[PHOTO]
The
Gabelli
Equity
Income
Fund
THIRD QUARTER REPORT
JUNE 30, 1997
<PAGE>
The Gabelli Equity Income Fund
One Corporate Center
Rye, New York 10580-1434
Third Quarter Report
June 30, 1997(a)
To Our Shareholders:
In the second quarter of 1997, equities investors concluded that inflation
was just a bad dream after all and that "Captain Greenspan" was bringing the
economy in for another soft landing. Blue chip stocks remained in the limelight,
but smaller stocks participated in the surge. The Dow Jones Industrial Average
(DJIA) gained 17.1%.
INVESTMENT RESULTS (b)
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<CAPTION>
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Calendar Quarter
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1st 2nd 3rd 4th Year
--- --- --- --- ----
<S> <C> <C> <C> <C> <C>
1997: Net Asset Value...................... $14.27 $16.03 __ __ __
Total Return......................... 1.2% 12.7% __ __ __
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1996: Net Asset Value...................... $13.47 $13.54 $13.81 $14.16 $14.16
Total Return......................... 5.5% 0.1% 2.5% 8.0% 17.9%
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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%
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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%
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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%
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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)
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Average Annual Returns - June 30, 1997 (b)
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1 Year..................................... 26.2%
5 Year..................................... 16.6%
Life of Fund (c)........................... 16.0%
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(a) The Fund's fiscal year ends September 30, 1997. (b) 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. (c)
From commencement of operations on January 2, 1992.
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<PAGE>
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Dividend History
--------------------------------------------------------
Rate Reinvestment
Payment (ex) Date Per Share Price
----------------- --------- ------------
June 30, 1997 $0.05 $16.03
March 31, 1997 $0.06 $14.27
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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
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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
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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
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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
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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
- ------------------------------------------------------------
Investment Performance
For the third quarter ended June 30, 1997, The Gabelli Equity Income
Fund's net asset value increased 12.7% to $16.03 after adjusting for the $0.05
per share dividend paid on June 30, 1997. The Lipper Analytical Services Equity
Income Fund Index and Standard & Poor's (S&P) 500 Index had returns of 12.8% and
17.5%, respectively, over the same period. Each index is an unmanaged indicator
of stock market performance. The Fund is up 14.0% year-to-date. The Lipper
Equity Income Fund Index and S&P 500 rose 14.7% and 20.6%, respectively, over
the same six month period.
For the five-year period ended June 30, 1997, the Fund's return averaged
16.6% annually, versus average annual returns of 16.6% and 19.8% for the Lipper
Equity Income Fund Index and S&P 500, respectively. Since inception on January
2, 1992 through June 30, 1997, the Fund has a total return of 125.6%, which
equates to an average annual return of 16.0%. The Dividend History chart details
each dividend paid by the Fund since inception.
What We Do
We do what is described as bottom-up research: we read annual reports; we
visit the competition; we talk to customers; we go belly to belly with
management. We structure our portfolio by picking stocks.
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
2
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improvement. We also look at earnings per share trends. Unlike Wall Street's
ubiquitous earnings momentum players, we do not try to forecast earnings with
accounting precision and then trade stocks based on quarterly expectations and
realities. We simply try to position ourselves in front of long-term earnings
uptrends. In addition, we analyze on and off balance sheet assets and
liabilities such as plant and equipment, inventories, receivables, and legal,
environmental and health care issues. We want to know everything and anything
that will add to or detract from our private market value (PMV) estimates.
Finally, we look for a catalyst; something happening in the company's industry
or indigenous to the company itself that will surface value. In the case of the
independent telephone stocks, the catalyst is a regulatory change. In the
agricultural equipment business, it is the increasing world-wide demand for
American food and feed crops. In other instances, it may be a change in
management, sale or spin-off of a division or the development of a profitable
new business.
Once we identify stocks that qualify as fundamental and conceptual
bargains, we then become patient investors. This has been a proven long-term
method for preserving and enhancing wealth in the U.S. equities market. At the
margin, our new investments are focused on businesses that are well- managed and
will benefit from sustainable long-term economic dynamics. These include macro
trends, such as the globalization of the market in filmed entertainment and
telecommunications, and micro trends, such as an increased focus on productivity
enhancing goods and services.
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 greater economic activity in Asia. 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.
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.
3
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COMMENTARY
The Economy and the Stock Market: Having Your Cake and Eating It Too
From 1995 through the second quarter of 1997, equities investors have
enjoyed their just desserts. Modest economic growth, low inflation, and strong
corporate earnings have translated into spectacular equities returns. The "What
Me Worry" market cheerleaders are now projecting these favorable conditions
forward indefinitely in order to justify high equities valuations and to support
their fantastic predictions for the Dow and S&P. We look at the same picture and
wonder whether all the economic components that have combined to propel this
historic market advance are sustainable.
If it is truly different this time around, the stock market tree can grow
to the sky. Stocks probably deserve to trade at 20 times earnings or higher if
the following scenario holds: the Federal Reserve and corporate managements have
really tamed the business cycle; inflation is truly dead rather than dormant;
further cost cutting and productivity gains allow American corporations to
continue to grow earnings at three to four times top line revenues; and there
are no major political or financial accidents here or abroad. In other words,
everything has to remain right for the fundamentals to raise the safety net --
we just do not have a "margin of safety".
Let's look at what's been going so right and what could go wrong. We
applaud Alan Greenspan's Federal Reserve and corporate managements for reducing
economic volatility. More modest but sustainable economic growth is vastly
preferable to the boom/bust business cycles of the past. The business cycle has
not disappeared, but the 31 1/42 billion new consumers in the global market
place have added extra secular growth to the global economy, perhaps diluting
the cyclical effects of economic policy most of us have lived through. We do not
believe inflation is dead, but it is certainly subdued.
Can net earnings continue to outpace top line revenue growth? Corporate
America has been on "Slim Fast" for almost a decade. Management has restructured
and technology has contributed to enormous productivity gains. How much more
efficiently can we run our businesses? Rebounding from 1994's inventory bubble,
S&P 500 earnings grew approximately 18% in 1995. These earnings rose nearly 10%
in 1996, and are projected to advance another 9% to 11% in 1997. These are
impressive numbers considering the economy has chugged along at a modest 3% to
4% annual growth rate over this same time period. Will we retreat to a more
normal relationship between top line revenue and earnings growth? Return on
equity has exceeded the expectation of even the most optimistic.
This year, equities investors have been so concerned about inflation and
the potential for higher interest rates while praying so fervently for a slower
economy, that they seem to have lost sight of the fact that one of the
consequences may be corporate earnings growth below "enhanced expectations."
With Europe and the Far East gaining economic momentum, second half earnings for
U.S. Internationals should be okay, with an obvious yellow flag associated with
"currency" adjustments. But, we are likely to see disappointments domestically.
Investors' recent reaction to warnings of earnings shortfalls from a
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string of leading technology companies may be duplicated in other industry
groups in the next six months.
The final piece of the puzzle is always the most difficult to
predict--some form of political or financial accident that could spread like a
California brush fire in the increasingly interconnected global economy and
capital markets. That is the "G Factor" - only God knows.
What do we conclude from all this conjecture? If we continue to be blessed
with this highly favorable economic backdrop for equities, the stock market can
continue to advance, albeit at a much less torrid pace than we have enjoyed over
the last 21 1/42 years. Equities investors can continue to have their cake and
eat it too, but it will be served in significantly smaller portions. If there
proves to be one or more flies in the ointment, we could see a substantial
correction that lasts for more than just a few weeks. We also believe we are
entering what could be an extended phase of a market of stocks rather than a
stock market. Investors have been broadening their horizons as evidenced by the
much stronger relative performance of broader market indices. This would
indicate that individual stock fundamentals are becoming as important as sheer
market momentum in the decision making process.
Cable Television: One Man's Junk is Bill Gates' Treasure
We have been analyzing the cable television (CATV) stocks for many years.
We've experienced the thrill of victory--the pricing deregulation and rampant
consolidation of the industry in the mid eighties--and over the last few years,
the agony of defeat--re-regulation and the threat of competition from telcos and
satellite broadcasters. Through it all, we have viewed cable TV as a good
long-term investment. The business has most of the economic and financial
characteristics we favor: an identifiable franchise, high operating margins, and
strong cash flow. We are aware of the negatives: lousy service by new entrants,
high debt, the need for a second round of substantial capital investment to
technologically upgrade systems, and the prospect for increased competition.
However, we remain confident that the value of all those connections to American
homes will ultimately be recognized.
Although a much more diversified media company, Time Warner Inc. (TWX -
$48.25 - NYSE) stock has been stuck in the mud due to its substantial cable
television operations. Chairman Gerald Levin has been pressured by Wall Street
and several large institutional and corporate shareholders to reduce the
company's exposure to the business by off-loading cable systems to US West Media
Group (UMG - $20.25 - NYSE) in return for its minority stake in Time Warner
Entertainment. Believing Levin would be forced to throw in the towel on cable,
US West Media Group held out for a higher price (more cable subscribers) than
Levin was willing to part with. Perhaps US West Media has outfoxed itself. With
the escalating value of its assets, Time Warner is now in the driver's seat in
negotiating a deal. We believe Time Warner will eventually reduce its exposure
to cable and focus more on its programming and publishing assets. When they pull
the trigger on cable, they will get a much better price.
5
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Let's Make a Deal
News Corp/International Family Entertainment
In the long-running game show "Let's Make a Deal", host Monty Hall would
urge his contestants to deal for the fabulous prizes hidden behind door number
one, two, or three. This quarter, we've had portfolio prizes hidden behind all
three doors. Seeking a national distribution channel for its children's
programming and shut out by a Supreme Court ruling upholding "must carry"
requirements, News Corp. wooed and won International Family Entertainment, Inc.
(FAM - $34.375 - NYSE).
We believe the current "Let's Make a Deal" market may run as long as the
popular game show. There is tremendous liquidity in the financial system. With
modest top line revenue growth, minimal pricing flexibility, and limits to
further margin expansion through cost cutting and productivity gains, the
ability of many companies to grow earnings from existing operations is
restrained. The answer for many will be to grow via acquisitions. This will not
take the form of the re-conglomeratization of American business. Instead, we
will see larger companies buying smaller niche companies to complement their
existing businesses. This feeds nicely into our focus on smaller niche
franchises and we expect to be bidding a fond farewell to additional portfolio
holdings in the years ahead. We identified the "urge to consolidate" in previous
reports to you. We have announced and heralded this Third Wave of Mergers in all
of our letters to you since General Electric attempted a hostile takeover of
Kemper in February 1994. A reduction in long-term capital gains rates will
provide another accelerant to an already raging fire.
The Last Shall Be First
Our investment thesis is that if you buy good businesses at the right
price, and hold them long term, you will eventually earn a satisfactory return.
Often, it takes quite awhile for the corporate values we identify to be
recognized by other investors. Generally, our patience is rewarded. This
quarter, many of our sleepers have come to life. GenCorp Inc. (GY - $23.125 -
NYSE) was among our top performing stocks, posting a large percentage gain after
a somewhat extended nap. In this age of instant gratification, most investors
are simply not willing to wait on stocks that aren't moving. They dump and run,
chasing momentum not value. This may work well during roaring bull markets. But,
over the long term and through the market cycles, it has not proven to be a
particularly effective way to generate superior returns.
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 Company (AXP - $74.50 - 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
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American Express charge card and its travel-related services. Minneapolis-based
American Express Financial Advisors, Inc. (formerly IDS Financial Services)
sells financial products ranging from mutual funds to annuities. Harvey Golub,
Chairman and CEO, has refocused AXP on its core charge card and investment
management businesses. The company has significantly expanded the range of
merchants who welcome its cards and is slowly gaining market share. Management's
objective is virtual parity with bankcard networks. American Express has joined
forces with Microsoft to start an on-line 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.
British Petroleum Company plc (BP - $74.875 - NYSE), with an equity market
capitalization exceeding $75 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, total 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 refining and marketing formed with Mobil Corporation (MOB -
$69.875 - NYSE) in Europe. BP is a substantial cash flow generator, a portion of
which has been used to reduce debt.
Chevron Corporation (CHV - $73.9375 - 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. World-wide production is more than 1 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 world-wide 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 & Company (DE - $54.875 - NYSE) is the largest manufacturer of farm
equipment in the world. 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. With raw material costs under
control, Deere's near-term earnings should be impressive. Long-term prospects
for farm equipment manufacturers like Deere are enhanced as incomes, diets and
standards of living improve overseas.
Eastern Enterprises (EFU - $34.8125 - NYSE) owns and operates Boston Gas
Company, 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. Headquartered in
Cincinnati, Midland
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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 $1.60 per share on an annual
basis and provides an appealing yield approaching 4.7% for this cash rich
company.
Exxon Corporation (XON - $61.50 - 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.
Grace (W.R.) & Co. (GRA - $55.125 - NYSE) is a supplier of packaging products,
specialty chemicals and construction products. Under Chairman and CEO Albert
Costello, the company is restructuring its operations by divesting and
monetizing businesses. Divestitures include the sale of the Grace Dearborn water
treatment business and the spin-off of The National Medical Care division - both
in 1996. New products, new markets, cost reductions and increasing global
economic activity are expected to drive profitability through the year 2000.
International Business Machines Corporation (IBM - $90.1875 - NYSE) is the
world's largest information technology services company. The company's software
division, now fortified by Lotus and Tivoli, continues to expand at an
accelerating pace and holds significant future potential. IBM is an enormous
cash flow generator, producing $13.6 billion in EBITDA during 1996. During the
same period, IBM devoted $6 billion to capital expenditures and $5 billion to
stock repurchases, bringing its common stock buybacks to $10.6 billion over the
last 2 years. After all these expenditures, IBM still increased its cash
balances from $7.7 billion at the end of 1995 to $8.1 billion at the end of
1996.
Southwest Gas Corporation (SWX - $19.875 - 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.
Time Warner Inc. (TWX - $48.25 - NYSE), having completed its acquisition of
Turner Broadcasting in the fourth quarter of 1996, is the world's largest
diversified media and publishing company. The combined companies have more than
$23 billion in revenues and over $4.5 billion in EBITDA. Together they control a
host of powerful media brands, such as CNN, Warner Brothers film, HBO, Cinemax
and Time and People magazines. Under the leadership of Chairman Gerald Levin and
Vice-Chairman Ted Turner, Time Warner is now focused on reducing its almost $13
billion in debt and simplifying its capital
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structure. Achievement of both goals would be greatly aided by a successful
restructuring of the Time Warner Entertainment partnership with U.S. West Media
Group (UMG - $20.25 - NYSE).
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
The strength of the market is understandable considering today's favorable
economic/earnings/ interest rate backdrop and the enormous amount of money being
poured into equities mutual funds. Although high by historical standards,
current equities valuations may be justified as long as these "best of all
possible worlds" market conditions can be sustained. If something happens to
disrupt this comfortable scenario--our best guess is it may come in the form of
more widespread earnings disappointments as the slowing economy begins to impact
corporate profitability--the market could run into some trouble.
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We are encouraged by the broadening of this bull market and some evidence
that investors are once again focusing on fundamental value instead of just
momentum. Stock pickers across the land rejoice! Ongoing merger and acquisition
activity should continue to provide a tailwind for our portfolio.
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 work hard to preserve and enhance 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
August 1, 1997
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Top Ten Holdings
June 30, 1997
Exxon Corporation International Business Machines Corporation
Chevron Corporation British Petroleum Company plc
American Express Company Southwest Gas Corporation
Grace (W.R.) & Co. Deere & Company
Eastern Enterprises Time Warner Inc.
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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
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The Gabelli Equity Income Fund
Portfolio of Investments -- June 30, 1997 (Unaudited)
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Market
Shares Value
------ ------
COMMON STOCKS -- 87.72%
AEROSPACE (1.34%):
15,000 Boeing Company.............................. $ 795,938
2,000 Rockwell International Corp................. 118,000
----------
913,938
----------
AUTOMOTIVE (1.34%):
6,500 Ford Motor Company.......................... 245,375
12,000 General Motors Corporation.................. 668,250
----------
913,625
----------
AUTOMOTIVE: PARTS and ACCESSORIES (2.33%):
2,500 Dana Corporation............................ 95,000
38,343 GenCorp Inc................................. 886,674
18,000 Genuine Parts Company....................... 609,750
----------
1,591,424
----------
AVIATION: PARTS and SERVICES (2.73%):
12,000 Barnes Group................................ 355,500
15,000 Curtiss-Wright Corporation.................. 873,750
3,000 General Motors Corporation, Class H......... 173,250
1,000 Raytheon Co................................. 51,000
5,000 United Technologies......................... 415,000
----------
1,868,500
----------
BUSINESS SERVICES (3.23%):
2,000 Cognizant Corporation....................... 81,000
4,000 Dun & Bradstreet Corp....................... 105,000
300 Imation Corporation+........................ 7,913
20,000 International Business Machines
Corporation.................................. 1,803,749
9,000 Landauer, Inc................................ 208,688
----------
2,206,350
----------
CABLE (0.82%):
16,300 International Family Entertainment, Inc.+... 560,313
----------
COMMUNICATIONS EQUIPMENT (0.11%):
1,000 Motorola, Inc............................... 76,000
----------
CONSUMER PRODUCTS (8.10%):
2,500 Culbro Corporation+......................... 347,969
4,000 Eastman Kodak Company....................... 307,000
15,000 Fortune Brands, Inc......................... 559,688
50,000 Gallaher Group plc, ADR+.................... 921,875
20,000 General Electric Company.................... 1,307,499
5,000 Gillette Company............................ 473,750
15,000 National Presto Industries, Inc............. 604,688
6,000 Philip Morris Companies Inc................. 266,250
15,000 Tambrands Inc............................... 748,125
----------
5,536,844
----------
DIVERSIFIED INDUSTRIAL (3.15%):
9,137 GATX Corporation............................ 527,662
7,500 Honeywell, Inc.............................. 569,062
5,000 Minnesota Mining & Manufacturing Company.... 510,000
1,000 Tenneco Inc................................. 45,188
14,000 Thomas Industries Inc....................... 402,500
3,000 Trinity Industries, Inc..................... 95,250
----------
2,149,662
----------
ENERGY: ELECTRIC (1.22%):
26,007 Citizens Utilities Company, Cl. A+.......... 243,820
1,000 FPL Group, Inc.............................. 46,063
35,000 Niagara Mohawk Power Corp.+................. 299,687
11,000 PacifiCorp.................................. 242,000
----------
831,570
----------
ENERGY: NATURAL GAS (8.42%):
19,000 Bay State Gas Company....................... 505,875
2,000 Berkshire Gas Company....................... 32,000
3,000 Brooklyn Union Gas Company.................. 85,875
24,000 Colonial Gas Company........................ 505,500
27,000 Commonwealth Energy System.................. 646,313
54,000 Eastern Enterprises......................... 1,873,124
58,000 ENI SpA..................................... 328,963
2,500 Essex County Gas Company.................... 64,688
5,000 Fall River Gas Company...................... 67,500
4,000 Peoples Energy Corp......................... 149,750
75,000 Southwest Gas Corporation................... 1,490,624
----------
5,750,212
----------
ENERGY: OIL (16.64%):
13,000 Atlantic Richfield Company.................. 916,500
23,000 British Petroluem Company plc, ADR.......... 1,722,125
15,000 Burlington Resources Inc.................... 661,875
29,000 Chevron Corporation......................... 2,144,187
5,000 Elf Aquitane SA............................. 272,188
46,000 Exxon Corporation........................... 2,828,999
10,000 Halliburton Company......................... 792,500
8,000 Pennzoil Company............................ 614,000
13,000 Texaco Inc.................................. 1,413,750
----------
11,366,124
----------
ENTERTAINMENT (2.61%):
5,866 Ascent Entertainment Group Inc.+............ 53,524
2,000 PolyGram NV, ADR............................ 107,625
30,000 Time Warner Inc............................. 1,447,500
6,000 Viacom Inc., Cl. A+......................... 178,125
----------
1,786,774
----------
EQUIPMENT and SUPPLIES (6.18%):
17,000 Aeroquip-Vickers Inc........................ 803,250
2,400 Caterpillar Inc............................. 257,700
11
<PAGE>
The Gabelli Equity Income Fund
Portfolio of Investments (Continued) -- June 30, 1997 (Unaudited)
- --------------------------------------------------------------------------------
Market
Shares Value
------ ------
COMMON STOCKS (Continued)
EQUIPMENT and SUPPLIES (continued)
2,000 Cooper Industries, Inc...................... $ 99,500
27,000 Deere & Company............................. 1,481,625
10,000 EG&G Inc.................................... 225,000
11,500 Ingersoll Rand Company...................... 710,125
1,500 Minerals Technologies Inc................... 56,250
14,000 Smith (A.O.) Corp., Class B+................ 497,875
2,000 Union Carbide Corporation................... 94,125
----------
4,225,450
----------
FINANCIAL SERVICES (11.71%):
28,000 American Express Company.................... 2,085,999
30,000 Banco Santander SA, ADR..................... 928,125
10,000 BankAmerica Co.............................. 645,625
4,000 Bankers Trust Company....................... 348,000
25,000 Commerzbank AG, Sponsored ADR............... 708,738
16,000 Deutsche Bank AG, ADR....................... 935,648
500 Fidelity National Corp.+.................... 4,563
11,000 Morgan (J.P.) & Co. Incorporated............ 1,148,124
3,000 Northern Trust Company...................... 145,125
12,000 SunTrust Banks, Inc......................... 660,750
2,200 Transamerica Corporation.................... 205,838
4,000 U.S. Trust Corporation...................... 188,500
----------
8,005,035
----------
FOOD and BEVERAGE (1.11%):
3,500 Kellogg Company............................. 299,688
3,000 Quaker Oats Company......................... 134,625
14,000 Rykoff-Sexton, Inc.......................... 326,375
----------
760,688
----------
HEALTH CARE (1.64%):
11,000 Johnson & Johnson........................... 708,125
12,000 Pharmacia & Upjohn Inc...................... 414,000
----------
1,122,125
----------
METALS and MINING (1.10%):
21,000 Freeport-McMoRan Copper & Gold Inc., Cl. B.. 653,625
3,500 Freeport-McMoRan Inc........................ 101,063
----------
754,688
----------
PUBLISHING (0.81%):
3,000 Dow Jones & Company Inc..................... 120,563
6,000 Harcourt General, Inc....................... 285,749
2,000 McGraw-Hill Companies, Inc.................. 117,625
1,000 Readers Digest Association, Inc., Class B... 27,688
----------
551,625
----------
RETAIL (0.40%):
5,000 Giant Food Inc., Cl. A...................... 163,125
2,000 Sears, Roebuck & Co......................... 107,500
----------
270,625
----------
SPECIALTY CHEMICALS (3.55%):
5,000 E.I du Pont de Nemours and Company.......... 314,375
5,000 Ferro Corporation........................... 185,313
35,000 Grace (W.R.) & Co........................... 1,929,375
----------
2,429,063
----------
TELECOMMUNICATIONS (8.76%):
5,000 ALLTEL Corporation.......................... 167,188
18,000 BC TELECOM Inc.............................. 422,303
50,000 BCE Inc..................................... 1,399,999
2,000 British Telecommunications plc, ADR......... 148,500
7,500 Cable & Wireless plc, ADR................... 209,531
1,000 Deutsche Telekom AG, Sponsored ADR.......... 24,125
30,000 GTE Corporation............................. 1,316,249
10,000 Hong Kong Telecommunications Ltd., ADR...... 233,750
3,000 NYNEX Corporation........................... 172,875
1,000 SBC Communications Inc...................... 61,875
28,000 Southern New England Telecommunications
Corporation................................ 1,088,500
4,000 STET-Societa Financiaria Telefonica SpA,
ADR........................................ 233,500
5,000 Telefonica de Espana, ADR................... 431,250
2,000 US WEST Communications Group................ 75,375
----------
5,985,020
----------
WIRELESS COMMUNICATIONS (0.42%):
12,000 COMSAT Corporation.......................... 285,750
----------
TOTAL COMMON STOCKS......................... 59,941,405
----------
CONVERTIBLE PREFERRED STOCKS -- 1.48%
BROADCASTING (0.19%):
2,500 Granite Broadcasting Corporation
$1.938 Cv. Pfd............................. 128,750
----------
CONSUMER PRODUCTS (0.11%):
6,000 Kerr Group, Inc.
Cl. B $1.70 Cv. Pfd. Ser. D................ 75,000
----------
EQUIPMENT and SUPPLIES (0.73%):
2,500 Navistar International Corporation
$6.00 Cv. Pfd. Ser. G .................... 152,813
4,000 Sequa Corporation $5.00 Cv. Pfd............. 348,000
----------
500,813
----------
METALS and MINING (0.20%):
5,000 Freeport-McMoRan Copper & Gold Inc.
7.00% Cv. Pfd............................. 136,875
----------
PUBLISHING (0.18%):
2,000 Golden Books Family Entertainment, Inc.
8.75% Cv. Pfd. (a)........................ 122,750
----------
12
<PAGE>
The Gabelli Equity Income Fund
Portfolio of Investments (Continued) -- June 30, 1997 (Unaudited)
- --------------------------------------------------------------------------------
Principal
Amount or Market
Shares Value
--------- ------
CONVERTIBLE PREFERRED STOCKS (Continued)
TELECOMMUNICATIONS (0.07%):
1,000 US West, Inc................................ $ 50,313
----------
TOTAL CONVERTIBLE
PREFERRED STOCKS........................... 1,014,501
----------
CONVERTIBLE CORPORATE BONDS -- 5.29%
BUSINESS SERVICES (0.14%):
$ 100,000 BBN Corporation Sub. Deb. Cv.
6.00%, 04/01/12 .......................... 96,625
----------
CONSUMER PRODUCTS (0.70%):
600,000 Fieldcrest Cannon, Inc. Sub. Deb. Cv.
6.00%, 03/15/12 .......................... 477,000
----------
CONSUMER SERVICES (1.48%):
800,000 HSN, Inc. Sub. Deb. Cv.
5.875%, 03/01/06 (a) ..................... 1,016,000
----------
ENERGY (0.26%):
100,000 Pennzoil Company Sub. Deb. Cv.
6.50%, 01/15/03 .......................... 177,620
----------
ENTERTAINMENT (0.19%):
150,000 Savoy Pictures Entertainment, Inc.
Sub. Deb. Cv. 7.00%, 07/01/03.............. 129,000
----------
EQUIPMENT and SUPPLIES (0.59%):
398,000 Kollmorgen Corporation Sub. Deb. Cv.
8.75%, 05/01/09 .......................... 401,980
----------
HOTELS/GAMING (0.08%):
50,000 Hilton Hotels Corporation Sub.
Deb. Cv. 5.00%, 05/15/06 ................. 53,500
----------
PUBLISHING (1.01%):
100,000 News America Holdings Incorporated
Sub. Deb. Cv. Zero Cpn., 03/31/02 ........ 75,250
600,000 Thomas Nelson Inc. Sub. Deb. Cv.
5.75%, 11/30/99 (a) ...................... 612,000
----------
687,250
----------
Principal Market
Amount Value
--------- ------
RETAIL (0.48%):
$ 400,000 General Host Corporation Sub.
Deb. Cv. 8.00%, 02/15/02 .................. $ 326,000
----------
TRANSPORTATION (0.36%):
250,000 Greyhound Lines, Inc. Sub.
Deb. Cv. 8.50%, 03/31/07 ................. 248,750
----------
TOTAL CONVERTIBLE
CORPORATE BONDS............................ 3,613,725
----------
U.S. GOVERNMENT OBLIGATIONS -- 3.94%
2,700,000 U.S. Treasury Bills 4.65% to 4.97%,
due 07/03/97 to 08/21/97................... 2,691,077
----------
TOTAL U.S. GOVERNMENT
OBLIGATIONS................................ 2,691,077
----------
TOTAL INVESTMENTS-- 98.43%.................. 67,260,708
Cash and Other Assets
in excess of Liabilities-- 1.57%........... 1,071,915
----------
NET ASSETS -- 100.00%
(4,263,322 shares outstanding).............. $68,332,623
==========
Net Asset Value And Redemption
Price Per Share........................... $16.03
======
- ----------
(a) -- Security exempt from registration under Rule 144A of the Securities Act
of 1933. These securities may be resold in transactions exempt from
registration, normally to qualified institutional buyers. At June 30,
1997, Rule 144A securities amounted to $1,750,750 or 2.56% of net assets.
(+) -- Non-income producing security.
ADR -- American Depositary Receipt.
13
<PAGE>
This page intentionally left blank
<PAGE>
GABELLI FAMILY OF FUNDS
Gabelli Asset Fund ------------------------------------------------------------
Invests in securities of companies selling below their intrinsic economic value.
The Fund's primary objective is long-term growth of capital. (No-load)
Portfolio Manager: Mario J. Gabelli, CFA
Gabelli Growth Fund ------------------------------------------------------------
Invests primarily in large cap stocks believed to have superior earnings growth
potential. The Fund's primary objective is long-term capital appreciation.
(No-load)
Portfolio Manager: Howard F. Ward, CFA
Gabelli/Westwood Funds ---------------------------------------------------------
Four investment portfolios designed to pursue a variety of investment
objectives. Equity Fund seeks growth, SmallCap Equity seeks aggressive growth,
Balanced Fund seeks income and growth, Intermediate Bond Fund seeks current
income. (No-load)
Chief Investment Officer: Susan M. Byrne
Gabelli Small Cap Growth Fund --------------------------------------------------
Invests primarily in common stock of smaller companies (market capitalizations
less than $500 million) with rapid revenue and earnings growth potential. The
Fund's primary objective is long-term capital appreciation. (No-load)
Portfolio Manager: Mario J. Gabelli, CFA
Gabelli Equity Income Fund -----------------------------------------------------
Invests primarily in equity securities with above market average yields. The
Fund pays quarterly dividends and seeks a high level of total return. (No-load)
Portfolio Manager: Mario J. Gabelli, CFA
Gabelli Value Fund -------------------------------------------------------------
Invests in securities of companies selling below their intrinsic economic value.
The Fund's primary objective is long-term growth of capital. Max. Sales charge:
5 1/2%
Portfolio Manager: Mario J. Gabelli, CFA
Gabelli ABC Fund --------------------------------------------------------------
Invests in securities with capital appreciation potential and/or above market
average yields. The Fund's primary objective is consistent returns in various
market conditions without excessive risk of capital loss.
(No-load) Portfolio Manager: Mario J. Gabelli, CFA
Gabelli U.S. Treasury Money Market Fund ----------------------------------------
Invests exclusively in short-term U.S. Treasury securities. The Fund's primary
objective is to provide high current income consistent with the preservation of
principal and liquidity. An investment in the Fund is neither insured nor
guaranteed by the U.S. Government and there can be no assurance that the Fund
will be able to maintain a stable net asset value of $1.00 per share.
Portfolio Manager: Ronald Eaker
The Treasurer's Fund -----------------------------------------------------------
Three money market portfolios designed to generate superior returns without
compromising portfolio safety. U.S. Treasury Money Market invests in U.S.
Treasury bills, notes and bonds. Tax Exempt Money Market invests in municipal
securities. Domestic Prime Money Market invests in prime quality, domestic money
market instruments. (No-Load)
Portfolio Manager: Judith Fabrizi
GLOBAL SERIES
Gabelli Global Telecommunications Fund
Invests in telecommunications companies throughout the world - targeting
undervalued companies with strong earnings and cash flow dynamics. The
Fund's primary objective is long-term capital appreciation. (No-load)
Team Manager: Mario J. Gabelli, CFA
Gabelli Global Convertible Securities Fund
Invests principally in bonds and preferred stocks which are convertible
into common stock of foreign and domestic companies. The Fund's primary
objective is total return through a combination of current income and
capital appreciation. (No-load)
Portfolio Manager: Hart Woodson
Gabelli Global Interactive Couch Potato(R) Fund
Invests globally in companies creating and/or distributing information and
entertainment products and services. The Fund will also invest in
companies participating in emerging technological advances in interactive
services and products. The Fund's primary objective is long-term capital
appreciation. (No-load)
Portfolio Manager: Marc J. Gabelli
Gabelli Gold Fund --------------------------------------------------------------
Invests in a global portfolio of equity securities of gold mining and related
companies. The Fund's objective is capital appreciation. Investment in gold
stocks is considered speculative and is affected by a variety of world-wide
economic, financial and political factors. (No-load)
Portfolio Manager: Caesar Bryan
Gabelli International Growth Fund ----------------------------------------------
Invests in international equities securities with superior long-term capital
appreciation potential. The Fund offers investors global diversification.
(No-load)
Portfolio Manager: Caesar Bryan
The five funds above invest in foreign securities which involves risks not
ordinarily associated with investments in domestic issues, including currency
fluctuation, economic and political risks.
Distributed by Gabelli & Company, Inc.
<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 Robert J. Morrissey
Vice President Attorney-at-Law
Gabelli & Company, Inc. Morrissey & Hawkins
Karl Otto Pohl Anthonie C. van Ekris
Former President Managing Director
Deutsche Bundesbank 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, L.L.P.
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
