[PHOTO OMITTED]
The
Gabelli
Equity
Income
Fund
ANNUAL REPORT
SEPTEMBER 30, 1998
<PAGE>
The Gabelli Equity Income Fund
Annual Report
September 30, 1998(a)
* * * *
Morningstar rated The Gabelli Equity Income Fund 4 stars overall and
for the three and five year periods ended 9/30/98 among 2678
and 1584 domestic equity funds, respectively.
To Our Shareholders,
In the third quarter of 1998, higher yielding stocks performed modestly
better than the broad stock market averages. The generally positive performance
of tobaccos, telecommunications and health care stocks was offset by substantial
losses for energy service companies, industrial cyclicals and financial stocks.
We believe the income component of our portfolio holdings will continue to work
in shareholders' favor in this highly volatile market environment.
Investment Performance
For the quarter ended September 30, 1998, The Gabelli Equity Income Fund's
(the "Fund") net asset value decreased 9.7% to $15.97 after adjusting for the
$0.04 per share dividend paid on September 28, 1998. The Lipper Analytical
Services Equity Income Fund Average and the Standard & Poor's ("S&P") 500 Index
declined 10.2% and 9.9%, respectively, over the same period. Each index is an
unmanaged indicator of investment performance. Over the trailing twelve month
period, the Fund was up 3.0%. The Lipper Equity Income Fund Average and S&P 500
rose 0.1% and 9.1%, respectively, over the same twelve month period.
For the five year period ended September 30, 1998, the Fund's return
averaged 14.7% annually, versus average annual returns of 14.1% and 19.9% for
the Lipper Equity Income Fund Average and S&P 500, respectively. Since inception
on January 2, 1992 through September 30, 1998, the Fund has a total return of
152.8%, which equates to an average annual return of 14.7%. The Dividend History
chart details each dividend paid by the Fund since inception.
- --------------------------------------------------------------------------------
Past performance is no guarantee of future results. Morningstar proprietary
ratings reflect historical risk adjusted performance as of September 30, 1998
and are subject to change every month. Morningstar ratings are calculated from a
Fund's three, five and ten year average annual returns in excess of 90-day
T-Bill returns with appropriate fee adjustments and a risk factor that reflects
fund performance below 90-day T-Bill returns. The top 10% of the funds in an
investment category receive five stars, the next 22.5% receive four stars, the
next 35% receive three stars, the next 22.5% receive two stars and the last 10%
receive one star. (a) The Fund's fiscal year ends September 30.
<PAGE>
INVESTMENT RESULTS (a)(c)
- --------------------------------------------------------------------------------
Calendar Quarter
-------------------------------------
1st 2nd 3rd 4th Year
--- --- --- --- ----
1998: Net Asset Value .... $17.70 $17.72 $15.97 - -
Total Return ....... 10.1% 0.5% (9.7)% - -
1997: Net Asset Value .... $14.27 $16.03 $17.39 $16.12 $16.12
Total Return ....... 1.2% 12.7% 8.8% 3.0% 27.9%
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)
------------------------------------------------------------
Average Annual Returns - September 30, 1998 (a)
1 Year .................................... 3.0%
5 Year .................................... 14.7%
Life of Fund (b) .......................... 14.7%
------------------------------------------------------------
(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.
- --------------------------------------------------------------------------------
[The following table was depicted as a line chart in the printed material.]
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN THE GABELLI EQUITY
INCOME FUND, LIPPER EQUITY INCOME FUND AVERAGE AND THE S&P 500 INDEX
<TABLE>
<CAPTION>
1/2/92 9/30/92 9/30/93 9/30/94 9/30/95 9/30/96 9/30/97 9/30/98
------ ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Gabelli Equity
Income Fund $10,000 $10,580 $12,750 $13,171 $15,700 $18,320 $24,549 $25,285
Lipper Equity
Income Fund
Average $10,000 $10,530 $12,415 $12,688 $15,226 $17,783 $23,865 $23,889
S&P 500 Index $10,000 $10,250 $11,583 $12,011 $15,590 $18,755 $26,332 $28,728
</TABLE>
2
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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 six 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.
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.
- ---------------------------------------------------
Dividend History
Rate Reinvestment
Payment (ex) Date Per Share Price
----------------- --------- -----
September 28, 1998 $0.04 $16.20
June 26, 1998 $0.06 $17.65
March 27, 1998 $0.05 $17.70
- ---------------------------------------------------
December 29, 1997 $1.78 $15.94
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
- ---------------------------------------------------
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.
3
<PAGE>
Commentary
Where Do We Go From Here?
Is the stock market bottoming or has the retreat from equities just begun?
We have opinions, not answers. Bear markets generally anticipate either a
recession or a serious crack in the financial infrastructure. While the U.S.
economy is starting to slow, it is still advancing at a respectable pace. If
Latin America remains stable--as aforementioned, a very big and critical IF--and
if the American consumer shrugs off the market decline and continues to spend,
the U.S. economy should continue to expand, albeit at a slower pace than in
recent years. High "real interest rates" (the spread between interest rates and
inflation) would indicate the Federal Reserve has room to lower rates to provide
some stimulus if it sees the economy weakening. But, timing is an issue. This
would argue against recession.
Despite volatility and the sharp decline from this year's highs, the
market has retreated in a relatively orderly fashion--essentially doing what it
is supposed to do, respond to changing economic circumstances, most notably
diminished earnings prospects. We have not seen panic selling. If we were to
experience a real jolt to the financial infrastructure such as a major hedge
fund collapse sending shock waves through the banking system, this could change.
If the economy keeps chugging along and financial institutions remain
relatively healthy, the market should stabilize. If this is a correction, one
would argue it is long overdue and may be setting the stage for the next leg up
in the bull market. Even if the market continues to drift, we could see
accelerated merger and acquisition activity buoying returns for value oriented
investors.
Finally, Some Margin of Safety
We leave it to others to forecast the short to intermediate term direction
of the market. We have a longer term perspective. We are encouraged by the fact
that Ben Graham's "margin of safety" has returned to the market. We now see many
more good companies trading at much more reasonable valuations relative to their
intrinsic value. This does not necessarily mean they have bottomed, as stocks
can go from being substantially overvalued to significantly undervalued. But,
the long term investor should take some comfort in the fact that some of the
speculative excess has departed many stocks, if not those in the S&P 500 Index.
Whether the investing public will take comfort in this is another question. Thus
far, despite the market's sharp decline and continued volatility, we have not
seen substantial redemptions from equity mutual funds. Investors have been
conditioned by the extended bull market to buy on dips. However, if the pain
gets more severe, they may react differently. For those who are tempted to walk
away from equities, we point out that the stocks you loved six months ago are
now a lot less expensive. We think this improves the odds for achieving
respectable long term returns going forward.
The Good, the Not So Bad and the Ugly
During the third quarter, our global telecommunications holdings continued
to perform well, with Bell Atlantic, AT&T, Deutsche Telekom, British
Telecommunications, Hong Kong Telecommunications and Southern New England
Telecommunications posting solid returns. Our tobacco holdings, Gallaher and
4
<PAGE>
Philip Morris, also gained ground as did health care positions such as Johnson &
Johnson and Pharmacia & Upjohn. Utility holdings such as Public Services
Enterprise Group, FPL Group, Niagara Mohawk and Fall River Gas advanced as well.
As the price of oil stabilized, positions in major integrated oils Texaco,
Exxon and Chevron fell into the "Not So Bad" category, posting either modest
gains or small declines during the quarter. The Fund suffered some ugly losses
in energy service giant Halliburton, industrial cyclicals such as Deere and
Aeroquip-Vickers and financials including American Express and Chase Manhattan.
With the price of oil stabilizing and worldwide inventories low, we believe the
oil services group will rebound strongly. Considering ongoing global economic
distress and our own slowing economy, we may have to be somewhat more patient
with industrial cyclicals. However, these stocks are now trading at historically
low valuations and should make a solid contribution to portfolio returns longer
term. We believe this quarter's sharp decline in the financial sector was a
classic investor overreaction and in September, the group did bounce nicely off
its lows. We believe dominant franchise companies like American Express and
Chase have unparalleled global growth opportunities and will excel in the years
ahead.
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 - $77.625 - NYSE) is a global travel, financial and
network services provider. Founded in 1850, the company operates in 160
countries around the world. Best known for its "green" charge card and its
travel-related services, American Express also offers financial planning,
brokerage services, mutual funds, insurance and other investment products.
Harvey Golub, Chairman and CEO, has refocused AXP on its core charge card and
investment management businesses. The company continues to expand the
competitive reach of its credit card operations which should benefit if the U.S.
Department of Justice prevails in its antitrust suit against the Visa and
MasterCard associations.
BetzDearborn Inc. (BTL - $69.125 - NYSE) has agreed to be acquired by Hercules
Inc. (HPC - $30.0625 - NYSE), a U.S. specialty chemicals maker, for $3.1 billion
in cash and assumed debt, creating one of the world's biggest makers of
chemicals used in paper-making, water-treatment and other industrial processes.
Hercules, which had $1.87 billion in 1997 sales, is offering $72 per
BetzDearborn share. BetzDearborn is the number two U.S. producer of
water-treatment and industrial process chemicals, with $1.3 billion in 1997
sales. The purchase allows Wilmington, Delaware-based Hercules to resume its
worldwide expansion amid industry consolidation. The companies have set October
8, 1998 for BetzDearborn shareholders to approve the merger. They expect to
close the transaction in October 1998.
British Petroleum Co. plc (BP - $87.25 - NYSE), with an equity market
capitalization exceeding $80 billion, is one of the world's largest integrated
oil companies. Production, which reached 1.25 million barrels of oil and 1.7
billion cubic feet of natural gas per day in 1997, is slated to rise five
percent per year to reach 1.8 million barrels of oil equivalent (BOE) per day by
the year 2000 as new projects come on
5
<PAGE>
stream. The company, like other major oil producers and refiners, has embarked
on a program to deliver $1.5 billion of underlying performance improvements -
cost savings and volume increases - by the year 2000. BP has proposed an
all-stock acquisition of Amoco Corp. (AN - $53.875 - NYSE). The merged companies
would rank near the top of the oil industry, following Exxon and Shell.
Additional savings of approximately $2 billion are anticipated.
Citizens Utilities Co. (CZN - $8.125 - NYSE) provides telecommunications
services and public services to approximately 1.8 million customers in 21
states. Citizens owns 83% of Electric Lightwave (ELIX - $8.50 -Nasdaq) and has a
significant investment in Centennial Cellular Corp. (CYCL - $32.00 - Nasdaq). In
May, management authorized the separation of Citizen's telecommunications
businesses and public services businesses into two stand-alone, publicly traded
companies. Upon separation, the new company's telecommunications business will
include Citizen's stake in Electric Lightwave, as well as its interest in
Centennial Cellular, D&E Communications, Hungarian Telephone & Cable, cable
television and other telecom businesses. The company's public services
businesses, consisting of natural gas distribution, electric distribution, water
distribution and wastewater treatment facilities in 10 states, will continue to
trade as Citizens Utilities. This restructuring will be facilitated by the $215
million in cash the company should receive from its 16% stake in Centennial
Cellular Corp. when Centennial's planned sale to Welsh, Carson, Anderson & Stowe
VIII, L.P. is concluded.
DeKalb Genetics Corp. (DKB - $92.00 - NYSE), an agricultural genetics and crop
biotechnology company, develops and sells hybrid seeds and is the second largest
supplier of hybrid seed corn. Monsanto (MTC - $56.25 - NYSE), which controls 40%
of DeKalb's outstanding shares, won a three-month-long auction by agreeing to
pay $100 in cash for each of the remaining shares, or $2.5 billion. The
transaction is expected to be completed by year end.
Eastern Enterprises (EFU - $42.125 - NYSE) owns and operates Boston Gas Company,
New England's largest distributor of natural gas, serving 530,000 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 2,300 barges and 87 tug boats. Headquartered in Cincinnati, Midland
provides low-cost marine transportation to many of the country's major
industrial and agricultural regions. In December 1997, Eastern sold its 50%
interest in AllEnergy. In June 1998, the U.S. Supreme Court held the "Coal Act"
to be unconstitutional as applied to Eastern, resulting in the reversal of
approximately $75 million in liability provisions made by the company. The
company's strong balance sheet affords the opportunity to make attractive
strategic commitments, such as the acquisition of Essex County Gas for $80
million. Eastern's heating, ventilation and air conditioning services
subsidiary, ServicEdge Partners, is incurring startup costs but is anticipated
to be profitable in 1999. The dividend, increased to an annual rate of $1.68 per
share, provides an attractive 4.0% yield.
Exxon Corp. (XON - $70.1875 - NYSE), with an equity market value of $180
billion, is the world's largest, publicly-owned integrated oil company. The
company produced 1.6 million barrels of crude oil and 6.3 billion cubic feet of
natural gas per day in 1997. Roughly one-half of Exxon's production comes from
overseas reserves. Major, promising oil and gas exploration projects include
West Africa, the Caspian Sea, Russia, the Gulf of Mexico and South America.
Profitability, in a period of fluctuating energy prices, has been sustained by
management's success in holding costs essentially flat since 1990. Dividends
have been paid since 1882 and have been increased annually since 1983.
6
<PAGE>
Giant Food Inc. (GFS'A - $43.1875 - AMEX) operates a chain of over 170
supermarkets, mostly food and drug combination stores, primarily in the
Washington, DC and Baltimore metropolitan areas. The company is expanding from
this base into New Jersey, Pennsylvania and Delaware. J. Sainsbury plc, one of
the largest supermarket retailers in the United Kingdom, was the owner of a
non-controlling 50% of Giant's voting shares, in addition to approximately 20%
of the non-voting shares. The Dutch food retailer Royal Ahold NV (AHO - $29.0625
- - NYSE) paid Sainsbury $613 million for its Giant Food stake and is purchasing
the remaining Giant Food shares for $43.50 per share.
Orange & Rockland Utilities Inc. (ORU - $54.875 - NYSE) has agreed to be
acquired by Consolidated Edison (ED - $52.00 - NYSE) for $1.15 billion in cash
and assumed debt, allowing Con Edison to boost its power transmission business
in a growing part of the New York City area. Orange & Rockland is a small
utility, with most of its customers in New York's northern suburbs. Con Edison
is to pay $58.50 per share for all of Orange & Rockland's 13.5 million
outstanding shares. Orange & Rockland shareholders approved the merger on August
20, 1998 and the companies have filed all necessary regulatory applications. The
transaction is expected to be completed once all state and federal regulatory
approvals are obtained which is expected during the second quarter of 1999. In
addition to the $58.50 per share, we will also receive Orange & Rockland's
$0.645 quarterly dividend.
Philip Morris Companies Inc. (MO - $46.0625 - NYSE) is a leading consumer
products company concentrating on tobacco (55% of revenues), food (38% of
revenues) and beverages (6% of revenues). The company's Marlboro brand commands
an increasing share of the domestic and international cigarette markets and
Miller beer is number two (behind Anheuser-Busch) in its market. Food brands
include Jell-O, Kool-Aid, Kraft, Sealtest and Post cereals. The company
generates significant amounts of excess cash which is being used to repurchase
stock and to support healthy dividend payments to shareholders.
Quaker Oats Co. (OAT - $59.00 - NYSE) manufactures hot cereals, pancake mixes,
grain-based snacks, value-added rice products, sports beverages, syrups and
pasta products. Its Gatorade brand is a global brand with worldwide sales of
approximately $1.5 billion. Sales are growing approximately 12% per year. In the
U.S., Gatorade maintains a dominant market share of over 80%, despite
competition from Coca-Cola and PepsiCo. The unprofitable Snapple Beverages unit
was sold to Triarc Co.
Southern New England Telecommunications Corp. (SNG - $78.125 - NYSE) is a
holding company for Southern New England Telephone (SNET) which provides
telephone services for most of Connecticut. SNET has had success in expanding
into the long distance market in its home territory, gathering a 40% share of
the long distance market in Connecticut. SBC Communications (SBC - $44.4375 -
NYSE) has agreed to acquire SNG for $4.26 billion in stock.
Sprint Corp. (FON - $67.50 - NYSE) is the third largest long distance carrier
and the second largest independent local telephone company in the U.S. Sprint
has positioned itself globally through a joint venture called GlobalOne. Its
joint venture partners, France Telecom and Deutsche Telekom, also have a direct
20% stake in Sprint. The company has a promising national personal
communications services ("PCS") and wireless joint venture with three major
cable operators: Tele-Communications Inc., Comcast and Cox Communications. FON
faces risks from prospective new entrants in its long distance business which
may be offset by the PCS venture and its own pursuit of the $100 billion local
telephone market.
7
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Thomas Industries Inc. (TII - $21.4375 - NYSE), headquartered in Louisville,
Kentucky, is the recognized leader in the design and manufacture of
high-quality, precision-engineered fractional horsepower compressors and vacuum
pumps for use in global OEM applications, as well as pneumatic construction
equipment, leakage detection systems and laboratory equipment. The company sells
annually over one million units into more than 60 countries. Thomas Industries
also owns a 32% interest in the recently created Genlyte Thomas Group, estimated
to be the third largest lighting fixture manufacturer in North America. Thomas
has operations in the U.S., Mexico, South America, Europe and Asia.
Viacom Inc. (VIA - $57.50 - AMEX), long a major provider of entertainment
"content", has evolved into one of the world's dominant media companies.
Paramount Communications and Blockbuster Entertainment were acquired. Non-core
assets are being divested and debt has been reduced to approximately $8 billion.
Viacom is focusing on global expansion of its media franchises. Viacom is
particularly well-positioned in music (notably MTV) and cable networks (such as
Nickelodeon).
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.
The Roth IRA
The Taxpayer Relief Act of 1997 included new tax incentives and more
opportunities to save for retirement and other major expenditures. The Roth IRA
is just one of these new opportunities now available at Gabelli Funds. Our
investor representatives are available at 1-800-GABELLI (1-800-422-3554) to
speak with you about establishing a new Roth IRA and to discuss your investment
choices.
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].
Shareholders will soon be able to receive quarterly reports from Gabelli
Funds via e-mail. We anticipate that this service will be available in early
1999. If you are interested in receiving your quarterly report via e-mail,
please send an e-mail to [email protected] with your name and address and
we will provide you with the appropriate forms. Our investor representatives are
available at 1-800-GABELLI (1-800-422-3554) to assist you as well.
8
<PAGE>
In Conclusion
We are not in the business of predicting where the market is heading.
Presently, we think the odds continue to favor sustainable domestic economic
growth, which would argue against a recession and prolonged bear market. It's
our job to invest in high quality companies that pay reliable dividends, a task
we believe we do well, and one we are confident will reward shareholders over
the long term.
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.
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 30, 1998
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Top Ten Holdings
September 30, 1998
Exxon Corp. DeKalb Genetics Corp.
Giant Food Inc. American Express Co.
Eastern Enterprises Southern New England Telecom
Philip Morris Companies Inc. British Petroleum Co. plc
Orange & Rockland Utilities Inc. Sprint Corp.
-------------------------------------------------------------------------------
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.
9
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The Gabelli Equity Income Fund
Portfolio of Investments -- September 30, 1998
================================================================================
Market
Shares Cost Value
------ ---- -----
COMMON STOCKS - 88.7%
Aerospace - 1.0%
20,000 Boeing Co. .................................. $ 772,544 $ 686,250
1,000 Raytheon Co., Cl. A ......................... 27,785 51,813
2,000 Rockwell International Corp. ................ 50,431 72,250
----------- -----------
850,760 810,313
----------- -----------
Agriculture - 2.5%
20,000 DeKalb Genetics Corp. ....................... 1,886,532 1,840,000
3,000 Monsanto Co. ................................ 117,236 169,125
----------- -----------
2,003,768 2,009,125
----------- -----------
Automotive - 1.1%
4,500 Ford Motor Co. .............................. 70,226 211,219
12,000 General Motors Corp. ........................ 423,560 656,250
----------- -----------
493,786 867,469
----------- -----------
Automotive: Parts and Accessories - 1.2%
2,500 Dana Corp. .................................. 65,938 93,281
5,000 Ethyl Corp. ................................. 39,500 20,000
20,000 GenCorp Inc. ................................ 327,212 385,000
14,000 Genuine Parts Co. ........................... 333,495 420,875
3,000 Meritor Automotive Inc. ..................... 67,150 45,188
----------- -----------
833,295 964,344
----------- -----------
Aviation: Parts and Services - 1.7%
10,000 Barnes Group Inc. ........................... 166,500 287,500
19,000 Curtiss-Wright Corp. ........................ 279,091 754,063
4,000 United Technologies ......................... 226,617 305,750
----------- -----------
672,208 1,347,313
----------- -----------
Business Services - 0.4%
4,000 Dun & Bradstreet Corp. ...................... 85,317 107,999
1,000 Imation Corp.+ .............................. 16,753 18,500
1,000 IMS Health Inc. ............................. 31,331 61,938
2,000 Landauer Inc. ............................... 35,944 51,000
666 Nielsen Media Research Inc. ................. 4,842 6,827
5,800 R. H. Donnelley Corp. ....................... 66,844 71,775
----------- -----------
241,031 318,039
----------- -----------
Communications Equipment - 0.1%
1,000 Motorola Inc. ............................... 27,263 42,688
----------- -----------
Computer Software and Services - 1.0%
6,500 International Business Machines Corp. ....... 165,539 832,000
----------- -----------
Consumer Products - 7.7%
11,000 Eastman Kodak Co. ........................... 660,722 850,438
2,000 Fortune Brands Inc. ......................... 55,490 59,250
40,000 Gallaher Group plc, ADR ..................... 679,371 1,174,999
5,000 General Cigar Holdings Inc., Cl. B+ (b) ..... 44,132 32,188
9,000 General Electric Co. ........................ 213,809 716,063
8,000 Gillette Co. ................................ 96,850 306,000
18,000 National Presto Industries Inc. ............. 754,427 675,000
50,000 Philip Morris Companies Inc. ................ 2,055,628 2,303,124
200 Rothmans Inc. ............................... 27,296 26,732
----------- -----------
4,587,725 6,143,794
----------- -----------
Consumer Services - 0.4%
20,000 Rollins Inc. ................................ 412,219 355,000
----------- -----------
Diversified Industrial - 3.7%
34,274 GATX Corp. .................................. 998,952 1,133,184
7,000 Honeywell Inc. .............................. 301,396 448,438
5,000 Minnesota Mining & Manufacturing Co. ........ 399,500 368,438
16,000 Tenneco Inc. ................................ 635,100 525,999
21,000 Thomas Industries Inc. ...................... 157,975 450,187
1,000 Trinity Industries Inc. ..................... 26,570 32,438
----------- -----------
2,519,493 2,958,684
----------- -----------
Energy: Electric - 7.9%
8,000 Central & South West Corp. .................. 217,400 228,500
3,500 Central Hudson Gas & Electric Corp. ......... 148,613 146,563
11,000 Energy East Corp. ........................... 474,584 561,000
17,000 Florida Public Utilities Co. ................ 255,700 259,250
1,000 FPL Group Inc. .............................. 28,613 69,688
45,000 MarketSpan Corp. ............................ 1,269,267 1,290,938
95,000 Niagara Mohawk Power Corp.+ ................. 1,010,837 1,460,625
35,000 Orange & Rockland Utilities Inc. ............ 1,877,652 1,920,624
8,000 PacifiCorp .................................. 158,700 153,500
5,000 Public Services Enterprise Group Inc. ....... 164,125 196,563
----------- -----------
5,605,491 6,287,251
----------- -----------
Energy: Natural Gas - 12.6%
30,000 AGL Resources Inc. .......................... 548,529 581,250
30,000 Bay State Gas Co. ........................... 858,690 1,168,125
4,500 Berkshire Gas Co. ........................... 79,060 101,250
50,000 Colonial Gas Co. ............................ 1,183,188 1,446,875
34,000 Commonwealth Energy System .................. 761,900 1,236,750
55,552 Eastern Enterprises ......................... 1,551,633 2,340,125
58,000 ENI SpA ..................................... 304,221 355,206
10,000 Fall River Gas Co. .......................... 160,250 154,375
4,000 Peoples Energy Corp. ........................ 138,275 144,000
70,000 Southwest Gas Corp. ......................... 1,128,400 1,430,625
41,000 Wicor Inc. .................................. 914,533 978,875
----------- -----------
7,628,679 9,937,456
----------- -----------
Energy: Oil - 12.1%
13,000 Atlantic Richfield Co. ...................... 703,892 922,188
19,000 British Petroluem Co. plc, ADR .............. 417,288 1,657,749
16,000 Burlington Resources Inc. ................... 661,765 598,000
10,000 Chevron Corp. ............................... 312,563 840,625
6,000 Elf Aquitaine SA ............................ 299,550 373,125
See accompanying notes to financial statements.
10
<PAGE>
The Gabelli Equity Income Fund
Portfolio of Investments (Continued) -- September 30, 1998
================================================================================
Market
Shares Cost Value
------ ---- -----
COMMON STOCKS (Continued)
Energy: Oil (Continued)
43,000 Exxon Corp. ................................. $ 1,301,977 $ 3,018,062
18,000 Halliburton Co. ............................. 378,023 514,125
10,000 Pennzoil Co. ................................ 488,500 350,625
21,000 Texaco Inc. ................................. 641,025 1,316,438
----------- -----------
5,204,583 9,590,937
----------- -----------
Entertainment - 0.4%
2,000 PolyGram NV, ADR ............................ 58,725 113,500
1,500 USA Networks Inc. + ......................... 20,003 29,156
3,000 Viacom Inc., Cl. A+ ......................... 92,520 172,500
----------- -----------
171,248 315,156
----------- -----------
Equipment and Supplies - 2.8%
15,000 Aeroquip-Vickers Inc. ....................... 454,967 431,250
3,000 Caterpillar Inc. ............................ 35,181 133,688
2,000 Cooper Industries Inc. ...................... 84,754 81,500
25,000 Deere & Co. ................................. 347,127 756,249
10,000 EG&G Inc. ................................... 175,863 226,250
3,000 Ingersoll Rand Co. .......................... 75,350 113,813
1,500 Minerals Technologies Inc. .................. 37,938 66,094
18,000 Smith (A.O.) Corp., Cl. B ................... 401,225 353,250
1,000 Union Carbide Corp. ......................... 16,675 43,125
----------- -----------
1,629,080 2,205,219
----------- -----------
Financial Services - 10.5%
6,000 Allied Group Inc. ........................... 279,150 288,375
23,000 American Express Co. ........................ 492,759 1,785,374
4,700 Argonaut Group Inc. ......................... 122,088 119,850
1,500 Banco Popular Espanol ....................... 122,662 94,499
57,000 Banco Santander SA, ADR ..................... 417,536 862,125
1,500 Banco Santiago .............................. 23,513 18,656
8,000 BankAmerica Co. ............................. 167,825 481,000
2,500 Bankers Trust Co. ........................... 213,813 147,500
2,500 Banque Nationale de Paris ................... 205,080 133,814
1,000 Chase Manhattan Corp. ....................... 45,675 43,250
27,000 Commerzbank AG, ADR ......................... 554,661 730,185
19,500 Deutsche Bank AG, ADR ....................... 990,574 1,006,877
2,000 Fidelity National Corp.+ .................... 22,958 19,500
1,500 First Union Corp. ........................... 66,944 76,781
4,000 Mellon Bank Corp. ........................... 229,741 220,250
8,200 Morgan (J.P.) & Co. Inc. .................... 506,833 693,925
3,000 Municipal Mortgage & Equity LLC ............. 60,488 59,063
3,000 Northern Trust Co. .......................... 60,300 204,750
1,000 Pioneer Group Inc. .......................... 30,124 16,500
3,000 Sterling Bancorp ............................ 74,525 60,375
12,000 SunTrust Banks Inc. ......................... 251,737 744,000
2,200 Transamerica Corp. .......................... 111,528 233,200
4,000 U.S. Trust Corp. ............................ 47,394 265,500
1,000 Wachovia Corp. .............................. 77,569 85,250
----------- -----------
5,175,477 8,390,599
----------- -----------
Food and Beverage - 1.5%
4,000 Bestfoods Inc. .............................. 192,316 193,750
6,000 Coca-Cola Amatil Ltd., ADR .................. 63,363 31,619
12,000 Coca-Cola Beverages plc + ................... 28,750 27,326
3,000 Corn Products International Inc.+ ........... 86,909 75,750
6,000 Heinz (H.J.) Co. ............................ 289,963 306,750
14,000 Kellogg Co. ................................. 452,197 461,125
2,000 Quaker Oats Co. ............................. 69,725 118,000
----------- -----------
1,183,223 1,214,320
----------- -----------
Health Care - 1.3%
1,000 Glaxo Wellcome plc, ADR ..................... 54,024 57,125
3,500 Johnson & Johnson ........................... 67,525 273,875
10,000 Pharmacia & Upjohn Inc. ..................... 290,500 501,875
3,000 SmithKline Beecham plc, ADR ................. 184,980 164,250
----------- -----------
597,029 997,125
----------- -----------
Metals and Mining - 0.2%
16,000 Freeport-McMoRan Copper &
Gold Inc., Cl. B .......................... 293,099 190,000
----------- -----------
Publishing - 2.2%
10,000 Dow Jones & Co. Inc. ........................ 463,770 465,000
3,000 Harcourt General Inc. ....................... 136,775 145,125
3,000 McGraw-Hill Companies Inc. .................. 178,192 237,750
28,000 Reader's Digest Association Inc., Cl. A ..... 640,013 535,500
21,000 Reader's Digest Association Inc., Cl. B ..... 500,319 399,000
----------- -----------
1,919,069 1,782,375
----------- -----------
Real Estate - 0.0%
2,500 Griffin Land & Nurseries Inc.+ .............. 11,716 27,656
----------- -----------
Retail - 3.6%
65,000 Giant Food Inc., Cl. A ...................... 2,749,106 2,807,188
2,000 Sears, Roebuck & Co. ........................ 51,242 88,375
----------- -----------
2,800,348 2,895,563
----------- -----------
Satellite - 0.7%
15,000 COMSAT Corp. ................................ 291,042 528,750
----------- -----------
Specialty Chemicals - 2.2%
12,500 BetzDearborn Inc. ........................... 843,638 864,062
2,000 du Pont de Nemours (E.I.) and Co. ........... 65,500 112,250
7,500 Ferro Corp. ................................. 138,500 149,063
10,000 Grace (W.R.) & Co. + ........................ 115,126 124,375
12,000 Hoechst AG, ADR ............................. 460,144 468,750
1,500 IMC Global Inc. ............................. 31,075 29,063
----------- -----------
1,653,983 1,747,563
----------- -----------
See accompanying notes to financial statements.
11
<PAGE>
The Gabelli Equity Income Fund
Portfolio of Investments (Continued) -- September 30, 1998
================================================================================
Market
Shares Cost Value
------ ---- -----
COMMON STOCKS (Continued)
Telecommunications - 9.4%
3,000 Alltel Corp. ................................ $ 71,900 $ 142,125
4,000 AT&T Corp. .................................. 235,950 233,750
18,000 BC Telecom Inc. ............................. 317,456 424,572
50,000 BCE Inc. .................................... 845,709 1,396,874
4,608 Bell Atlantic Corp. ......................... 117,619 223,200
1,500 British Telecommunications plc, ADR ......... 84,309 199,594
10,000 Cable & Wireless plc, ADR + ................. 217,366 271,250
40,964 Citizens Utilities Co., Cl. B+ .............. 428,249 332,832
7,000 Deutsche Telekom AG, ADR .................... 149,708 206,063
1,000 France Telecom SA, ADR ...................... 34,488 58,750
24,000 GTE Corp. ................................... 811,200 1,320,000
10,000 Hong Kong Telecommunications Ltd., ADR ...... 139,671 191,250
2,000 SBC Communications Inc. ..................... 37,775 88,875
22,000 Southern New England
Telecommunications Corp. .................. 773,997 1,718,749
3,500 Telecom Italia SpA, ADR ..................... 108,779 234,500
4,000 Telefonica de Espana, ADR ................... 173,262 431,750
1,000 US West Inc. ................................ 24,839 52,438
----------- -----------
4,572,277 7,526,572
----------- -----------
Utilities - 0.5%
24,000 United Water Resources Inc. ................. 437,013 408,000
----------- -----------
TOTAL COMMON STOCKS ......................... 51,980,444 70,693,311
----------- -----------
CONVERTIBLE PREFERRED STOCKS - 5.0%
Aviation: Parts and Services - 0.1%
3,000 Coltec Capital Trust Pfd. (a) ............... 129,000 114,000
----------- -----------
Broadcasting - 0.1%
3,000 Granite Broadcasting Corp. $1.9375 Cv. Pfd. . 165,917 99,750
----------- -----------
Cable - 0.5%
4,000 MediaOne Group Inc. Pfd. D .................. 206,033 375,500
----------- -----------
Entertainment - 0.0%
500 Metromedia International Group Inc. Cv. Pfd. 25,000 11,375
----------- -----------
Equipment and Supplies - 0.4%
4,000 Sequa Corp. $5.00 Cv. Pfd. .................. 273,150 354,000
----------- -----------
Metals and Mining - 0.1%
5,000 Freeport-McMoRan Copper &
Gold Inc. 7.00% Cv. Pfd. .................. 106,500 80,625
----------- -----------
Paper and Forest Products - 0.9%
20,000 Sealed Air Corp. $2.00 Cv. Pfd. ............. 836,276 722,500
----------- -----------
Publishing - 0.0%
4,000 Golden Books Financial Trust Pfd. ........... 63,000 14,000
----------- -----------
Telecommunications - 2.9%
17,000 Citizens Utilities Co. 5.00% Cv. Pfd. ....... 816,716 731,000
22,000 Sprint Corp. $2.6301 Cv. Pfd. ............... 817,629 1,485,000
----------- -----------
1,634,345 2,216,000
----------- -----------
TOTAL CONVERTIBLE PREFERRED STOCKS .......... 3,439,221 3,987,750
----------- -----------
Principal
Amount
------
CONVERTIBLE CORPORATE BONDS - 2.9%
Business Services - 0.1%
$100,000 BBN Corp. Sub. Deb. Cv. 6.00%, 04/01/12 (b) . 97,091 96,750
----------- -----------
Consumer Products - 0.7%
700,000 Fieldcrest Cannon Inc. Sub. Deb. Cv.
6.00%, 03/15/12 ........................... 547,177 567,000
----------- -----------
Entertainment - 0.2%
150,000 Savoy Pictures Entertainment Inc.
Sub. Deb. Cv. 7.00%, 07/01/03 ............. 133,814 150,000
----------- -----------
Equipment and Supplies - 0.5%
377,000 Kollmorgen Corp. Sub. Deb. Cv.
8.75%, 05/01/09 ........................... 327,873 382,184
----------- -----------
Hotels and Gaming - 0.1%
100,000 Hilton Hotels Corp. Sub. Deb. Cv.
5.00%, 05/15/06 ........................... 94,441 88,500
----------- -----------
Publishing - 1.0%
100,000 News America Holdings Inc.
Sub. Deb. Cv. Zero Cpn., 03/31/02 ......... 76,650 111,000
700,000 Thomas Nelson Inc.
Sub. Deb. Cv.
5.75%, 11/30/99 (a) ....................... 692,830 688,625
----------- -----------
769,480 799,625
----------- -----------
Transportation - 0.3%
200,000 Greyhound Lines Inc.
Sub. Deb. Cv. 8.50%, 03/31/07 ............. 94,825 203,000
----------- -----------
TOTAL CONVERTIBLE CORPORATE BONDS ........... 2,064,701 2,287,059
----------- -----------
See accompanying notes to financial statements.
12
<PAGE>
The Gabelli Equity Income Fund
Portfolio of Investments (Continued) -- September 30, 1998
================================================================================
Market
Cost Value
---- -----
TOTAL INVESTMENTS - 96.6% $57,484,366 $76,968,120
===========
Other Assets and
Liabilities (Net) - 3.4% .................. 2,700,763
-----------
NET ASSETS - 100.0%
(4,988,331 shares outstanding) ............ $79,668,883
===========
NET ASSET VALUE,
Offering and Redemption Price Per Share ... $15.97
======
For Federal tax purposes:
Aggregate cost ............................ $57,555,288
===========
Gross unrealized appreciation ............. $21,265,832
Gross unrealized depreciation ............. (1,853,000)
-----------
Net unrealized appreciation ............... $19,412,832
===========
Net
Principal Settlement Unrealized
Amount Date Depreciation
------ ---- ------------
FORWARD FOREIGN EXCHANGE CONTRACTS
1,600,000(c) Deliver Hong Kong Dollars
in exchange for USD 203,449 ........... 02/26/99 $(4,010)
- ----------
(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, 1998, the market value of Rule 144A securities amounted to
$802,625 or 1.01% of net assets.
(b) Security fair valued as determined by the Board of Directors.
(c) Principal amount denoted in Hong Kong Dollars.
+ Non-income producing security.
ADR--American Depositary Receipt.
See accompanying notes to financial statements.
13
<PAGE>
The Gabelli Equity Income Fund
Statement of Assets and Liabilities
September 30, 1998
================================================================================
Assets:
Investments, at value (Cost $57,484,366) ................. $ 76,968,120
Cash and foreign currency, at value
(Cost $779,068) ........................................ 779,896
Dividends and interest receivable ........................ 224,136
Receivable for investments sold .......................... 1,938,871
Receivable for capital shares issued ..................... 48,973
------------
Total Assets ........................................... 79,959,996
------------
Liabilities:
Payable for capital shares redeemed ...................... 89,365
Payable for investment advisory fees ..................... 64,979
Payable for distribution fees ............................ 16,245
Other accrued expenses ................................... 120,524
------------
Total Liabilities ...................................... 291,113
------------
Net Assets applicable to 4,988,331
shares outstanding ................................... $ 79,668,883
============
Net Assets consist of:
Capital stock, at par value .............................. $ 4,988
Additional paid-in capital ............................... 54,743,516
Accumulated distributions in excess of
net investment income .................................. (2,608)
Accumulated net realized gain on investments
and foreign currency transactions ...................... 5,442,493
Net unrealized appreciation on investments
and foreign currency transactions ...................... 19,480,494
------------
Total Net Assets ....................................... $ 79,668,883
============
Net Asset Value, offering and redemption
price per share ($79,668,883 / 4,988,331
shares outstanding; 1,000,000,000 shares
authorized of $0.001 par value) ...................... $15.97
======
Statement of Operations
For the Year Ended September 30, 1998
================================================================================
Investment Income:
Dividends ............................................... $ 1,940,690
Interest ................................................ 458,023
-----------
Total Investment Income ............................... 2,398,713
-----------
Expenses:
Investment advisory fees ................................ 823,207
Distribution fees ....................................... 205,801
Shareholder services fees ............................... 122,662
Directors' fees ......................................... 46,553
Legal and audit fees .................................... 43,419
Shareholder report expenses ............................. 36,332
Custodian fees .......................................... 32,647
Registration fees ....................................... 26,453
Miscellaneous expenses .................................. 13,553
-----------
Total Expenses ........................................ 1,350,627
-----------
Net Investment Income ................................. 1,048,086
-----------
Net Realized and Unrealized Gain (Loss)
on Investments:
Net realized gain on investments
and foreign currency transactions ..................... 5,867,346
Net change in unrealized appreciation
on investments and foreign currency
transactions .......................................... (4,965,383)
-----------
Net realized and unrealized gain on
investments and foreign currency
transactions .......................................... 901,963
-----------
Net increase in net assets resulting
from operations ......................................... $ 1,950,049
===========
Statement of Changes in Net Assets
================================================================================
Year Ended Year Ended
September 30, September 30,
1998 1997
------------- -------------
Operations:
Net investment income ....................... $ 1,048,086 $ 912,876
Net realized gain on investments and
foreign currency transactions ............. 5,867,346 7,289,794
Net change in unrealized appreciation on
investments and foreign currency
transactions .............................. (4,965,383) 10,713,542
------------ ------------
Net increase in net assets resulting
from operations ......................... 1,950,049 18,916,212
------------ ------------
Distributions to shareholders:
Net investment income ....................... (1,221,353) (912,876)
In excess of net investment income .......... -- (6,607)
Net realized gain on investments ............ (7,160,971) (2,841,998)
------------ ------------
Total distributions to shareholders ....... (8,382,324) (3,761,481)
------------ ------------
Capital share transactions:
Net increase in net assets from capital
share transactions ........................ 12,370,942 1,569,224
------------ ------------
Net increase in net assets ................ 5,938,667 16,723,955
Net Assets:
Beginning of period ......................... 73,730,216 57,006,261
------------ ------------
End of period ............................... $ 79,668,883 $ 73,730,216
============ ============
See accompanying notes to financial statements.
14
<PAGE>
The Gabelli Equity Income Fund
Notes to Financial Statements
================================================================================
1. Description. The Gabelli Equity Income Fund (the "Fund"), a series of Gabelli
Equity Series Funds, Inc. (the "Corporation"), was organized on July 25, 1991 as
a Maryland corporation. The Fund is a diversified, open-end management
investment company registered under the Investment Company Act of 1940, as
amended (the "1940 Act"), and one of two separately managed portfolios
(collectively, the "Portfolios") of the Corporation. The Fund's primary
objective is to seek a high level of total return with an emphasis on income.
The Fund commenced investment operations on January 2, 1992.
2. Significant Accounting Policies. 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 as of the close of business on
the day the securities are being valued (if there were no sales that day, the
security is valued at the average of the closing bid and asked prices or, if
there were no asked prices quoted on that day, then the security is valued at
the closing bid price on that day). 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. Portfolio securities traded on more
than one national securities exchange or market are valued according to the
broadest and most representative market, as determined by Gabelli Funds, Inc.
(the "Adviser"). Securities and assets for which market quotations are not
readily available are valued at their fair value as determined in good faith
under procedures established by and under the general supervision of the Board
of 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. Debt instruments
having a greater maturity are valued at the highest bid price obtained from a
dealer maintaining an active market in those securities. 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.
Repurchase Agreements. The Fund may enter into repurchase agreements with
primary government securities dealers recognized by the Federal Reserve Bank of
New York, with member banks of the Federal Reserve System or with other brokers
or dealers that meet credit guidelines established by the Directors. Under the
terms of a typical repurchase agreement, the Fund takes possession of an
underlying debt obligation subject to an obligation of the seller to repurchase,
and the Fund to resell, the obligation at an agreed-upon price and time, thereby
determining the yield during the Fund's holding period. The Fund will always
receive and maintain securities as collateral whose market value, including
accrued interest, will be at least equal to 100% of the dollar amount invested
by the Fund in each agreement. The Fund will make payment for such securities
only upon physical delivery or upon evidence of book entry transfer of the
collateral to the account of the custodian. To the extent that any repurchase
transaction exceeds one business day, the value of the collateral is
marked-to-market on a daily basis to maintain the adequacy of the collateral. If
the seller defaults and the value of the collateral declines or if bankruptcy
proceedings are commenced with respect to the seller of the security,
realization of the collateral by the Fund may be delayed or limited.
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
15
<PAGE>
The Gabelli Equity Income Fund
Notes to Financial Statements (Continued)
================================================================================
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 included in unrealized gains or losses.
The Fund recognizes a realized gain or loss when the contract is closed. At
September 30, 1998, 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 future 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 Exchange 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 exchange contracts are valued at the
forward rate and are marked-to-market daily. The change in market value is
included in unrealized appreciation/depreciation on investments. 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 exchange 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
exchange contracts limit the risk of loss due to a decline in the value of the
hedged currency, they also limit any potential gain that might result should the
value of the currency increase. In addition, the Fund could be exposed to risks
if the counterparties to the contracts are unable to meet the terms of their
contracts.
Foreign Currency Translation. The books and records of the Fund are maintained
in United States (U.S.) dollars. Foreign currencies, investments and other
assets and liabilities are translated into U.S. dollars at the exchange rates
prevailing at the end of the period, and purchases and sales of investment
securities, income and expenses are translated at the exchange rate prevailing
on the respective dates of such transactions. Unrealized gains and losses, which
result from changes in foreign exchange rates and/or changes in market prices of
securities, have been included in unrealized appreciation/depreciation on
investments. Net realized foreign currency gains and losses resulting from
changes in exchange rates include foreign currency gains and losses between
trade date and settlement date on investment securities transactions, foreign
currency transactions and the difference between the amounts of interest and
dividends recorded on the books of the Fund and the amounts actually received.
The portion of foreign currency gains and losses related to fluctuation in
exchange rates between the initial trade date and subsequent sale trade date is
included in realized gain/(loss) on investments.
Securities Transactions and Investment Income. Securities transactions are
accounted for on the trade date with realized gain or loss on investments
determined by using the identified cost method. Interest income (including
amortization of premium and accretion of discount) is recorded as earned.
Dividend income is recorded on the ex-dividend date.
Expenses. Certain administrative expenses are common to, and allocated among,
the Portfolios. Such allocations are made on the basis of each Portfolio's
average net assets or other criteria directly affecting the expenses as
determined by the Adviser.
16
<PAGE>
The Gabelli Equity Income Fund
Notes to Financial Statements (Continued)
================================================================================
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.
For the year ended September 30, 1998, reclassifications were made to decrease
accumulated net investment loss for $5,782 and increase accumulated net realized
gain on investments and foreign currency transactions for $5,782.
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.
Dividends and interest from non-U.S. sources received by the Fund are generally
subject to non-U.S. withholding taxes at rates ranging up to 30%. Such
withholding taxes may be reduced or eliminated under the terms of applicable
U.S. income tax treaties, and the Fund intends to undertake any procedural steps
required to claim the benefits of such treaties
3. 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.
4. Distribution Plan. The Fund's Board of Directors has adopted a distribution
plan (the "Plan") pursuant to Rule 12b-1 under the 1940 Act. For the year ended
September 30, 1998, the Fund incurred distribution costs payable to Gabelli &
Company, Inc., an indirect wholly-owned subsidiary of the Adviser, of $205,801,
or 0.25% of average daily net assets, the annual limitation under the Plan. Such
payments are accrued daily and paid monthly.
5. Portfolio Securities. Purchases and sales of securities for the year ended
September 30, 1998, other than short term securities, aggregated $35,929,273 and
$27,041,372, respectively.
6. Transactions with Affiliates. During the year ended September 30, 1998, the
Fund paid brokerage commissions of $26,302 to Gabelli & Company, Inc. and its
affiliates.
7. Bank Loan. The Fund has access to an unsecured line of credit from the
custodian for temporary borrowing purposes. Borrowings under this arrangement
bear interest at 0.75% above the Federal Funds rate on outstanding balances.
There were no borrowings outstanding at September 30, 1998.
The average daily amount of borrowings outstanding during the year ended
September 30, 1998, was $38,055, with a related weighted average interest rate
of 6.32%. The maximum amount borrowed at any time during the year ended
September 30, 1998 was $1,780,000.
17
<PAGE>
The Gabelli Equity Income Fund
Notes to Financial Statements (Continued)
================================================================================
8. Capital Stock Transactions. Transactions in shares of capital stock were as
follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
September 30, 1998 September 30, 1997
---------------------- ----------------------
Shares Amount Shares Amount
--------- ----------- ---------- ---------
<S> <C> <C> <C> <C>
Shares sold ................................... 1,216,183 $20,779,591 920,283 $13,914,893
Shares issued upon reinvestment of dividends .. 491,179 7,882,560 243,710 3,536,567
Shares redeemed ............................... (958,240) (16,291,209) (1,052,497) (15,882,236)
--------- ----------- ---------- -----------
Net increase ................................ 749,122 $12,370,942 111,496 $ 1,569,224
========= =========== ========== ===========
</TABLE>
Financial Highlights
================================================================================
Selected data for a share of capital stock outstanding throughout each period:
<TABLE>
<CAPTION>
Year Ended September 30,
------------------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Operating performance:
Net asset value, beginning of period .......... $ 17.39 $ 13.81 $ 12.65 $ 11.54 $ 12.15
------- ------- ------- ------- -------
Net investment income ......................... 0.22 0.22 0.28 0.29 0.30
Net realized and unrealized gain
on investments .............................. 0.29 4.28 1.76 1.77 0.08
------- ------- ------- ------- -------
Total from investment operations .............. 0.51 4.50 2.04 2.06 0.38
------- ------- ------- ------- -------
Distributions to shareholders:
Net investment income ......................... (0.26) (0.22) (0.28) (0.29) (0.31)
In excess of net investment income ............ -- -- (0.01) -- --
Net realized gain on investments .............. (1.67) (0.70) (0.59) (0.66) (0.68)
------- ------- ------- ------- -------
Total distributions ........................... (1.93) (0.92) (0.88) (0.95) (0.99)
------- ------- ------- ------- -------
Net asset value, end of period ................ $ 15.97 $ 17.39 $ 13.81 $ 12.65 $ 11.54
======= ======= ======= ======= =======
Total return+ ................................. 3.0% 34.0% 16.7% 19.2% 3.3%
======= ======= ======= ======= =======
Ratios to average net assets and supplemental data:
Net assets, end of period (in 000's) .......... $79,669 $73,730 $57,006 $54,806 $50,191
Ratio of net investment income
to average net assets ....................... 1.27% 1.42% 1.99% 2.50% 2.58%
Ratio of operating expenses
to average net assets ....................... 1.64% 1.78% 1.93% 1.83% 1.81%
Portfolio turnover rate ....................... 35% 43% 20% 30% 20%
</TABLE>
- ----------
+ 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.
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, 1998, 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, 1998 by correspondence with the custodian
and others. 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, 1998, 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 10, 1998
- --------------------------------------------------------------------------------
1998 TAX NOTICE TO SHAREHOLDERS (Unaudited)
For the fiscal year ended September 30, 1998, the Fund paid to shareholders
ordinary income dividends (comprised of net investment income and short term
capital gains) totaling $0.51 per share and long term capital gains totaling
$1.42 per share. For the fiscal year ended September 30, 1998, 94.79% 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
year 1998 which was derived from U.S. Treasury securities was 1.27%. Such income
is exempt from state and local 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 1998. 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.
- --------------------------------------------------------------------------------
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.
Felix J. Christiana
Former Senior Vice President
Dollar Dry Dock Savings Bank
Anthony J. Colavita
Attorney-at-Law
Anthony J. Colavita, P.C.
Vincent D. Enright
Former Senior Vice President
and Chief Financial Officer
KeySpan Energy Corp.
John D. Gabelli
Vice President
Gabelli & Company, Inc.
Robert J. Morrissey
Attorney-at-Law
Morrissey & Hawkins
Karl Otto Pohl
Former President
Deutsche Bundesbank
Anthony R. Pustorino
Certified Public Accountant
Professor, Pace University
Anthonie C. van Ekris
Managing Director
BALMAC International, Inc.
Officers
Mario J. Gabelli, CFA
President and Chief
Investment Officer
James E. McKee
Secretary
Bruce N. Alpert
Vice President and Treasurer
Distributor
Gabelli & Company, Inc.
Custodian, Transfer Agent and Dividend Agent
State Street Bank and Trust Company
Legal Counsel
Skadden, Arps, Slate, Meagher & Flom LLP
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
