[PHOTO OMITTED]
The
Gabelli
Equity
Income
Fund
ANNUAL REPORT
SEPTEMBER 30, 1997
<PAGE>
The Gabelli Equity Income Fund
One Corporate Center
Rye, New York 10580-1434
Annual Report -- 1997(c)
To Our Shareholders:
In the third quarter of 1997, buoyed by low inflation, solid corporate
earnings, and ongoing merger and acquisition activity, stocks posted solid
gains. In the process, the market overcame global currency instability and
attendant concerns regarding the earnings prospects for multi-national consumer
staple companies like Coca-Cola, Gillette and Proctor and Gamble. As
demonstrated by the Fund's outstanding returns, stock pickers like us were more
than adequately rewarded for our efforts.
INVESTMENT RESULTS (a)(c)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Calendar Quarter
------------------------------------
1st 2nd 3rd 4th Year
<S> <C> <C> <C> <C> <C>
1997: Net Asset Value................ $14.27 $16.03 $17.39 -- --
Total Return................... 1.2% 12.7% 8.8% -- --
- --------------------------------------------------------------------------------------
1996: Net Asset Value................ $13.47 $13.54 $13.81 $14.16 $14.16
Total Return................... 5.5% 1.0% 2.5% 8.0% 17.9%
- --------------------------------------------------------------------------------------
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%(b) 2.3% 1.1% 3.7% 9.8%(b)
- --------------------------------------------------------------------------------------
</TABLE>
- ---------------------------------------------------
Average Annual Returns - September 30, 1997 (a)
-----------------------------------------------
1 Year............................. 34.0%
5 Year............................. 18.3%
Life of Fund (b)................... 16.9%
- ---------------------------------------------------
(a) Total returns and average annual 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, 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. (b) From commencement of operations on January 2, 1992. (c) The
Fund's fiscal year ends September 30, 1997.
- --------------------------------------------------------------------------------
<PAGE>
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT IN
THE GABELLI EQUITY INCOME FUND AND THE S&P 500 INDEX
[LINE CHART OMITTED]
Investment Performance
For the quarter ended September 30, 1997, The Gabelli Equity Income Fund's
net asset value increased 8.8% to $17.39 after adjusting for the $0.05 per share
dividend paid on September 30, 1997. The Lipper Analytical Services Equity
Income Fund Index and Standard & Poor's (S&P) 500 Index had returns of 8.5% and
7.5%, respectively, over the same period. Each index is an unmanaged indicator
of investment performance. The Fund is up 24.1% year-to-date. The Lipper Equity
Income Fund Index and S&P 500 rose 24.6% and 29.6%, respectively, over the same
nine month period.
For the five-year period ended September 30, 1997, the Fund's return
averaged 18.3% annually, versus average annual returns of 17.6% and 20.8% for
the Lipper Equity Income Fund Index and S&P 500, respectively. Since inception
on January 2, 1992 through September 30, 1997, the Fund has a total return of
145.5%, which equates to an average annual return of 16.9%. The Dividend History
chart details each dividend paid by the Fund since inception.
---------------------------------------------
Dividend History
---------------------------------------------
Rate Reinvestment
---- ------------
Payment (ex) Date Per Share Price
----------------- --------- -----
September 30, 1997 $0.05 $17.39
June 30, 1997 $0.05 $16.03
March 31, 1997 $0.06 $14.27
----------------------------------------------
December 27, 1996 $0.76 $14.28
September 30, 1996 $0.07 $13.81
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
=============================================
2
<PAGE>
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 five years at
The Gabelli Equity Income Fund and for over 20 years at The 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.
[GRAPHIC OMITTED]
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 worldwide 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.
Energy
An important component of our portfolio is invested in energy-related oil
stocks. Demand from the mid-1980s to 1995 increased slowly, on average about
1.5% per year. The growth rate is expected to rise to 2.5% to 3% per year due
mainly to increased worldwide economic activity. Incrementally, this means the
current consumption base of 70 million barrels per day (b/d) could reach
approximately 80 million b/d by the year 2000.
3
<PAGE>
Consumption-million b/d 1992 1995 1996 2000E
- ----------------------- ---- ---- ---- -----
North America 18.0 18.6 19.1 21.0
Europe 15.0 15.3 15.6 16.5
Japan, Australia, New Zealand 6.3 6.7 6.7 7.5
---- ---- ---- ----
Sub-total 39.3 40.6 41.4 45.0
China 2.7 3.4 3.6 5.0
Mexico, Central and South America 5.3 5.7 5.9 7.0
Asia, excluding Japan 6.3 7.8 8.4 11.0
Middle East and Africa 5.6 6.2 6.3 7.0
Former Soviet Union 6.9 4.3 4.0 5.0
---- ---- ---- ----
Total 66.1 68.0 69.6 80.0
Sources: BP Statistical Review; Gabelli & Company, Inc. estimates.
Commentary
Deal Activity Surfaces Value
A component of our investment methodology is to identify industry and
sector trends and themes ahead of the curve and position ourselves to benefit
from these developments. Industry consolidation is one such trend. As we have
discussed in previous letters, the continued strong activity in mergers and
acquisitions is providing a tailwind to the outstanding performance of the Fund
this year. The accompanying table illustrates how deal activity surfaced value
in a small sample of the portfolio holdings.
1997 Completed Deals
Fund Holding 1997 Closing Date 1997 % Return (a)
- ------------ ----------------- -----------------
International Family Entertainment Inc. 9/5 125.4%
Rykoff-Sexton Inc. 7/3 54.3%
Tambrands Inc 7/22 22.0%
NYNEX Corp. 8/15 20.5%
Conrail Inc. 6/2 15.4%
The Economy and the Stock Market: "Bear Watch"
In view of still favorable economic and investment demographic trends, the
Dow Jones Industrial Average is fairly, if not fully, valued at around 8,000. We
do not see many rampant excesses in the current market, but the margin of safety
is razor thin. As the doctors in charge of your financial health, we are always
looking for things that may cause investor indigestion. Accordingly, we are
keeping a close watch on the following developments that may cause us to change
our economic and market diagnoses.
(a) Represents changes in share price and dividends paid from December 31,
1996, through the closing date.
4
<PAGE>
Inflation Watch
In 1981-82, then President Reagan dealt a knockdown blow to labor by
breaking the air traffic controllers strike. The settlement in the recent UPS
strike may indicate labor is finally getting up off the canvas. Labor represents
about two-thirds of U.S. industries' total costs. If labor is making a comeback,
we may see more inflation than the consensus expects.
Profit Taking
Wall Street was soundly in favor of a reduction in the capital gains tax
rate. Long term, it is a positive for stocks. However, shorter term, it may
entice investors to take some profits. Increased profit taking could temporarily
alter the very favorable supply and demand profile stocks have enjoyed for the
last several years.
Currency Turmoil - ASEAN Flu
Thus far, the currency crises in Thailand, the Philippines, Malaysia, and
Singapore have not spread to the Hong Kong dollar, which is the most stable and
critical currency in the region. The same is true in Latin America, where the
recent run on the Brazilian real has failed to upset the Mexican peso. If this
currency virus were to spread further, worldwide stock markets would likely
experience some vertigo.
Stormy Weather
On the food front, El Nino, the unusual weather pattern that threatens
warm, wet weather throughout the U.S. may play havoc with commodities prices. A
late planting season in the Midwest could send food prices higher. A warm winter
throughout the Northern states could send fuel prices lower while oil continues
to be in short term imbalance on the supply side. This could impact earnings
patterns for companies in a range of industry groups.
Having listed some of the things that could disrupt a still favorable
backdrop for the economy and stock market, let us acknowledge the positives.
Inflation remains restrained. With a historically large spread between inflation
and interest rates along the yield curve, rates could trend down from current
levels. Corporate earnings should grow by 8% to 9% in 1998. We do not believe
price/earnings multiples are likely to expand substantially in the year ahead,
but earnings progress could push the stock market higher. Specific to the Fund,
which owns many smaller companies in attractive niche businesses, the lower
capital gains tax rate should help promote even more deal activity in smaller
firms since family managements will be able to keep more of the proceeds from
any such transactions.
The Cars
Everyone knows the bearish view on the domestic auto makers. The economic
expansion is long of tooth, foreshadowing earnings deceleration for cyclical
industries like the autos. The strong dollar versus the Japanese yen is eroding
pricing advantages and shrinking market share. Increased incentives are pinching
profit margins. Finally, there is still excess worldwide capacity in the auto
industry.
5
<PAGE>
We believe the short term bad news is offset by much better than expected
long term prospects. Going forward, we are not likely to experience the kind of
boom and bust cycles that have traditionally punished cyclical companies during
economic downturns. The auto makers are much more efficiently run today. To wit,
a tougher stance with the unions and outsourcing of parts manufacturing has
reduced inventory and assembly costs considerably. The "Big Three" are in the
pink financially, with enormous "war chests" to cushion themselves from an
industry slowdown and allow them to support stock prices through dividend
increases and share repurchase programs. Additionally, they are becoming more
focused by shedding unrelated assets.
We concede that demand, margins and operating earnings may slacken in the
year ahead. Longer term, however, we believe the auto makers will surprise on
the upside. We believe General Motors (GM - $66.9375 - NYSE) is the best
investment vehicle. GM can make more progress on the cost cutting front than
Ford (F - $45.125 - NYSE) or Chrysler (C - $36.8125 - NYSE). It recently
introduced a series of new models which should help it preserve if not gain
market share. GM sold EDS to finance under-funded pension liabilities and is in
the process of selling subsidiary Hughes' defense electronics business to
Raytheon (RTN - $59.125 - NYSE). It will likely spin-off its promising DirecTV
division to shareholders. GM has a big pile of cash it can use to either raise
its dividend or preferably, repurchase shares to leverage earnings. GM stock is
trading at a price/earnings multiple which fully discounts the bad news and does
not reflect the positive changes in the industry and within the company itself.
The Auto After-market: Coming Together
The auto after-market industry has suffered in recent years as it worked
off an extended inventory glut resulting from the elimination of middlemen in
the distribution system. Today, that excess inventory is largely history. Parts
retailers like Genuine Parts (GPC - $30.8125 - NYSE) have restructured
operations. They are entering a period of very easy earnings comparisons. They
do relatively little foreign business, so they are not subject to the
vicissitudes of currency swings. Finally, they are much less cyclical than most
industrial companies. Yet, they trade at big price/earnings and price/cash flow
discounts to the market. Investors have largely overlooked this industry group.
If earnings come in as strong as we anticipate, it should attract investor
attention.
Let's Talk Stocks
The following are stock specifics on selected holdings of our Fund.
Favorable earnings 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 - $81.875 - 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
6
<PAGE>
investment management businesses. The company has significantly expanded the
range of merchants who welcome its cards and is slowly gaining market share.
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 1996, we
believe that American Express has been repositioned to enjoy double digit
earnings growth over the balance of this decade.
BCE Inc. (BCE - $29.875 - NYSE), the holding company for Bell Canada, is
Canada's largest telecommunications company. BCE has controlling interests in
Northern Telecom (NT - $103.9375 - NYSE) and BCEMobile Communications (BCX -
$34.6488 - 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 $20 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.
British Petroleum Co. plc (BP - $90.8125 - NYSE), with an equity market
capitalization exceeding $85 billion, is one of the world's largest integrated
oil companies. Production, which rose 5% during 1996 to over 1.5 million barrels
of oil equivalent (BOE) per day, is slated to rise 5% per year to reach 1.8
million BOE per day by the year 2000 as new projects come on line. The company,
like other major oil producers and refiners, has embarked on a major, $1.5
billion cost-cutting program. As an example, lifting costs in 1996 were reduced
by 20 cents to $2.40 per BOE. Finding costs also were reduced by 20 cents to
$1.30 per BOE. Sizable cost savings are expected to result from the joint
venture in European refining and marketing formed with Mobil. BP is a
substantial cash flow generator, a portion of which has been used to reduce
debt.
Chevron Corp. (CHV - $83.1875 - NYSE) is the third largest U.S. natural gas
producer and is one of the nation's largest crude oil refiners and marketers of
petroleum products. Chevron is the largest supplier of California's mandated
reformulated gasolines. Worldwide production is more than one million barrels of
oil and 2.45 billion cubic feet of natural gas per day. Through its 50% interest
in Caltex Petroleum, Chevron is benefiting from increasing energy consumption in
Southeast Asia. The company's worldwide capital and exploratory expenditures are
slated to reach almost $5 billion in 1997, including overseas exploration and
development projects in Kazakstan (building a pipeline linking the giant Tengiz
oil field to the Black Sea ports) and the North Sea.
Deere & Co. (DE - $53.75 - 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. Weather permitting, bountiful harvests are likely in 1997, so farm
incomes should show substantial increases. Global demand for U.S. wheat and
other crops should further boost farm income. Long term prospects for farm
equipment manufacturers like Deere are enhanced as incomes, diets and standards
of living improve overseas. Deere 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. International sales
account for one-quarter of Deere's revenues.
7
<PAGE>
Eastern Enterprises (EFU - $37.3125 - NYSE) owns and operates Boston Gas Co.,
New England's largest distributor of natural gas, serving 525,000 residential,
commercial and industrial customers. The company also owns and operates Midland
Enterprises, the leading U.S. dry-cargo, inland waterways barge operator with a
fleet of 2,430 barges and 87 tug boats. Midland, headquartered in Cincinnati,
provides low cost marine transportation to much of the country's major
industrial and agricultural regions. Our interest in Eastern Enterprises stems
from management's direction under Woody Ives and from the prospect that the
company's strong balance sheet will be used to make attractive strategic
commitments. The dividend, recently increased to an annual rate of $1.60 per
share, provides an appealing yield approaching 4.3% for this cash rich company.
Exxon Corp. (XON - $64.0625 - NYSE), with an equity market value exceeding $150
billion, is the world's largest publicly owned integrated oil company. The
company produces 1.6 million barrels of crude oil and 6.6 billion cubic feet of
natural gas per day, roughly half of which comes from overseas reserves.
Production is being ramped up 2% to 3% each year. Major, promising projects are
under way in Africa, Russia and Indonesia. 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.
Rhone-Poulenc Rorer Inc. (RPR - $96.6875 - NYSE) announced that its majority
shareholder, Rhone-Poulenc SA, made a $4.5 billion ($97 per share) bid to
acquire the 31.7% stake of Rhone-Poulenc Rorer that it does not already own.
Rhone-Poulenc also said it will combine its chemicals and fibers and polymers
activities into an independent company that will be floated on the stock market
in 1998. The plan is the latest in a series of restructurings that have
transformed the global chemical and pharmaceutical industries during the decade.
Driven by a desire to break up conglomerates, most large groups that once
included both chemicals and pharmaceutical businesses have opted to focus on one
activity or the other.
Southwest Gas Corp. (SWX - $19.625 - NYSE) is a natural gas utility based in Las
Vegas, providing natural gas service to approximately 1.1 million residential,
commercial and industrial customers in the fastest growing regions of the United
States - Arizona, Nevada and parts of northern and southern California. The
company added 63,000 customers during 1996, which was another record breaking
year. A settlement with Arizona regulators granting the gas utility an increase
of over $30 million in base rates is expected to impact cash flow and earnings
starting in the fourth quarter.
Texaco Inc. (TX - $61.4375 - 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. Texaco is buying Monterey Reserves for $1.1 billion plus
assumption of roughly $300 million of Monterey debt. This transaction materially
enhances Texaco's California heavy oil operations. An international group that
includes Texaco has discovered oil in the South China Sea. 1997 looks to be a
record year for Texaco in the generation of cash flow and earnings.
8
<PAGE>
Minimum Initial Investment - $1,000
The Fund's minimum initial investment for both regular and retirement
accounts is $1,000. There are no subsequent investment minimums. No initial
minimum is required for those establishing an Automatic Investment Plan.
Additionally, The Gabelli Equity Income Fund and other Gabelli Funds are
available through the no-transaction fee programs at many major discount
brokerage firms.
No Load - Effective August 12, 1996
Effective August 12, 1996, the Fund no longer imposes a front-end sales
charge. All purchases made after August 12, 1996 are no load, that is, without a
sales charge.
Gabelli U.S. Treasury Money Market Fund
Shareholders of any of the Gabelli Funds may invest in The Gabelli U.S.
Treasury Money Market Fund with an initial investment of $3,000 or more. The
Fund provides checkwriting and exchange privileges. The Fund's expenses are
capped at .30% of average net assets, making it one of the most attractive U.S.
Treasury-only money market funds. With dividends that are exempt from state and
local income taxes in all states, the Fund is an excellent vehicle in which to
store idle cash. An investment in The Gabelli U.S. Treasury Money Market Fund is
neither insured nor guaranteed by the U.S. Government. There can be no assurance
that the Fund will maintain a stable $1 per share net asset value. Call us at
1-800-GABELLI (1-800-422-3554) for a prospectus which gives a more complete
description of the Fund, including management fees and expenses. Read the
prospectus carefully before you invest or send money.
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, IRAs, 401(k)s, quarterly reports, closing prices and other
current news. You can send us e-mail at [email protected].
In Conclusion
Little has changed in the favorable economic backdrop for stocks. That
does not necessarily mean there are not potential problems that could upset the
market apple cart. Barring any unexpected economic dilemmas, stocks should
continue to deliver respectable returns. More important, in our view, the market
is broadening and investors once again appear to be focusing on fundamental
value. Already, strong deal activity is gaining momentum. The capital gains tax
cut should encourage smaller niche companies' "urge to merge" in the year ahead.
We close ever mindful of the potholes that will invariably challenge
equities investors, but remain confident the Fund's portfolio is well-positioned
to endure the long investment journey to your financial success.
9
<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
business day for further information.
As always, we thank you for your confidence in our investment abilities
and will strive to preserve the assets you have entrusted to us.
Sincerely,
/s/ Mario J. Gabelli /s/ James Foung
Mario J. Gabelli, CFA James Foung, CFA
Portfolio Manager and Associate Portfolio Manager
Chief Investment Officer
October 25, 1997
- --------------------------------------------------------------------------------
Top Ten Holdings
September 30, 1997
------------------
Rhone-Poulenc Rorer Inc. Eastern Enterprises
Exxon Corp. Texaco Inc.
Chevron Corp. BCE Inc.
American Express Co. Southwest Gas Corp.
British Petroleum Co. plc Deere & Co.
- --------------------------------------------------------------------------------
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.
10
<PAGE>
The Gabelli Equity Income Fund
Portfolio of Investments -- September 30, 1997
================================================================================
Market
Shares Value
------ -----
COMMON STOCKS -- 82.14%
AEROSPACE -- 0.91%
10,000 Boeing Co. ................................. $ 544,375
2,000 Rockwell International Corp. ............... 125,875
----------
670,250
----------
AUTOMOTIVE -- 1.49%
6,500 Ford Motor Co. ............................. 294,125
12,000 General Motors Corp. ....................... 803,250
----------
1,097,375
----------
AUTOMOTIVE: PARTS AND ACCESSORIES -- 1.52%
2,500 Dana Corp. ................................. 123,438
20,000 GenCorp Inc. ............................... 568,750
14,000 Genuine Parts Co. .......................... 431,375
----------
1,123,563
----------
AVIATION: PARTS AND SERVICES -- 2.17%
10,000 Barnes Group ............................... 283,125
9,500 Curtiss-Wright Corp. ....................... 735,062
3,000 General Motors Corp., Cl. H ................ 198,938
1,000 Raytheon Co. ............................... 59,125
4,000 United Technologies ........................ 324,000
----------
1,600,250
----------
BUSINESS SERVICES -- 1.67%
2,000 Cognizant Corp. ............................ 81,500
4,000 Dun & Bradstreet Corp. ..................... 113,500
300 Imation Corp.* ............................. 8,006
9,000 International Business Machines Corp. ...... 953,438
3,000 Landauer Inc. .............................. 75,000
----------
1,231,444
----------
COMMUNICATIONS EQUIPMENT -- 0.10%
1,000 Motorola Inc. .............................. 71,875
----------
CONSUMER PRODUCTS -- 5.09%
4,000 Eastman Kodak Co. .......................... 259,750
12,000 Fortune Brands Inc. ........................ 404,250
50,000 Gallaher Group plc, ADR* ................... 959,374
6,001 General Cigar Holdings Inc.* ............... 173,277
12,000 General Electric Co. ....................... 816,750
4,000 Gillette Co. ............................... 345,250
15,000 National Presto Industries Inc. ............ 630,938
4,000 Philip Morris Companies Inc. ............... 166,250
----------
3,755,839
----------
DIVERSIFIED INDUSTRIAL -- 2.72%
9,137 GATX Corp. ................................. 617,319
7,500 Honeywell Inc. ............................. 503,906
4,000 Minnesota Mining & Manufacturing Co. ....... 370,000
1,000 Tenneco Inc. ............................... 47,875
14,000 Thomas Industries Inc. ..................... 420,000
1,000 Trinity Industries Inc. .................... 48,250
----------
2,007,350
----------
ENERGY-ELECTRIC -- 1.10%
30,007 Citizens Utilities Co., Cl. B* ............. 277,565
1,000 FPL Group Inc. ............................. 51,250
32,000 Niagara Mohawk Power Corp.* ................ 306,000
8,000 PacifiCorp. ................................ 179,000
----------
813,815
----------
ENERGY-NATURAL GAS -- 9.66%
19,000 Bay State Gas Co. .......................... 553,375
2,000 Berkshire Gas Co. .......................... 33,000
24,000 Colonial Gas Co. ........................... 592,500
27,000 Commonwealth Energy System ................. 729,000
49,000 Eastern Enterprises ........................ 1,828,312
58,000 ENI SpA .................................... 366,089
2,500 Essex County Gas Co. ....................... 71,875
6,000 Fall River Gas Co. ......................... 81,750
3,000 KeySpan Energy Corp. ....................... 100,125
4,000 Peoples Energy Corp. ....................... 150,750
72,000 Southwest Gas Corp. ........................ 1,413,000
20,000 Tejas Gas Corp.* ........................... 1,201,250
----------
7,121,026
----------
ENERGY-OIL -- 17.48%
13,000 Atlantic Richfield Co. ..................... 1,110,688
22,500 British Petroluem Co. plc, ADR ............. 2,043,280
15,000 Burlington Resources Inc ................... 769,688
29,000 Chevron Corp. .............................. 2,412,437
5,000 Elf Aquitaine SA ........................... 333,438
46,000 Exxon Corp. ................................ 2,946,874
20,000 Halliburton Co. ............................ 1,040,000
8,000 Pennzoil Co. ............................... 637,500
26,000 TexaCo. Inc. ............................... 1,597,375
----------
12,891,280
----------
ENTERTAINMENT -- 0.33%
2,000 PolyGram NV, ADR ........................... 114,875
4,000 Viacom Inc., Cl. A* ........................ 125,750
----------
240,625
----------
EQUIPMENT AND SUPPLIES -- 5.58%
15,000 Aeroquip-Vickers Inc. ...................... 735,000
4,800 Caterpillar Inc. ........................... 258,900
2,000 Co.oper Industries Inc. .................... 108,125
25,000 Deere & Co. ................................ 1,343,750
10,000 EG&G Inc. .................................. 206,875
17,250 Ingersoll Rand Co. ......................... 742,828
1,500 Minerals Technologies Inc. ................. 66,844
14,000 Smith (A.O.) Corp., Cl. B .................. 554,750
2,000 Union Carbide Corp. ........................ 97,375
----------
4,114,447
----------
FINANCIAL SERVICES -- 12.36%
28,000 American Express Co. ....................... 2,292,499
29,000 Banco Santander SA, ADR .................... 946,125
The accompanying notes are an integral part of the financial statements.
11
<PAGE>
The Gabelli Equity Income Fund
Portfolio of Investments (Continued) -- September 30, 1997
================================================================================
Market
Shares Value
------ -----
COMMON STOCKS (Continued):
10,000 BankAmerica Co. ............................ $ 733,125
3,000 Bankers Trust Co. .......................... 367,500
25,000 Commerzbank AG, Sponsored ADR .............. 901,658
16,000 Deutsche Bank AG, ADR. ..................... 1,126,946
500 Fidelity National Corp.* ................... 4,375
3,000 Mellon Bank Corp. .......................... 164,250
10,000 Morgan (J.P.) & Co. Inc. ................... 1,136,250
3,000 Northern Trust Co. ......................... 177,375
12,000 SunTrust Banks Inc. ........................ 815,250
2,200 Transamerica Corp. ......................... 218,900
4,000 U.S. Trust Corp. ........................... 225,500
-----------
9,109,753
-----------
FOOD AND BEVERAGE-- 0.79%
4,000 Heinz (H.J.) Co. ........................... 184,750
7,000 Kellogg Co. ................................ 294,875
2,000 Quaker Oats Co. ............................ 100,750
-----------
580,375
-----------
HEALTH CARE-- 6.52%
10,000 Johnson & Johnson .......................... 576,250
10,000 Pharmacia & Upjohn Inc. .................... 365,000
40,000 Rhone-Poulenc Rorer Inc. ................... 3,867,500
-----------
4,808,750
-----------
METALS AND MINING -- 0.88%
17,000 Freeport-McMoRan Copper & Gold Inc., Cl. B . 489,812
3,500 Freeport-McMoRan Inc. ...................... 124,688
1,000 Pioneer Group Inc. ......................... 32,000
-----------
646,500
-----------
PUBLISHING-- 0.82%
3,000 Dow Jones & Co. Inc. ....................... 140,250
6,000 Harcourt General Inc. ...................... 297,375
2,000 McGraw-Hill Companies Inc. ................. 135,375
1,000 Readers Digest Association Inc., Cl. B ..... 28,500
-----------
601,500
-----------
REAL ESTATE -- 0.06%
2,500 Griffin Land & Nurseries Inc.* ............. 42,813
-----------
RETAIL -- 0.38%
5,000 Giant Food Inc., Cl. A. .................... 162,813
2,000 Sears, Roebuck & Co. ....................... 113,875
-----------
276,688
-----------
SPECIALTY CHEMICALS -- 1.92%
2,000 E.I. du Pont de Nemours and Co. ............ 123,125
5,000 Ferro Corp. ................................ 190,938
15,000 Grace (W.R.) & Co. ......................... 1,104,375
-----------
1,418,438
-----------
TELECOMMUNICATIONS-- 8.20%
5,000 ALLTEL Corp. ............................... 172,500
18,000 BC Telecom Inc. ............................ 465,315
50,000 BCE Inc. ................................... 1,493,749
2,304 Bell Atlantic Corp. ........................ 185,328
2,000 British Telecommunications plc, ADR ........ 133,250
7,500 Cable & Wireless plc, ADR. ................. 194,063
1,000 Deutsche Telekom AG, Sponsored ADR ......... 19,063
27,000 GTE Corp. .................................. 1,225,124
10,000 Hong Kong Telecommunications Ltd.,ADR ...... 223,750
1,000 SBC Communications Inc. .................... 61,375
29,000 Southern New England Telecommunications
Corp. ..................................... 1,187,188
3,500 Telecom Italia SpA, ADR .................... 234,938
4,000 Telefonica de Espana, ADR .................. 376,500
2,000 U S WEST Communications Group .............. 77,000
-----------
6,049,143
-----------
WIRELESS COMMUNICATIONS -- 0.39%
12,000 COMSAT Corp. ............................... 285,750
-----------
TOTAL COMMON STOCKS ........................ 60,558,849
-----------
CONVERTIBLE PREFERRED STOCKS -- 2.68%
BROADCASTING -- 0.20%
2,500 Granite Broadcasting Corp. $1.938 Cv. Pfd... 150,000
-----------
ENTERTAINMENT -- 0.03%
500 Metromedia International Group Inc. ........ 25,719
-----------
EQUIPMENT AND SUPPLIES -- 0.70%
2,500 Navistar International Corp.
$6.00 Cv. Pfd. Ser. G .................... 151,250
4,000 Sequa Corp. $5.00 Cv. Pfd. ................. 362,000
-----------
513,250
-----------
METALS AND MINING -- 0.19%
5,000 Freeport-McMoRan Copper & Gold Inc.
7.00% Cv. Pfd. .......................... 138,438
-----------
PUBLISHING -- 0.15%
2,000 Golden Books Family Entertainment Inc.
8.75% Cv. Pfd. (a) ....................... 111,250
-----------
TELECOMMUNICATIONS -- 1.41%
22,000 Sprint Corp. $2.6301 Cv. Pfd. .............. 827,749
4,000 U S WEST Communications Group .............. 212,000
-----------
1,039,749
-----------
TOTAL CONVERTIBLE
PREFERRED STOCKS ......................... 1,978,406
-----------
Principal
Amount
------
CONVERTIBLE CORPORATE BONDS -- 5.34%
BUSINESS SERVICES -- 0.13%
$100,000 BBN Corp. Sub. Deb. Cv.
6.00%, 04/01/12 .......................... 96,625
-----------
CONSUMER PRODUCTS -- 0.81%
700,000 Fieldcrest Cannon Inc. Sub. Deb. Cv.
6.00%, 03/15/12 .......................... 595,000
-----------
The accompanying notes are an integral part of the financial statements.
12
<PAGE>
The Gabelli Equity Income Fund
Portfolio of Investments (Continued) -- September 30, 1997
================================================================================
Principal Market
Amount Value
------ -----
CONVERTIBLE CORPORATE BONDS (Continued)
CONSUMER SERVICES -- 1.65%
$ 800,000 HSN Inc. Sub. Deb. Cv.
5.875%, 03/01/06(a) ..................... $ 1,216,000
-----------
ENERGY -- 0.27%
100,000 Pennzoil Co. Sub. Deb. Cv.
6.50%, 01/15/03 ......................... 199,760
-----------
ENTERTAINMENT -- 0.18%
150,000 Savoy Pictures Entertainment Inc.
Sub. Deb. Cv. 7.00%, 07/01/03 ........... 133,500
-----------
EQUIPMENT AND SUPPLIES -- 0.56%
398,000 Kollmorgen Corp. Sub. Deb. Cv.
8.75%, 05/01/09 ......................... 409,940
-----------
HOTELS and GAMING -- 0.08%
50,000 Hilton Hotels Corp. Sub. Deb. Cv.
5.00%, 05/15/06 (a) ..................... 58,875
-----------
PUBLISHING -- 0.92%
100,000 News America Holdings Inc. Sub.
Deb. Cv. Zero Cpn., 03/31/02 ............ 78,625
600,000 Thomas Nelson Inc. Sub. Deb. Cv.
5.75%, 11/30/99 (a) ..................... 603,000
-----------
681,625
-----------
RETAIL -- 0.47%
400,000 General Host Corp. Sub. Deb. Cv.
8.00%, 02/15/02 ......................... 350,000
-----------
TRANSPORTATION -- 0.27%
200,000 Greyhound Lines Inc. Sub. Deb. Cv.
8.50%, 03/31/07 ......................... 197,000
-----------
TOTAL CONVERTIBLE
CORPORATE BONDS ......................... 3,938,325
-----------
U.S. GOVERNMENT OBLIGATIONS -- 9.86%
$7,300,000 U.S. Treasury Bills, 4.50% to 5.05%,
due 10/16/97 to 11/20/97 ................ 7,267,377
-----------
Total U.S. GOVERNMENT
OBLIGATIONS ............................. 7,267,377
-----------
Total INVESTMENTS -- 100.02%
(Cost $49,295,818)+ ..................... 73.742,957
-----------
Other Assets and
Liabilities (Net) -- (0.2%) ............. (12,741)
-----------
NET ASSETS -- 100%
(4,239,209 shares outstanding) .......... $73,730,216
===========
Net Asset Value, Offering and
Redemption Price Per Share .............. $ 17.39
===========
---------------------------
+For Federal tax purposes:
Aggregate cost $49,500,409
===========
Gross unrealized appreciation 24,380,476
Gross unrealized depreciation (137,928)
-----------
Net unrealized appreciation $24,242,548
===========
- ----------------
(a) -- 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. At
September 30, 1997, the market value of rule 144A securities amounted to
$1,930,250 or 2.62% of net assets.
* -- Non-income producing security.
ADR -- American Depository Receipt.
The accompanying notes are an integral part of the financial statements.
13
<PAGE>
The Gabelli Equity Income Fund
Statement of Assets and Liabilities
September 30, 1997
================================================================================
Assets:
Investments, at value (cost $49,295,818) ................... $73,742,957
Foreign cash, at value (cost $8,195) ....................... 8,051
Receivable for Fund shares sold ............................ 7,600
Receivable for investments sold ............................ 161,544
Dividends and interest receivable .......................... 164,882
-----------
Total assets ............................................. 74,085,034
-----------
Liabilities:
Payable for investments purchased .......................... 68,340
Payable to custodian ....................................... 104,322
Payable for investment advisory fees ....................... 59,621
Payable for distribution fees .............................. 29,953
Payable for shareholder servicing fees ..................... 23,240
Payable for dividends ...................................... 14,798
Payable for audit fees ..................................... 29,500
Other accrued expenses ..................................... 25,044
-----------
Total liabilities ........................................ 354,818
-----------
Net Assets (applicable to 4,239,209
shares outstanding) ..................................... $73,730,216
===========
Net Asset Value, offering and
redemption price per share .............................. $ 17.39
===========
Net Assets Consist of:
Capital Stock, at par value ................................ $ 4,239
Additional paid-in capital ................................. 42,373,323
Accumulated undistributed
net investment income ..................................... 176,441
Accumulated undistributed net realized gain on
investments and foreign currency transactions ............. 6,730,336
Net unrealized appreciation on
investments and assets and liabilities
denominated in foreign currencies ......................... 24,445,877
-----------
Net Assets ............................................... $73,730,216
===========
Statement of Operations
For the Year Ended September 30, 1997
================================================================================
Investment Income:
Dividends (net of foreign withholding tax
of $40,284) ............................................... $ 1,562,327
Interest ................................................... 489,145
-----------
Total investment income .................................. 2,051,472
-----------
Expenses:
Investment advisory fees ................................... 640,070
Distribution fees .......................................... 159,992
Shareholder servicing fees ................................. 132,215
Directors' Fees ............................................ 29,735
Miscellaneous expenses ..................................... 176,584
-----------
Total expenses ........................................... 1,138,596
-----------
Net Investment Income ......................................... 912,876
-----------
Net Realized and Unrealized Gain on Investments:
Net realized gain on investments,
foreign currency transactions
and futures contracts ..................................... 7,289,794
Net change in unrealized appreciation
of investments ............................................ 10,713,542
-----------
Net realized and unrealized gain on
investments, foreign currency
transactions and futures contracts ...................... 18,003,336
-----------
Net increase in net assets resulting from
operations ................................................. $18,916,212
===========
Statement of Changes in Net Assets
================================================================================
Year Ended September 30,
----------------------------
1997 1996
----------------------------
Operations:
Net investment income ........................... $ 912,876 $ 1,117,055
Net realized gain on investments ................ 7,289,794 2,561,519
Net change in unrealized appreciation
of investments ................................. 10,713,542 4,939,022
------------ ------------
Net increase in net assets resulting
from operations .............................. 18,916,212 8,617,596
------------ ------------
Distributions to shareholders from:
Net investment income ........................... (912,876) (1,142,065)
In excess of net investment income .............. (6,607) (27,356)
Net realized gain on investments ................ (2,841,998) (2,515,013)
------------ ------------
Total Distributions to Shareholders ............. (3,761,481) (3,684,434)
------------ ------------
Share transactions -- net ....................... 1,569,224 (2,732,464)
------------ ------------
Net increase in net assets .................. 16,723,955 2,200,698
Net Assets:
Beginning of year ............................... 57,006,261 54,805,563
------------ ------------
End of year ..................................... $ 73,730,216 $ 57,006,261
============ ============
See accompanying notes to financial statements.
14
<PAGE>
The Gabelli Equity Income Fund
Notes to Financial Statements
================================================================================
1. Significant Accounting Policies. The Gabelli Equity Income Fund (the "Fund")
is a series of Gabelli Equity Series Funds, Inc. (the "Corporation"). The
Corporation was incorporated in Maryland on July 25, 1991. Prior to January 2,
1992 (commencement of operations), the Fund had no operations other than the
sale of 10,000 shares of common stock at $10.00 per share to Gabelli Funds,
Inc., the Fund's adviser, on November 12, 1991. The Fund is an open-end,
diversified management investment company and one of two separately managed
portfolios of the Corporation. The preparation of financial statements in
accordance with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts and disclosures
in the financial statements. Actual results could differ from those estimates.
The following is a summary of significant accounting policies followed by the
Fund in the preparation of its financial statements.
Security Valuation. Portfolio securities listed or traded on a nationally
recognized securities exchange, quoted by the National Association of Securities
Dealers Automated Quotations, Inc. ("NASDAQ") or traded on foreign exchanges are
valued at the last sale price on that exchange (if there were no sales that day,
the security is valued at the average of the bid and asked prices). All other
portfolio securities for which over-the-counter market quotations are readily
available are valued at the latest average of the bid and asked prices. When
market quotations are not readily available, portfolio securities are valued at
their fair value as determined in good faith under procedures established by and
under the general supervision of the Corporation's Directors. Short-term debt
securities with remaining maturities of 60 days or less are valued at amortized
cost, unless the Directors determine such does not reflect the securities' fair
value, in which case these securities will be valued at their fair value as
determined by the Directors. Options are valued at the last sale price on the
exchange on which they are listed. If no sales of such options have taken place
that day, they will be valued at the mean between their closing bid and asked
prices.
Foreign Currency Translations. The books and records of the Fund are maintained
in U.S. dollars as follows:
(i) market value of investment securities and other assets and liabilities are
recorded at the exchange rate on the valuation date.
(ii) purchases and sales of investment securities, income and expenses are
recorded at the exchange rate prevailing on the respective date of such
transactions.
Futures Contracts. The Fund 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. Upon entering into a futures
contract, the Fund is required to deposit with the broker an amount of cash or
cash equivalents equal to a certain percentage of the contract amount. This is
known as the "initial margin." Subsequent payments ("variation margin") are made
or received by the Fund each day, depending on the daily fluctuation of the
value of the contract. The daily changes in the contract are recorded as
unrealized gains or losses. The Fund recognizes a realized gain or loss when the
contract is closed. The Fund sold short futures contracts aggregating
$21,222,375 and closed short futures contracts aggregating $21,356,910 during
the year ended September 30, 1997. As of September 30, 1997, there were no open
futures contracts.
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 that
the Fund may not be able to enter into a closing transaction because of an
illiquid secondary market.
Forward Foreign Currency Contracts. The Fund 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 currency contracts are valued at the
15
<PAGE>
The Gabelli Equity Income Fund
Notes to Financial Statements (continued)
================================================================================
forward rate and are marked-to-market daily. The change in market value is
recorded by the Fund as an unrealized gain or loss. When the contract is closed,
the Fund 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 currency contracts does not eliminate fluctuations in
the underlying prices of the Fund's portfolio securities, but it does establish
a rate of exchange that can be achieved in the future. Although forward foreign
currency 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 Fund could be exposed to risks
if the counterparties to the contracts are unable to meet the terms of their
contracts.
At September 30, 1997, the Fund had sold short the following forward foreign
currency contract:
Amount/Currency Settlement Date Value Unrealized (Loss)
---------------- --------------- --------- -----------------
1,700,000 Hong Kong Dollars 2/26/98 $217,155 ($1,121)
Options. The Fund may purchase or write call or put options on securities or
indices. As a writer of call options, the Fund receives a premium at the outset
and then bears the market risk of unfavorable changes in the price of the
financial instrument underlying the option. The Fund would incur a loss if the
price of the underlying financial instrument increases between the date the
option is written and the date on which the option is terminated. The Fund would
realize a gain, to the extent of the premium, if the price of the financial
instrument decreases between those dates.
As a purchaser of put options, the Fund pays a premium for the right to sell to
the writer of the put option the underlying security at a specified price. The
seller of the put has the obligation to purchase the underlying security upon
exercise at the exercise price. If the price of the underlying security
declines, the Fund would realize a gain upon sale or exercise. If the price of
the underlying security increases, the Fund would realize a loss upon sale or at
the expiration date, but only to the extent of the premium paid.
During the year ended September 30, 1997, the Fund utilized put and call options
to hedge the value of the Fund's portfolio. Transactions in options during the
year ended September 30, 1997 were as follows:
Written call options:
---------------------
Number of
Contracts Premium
------------------
Options outstanding at October 1, 1996................... 10 $ 5,094
Options written.......................................... -- --
Options purchased........................................ -- --
Options exercised........................................ (10) (5,094)
--- ------
Options outstanding at September 30, 1997................ 0 $ 0
=== =======
Short-Sales. The Fund is authorized to engage in short-selling which obligates
the Fund to replace the security borrowed by purchasing the security at current
market value sometime in the future. The Fund would incur a loss if the price of
the security increases between the date of the short sale and the date on which
the Fund replaces the borrowed security. The Fund would realize a gain if the
price of the security declines between those dates. Until the Fund replaces the
borrowed security, the Fund will maintain a segregated account with cash and/or
U.S. Government securities sufficient to cover its short position on a daily
basis. At September 30, 1997, there were no short positions.
16
<PAGE>
The Gabelli Equity Income Fund
Notes to Financial Statements (continued)
================================================================================
Securities Transactions and Investment Income. Security transactions are
accounted for on the trade date with realized gain or loss on investments
determined by using specific identification as the cost method. Interest income
(including amortization of premium and accretion of discount) is recorded as
earned. Dividend income and dividend and capital gain distributions to
shareholders are recorded on the ex-dividend date.
Dividends and Distributions to Shareholders. Dividends and distributions to
shareholders are recorded on the ex-dividend date. Income distributions and
capital gain distributions are determined in accordance with income tax
regulations which may differ from generally accepted accounting principles.
These differences are primarily due to differing treatments of income and gains
on various investment securities held by the Fund, timing differences and
differing characterization of distributions made by the Fund.
As of September 30, 1997, the following reclassifications have been made to
increase (decrease) such accounts with offsetting adjustments made to additional
paid-in-capital:
Accumulated Accumulated Undistributed Net
Undistributed Net Realized (Loss) on Investments
Investment Income and Foreign Currency Transactions
----------------- --------------------------------
$210,404 ($294,555)
Provision for Income Taxes. The Fund has qualified and intends to continue to
qualify as a regulated investment company under Subchapter M of the Internal
Revenue Code of 1986, as amended. As a result, a Federal income tax provision is
not required.
2. Investment Advisory Agreement. The Fund has entered into an investment
advisory agreement (the "Advisory Agreement") with the Adviser which provides
that the Fund will pay the Adviser a fee, computed daily and paid monthly, at
the annual rate of 1.00% of the value of the Fund's average daily net assets. In
accordance with the Advisory Agreement, the Adviser provides a continuous
investment program for the Fund's portfolio, oversees the administration of all
aspects of the Fund's business and affairs, and pays the compensation of all
Officers and Directors of the Fund who are its affiliates.
3. Distribution Plan. The Fund's Board of Directors has adopted a distribution
plan (the "Plan") pursuant to Rule 12b-1 under the Investment Company Act of
1940. For the year ended September 30, 1997, the Fund incurred distribution
costs payable to Gabelli & Company, Inc., an indirect wholly-owned subsidiary of
the Adviser, of $159,992, or 0.25% of average net assets, the annual limitation
under the Plan.
4. Portfolio Securities. Purchases and sales of securities for the year ended
September 30, 1997, other than U.S. Government obligations, short-term
securities and securities sold short, aggregated $25,848,916 and $33,496,802,
respectively.
5. Transactions with Affiliates. During the year ended September 30, 1997, the
Fund paid brokerage commissions, of $19,323 to Gabelli & Company, Inc. an
affiliate of the adviser.
6. Capital Stock Transactions. Transactions in shares of common stock were as
follows:
<TABLE>
<CAPTION>
Year ended September 30,
--------------------------------------------------
1997 1996
------------------------ -----------------------
Shares Amount Shares Amount
---------- ----------- -------- ------------
<S> <C> <C> <C> <C>
Shares sold................................. 920,283 $13,914,893 303,716 $ 4,038,336
Shares issued upon reinvestment of dividends 243,710 3,536,567 267,164 3,474,191
Shares redeemed............................. (1,052,497) (15,882,236) (775,940) (10,244,991)
---------- ----------- -------- ------------
Net increase (decrease)................... 111,496 $ 1,569,224 (205,060) $ (2,732,464)
========== =========== ======== ============
</TABLE>
17
<PAGE>
The Gabelli Equity Income Fund
Financial Highlights
================================================================================
Selected data for a share of capital stock outstanding throughout each year:
<TABLE>
<CAPTION>
For the Year Ended September 30,
-----------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Operating Performance:
Net asset value, beginning of year ................. $ 13.81 $ 12.65 $ 11.54 $ 12.15 $ 10.40
------- ------- ------- ------- -------
Net investment income .............................. 0.22 0.28 0.29 0.30 0.29
Net realized and unrealized gain on investments .... 4.28 1.76 1.77 0.08 1.81
------- ------- ------- ------- -------
Total income from investment operations ............ 4.50 2.04 2.06 0.38 2.10
------- ------- ------- ------- -------
Distributions:
Dividends from net investment income ............... (0.22) (0.28) (0.29) (0.31) (0.29)
Distributions in excess of net investment income ... -- (0.01) -- -- --
Dividends from net realized gain on investments .... (0.70) (0.59) (0.66) (0.68) (0.06)
------- ------- ------- ------- -------
Total distributions ................................ (0.92) (0.88) (0.95) (0.99) (0.35)
------- ------- ------- ------- -------
Net asset value, end of year ....................... $ 17.39 $ 13.81 $ 12.65 $ 11.54 $ 12.15
======= ======= ======= ======= =======
Total Return (a) ................................... 34.00% 16.65% 19.24% 3.30% 20.50%
======= ======= ======= ======= =======
Ratios to average net assets and supplemental data:
Net assets, end of year (in thousands) ............. $73,730 $57,006 $54,806 $50,191 $54,585
Ratio of operating expenses to average net assets .. 1.78% 1.93% 1.83% 1.81% 1.78%
Ratio of net investment income to average net assets 1.42% 1.99% 2.50% 2.58% 2.62%
Portfolio turnover rate ............................ 43% 20% 30% 20% 76%
Average commission rate per share (b) .............. $0.0464 $0.0480 -- -- --
</TABLE>
- ----------
(a) Total return represents aggregate total return of a hypothetical $1,000
investment at the beginning of the period and sold at the end of the
period including reinvestment of dividends.
(b) For fiscal years beginning after September 1, 1995, the SEC requires the
Fund to disclose of the average commission rate paid per share for
purchases and sales of investment securities.
18
<PAGE>
The Gabelli Equity Income Fund
Report of Ernst & Young LLP, Independent Auditors
================================================================================
Shareholders and Board of Directors
The Gabelli Equity Income Fund
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of The Gabelli Equity Income Fund (a series of
Gabelli Equity Series Funds, Inc.) as of September 30, 1997, and the related
statement of operations for the year then ended, the statement of changes in net
assets for each of the two years in the period then ended, and the financial
highlights for each of the periods indicated therein. These financial statements
and financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and financial highlights. Our procedures included confirmation of
securities owned as of September 30, 1997 by correspondence with the custodian.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of The
Gabelli Equity Income Fund at September 30, 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 indicated
periods, in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
New York, New York
November 15, 1997
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1997 TAX NOTICE TO SHAREHOLDERS (Unaudited)
For the fiscal year ended September 30, 1997, the Fund paid to shareholders
ordinary income dividends (comprised of net investment income and short term
capital gains) totalling $0.34 per share. Additionally, the $0.58 per share
distribution of long term capital gains paid on December 27, 1996 was designated
by the Board of Directors as a capital gain distribution. For fiscal year 1997,
70.59% of the ordinary income dividend qualifies for the dividend received
deduction available to corporations.
U.S. Government Income:
The percentage of the ordinary income dividend paid by the Fund during fiscal
1997 which was derived from U.S. Treasury securities was 8.95%. Such income is
exempt from state and local income tax in all states. However, many states,
including New York and California, allow a tax exemption for a portion of the
income earned only if a mutual fund has invested at least 50% of its assets at
the end of each quarter of the Fund's fiscal year in U.S. Government securities.
The Gabelli Equity Income Fund did not meet this strict requirement in 1997. Due
to the diversity in state and local tax law, it is recommended that you consult
your personal tax advisor for the applicability of the information provided as
to your specific situation.
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19
<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
Chairman and Chief
Investment Officer
Gabelli Funds, Inc.
Anthony J. Colavita
Attorney-at-Law
Anthony J. Colavita, P.C.
John D. Gabelli
Vice President
Gabelli & Company, Inc.
Karl Otto Pohl
Former President
Deutsche Bundesbank
Anthony R. Pustorino
Certified Public Accountant
Professor, Pace University
Felix J. Christiana
Former Senior
Vice President
Dollar Dry Dock Savings Bank
Vincent D. Enright
Senior Vice President and
Chief Financial Officer
KeySpan Energy Corp.
Robert J. Morrissey
Attorney-at-Law
Morrissey & Hawkins
Anthonie C. van Ekris
Managing Director
BALMAC International, Inc.
Officers
Mario J. Gabelli, CFA
President and
Chief Investment Officer
Bruce N. Alpert
Vice President and Treasurer
James E. McKee
Secretary
James Foung, CFA
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, LLP
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This report is submitted for the general information of the shareholders of The
Gabelli Equity Income Fund. It is not authorized for distribution to prospective
investors unless preceded or accompanied by an effective prospectus.
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