largest
diversified media and publishing company. The combined companies have more than
$23 billion in revenues and over $4.5 billion in EBITDA. Together they control a
host of powerful media brands, such as CNN, Warner Brothers, HBO, Cinemax and
Time and People magazines. Under the leadership of Chairman Gerald Levin and
Vice Chairman Ted Turner, Time Warner is now focused on reducing its almost $13
billion in debt and simplifying its capital structure. Cash flow in 1997 is
demonstrating a substantial increase as the companies reap the synergies of
their merged activities.
United Television Inc. (UTVI - $103.875 - Nasdaq) is a television broadcasting
company which owns and operates five television stations: one ABC, one NBC and
three UPN affiliates. UTVI has purchased WRBW, a UPN affiliate in Orlando for
approximately $60 million and WHSW in Baltimore for $80 million. UTVI stations
will cover approximately 8% of the U.S. population. UTVI is a 59%-owned
subsidiary of BHC Communications (BHC - $103.25 - ASE). Strong advertising
demand, prospects for favorable regulatory changes in the industry and corporate
cost controls will increase EBITDA growth going forward. Our 1997 PMV is
estimated at $123 per share, $29 of which is cash. UTVI's PMV is expected to
reach $165 by the year 2000.
In Conclusion
1997 was yet another good year for equities investors. If earnings
expectations are met, 1998 may be as well. We do have our reservations and are
mindful that at current valuations, stocks are well above the safety net. As
always, we are focusing on value--stocks trading at a material discount to their
longer term intrinsic value. We believe this discipline will effectively
preserve and enhance the value of the assets you have entrusted to us.
Sincerely,
/s/ Mario J. Gabelli
Mario J. Gabelli
President and Chief Investment Officer
February 1, 1998
- --------------------------------------------------------------------------------
Top Ten Holdings
December 31, 1997
Chris-Craft Industries, Inc. Deere & Co.
United Television Inc. Viacom Inc.
Time Warner Inc. Telecomunicacoes Brasileiras SA (Telebras)
American Express Co. BCE Inc.
Cablevision Systems Corp. Media General Inc.
- --------------------------------------------------------------------------------
NOTE: The views expressed in this report reflect those of the portfolio manager
only through the end of the period of this report as stated on the cover. The
manager's views are subject to change at any time based on market and other
conditions.
19
<PAGE>
THE GABELLI EQUITY TRUST INC.
PORTFOLIO CHANGES
Quarter Ended December 31, 1997
(Unaudited)
Ownership at
December 31,
Shares 1997
-------- ------------
NET PURCHASES
Common Stocks
Aeroquip-Vickers Inc. ....................... 5,000 30,000
AMP Inc. .................................... 15,000 60,000
Ascent Entertainment Group Inc .............. 30,000 103,768
Associated Group Inc., Class A .............. 66,500 133,000
Associated Group Inc., Class B .............. 66,500 133,000
Astra AB, Class A ........................... 10,000 49,666
Aztar Corp. ................................. 3,000 33,000
Banca Commerciale Italiana .................. 40,000 360,000
Bank of Ireland ............................. 631 80,631
Bank of Scotland. ........................... 782 120,782
Bankgesellschaft Berlin AG. ................. 300,000 300,000
Bruno's Inc. ................................ 25,000 120,000
Cable Michigan. ............................. 40,125 40,125
Catellus Development Corp. .................. 70,000 150,000
Cendant Corporation(a) ...................... 25,000 25,000
Christian Dior SA ........................... 1,000 9,500
Colonial Limited, Options ................... 180,000 180,000
Colonial Limited ............................ 180,000 180,000
Corporacion Mapfre .......................... 7,200 14,400
Curtiss-Wright Corp. ........................ 50,000 100,000
Diageo plc Sponsored ADR(b) ................. 25,000 25,000
Dow Jones & Co. Inc. ........................ 40,000 100,000
Dynatech Corporation. ....................... 10,000 10,000
Earl Scheib Inc. ............................ 2,000 80,000
Eastern Enterprises ......................... 32,000 32,000
Eastman Kodak Co. ........................... 13,000 25,000
Echlin Inc. ................................. 38,000 120,000
EMI Group plc. .............................. 23,287 23,287
Fairchild Corporation Class A ............... 100,000 100,000
Ferro Corp. ................................. 81,750 246,750
Fred Meyer Inc. ............................. 1,000 2,000
Frontier Corp. .............................. 30,000 50,000
General Cigar Holdings Inc. ................. 5,000 115,000
Granada Group plc ORD ....................... 6,000 60,000
Griffin Land & Nurseries Inc. ............... 9,000 50,000
Hartwall Oy AB .............................. 2,000 9,000
Hilton Hotels Corp. ......................... 20,000 350,000
Honeywell Inc. .............................. 37,000 57,000
H&R Block Inc. .............................. 45,000 95,000
Independent Newspapers Ltd.,
ORD ....................................... 25,000 228,000
Italy Fund Inc. ............................. 6,000 40,250
Lillian Vernon Corp. ........................ 4,700 85,000
LIN Television Corp. ........................ 278,000 285,000
Merkantildata ............................... 7,000 7,000
Monsanto Company ............................ 5,000 5,000
National Presto Industries Inc. ............. 2,000 30,000
NEC Corp., Sponsored ADR .................... 5,000 41,500
Newmont Gold Co. ............................ 10,000 30,000
News Corporation Ltd., ORD. ................. 140,000 140,000
Nintendo Co. Ltd. ........................... 2,000 6,000
NRJ SA ...................................... 1,250 3,250
Paxson Communications Corp.,
Class A ................................... 10,900 110,900
Pegasus Gold Inc. ........................... 659,000 834,000
Pennzoil Co. ................................ 25,000 70,000
Pittway Corp. ............................... 66,100 206,300
Placer Dome Inc. ............................ 20,000 30,000
Raytheon Company Class A .................... 13,711 13,711
RCN Corporation ............................. 160,500 160,500
Reader's Digest Association Inc.,
Class B ................................... 60,000 75,000
Roche Holding AG ............................ 50 100
Rollins Inc. ................................ 2,000 442,000
Sequa Corp., Class B ........................ 12,500 75,000
Skandinaviska Enskilda Banken ............... 25,000 60000
Smedvig ASA. ................................ 20,000 20,000
Southern New England
Telecommunications Corp. .................. 20,000 20,000
Standard Motor Products Inc. ................ 10,000 130,000
Sydney Harbour Casino Holdings Ltd. ......... 35,000 285,000
Tejas Gas Corp. ............................. 100,000 150,000
Telecomunications of Jamaica Ltd.(c) ........ 2,040,000 2,040,000
Tenneco Inc. ................................ 20,000 80,000
Thomas Industries Inc. ...................... 26,000 78,000
TI Group plc ................................ 7,000 12,000
Ticketmaster Group Inc. ..................... 10,000 70,000
Trimark Financial Corporation. .............. 8,000 8,000
Trimas Corporation .......................... 73,000 73,000
Tyco International Ltd. ..................... 11,383 26,000
USX-Delhi Group ............................. 71,000 71,000
Viacom Inc., Class A. ....................... 120,000 480,000
Zeneca Group plc ............................ 4,000 25,000
Preferred Stocks
Village Roadshow Ltd., PFD. ................. 8,856 183,856
ProSieben Media AG, Preferred ............... 6,750 6,750
NET SALES
Common Stocks
AirTouch Communications Inc. ................ 80,000 140,000
Albertson's Inc. ............................ 70,000 --
American Express Co. ........................ 15,000 290,000
AMETEK Inc. ................................. 125,000 95,000
Amphenol Corp., Class A ..................... 5,000 145,000
AMR Corp. ................................... 10,000 70,000
APS Holding Corp., Class A .................. 8,000 --
AptarGroup Inc. ............................. 5,000 20,000
Archer-Daniels-Midland Co. .................. 50,000 300,000
AT&T Corp. .................................. 8,000 67,000
BCE Inc. .................................... 5,000 550,000
Berliner Bank Aktiengesellschaft ............ 300,000 --
BHC Communications Inc., Class A ............ 51,400 --
Boeing Co. .................................. 15,000 95,000
Cablevision Systems Corp., Class A. ......... 16,000 224,000
Caterpillar Inc. ............................ 2,000 12,000
Centennial Cellular Corp., Class A. ......... 9,000 74000
Century Telephone Enterprises Inc. .......... 19,000 145,000
Cheung Kong (Holdings) Ltd. ................. 26,000 59,000
CLARCOR Inc. ................................ 200 69,800
Coltec Industries Inc. ...................... 15,000 385000
Comcast Corp., Class A Special .............. 10,000 40,000
Comcast Corp., Class A ...................... 10,000 40,000
CommScope Inc. .............................. 10,000 --
C-TEC Corp. ................................. 50,500 80,000
C-TEC Corp., Class B ........................ 10,000 20,000
CTS Corp. ................................... 25,000 50,000
CUC International Inc.(a) ................... 25,000 --
Deere & Co. ................................. 9,000 345,000
Donaldson Co. Inc. .......................... 21,000 157,000
20
<PAGE>
THE GABELLI EQUITY TRUST INC.
PORTFOLIO CHANGES -- (Continued)
Quarter Ended December 31, 1997
(Unaudited)
Ownership at
December 31,
Shares 1997
-------- ------------
NET SALES (continued)
Common Stocks (continued)
EMI Group plc, Sponsored ADR ................ 23,287 108,000
E.I. du Pont de Nemours and Co. ............. 10,000 20,000
Federal-Mogul Corp. ......................... 10,000 --
Fortune Brands Inc. ......................... 10,000 180,000
Franklin Electric Co. ....................... 3,500 6500
Frontec AB .................................. 25,000 --
Gaylord Entertainment Co.,
Class A(d). ............................... 188,000 100,000
General Host Corp.(e) ....................... 90,000 --
General Motors Corp. ........................ 31,000 215,000
Genuine Parts Co. ........................... 80,000 80,000
Grupo Televisa S.A., GDR .................... 25,000 280,000
GTE Corp. ................................... 49,000 271,000
Gucci Group ................................. 15,000 --
Guinness plc, Sponsored ADR (b) ............. 20,000 --
Handy & Harman .............................. 2,660 120,000
Hanjaya Mandala Sampoerna. .................. 125,000 --
Harcourt General Inc. ....................... 10,000 55,000
Hellenic Telecommunications
Organization S.A. OTE ..................... 24,000 24,000
Hitachi Ltd., ADR ........................... 55,000 2,000
Hong Kong & China Gas Co. Ltd. .............. 300,000 --
IDEX Corp. .................................. 15,000 350,000
Imation Corp. ............................... 3,500 5,000
ITT Corp., New. ............................. 60,000 180,000
Jamaica Telephone Ltd. ORD(c) ............... 1,020,000 --
Johnson Controls Inc. ....................... 12,000 135,000
Johnson & Johnson ........................... 92,000 --
Krones AG ................................... 900 --
Landauer Inc. ............................... 15,000 105,000
LucasVarity plc ............................. 30,000 10,000
Manitowoc Co. Inc. .......................... 5,000 30,000
Mark IV Industries Inc. ..................... 5,000 145,000
Mattel Inc. ................................. 5,000 --
Media General Inc., Class A ................. 30,500 395,000
Meredith Corp. .............................. 15,000 145,000
Midland Co. ................................. 100 38,900
Modine Manufacturing Co. .................... 11,500 288,500
Navistar International Corp. ................ 95,000 505,000
News Corp. Ltd., ADR ........................ 140,000 5,000
NextLevel Systems Inc. ...................... 20,000 --
ORIX Corp. .................................. 6,000 --
PepsiCo Inc. ................................ 15,000 335,000
Pfizer Inc. ................................. 5,000 25,000
Pittway Corp., Class A ...................... 95,500 103,500
ProSieben Media AG .......................... 3,750 --
PT Ramayana Lestari Sentosa ................. 115,000 --
Quaker Oats Co. ............................. 5,000 240,000
Quaker State Corp. .......................... 10,000 --
Rhone-Poulenc Rorer Inc.(f) ................. 510,700 --
SAP AG ...................................... 800 --
SBC Communications Inc. ..................... 1,000 28,000
Sprint Corp. ................................ 25,000 250,000
SPX Corp. ................................... 500 6,500
Star Publication Malaysia ................... 85,000 --
St. Joe Corp. ............................... 1,500 87,500
Sun Hung Kai Properties Ltd. ................ 24,000 51,000
Swire Pacific Ltd., Class A ................. 75,000 --
Telecom Italia SpA ORD ...................... 9,000 619,440
Tele-Communications Inc., Class A ........... 9,015 290,000
Tele-Communications Inc./Liberty
Media Group, Class A. ..................... 540,000 --
Telecomunicacoes Brasileiras SA
(Telebras), Sponsored ADR ................. 6,500 168,500
Telefonica de Espana, Sponsored
ADR ....................................... 2,000 48,000
Telefonica del Peru S.A. .................... 110,000 --
Telephone and Data Systems Inc. ............. 2,000 320,000
Time Warner Inc. ............................ 28,000 372,000
Trinity Industries Inc. ..................... 28,000 52,000
United Television Inc. ...................... 30,000 311,000
Unitrin Inc. ................................ 5,000 30,000
Viacom Inc., Class B. ....................... 110,000 --
Walt Disney Co. ............................. 6,000 34,000
Worms et Compagnie .......................... 10,000 --
Wrigley (Wm.) Jr. Co. ....................... 11,000 74,000
Preferred Stocks ......................
Preferred Stocks
Fieldcrest Cannon Inc., Series A,
6.000%, Conv. Pfd.(g) ..................... 30,000 --
- ----------
(a) Merger of CUCInternational and HFSInc.; name change to Cendant.
(b) Merger of Guiness plc and Grand Metropolitan plc; name change to Diageo plc.
(c) Name change and bonus share issue.
(d) Merger with Westinghouse Electric.
(e) Tender offer-tender @$5.50 per share.
(f) Tender offer-tender @$97 per share.
(g) Merger with Pillowtex.
21
<PAGE>
THE GABELLI EQUITY TRUST INC.
PORTFOLIO OF INVESTMENTS
December 31, 1997
Market
Shares Cost Value
------ ---- ------
COMMON STOCKS -- 88.0%
Equipment And Supplies -- 10.3%
30,000 Aeroquip-Vickers Inc. ............ $ 995,425 $ 1,471,875
95,000 AMETEK Inc. ...................... 1,244,973 2,565,000
180,000 Ampco-Pittsburgh Corp. ........... 2,386,035 3,521,250
145,000 Amphenol Corp., Class A+ ......... 3,759,125 8,074,688
20,000 AptarGroup Inc. .................. 306,042 1,110,000
12,000 Caterpillar Inc. ................. 163,932 582,750
69,800 CLARCOR Inc. ..................... 1,294,490 2,067,825
50,000 CTS Corp. ........................ 518,632 1,596,875
23,100 Culligan Water
Technologies Inc.+ ........... 562,634 1,166,550
345,000 Deere & Co. (d). ................. 3,335,659 20,117,812
157,000 Donaldson Co. Inc. ............... 1,828,120 7,074,812
20,000 EG&G Inc. ........................ 354,637 416,250
15,000 Flowserve Corp. .................. 85,750 419,062
6,500 Franklin Electric Co. ............ 210,023 417,625
100,000 Gerber Scientific Inc. ........... 1,022,407 1,987,500
350,000 IDEX Corp. ....................... 2,271,076 12,206,250
50,000 Lufkin Industries Inc. ........... 908,349 1,787,500
30,000 Manitowoc Co. Inc. ............... 265,667 975,000
145,000 Mark IV Industries Inc. .......... 1,548,183 3,171,875
505,000 Navistar
International Corp.+ ......... 8,397,004 12,530,313
20,000 PACCAR Inc. ...................... 450,000 1,050,000
206,300 Pittway Corp. .................... 9,072,857 14,221,806
103,500 Pittway Corp., Class A ........... 946,065 7,206,188
80,000 Sequa Corp., Class A+ ............ 3,159,916 5,205,000
75,000 Sequa Corp., Class B+ ............ 3,888,160 5,587,500
170,000 SPS Technologies Inc.+ ........... 2,920,863 7,416,250
12,000 TI Group plc ..................... 126,225 91,446
20,000 Watts Industries Inc.,
Class A ...................... 415,830 566,250
----------- -----------
52,438,079 124,605,252
----------- -----------
Telecommunications -- 9.3%
40,000 Aliant Communi-
cations Inc. ................. 593,225 1,255,000
67,000 AT&T Corp. ....................... 2,232,628 4,103,750
87,000 BC TELECOM Inc. .................. 1,563,919 2,709,143
550,000 BCE Inc. ......................... 10,571,113 18,321,875
70,000 Cable & Wireless plc,
Sponsored ADR ................ 1,453,923 1,903,125
2,000 Cincinnati Bell Inc. ............. 16,050 62,000
35,000 Compania de
Telecomunicaciones de
Chile SA, Sponsored
ADR+ ......................... 592,324 1,045,625
80,000 C-TEC Corp.+ ..................... 695,564 2,070,000
20,000 C-TEC Corp., Class B+ ............ 128,902 525,000
50 DDI Corp. ........................ 297,065 132,133
50,000 Frontier Corp. ................... 1,062,875 1,203,125
271,000 GTE Corp. (d). ................... 5,606,972 14,159,750
24,000 Hellenic Telecommuni-
cations Organization
S.A. OTE ..................... 577,807 492,091
35,000 Hong Kong Telecommuni-
cations Ltd., Sponsored
ADR .......................... 619,835 721,875
10,000 Maritime Telegraph
and Telephone Co. Ltd. ....... 162,919 237,920
10,000 Motorola Inc. .................... 187,870 570,625
70 Nippon Telegraph and
Telephone Corp. .............. 515,599 600,536
160,500 RCN Corporation .................. 1,950,703 5,497,125
28,000 SBC Communications Inc. .......... 507,348 2,051,000
20,000 Southern New England Tele-
communications Corp. ......... 897,532 1,006,250
250,000 Sprint Corp. (d) ................. 2,831,164 14,656,250
10,000 Telecom Argentina Stet-
France Telecom S.A.,
Sponsored ADR ................ 227,333 357,500
619,440 Telecom Italia SpA ORD ........... 4,347,700 14,038,989
168,500 Telecomunicacoes
Brasileiras SA (Telebras),
Sponsored ADR ............... 2,955,242 19,619,719
2,040,000 Telecomunications of
Jamaica Ltd. ................. 101,642 142,800
10,000 Telefonica de
Argentina S.A., ADR,
Class B ...................... 274,045 372,500
48,000 Telefonica de Espana,
Sponsored ADR ................ 1,641,914 4,371,000
20,000 Telefonos De Mexico SA,
Class L, ADR ................. 733,042 1,121,250
----------- -----------
43,346,255 113,347,956
----------- -----------
Broadcasting -- 9.1%
50,000 Ackerley Inc. .................... 544,975 846,875
331,576 Chris-Craft Industries Inc. ...... 4,814,023 17,345,570
542,588 Chris-Craft Industries Inc.,
Class B (a). ................. 8,836,290 28,384,135
20,500 Gray Communications
Systems Inc. ................. 377,899 538,125
280,000 Grupo Televisa S.A.,
GDR+ ......................... 6,239,678 10,832,500
55,000 Liberty Corp. .................... 1,613,322 2,571,250
285,000 LIN Television Corp.+ ............ 14,800,072 15,532,500
3,250 NRJ SA ........................... 476,508 452,409
2,500 Pathe SA+ ........................ 647,904 485,050
110,900 Paxson Communications
Corp., Class A+ .............. 1,162,777 817,888
100,000 Television Broadcasting
Ltd. ORD ..................... 396,239 285,198
311,000 United Television Inc. ........... 18,065,764 32,305,125
----------- -----------
57,975,451 110,396,625
----------- -----------
Financial Services -- 7.7%
290,000 American Express Co. (d) ......... 5,068,658 25,882,500
360,000 Banca Commerciale
Italiana. .................... 757,701 1,251,555
10,500 Banco Pastor SA .................. 633,260 885,625
66,000 Banco Santander SA, ADR. ......... 939,291 2,149,125
80,631 Bank of Ireland .................. 813,417 1,240,173
120,782 Bank of Scotland ................. 725,022 1,110,853
300,000 Bankgesellschaft
Berlin AG .................... 6,004,015 6,603,669
260 Berkshire Hathaway Inc.,
Class A + .................... 824,299 11,960,000
See Notes to Financial Statements.
22
<PAGE>
THE GABELLI EQUITY TRUST INC.
PORTFOLIO OF INVESTMENTS (Continued)
December 31, 1997
Market
Shares Cost Value
------ ---- ------
COMMON STOCKS (continued)
Financial Services (continued)
180,000 Colonial Limited(c) .............. $ 474,109 $ 513,840
180,000 Colonial Limited, Options ........ 9,676 8,447
68,342 Commercial Union plc ............. 796,486 952,930
46,000 Commerzbank AG,
Sponsored ADR ................ 1,074,067 1,811,020
14,400 Corporacion Mapfre ............... 385,405 381,858
163,000 Deutsche Bank AG,
Sponsored ADR ................ 7,120,260 11,445,857
25,000 Dundee Bancorp Inc.,
Class A + .................... 536,920 526,574
25,000 Hibernia Corp. ................... 198,750 470,313
95,000 H&R Block Inc. ................... 3,201,457 4,257,188
26,695 HSBC Holdings plc ................ 673,707 657,987
16,666 Invik & Co. AB, Class B .......... 749,968 745,152
87,000 Lehman Brothers
Holdings Inc. ................ 1,972,861 4,437,000
38,900 Midland Co. ...................... 1,243,686 2,450,700
12,000 Morgan (J.P.) & Co. Inc. ......... 752,350 1,354,500
12,500 Reuters Holdings plc,
Class B, Sponosored
ADR. ......................... 815,812 828,125
60,000 Riggs National Corp. ............. 552,538 1,612,500
7,000 Safra Republic Holdings SA ....... 698,000 749,000
20,000 SCOR SA .......................... 773,680 956,146
26,000 Skandia Forsakrings AB. .......... 749,620 1,226,338
60,000 Skandinaviska Enskilda
Banken. ...................... 657,614 759,456
40,000 State Street Corp. ............... 1,417,370 2,327,500
20,000 SunTrust Banks Inc. .............. 419,333 1,427,500
8,000 Trimark Financial
Corporation .................. 391,417 362,479
30,000 Unitrin Inc. ..................... 983,583 1,938,750
----------- -----------
42,414,332 93,284,660
----------- -----------
Entertainment -- 4.7%
103,768 Ascent Entertainment
Group Inc.+ .................. 936,953 1,076,593
40,000 CANAL + ,
Sponsored ADR. ............... 1,355,000 1,487,908
23,287 EMI Group plc .................... 89,739 194,290
108,000 EMI Group plc,
Sponsored ADR ................ 1,273,519 1,795,500
60,000 GC Companies Inc.+ ............... 1,312,774 2,842,500
60,000 Granada Group plc ORD ............ 882,213 916,431
120,000 Havas, Sponsored ADR ............. 2,305,631 2,040,000
12,000 PolyGram NV ...................... 315,662 572,250
372,000 Time Warner Inc. (d) ............. 12,407,733 23,064,000
65,000 Todd-AO Corp., Class A ........... 177,273 544,375
480,000 Viacom Inc., Class A + ........... 10,060,286 19,620,000
34,000 Walt Disney Co. .................. 1,420,868 3,368,125
----------- -----------
32,537,651 57,521,972
----------- -----------
Food And Beverage -- 4.5%
18,000 Brau and Brunnen+ ................ 2,282,408 1,801,001
25,000 Diageo PLC
Sponsored ADR ................ 729,363 946,875
200,000 Fomento Economico
Mexicano SA,
ADR 144A (c). ................ 607,500 1,575,000
450,000 Foster's Brewing
Group Ltd. ................... 857,334 856,399
40,520 General Mills Inc. ............... 1,851,311 2,902,245
9,000 Hartwall Oy AB ................... 517,989 743,228
90,000 Kellogg Co. ...................... 2,393,384 4,466,250
11,000 LVHM Moet Hennessy
Louis Vuitton,
Sponsored ADR ................ 416,625 364,375
700 Nestle SA ........................ 827,951 1,048,336
335,000 PepsiCo Inc. (d) ................ 8,599,600 12,206,563
240,000 Quaker Oats Co. .................. 8,140,547 12,660,000
40,000 Ralcorp Holdings Inc.+ ........... 615,527 677,500
100,000 Seagram Co. Ltd. ................. 2,713,688 3,231,250
43,879 Tootsie Roll Industries Inc. ..... 1,501,027 2,742,438
100,000 Whitman Corp. .................... 1,082,376 2,606,250
74,000 Wrigley (Wm.) Jr. Co. ............ 3,332,640 5,887,625
----------- -----------
36,469,270 54,715,335
----------- -----------
Wireless Communications -- 4.4%
140,000 AirTouch Communications
Inc.+ ........................ 3,247,429 5,818,750
133,000 Associated Group Inc.,
Class A + .................... 354,616 3,940,125
133,000 Associated Group Inc.,
Class B + .................... 354,616 3,873,625
74,000 Centennial Cellular Corp.,
Class A + .................... 910,575 1,517,000
145,000 Century Telephone
Enterprises Inc. ............. 813,880 7,222,813
100,000 COMSAT Corp., Series 1 ........... 1,613,789 2,425,000
100,000 Loral Space &
Communications Ltd.+. ........ 1,242,687 2,143,750
5,000 NEXTEL Communications
Inc., Class A + .............. 78,950 130,000
250,000 Securicor Group plc ORD .......... 567,956 1,176,332
75,000 TCI Satellite Entertainment
Inc., Class A+ ............... 826,904 515,625
1,470,000 Telecom Italia Mobile SpA. ....... 1,918,757 6,784,935
320,000 Telephone and Data
Systems Inc. ................. 3,119,613 14,900,000
120,000 360(degree)Communications Co. .... 946,701 2,422,500
115,000 Vodafone Group plc ORD ........... 546,042 837,639
----------- -----------
16,542,515 53,708,094
----------- -----------
Publishing -- 4.0%
30,000 Arnoldo Mondadori
Editore SpA + ................ 250,450 235,725
100,000 Dow Jones & Co. Inc. ............. 4,362,234 5,368,750
215,000 Golden Books Family
Entertainment Inc.+ .......... 3,361,485 2,217,188
55,000 Harcourt General Inc. ............ 2,559,812 3,014,688
228,000 Independent Newspapers
Ltd., ORD .................... 1,021,395 1,249,372
50,000 McGraw-Hill Companies
Inc. ......................... 2,236,763 3,700,000
395,000 Media General Inc.,
Class A (d) .................. 7,293,119 16,515,938
See Notes to Financial Statements.
23
<PAGE>
THE GABELLI EQUITY TRUST INC.
PORTFOLIO OF INVESTMENTS (Continued)
December 31, 1997
Market
Shares Cost Value
------ ---- ------
COMMON STOCKS (continued)
Publishing (continued)
145,000 Meredith Corp. ................... $ 2,316,214 $ 5,174,688
87,000 New York Times Co.,
Class A ...................... 1,195,454 5,752,875
140,000 News Corporation Ltd.,
ORD .......................... 666,213 772,845
5,000 News Corporation Ltd.,
ADR .......................... 54,120 111,562
60,000 Pearson plc ORD .................. 729,454 779,459
70,000 Publishing &
Broadcasting Ltd. ............ 349,424 315,434
75,000 Reader's Digest Association
Inc., Class B ................ 1,963,007 1,828,125
50,000 Schibsted A/A .................... 1,003,985 857,627
1,599,000 Seat SpA + ....................... 334,505 623,690
200,000 South China Morning Post
Holdings ORD. ................ 117,763 140,662
----------- -----------
29,815,397 48,658,628
----------- -----------
Consumer Products -- 4.0%
500,000 Carter-Wallace Inc. .............. 7,175,843 8,437,500
9,500 Christian Dior SA ................ 1,389,109 973,671
75,000 Church & Dwight Co. Inc. ......... 1,605,940 2,104,688
650 Compagnie Financiere
Richemont AG,
Class A ...................... 917,208 707,078
25,000 Eastman Kodak Co. ................ 1,495,576 1,520,312
57,000 First Brands Corp. ............... 735,613 1,535,438
180,000 Fortune Brands Inc. (d) .......... 4,331,302 6,671,250
300,000 Gallaher Group plc ............... 4,599,557 6,412,500
115,000 General Cigar
Holdings Inc.+ ............... 882,024 2,486,875
54,000 Harley Davidson Inc. ............. 270,075 1,478,250
30,000 National Presto
Industries Inc. .............. 1,111,387 1,186,875
6,000 Nintendo Co. Ltd. ................ 471,010 592,876
145,000 Ralston Purina Group ............. 5,307,812 13,475,938
275,000 Swedish Match AB ................. 933,630 917,832
----------- -----------
31,226,086 48,501,083
----------- -----------
Cable -- 4.0%
40,125 Cable Michigan. .................. 292,992 917,859
224,000 Cablevision Systems Corp.,
Class A + .................... 9,511,198 21,448,000
40,000 Comcast Corp., Class A ........... 707,299 1,275,000
40,000 Comcast Corp., Class A
Special ...................... 533,414 1,262,500
50,000 Shaw Communications Inc.,
Class B, Conv. ............... 444,218 531,821
290,000 Tele-Communications Inc.,
Class A ...................... 4,589,374 8,101,875
55,000 Tele-Communications
International Inc.,
Class A + .................... 1,074,813 990,000
170,985 TCI Ventures Group+ .............. 1,781,345 4,841,012
300,000 US WEST Media Group+ ............. 5,822,102 8,662,500
----------- -----------
24,756,755 48,030,567
----------- -----------
Energy -- 3.2%
34,000 Apache Corp. ..................... 844,013 1,192,125
70,000 Atlantic Richfield Co. ........... 3,751,112 5,608,750
150,000 British Petroleum Co.
plc, ADR ..................... 2,810,721 7,960,203
65,000 Burlington Resources Inc. ........ 2,874,685 2,912,813
10,000 Chevron Corp. .................... 427,525 770,000
32,000 Eastern Enterprises .............. 1,274,100 1,440,000
50,000 Halliburton Co. .................. 1,064,376 2,596,875
70,000 Pennzoil Co. ..................... 5,093,192 4,676,875
20,000 Smedvig ASA ...................... 524,802 420,339
150,000 Tejas Gas Corp.+. ................ 9,076,315 9,187,500
71,000 USX-Delhi Group .................. 1,407,875 1,455,500
9,000 Veba AG .......................... 512,363 612,840
----------- -----------
29,661,079 38,833,820
----------- -----------
Diversified Industrial -- 3.2%
70,909 Antofagasta Holdings plc. ........ 480,667 384,309
105,000 Crane Co. ........................ 1,801,447 4,554,375
59,022 GATX Corp. ....................... 1,659,864 4,282,784
57,000 Honeywell Inc. ................... 3,467,425 3,904,500
175,000 ITT Industries Inc. .............. 3,041,489 5,490,625
390,000 Lamson & Sessions Co.+ ........... 2,439,425 2,266,875
60,000 Lawter International Inc. ........ 632,883 652,500
100,000 National Service
Industries Inc. .............. 2,203,498 4,956,250
26,715 Park-Ohio Industries Inc.+ ....... 310,560 487,548
750 Rieter Holding AG ................ 342,621 320,185
80,000 Tenneco Inc.+ .................... 3,129,207 3,160,000
78,000 Thomas Industries Inc. ........... 790,732 1,540,500
73,000 Trimas Corporation ............... 2,503,900 2,509,375
52,000 Trinity Industries Inc. .......... 945,738 2,320,500
26,000 Tyco International Ltd. .......... 541,378 1,171,625
100,000 Tyler Corp.+ ..................... 354,618 550,000
----------- -----------
24,645,452 38,551,951
----------- -----------
Automotive: Parts And Accessories -- 3.1%
120,000 Echlin Inc. ...................... 3,260,112 4,342,500
140,000 GenCorp Inc. ..................... 1,857,937 3,500,000
80,000 Genuine Parts Co. ................ 2,013,327 2,715,000
120,000 Handy & Harman ................... 1,833,392 4,140,000
135,000 Johnson Controls Inc. ............ 2,290,527 6,446,250
10,000 LucasVarity plc .................. 168,280 348,750
288,500 Modine Manufacturing Co. ......... 3,011,232 9,845,062
55,000 Phoenix AG. ...................... 900,811 963,035
6,500 SPX Corp. ........................ 87,669 448,500
130,000 Standard Motor
Products Inc. ................ 1,019,000 2,933,125
110,000 TransPro Inc. .................... 988,933 990,000
36,000 Wynn's International Inc. ........ 568,179 1,147,500
----------- -----------
17,999,399 37,819,722
----------- -----------
Hotels/Gaming -- 3.0%
33,000 Aztar Corp.+. .................... 230,025 206,250
100,000 Gaylord Entertainment Co.,
Class A ...................... 2,496,344 3,193,750
10,000 GTECH Holdings Corp.+ ............ 170,269 319,375
350,000 Hilton Hotels Corp. (d) .......... 5,550,425 10,412,500
180,000 ITT Corp., New+ .................. 8,815,420 14,917,500
1,016,949 Ladbroke Group plc ............... 3,174,247 4,409,289
See Notes to Financial Statements.
24
<PAGE>
THE GABELLI EQUITY TRUST INC.
PORTFOLIO OF INVESTMENTS (Continued)
December 31, 1997
Market
Shares Cost Value
------ ---- ------
COMMON STOCKS (Continued)
Hotels/Gaming (Continued)
100,000 Mirage Resorts Inc.+ ............. $ 532,231 $ 2,275,000
285,000 Sydney Harbour Casino
Holdings Ltd.+ ............... 464,377 270,264
----------- -----------
21,433,338 36,003,928
----------- -----------
Aviation: Parts And Services -- 1.6%
95,000 Boeing Co. ....................... 3,760,395 4,649,062
385,000 Coltec Industries Inc.+ .......... 5,237,783 8,927,187
100,000 Curtiss-Wright Corp. ............. 2,491,103 3,631,250
145,000 Hi-Shear Industries Inc. ......... 1,737,757 299,062
23,000 Precision Castparts Corp. ........ 914,575 1,387,188
----------- -----------
14,141,613 18,893,749
----------- -----------
Paper And Forest Products -- 1.4%
252,000 Greif Bros. Corp.,
Class A ...................... 4,620,381 8,442,000
3,400 Greif Bros. Corp.,
Class B (a). ................ 69,825 113,900
87,500 St. Joe Corp. .................... 2,942,921 7,918,750
----------- -----------
7,633,127 16,474,650
----------- -----------
Consumer Services -- 1.2%
25,000 Cendant Corporation .............. 111,391 859,375
20,000 Department 56 Inc.+ .............. 407,679 575,000
50,000 HSN Inc.+. ....................... 1,156,643 2,575,000
442,000 Rollins Inc. ..................... 4,480,645 8,978,125
70,000 Ticketmaster Group Inc.+ ......... 1,064,027 1,610,000
----------- -----------
7,220,385 14,597,500
----------- -----------
Automotive -- 1.2%
215,000 General Motors Corp. (d). ........ 6,488,699 13,034,375
28,000 Renault Ord ...................... 771,362 787,442
20,000 Toyota Motor Corp. ............... 556,685 572,960
----------- -----------
7,816,746 14,394,777
----------- -----------
Retail -- 1.2%
25,000 Crown Books Corp.+ ............... 284,112 159,375
80,000 Earl Scheib Inc.+ ................ 749,281 640,000
2,000 Fred Meyer Inc.+ ................. 25,050 72,750
85,000 Lillian Vernon Corp. ............. 1,095,302 1,413,125
350,000 Neiman Marcus Group Inc.+ ........ 5,136,063 10,587,500
100,000 Simint SpA ....................... 595,336 726,399
10,425 Syratech Corp.+ .................. 333,704 370,088
----------- -----------
8,218,848 13,969,237
----------- -----------
Health Care -- 1.1%
15,000 Amgen Inc.+ ...................... 256,894 811,875
49,666 Astra AB, Class A. ............... 847,207 860,096
13,000 Biogen Inc.+ ..................... 181,025 472,875
40,000 Glaxo Wellcome plc ORD ........... 726,384 945,993
70,000 Lavipharm S.A. ................... 580,331 372,380
1,150 Novartis AG, Registered+ ......... 1,431,247 1,864,673
54,000 Novartis AG, ADR+. ............... 970,641 4,387,500
25,000 Pfizer Inc. ...................... 403,906 1,864,063
100 Roche Holding AG ................. 896,746 992,372
25,000 Zeneca Group plc+ ................ 767,122 877,425
----------- -----------
7,061,503 13,449,252
----------- -----------
Transportation -- 0.9%
70,000 AMR Corp.+ ....................... 4,663,063 8,995,000
30,600 MIF Ltd.+ ........................ 450,000 543,539
70,000 SAS Norge ASA .................... 835,290 977,627
----------- -----------
5,948,353 10,516,166
----------- -----------
Specialty Chemical -- 0.7%
5,400 Ciba Specialty Chemicals,
ADR 144A (c)+. ............... 21,140 321,214
1,000 Clariant AG ...................... 478,708 834,672
20,000 E.I. du Pont de Nemours
and Co. ...................... 655,000 1,201,250
246,750 Ferro Corp. ...................... 3,783,662 5,999,109
5,000 Monsanto Company ................. 195,250 210,000
----------- -----------
5,133,760 8,566,245
----------- -----------
Retail Food And Drug -- 0.7%
120,000 Bruno's Inc. ..................... 1,154,718 247,500
227,000 Giant Food Inc., Class A ......... 7,316,548 7,647,062
----------- -----------
8,471,266 7,894,562
----------- -----------
Electronics -- 0.6%
60,000 AMP Inc. ......................... 2,477,375 2,520,000
2,000 Hitachi Ltd., ADR ................ 171,183 138,375
5,000 Imation Corp.+ ................... 113,170 80,000
29,500 Matsushita Electric Industrial
Co. Ltd., ADR ................ 752,981 637,651
41,500 NEC Corp.,
Sponsored ADR ................ 518,676 506,328
12,000 Philips Electronics N.V.,
New York ..................... 167,918 726,000
28,000 Sony Corp., ADR .................. 1,635,166 2,525,839
----------- -----------
5,836,469 7,134,193
----------- -----------
Agriculture -- 0.5%
300,000 Archer-Daniels-
Midland Co. .................. 5,418,601 6,506,250
----------- -----------
Real Estate -- 0.5%
150,000 Catellus Development
Corp.+ ....................... 1,996,394 3,000,000
11,000 Florida East Coast
Industries Inc. .............. 523,108 1,057,375
50,000 Griffin Land &
Nurseries Inc.+. ............. 447,943 775,000
30,000 Mitsubishi Estate Co Ltd. ........ 322,449 326,312
51,000 Sun Hung Kai
Properties Ltd. .............. 619,915 355,401
----------- -----------
3,909,809 5,514,088
----------- -----------
Country/Closed-End Funds -- 0.3%
59,000 Central European
Equity Fund Inc. ............. 740,735 1,080,438
70,000 Emerging Germany
Fund Inc.+ ................... 512,662 787,500
25,000 France Growth Fund Inc. .......... 246,844 262,500
40,250 Italy Fund Inc. .................. 360,845 432,688
70,000 New Germany Fund ................. 771,780 945,000
45,942 Royce Value Trust Inc. ........... 519,501 692,001
----------- -----------
3,152,367 4,200,127
----------- -----------
See Notes to Financial Statements.
25
<PAGE>
THE GABELLI EQUITY TRUST INC.
PORTFOLIO OF INVESTMENTS (Continued)
December 31, 1997
Market
Shares Cost Value
------ ---- ------
Communications Equipment -- 0.3%
100,000 Allen Telecom Inc.+ .............. $ 1,166,791 $ 1,843,750
10,000 Dynatech Corporation ............. 469,625 468,750
18,000 Lucent Technologies Inc. ......... 799,290 1,437,750
20,000 Scientific-Atlanta Inc. .......... 319,775 335,000
----------- -----------
2,755,481 4,085,250
----------- -----------
Housing Related -- 0.3%
130,000 Nortek Inc.+ ..................... 808,129 3,453,125
5,000 Nortek Inc., Special
Common+(a) ................... 72,155 132,812
----------- -----------
880,284 3,585,937
----------- -----------
Business Services -- 0.3%
9,625 Alliance et Gestion .............. 453,274 426,890
1,000 CheckFree Corp. .................. 18,875 27,000
105,000 Landauer Inc. .................... 679,614 2,940,000
----------- -----------
1,151,763 3,393,890
----------- -----------
Aerospace / Defense -- 0.3%
100,000 Fairchild Corporation
Class A ...................... 2,004,008 2,487,500
13,711 Raytheon Company
Class A ...................... 370,478 676,102
----------- -----------
2,374,486 3,163,602
----------- -----------
Metals And Mining -- 0.2%
30,000 Newmont Gold Co. ................. 1,085,502 894,375
834,000 Pegasus Gold Inc.+ ............... 2,107,847 521,250
30,000 Placer Dome Inc. ................. 401,019 380,625
40,000 Rangold and Exploration
Co. Ltd.+ .................... 117,200 60,000
----------- -----------
3,711,568 1,856,250
----------- -----------
Conglomerates -- 0.1%
59,000 Cheung Kong
(Holdings) Ltd. .............. 569,442 386,405
7,750 Oerlikon-Buhrle
Holding AG ................... 846,224 1,086,957
----------- -----------
1,415,666 1,473,362
----------- -----------
Building and Construction -- 0.1%
70,000 CRH plc .......................... 720,634 812,918
15,000 Martin Marietta
Materials Inc. ............... 322,688 548,438
----------- -----------
1,043,322 1,361,356
----------- -----------
Computer Software -- 0.0%
7,000 Merkantildata .................... 248,827 241,084
----------- -----------
TOTAL COMMON STOCKS .............................. 564,805,303 1,065,251,120
----------- -------------
PREFERRED STOCKS -- 0.5%
Telecommunications -- 0.2%
40,000 Sprint Corp., 8.250%, Conv.
Pfd. ......................... 1,419,782 1,790,000
2,223,575 Telecomunicacoes de Sao
Paulo SA (Telesp), Pfd.,
Registered ................... 289,164 591,711
----------- -----------
1,708,946 2,381,711
----------- -----------
Diversified Industrial -- 0.1%
4,000 KSB AG, Pfd. ..................... 830,754 889,383
----------- -----------
Publishing -- 0.1%
43,500 News Corp. Ltd, Sponsored
ADR, Pfd. .................... 656,340 864,562
----------- -----------
Cable -- 0.1%
8,000 Tele-Communications Inc.,
Class B, 6.000%, Ex.
Jr. Pfd. ..................... 408,017 744,000
----------- -----------
Automotive -- 0.0%
1,500 Volkswagen AG, Pfd. .............. 665,292 643,691
----------- -----------
Entertainment -- 0.0%
183,856 Village Roadshow
Ltd., PFD. ................... 455,731 378,178
----------- -----------
Television -- 0.0%
6,750 ProSieben Media AG,
Preferred .................... 301,207 315,175
----------- -----------
TOTAL PREFERRED STOCKS ........................... 5,026,287 6,216,700
----------- -----------
COMMON STOCK WARRANTS AND RIGHTS -- 0.0%
29,900 Oriental Press Group,
Warrants, expires
10/02/1998+ .................. 0 270
----------- -----------
Princial
Amount
--------
CORPORATE BONDS -- 0.7%
Entertainment -- 0.6%
125,000 Havas, Conv. Bonds,
Payment-in-kind,
3.00% due 03/31/98 ........... 26,357 24,564
$1,200,000 Time Warner Inc.,
Note, 7.975%
due 08/15/2004 ............... 1,194,652 1,287,000
2,400,000 Time Warner Inc.,
Deb., 8.110%
due 08/15/2006 ............... 2,407,265 2,613,000
2,400,000 Time Warner Inc.,
Deb., 8.180%
due 08/15/2007 ............... 2,398,284 2,637,000
----------- -----------
6,026,558 6,561,564
----------- -----------
Publishing -- 0.1%
200,000 News American Holdings
Inc., Gtd. Ex. Sub. Note,
Zero Coupon
due 03/31/2002 ............... 145,436 192,500
----------- -----------
1,000,000 Thomas Nelson Inc.,
Conv. Sub. Note,
5.750% due 11/30/1999
144A (c) ..................... 994,880 967,500
----------- -----------
1,140,316 1,160,000
----------- -----------
Food And Beverage -- 0.0%
1,550,000 Flagstar Companies Inc.,
Conv. Jr. Sub. Deb.,
10.000% due
11/01/2014 ................... 364,152 480,500
----------- -----------
Retail -- 0.0%
50,000 General Host Corp., Class D,
Conv. Sub. Note, 8.000%
due 02/15/2002 ............... 44,339 50,125
----------- -----------
TOTAL CORPORATE BONDS ............................ 7,575,365 8,252,189
----------- -----------
See Notes to Financial Statements.
26
<PAGE>
THE GABELLI EQUITY TRUST INC.
PORTFOLIO OF INVESTMENTS (Continued)
December 31, 1997
Princial Market
Amount Cost Value
-------- ---- ------
U.S. TREASURY BILLS -- 9.8%
$119,000,000 5.183% to 5.357%++
due 01/22/98 (d) ....... $ 118,637,599 $ 118,637,599
------------- -------------
REPURCHASE AGREEMENT -- 0.5%
6,186,000 Agreement with Salomon
Brothers Inc., 6.70%
dated 12/31/97, to
be repurchased at
$6,188,303 on
01/02/1998,
collateralized by
$4,099,000 U.S.
Treasury Note,
10.625% due
08/15/15 (value
$6,474,914) ............ 6,186,000 6,186,000
------------- -------------
TOTAL INVESTMENTS ................. 99.5% $702,230,554(b) 1,204,543,878
============
OTHER ASSETS AND
LIABILITIES (Net) ............... 0.5 6,025,716
---- ------------
NET ASSETS ........................ 100.0% 1,210,569,594
====== =============
NET ASSET VALUE
($1,210,565,594 / 104,676,383
shares outstanding ) ..................... $11.56
======
(a) Security fair valued under procedures established by the Board of
Directors.
(b) Aggregate cost for Federal tax purposes was $702,676,192. Net unrealized
appreciation for Federal tax purposes was $501,867,686 (gross unrealized
appreciation was $512,651,096 and gross unrealized depreciation was
$10,783,410).
(c) Security exempt from registration under Rule 144A of the Securities Act of
1933, as amended. These securities may be resold in transactions exempt
from registration, normally to qualified institutional buyers. The market
value of these securities at December 31, 1997 was $2,863,714 representing
0.24% of total net assets.
(d) A portion of the securities pledged as collateral for futures contracts.
+ Non-income producing security
++ Represents annualized yield at date of purchase.
ADR - American Depositary Receipt, ADS - American Depositary Share,
AUD - Australian Dollar, DEM - German Mark, FRF - French Franc, GDR - Global
Depositary Receipt, ORD - Ordinary Share
SCHEDULE OF FORWARD EXCHANGE CONTRACTS
Unrealized
Expiration Appreciation/
Date (Depreciation)
---------- --------------
Forward Foreign Exchange
Contracts to Deliver
586,463 French Francs
in exchange for
USD 98,400 ........................ 01/02/98 $ (981)
653,440 French Francs
exchange for
USD 110,273 ....................... 01/02/98 (1,729)
4,186,084 U.S. Dollars in
exchange for
FRF 704,728 ....................... 01/02/98 9,365
654,531 U.S. Dollars in
exchange for
DEM 369,729 ....................... 01/05/98 5,900
18,777 U.S. Dollars in
exchange for
AUD 12,318 ........................ 01/06/98 81
130,120 Canadian Dollars in
exchange for
USD 91,344 ........................ 01/27/98 (291)
44,300,000 Hong Kong Dollars
in exchange for
USD 5,658,811 ..................... 02/26/98 35,455
--------
Total Net Unrealized Appreciation
on Forward Foreign
Exchange Contracts ........................................... $ 47,800
========
FUTURES CONTRACTS -- SHORT POSITION
Number of Unrealized
Contracts Appreciation
--------- ------------
(550) S&P 500 Index Futures,
March 1998 $ 825,000
=========
GEOGRAPHIC DIVERSIFICATION
United States ............................ 83.7% $1,012,747,041
Europe ................................... 10.2 124,021,695
Latin America ............................ 2.9 35,658,605
Canada ................................... 2.2 26,058,637
Asia/Pacific Rim ......................... 1.0 12,023,616
Africa ................................... 0.0 60,000
----- --------------
Net Assets ............................ 100.0% $1,210,569,594
===== ==============
See Notes to Financial Statements.
27
<PAGE>
THE GABELLI EQUITY TRUST INC.
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1997
ASSETS:
Investments, at value (Cost $702,230,554) ........... $1,204,543,878
Cash and foreign currency
(Cost $1,359,638) ................................. 1,313,570
Receivable for investment securities sold ........... 5,868,087
Unrealized appreciation on forward
foreign exchange contracts ........................ 50,801
Variation margin .................................... 32,500
Dividends receivable ................................ 2,086,989
Interest receivable ................................. 208,742
--------------
Total Assets .................................... 1,214,104,567
--------------
LIABILITIES:
Payable for investment securities purchased ......... 978,902
Payable to custodian ................................ 857,737
Unrealized depreciation on forward
foreign exchange contracts ........................ 3,001
Payable for investment advisory fee ................. 848,186
Accrued Directors' fees ............................. 32,848
Accrued expenses and other payables ................. 814,299
--------------
Total Liabilities ............................... 3,534,973
--------------
NET ASSETS FOR 104,676,383 shares
outstanding ...................................... $1,210,569,594
--------------
NET ASSETS consist of:
Common stock at par value ........................... $ 104,676
Additional paid-in capital .......................... 708,595,580
Distributions in excess
of net investment income .......................... (81)
Distribution in excess of net realized gain
on investments .................................... (1,270,637)
Unrealized appreciation on investments .............. 503,140,056
--------------
Total Net Assets ................................ $1,210,569,594
--------------
NET ASSET VALUE ($1,210,569,594 /
104,676,383 shares outstanding;
200,000,000 shares authorized of
$0.001 par value) .................................... $11.56
======
STATEMENT OF OPERATIONS
For the Year Ended December 31, 1997
INVESTMENT INCOME:
Dividends (net of foreign withholding
taxes of $319,039) ................................. $ 14,623,250
Interest ............................................ 6,472,307
------------
Total Investment Income ........................... 21,095,557
EXPENSES:
Investment advisory fee ................. $11,136,210
Custodian fees .......................... 394,618
Printing fees ........................... 168,427
Payroll ................................. 109,195
Directors' fees ......................... 107,884
Legal and audit fees .................... 92,089
Shareholder services fees ............... 72,695
Other ................................... 594,791
-----------
Total Expenses ................................ 12,675,909
------------
NET INVESTMENT INCOME ................................... 8,419,648
------------
REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS:
Net realized gain/(loss) on:
Securities transactions ........................... 127,179,022
Futures transactions .............................. (31,293,751)
Forward foreign exchange
contracts and foreign
currency transactions ........................... (21,859)
------------
Net realized gain on investments
during the year ................................... 95,863,412
------------
Net change in unrealized
appreciation/(depreciation) of:
Securities ........................................ 188,729,064
Futures transactions .............................. 1,447,500
Foreign currency and other
assets and liabilities .......................... (2,289)
------------
Net change in unrealized
depreciation of investments
during the year ................................... 190,174,275
------------
NET REALIZED AND UNREALIZED
GAIN ON INVESTMENTS ................................... 286,037,687
------------
NET INCREASE IN NET ASSETS
RESULTING FROM
OPERATIONS ............................................ $294,457,335
============
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Year Year
Ended Ended
12/31/97 12/31/96
--------------- ---------------
<S> <C> <C>
Net investment income ................................... $ 8,419,648 $ 11,083,439
Net realized gain on investments during the year ........ 95,863,412 81,151,706
Change in unrealized gains and losses on investments .... 190,174,275 (6,972,846)
--------------- ---------------
Net increase in net assets resulting from operations .... 294,457,335 85,262,299
Distributions to shareholders from:
Net investment income ................................. (7,909,242) (10,886,116)
Net realized gain on investments ...................... (95,863,412) (81,110,584)
Distributions in excess of net realized gains ......... (1,678,389) (68,227)
Paid-in capital ....................................... (2,630,445) (11,851,508)
Net increase in net assets from Equity Trust
share transactions .................................... 8,757,175 --
--------------- ---------------
Net increase/(decrease) in net assets ................... 195,133,022 (18,654,136)
NET ASSETS:
Beginning of year ....................................... 1,015,436,572 1,034,090,708
--------------- ---------------
End of year ............................................. $ 1,210,569,594 $ 1,015,436,572
=============== ===============
</TABLE>
See Notes to Financial Statements.
28
<PAGE>
THE GABELLI EQUITY TRUST INC.
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies
The Gabelli Equity Trust Inc. (the "Equity Trust") is a closed-end,
non-diversified management investment company organized as a Maryland
corporation and registered under the Investment Company Act of 1940, as amended
(the "1940 Act"), whose primary objective is long-term growth of capital. The
Equity Trust had no operations until August 11, 1986, when it sold 10,696 shares
of common stock to Gabelli Funds, Inc. (the "Adviser") for $100,008. Investment
operations commenced on August 21, 1986. The preparation of financial statements
in accordance with generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amounts and
disclosures in the financial statements. Actual results could differ from those
estimates. The following is a summary of significant accounting policies
followed by the Equity Trust in the preparation of its financial statements.
Security Valuation. Portfolio securities which are traded on a nationally
recognized stock exchange or Nasdaq National Market System are valued at the
last sale price as of the close of regular trading on the day the securities are
being valued, or lacking any sales, at the mean between closing bid and asked
prices. Other over-the-counter securities are valued at the mean of the current
bid and asked prices as reported by Nasdaq, or in the case of securities not
quoted by Nasdaq, the National Quotation Bureau or other comparable sources, as
the Board of Directors deems appropriate to reflect their fair value. If no
asked prices are quoted on such day, then the security is valued at the closing
bid price on such day. If no bid or asked prices are quoted on that 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. Portfolio securities traded on
more than one national securities exchange or market are valued according to the
broadest and most representative market, as determined by the Adviser.
Securities traded primarily on foreign exchanges are valued at the closing price
on such exchanges immediately prior to the close of the New York Stock Exchange.
Securities and assets for which market quotations are not readily available are
valued at fair value as determined in good faith by or under the direction of
the Board of Directors of the Equity Trust. Short-term investments that mature
in more than 60 days are valued at the highest bid price obtained from a dealer
maintaining an active market in that security or on the basis of prices obtained
from a pricing service approved as reliable by the Board of Directors.
Short-term investments that mature in 60 days or fewer are valued at amortized
cost, unless the Board of Directors determines that such valuation does not
constitute fair value.
Repurchase Agreements. The Equity Trust may engage in repurchase agreement
transactions. Under the terms of a typical repurchase agreement, the Equity
Trust takes possession of an underlying debt obligation for a relatively short
period (usually not more than one week) subject to an obligation of the seller
to repurchase, and the Equity Trust to resell, the obligation at an agreed-upon
price and time, thereby determining the yield during the Equity Trust's holding
period. This arrangement results in a fixed rate of return that is not subject
to market fluctuations during the Equity Trust's holding period. The value of
the collateral is at least equal at all times to the total amount of the
repurchase obligation, including interest. The Equity Trust bears a risk of loss
in the event that the other party to a repurchase agreement defaults on its
obligations and the Equity Trust is delayed or prevented from exercising its
rights to dispose of the collateral securities, including the risk of a possible
decline in the value of the underlying securities during the period while the
Equity Trust seeks to assert its rights. The Adviser, acting under the
supervision of the Board of Directors, reviews the value of the collateral and
the creditworthiness of those banks and dealers with which the Equity Trust
enters into repurchase agreements to evaluate potential risks.
Futures Contracts. The Equity Trust may engage in futures contracts for
the purpose of hedging against changes in the value of its portfolio securities
and in the value of securities it intends to purchase. Such investments will
only be made if they are economically appropriate to the reduction of risks
involved in the management of the Equity Trust's investments. Upon entering into
a futures contract, the Equity Trust is required to deposit with the broker an
amount of cash or cash equivalents equal to a certain percentage of the contract
29
<PAGE>
THE GABELLI EQUITY TRUST INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
amount. This is known as the "initial margin." Subsequent payments ("variation
margin") are made or received by the Equity Trust each day, depending on the
daily fluctuation of the value of the contract. The daily changes in the
contract are included in unrealized appreciation/depreciation on investments.
The Equity Trust recognizes a realized gain or loss when the contract is closed.
The net unrealized appreciation/depreciation is shown in the financial
statements.
There are several risks in connection with the use of futures contracts as
a hedging device. The change in value of futures contracts primarily corresponds
with the value of their underlying instruments, which may not correlate with the
change in value of the hedged investments. In addition, there is the risk the
Equity Trust may not be able to enter into a closing transaction because of an
illiquid secondary market.
Forward Foreign Exchange Contracts. The Equity Trust may engage in forward
foreign exchange contracts for hedging a specific transaction with respect to
either the currency in which the transaction is denominated or another currency
as deemed appropriate by the Adviser. Forward foreign exchange contracts are
valued at the forward rate and are marked-to-market daily. The change in market
value is recorded by the Equity Trust as an unrealized gain or loss. When the
contract is closed, the Equity Trust records a realized gain or loss equal to
the difference between the value of the contract at the time it was opened and
the value at the time it was closed.
The use of forward foreign exchange contracts does not eliminate
fluctuations in the underlying prices of the Equity Trust's portfolio
securities, but it does establish a rate of exchange that can be achieved in the
future. Although forward foreign exchange contracts limit the risk of loss due
to a decline in the value of the hedged currency, they also limit any potential
gain that might result should the value of the currency increase. In addition,
the Equity Trust could be exposed to risks if the counterparties to the
contracts are unable to meet the terms of their contracts.
Foreign Currency. The books and records of the Equity Trust are maintained
in United States (U.S.) dollars. Foreign currencies, investments and other
assets and liabilities are translated into U.S. dollars at the exchange rates
prevailing at the end of the period, and purchases and sales of investment
securities, income and expenses are translated on the respective dates of such
transactions. Unrealized gains and losses not relating to securities which
result from changes in foreign currency exchange rates have been included in
unrealized appreciation/depreciation on investments. Unrealized gains and losses
on securities, which result from changes in foreign exchange rates as well as
changes in market prices of securities, have been included in unrealized
appreciation/depreciation on investments. Net realized foreign currency gains
and losses resulting from changes in exchange rates include foreign currency
gains and losses between trade date and settlement date on investment securities
transactions, foreign currency transactions and the difference between the
amounts of interest and dividends recorded on the books of the Equity Trust and
the amounts actually received. The portion of foreign currency gains and losses
related to fluctuation in exchange rates between the initial trade date and
subsequent sale trade date is included in realized gain/(loss) on securities
transactions.
Securities Transactions and Investment Income. Securities transactions are
accounted for as of the trade date with realized gain or loss on investments
determined using specific identification as the cost method. Interest income
(including amortization of premium and accretion of discount) is recorded as
earned. Dividend income is recorded on the ex-dividend date.
Dividends and Distributions to Shareholders. Distributions to shareholders
are recorded on the ex-dividend date. Income distributions and capital gain
distributions are determined in accordance with income tax regulations which may
differ from generally accepted accounting principles. These differences are
primarily due to differing treatments of income and gains on various investment
securities held by the Equity Trust, timing differences and differing
characterization of distributions made by the Equity Trust. Permanent
differences
30
<PAGE>
THE GABELLI EQUITY TRUST INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
incurred during the year ended December 31, 1997 resulting from different book
and tax accounting policies for currency gains and losses and certain
distributions, are reclassified between net investment income and net realized
gains at year end. The reclassifications for the year ended December 31, 1997
were a decrease in undistributed net investment income of $510,487 and a
decrease in distributions in excess of net realized gain on investments of
$510,487. Paid-in capital was reduced by a distribution of $2,630,445 due to a
tax basis return of capital.
Provision for Income Taxes. The Equity Trust has qualified and intends to
continue to qualify as a regulated investment company under Subchapter M of the
Internal Revenue Code of 1986, as amended. As a result, a Federal income tax
provision is not required.
2. Agreements and Transactions with Affiliates
The Equity Trust has entered into an investment advisory agreement (the
"Advisory Agreement") with the Adviser which provides that the Equity Trust will
pay the Adviser a fee, computed weekly and paid monthly, equal on an annual
basis to 1.00 percent of the value of the Equity Trust's average weekly net
assets. In accordance with the Advisory Agreement, the Adviser manages the
Equity Trust's portfolio, makes investment decisions for the Equity Trust,
places orders to purchase and sell securities on behalf of the Equity Trust and
oversees the administration of all aspects of the Equity Trust's business and
affairs.
During the year ended December 31, 1997, Gabelli & Company, Inc. ("Gabelli
& Company") and its affiliates received $178,336 in brokerage commissions as a
result of executing agency transactions in portfolio securities on behalf of the
Equity Trust.
3. Portfolio Securities
Cost of purchases and proceeds from sales of securities, other than
short-term securities, aggregated $389,096,325 and $443,902,645, respectively,
for the year ended December 31, 1997.
4. Capital
The Articles of Incorporation, dated May 19, 1986, permit the Equity Trust
to issue 200,000,000 shares (par value $0.001).
Common stock transactions were as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
12/31/97 12/31/96
---------- ----------
Shares Amount Shares Amount
------ ------ ------ ------
<S> <C> <C> <C> <C>
Shares issued upon reinvestment
of dividends and distributions .. 756,713 $ 8,757,175 -- --
----------- ----------- ----------- -----------
Net increase ........................ 756,713 $ 8,757,175 -- --
=========== =========== =========== ===========
</TABLE>
5. Subsequent Event
The Gabelli Equity Trust Inc., as authorized by the Board of Directors,
filed a registration statement on February 11, 1998 for an offering of
cumulative preferred stock. The actual amount of capital to be raised, the
dividend rate and the timing of the offering have not been determined and will
be announced at a later date.
31
<PAGE>
THE GABELLI EQUITY TRUST INC.
FINANCIAL HIGHLIGHTS
Per share amount for an Equity Trust share outstanding throughout each year
ended December 31,
<TABLE>
<CAPTION>
1997 (a) 1996 (a) 1995 (a) 1994 (a) 1993 (a)
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Operating performance:
Net asset value, beginning of year .............. $ 9.77 $ 9.95 $ 9.46 $ 11.23 $ 10.58
----------- ----------- ----------- ----------- -----------
Net investment income ........................... 0.08 0.11 0.13 0.14 0.14
Net realized and unrealized gain/(loss)
on investments ................................ 2.75 0.71 1.74 (0.08) 2.13
----------- ----------- ----------- ----------- -----------
Total from investment operations ................ 2.83 0.82 1.87 0.06 2.27
----------- ----------- ----------- ----------- -----------
Increase/(decrease) in net asset value
from Equity Trust share transactions .......... -- -- (0.37) -- (0.50)
Offering expenses charged to capital
surplus ....................................... -- -- (0.01) -- (0.01)
Distributions to shareholders from:
Net investment income ......................... (0.08) (0.11) (0.13) (0.14) (b) (0.11)
Distribution in excess
of net investment income ...................... -- (d) -- -- -- --
Net realized gains ............................ (0.92) (0.78) (0.47) (0.37) (0.77)
Distribution in excess of net
realized gains ................................ (0.01) (0.00) (d) (0.02) -- (0.02)
Paid-in capital ............................... (0.03) (0.11) (0.38) (1.32) (b) (0.21)
----------- ----------- ----------- ----------- -----------
Total distributions ............................. (1.04) (1.00) (1.00) (1.83) (1.11)
----------- ----------- ----------- ----------- -----------
Net Asset Value, end of year .................... $ 11.56 $ 9.77 $ 9.95 $ 9.46 $ 11.23
=========== =========== =========== =========== ===========
Market value, end of year ....................... $ 11.688 $ 9.375 $ 9.375 $ 9.625 $ 12.125
=========== =========== =========== =========== ===========
Total Investment Return* ........................ 37.46% 11.00% 11.70% (5.10)% 36.50%
=========== =========== =========== =========== ===========
Net Asset Value Total Return** .................. 30.46% 9.00% 20.60% 0.50% 22.40%
=========== =========== =========== =========== ===========
Ratios to average net assets/
supplemental data:
Net assets, end of year (in 000's) .............. $ 1,210,570 $ 1,015,437 $ 1,034,091 $ 825,193 $ 937,773
Net investment income ........................... 0.76% 1.07% 1.26% 1.29% 1.25%
Operating expenses .............................. 1.14% 1.18% 1.21% 1.19% 1.20%
Portfolio turnover rate ......................... 39.2% 18.9% 25.1% 22.2% 24.4%
Average commission rate
(per share of security) (c) ................... $ 0.0342 $ 0.0335 N/A N/A N/A
</TABLE>
- ----------
* Based on market value per share, adjusted for reinvestment of
distributions and taxes, including the effect of shares issued pursuant to
rights offering, assuming full subscription by shareholder.
** Based on net asset value per share, adjusted for reinvestment of
distributions and taxes, including the effect of shares issued pursuant to
rights offering, assuming full subscription by shareholder.
+ Before provision for income taxes.
(a) Per share amounts have been calculated using the monthly average shares
outstanding method.
(b) A distribution equivalent to $0.75 per share for The Gabelli Global
Multimedia Trust Inc. spin-off from net investment income, realized
short-term gains, and paid-in capital were $0.064, $0.031 and $0.655,
respectively.
(c) Average commission rate (per share of security) as required by amended SEC
disclosure requirements effective September 1, 1995.
(d) Amount represents less than $0.005 per share.
See Notes to Financial Statements.
32
<PAGE>
THE GABELLI EQUITY TRUST INC.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
The Gabelli Equity Trust Inc.
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of The Gabelli Equity Trust Inc. (the
"Equity Trust") at December 31, 1997, the results of its operations for the year
then ended, the changes in its net assets for each of the two years in the
period then ended and the financial highlights for each of the five years in the
period then ended, in conformity with generally accepted accounting principles.
These financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Equity Trust's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these financial statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at
December 31, 1997 by correspondence with the custodian and brokers and the
application of alternative auditing procedures where confirmations from brokers
were not received, provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York
February 20, 1998
33
<PAGE>
THE GABELLI EQUITY TRUST INC.
FEDERAL INCOME TAX INFORMATION (Unaudited)
December 31, 1997
Cash Dividends and Distributions
<TABLE>
<CAPTION>
Non-taxable
Total Amount Ordinary Return Long-Term Dividend
Payable Record Paid Investment of Capital Reinvestment
Date Date Per Share Income Capital Gains Price
------- ------ ------------ ---------- ----------- --------- ------------
<S> <C> <C> <C> <C> <C> <C>
03/27/97 03/20/97 $0.25 $0.0188 $0.0060 $0.2252 $ 9.4492
06/27/97 06/20/97 0.25 0.0188 0.0060 0.2252 10.1519
09/26/97 09/17/97 0.25 0.0188 0.0060 0.2252 11.0125
12/26/97 12/17/97 0.29 0.0218 0.0070 0.2612 11.5600
----- ------- ------- -------
$1.04 $0.0782 $0.0250 $0.9368
</TABLE>
A Form 1099-DIV has been mailed to all shareholders of record for the
distributions mentioned above, setting forth specific amounts to be included in
the 1997 tax returns. Ordinary income distributions include net investment
income and realized net short-term capital gains.
20% Rate / 28% Rate Capital Gain Allocation:
20% Rate Gains: 88.59%
28% Rate Gains: 11.41%
The percentage of long-term capital gains paid by the Gabelli Equity Trust
in 1997 that was classified as "20% Rate Gains" subject to a maximum tax rate of
20% (or 10% depending on an individual's tax bracket) was 88.59%. The percentage
that was classified as "28% Rate Gains" -- reportable in column (g), line 13 on
Form 1040, Schedule D -- subject to a maximum tax rate of 28% (or 15% depending
on an individual's tax bracket) was 11.41%. Capital gain distributions are
reported in box 1c of Form 1099-DIV.
Non-taxable Return of Capital
The amount received as a non-taxable (return of capital) distribution
should be applied to reduce the tax cost of shares. This amount will be
reflected on Form 1099-DIV. If the amount of the non-taxable portion exceeds
your tax basis, the excess will be taxable as a capital gain.
Corporate Dividends Received Deduction and U.S. Treasury Securities Income
The Equity Trust paid to shareholders an ordinary income dividend of
$0.0782 per share in 1997. The percentage of such dividends that qualifies for
the dividends received deduction available to corporations is 100.00% for all
such dividends paid in 1997. The percentage of the ordinary income dividends
paid by the Equity Trust during 1997 derived from U.S. Treasury Securities was
25.92%.
Historical Distribution Summary
<TABLE>
<CAPTION>
Taxes Paid
Short- Long- Undistributed on
term term Non-taxable Long-term Undistributed Adjustment
Annual Investment Capital Capital Return of Capital Capital Total to
Summary Income Gains Gains Capital Gains Gains (a) Distributions Cost Basis
------- ---------- -------- -------- ----------- ------------- ------------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1997 ............... $0.07610 $0.00210 $0.93670 $0.02510 -- -- $1.04000 $0.02500 -
1996 ............... 0.10480 -- 0.78120 0.11400 -- -- 1.00000 0.11400 -
1995 (b) ........... 0.12890 -- 0.49310 0.37800 -- -- 1.00000 0.37800 -
1994 (c) ........... 0.13536 0.06527 0.30300 1.38262 -- -- 1.88625 1.38262 -
1993 (d) ........... 0.13050 0.02030 0.72930 0.22990 -- -- 1.11000 0.22990 -
1992 (e) ........... 0.20530 0.04050 0.29660 0.51760 -- -- 1.06000 0.51760 -
1991 (f) ........... 0.22590 0.03990 0.14420 0.68000 -- -- 1.09000 0.68000 -
1990 ............... 0.50470 -- 0.22950 0.44580 -- -- 1.18000 0.44580 -
1989 ............... 0.29100 0.35650 0.66250 -- $0.6288 $0.2138 1.31000 0.41500 +
1988 ............... 0.14500 0.20900 0.19600 -- 0.2513 0.0854 0.55000 0.16590 +
1987 ............... 0.25600 0.49100 0.33500 -- -- -- 1.08200 --
</TABLE>
- ----------
(a) Net Asset Value is reduced by this amount on the last business day of the
year.
(b) On October 19, 1995, the Company distributed Rights equivalent to $0.37
per share based upon full subscription of all issued shares.
(c) On November 15, 1994, the Company distributed shares of The Gabelli Global
Multimedia Trust Inc. valued at $8.0625 per share.
(d) On July 14, 1993, the Company distributed Rights equivalent to $0.50 per
share based upon full subscription of all issued shares.
(e) On September 28, 1992, the Company distributed Rights equivalent to $0.36
per share based upon full subscription of all issued shares.
(f) On October 21, 1991, the Company distributed Rights equivalent to $0.42
per share based upon full subscription of all issued shares.
- Decrease in cost basis.
+ Increase in cost basis.
34
<PAGE>
AUTOMATIC DIVIDEND REINVESTMENT
AND VOLUNTARY CASH PURCHASE PLAN
Enrollment in the Plan
It is the policy of The Gabelli Equity Trust Inc. ("Equity Trust") to
automatically reinvest dividends. As a "registered" shareholder you
automatically become a participant in the Equity Trust's Automatic Dividend
Reinvestment Plan (the "Plan"). The Plan authorizes the Equity Trust to issue
shares to participants upon an income dividend or a capital gains distribution
regardless of whether the shares are trading at a discount or a premium to net
asset value. All distributions to shareholders whose shares are registered in
their own names will be automatically reinvested pursuant to the Plan in
additional shares of the Equity Trust. Plan participants may send their stock
certificates to State Street Bank and Trust Company ("State Street") to be held
in their dividend reinvestment account. Registered shareholders wishing to
receive their distribution in cash must submit this request in writing to:
The Gabelli Equity Trust Inc.
c/o State Street Bank and Trust Company
P.O. Box 8200
Boston, MA 02266-8200
Shareholders requesting this cash election must include the shareholder's
name and address as they appear on the share certificate. Shareholders with
additional questions regarding the Plan may contact State Street at 1 (800)
336-6983.
Shareholders wishing to liquidate reinvested shares held at State Street
Bank must do so in writing or by telephone. Please submit your request to the
above mentioned address or telephone number. Include in your request your name,
address and account number. The cost to liquidate shares is $2.50 per
transaction as well as the brokerage commission incurred. Brokerage charges are
expected to be less than the usual brokerage charge for such transactions.
If your shares are held in the name of a broker, bank or nominee, you
should contact such institution. If such institution is not participating in the
Plan, your account will be credited with a cash dividend. In order to
participate in the Plan through such institution, it may be necessary for you to
have your shares taken out of "street name" and re-registered in your own name.
Once registered in your own name your dividends will be automatically
reinvested. Certain brokers participate in the Plan. Shareholders holding shares
in "street name" at participating institutions will have dividends automatically
reinvested. Shareholders wishing a cash dividend at such institution must
contact their broker to make this change.
The number of shares of Common Stock distributed to participants in the
Plan in lieu of cash dividends is determined in the following manner. Under the
Plan, whenever the market price of the Equity Trust's Common Stock is equal to
or exceeds net asset value at the time shares are valued for purposes of
determining the number of shares equivalent to the cash dividends or capital
gains distribution, participants are issued shares of Common Stock valued at the
greater of (i) the net asset value as most recently determined or (ii) 95% of
the then current market price of the Equity Trust's Common Stock. The valuation
date is the dividend or distribution payment date or, if that date is not a New
York Stock Exchange trading day, the next trading day. If the net asset value of
the Common Stock at the time of valuation exceeds the market price of the Common
Stock, participants will receive shares from the Equity Trust valued at market
price. If the Equity Trust should declare a dividend or capital gains
distribution payable only in cash, State Street will buy Common Stock in the
open market, or on the
35
<PAGE>
New York Stock Exchange or elsewhere, for the participants' accounts, except
that State Street will endeavor to terminate purchases in the open market and
cause the Equity Trust to issue shares at net asset value if, following the
commencement of such purchases, the market value of the Common Stock exceeds the
then current net asset value.
The automatic reinvestment of dividends and capital gains distributions
will not relieve participants of any income tax which may be payable on such
distributions. A participant in the Plan will be treated for Federal income tax
purposes as having received, on a dividend payment date, a dividend or
distribution in an amount equal to the cash the participant could have received
instead of shares.
The Equity Trust reserves the right to amend or terminate the Plan as
applied to any voluntary cash payments made and any dividend or distribution
paid subsequent to written notice of the change sent to the members of the Plan
at least 90 days before the record date for such dividend or distribution. The
Plan also may be amended or terminated by State Street on at least 90 days'
written notice to participants in the Plan.
Voluntary Cash Purchase Plan
The Voluntary Cash Purchase Plan is yet another vehicle for our
shareholders to increase their investment in the Equity Trust. In order to
participate in the Voluntary Cash Purchase Plan, shareholders must have their
shares registered in their own name.
Participants in the Voluntary Cash Purchase Plan have the option of making
additional cash payments to State Street for investments in the Equity Trust's
shares at the then current market price. Shareholders may send an amount from
$250 to $10,000. State Street will use these funds to purchase shares in the
open market on or about the 15th of each month. State Street will charge each
shareholder who participates $0.75, plus a pro rata share of the brokerage
commissions. Brokerage charges for such purchases are expected to be less than
the usual brokerage charge for such transactions. It is suggested that any
voluntary cash payments be sent to State Street Bank and Trust Company, P.O. Box
8200, Boston, MA 02266-8200 such that State Street receives such payments
approximately 10 days before the 15th of the month. Funds not received at least
five days before the investment date shall be held for investment in the
following month. A payment may be withdrawn without charge if notice is received
by State Street at least 48 hours before such payment is to be invested.
For more information regarding the Dividend Reinvestment Plan and
Voluntary Cash Purchase Plan, brochures are available by calling (914) 921-5070
or by writing directly to the Equity Trust.
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The Annual Meeting of the Equity Trust's stockholders will be held at 9:30
A.M. on Monday, May 11, 1998, at the Cole Auditorium, Greenwich Public
Library in Greenwich, Connecticut.
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36
<PAGE>
DIRECTORS AND OFFICERS
THE GABELLI EQUITY TRUST INC.
One Corporate Center, Rye, NY 10580-1434
Directors
Mario J. Gabelli, CFA
Chairman
Dr. Thomas E. Bratter
President, John Dewey Academy
Bill Callaghan
President, Bill Callaghan Associates
Felix J. Christiana
Former Senior Vice President,
Dollar Dry Dock Savings Bank
James P. Conn
Managing Director and Chief Investment Officer,
Financial Security Assurance Holdings Ltd.
Karl Otto Pohl
Former President, Deutsche Bundesbank
Anthony R. Pustorino
Certified Public Accountant
Professor, Pace University
Salvatore J. Zizza
Executive Vice President,
FMG Group
Officers
Mario J. Gabelli, CFA
President & Chief Investment Officer
Bruce N. Alpert
Vice President & Treasurer
Marc S. Diagonale
Vice President
James E. McKee
Secretary
Investment Advisor
Gabelli Funds, Inc.
One Corporate Center
Rye, New York 10580-1434
Custodian
Boston Safe Deposit and Trust Company
Counsel
Willkie Farr & Gallagher
Transfer Agent and Registrar
State Street Bank and Trust Company
Stock Exchange Listing
NYSE-Symbol: GAB
Shares Outstanding 104,676,383
The Net Asset Value appears in the Publicly Traded Funds column, under the
heading "General Equity Funds," in Saturday's The New York Times and in Monday's
The Wall Street Journal. It is also listed in Barron's Mutual Funds/Closed End
Funds section under the heading "General Equity Funds".
The Net Asset Value may be obtained each day by calling (914) 921-5071.
- -------------------------------------------------
For general information about the Gabelli Funds,
call 1-800-GABELLI (1-800-422-3554), fax us at
914-921-5118, visit Gabelli Funds' Internet
homepage at: http://www.gabelli.com
or e-mail us at: [email protected]
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Notice is hereby given in accordance with Section 23(c) of the Investment
Company Act of 1940, as amended, that the Equity Trust may from time to time
purchase shares of its capital stock in the open market when the Equity Trust
shares are trading at a discount of 10% or more from the net asset value of the
shares.
- --------------------------------------------------------------------------------
<PAGE>
THE GABELLI EQUITY TRUST INC.
One Corporate Center, Rye, NY 10580-1434
Phone: 1-800-GABELLI (1-800-422-3554)
Fax: 1-914-921-5118 Internet: www.gabelli.com
e-mail: [email protected]
GBFCM-AR-98
