<PAGE>
Gabelli Equity Series Funds, Inc.
THE GABELLI EQUITY INCOME FUND
One Corporate Center
Rye, New York 10580-1434
1-800-GABELLI
[1-800-422-3554]
FAX: 1-914-921-5118
HTTP://WWW.GABELLI.COM
E-MAIL: [email protected]
(Net Asset Value may be obtained daily by calling
1-800-GABELLI after 6:00 P.M.)
BOARD OF DIRECTORS
Mario J. Gabelli, CFA Felix J. Christiana
Chairman and Chief Former Senior
Investment Officer Vice President
Gabelli Funds, Inc. Dollar Dry Dock Savings Bank
Anthony J. Colavita Vincent D. Enright
Attorney-at-Law Senior Vice President and
Anthony J. Colavita, P.C. Chief Financial Officer
The Brooklyn Union Gas Company
John D. Gabelli
Vice President Robert J. Morrissey
Gabelli & Company, Inc. Attorney-at-Law
Morrissey & Hawkins
Karl Otto Pohl
Former President Anthonie C. van Ekris
Deutsche Bundesbank Managing Director
BALMAC International, Inc.
Anthony R. Pustorino
Certified Public Accountant
Professor, Pace University
OFFICERS
Mario J. Gabelli, CFA James E. McKee
President and Secretary
Chief Investment Officer
Bruce N. Alpert James Foung, CFA
Vice President and Treasurer Associate Portfolio Manager
DISTRIBUTOR
Gabelli & Company, Inc.
CUSTODIAN, TRANSFER AGENT AND DIVIDEND AGENT
State Street Bank and Trust Company
LEGAL COUNSEL
Skadden, Arps, Slate, Meagher & Flom
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This report is submitted for the general information of the shareholders
of The Gabelli Equity Fund. It is not authorized for distribution
to prospective investors unless preceded or accompanied by an
effective prospectus.
- -----------------------------------------------------------------------
[PHOTO]
THE
GABELLI
EQUITY
INCOME
FUND
THIRD QUARTER REPORT
JUNE 30, 1996
<PAGE>
THE GABELLI EQUITY INCOME FUND
One Corporate Center
Rye, New York 10580-1434
THIRD QUARTER REPORT
JUNE 30, 1996(A)
TO OUR SHAREHOLDERS:
Rebounding from the inventory contraction of the previous two quarters,
the malaise of a snowy winter and political stalemate in Washington, the
economy surged ahead. Domestic profits will likely benefit despite earnings
from continental European sources being hobbled by a weaker economic
backdrop and a stronger dollar. This stronger than expected economy
re-awakened long dormant inflationary fears and a slumping bond market
sounded a cautionary note for stocks. Still, buoyed by favorable flow of
funds -- investment in equity mutual funds remained near record levels --
the Dow Jones Industrial Average and Standard & Poors' 500 forged ahead.
INVESTMENT RESULTS (b)
<TABLE>
<CAPTION>
Calendar Quarter
----------------------------------
<S> <C> <C> <C> <C> <C>
1st 2nd 3rd 4th Year
1996: Net Asset Value $13.47 $13.54 -- -- --
Total Return 5.5% 1.0% -- -- --
- -----------------------------------------------------------------------
1995: Net Asset Value $11.56 $11.99 $12.65 $12.84 $12.84
Total Return 8.5% 4.3% 6.1% 6.9% 28.3%
- ------------------------------------------------------------------------
1994: Net Asset Value $11.26 $11.08 $11.54 $10.72 $10.72
Total Return (2.2)% (0.8)% 4.9% (0.7)% 1.1%
- ------------------------------------------------------------------------
1993: Net Asset Value $11.35 $11.72 $12.15 $11.57 $11.57
Total Return 7.4% 3.8% 4.2% 1.5% 17.9%
- ------------------------------------------------------------------------
1992: Net Asset Value $10.19 $10.36 $10.40 $10.64 $10.64
Total Return 2.4%(c) 2.3% 1.1% 3.7% 9.8%(c)
Average Annual Returns - June 30, 1996 (b)
- ------------------------------------------
<S> <C>
1 Year 20.7%
15.3%(d)
3 Year 13.4%
11.7%(d)
Life of Fund (c) 13.8%
12.6%(d)
<FN>
(a) The Fund's fiscal year ends September 30, 1996. (b) Average annual and
total returns reflect changes in share price and reinvestment of dividends,
and are net of expenses. The net asset value of the Fund is reduced on the ex-
dividend (payment) date by the amount of the dividend paid. Of course, the
returns represent past performance and do not guarantee future results.
Investment returns and the principal value of an investment will fluctuate.
When shares are redeemed they may be worth more or less than their original
cost. (c) From commencement of operations on January 2, 1992. (d) Adjusted
for the maximum 4.5% sales charge.
</FN>
</TABLE>
<PAGE>
<TABLE>
Dividend History
- ------------------------------------------------------
<C> <C>
Rate Reinvestment
<S> ---- ------------
Payment (ex) Date Per Share Price
- ----------------- --------- -----
June 28, 1996 $0.06 $13.54
March 31, 1996 $0.07 $13.47
December 29, 1995 $0.68 $12.84
September 29,1995 $0.07 $12.65
June 30, 1995 $0.07 $11.99
March 31, 1995 $0.07 $11.56
December 30, 1994 $0.74 $10.72
September 30, 1994 $0.08 $11.54
June 30, 1994 $0.09 $11.08
March 31, 1994 $0.06 $11.26
December 31, 1993 $0.76 $11.57
September 30, 1993 $0.06 $12.15
June 30, 1993 $0.06 $11.72
March 31, 1993 $0.08 $11.35
December 31, 1992 $0.15 $10.64
September 30, 1992 $0.07 $10.40
June 30, 1992 $0.06 $10.36
March 31, 1992 $0.05 $10.19
</TABLE>
INVESTMENT PERFORMANCE
For the three month and one year periods ended June 30, 1996, the
Fund's net asset value increased 1.0% and 20.7%, respectively, to $13.54
per share. The Fund paid a $0.06 per share dividend on June 30, 1996.
For the three month period ended June 30, 1996, the Lipper Analytical
Services, Inc. Equity Income Fund Index and the Standard & Poor's 500
Index (S&P 500) returned 2.7% and 4.5%, respectively. Each index is
an unmanaged indicator of stock market performance. For the twelve
months ended June 30, 1996, the Lipper Equity Income Fund Index and the
S&P 500 Index gained 21.0% and 26.0%, respectively.
Since its inception on January 2, 1992, through June 30, 1996, the Fund
achieved a total return of 78.7%, which equates to an average annual return
of 13.8%, assuming reinvestment of all dividends. The Dividend History chart
details each dividend paid by the Fund since its inception. As of
June 30, 1996, the Fund's shareholders numbered 7,150 and net assets were
$56.6 million.
NO LOAD - EFFECTIVE AUGUST 12, 1996
Effective August 12, 1996, the Fund will no longer impose a front-end sales
charge. All purchases made after August 12, 1996 will not be subject to a
sales charge. The minimum initial investment for all accounts is $1,000.
Additionally, we invite shareholders to start an automatic investment plan
whereby no initial minimum is required.
INTERNET
You can now visit us on the Internet. Our home page at http://www.gabelli.com
contains information about Gabelli Funds, Inc., the Gabelli Mutual Funds,
quarterly reports,closing prices, IRAs, 401(k)s and other current news. You
can also send us E-mail at [email protected].
<PAGE>
BARRON'S 75TH SPECIAL ANNIVERSARY ISSUE
BARRON'S asked our Chief Investment Officer, Mario J. Gabelli, to discuss his
investment themes in it's 75th Special Anniversary Issue. While these comments
were written in mid February, we believe they are still vaild today.
Discussion of individual companies is not necessarily reflective of the
Fund's entire portfolio.
GRAND SLAM HITTING
The new international middle class will be taking to the friendly skies, for
business and pleasure.
By Mario Gabelli
[PHOTO]
The ancient Greek dramatist Euripides said, "The best of seers is he who
guesses well." Each year since 1980, Barron's has given me the opportunity to
sit down with a distinguished group of good guessers at the annual Roundtable
and divine what the economy, the markets and some individual stocks would do
in the year ahead. Now, in honor of Barron's 75th Anniversary, I've been invited
to stick my neck out even further and discuss several investment themes that
will theoretically enrich readers over the next five years. Fair enough.
I will begin with the confession that over the past 20 years, our annual macro-
economic and market forecasts haven't always been right. Fortunately for our
clients and Barron's readers, our investment methodology is not built upon
accurately predicting interest-rate trends or timing the market, but rather on
picking stocks, and many of our picks have fared quite well.
One reason is that we've had a good batting average identifying trends - we
call them catalysts - that have unlocked value in selected industry groups.
A catalyst can be a change in regulatory standards such as the original cable
television deregulation bill of 1984 that led us to lucrative investments in
cable stocks. It can be consolidation within an industry. The scramble for
filmed entertainment assets engendered by expanding distribution systems
throughout the 1980s and early 1990s inspired us to take substantial and
ultimately quite profitable positions in Warner Communications, MCA and
Paramount prior to their acquisitions by Time Inc., Matsushita and Viacom,
respectively.
Catalysts can also be corporate restructurings. The recent trend to help
realize shareholder value through the sale or spinoff of businesses has helped
us earn good returns from "Humpty Dumpty" companies as all the king's horses
and all the king's men help break conglomerates into pieces again. Among them
have been TENNECO, AMERICAN BRANDS, AMERICAN EXPRESS, ITT and, now, AT&T.
Over the next five years, the most powerful trend we see is the explosive
growth of the international marketplace for American goods and services. This
traces its roots to two major catalysts: the rejuvenation of American industry
spawned by a declining cost of capital and enormous productivity gains, and
the victory of global capitalism symbolized best by the crumbling of the Berlin
Wall. Good old-fashioned Yankee ingenuity has made us more than competitive
with Japan and Germany. We are now in a terrific position to conquer new
international economic frontiers.
With free-market economies evolving in China and the former Soviet bloc, and
the middle classes rapidly expanding in developing nations in Latin America and
the Pacific Rim, there will be 2.5 billion to three billion new consumers by
the turn of the century. How is this emerging international middle class going
to spend its money? If past is prologue - and we can learn something by looking
back at the economic evolution of the great American middle class - the new
international middle class
Mario Gabelli, a regular member of Barron's Roundtable since 1980, is chairman
and chief investment officer of Gabelli Funds Inc.
<PAGE>
will upgrade their food consumption habits; if it is made
available, they will buy telephone service; they will spend money on
entertainment, and they will travel.
Investors of our persuasion - stock-pickers, if you will - can't talk about
investment trends without naming some names. Unlike the Roundtable, where we
are constantly prodded both by Barron's and our colleagues to fill in the
fundamental blanks on individual stock selections, I won't be providing hard
data on the companies I mention in this article. Nor will I make predictions
about short-term earnings and cash flow. That said, consistent with our
Graham-and-Dodd-oriented value philosophy, we would like to own the businesses
named here for the long term.
It's Not Chickenfeed: Let's start in, of all places, Iowa. The American grains
farmer is the most productive in the world. Iowa is agriculturally state-of-the
- -art. Let me give you a hypothetical example. There are seven ounces of grain
needed to produce one ounce of meat at market. If chicken or pork consumption
in China were to increase by one ounce per capita, and Iowa were to produce all
the grain used to fatten these Chinese chickens and hogs, on a gross national
product basis, Iowa would be among the richest countries in the world. This may
be perceived as a silly example. But its purpose is to call attention to the
tremendous upside potential for American grain farmers and vendors to those
farmers. Agricultural equipment manufacturers like JOHN DEERE, companies that
move grains to shipping centers, like ARCHER-DANIELS-MIDLAND, and irrigation-
equipment makers like LINDSAY MANUFACTURING should all be long term
beneficiaries of the increased role the American farmer will play in feeding
the world.
Dialing for Dollars: Once the new international consumer puts some more meat
on the table, what else would make his or her life better? Being able to call
friends and family on the telephone would be a big step forward. In fact, you
could argue that telecommunications is both the engine and the caboose in the
emergence of the international middle class. To compete on the global stage,
businesses in developing countries need healthy stock markets to attract
global capital. Modern telecommunications systems are a prerequisite.
As efficient telecommunications systems further enhance economic growth and
expand the middle class, the demand for more universal telephone service
increases. Here, we need to tip our hat to Craig McCaw's evolutionary theory of
time and space, which effectively jump-started the cellular telephone industry.
And when it comes to developing countries, it is wireless service that will
help bring telecommunications services at reasonable prices.
Arguably, telecommunications is the No. 1 global growth industry for the next
decade or more. Consequently, long-term investors will not have to be terribly
discriminating to earn pretty good returns in this sector. But rather than
take a scattershot approach, investors might maximize their returns by
focusing on those segments of the industry that will grow the fastest and
the dominant players therein. The big three U.S. long distance companies,
AT&T, MCI and SPRINT, are rapidly developing the strategic alliances with
national and local carriers around the world that should allow them to dominate
the international long-distance market. Telecommunications equipment
manufacturers like LUCENT, the spinoff from AT&T, and NORTHERN TELECOM will
play a big role in wiring the world. Suppliers of advanced cable equipment like
SCIENTIFIC ATLANTA also have terrific international growth prospects. On the
wireless side, cellular-phone makers like MOTOROLA and NOKIA should thrive. A
special mention should go to AIRTOUCH, which has done a terrific job winning
joint-venture cellular-telephone franchises throughout Europe. Two other
cellular investments worth considering are 360 COMMUNICATIONS, which is the
domestic cellular spinoff from Sprint, and Britain's VODAFONE.
If you favor a more focused "special situation" approach, the Canadian
telephone giant BCE should benefit when it sells off its substantial investment
in Northern Telecom and as Canadian deregulation catches up to the rest of the
world. On a per-capita basis, the Vancouver metropolitan area has the highest
concentration of expatriate Chinese in North America. This could prove to be a
great "gateway to China."
Global Eyeballs: No American products travel better than filmed entertainment
and pre-recorded music. Several years ago, the investor relations people at
TIME WARNER were kind enough to give us a tape of Warner cartoon characters
providing a global geography lesson dubbed in a dozen foreign languages. We've
used this tape at our annual client meeting to illustrate the global reach of
the American entertainment industry. There is simply no place you can go in the
world without American film being a staple of cinematics, cable TV or
broadcast entertainment. The same goes for music. Just look at the convergence
of the computer, telephone and cable television industries in the U.S.
Overseas opportunities beckon as well. In the past five years alone, the number
of satellite dishes in India has gone from 400,000 to 10 million. As the
distribution channels expand world-wide, the value of entertainment will
continue to increase.
With the consolidation we've already experienced in the filmed entertainment
industry, there are fewer ways to participate. Time Warner is a dominant global
company in both filmed entertainment and pre-recorded music. Assuming the
marriage with TURNER BROADCASTING is consummated, Time could become an
international cable TV powerhouse as well. The stock price has been restrained
by concerns about Time's debt, the unwinding of what has become an acrimonious
relationship with US WEST, and the uncertain prospects for Time Warner's huge
cable television operations. Investors are currently blind to the forest
through the trees on this one. In the long run, however, we are confident
the market will recognize Time Warner's pre-eminent global position in
entertainment software.
Other beneficiaries of this favorable long-term trend for entertainment
software producers and packagers also include Viacom - the world wants its MTV;
SEAGRAM, the new owner of MCA, and LIBERTY MEDIA, John Malone's combination of
TELE-COMMUNICATIONS INC.'s cable network investments.
Up, Up and Away: Air traffic is tremendously sensitive to increases in personal
income. The new international middle class will be taking to the friendly
skies. They will fly for business, and they will fly for pleasure. Over the
next five years, you could probably make a lot of money investing in
international airline stocks. But it will be less complicated and perhaps just
as profitable investing in BOEING, which along with Europe's Airbus consortium
will build the foreign fleets to accommodate increasing air traffic abroad.
We are almost right at the bottom of a five-year down cycle in the aircraft
industry. Industry studies indicate that in the next 20 years, there will be
12,000 new aircraft built to satisfy incremental global demand and 4,000 to
replace aircraft that will be retired because they are too old or fuel-
inefficient or don't meet new noise-control requirements. That's 16,000 new
<PAGE>
airplanes to be built over the next two decades. Boeing, which is a
technological leader, will get the lion's share of orders.
Another option is to invest in vendors to Boeing. There are very few pure plays
in this arena, but companies deriving a material volume of revenues from
commercial aerospace include AMETEK, PRECISION CASTPARTS, MOOG, CRANE, SPS
TECHNOLOGIES, HONEYWELL and CURTISS-WRIGHT. SEQUA Corp., whose Chromalloy
division is a leader in jet engine maintenance and repair, would be a good
"aging of the existing fleet" play.
The Deal: Another global dynamic that isn't new, but is far from finished,
is strategic merger-and-acquisition activity. At the 1995 Roundtable,
I said there would be a ton of deals done in the year ahead. It
worked out to be $458 billion in deals in the U.S. and $866 billion
globally. I don't know that we will see that kind of record volume
this year, but you will see some big numbers. Why? The world is awash in
liquidity, rising equity markets make stock a more valuable currency and, most
importantly, it is still cheaper to buy businesses on global stock markets than
it is to build them from scratch.
How do you take advantage of this long-term trend? I am going to unabashedly
preach for my own church here. As Benjamin Graham and his successor at Columbia,
Roger Murray, instructed us, and as Warren Buffett has put so profitably into
practice, you approach stocks as if they were pieces of a business you want to
buy at a discount to what Graham called intrinsic value, others call economic
value, and what years ago was termed "private market value."
How do you go about quantifying value? We believe free cash flow, defined as
earnings before interest, taxes and depreciation (EBITD), or a slight variation,
EBITDA, both minus the capital expenditures necessary to grow the business, is
the best barometer of a company's value. Most corporate merger-and-acquisition
people look at the very same thing. When the informed industrialist is
evaluating a business for purchase, he or she is not going to put a lot of
weight on stated book value. That's for accountants, not for savvy buyers of
businesses. They probably don't care much about net earnings. Clever corporate
managements can be creative in booking earnings. What that informed
industrialist wants to know is: How much cash is this business throwing off
today and how much is he going to have to invest in this business to sustain or
grow this stream of cash in the future?
There are other factors in determining a stock's private market value. Cost of
capital always affects a company's values. That's why stocks tend to be valued
lower when interest rates rise. Cash flow growth rates will alter values, too.
Just as growth-stock investors will pay a higher price-to-earnings ratio for
higher earnings growth, private-market-value investors will pay a higher
multiple of cash flow for faster cash-flow growth. Finally, sophisticated
business buyers will look beyond the balance sheet for hidden assets -
valuable land on the books at original cost or an overfunded pension plan - as
well as hidden liabilities, like unfunded health-care responsibilities or
potentially costly environmental problems.
By doing this kind of analysis of income statements and balance sheets, and
checking out all those little footnotes attached, and keeping an eye on the
prices businesses are being bought and sold at every day out there in the
real world, you can quantify the value of a business or group of businesses.
You can usually find fundamental bargains - stocks selling at substantial
discounts to private market value. Then you have to ask the subjective
questions: Who might wantto own this company? Would management be
receptive to a takeover proposal? Are the target company's assets so
unique that someone might pay well above fair value?
If you can come up with some positive answers to questions like
these, you may well have found yourself a terrific take-over candidate.
Don't Expect Too Much: Lastly, some comments on the longer-term prospects for
equities. I'm not talking about what is going to happen to the market over the
next quarter or even the next several years. However, I do think investors
should have some perspective on what they can expect. The average annualized
return on equities over the last 15 years, as measured by the S&P 500, is
14.8%. That's almost 50% above the historical return on stocks on an
annualized basis. When you compound this out 10 years, the differential is
staggering. Will we see the same kind of returns from stocks over the next 15
years? I wouldn't bet the ranch on it. Sooner or later, this roaring bull
market will end, either with a substantial correction or a bear market or,
preferably, an extended period of much more modest returns.
How should today's investor prepare for this? I would start by adjusting
expectations. When making financial planning assumptions, use conservative
return figures for equities, and save and invest accordingly. In other words,
if you are putting a given amount of dollars into equities and assuming that it
will compound at 15% a year over the next 10-20 years, you will likely find
your children's college fund or your retirement nest egg more than a little
short.
Secondly, you might want to look at alternative investment strategies.
Market-neutral disciplines like risk arbitrage, which is capable of
delivering low- to mid-double-digit annualized returns regardless of the
direction of the broad equities market, should be considered. This will be
particularly rewarding if what we have characterized as the third great wave
of mergers continues as long as we expect it to.
Finally, although one can play many global trends from the relative comfort of
the New York Stock Exchange, investors should internationalize their
portfolios. Twenty-five years ago, U.S. equities represented 66% of the
capitalization of the total global equities market. Today it is 38%. Twenty
years ago, only the most adventurous Americans would invest in places like
Spain or Italy. Today, there are billions of American dollars in emerging
markets in Latin America and the Pacific Rim. It has always been my inclination
to challenge the conventional wisdom. But I do think there is some legitimacy
to the idea that many foreign economies will grow faster than the U.S., and
that returns from foreign equities markets will trend higher than our own.
<PAGE>
LET'S TALK STOCKS
The following are stock specifics on selected holdings of our Fund's
investments. 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 Company (AXP - $44.625 - 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 travel-related services. Another important operation is Minneapolis-
based American Express Financial Advisors, Inc. (formerly IDS Financial
Services) which sells financial products ranging from mutual funds to
annuities. Harvey Golub, Chairman and CEO, has refocused AXP on its core
"green" charge card and investment management businesses. The company has
significantly expanded the range of merchants who welcome its cards.
Management's objective is in virtual parity with bankcard networks. An
electronic interactive service was introduced last year that enables
cardmembers to make travel arrangements, check the status of their accounts,
pay their bills and purchase catalogue merchandise. We believe the company has
been repositioned to enjoy double-digit earnings growth over the balance of
this decade.
Atlantic Richfield Company (ARCO) (ARC - $118.50 - NYSE) is a diversified
company operating globally in all aspects of the energy business. Included
are ventures in China and Russia. Approximately 35% of ARCO's 1995 revenues
of $17.3 billion were oil, gas and coal resources, 40% refining and marketing
and almost 25% intermediate chemicals and specialty products. ARCO's operating
results last year were the highest since its record earnings in 1990. Earnings
should continue to expand as worldwide demand for energy and petrochemical
products grows over the rest of the decade. The company's strong cash flow,
exceeding $3 billion, readily supports the shares' current 4.65% yield.
British Petroleum Company, plc (BP - $106.875 - NYSE), with an equity market
capitalization approaching $50 billion, is one of the largest integrated oil
enterprises in the world. Crude oil output is approximately 1.2 million
barrels per day. Refinery throughputs are larger still, at 1.9 million barrels
per day. The company, like other major oil producers and refiners, has embarked
on a major cost-cutting program. British Petroleum is a substantial cash flow
generator, a portion of which is being used to reduce debt.
Chevron Corporation (CHV - $59.00 - NYSE) is the third largest U.S. natural gas
producer and one of the nation's largest crude oil refineries and marketers of
refined products. CHV is the largest supplier of California reformulated
gasoline. Worldwide net production was more than 1.4 million barrels a day of
oil and equivalent gas.
Exxon Corporation (XON - $86.875 - NYSE), with an equity market value exceeding
$100 billion, is the second-largest capitalized company in the U.S. and the
world's largest publicly-owned integrated oil company. The company produces
an average 1.7 million barrels of crude oil and natural gas liquids per day,
roughly two-thirds of which come from overseas reserves. Revenues, having
plateaued at roughly $100 billion over the past five years, reflect pressure on
oil prices, but should eventually rebound as worldwide demand for energy
increases. Profitability has been sustained by management's success in cutting
approximately $1 billion from overhead in each of the last few years.
Dividends have been paid since 1882 and have increased annually since 1983.
<PAGE>
GTE Corporation (GTE - $44.75 - NYSE) is the fourth-largest publicly-owned
telecommunications company in the world. The company owns the largest non-Bell
telecommunications system, serving 19 million access lines in 30 states. GTE
is the nation's second-largest provider of cellular services, with a
controlling interest in metropolitan and rural service areas covering more than
50 million people. Roughly 25% of earnings are derived from non-telephone
businesses growing at more than 20% per year. Chairman Charles Lee has
prepared the company for accelerated growth.
International Business Machines Corporation (IBM - $99.00 - NYSE) is the
world's largest information technology services company. 1995 total revenue
increased almost $8 billion, or 12%, to $72 billion. IBM is also a huge
cash flow generator. The company ended the year with $7.7 billion in cash,
after spending $5.7 billion to repurchase IBM stock and $2.9 billion to
acquire Lotus Development.
Time Warner Inc. (TWX - $39.25 - NYSE), in a bold and brilliant tactic, is
endeavoring to acquire Turner Broadcasting Systems Inc. for $7.5 billion.
Management is currently working to obtain governmental approval of the
transaction. At the same time, efforts are underway to restructure TWX's
partnership with U.S. West Media Group. The acquisition would make TWX the
largest diversified media and publishing company in the world, adding a wealth
of programming to a company already rich in entertainment content.
Time Warner is redirecting its operations into two general areas: copyright
and creativity, which includes publishing, music and filmed entertainment, and
distribution, which is mostly cable. Its two summer movie hits are Twister and
Eraser. Under the aegis of Gerald M. Levin, investors can expect significant
returns over the rest of the decade.
Texaco Inc. (TX - $83.875 - NYSE) is a major integrated international oil
company. 50%-owned Caltex (Chevron holds the other 50%) concentrates on
refining and marketing in the Pacific Rim, where standards of living and
economies are advancing rapidly. 1996 promises to be a record year in the
generation of cash flow and earnings.
IN CONCLUSION
At the beginning of 1996, we forecast that higher than expected inflation and
rising long-term interest rates would restrain stock returns. Our economic
forecast has proved remarkably accurate. Thus far, the market has largely
ignored these economic signs and marched steadily forward. Whether it will
continue to do so in the second half is questionable.
As always, we are focusing on the individual stocks in the Fund's portfolio.
By concentrating on niche industry groups and individual companies that can
do well independent of prevailing economic and broad market trends, we believe
we are well-positioned to prosper, even in a less generous market environment.
Our investment philosophy is simple and straightforward: buying good
businesses cheap will generate consistently superior returns.
<PAGE>
The Fund's daily net asset value is available in the financial press and each
evening after 6:00 PM (Eastern Time) by calling 1-800-GABELLI (1-800-422-3554).
The Fund's NASDAQ symbol is GABEX. Please call us during the day for further
information.
Thank you for your appreciation of our efforts to preserve and enhance the
assets you have entrusted to us.
Sincerely,
JAMES FOUNG, CFA MARIO J. GABELLI, CFA
Associate Portfolio Manager President and
Chief Investment Officer
August 1, 1996
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.
<PAGE>
<TABLE>
THE GABELLI EQUITY INCOME FUND
PORTFOLIO OF INVESTMENTS-JUNE 30, 1996 (UNAUDITED)
- -----------------------------------------------------------------------------------------------------------------
<CAPTION> Market Market Market
Shares Cost Value Shares Cost Value
- ------ ---- ----- ------ ---- -----
<C> <S> <C> <C> <C> <S> <C> <C>
COMMON STOCKS - 81.40% 28,000 Commonwealth Energy
AUTOMOTIVE - 1.47% System $556,837 $721,000
6,500 Ford Motor Company $153,183 $210,438 56,000 Eastern Enterprises Inc. 1,521,906 1,862,000
12,000 General Motors Corporation 447,738 628,500 2,500 Essex County Gas Company 63,375 58,750
--------- --------
600,921 838,938 1,800 Fall River Gas Company 43,875 32,850
--------- --------
AUTOMOTIVE: PARTS AND ACCESSORIES - 1.51% 50,000 Southwest Gas Corporation 771,275 800,000
2,500 Dana Corporation 65,938 77,500 --------- ---------
4,051,533 4,676,475
15,000 GenCorp Inc. 184,500 226,875 --------- ---------
ENERGY - OIL - 19.33%
12,000 Genuine Parts Company 427,123 549,000 14,500 Atlantic Richfield Company 1,611,435 1,718,250
-------- --------
677,561 853,375 20,000 British Petroleum Company,
-------- -------- plc ADR 878,500 2,137,500
AVIATION: PARTS AND ACCESSORIES - 3.35% 20,000 Burlington Resources Inc. 844,528 860,000
9,000 Boeing Co. 573,279 784,125 30,000 Chevron Corporation 984,813 1,770,000
15,000 Curtiss-Wright Corp. 444,138 810,000 25,000 Exxon Corporation 1,527,887 2,171,875
5,000 General Motors Corporation 10,000 Halliburton Company 420,389 555,000
Cl. H 174,000 300,625
--------- --------- 10,000 Pennzoil Company 453,000 462,500
1,191,417 1,894,750
--------- --------- 15,000 Texaco Inc. 938,375 1,258,125
BUSINESS SERVICES - 5.30% --------- ----------
18,000 Dun & Bradstreet Corp. 1,080,024 1,125,000 7,658,927 10,933,250
--------- ----------
7,500 Honeywell, Inc. 323,295 408,750 Entertainment - 0.28%
2,000 Polygram NV ADR 58,725 117,250
12,000 International Business 1,000 Time Warner Inc. 25,888 39,250
Machines Corporation 615,237 1,188,000 --------- ---------
13,000 Landauer, Inc. 200,317 274,625 84,613 156,500
--------- --------- --------- ---------
2,218,873 2,996,375 Financial Services - 9.89%
--------- --------- 40,000 American Express Company 854,291 1,785,000
CONSUMER PRODUCTS - 6.99% 10,000 Banco Santander SA ADR 448,234 463,750
13,000 American Brands, Inc. 534,400 589,875 5,000 BankAmerica Corporation 211,500 378,750
7,000 Eastman Kodak Company 413,935 544,250 12,500 Commerzbank AG Spons ADR 480,411 517,364
12,500 General Electric Company 606,651 1,081,250 15,000 Deutsche Bank AG ADR 691,825 709,527
8,000 Gillette Company 202,038 499,000 11,000 Morgan (J.P.) & Co.
10,000 National Presto Industries, Inc.441,767 380,000 Incorporated 685,500 930,875
2,000 Philip Morris Companies Inc. 93,100 208,000 1,500 Northern Trust Company 60,300 86,625
4,500 Procter & Gamble Company 226,425 407,813 12,000 SunTrust Banks Inc. 251,737 444,000
6,000 Tambrands Inc. 255,066 245,250
--------- --------- 2,200 Transamerica Corporation 111,528 178,200
2,773,382 3,955,438
--------- --------- 2,000 U.S. Trust Corporation 47,394 101,000
DIVERSIFIED INDUSTRIAL- 1.02% --------- ---------
3,000 Minnesota Mining and 3,842,720 5,595,091
Manufacturing Company 178,650 207,000 --------- ---------
3,842,720 5,595,091
FOOD AND BEVERAGE - 1.03%
500 Giant Food, Inc. Cl. A 15,713 17,938
14,000 Thomas Industries Inc. 157,975 267,750 3,500 Kellogg Company 176,926 256,375
3,000 Trinity Industries, Inc. 105,275 102,000
--------- --------- 2,000 PepsiCo, Inc. 62,675 70,750
441,900 576,750
--------- --------- 1,000 Quaker Oats Company 35,125 34,125
ENERGY - ELECTRIC - 1.34% 14,000 Rykoff-Sexton, Inc. 176,347 201,250
1,000 FPL Group, Inc. 28,613 46,000 --------- --------
32,000 PacifiCorp 640,600 712,000 466,786 580,438
--------- -------- --------- --------
669,213 758,000 HEALTH CARE - 2.68%
--------- -------- 15,000 Community Health Systems 777,525 776,250
ENERGY - NATURAL GAS - 8.27% 15,000 Johnson & Johnson 301,284 742,500
21,000 Bay State Gas Company 501,475 585,375 --------- ---------
2,000 Berkshire Gas Company 33,290 30,750 1,078,809 1,518,750
--------- ---------
3,000 Brooklyn Union Gas Company 74,900 81,750 INDUSTRIAL EQUIPMENT AND SUPPLIES - 3.99%
2,400 Caterpillar Inc. 56,973 162,600
24,000 Colonial Gas Company 484,600 504,000 27,500 Deere & Company 381,351 1,100,000
<PAGE>
THE GABELLI EQUITY INCOME FUND
PORTFOLIO OF INVESTMENTS (CONTINUED) -JUNE 30, 1996 (UNAUDITED)
- ----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Principal
Amount or Market Principal Market
Shares Cost Value Amount Cost Value
- --------- ---- ----- --------- ---- ------
<C> <S> <C> <C> <C> <S> <C> <C>
11,500 Ingersoll Rand Co. $446,263 $503,125 BUILDING AND CONSTRUCTION - 0.18%
2,500 Minerals Technologies Inc 63,290 85,691 $100,000 Medusa Corporation Sub. Notes Cv.
4,000 Tenneco Inc. 164,497 204,500 6.00%, 01/15/20 $ 97,517 $ 103,750
5,000 Union Carbide Corporation 83,375 198,750 --------- ---------
CABLE - 2.07%
--------- ---------
1,195,749 2,254,666 1,000,000 Home Shopping Network, Inc.
--------- ---------
METALS AND MINING - 1.73% Sub. Deb. Cv.
2,400 Freeport-McMoRan Copper & 5.875%, 03/01/06 (a) 1,000,000 1,170,000
Gold Inc. Cl. A 50,935 71,700 --------- ---------
CONSUMER PRODUCTS - 0.84%
22,455 Freeport-McMoRan Copper & 600,000 Fieldcrest Cannon, Inc.
Gold Inc. Cl. B* 436,032 715,753 Sub. Deb. Cv.
5,333 Freeport-McMoRan Inc. 116,854 189,321 6.00%, 03/15/12 450,572 475,500
--------- --------- --------- ---------
603,821 976,774 ENERGY - OIL - 0.39%
--------- ---------
PUBLISHING - 0.17% 150,000 Pennzoil Company
2,500 Reader's Digest Association, Sub. Deb. Cv.
Inc. Cl. B 92,668 98,438 6.50%, 01/15/02 150,000 219,000
--------- --------- --------- ---------
RETAIL - 0.17% ENTERTAINMENT - 0.21%
2,000 Sears, Roebuck and Co. 51,241 97,250 150,000 Savoy Pictures Entertainment,
--------- ---------
SPECIALTY CHEMICALS - 1.12% Inc., Sub. Deb. Cv.
8,000 E.I. du Pont de Nemours 7.00%, 07/01/03 129,056 118,500
and Company 524,000 633,000 --------- ---------
FOOD AND BEVERAGE - 0.35%
--------- ---------
TELECOMMUNICATIONS - 11.76% 350,000 Flagstar Companies, Inc.
5,000 ALLTEL Corporation 120,500 153,750 Sub. Deb. Cv.
18,000 BC TELECOM Inc. 317,456 350,367 10.00%, 11/01/14 290,214 200,812
25,000 BCE Inc. 845,708 987,500 --------- ---------
HOTELS/CASINOS - 0.47%
11,000 British Telecommunications 250,000 Hilton Hotels Corporation
plc ADR 691,526 591,250 Sub. Deb. Cv.
7,500 Cable & Wireless plc ADR 147,710 148,125 5.00%, 05/15/06 250,000 263,122
3,000 Cincinnati Bell Inc. 48,150 156,375 ---------- ---------
INDUSTRIAL EQUIPMENT AND SUPPLIES - 1.51%
1,500 COMSAT Corporation 46,200 39,000 500,000 Cooper Industries, Inc.
36,000 GTE Corporation 1,220,300 1,611,000 Sub. Deb. Cv.
10,000 Hong Kong Telecommunications 7.05%, 01/01/15 496,558 533,750
Ltd. ADR 139,671 180,000 319,000 Kollmorgen Corporation
1,500 Motorola, Inc. 40,894 94,313 Sub. Deb. Cv.
8,000 NYNEX Corporation 315,750 380,000 8.75%, 05/01/09 261,194 320,196
5,000 Pacific Telesis Group Inc. 135,659 168,750 ---------- ----------
757,752 853,946
25,000 Southern New England Tele- ---------- ----------
Communications Corporation 866,964 1,050,000 PUBLISHING - 0.86%
10,000 Telefonica de Espana ADR 384,623 551,250 100,000 News American Holdings
6,000 US WEST Communications Incorporated Sub. Deb. Cv.
Group 147,104 191,250 Zero Cpn., 03/31/02 64,577 99,250
---------- ---------- 400,000 Thomas Nelson Inc. Sub. Deb. Cv.
5,468,215 6,652,930
---------- ---------- 5.75%, 11/30/99 396,483 388,000
TOTAL COMMON STOCKS 33,692,349 46,047,188 ---------- ----------
---------- ---------- 461,060 487,250
CONVERTIBLE CORPORATE BONDS - 8.93% RETAIL - 0.57% ---------- ----------
AUTOMOTIVE: PARTS AND ACCESSORIES - 0.71% 400,000 General Host Corporation Sub.
$375,000 GenCorp Inc. Sub. Deb. Cv. Deb. Cv.8.00%, 02/15/02 393,377 320,000
8.00%, 08/01/02 370,411 404,063 ---------- ----------
---------- ----------
<PAGE>
THE GABELLI EQUITY INCOME FUND
PORTFOLIO OF INVESTMENTS (CONTINUED) -JUNE 30, 1996 (UNAUDITED)
- -----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
<C> <S> <C> <C> <S> <C> <C>
Principal
Amount or Market Principal Market
Shares Cost Value Amount Cost Value
- ------ ---- ------ --------- ---- ------
TRANSPORTATION - 0.40% U.S. GOVERNMENT OBLIGATIONS - 7.64%
$250,000 Greyhound Lines, Inc. $4,350,000 U.S. Treasury Bills, 4.88% to
Sub. Deb. Cv. 4.95%, due 08/08/96 to 08/22/96 $4,322,161 $4,322,161
8.50%, 03/31/07 $141,438 $226,875 ---------- ----------
--------- --------- TOTAL U.S. GOVERNMENT
WIRELESS COMMUNICATIONS - 0.37% OBLIGATIONS 4,322,161 4,322,161
300,000 COMCAST Cellular Communications Inc. ---------- ----------
Redeemable Notes, TOTAL INVESTMENTS
Zero Cpn., 03/05/00 203,985 $207,000 - 99.48% $43,514,690* 56,276,730
--------- --------- ----------- ----------
TOTAL CONVERTIBLE -----------
CASH AND OTHER ASSETS,
CORPORATE BONDS 4,695,382 5,049,818 IN EXCESS OF LIABILITIES- 0.52% 293,718
--------- --------- ----------
CONVERTIBLE PREFFERED STOCKS - 1.51% NET ASSETS - 100.00%
CONSUMER PRODUCTS - 0.03% (4,177,015 shares outstanding) $56,570,448
1,500 Kerr Group, Inc. -----------
NET ASSET VALUE AND REDEMPTION
Cl. B $1.70 Cv. Pfd. Ser. D 27,075 20,250 PRICE PER SHARE $ 13.54
--------- --------- -----------
-----------
DIVERSIFIED INDUSTRIAL - 0.36% MAXIMUM PUBLIC OFFERING PRICE
3,500 GATX Corporation PER SHARE ($13.54/ .955 Based on
$3.875 Cv. Pfd. 164,025 203,875 a maximum sales charge of 4.5%) $ 14.18
--------- --------- -----------
INDUSTRIAL EQUIPMENT AND SUPPLIES - 0.88% <FN> -----------
*For Federal income purposes:
10,000 Flagstar Companies, Inc. Aggregate cost $43,514,690
$2.25 Cv. Pfd. Ser. A 234,063 128,125 -----------
2,500 Navistar International Corporation -----------
$6.00 Cv. Pfd. Ser. G 68,625 139,063 Gross unrealized appreciation. . .$13,174,748
3,200 Sequa Corporation Gross unrealized depreciation (543,231)
$5.00 Cv. Pfd. 204,510 230,000 -----------
--------- ---------
507,198 497,188 Net unrealized appreciation. . . .$12,631,517
--------- --------- -----------
-----------
METALS AND MINING - 0.24% * Non-income producing security.
5,000 Freeport-McMoRan Copper & ADR - American Depositary Receipt.
Gold Inc. 5.00% Cv. Pfd. 106,500 136,250 (a)Security exempt from registration under Rule 144A of the
--------- --------- Securities Act of 1933. This security may be resold in
TOTAL CONVERTIBLE transactions exempt from registration, normally to
PREFERRED STOCKS 804,798 857,563 qualified institutional buyers. At June 30, 1996, Rule
--------- --------- 144A securities amounted to 1,170,000 or 2.1% of net
assets.
</TABLE>
Top Ten Holdings
June 30, 1996
-------------
United Television, Inc. Int'l Family Entertainment, Inc.
Neiman Marcus Group, Inc. AMETEK, Inc.
Liberty Corporation Aztar Corporation
CLARCOR Inc. Dynamics Corp. of America
Lamson & Sessions Company BET Holdings, Inc.
