<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION ON NOVEMBER 30, 1998
REGISTRATION NO. 33-41913
811-6367
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
----------------
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
PRE-EFFECTIVE AMENDMENT NO. [ ]
POST-EFFECTIVE AMENDMENT NO. 8 [X]
AND / OR
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
AMENDMENT NO. 9 [X]
(CHECK APPROPRIATE BOX OR BOXES)
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GABELLI EQUITY SERIES FUNDS, INC.
(Exact Name of Registrant as Specified in Charter)
One Corporate Center, Rye, New York 10580-1434
(Address of Principal Executive Offices)(Zip Code)
Registrant's Telephone Number, including Area Code: (800) 422-3554
--------------------------
BRUCE N. ALPERT
JAMES E. MCKEE, ESQ.
One Corporate Center
Rye, New York 10580-1434
(Name and address of Agent for Service)
Copies to:
RICHARD T. PRINS, ESQ.
Skadden, Arps, Slate, Meagher & Flom
919 Third Avenue
New York, New York 10022
(212) 735-3000
--------------------------
IT IS PROPOSED THAT THIS FILING WILL BE EFFECTIVE (CHECK APPROPRIATE BOX):
[ ] immediately upon filing pursuant to paragraph (b)
[ x ] on December 21, 1998 pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(1)
on (date) pursuant to paragraph (a)(1)
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] on (date) pursuant to paragraph (a)(2) Rule 485.
<PAGE> 2
IF APPROPRIATE, CHECK THE FOLLOWING BOX:
[ ] this post-effective amendment designates a new effective date
for a previously filed post-effective amendment.
------------------------
<PAGE> 3
CROSS-REFERENCE SHEET
(AS REQUIRED BY RULE 495(a)
UNDER THE SECURITIES ACT OF 1933)
<TABLE>
<CAPTION>
N1A
ITEM NO.................................................................LOCATION
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<S> <C>
Part A Prospectus Caption
Item 1. Cover Page Cover Page
Item 2. Synopsis Fee Table
Item 3. Condensed Financial Information Table of Fees and Expenses; Financial Highlights
Item 4. General Description of Registrant Cover Page; Investment Objective and Policies and Related Risk
Factors; Other Investment Techniques and Related Risk Factors;
General Information
Item 5. Management of the Fund Management of the Fund; General Information
Item 5(a) Management's Discussion of Performance Not Applicable
Item 6. Capital Stock and Other Securities Dividends, Distributions and Taxes; General Information
Item 7. Purchase of Securities Being Offered Purchase of Shares; Distribution Plan
Item 8. Redemption or Repurchase Redemption of Shares
Item 9. Legal Proceedings Not Applicable
Part B Statement of Additional Information Caption
Item 10. Cover Page Cover Page
Item 11. Table of Contents Table of Contents
Item 12. General Information and History Not Applicable
Item 13. Investment Objectives and Policies Other Investment Techniques; Invesment Restrictions
Item 14. Management of the Fund Directors and Officers
Item 15. Control Persons and Principal Holders Directors and Officers
of Securities
Item 16. Investment Advisory and Other Services Prospectus - General Information; The Adviser; The
Distributor
Item 17. Brokerage Allocation Portfolio Transactions and Brokerage
Item 18. Capital Stock and Other Securities Prospectus - Dividends, Distributions and Taxes; General
Information
Item 19. Purchase, Redemption and Pricing of Purchase and Redemption of Fund Shares; Determination
Securities Being Offered of Net Asset Value
Item 20. Tax Status and Taxes Dividends, Distributions and Taxes
Item 21. Underwriters The Distributor
Item 22. Calculation of Performance Data Investment Performance Information
Item 23. Financial Statements Financial Statements
Part C Information required to be included in Part C is set forth
under the appropriate Item, so numbered, in Part C of this
Registration Statement.
</TABLE>
<PAGE> 4
The Gabelli Small Cap Growth Fund
ONE CORPORATE CENTER
RYE, NEW YORK 10580-1434
TELEPHONE: 1-800-GABELLI (1-800-422-3554)
HTTP://WWW.GABELLI.COM
PROSPECTUS December 21, 1998
The Gabelli Small Cap Growth Fund (the "Fund") is a series of Gabelli Equity
Series Funds, Inc., a Maryland corporation (the "Corporation"). The Fund is a
no-load open-end, diversified, management investment company whose investment
objective is to seek a high level of capital appreciation on its assets. The
Fund seeks to achieve its investment objective by investing primarily in the
equity securities of smaller companies (those with market values at the time of
investment of less than $500 million) which the Fund's investment adviser
believes are likely to have rapid growth in revenue and/or earnings and
potential for above average capital appreciation.
Shares of the Fund may be purchased without a sales load at net asset value.
The minimum initial investment is $1,000. Additionally, accounts establishing
an Automatic Investment Plan do not require any minimum initial investment (see
"Purchase of Shares"). The Fund has a distribution plan which permits it to pay
up to .25% per year of its average daily net assets for marketing and
shareholder services and expenses. For further information, contact Gabelli &
Company, Inc. at the address or telephone number shown above.
----------------------
This Prospectus sets forth concisely the information a prospective investor
should know before investing in the Fund. A Statement of Additional Information
dated December 21, 1998 (the "Additional Statement") containing additional
information about the Fund has been filed with the Securities and Exchange
Commission (the "SEC") and is available for reference along with other materials
on the SEC Internet website (http://www.sec.gov) and is incorporated by
reference into this Prospectus. For a free copy, write or call the Fund at the
telephone number or address set forth above.
Shares of the Fund are not deposits or obligations of any bank, are not endorsed
or guaranteed by any bank and are not insured or guaranteed by the Federal
Deposit Insurance Corporation, The Federal Reserve Board or any other government
agency and involve risk, including the possible loss of principal.
----------------------
This Prospectus should be retained
by investors for future reference.
----------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SEC OR ANY STATE
SECURITIES COMMISSION NOR HAS THE SEC OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
1
<PAGE> 5
TABLE OF FEES AND EXPENSES
<TABLE>
<CAPTION>
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Shareholder Transaction Expenses:
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<S> <C>
Maximum Sales Charge Imposed on Purchases None
Maximum Sales Charge Imposed on Reinvested Dividends None
Deferred Sales Charge None
Redemption Fees None
Exchange Fees None
Annual Fund Operating Expenses (as a percentage of average net assets):
- ---------------------------------------------------------------------------------------------------------------------------
Management Fees 1.00%
12b-1 Expenses (a) .25
Other Expenses (b) .28%
-----
Total Fund Operating Expenses 1.53%
-------
- ------------
- ---------------------
(a) See "Distribution Plan."
(b) Such expenses include custodian and transfer agency fees and other customary
Fund expenses.
Example: 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ---------------------------------------------------------------------------------------------------------------------------
----- ------ ------ -------
You would pay the following expenses on a $1,000 investment,
assuming a 5% annual return at the end of each period $16 $48 $83 $182
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
The amounts listed in this example should not be considered as representative of
future expenses since actual expenses may be greater or less than those
indicated. Moreover, while the example assumes a 5% annual return, the Fund's
actual performance will vary and may result in an actual return greater or less
than 5%.
The foregoing table is to assist you in understanding the various direct and
indirect costs and expenses that an investor in the Fund would bear.
Management's Discussion and Analysis of the Fund's performance during the fiscal
year ended September 30, 1998 is included in the Fund's Annual Report to
Shareholders dated September 30, 1998. The Fund's Annual Report to Shareholders
may be obtained upon request and without charge by writing or calling the Fund
at the address or telephone number listed on the Prospectus cover.
FINANCIAL HIGHLIGHTS
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The information in the following table has been audited by Ernst & Young LLP,
the Fund's independent auditors, whose unqualified report thereon appears in the
Statement of Additional Information:
Selected data for a share of capital stock outstanding throughout each period
ended September 30:
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994 1993 1992+
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING PERFORMANCE:
Net asset value, beginning of period $25.42 $20.02 $19.34 $17.24 $16.90 $13.10 $10.00
------ ------ ------ ------ ------ ------ ------
Net investment income (loss) (0.03) (0.07) (0.09) (0.04) (0.05) 0.01 0.04
Net realized and unrealized gain (loss) on
investments (2.99) 7.70 2.11 3.17 0.81 3.98 3.14
------ ---- ---- ---- ---- ---- ----
Total from investment operations (3.02) 7.63 2.02 3.13 0.76 3.99 3.18
------ ---- ---- ---- ---- ---- ----
DISTRIBUTIONS TO SHAREHOLDERS:
Net investment income -- -- -- -- -- (0.03) (0.01)
Net realized gains on
investments (3.59) (2.23) (1.34) (1.03) (0.42) (0.16) (0.07)
----- ------ ------ ------ ------ ------ ------
Total Distributions (3.59) (2.23) (1.34) (1.03) (0.42) (0.19) (0.08)
------ ------ ----- ------ ------ ------ ------
NET ASSET VALUE, END OF PERIOD $18.81 $25.42 $20.02 $19.34 $17.24 $16.90 $13.10
====== ====== ====== ====== ====== ====== ======
Total Return (a) (13.5%) 42.20% 11.01% 19.47% 4.48% 30.65% 31.86%
======= ====== ====== ====== ===== ====== ======
RATIOS TO AVERAGE NET
ASSETS AND SUPPLEMENTAL DATA:
</TABLE>
2
<PAGE> 6
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
Net assets, end of period (in 000s) $277,820 $296,519 $223,239 $231,156 $205,699 $204,617 $94,864
Ratio of net investment (loss) to average
net assets (0.14%) (0.36%) (0.42%) (0.24%) (0.28%) 0.03% 0.32%*
Ratio of operating expenses to
average net assets 1.44% 1.62% (b) 1.58% 1.54% 1.54% 1.64% 1.97%*
Portfolio turnover rate 20% 14% 11% 17% 19% 14% 16%
</TABLE>
* Annualized
+ For the period October 22, 1991 (commencement of operations) through September
30, 1992.
(a) Total return represents aggregate total return of a hypothetical $1,000
investment at the beginning of the period and sold at the end of the period
including reinvestment of dividends.
(b) The Fund incurred interest expense during the year ended September 30,
1997. Excluding interest expense, the operating expense ratio would have been
1.52%.
3
<PAGE> 7
INVESTMENT OBJECTIVE AND
- --------------------------------------------------------------------------------
POLICIES AND RELATED RISK FACTORS
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The Fund's investment objective is to seek a high level of capital appreciation
on its assets by investing primarily in the equity securities of smaller
companies (those with total market values at the time of investment of less than
$500 million) which the Adviser believes are likely to have rapid growth in
revenues and earnings and potential for above average capital appreciation.
Although the Fund may also invest in any type of fixed income instrument and may
use various hedging techniques, under normal market conditions the Fund will
invest at least 65% of its total assets in the equity securities of smaller
growth companies (as defined above). Equity securities include common stock,
preferred stock and securities convertible into or exchangeable for common or
preferred stock. Risks inherent in the Fund's investment objective and policies
are discussed below.
Equity Securities
- --------------------------------------------------------------------------------
Common stocks represent the residual ownership interest in the issuer and are
entitled to the income and increase in the value of the assets and business of
the entity after all of its obligations and preferred stock are satisfied.
Common stocks generally have voting rights. Common stocks fluctuate in price in
response to many factors including historical and prospective earnings of the
issuer, the value of its assets, general economic conditions, interest rates,
investor perceptions and market liquidity.
Equity securities also include preferred stock (whether or not convertible into
common stock) and debt securities convertible into or exchangeable for common or
preferred stock. Preferred stock has a preference over common stock in
liquidation (and generally dividends as well) but is subordinated to the
liabilities of the issuer in all respects. As a general rule the market value of
preferred stock with a fixed dividend rate and no conversion element varies
inversely with interest rates and perceived credit risk, while the market price
of convertible preferred stock generally also reflects some element of
conversion value. Because preferred stock is junior to debt securities and other
obligations of the issuer, deterioration in the credit quality of the issuer
will cause greater changes in the value of a preferred stock than in a more
senior debt security with similarly stated yield characteristics. Debt
securities that are convertible into or exchangeable for preferred common stock
are liabilities of the issuer but are generally subordinated to more senior debt
included on the issuer's balance sheet. Although such securities also generally
reflect an element of conversion value, their market value also varies with
interest rates and perceived credit risk.
Smaller growth companies may offer greater potential for capital appreciation
than larger companies. Smaller growth companies usually have new products or
technologies, new distribution methods, rapid changes in industry conditions due
to regulatory or other developments, changes in management or similar
characteristics that may result not only in the expected growth in revenues but
in an accelerated or above average rate of earnings growth, which would usually
be reflected in capital appreciation. In addition, because they are less
actively followed by stock analysts and less information is available on which
to base stock price evaluations, the market may overlook favorable trends in
particular smaller growth companies, and then adjust its valuation more quickly
once investor interest is gained. Smaller growth companies may also be more
subject to a valuation catalyst (such as increased investor attention, takeover
efforts or a change in management) than larger companies.
On the other hand, higher market risks are often associated with smaller growth
companies. They may have limited product lines, markets, market share and
financial resources, or they may be dependent on a small or inexperienced
management team. In addition, their stocks may trade less frequently and in more
limited volume and be subject to greater and more abrupt price swings than
stocks of larger companies.
The Adviser believes that opportunities for capital appreciation may also be
found in the preferred stock and convertible securities of smaller growth
companies. This is particularly true in the case of companies that have
performed below expectations at the time the preferred stock or convertible
security was issued. If the company's performance has been poor enough, its
preferred stock and convertible debt securities will trade more like the common
stock than like a fixed income security and may result in above average
appreciation once it becomes apparent that performance is improving. Even if the
credit quality of the company is not in question, the market price of the
convertible security will often reflect little or no element of conversion value
if the price of its common stock has fallen substantially below the conversion
price. This leads to the possibility of capital appreciation if the price of the
common stock recovers. Although the Adviser believes that capital appreciation
opportunities may be found in these securities, it does not expect them to
constitute a major portion of the Fund's portfolio. Preferred
4
<PAGE> 8
stocks and convertible securities have many of the same characteristics and
risks as nonconvertible debt securities described below. There is no minimum
credit rating for these securities in which the Fund may invest.
Nonconvertible Debt Securities
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Under normal market conditions, the Fund may invest up to 35% of its total
assets in nonconvertible debt securities. These securities include bonds,
debentures, notes, asset and mortgage backed securities and money market
instruments such as commercial paper and bankers acceptances. There is no
minimum credit rating for these securities in which the Fund may invest.
Accordingly, the Fund could invest in securities in default although the Fund
will not invest more than 5% of its assets in such securities. Fixed income
securities rated, at the time of investment, less than BBB by Standard & Poor's
Corporation ("S&P") or Baa by Moody's Investor Service ("Moody's") or which are
unrated but of comparable quality in the judgment of the Adviser, are not
investment grade and are viewed by the rating agencies as being predominantly
speculative in character and are characterized by substantial risk concerning
payments of interest and principal, sensitivity to economic conditions and
changes in interest rates, as well as by market price volatility and/or relative
lack of secondary market trading, among other risks. For further information
regarding lower rated securities, which are often known as "junk bonds", and the
risks associated therewith, see "Other Investment Techniques" and the
Description of Corporate Bond, Corporate Debt and Preferred Stock Ratings
attached in the Additional Statement as an Appendix.
Asset-Backed and Mortgage-Backed
- --------------------------------------------------------------------------------
Securities
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Prepayments of principal may be made at any time on the obligations underlying
asset and mortgage backed securities and are passed on to the holders of the
asset and mortgage backed securities. As a result, if the Fund purchases such a
security at a premium, faster than expected prepayments will reduce and slower
than expected prepayments will increase yield to maturity. Conversely, if the
Fund purchases these securities at a discount, faster than expected prepayments
will increase, while slower than expected prepayments will reduce, yield to
maturity.
For temporary defensive purposes the Fund may invest up to 100% of its assets
in fixed income securities of high quality money market instruments.
OTHER INVESTMENT
- --------------------------------------------------------------------------------
TECHNIQUES AND RELATED RISK FACTORS
- --------------------------------------------------------------------------------
Foreign Securities
- --------------------------------------------------------------------------------
The Fund may invest up to 35% of its total assets in the securities of non-U.S.
issuers. These investments involve certain risks not ordinarily associated with
investments in securities of domestic issuers. These risks include fluctuations
in foreign exchange rates, future political and economic developments, and the
possible imposition of exchange controls or other foreign governmental laws or
restrictions. In addition, with respect to certain countries, there is the
possibility of expropriation of assets, confiscatory taxation, political or
social instability or diplomatic developments which could adversely affect
investments in those countries.
The expected introduction of a single currency, the Euro, on January 1, 1999 for
participating nations in the European Economic and Monetary Union presents
unique uncertainties, including whether the payment and operational systems of
banks and other financial institutions will be ready by the scheduled launch
date; the legal treatment of certain outstanding financial contracts after
January 1, 1999 that refer to existing currencies rather than the Euro; the
establishment of exchange rates for existing currencies and the Euro; and the
creation of suitable clearing and settlement payment systems for the new
currency. These or other factors, including political and economic risks, could
cause market disruptions before or after the introduction of the Euro, and could
adversely affect the value of securities held by the Fund.
There may be less publicly available information about a foreign company than
about a U.S. company, and foreign companies may not be subject to accounting,
auditing and financial reporting standards and requirements comparable to or as
uniform as those of U.S. companies. Non-U.S. securities markets, while growing
in volume, have, for the most part, substantially less volume than U.S. markets,
and securities of many foreign companies
5
<PAGE> 9
are less liquid and their prices more volatile than securities of comparable
U.S. companies. Transaction costs of investing in non-U.S. securities markets
are generally higher than in the U.S. There is generally less government
supervision and regulation of exchanges, brokers and issuers than there is in
the U.S. The Fund might have greater difficulty taking appropriate legal action
in non-U.S. courts. Non-U.S. markets also have different clearance and
settlement procedures which in some markets have at times failed to keep pace
with the volume of transactions, thereby creating substantial delays and
settlement failures that could adversely affect the Fund's performance.
Corporate Reorganizations
- --------------------------------------------------------------------------------
Subject to the Fund's policy of investing at least 65% of its total assets in
equity securities of smaller companies, the Fund may invest without limit in
securities for which a tender or exchange offer has been made or announced and
in securities of companies for which a merger, consolidation, liquidation or
similar reorganization proposal has been announced if, in the judgment of the
Adviser, there is a reasonable prospect of capital appreciation significantly
greater than the added portfolio turnover expenses inherent in the short term
nature of such transactions. The principal risk is that such offers or proposals
may not be consummated within the time and under the terms contemplated at the
time of the investment, in which case, unless such offers or proposals are
replaced by equivalent or increased offers or proposals which are consummated,
the Fund may sustain a loss. For further information on such investments, see
"Other Investment Techniques" in the Additional Statement.
Options and Futures
- --------------------------------------------------------------------------------
The Fund may purchase or sell options on individual securities as well as on
indices of securities as a means of achieving additional return or of hedging
the value of the Fund's portfolio.
A call option is a contract that gives the holder of the option the right, in
return for a premium paid, to buy from the seller the security underlying the
option at a specified exercise price at any time during the term of the option
or, in some cases, only at the end of the term of the option. The seller of the
call option has the obligation upon exercise of the option to deliver the
underlying security upon payment of the exercise price. A put option is a
contract that gives the holder of the option the right, in return for a premium
paid, to sell to the seller the underlying security at a specified price. The
seller of the put, on the other hand, has the obligation to buy the underlying
security upon exercise at the exercise price.
If the Fund has sold an option, it may terminate its obligation by effecting a
closing purchase transaction. This is accomplished by purchasing an option of
the same series as the option previously sold. There can be no assurance that a
closing purchase transaction can be effected when the Fund so desires.
The purchaser of an option risks a total loss of the premium paid for the option
if the price of the underlying security does not increase or decrease
sufficiently to justify exercise. The seller of an option, on the other hand,
will recognize the premium as income if the option expires unexercized but
foregoes any capital appreciation in excess of the exercise price in the case of
a call option and may be required to pay a price in excess of current market
value in the case of a put option. Options purchased and sold other than on an
exchange in private transactions also impose on the Fund the credit risk that
the counterparty will fail to honor its obligations. The Fund will not purchase
options if, as a result, the aggregate cost of all outstanding options exceeds
10% of the Fund's assets. To the extent that puts, calls, straddles and similar
investment strategies involve instruments regulated by the Commodity Futures
Trading Commission, the Fund is limited to an investment not in excess of 5% of
its total assets.
Other Investment Companies
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The Fund may invest up to 10% of its total assets in other investment companies
(not more than 5% of the Fund's total assets may be invested in any one
investment company and the Fund may not invest in more than 3% of the voting
securities of any one investment company).
Warrants and Rights
- --------------------------------------------------------------------------------
The Fund may invest up to 5% of its total assets in warrants or rights (other
than those acquired in units or attached to other securities) which entitle the
holder to buy equity securities at a specific price during or at the end of a
specific period of time.
6
<PAGE> 10
Unseasoned Companies
- --------------------------------------------------------------------------------
The Fund may invest in securities of unseasoned companies. In view of the
limited liquidity, more speculative prospects and more volatile pricing
attributes, the Fund will not invest more than 10% of the Fund's assets (at the
time of purchase) in equity securities of non-investment companies (including
predecessors) that have operated less than three years.
When Issued, Delayed
- --------------------------------------------------------------------------------
Delivery Securities and Forward Commitments
- --------------------------------------------------------------------------------
The Fund may enter into forward commitments for the purchase or sale of
securities, including on a "when issued" or "delayed delivery" basis in excess
of customary settlement periods for the type of security involved. In some
cases, a forward commitment may be conditioned upon the occurrence of a
subsequent event, such as approval and consummation of a merger, corporate
reorganization or debt restructuring, i.e., a when, as and if issued security.
When such transactions are negotiated, the price is fixed at the time of the
commitment, with payment and delivery taking place in the future, generally a
month or more after the date of the commitment. While the Fund will only enter
into a forward commitment with the intention of actually acquiring the security,
the Fund may sell the security before the settlement date if it is deemed
advisable.
Securities purchased under a forward commitment are subject to market
fluctuation, and no interest (or dividends) accrues to the Fund prior to the
settlement date. The Fund will segregate with its Custodian (as hereinafter
defined) cash or liquid securities in an aggregate amount at least equal to the
amount of its outstanding forward commitments.
Short Sales
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The Fund may make short sales of securities. A short sale is a transaction in
which the Fund sells a security it does not own in anticipation that the market
price of that security will decline. The Fund expects to make short sales both
to obtain capital gains from anticipated declines in securities and as a form of
hedging to offset potential declines in long positions in the same or similar
securities. The short sale of a security is considered a speculative investment
technique.
When the Fund makes a short sale, it must borrow the security sold short and
deliver it to the broker-dealer through which it made the short sale in order to
satisfy its obligation to deliver the security upon conclusion of the sale. The
Fund may have to pay a fee to borrow particular securities and is often
obligated to pay over any payments received on such borrowed securities.
The Fund's obligation to replace the borrowed security will be secured by
collateral deposited with the broker-dealer, usually cash, U.S. government
securities or other highly liquid securities. The Fund will also be required to
deposit similar collateral with its Custodian to the extent, if any, necessary
so that the value of both collateral deposits in the aggregate is at all times
equal to the greater of the price at which the security is sold short or 100% of
the current market value of the security sold short. Depending on arrangements
made with the broker-dealer from which it borrowed the security regarding
payment over of any payments received by the Fund on such security, the Fund may
not receive any payments (including interest) on its collateral deposited with
such broker-dealer.
If the price of the security sold short increases between the time of the short
sale and the time the Fund replaces the borrowed security, the Fund will incur a
loss; conversely, if the price declines, the Fund will realize a capital gain.
Any gain will be decreased, and any loss increased, by the transaction costs
described above. Although the Fund's gain is limited to the price at which it
sold the security short, its potential loss is theoretically unlimited.
The market value of the securities sold short of any one issuer will not exceed
either 5% of the Fund's total assets or 5% of such issuer's voting securities.
The Fund will not make a short sale, if, after giving effect to such sale, the
market value of all securities sold short exceeds 25% of the value of its assets
or the Fund's aggregate short sales of a particular class of securities exceeds
25% of the outstanding securities of that class. The Fund may also make short
sales "against the box" without respect to such limitations. In this type of
short sale, at the time of the sale, the Fund owns or has the immediate and
unconditional right to acquire at no additional cost the identical security.
Restricted and Illiquid Securities
- --------------------------------------------------------------------------------
7
<PAGE> 11
The Fund may invest up to 15% of its net assets in securities the markets for
which are illiquid. Illiquid securities include most of the securities the
disposition of which is subject to substantial legal or contractual
restrictions. The sale of illiquid securities often requires more time and
results in higher brokerage charges or dealer discounts and other selling
expenses than does the sale of securities eligible for trading on national
securities exchanges or in the over-the-counter markets. Restricted securities
may sell at a price lower than similar securities that are not subject to
restrictions on resale. Securities freely salable among qualified institutional
investors under special rules adopted by the SEC may be treated as liquid if
they satisfy liquidity standards established by the Board of Directors. The
continued liquidity of such securities is not as well assured as that of
publicly traded securities, and accordingly the Board of Directors will monitor
their liquidity.
Repurchase Agreements
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The Fund may invest in repurchase agreements, which are agreements pursuant to
which securities are acquired by the Fund from a third party with the
understanding that they will be repurchased by the seller at a fixed price on an
agreed date. These agreements may be made with respect to any of the portfolio
securities in which the Fund is authorized to invest. Repurchase agreements may
be characterized as loans secured by the underlying securities. The Fund may
enter into repurchase agreements with (i) member banks of the Federal Reserve
System having total assets in excess of $500 million and (ii) securities
dealers, provided that such banks or dealers meet the creditworthiness standards
established by the Fund's Board of Directors ("Qualified Institutions"). The
Adviser will monitor the continued creditworthiness of Qualified Institutions,
subject to the supervision of the Fund's Board of Directors. The resale price
reflects the purchase price plus an agreed upon market rate of interest which is
unrelated to the coupon rate or date of maturity of the purchased security. The
collateral is marked to market daily. Such agreements permit the Fund to keep
all its assets earning interest while retaining "overnight" flexibility in
pursuit of investments of a longer-term nature.
The use of repurchase agreements involves certain risks. For example, if the
seller of securities under a repurchase agreement defaults on its obligation to
repurchase the underlying securities, as a result of its bankruptcy or
otherwise, the Fund will seek to dispose of such securities, which action could
involve costs or delays. If the seller becomes insolvent and subject to
liquidation or reorganization under applicable bankruptcy or other laws, the
Fund's ability to dispose of the underlying securities may be restricted.
Finally, it is possible that the Fund may not be able to substantiate its
interest in the underlying securities. To minimize this risk, the securities
underlying the repurchase agreement will be held by the Fund's Custodian at all
times in an amount at least equal to the repurchase price, including accrued
interest. If the seller fails to repurchase the securities, the Fund may suffer
a loss to the extent proceeds from the sale of the underlying securities are
less than the repurchase price. The Fund will not enter into repurchase
agreements of a duration of more than seven days if, taken together with all
other illiquid securities in the Fund's portfolio, more than 15% of its net
assets would be so invested.
Loans of Portfolio Securities
- --------------------------------------------------------------------------------
To increase income, the Fund may lend its portfolio securities to securities
broker-dealers or financial institutions if (1) the loan is collateralized in
accordance with applicable regulatory requirements including collateralization
continuously at no less than 100% by marking to market daily, (2) the loan is
subject to termination by the Fund at any time, (3) the Fund receives reasonable
interest or fee payments on the loan, (4) the Fund is able to exercise all
voting rights with respect to the loaned securities and (5) the loan will not
cause the value of all loaned securities to exceed 33% of the value of the
Fund's assets.
If the borrower fails to maintain the requisite amount of collateral, the loan
automatically terminates and the Fund could use the collateral to replace the
securities while holding the borrower liable for any excess of replacement cost
over the value of the collateral. As with any extension of credit, there are
risks of delay in recovery and in some cases even loss of rights in collateral
should the borrower of the securities fail financially.
Borrowing
- --------------------------------------------------------------------------------
The Fund may not borrow money except for (1) short-term credits from banks as
may be necessary for the clearance of portfolio transactions, and (2) borrowings
from banks for temporary or emergency purposes, including the meeting of
redemption requests, which would otherwise require the untimely disposition of
its portfolio securities. Borrowing may not, in the aggregate, exceed 15% of
assets after giving effect to the borrowing and borrowing for purposes other
than meeting redemptions may not exceed 5% of the value of the Fund's assets
8
<PAGE> 12
after giving effect to the borrowing. The Fund will not make additional
investments when borrowings exceed 5% of assets. The Fund may mortgage, pledge
or hypothecate assets to secure such borrowings.
- --------------------------------------------------------------------------------
Portfolio Turnover
- --------------------------------------------------------------------------------
The investment policies of the Fund may lead to frequent changes in investments,
particularly in periods of rapidly fluctuating interest or currency exchange
rates. The portfolio turnover is expected to be less than 100%.
Portfolio turnover generally involves some expense to the Fund, including
brokerage commissions or dealer mark-ups and other transaction costs on the sale
of securities and reinvestment in other securities. The portfolio turnover rate
is computed by dividing the lesser of the amount of the securities purchased or
securities sold by the average monthly value of securities owned during the year
(excluding securities whose maturities at acquisition were one year or less).
MANAGEMENT OF THE FUND
- --------------------------------------------------------------------------------
The Fund's Board of Directors (who, with its officers, are described in the
Additional Statement) has overall responsibility for the management of the Fund.
The Board of Directors decides upon matters of general policy and reviews the
actions of Gabelli & Company, Inc. (the "Distributor"), the Adviser and the
Sub-Administrator (as defined below). Pursuant to an Investment Advisory
Contract with the Fund, the Adviser provides a continuous investment program for
the Fund's portfolio; provides investment research and makes and executes
recommendations for the purchase and sale of securities and the exercise of all
voting and other rights appertaining thereto; provides facilities and personnel
required for the Fund's administrative management; supervises the performance of
administrative and professional services provided by others, and pays the
compensation of the Sub-Administrator and all officers and directors of the Fund
who are its affiliates. Mr. Mario J. Gabelli -- Portfolio Manager, will be
primarily responsible for the day-to-day management of The Gabelli Small Cap
Growth Fund. Mr. Gabelli is Chairman, Chief Investment Officer and a Director of
the Adviser. As compensation for its services and the related expenses borne by
the Adviser, the Fund pays the Adviser a fee, computed daily and payable
monthly, equal, on an annual basis, to 1.00% of the Fund's average daily net
assets, which is higher than that paid by most mutual funds. The Adviser is
located at One Corporate Center, Rye, New York 10580-1434.
The Adviser was formed in 1980 and as of October 31, 1998 acts as investment
adviser to the following funds with aggregate assets in excess of $7.5 billion:
<TABLE>
<CAPTION>
Net Assets
Open-end funds: 10/31/98
- ------------ -------
(in millions)
<S> <C>
Gabelli Asset Fund $1,472
Gabelli Growth Fund 1,571
Gabelli Gold Fund, Inc. 12
Gabelli Value Fund Inc. 728
Gabelli Small Cap Growth Fund 298
Gabelli Equity Income Fund 84
Gabelli U.S. Treasury Money Market Fund 110
Gabelli ABC Fund 32
Gabelli Global Telecommunications Fund 154
Gabelli Global Interactive
Couch Potato(R) Fund 64
Gabelli Global Convertible Securities Fund 6
Gabelli Global Opportunity Fund 5
Gabelli International Growth Fund, Inc. 24
Gabelli Capital Asset Fund 141
Closed-end funds:
- -------------
Gabelli Convertible
Securities Fund, Inc. 117
Gabelli Equity Trust Inc. 1,278
Gabelli Global Multimedia
Trust Inc. 149
</TABLE>
9
<PAGE> 13
Gabelli & Company, Inc., the Distributor of each open-end fund's respective
shares, is an indirect majority owned subsidiary of the Adviser. GAMCO
Investors, Inc. ("GAMCO"), a wholly owned subsidiary of the Adviser, acts as
investment adviser for individuals, pension trusts, profit sharing trusts and
endowments. As of September 30, 1998, GAMCO had aggregate assets in excess of
$6.7 billion under its management. Gabelli Advisers, Inc. is an affiliated
Investment Adviser to The Gabelli Westwood Funds with aggregate assets in excess
of $360 million. Gabelli Fixed Income LLC is an affiliated Investment Adviser
to The Treasurer's Fund, Inc. and separate accounts with aggregate assets in
excess of $1.2 billion. Mr. Mario J. Gabelli may be deemed a "controlling
person" of the Adviser and the Distributor on the basis of his ownership of
stock of the Adviser.
In addition to the fees of the Adviser, the Fund is responsible for the payment
of all its other expenses incurred in the operation of the Fund, which include,
among other things, expenses for legal and independent auditor's services, costs
of printing all materials sent to shareholders, charges of State Street Bank and
Trust Company (the "Custodian", "Transfer Agent" and dividend paying agent), and
any persons hired by the Fund, SEC fees, fees and expenses of unaffiliated
directors, accounting and printing costs for reports and similar materials sent
to shareholders, the Fund's pro rata portion of membership fees in trade
organizations, fidelity bond coverage for the Fund's officers and employees,
interest, brokerage and other trading costs, taxes, expenses of qualifying the
Fund for sale in various jurisdictions, expense of the Fund's distribution plan
adopted under Rule 12b-1, expenses of personnel performing shareholder servicing
functions, litigation and other extraordinary or non-recurring expenses and
other expenses properly payable by the Fund.
Sub-Administrator
- --------------------------------------------------------------------------------
The Adviser has entered into a Sub-Administration Contract with BISYS Fund
Services, Inc. ("BISYS" or the "Sub-Administrator") pursuant to which the
Sub-Administrator provides certain administrative services necessary for the
Fund's operations. These services include the preparation and distribution of
materials for meetings of the Fund's Board of Directors, compliance testing of
Fund activities and assistance in the preparation of proxy statements, reports
to shareholders and other documentation. The Sub-Administrator's services do not
include the investment advisory and portfolio management services provided by
the Adviser. For the services and related expenses borne by BISYS, the Adviser
pays it a prorated monthly fee at the annual rate of .0625% of the average net
assets of all the funds advised by such Adviser, (with a minimum annual fee of
$30,000 per portfolio) on the first $350 million of funds advised by the Adviser
and administered by BISYS and .0425% of any net assets above $350 million, and
.0225% of any assets above $700 million, which, together with the services to be
rendered, are subject to negotiation between the parties and both parties retain
the right unilaterally to terminate the arrangement on not less than 60 days'
notice. BISYS has its office at 3435 Stelzer Road, Columbus, Ohio 43219.
DISTRIBUTION PLAN
- --------------------------------------------------------------------------------
The Board of Directors of the Fund has approved as being in the best interests
of the Fund and its shareholders a Distribution Plan which authorizes payments
by the Fund in connection with the distribution of its shares at an annual rate
of .25% of the Fund's average daily net assets.
Payments may be made by the Fund under the Distribution Plan for the purpose of
financing any activity primarily intended to result in the sale of shares of the
Fund as determined by the Board of Directors. Such activities typically include
advertising; compensation for sales and sales marketing activities of the
Distributor and other banks, broker-dealers and service providers; shareholder
account servicing; production and dissemination of prospectuses and sales and
marketing materials; and capital or other expenses of associated equipment,
rent, salaries, bonuses, interest and other overhead. To the extent any activity
is one which the Fund may finance without a Distribution Plan, the Fund may also
make payments to finance such activity outside of the Plan and not subject to
its limitations.
The Plan has been implemented by written agreements between the Fund and/or the
Distributor and each person (including the Distributor) to which payments may be
made. Administration of the Plan is regulated by Rule 12b-1 under the Investment
Company Act of 1940, which includes requirements that the Board of Directors
receive and review, at least quarterly, reports concerning the nature and
qualification of expenses for which payments are made, that the Board of
Directors approves all agreements implementing the Plan and that the Plan may be
10
<PAGE> 14
continued from year to year only if the Board of Directors concludes, at least
annually, that continuation of the Plan is likely to benefit shareholders. To
the extent any of these payments are based on allocations by the Distributor,
the Fund may be considered to be participating in joint distribution activities
with other funds distributed by the Distributor. Any such allocations would be
subject to approval by the Fund's non-interested Directors and would be based on
such factors as the net assets of each Fund, the number of shareholder inquiries
and similar pertinent criteria. For the fiscal year ended September 30, 1998,
the Fund incurred distribution costs payable to the Adviser, of $805,996 or
0.25% of average net assets, under the Plan. Long-term investors may pay more
than the economic equivalent of the maximum front-end sales charge permitted by
the National Association of Securities Dealers, Inc.
PURCHASE OF SHARES
- --------------------------------------------------------------------------------
Shares of the Fund are sold at the net asset value per share next determined
after receipt of an order by the Fund's Distributor or Transfer Agent in proper
form with accompanying check or bank wire payments arrangements satisfactory to
the Fund. The minimum initial investment is $1,000. There is no minimum initial
investment for accounts establishing an Automatic Investment Plan. Custodial
accounts for minor children require only $1,000. There is no minimum for
subsequent investments. Although most shareholders elect not to receive stock
certificates, certificates for whole shares only can be obtained on specific
written request to the Transfer Agent.
Shares of the Fund may be purchased through registered broker-dealers. Certain
broker-dealers may charge the investor a fee for their services. Such fees may
vary among broker-dealers, and such broker-dealers may impose higher initial or
subsequent investment requirements than those established by the Fund. Services
provided by broker-dealers may include allowing the investor to establish a
margin account and to borrow on the value of the Fund's shares in that account.
Prospectuses, sales material and applications may be obtained from the
Distributor. The Fund and its Distributor reserve the right in their sole
discretion (1) to suspend the offerings of the Fund's shares and (2) to reject
purchase orders when, in the judgment of the Fund's management, such rejection
is in the best interest of the Fund. The net asset value per share of the Fund
is determined as of the close of the regular session of the New York Stock
Exchange ("NYSE"), which is generally 4:00 p.m., eastern time, on each day that
trading is conducted on the NYSE by dividing the value of the Fund's net assets
(i.e., the value of its securities and other assets less its liabilities,
including expenses payable or accrued) by the number of shares outstanding at
the time the determination is made. Portfolio securities for which market
quotations are readily available are valued at market value as determined by the
last quoted sale price prior to the valuation time on the valuation date in the
case of securities traded on securities exchanges or other markets for which
such information is available. Other readily marketable securities are valued at
the average of the latest bid and asked quotations for such securities prior to
the valuation time. Debt securities with remaining maturities of 60 days or less
are valued at amortized cost. All other assets are valued at fair value as
determined by or under the supervision of the Board of Directors of the Fund.
See "Determination of Net Asset Value" in the Additional Statement.
Mail
- --------------------------------------------------------------------------------
To make an initial purchase by mail, send a completed subscription order form
with a check for the amount of the investment payable to "The Gabelli Small Cap
Growth Fund" to:
THE GABELLI FUNDS
P.O. BOX 8308
BOSTON, MA 02266-8308
Subsequent purchases do not require a completed application and can be made by
(1) mailing a check to the same address noted above or by (2) bank wire, as
indicated below. The exact name and number of the shareholder's account should
be clearly indicated.
Checks will be accepted if drawn in U.S. currency on a domestic bank for less
than $100,000. U.S. dollar checks drawn against a non-U.S. bank may be subject
to collection delays and will be accepted only upon actual receipt of funds by
the Transfer Agent. Bank collection fees may apply. Bank or certified checks for
investments of $100,000 or more will be required unless the investor elects to
invest by bank wire as described below. The Fund reserves the right to reject
purchases by check made payable to someone other than the Fund.
11
<PAGE> 15
Bank Wire
- --------------------------------------------------------------------------------
To initially purchase shares of the Fund using the wire system for transmittal
of money among banks, an investor should first telephone the Fund at
1-800-422-3554 to obtain a new account number. The investor should then instruct
a Federal Reserve System member bank to wire funds to:
12
<PAGE> 16
State Street Bank and Trust Company
ABA # 011-0000-28 REF DDA # 9904-6187
Attn: Shareholder Services
Re: The Gabelli Small Cap Growth Fund
A/C # ____________________________________
Account of (Registered Owner)
-------------------------
225 Franklin Street, Boston, MA 02110
For initial purchases, the investor should promptly complete and mail the
subscription order form to the address shown above for mail purchases. There may
be a charge by your bank for transmitting the money by bank wire but State
Street Bank and Trust Company does not charge investors in the Fund for the
receipt of wire transfers. If you are planning to wire funds, it is suggested
that you instruct your bank early in the day so the wire transfer can be
accomplished the same day.
Personal Delivery
- --------------------------------------------------------------------------------
Deliver a check made payable to "The Gabelli Small Cap Fund" along with a
completed subscription order form to:
The Gabelli Funds
The BFDS Building, 6th Floor
Two Heritage Drive
North Quincy, MA 02171
Telephone Investment Plan
- --------------------------------------------------------------------------------
You may purchase additional shares of the Fund by telephone through the
Automated Clearing-house (ACH) system as long as your bank is a member of the
ACH system and you have a completed, approved investment plan application on
file with our Transfer Agent. The funding for your purchase will be
automatically deducted from the ACH eligible account you designate on the
application. Your investment will normally be credited to your mutual fund
account on the first business day following your telephone request. Your request
must be received no later than 4:00 p.m. eastern time. There is a minimum of
$100 for each telephone investment. Any subsequent changes in banking
information must be submitted in writing and accompanied by a sample voided
check. To initiate an ACH purchase, please call 1-800-GABELLI (422-3554) or
1-800-872-5365. Fund shares purchased through the Telephone or Automatic
Investment Plan will not be available for redemption for up to fifteen (15) days
following the purchase date.
Automatic Investment Plan
- --------------------------------------------------------------------------------
The Fund offers an automatic monthly investment plan, details of which can be
obtained from the Distributor. There is no minimum initial investment for
accounts establishing an Automatic Investment Plan.
Systematic Withdrawal Plan
- --------------------------------------------------------------------------------
The Fund offers a systematic withdrawal program for shareholders whereby they
can authorize an automatic redemption on a monthly, quarterly or annual basis.
Details can be obtained from the Distributor.
Other Investors
- --------------------------------------------------------------------------------
No minimum initial investment is required for officers, directors or full-time
employees of the Fund, other investment companies managed by the Adviser, the
Adviser, the Administrator, the Distributor or their affiliates, including
members of the "immediate family" of such individuals and retirement plans and
trusts for their benefit. The term "immediate family" refers to spouses,
children and grandchildren (adopted or natural), parents, grandparents,
siblings, a spouse's siblings, a sibling's spouse and a sibling's children.
REDEMPTION OF SHARES
- --------------------------------------------------------------------------------
Upon receipt by the Distributor or the Transfer Agent of a redemption request in
proper form, shares of the Fund will be redeemed at their next determined net
asset value. Redemption requests received after the time as of which the Fund's
net asset value is determined on a particular day will be redeemed at the net
asset value of the Fund determined on the next day that net asset value is
determined. Checks for redemption proceeds will normally be mailed to the
shareholder's address of record within seven days, but will not be mailed until
all checks in payment for the purchase of the shares to be redeemed have been
honored, which may take up to 15 days. Redemption requests may be made by letter
to the Transfer Agent, specifying the name of the Fund, the dollar amount or
number of shares to be redeemed, and the account number. The letter must be
signed in exactly the
13
<PAGE> 17
same way the account is registered (if there is more than one owner of the
shares, all must sign) and, if any certificates for the shares to be redeemed
are outstanding, presentation of such certificates properly endorsed is also
required. Signatures on a redemption request and/or certificates must be
guaranteed by an "eligible guarantor institution" as such term is defined in
Rule 17Ad-15 under the Securities Exchange Act of 1933, which includes certain
banks, brokers, dealers, credit unions, securities exchanges and associations,
clearing agencies and savings associations (signature guarantees by notaries
public are not acceptable). Shareholders may also redeem Fund shares through
certain registered broker-dealers, who have made arrangements with the Fund
permitting them to redeem shares by telephone or facsimile transmission and who
may charge shareholders a fee for this service if they have not received any
payments under the Distribution Plan.
Further documentation, such as copies of corporate resolutions and instruments
of authority, are normally requested from corporations, administrators,
executors, personal representatives, trustees or custodians to evidence the
authority of the person or entity making the redemption request.
If the Board of Directors should determine that it would be detrimental to the
remaining shareholders of the Fund to make payment wholly or partly in cash, the
Fund may pay the redemption price in whole or in part by a distribution in kind
of securities from the portfolio of the Fund, in lieu of cash, in conformity
with applicable rules of the SEC. Under such circumstances, shareholders of the
Fund receiving distributions in kind of securities will incur brokerage
commissions when they dispose of the securities.
The Fund may suspend the right of redemption or postpone the date of payment for
more than seven days during any period when (1) trading on the NYSE is
restricted or the Exchange is closed, other than customary weekend and holiday
closings; (2) the SEC has by order permitted such suspension or (3) an
emergency, as defined by rules of the SEC, exists making disposal of portfolio
investments or determination of the value of the net assets of the Fund not
reasonably practicable.
To minimize expenses, the Fund reserves the right to redeem, upon not less than
30 days notice, all shares of the Fund in an account (other than an IRA) which
as a result of shareholder redemption has a value below $500. However, a
shareholder will be allowed to make additional investments prior to the date
fixed for redemption to avoid liquidation of the account.
Telephone Redemption
- --------------------------------------------------------------------------------
By Check
- --------------------------------------------------------------------------------
The Fund accepts telephone requests for redemption of unissued shares, subject
to a $25,000 limitation. By calling either 1-800-GABELLI (422-3554) or
1-800-872-5365, you may request that a check be mailed to the address of record
on the account, provided that the address has not changed within thirty (30)
days prior to your request. The check will be made payable to the person in
whose name the account is registered and will normally be mailed within seven
(7) days.
By Bank Wire
- --------------------------------------------------------------------------------
The Fund accepts telephone requests for wire redemption in excess of $1,000 (but
subject to a $25,000 limitation) to a predesignated bank either on the
subscription order form or in a subsequent written authorization with the
signature guaranteed. The Fund accepts signature guaranteed written requests for
redemption by bank wire without limitation. The proceeds are normally wired on
the following business day. Your bank must be either a member of the Federal
Reserve System or have a correspondent bank which is a member. Any change to the
banking information made at a later date must be submitted in writing with a
signature guarantee.
Requests for telephone redemption must be received between 9:00 a.m. and 4:00
p.m. eastern time. If your telephone call is received after this time or on a
day when the NYSE is not open, the request will be entered for the following
business day. Shares are redeemed at the net asset value next determined
following your request. Fund shares purchased by check or through the automatic
purchase plan will not be available for redemption for up to fifteen (15) days
following the purchase. Shares held in certificate form must be returned to the
Transfer Agent for redemption of shares. Telephone redemption is not available
for IRAs. The proceeds of a telephone redemption may be directed to an existing
account in another mutual fund advised by the Adviser, provided the account is
registered in the redeeming shareholder's name. Such purchase will be made at
the respective net asset value plus applicable sales charge, if any, with credit
for any sales charge previously charged by the Distributor.
14
<PAGE> 18
The Fund and its Transfer Agent will not be liable for following telephone
instructions reasonably believed to be genuine. In this regard, the Fund and its
Transfer Agent require personal identification information before accepting a
telephone redemption. If the Fund or its Transfer Agent fail to use reasonable
procedures, the Fund may be liable for losses due to fraudulent instructions.
RETIREMENT PLANS
- --------------------------------------------------------------------------------
The Fund has available a form of Individual Retirement Account ("IRA") for
investment in Fund shares which may be obtained from the Distributor. The
minimum investment required to open an IRA for investment in shares of the Fund
is $1,000 for an individual except that both the individual and his or her
spouse may establish separate IRAs if their combined investment is $1,250. There
is no minimum for additional investment in an IRA account.
Investors who are self-employed may purchase shares of the Fund through
tax-deductible contributions to retirement plans for self-employed persons,
known as Keogh or H.R. 10 plans. The Fund does not currently act as Sponsor for
such plans. Fund shares may also be a suitable investment for other types of
qualified pension or profit-sharing plans which are employer-sponsored,
including deferred compensation or salary reduction plans known as "401(k)
Plans" which give participants the right to defer portions of their compensation
for investment on a tax-deferred basis until distributions are made from the
plans. The minimum initial investment for an individual under such plans is
$1,000 and there is no minimum for additional investments. Under the Code,
individuals may make wholly or partly tax deductible IRA contributions of up to
$2,000 annually, depending on whether they are active participants in an
employer-sponsored retirement plan and on their income level. However, dividends
and distributions held in the account are not taxed until withdrawn in
accordance with the provisions of the Code. An individual with a non-working
spouse may establish a separate IRA for the spouse under the same conditions and
contribute a maximum of $4,000 to either or both IRAs provided that no more than
$2,000 may be contributed to the IRA of either spouse. Beginning January 1,
1998, investors satisfying statutory income level requirements may make
non-deductible contributions up to $2,000 annually to a Roth IRA, distributions
from which are not subject to tax if a statutory five year holding period
requirement is satisfied. New for 1998, the Fund also makes available education
IRAs. Education IRAs permit eligible individuals to contribute up to $500 per
year per beneficiary under 18 years old. The minimum initial investment to an
Education IRA is $250. Distributions from an education IRA are generally
excluded from income when used for qualified higher education expenses.
Investors should be aware that they may be subject to penalties or additional
tax on contributions or withdrawals from IRAs or other retirement plans which
are not permitted by the applicable provisions of the Code. Persons desiring
information concerning investments through IRA accounts or other retirement
plans should write or telephone the Distributor.
DIVIDENDS, DISTRIBUTIONS AND TAXES
- --------------------------------------------------------------------------------
The Fund currently intends to pay dividends and capital gains distributions, if
any, on an annual basis. Each dividend and capital gains distribution, if any,
declared by the Fund on its outstanding shares will, unless the shareholder
elects otherwise, be paid on the payment date fixed by the Board of Directors in
additional shares of the Fund having an aggregate net asset value as of the
ex-dividend date of such dividend or distribution equal to the cash amount of
such distribution. An election to receive dividends and distributions may be
changed by notifying the Fund in writing at any time prior to the record date
for a particular dividend or distribution. There are no sales or other charges
in connection with the reinvestment of dividends and capital gains
distributions. There is no fixed dividend rate, and there can be no assurance
that the Fund will pay any dividends or realize any capital gains.
The Fund has qualified and intends to continue to qualify as a "Regulated
Investment Company" under the Code and thus is not subject to Federal income
tax on that portion of its net investment income and realized capital gain that
it pays out to its shareholders.
Failure to qualify would result in the Fund being subject to Federal income tax
on its taxable income and gains.
A redemption of shares will generally result in the recognition of gain or loss
for income tax purposes equal to the difference between the proceeds of the
redemption and the shareholder's basis in the shares redeemed.
Dividends from net investment income and distributions from realized short-term
capital gains are taxable to the recipient shareholders as ordinary income,
whether paid in cash or in additional Fund shares. In the case of corporate
shareholders, the portion of the Fund's distributions attributable to dividends
received by the Fund on its investments in common or preferred stock may be
eligible for the dividends received deduction as long as certain
15
<PAGE> 19
requirements are satisfied by the shareholder. Distributions out of long-term
capital gains are taxable to the recipient as long-term capital gains.
Shareholders will be advised as to what portion of capital gains are to be
treated as "long-term" rate gain with respect to the maximum tax rate for such
gains (10% for noncorporate shareholders who are subject to the 15% marginal tax
bracket for ordinary income). Dividends and distributions declared by the Fund
may also be subject to state and local taxes. Prior to investing in shares of
the Fund, prospective shareholders may wish to consult their tax advisers
concerning the Federal, state and local tax consequences of such investment.
GENERAL INFORMATION
- --------------------------------------------------------------------------------
Description of Shares, Voting
- --------------------------------------------------------------------------------
Rights and Liabilities
- --------------------------------------------------------------------------------
The Fund is a series of Gabelli Equity Series Funds, Inc., (the "Corporation")
which was incorporated in Maryland on July 25, 1991. The authorized capital
stock consists of one billion shares of stock having a par value of one tenth of
one cent ($.001) per share, one hundred million of which have been initially
classified as Fund shares. The Corporation is not required, and does not intend,
to hold regular annual shareholder meetings, but may hold special meetings for
consideration of proposals requiring shareholder approval, such as changing
fundamental policies or upon the written request of 10% of the Fund's shares to
replace its Directors. The Corporation's Board of Directors is authorized to
divide the unissued shares into separate series of stock, each series
representing a separate, additional portfolio. The Board currently has
authorized the division of the unissued shares into two series each having a
separate portfolio. Shares of all series will have identical voting rights,
except where by law, certain matters must be approved by a majority of the
shares of the affected series. Each share of any series of shares when issued
has equal dividend, liquidation (see "Redemption of Shares") and voting rights
within the series for which it was issued and each fractional share has those
rights in proportion to the percentage that the fractional share represents of a
whole share. Shares will be voted in the aggregate.
There are no conversion or preemptive rights in connection with any shares of
the Fund. All shares, when issued in accordance with the terms of the offering,
will be fully paid and nonassessable. Shares will be redeemed at net asset
value, at the option of the shareholder.
The Fund sends semi-annual and audited annual reports to all of its shareholders
which include a list of portfolio securities. Unless it is clear that a
shareholder is a nominee for the account of an unrelated person or a shareholder
otherwise specifically requests in writing, the Fund may send a single copy of
semi-annual, annual and other reports to shareholders to all accounts at the
same address and all accounts of any person at that address.
The shares of the Fund have noncumulative voting rights which means that the
holders of more than 50% of the shares can elect 100% of the directors if the
holders choose to do so, and, in that event, the holders of the remaining shares
will not be able to elect any person or persons to the Board of Directors.
Unless specifically requested by an investor who is a shareholder of record, the
Fund does not issue certificates evidencing Fund shares.
Shareholder Approval
- --------------------------------------------------------------------------------
Other than elections of Directors, which is by plurality, any matter for which
shareholder approval is required by the Investment Company Act of 1940 requires
the affirmative vote of at least a "majority" (as defined by the Investment
Company Act of 1940) of the outstanding voting securities of the Fund or the
Corporation at a meeting called for the purpose of considering such approval. A
majority of the Fund's outstanding securities is the lesser of (1) 67% of the
shares represented at a meeting at which more than 50% of the outstanding shares
are present in person or by proxy or (2) more than 50% of the outstanding
shares.
Performance Information
- --------------------------------------------------------------------------------
The Fund may furnish data about its investment performance in advertisements,
sales literature and reports to shareholders. "Total return" represents the
annual percentage change in value of $1,000 invested at the maximum public
offering price for the one, five and ten year periods (if applicable) and the
life of the Fund through the most recent calendar quarter, assuming reinvestment
of all dividends and distributions. Quotations of "yield" will be based on the
investment income per share earned during a particular 30 day period, less
expenses accrued
16
<PAGE> 20
during the period, with the remainder being divided by the maximum offering
price per share on the last day of the period. The Fund may also furnish total
return and yield calculations for other periods based on investments at various
sales charge levels or net asset values.
Custodian, Transfer Agent
- --------------------------------------------------------------------------------
and Dividend Disbursing Agent
- --------------------------------------------------------------------------------
State Street Bank and Trust Company is the Custodian for the Fund's cash and
securities as well as the Transfer and Dividend Disbursing Agent for its shares.
Boston Financial Data Services, Inc., an affiliate of State Street Bank and
Trust Company performs the shareholder services on behalf of State Street and is
located at The BFDS Building, Two Heritage Drive, North Quincy, MA 02171. State
Street Bank and Trust Company does not assist in and is not responsible for
investment decisions involving assets of the Fund.
Independent Auditors
- --------------------------------------------------------------------------------
Ernst & Young LLP has been appointed independent auditors for the Fund, and is
located at 787 Seventh Ave., New York, NY 10019.
Information for Shareholders
- --------------------------------------------------------------------------------
All shareholder inquiries regarding administrative procedures including the
purchase and redemption of shares should be directed to the Distributor, Gabelli
& Company, Inc., One Corporate Center, Rye, New York 10580-1434. For assistance,
call 1-800-GABELLI (1-800-422-3554) or through the internet at
http://www.gabelli.com.
Like other funds and business organizations around the world, the Fund could be
adversely affected if the computer systems used by the Adviser and the Fund's
other service providers do not properly process and calculate date-related
information for the year 2000 and beyond. The Fund has been informed that the
Adviser and the Fund's other service providers (i.e., Administrator, Transfer
Agent, Fund Accounting Agent, Distributor and Custodian) have developed and are
implementing plans to minimize the risk associated with the Year 2000 problem.
These plans include the following activities: inventorying of software systems,
determining inventory items that may not function properly after December 31,
1999, reprogramming or replacing such systems and retesting for Year 2000
readiness. In addition, the service providers are obtaining assurances from
their vendors and suppliers in the same manner. Non-compliant Year 2000 systems
upon which the Fund is dependent may result in errors and account maintenance
failures. The Fund has no reason to believe that (1) the Year 2000 plans of the
Adviser and the Fund's other service providers for services critical to the
Fund's operations will not be completed by December 31, 1999, and (2) the costs
currently associated with the implementation of their plans will have material
adverse impact on the business, operations or financial condition of the Fund
or its service providers.
In addition, the Year 2000 problem may adversely affect the companies in which
the Fund invests. For example, these companies may incur substantial costs to
correct the problem and may suffer losses caused by data processing errors.
Since the ultimate costs or consequences of incomplete or untimely resolution of
the Year 2000 problem by the Fund's service providers are unknown to the Fund at
this time, there may be costs or consequences having a material adverse impact
on the Fund, its service providers and/or your account records. The Fund and the
Adviser will continue to monitor developments relating to this issue.
17
<PAGE> 21
Upon request, Gabelli & Company, Inc. will provide without charge, a paper copy
of this Prospectus to investors or their representatives who received this
Prospectus in an electronic format.
This Prospectus omits certain information contained in the Registration
Statement filed with the SEC. Copies of the Registration Statement including
items omitted herein, may be obtained from the Commission by paying the charges
prescribed under its rules and regulations. The Additional Statement included in
such Registration Statement may be obtained without charge from the Fund or its
Distributor.
18
<PAGE> 22
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Table of Fees and Expenses .................
Financial Highlights .......................
Investment Objective and Policies and
Related Risk Factors .....................
Other Investment Techniques and
Related Risk Factors .....................
Management of the Fund .....................
Distribution Plan ..........................
Purchase of Shares .........................
Redemption of Shares .......................
Retirement Plans ...........................
Dividends, Distributions and Taxes .........
General Information ........................
</TABLE>
- --------------------------------------------------------------------------------
No dealer, salesman or other person has been authorized to give any information
or to make any representation other than those contained in this Prospectus, and
if given or made, such information or representation may not be relied upon as
being authorized by the Fund, the Adviser, the Administrator, the Distributor or
any affiliate thereof. This Prospectus does not constitute an offer to sell or a
solicitation of any offer to buy in any state to any person to whom it is
unlawful to make such offer in such state.
19
<PAGE> 23
THE
GABELLI
SMALL CAP
GROWTH
FUND
PROSPECTUS
DECEMBER 21, 1998
GABELLI FUNDS, INC.
INVESTMENT ADVISER
GABELLI & COMPANY, INC.
DISTRIBUTOR
20
<PAGE> 24
The Gabelli Equity Income Fund
ONE CORPORATE CENTER
RYE, NEW YORK 10580-1434
TELEPHONE: 1-800-GABELLI (1-800-422-3554)
HTTP://WWW.GABELLI.COM
PROSPECTUS December 21, 1998
The Gabelli Equity Income Fund (the "Fund") is a series of Gabelli Equity Series
Funds, Inc., a Maryland corporation (the "Corporation"). The Fund is a no-load
open-end, diversified, management investment company whose investment objective
is to seek a high level of total return on its assets with an emphasis on
income. The Fund seeks to achieve its investment objective through a combination
of capital appreciation and current income by investing primarily in income
producing equity securities.
Shares of the Fund may be purchased without a sales load at net asset value. The
minimum initial investment is $1,000. The Fund has a distribution plan which
permits it to pay up to .25% per year of its average daily net assets for
marketing and shareholder services and expenses. For further information,
contact Gabelli & Company, Inc. at the address or telephone number shown above.
----------------------
This Prospectus sets forth concisely the information a prospective investor
should know before investing in the Fund. A Statement of Additional Information
dated December 21, 1998 (the "Additional Statement") containing additional
information about the Fund has been filed with the Securities and Exchange
Commission (the "SEC") and is available for reference along with other materials
on the SEC Internet website (http://www.sec.gov) and is incorporated by
reference into this Prospectus. For a free copy, write or call the Fund at the
telephone number or address set forth above.
Shares of the Fund are not deposits or obligations of any bank, are not endorsed
or guaranteed by any bank and are not insured or guaranteed by the U.S.
government, The Federal Deposit Insurance Corporation, the Federal Reserve Board
or any other government agency and involve risk, including the possible loss of
principal.
----------------------
This Prospectus should be retained
by investors for future reference.
----------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SEC OR ANY STATE
SECURITIES COMMISSION NOR HAS THE SEC OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
1
<PAGE> 25
TABLE OF FEES AND EXPENSES
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Shareholder Transaction Expenses:
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C>
Maximum Sales Charge Imposed on Purchases None
Maximum Sales Charge Imposed on Reinvested Dividends None
Deferred Sales Charge None
Redemption Fees None
Exchange Fees None
Annual Fund Operating Expenses (as a percentage of average net assets):
- ---------------------------------------------------------------------------------------------------------------------------
Management Fees 1.00%
12b-1 Expenses (a) .25%
Other Expenses (b) .40%
-------
Total Operating Expenses 1.65%
=======
(a) See "Distribution Plan."
(b) Such expenses include custodian and transfer agency fees and other customary
Fund expenses.
Example: 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ---------------------------------------------------------------------------------------------------------------------------
You would pay the following expenses on a $1,000 investment, $17 $52 $90 $195
assuming a 5% annual return at the end of each period
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
The amounts listed in this example should not be considered as representative of
future expenses since actual expenses may be greater or less than those
indicated. Moreover, while the example assumes a 5% annual return, the Fund's
actual performance will vary and may result in an actual return greater or less
than 5%.
The foregoing table is to assist you in understanding the various direct and
indirect costs and expenses that an investor in the Fund would bear.
Management's Discussion and Analysis of the Fund's performance during the fiscal
year ended September 30, 1998 is included in the Fund's Annual Report to
Shareholders dated September 30, 1998. The Fund's Annual Report to Shareholders
may be obtained upon request and without charge by writing or calling the Fund
at the address or telephone number listed on the Prospectus cover.
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
The information in the following table has been audited by Ernst & Young LLP,
the Fund's independent auditors, whose unqualified report thereon appears in the
Statement of Additional Information: Selected data for a share of capital stock
outstanding throughout each period ended September 30:
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994 1993 1992+
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING PERFORMANCE:
Net asset value, beginning of period $17.39 $13.81 $12.65 $11.54 $12.15 $10.40 $10.00
------ ------ ------ ------ ------ ------ -----
Net investment income 0.22 0.22 0.28 0.29 0.30 0.29 0.21
Net realized and unrealized gain on
investments 0.29 4.28 1.76 1.77 0.08 1.81 0.37
---- ---- ---- ---- ---- ---- ----
Total from investment operations 0.51 4.50 2.04 2.06 0.38 2.10 0.58
---- ---- ---- ---- ---- ---- ----
DISTRIBUTIONS TO SHAREHOLDERS:
Net investment income (0.26) (0.22) (0.28) (0.29) (0.31) (0.29) (0.18)
</TABLE>
2
<PAGE> 26
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
In excess of net investment income -- -- (0.01) -- -- -- --
Net realized gain on investments (1.67) (0.70) (0.59) (0.66) (0.68) (0.06) --
------ ------ ------ ------ ------ ------ -----
Total Distributions (1.93) (0.92) (0.88) (0.95) (0.99) (0.35) (0.18)
------ ------ ------ ------ ------ ------ -----
NET ASSET VALUE, END OF PERIOD $15.97 $17.39 $13.81 $12.65 $11.54 $12.15 $10.40
====== ====== ====== ====== ====== ====== ======
Total Return (a) 3.0% 34.00% 16.65% 19.24% 3.30% 20.50% 5.80%
==== ====== ====== ====== ===== ====== =====
RATIOS TO AVERAGE NET
ASSETS AND SUPPLEMENTAL DATA:
Net assets, end of period (in 000s) $79,669 $73,730 $57,006 $54,806 $50,191 $54,585 $44,940
Ratio of net investment
income to average net assets 1.27% 1.42% 1.99% 2.50% 2.58% 2.62% 2.65%*
Ratio of operating expenses to
average net assets 1.64% 1.78% 1.93% 1.83% 1.81% 1.78% 1.93%*
Portfolio turnover rate 35% 43% 20% 30% 20% 76% 22%
</TABLE>
* Annualized
+For the period January 2, 1992 (commencement of operations) through September
30, 1992.
(a) Total return represents aggregate total return of a hypothetical $1,000
investment at the beginning of the period and sold at the end of the period
including reinvestment of dividends.
3
<PAGE> 27
INVESTMENT OBJECTIVE AND
- --------------------------------------------------------------------------------
POLICIES AND RELATED RISK FACTORS
- --------------------------------------------------------------------------------
The Fund's investment objective is to seek a high level of total return on its
assets with an emphasis on income, through a combination of capital appreciation
and current income by investing primarily in income producing equity securities
including securities convertible into common stock. The Adviser will look for
such securities that have a better yield than the average of the Standard &
Poor's 500 Stock Index, as well as capital gains potential. Although the Fund
may also invest in any type of debt instrument and may use various special
investment techniques, under normal market conditions the Fund will invest at
least 65% of its total assets in income producing equity securities (which
include common stocks, preferred stocks and securities convertible into or
exchangeable for common and preferred stock). Risks inherent in the Fund's
investment objective and policies are discussed below.
Equity Securities
- --------------------------------------------------------------------------------
Common stocks represent the residual ownership interest in the issuer and are
entitled to the income and increase in the value of the assets and business of
the entity after all of its obligations and preferred stock are satisfied.
Common stocks generally have voting rights. Common stocks fluctuate in price in
response to many factors including historical and prospective earnings of the
issuer, the value of its assets, general economic conditions, interest rates,
investor perceptions and market liquidity.
Equity securities also include preferred stock (whether or not convertible into
common stock) and debt securities convertible into or exchangeable for common or
preferred stock. Preferred stock has a preference over common stock in
liquidation (and generally dividends as well) but is subordinated to the
liabilities of the issuer in all respects. As a general rule the market value of
preferred stock with a fixed dividend rate and no conversion element varies
inversely with interest rates and perceived credit risk, while the market price
of convertible preferred stock generally also reflects some element of
conversion value. Because preferred stock is junior to debt securities and other
obligations of the issuer, deterioration in the credit quality of the issuer
will cause greater changes in the value of a preferred stock than in a more
senior debt security with similarly stated yield characteristics. Debt
securities that are convertible into or exchangeable for preferred common stock
are liabilities of the issuer but are generally subordinated to more senior
elements of the issuer's balance sheet. Although such securities also generally
reflect an element of conversion value, their market value also varies with
interest rates and perceived credit risk.
The Adviser believes that opportunities for capital appreciation may also be
found in the preferred stock and convertible securities of companies. This is
particularly true in the case of companies that have performed below
expectations at the time the preferred stock or convertible security was issued.
If the company's performance has been poor enough, its preferred stock and
convertible debt securities will trade more like the common stock than like a
fixed income security and may result in above average appreciation once it
becomes apparent that performance is improving. Even if the credit quality of
the company is not in question, the market price of the convertible security
will often reflect little or no element of conversion value if the price of its
common stock has fallen substantially below the conversion price. This leads to
the possibility of capital appreciation if the price of the common stock
recovers. Preferred stocks and convertible securities have many of the same
characteristics and risks as nonconvertible debt securities described below.
Many convertible securities are not investment grade, that is, not rated BBB or
better by Standard & Poor's Corporation ("S&P") or Baa or better by Moody's
Investors Service ("Moody's") and not considered by the Adviser to be of similar
quality.
The Fund may invest up to 35% of its assets in convertible and nonconvertible
fixed income securities rated, at the time of investment, less than BBB by S&P
or Baa by Moody's or are unrated but of comparable quality in the judgment of
the Adviser. Securities which are not investment grade are viewed by the rating
agencies as being predominantly speculative in character and are characterized
by substantial risk concerning payments of interest and principal, sensitivity
to economic conditions and changes in interest rates, as well as by market price
volatility and/or relative lack of secondary market trading among other risks
and may involve major risk exposure to adverse conditions or be in default.
However, the Fund does not expect to invest more than 5% of its assets in
securities which are in default at the time of investment and will invest in
such securities only when the Adviser expects that the securities will
appreciate in value. There is no minimum rating of securities in which the Fund
may invest. Securities rated less than BBB by S&P or Baa by Moody's or
comparable unrated securities are typically referred to in the financial press
as "junk bonds." For further information regarding lower rated securities and
the
4
<PAGE> 28
risks associated therewith, see "Other Investment Techniques" in the Additional
Statement and the Description of Corporate Bond, Corporate Debt and Preferred
Stock Ratings attached thereto as an Appendix.
Nonconvertible Debt Securities
- --------------------------------------------------------------------------------
Under normal market conditions, the Fund may invest up to 35% of its assets in
fixed income securities which are not convertible or exchangeable for common
stock. These securities include preferred stocks, bonds, debentures, notes,
asset and mortgage backed securities and money market instruments such as
commercial paper and bankers acceptances. There is no minimum credit rating for
these securities in which the Fund may invest. Accordingly, the Fund could
invest in securities in default although the Fund will not invest more than 5%
of its assets in such securities. See "Equity Securities" for a discussion of
credit considerations. Preferred stocks are subject to the same types of risks
as debt instruments.
Asset-Backed and Mortgage-Backed
- --------------------------------------------------------------------------------
Securities
- --------------------------------------------------------------------------------
Prepayments of principal may be made at any time on the obligations underlying
asset and mortgage backed securities and are passed on to the holders of the
asset and mortgage backed securities. As a result, if the Fund purchases such a
security at a premium, faster than expected prepayments will reduce and slower
than expected prepayments will increase yield to maturity. Conversely, if the
Fund purchases these securities at a discount, faster than expected prepayments
will increase, while slower than expected prepayments will reduce, yield to
maturity.
For temporary defensive purposes the Fund may invest up to 100% of its assets
in nonconvertible fixed income securities or high quality money market
instruments.
OTHER INVESTMENT TECHNIQUES
- --------------------------------------------------------------------------------
AND RELATED RISK FACTORS
- --------------------------------------------------------------------------------
Foreign Securities
- --------------------------------------------------------------------------------
The Fund may invest up to 35% of its total assets in the securities of non-U.S.
issuers. These investments involve certain risks not ordinarily associated with
investments in securities of domestic issuers. These risks include fluctuations
in foreign exchange rates (which the Fund will not seek to hedge), future
political and economic developments, and the possible imposition of exchange
controls or other foreign governmental laws or restrictions. In addition, with
respect to certain countries, there is the possibility of expropriation of
assets, confiscatory taxation, political or social instability or diplomatic
developments which could adversely affect investments in those countries.
The expected introduction of a single currency, the Euro, on January 1, 1999 for
participating nations in the European Economic and Monetary Union presents
unique uncertainties, including whether the payment and operational systems of
banks and other financial institutions will be ready by the scheduled launch
date; the legal treatment of certain outstanding financial contracts after
January 1, 1999 that refer to existing currencies rather than the Euro; the
establishment of exchange rates for existing currencies and the Euro; and the
creation of suitable clearing and settlement payment systems for the new
currency. These or other factors, including political and economic risks, could
cause market disruptions before or after the introduction of the Euro, and could
adversely affect the value of securities held by the Fund.
There may be less publicly available information about a foreign company than
about a U.S. company, and foreign companies may not be subject to accounting,
auditing and financial reporting standards and requirements comparable to or as
uniform as those of U.S. companies. Non-U.S. securities markets, while growing
in volume, have, for the most part, substantially less volume than U.S. markets,
and securities of many foreign companies are less liquid and their prices more
volatile than securities of comparable U.S. companies. Transaction costs of
investing in non-U.S. securities markets are generally higher than in the U.S.
There is generally less government supervision and regulation of exchanges,
brokers and issuers than there is in the U.S. The Fund might have greater
difficulty taking appropriate legal action in non-U.S. courts. Non-U.S. markets
also have different clearance and settlement procedures which in some markets
have at times failed to keep pace with the volume of transactions, thereby
creating substantial delays and settlement failures that could adversely affect
the Fund's performance.
5
<PAGE> 29
Dividend and interest income from non-U.S. securities will generally be subject
to withholding taxes by the country in which the issuer is located and may not
be recoverable by the Fund or the investor.
Corporate Reorganizations
- --------------------------------------------------------------------------------
Subject to the Fund's policy of investing at least 65% of its assets in income
producing equity securities, the Fund may invest without limit in securities for
which a tender or exchange offer has been made or announced and in securities of
companies for which a merger, consolidation, liquidation or similar
reorganization proposal has been announced if, in the judgment of the Adviser,
there is a reasonable prospect of capital appreciation significantly greater
than the added portfolio turnover expenses inherent in the short term nature of
such transactions. The principal risk is that such offers or proposals may not
be consummated within the time and under the terms contemplated at the time of
the investment, in which case, unless such offers or proposals are replaced by
equivalent or increased offers or proposals which are consummated, the Fund may
sustain a loss. For further information on such investments, see "Other
Investment Techniques" in the Additional Statement.
Options and Futures
- --------------------------------------------------------------------------------
The Fund may purchase or sell options on individual securities as well as on
indices of securities as a means of achieving additional return or of hedging
the value of the Fund's portfolio.
A call option is a contract that gives the holder of the option the right, in
return for a premium paid, to buy from the seller the security underlying the
option at a specified exercise price at any time during the term of the option
or, in some cases, only at the end of the term of the option. The seller of the
call option has the obligation upon exercise of the option to deliver the
underlying security upon payment of the exercise price. A put option is a
contract that gives the holder of the option the right, in return for a premium
paid, to sell to the seller the underlying security at a specified price. The
seller of the put option, on the other hand, has the obligation to buy the
underlying security upon exercise at the exercise price.
If the Fund has sold an option, it may terminate its obligation by effecting a
closing purchase transaction. This is accomplished by purchasing an option of
the same series as the option previously sold. There can be no assurance that a
closing purchase transaction can be effected when the Fund so desires.
The purchaser of an option risks a total loss of the premium paid for the option
if the price of the underlying security does not increase or decrease
sufficiently to justify exercise. The seller of an option, on the other hand,
will recognize the premium as income if the option expires unexercized but
foregoes any capital appreciation in excess of the exercise price in the case of
a call option and may be required to pay a price in excess of current market
value in the case of a put option. Options purchased and sold other than on an
exchange in private transactions also impose on the Fund the credit risk that
the counterparty will fail to honor its obligations. The Fund will not purchase
options if, as a result, the aggregate cost of all outstanding options exceeds
10% of the Fund's assets. To the extent that puts, straddles and similar
investment strategies involve instruments regulated by the Commodity Futures
Trading Commission the Fund is limited to an investment not in excess of 5% of
its total assets.
Warrants and Rights
- --------------------------------------------------------------------------------
The Fund may invest up to 5% of its total assets in warrants or rights (other
than those acquired in units or attached to other securities) which entitle the
holder to buy equity securities at a specific price for or at the end of a
specific period of time.
When Issued, Delayed Delivery
- --------------------------------------------------------------------------------
Securities and Forward Commitments
- --------------------------------------------------------------------------------
The Fund may enter into forward commitments for the purchase or sale of
securities, including on a "when issued" or "delayed delivery" basis in excess
of customary settlement periods for the type of security involved. In some
cases, a forward commitment may be conditioned upon the occurrence of a
subsequent event, such as approval and consummation of a merger, corporate
reorganization or debt restructuring, i.e., a when, as and if issued security.
When such transactions are negotiated, the price is fixed at the time of the
commitment, with payment and delivery taking place in the future, generally a
month or more after the date of the commitment. While the Fund will only enter
into a forward commitment with the intention of actually acquiring the security,
the Fund may sell the security before the settlement date if it is deemed
advisable.
6
<PAGE> 30
Securities purchased under a forward commitment are subject to market
fluctuation, and no interest (or dividends) accrues to the Fund prior to the
settlement date. The Fund will segregate with its Custodian (as hereinafter
defined) cash or liquid securities in an aggregate amount at least equal to the
amount of its outstanding forward commitments. See "When Issued, Delayed
Delivery Securities and Forward Commitments" in the Additional Statement.
Short Sales
- --------------------------------------------------------------------------------
The Fund may make short sales of securities. A short sale is a transaction in
which the Fund sells a security it does not own in anticipation that the market
price of that security will decline. The Fund expects to make short sales both
to obtain capital gains from anticipated declines in securities and as a form of
hedging to offset potential declines in long positions in the same or similar
securities. The short sale of a security is considered a speculative investment
technique.
When the Fund makes a short sale, it must borrow the security sold short and
deliver it to the broker-dealer through which it made the short sale in order to
satisfy its obligation to deliver the security upon conclusion of the sale. The
Fund may have to pay a fee to borrow particular securities and is often
obligated to pay over any payments received on such borrowed securities.
The Fund's obligation to replace the borrowed security will be secured by
collateral deposited with the broker-dealer, usually cash, U.S. government
securities or other highly liquid securities. The Fund will also be required to
deposit similar collateral with its custodian to the extent, if any, necessary
so that the value of both collateral deposits in the aggregate is at all times
equal to the greater of the price at which the security is sold short or 100%
of the current market value of the security sold short. Depending on
arrangements made with the broker-dealer from which it borrowed the security
regarding payment over of any payments received by the Fund on such security,
the Fund may not receive any payments (including interest) on its collateral
deposited with such broker-dealer.
If the price of the security sold short increases between the time of the short
sale and the time the Fund replaces the borrowed security, the Fund will incur a
loss; conversely, if the price declines, the Fund will realize a capital gain.
Any gain will be decreased, and any loss increased, by the transaction costs
described above. Although the Fund's gain is limited to the price at which it
sold the security short, its potential loss is theoretically unlimited.
The market value of the securities sold short of any one issuer will
not exceed either 5% of the Fund's total assets or 5% of such issuer's voting
securities. The Fund will not make a short sale, if, after giving effect to such
sale, the market value of all securities sold short exceeds 25% of the value of
its assets or the Fund's aggregate short sales of a particular class of
securities exceeds 25% of the outstanding securities of that class. The Fund may
also make short sales "against the box" without respect to such limitations. In
this type of short sale, at the time of the sale, the Fund owns or has the
immediate and unconditional right to acquire at no additional cost the identical
security.
Restricted and Illiquid Securities
- --------------------------------------------------------------------------------
The Fund may invest up to 15% of its net assets in securities the markets for
which are illiquid. Illiquid securities include most of the securities the
disposition of which is subject to substantial legal or contractual
restrictions. The sale of illiquid securities often requires more time and
results in higher brokerage charges or dealer discounts and other selling
expenses than does the sale of securities eligible for trading on national
securities exchanges or in the over-the-counter markets. Restricted securities
may sell at a price lower than similar securities that are not subject to
restrictions on resale. Securities freely salable among qualified institutional
investors under special rules adopted by the SEC may be treated as liquid if
they satisfy liquidity standards established by the Board of Directors. The
continued liquidity of such securities is not as well assured as that of
publicly traded securities, and accordingly the Board of Directors will monitor
their liquidity.
Repurchase Agreements
- --------------------------------------------------------------------------------
The Fund may invest in repurchase agreements, which are agreements pursuant to
which securities are acquired by the Fund from a third party with the
understanding that they will be repurchased by the seller at a fixed price on an
agreed date. These agreements may be made with respect to any of the portfolio
securities in which the Fund is authorized to invest. Repurchase agreements may
be characterized as loans secured by the underlying securities. The Fund may
enter into repurchase agreements with (i) member banks of the Federal Reserve
System having total assets in excess of $500 million and (ii) securities
dealers, provided that such banks or
7
<PAGE> 31
dealers meet the creditworthiness standards established by the Fund's Board of
Directors ("Qualified Institutions"). The Adviser will monitor the continued
creditworthiness of Qualified Institutions, subject to the supervision of the
Fund's Board of Directors. The resale price reflects the purchase price plus an
agreed upon market rate of interest which is unrelated to the coupon rate or
date of maturity of the purchased security. The collateral is marked-to-market
daily. Such agreements permit the Fund to keep all its assets earning interest
while retaining "overnight" flexibility in pursuit of investments of a
longer-term nature.
The use of repurchase agreements involves certain risks. For example, if the
seller of securities under a repurchase agreement defaults on its obligation to
repurchase the underlying securities, as a result of its bankruptcy or
otherwise, the Fund will seek to dispose of such securities, which action could
involve costs or delays. If the seller becomes insolvent and subject to
liquidation or reorganization under applicable bankruptcy or other laws, the
Fund's ability to dispose of the underlying securities may be restricted.
Finally, it is possible that the Fund may not be able to substantiate its
interest in the underlying securities. To minimize this risk, the securities
underlying the repurchase agreement will be held by the Fund's Custodian at all
times in an amount at least equal to the repurchase price, including accrued
interest. If the seller fails to repurchase the securities, the Fund may suffer
a loss to the extent proceeds from the sale of the underlying securities are
less than the repurchase price. The Fund will not enter into repurchase
agreements of a duration of more than seven days if taken together with all
other illiquid securities in the Fund's portfolio, more than 15% of its net
assets would be so invested.
Loans of Portfolio Securities
- --------------------------------------------------------------------------------
To increase income, the Fund may lend its portfolio securities to securities
broker-dealers or financial institutions if (1) the loan is collateralized in
accordance with applicable regulatory requirements including collateralization
continuously at no less than 100% by marking to market daily, (2) the loan is
subject to termination by the Fund at any time, (3) the Fund receives reasonable
interest or fee payments on the loan, (4) the Fund is able to exercise all
voting rights with respect to the loaned securities and (5) the loan will not
cause the value of all loaned securities to exceed 33% of the value of the
Fund's assets.
If the borrower fails to maintain the requisite amount of collateral, the loan
automatically terminates and the Fund could use the collateral to replace the
securities while holding the borrower liable for any excess of replacement cost
over the value of the collateral. As with any extension of credit, there are
risks of delay in recovery and in some cases even loss of rights in collateral
should the borrower of the securities fail financially.
Borrowing
- --------------------------------------------------------------------------------
The Fund may not borrow money except for (1) short-term credits from banks as
may be necessary for the clearance of portfolio transactions, and (2) borrowings
from banks for temporary or emergency purposes, including the meeting of
redemption requests, which would otherwise require the untimely disposition of
its portfolio securities. Borrowing may not, in the aggregate, exceed 15% of
assets after giving effect to the borrowing and borrowing for purposes other
than meeting redemptions may not exceed 5% of the value of the Fund's assets
after giving effect to the borrowing. The Fund will not make additional
investments when borrowings exceed 5% of assets. The Fund may mortgage, pledge
or hypothecate assets to secure such borrowings.
Portfolio Turnover
- --------------------------------------------------------------------------------
The investment policies of the Fund may lead to frequent changes in investments,
particularly in periods of rapidly fluctuating interest or currency exchange
rates. The portfolio turnover is expected to be less than 100%.
Portfolio turnover generally involves some expense to the Fund, including
brokerage commissions or dealer mark-ups and other transaction costs on the sale
of securities and reinvestment in other securities. The portfolio turnover rate
is computed by dividing the lesser of the amount of the securities purchased or
securities sold by the average monthly value of securities owned during the year
(excluding securities whose maturities at acquisition were one year or less).
MANAGEMENT OF THE FUND
- --------------------------------------------------------------------------------
The Fund's Board of Directors (who, with its officers, are described in the
Additional Statement) has overall responsibility for the management of the Fund.
The Board of Directors decides upon matters of general policy and
8
<PAGE> 32
reviews the actions of the Distributor, the Adviser and the Sub-Administrator
(as defined below). Pursuant to an Investment Advisory Contract with the Fund,
the Adviser, provides a continuous investment program for the Fund's portfolio;
provides investment research and makes and executes recommendations for the
purchase and sale of securities and the exercise of all voting and other rights
appertaining thereto; provides facilities and personnel required for the Fund's
administrative management; supervises the performance of administrative and
professional services provided by others; and pays the compensation of the
Sub-Administrator and all officers and directors of the Fund who are its
affiliates. Mr. Mario J. Gabelli -- Portfolio Manager, will be primarily
responsible for the day-to-day management of the Gabelli Equity Income Fund. Mr.
Gabelli is Chairman, Chief Investment Officer and a Director of the Adviser. As
compensation for its services and the related expenses borne by the Adviser, the
Fund pays the Adviser a fee, computed daily and payable monthly, equal, on an
annual basis, to 1.00% of the Fund's average daily net assets, which is higher
than that paid by most mutual funds. The Adviser is located at One Corporate
Center, Rye, New York 10580-1434.
The Adviser was formed in 1980 and as of October 31, 1998 acts as investment
adviser to the following funds with aggregate assets in excess of $7.5 billion:
Net Assets
Open-end funds: 10/31/98
-------
- ------------
(in millions)
Gabelli Asset Fund $1,472
Gabelli Growth Fund 1,571
Gabelli Gold Fund, Inc. 12
Gabelli Value Fund Inc. 728
Gabelli Small Cap Growth Fund 298
Gabelli Equity Income Fund 84
Gabelli U.S. Treasury Money Market Fund 110
Gabelli ABC Fund 32
Gabelli Global Telecommunications Fund 154
Gabelli Global Interactive
Couch Potato(R) Fund 64
Gabelli Global Convertible Securities Fund 6
Gabelli Global Opprotunity Fund 5
Gabelli International Growth Fund, Inc. 24
Gabelli Capital Asset Fund 141
Closed-end funds:
- -------------
Gabelli Convertible Securities Fund, Inc. 117
Gabelli Equity Trust Inc. 1,278
Gabelli Global Multimedia Trust Inc. 149
Gabelli & Company, Inc., the Distributor of each open-end fund's respective
shares, is an indirect majority owned subsidiary of the Adviser. GAMCO
Investors, Inc, ("GAMCO"), a wholly owned subsidiary of the Adviser, acts as
investment adviser for individuals, pension trusts, profit sharing trusts and
endowments. As of September 30, 1998, GAMCO had aggregate assets in excess of
$6.7 billion under its management. Gabelli Advisers, Inc. is an affiliated
Investment Adviser to The Gabelli Westwood Funds with aggregate assets in excess
of $360 million. Gabelli Fixed Income LLC is an affiliated Investment Adviser
to The Treasurer's Fund, Inc. And separate accounts with aggregate assets in
excess of $1.2 billion. Mr. Mario J. Gabelli may be deemed a "controlling
person" of the Adviser and the Distributor on the basis of his ownership of
stock of the Adviser.
In addition to the fees of the Adviser, the Fund is responsible for the payment
of all its other expenses incurred in the operation of the Fund, which include,
among other things, expenses for legal and independent auditors' services, costs
of printing all materials sent to shareholders, charges of State Street Bank and
Trust Company (the "Custodian", "Transfer Agent" and dividend paying agent) and
any other persons hired by the Fund, SEC fees, fees and expenses of unaffiliated
directors, accounting and printing costs for reports and similar materials sent
to shareholders, the Fund's pro rata portion of membership fees in trade
organizations, fidelity bond coverage for the Fund's officers and employees,
interest, brokerage and
9
<PAGE> 33
other trading costs, taxes, expenses of qualifying the Fund for sale in various
jurisdictions, expense of the Fund's distribution plan adopted under Rule 12b-1,
expenses of personnel performing shareholder servicing functions, litigation and
other extraordinary or non-recurring expenses and other expenses properly
payable by the Fund.
The Additional Statement contains further information about the Investment
Advisory Contract including a more complete description of the advisory and
expense arrangements, and administrative provisions.
Sub-Administrator
- --------------------------------------------------------------------------------
The Adviser has entered into a Sub-Administration Contract with BISYS Fund
Services, Inc. ("BISYS" or the "Sub-Administrator") pursuant to which the
Sub-Administrator provides certain administrative services necessary for the
Fund's operations. These services include the preparation and distribution of
materials for meetings of the Fund's Board of Directors, compliance testing of
Fund activities and assistance in the preparation of proxy statements, reports
to shareholders and other documentation. The Sub-Administrator's services do not
include the investment advisory and portfolio management services of the
Adviser. For the services and the related expenses borne by BISYS, the Adviser
pays it a prorated monthly fee at the annual rate of .0625% of the average net
assets (with a minimum annual fee of $30,000 per portfolio) on the first $350
million of all the funds advised by the Adviser and affiliates and administered
by BISYS; .0425% of any assets above $350 million and .0225% of any assets above
$700 million which, together with the services to be rendered, are subject to
negotiation between the parties and both parties retain the right unilaterally
to terminate the arrangement on not less than 60 days' notice. BISYS has its
principal office at 3435 Stelzer Rd., Columbus, Ohio 43219.
DISTRIBUTION PLAN
- --------------------------------------------------------------------------------
The Board of Directors of the Fund has approved as being in the best interests
of the Fund and its shareholders a Distribution Plan which authorizes payments
by the Fund in connection with the distribution of its shares at an annual rate,
of .25% of the Fund's average daily net assets.
Payments may be made by the Fund under the Distribution Plan for the purpose of
financing any activity primarily intended to result in the sale of shares of
the Fund as determined by the Board of Directors. Such activities typically
include advertising; compensation for sales and sales marketing activities of
the Distributor and other banks, broker-dealers and service providers;
shareholder account servicing; production and dissemination of prospectuses and
sales and marketing materials; and capital or other expenses of associated
equipment, rent, salaries, bonuses, interest and other overhead. To the extent
any activity is one which the Fund may finance without a Distribution Plan, the
Fund may also make payments to finance such activity outside of the Plan and
not subject to its limitations.
The Plan has been implemented by written agreements between the Fund and/or the
Distributor and each person (including the Distributor) to which payments may be
made. Administration of the Plan is regulated by Rule 12b-1 under the Investment
Company Act of 1940 which includes requirements that the Board of Directors
receive and review, at least quarterly, reports concerning the nature and
qualification of expenses for which payments are made, that the Board of
Directors approves all agreements implementing the Plan and that the Plan may be
continued from year to year only if the Board of Directors concludes, at least
annually, that continuation of the Plan is likely to benefit shareholders. To
the extent any of these payments are based on allocations by the Distributor,
the Fund may be considered to be participating in joint distribution activities
with other funds distributed by the Distributor. Any such allocations would be
subject to approval by the Fund's non-interested Directors and would be based on
such factors as the net assets of each Fund, the number of shareholder inquiries
and similar pertinent criteria. For the fiscal year ended September 30, 1998,
the Fund incurred distribution costs of $205,801 or 0.25% of average net assets
under the Plan. Long term investors may pay more than the economic equivalent of
the maximum front-end sales charge permitted by the National Association of
Securities Dealers, Inc.
PURCHASE OF SHARES
- --------------------------------------------------------------------------------
Shares of the Fund are currently offered without a sales charge. The minimum
initial investment is $1,000. There is no minimum for subsequent investments.
Shares of the Fund are sold at the net asset value per share next
10
<PAGE> 34
determined after receipt of an order by the Fund's Distributor or Transfer Agent
in proper form with accompanying check or bank wire payment arrangements
satisfactory to the Fund. Although most shareholders elect not to receive stock
certificates, certificates for whole shares only can be obtained on specific
written request to the Transfer Agent.
Shares of the Fund may be purchased through registered broker-dealers. Such
broker-dealers may charge the investor a fee for their services. Such fees may
vary among broker-dealers, and such broker-dealers may impose higher initial or
subsequent investment requirements than those established by the Fund. Services
provided by broker-dealers may include allowing the investor to establish a
margin account and to borrow on the value of the Fund's shares in that account.
Prospectuses, sales material and applications may be obtained from the
Distributor. The Fund and its Distributor reserve the right in their sole
discretion (1) to suspend the offerings of the Fund's shares and (2) to reject
purchase orders when, in the judgment of the Fund's management, such rejection
is in the best interest of the Fund. The net asset value per share of the Fund
is determined as of the close of the regular session of the New York Stock
Exchange ("NYSE"), which is generally 4:00 p.m. eastern time, on each day that
trading is conducted on the NYSE by dividing the value of the Fund's net assets
(i.e., the value of its securities and other assets less its liabilities,
including expenses payable or accrued) by the number of shares outstanding at
the time the determination is made. Portfolio securities for which market
quotations are readily available are valued at market value as determined by the
last quoted sale price prior to the valuation time on the valuation date in the
case of securities traded on securities exchanges or other markets for which
such information is available. Other readily marketable securities are valued at
the average of the latest bid and asked quotations for such securities prior to
the valuation time. Debt securities with remaining maturities of 60 days or less
are valued at amortized cost. All other assets are valued at fair value as
determined by or under the supervision of the Board of Directors of the Fund.
See "Determination of Net Asset Value" in the Additional Statement.
Mail
- --------------------------------------------------------------------------------
To make an initial purchase by mail, send a completed subscription order form
with a check for the amount of the investment payable to "The Gabelli Equity
Income Fund" to:
THE GABELLI FUNDS
P.O. BOX 8308
BOSTON, MA 02266-8308
Subsequent purchases do not require a completed application and can be made by
(1) mailing a check to the same address noted above or by (2) bank wire, as
indicated below. The exact name and number of the shareholder's account should
be clearly indicated.
Checks will be accepted if drawn in U.S. currency on a domestic bank for less
than $100,000. U.S. dollar checks drawn against a non-U.S. bank may be subject
to collection delays and will be accepted only upon actual receipt of funds by
the Transfer Agent. Bank collection fees may apply. Bank or certified checks for
investments of $100,000 or more will be required unless the investor elects to
invest by bank wire as described below. The Fund reserves the right to reject
purchases by check made payable to someone other than the Fund.
Bank Wire
- --------------------------------------------------------------------------------
To initially purchase shares of the Fund using the wire system for transmittal
of money among banks, an investor should first telephone the Fund at
1-800-422-3554 to obtain a new account number. The investor should then instruct
a Federal Reserve System member bank to wire funds to:
State Street Bank and Trust Company
ABA # 011-0000-28 REF DDA # 99046187
Attn: Shareholder Services
Re: The Gabelli Equity Income Fund
A/C # _____________________________________
Account of (Registered Owner)
---------------------------------
225 Franklin Street, Boston, MA 02110
For initial purchases, the investor should promptly complete and mail the
subscription order form to the address shown above for mail purchases. There may
be a charge by your bank for transmitting the money by bank wire
11
<PAGE> 35
but State Street Bank and Trust Company does not charge investors in the Fund
for the receipt of wire transfers. If you are planning to wire funds, it is
suggested that you instruct your bank early in the day so the wire transfer can
be accomplished the same day.
Personal Delivery
- --------------------------------------------------------------------------------
Deliver a check made payable to "The Gabelli Equity Income Fund" along with a
completed subscription order form to:
The Gabelli Funds
The BFDS Building, 6th Floor
Two Heritage Drive
North Quincy, MA 02171
Telephone Investment Plan
- --------------------------------------------------------------------------------
You may purchase additional shares of the Fund by telephone through the
Automated Clearing-house (ACH) system as long as your bank is a member of the
ACH system and you have a completed, approved investment plan application on
file with our Transfer Agent. The funding for your purchase will be
automatically deducted from the ACH eligible account you designate on the
application. Your investment will normally be credited to your mutual fund
account on the first business day following your telephone request. Your request
must be received no later than 4:00 p.m. eastern time. There is a minimum of
$100 for each telephone investment. Any subsequent changes in banking
information must be submitted in writing and accompanied by a sample voided
check. To initiate an ACH purchase, please call 1-800-GABELLI (422-3554) or
1-800-872-5365. Fund shares purchased through the Telephone or Automatic
Investment Plan will not be available for redemption for up to fifteen (15) days
following the purchase date.
Automatic Investment Plan
- --------------------------------------------------------------------------------
The Fund offers an automatic monthly investment plan, details of which can be
obtained from the Distributor. There is no minimum initial investment for
accounts establishing an Automatic Investment Plan.
Systematic Withdrawal Plan
- --------------------------------------------------------------------------------
The Fund offers a systematic withdrawal program for shareholders whereby they
can authorize an automatic redemption on a monthly, quarterly or annual basis.
Details can be obtained from the Distributor.
Other Investors
- --------------------------------------------------------------------------------
No minimum initial investment is required for officers, directors or full-time
employees of the Fund, other investment companies managed by the Adviser, the
Adviser, the Administrator, the Distributor or their affiliates, including
members of the "immediate family" of such individuals and retirement plans and
trusts for their benefit. The term "immediate family" refers to spouses,
children and grandchildren (adopted or natural), parents, grandparents,
siblings, a spouse's siblings, sibling's spouse and a sibling's children.
REDEMPTION OF SHARES
- --------------------------------------------------------------------------------
Upon receipt by the Distributor or the Transfer Agent of a redemption request in
proper form, shares of the Fund will be redeemed at their next determined net
asset value. Redemption requests received after the time as of which the Fund's
net asset value is determined on a particular day will be redeemed at the net
asset value of the Fund determined on the next day that net asset value is
determined. Checks for redemption proceeds will normally be mailed to the
shareholder's address of record within seven days, but will not be mailed until
all checks in payment for the purchase of the shares to be redeemed have been
honored, which may take up to 15 days. Redemption requests may be made by letter
to the Transfer Agent, specifying the name of the Fund, the dollar amount or
number of shares to be redeemed, and the account number. The letter must be
signed in exactly the same way the account is registered (if there is more than
one owner of the shares, all must sign) and, if any certificates for the shares
to be redeemed are outstanding, presentation of such certificates properly
endorsed is also required. Signatures on a redemption request and/or
certificates must be guaranteed by an "eligible guarantor institution" as such
term is defined in Rule 17Ad-15 under the Securities Exchange Act of 1934, which
includes certain banks, brokers, dealers, credit unions, securities exchanges
and associations, clearing agencies and savings associations (signature
guarantees by notaries public are not acceptable). Shareholders may also redeem
Fund shares through certain registered broker-dealers, who have made
arrangements with the Fund permitting them to redeem shares by telephone or
facsimile transmission and who may charge shareholders a fee for this service if
they have not received any payments under the Distribution Plan.
12
<PAGE> 36
Further documentation, such as copies of corporate resolutions and instruments
of authority, are normally requested from corporations, administrators,
executors, personal representatives, trustees or custodians to evidence the
authority of the person or entity making the redemption request.
If the Board of Directors should determine that it would be detrimental to the
remaining shareholders of the Fund to make payment wholly or partly in cash, the
Fund may pay the redemption price in whole or in part by a distribution in kind
of securities from the portfolio of the Fund, in lieu of cash, in conformity
with applicable rules of the SEC. Under such circumstances, shareholders of the
Fund receiving distributions in kind of securities will incur brokerage
commissions when they dispose of the securities.
The Fund may suspend the right of redemption or postpone the date of payment for
more than seven days during any period when (1) trading on the NYSE is
restricted or the Exchange is closed, other than customary weekend and holiday
closings; (2) the SEC has by order permitted such suspension or (3) an
emergency, as defined by rules of the SEC, exists making disposal of portfolio
investments or determination of the value of the net assets of the Fund not
reasonably practicable.
To minimize expenses, the Fund reserves the right to
redeem, upon not less than 30 days notice, all shares of the Fund in an account
(other than an IRA) which as a result of shareholder redemption has a value
below $500. However, a shareholder will be allowed to make additional
investments prior to the date fixed for redemption to avoid liquidation of the
account.
Telephone Redemption
- --------------------------------------------------------------------------------
By Check
- --------------------------------------------------------------------------------
The Fund accepts telephone requests for redemption of unissued shares, subject
to a $25,000 limitation. By calling either 1-800-GABELLI (422-3554) or
1-800-872-5365, you may request that a check be mailed to the address of record
on the account, provided that the address has not changed within thirty (30)
days prior to your request. The check will be made payable to the person in
whose name the account is registered and will normally be mailed within seven
(7) days.
By Bank Wire
- --------------------------------------------------------------------------------
The Fund accepts telephone requests for wire redemption in excess of $1,000 (but
subject to a $25,000 limitation) to a predesignated bank either on the
subscription order form or in a subsequent written authorization with the
signature guaranteed. The Fund accepts signature guaranteed written requests for
redemption by bank wire without limitation. The proceeds are normally wired on
the following business day. Your bank must be either a member of the Federal
Reserve System or have a correspondent bank which is a member. Any change to the
banking information made at a later date must be submitted in writing with a
signature guarantee.
Requests for telephone redemption must be received between 9:00 a.m. and 4:00
p.m. eastern time. If your telephone call is received after this time or on a
day when the NYSE is not open, the request will be entered for the following
business day. Shares are redeemed at the net asset value next determined
following your request. Fund shares purchased by check or through the automatic
purchase plan will not be available for redemption for up to fifteen (15) days
following the purchase. Shares held in certificate form must be returned to the
Transfer Agent for redemption of shares. Telephone redemption is not available
for IRAs. The proceeds of a telephone redemption may be directed to an existing
account in another mutual fund advised by the Adviser, provided the account is
registered in the redeeming shareholder's name. Such purchase will be made at
the respective net asset value plus applicable sales charge, if any, with credit
for any sales charge previously charged by the Distributor.
The Fund and its Transfer Agent will not be liable for following telephone
instructions reasonably believed to be genuine. In this regard, the Fund and its
Transfer Agent require personal identification information before accepting a
telephone redemption. If the Fund or its Transfer Agent fail to use reasonable
procedures, the Fund may be liable for losses due to fraudulent instructions.
RETIREMENT PLANS
- --------------------------------------------------------------------------------
The Fund has available a form of Individual Retirement Account ("IRA") for
investment in Fund shares which may be obtained from the Distributor. The
minimum investment required to open an IRA for investment in shares of the
13
<PAGE> 37
Fund is $1,000 for an individual except that both the individual and his or her
spouse may establish separate IRAs if their combined investment is $1,250. There
is no minimum for additional investment in an IRA account.
Investors who are self-employed may purchase shares of the Fund through
tax-deductible contributions to retirement plans for self-employed persons,
known as Keogh or H.R. 10 plans. The Fund does not currently act as Sponsor for
such plans. Fund shares may also be a suitable investment for other types of
qualified pension or profit-sharing plans which are employer-sponsored,
including deferred compensation or salary reduction plans known as "401(k)
Plans" which give participants the right to defer portions of their compensation
for investment on a tax-deferred basis until distributions are made from the
plans. The minimum initial investment for an individual under such plans is
$1,000 and there is no minimum for additional investments. Under the Code,
individuals may make wholly or partly tax deductible IRA contributions of up to
$2,000 annually, depending on whether they are active participants in an
employer-sponsored retirement plan and on their income level. However, dividends
and distributions held in the account are not taxed until withdrawn in
accordance with the provisions of the Code. An individual with a non-working
spouse may establish a separate IRA for the spouse under the same conditions and
contribute a maximum of $4,000 annually to either or both IRAs provided that no
more than $2,000 may be contributed to the IRA of either spouse. Beginning
January 1, 1998, investors satisfying statutory income level requirements may
make non-deductible contributions up to $2,000 annually to a Roth IRA,
distributions from which are not subject to tax if a statutory five year holding
period requirement is satisfied. New for 1998, the Fund also makes available
Education IRAs. Education IRAs permit eligible individuals to contribute up to
$500 per year per beneficiary under 18 years old. The minimum initial investment
for an education IRA is $250. Distributions from an education IRA are generally
excluded from income when used for qualified higher education expenses.
Investors should be aware that they may be subject to penalties or additional
tax on contributions or withdrawals from IRAs or other retirement plans which
are not permitted by the applicable provisions of the Code. Persons desiring
information concerning investments through IRA accounts or other retirement
plans should write or telephone the Distributor.
DIVIDENDS, DISTRIBUTIONS AND TAXES
- --------------------------------------------------------------------------------
The Fund currently intends to pay dividends quarterly and capital gains
distributions, if any, on an annual basis. Each dividend and capital gains
distribution, if any, declared by the Fund on its outstanding shares will,
unless the shareholder elects otherwise, be paid on the payment date fixed by
the Board of Directors in additional shares of the Fund having an aggregate net
asset value as of the ex-dividend date of such dividend or distribution equal to
the cash amount of such distribution. An election to receive dividends and
distributions may be changed by notifying the Fund in writing at any time prior
to the record date for a particular dividend or distribution. There are no sales
or other charges in connection with the reinvestment of dividends and capital
gains distributions. There is no fixed dividend rate, and there can be no
assurance that the Fund will pay any dividends or realize any capital gains.
The Fund has qualified and intends to continue to qualify as a "Regulated
Investment Company" under the Code and thus is not subject to Federal income tax
on that portion of its net investment income and realized capital gain that it
pays out to its shareholders. Failure to qualify would result in the Fund being
subject to Federal income tax on its taxable income and gains.
A redemption of shares will generally result in the recognition of gain or loss
for income tax purposes equal to the difference between the proceeds of the
redemption and the shareholder's basis in the shares redeemed.
Dividends from net investment income and distributions from realized short-term
capital gains are taxable to the recipient shareholders as ordinary income,
whether paid in cash or in additional Fund shares. In the case of corporate
shareholders, the portion of the Fund's distributions attributable to dividends
received by the Fund on its investments in common or preferred stock may be
eligible for the dividends received deduction as long as certain requirements
are satisfied by the shareholder. Distributions out of long-term capital gains
are taxable to the recipient as long-term capital gains. Shareholders will be
advised as to what portion of capital gains are to be treated as "long-term"
rate gain with respect to the maximum tax rate for such gains (10% for
noncorporate shareholders who are subject to the 15% marginal tax bracket for
ordinary income). Dividends and distributions declared by the Fund may also be
subject to state and local taxes. Prior to investing in shares of the Fund,
14
<PAGE> 38
prospective shareholders may wish to consult their tax advisers concerning the
Federal, state and local tax consequences of such investment.
GENERAL INFORMATION
- --------------------------------------------------------------------------------
Description of Shares, Voting Rights
- --------------------------------------------------------------------------------
and Liabilities
- --------------------------------------------------------------------------------
The Fund is a series of Gabelli Equity Series Funds, Inc., which was
incorporated in Maryland on July 25, 1991. The authorized capital stock consists
of one billion shares of stock having a par value of one tenth of one cent
($.001) per share, one hundred million of which have been initially classified
as Fund shares. The Corporation is not required, and does not intend, to hold
regular annual shareholder meetings, but may hold special meetings for
consideration of proposals requiring shareholder approval, such as changing
fundamental policies or upon the written request of 10% of the Fund's shares to
replace its Directors. The Corporation's Board of Directors is authorized to
divide the unissued shares into separate series of stock, each series
representing a separate, additional portfolio. The Board currently has
authorized the division of the unissued shares into two series each having a
separate portfolio. Shares of all series will have identical voting rights,
except where by law, certain matters must be approved by a majority of the
shares of the affected series. Each share of any series of shares when issued
has equal dividend, liquidation (see "Redemption of Shares") and voting rights
within the series for which it was issued and each fractional share has those
rights in proportion to the percentage that the fractional share represents of a
whole share. Shares will be voted in the aggregate.
There are no conversion or preemptive rights in connection with any shares of
the Fund. All shares, when issued in accordance with the terms of the offering,
will be fully paid and nonassessable. Shares will be redeemed at net asset
value, at the option of the shareholder.
The Fund sends semi-annual and audited annual reports to all of its shareholders
which include a list of portfolio securities. Unless it is clear that a
shareholder is a nominee for the account of an unrelated person or a shareholder
otherwise specifically requests in writing, the Fund may send a single copy of
semi-annual, annual and other reports to shareholders to all accounts at the
same address and all accounts of any person at that address.
The shares of the Fund have noncumulative voting rights which means that the
holders of more than 50% of the shares can elect 100% of the directors if the
holders choose to do so, and, in that event, the holders of the remaining shares
will not be able to elect any person or persons to the Board of Directors.
Unless specifically requested by an investor who is a shareholder of record, the
Fund does not issue certificates evidencing Fund shares.
Shareholder Approval
- --------------------------------------------------------------------------------
Other than elections of Directors, which is by plurality, any matter for which
shareholder approval is required by the Investment Company Act of 1940 requires
the affirmative vote of at least a "majority" (as defined by the Investment
Company Act of 1940) of the outstanding voting securities of the Fund or the
Corporation at a meeting called for the purpose of considering such approval. A
majority of the Fund's outstanding securities is the lesser of (1) 67% of the
shares represented at a meeting at which more than 50% of the outstanding shares
are present in person or by proxy or (2) more than 50% of the outstanding
shares.
Performance Information
- --------------------------------------------------------------------------------
The Fund may furnish data about its investment performance in advertisements,
sales literature and reports to shareholders. "Total return" represents the
annual percentage change in value of $1,000 invested at the maximum public
offering price for the one, five and ten year periods (if applicable) and the
life of the Fund through the most recent calendar quarter, assuming reinvestment
of all dividends and distributions. Quotations of "yield" will be based on the
investment income per share earned during a particular 30 day period, less
expenses accrued during the period, with the remainder being divided by the
maximum offering price per share on the last day of the period. The Fund may
also furnish total return and yield calculations for other periods based on
investments at various sales charge levels or net asset values.
Custodian, Transfer Agent and Dividend Disbursing Agent
- --------------------------------------------------------------------------------
15
<PAGE> 39
Dividend Disbursing Agent
- --------------------------------------------------------------------------------
State Street Bank and Trust Company is the Custodian for the Fund's cash and
securities as well as the Transfer and Dividend Disbursing Agent for its shares.
Boston Financial Data Services, Inc., an affiliate of State Street Bank and
Trust Company performs the shareholder services on behalf of State Street and is
located at The BFDS Building, Two Heritage Drive, North Quincy, MA 02171. State
Street Bank and Trust Company does not assist in and is not responsible for
investment decisions involving assets of the Fund.
Independent Auditors
- --------------------------------------------------------------------------------
Ernst & Young LLP has been appointed independent auditors for the Fund, and is
located at 787 Seventh Ave., New York, NY 10019.
Information for Shareholders
- --------------------------------------------------------------------------------
All shareholder inquiries regarding administrative procedures including the
purchase and redemption of shares should be directed to the Distributor, Gabelli
& Company, Inc., One Corporate Center, Rye, New York 10580-1434. For assistance,
call 1-800-GABELLI (1-800-422-3554) or through the internet at
http://www.gabelli.com.
Like other funds and business organizations around the world, the Fund could be
adversely affected if the computer systems used by the Adviser and the Fund's
other service providers do not properly process and calculate date-related
information for the year 2000 and beyond. The Fund has been informed that the
Adviser and the Fund's other service providers (i.e., Administrator, Transfer
Agent, Fund Accounting Agent, Distributor and Custodian) have developed and are
implementing plans to minimize the risk associated with the Year 2000 problem.
These plans include the following activities: inventorying of software systems,
determining inventory items that may not function properly after December 31,
1999, reprogramming or replacing such systems and retesting for Year 2000
readiness. In addition, the service providers are obtaining assurances from
their vendors and suppliers in the same manner. Non-compliant Year 2000 systems
upon which the Fund is dependent may result in errors and account maintenance
failures. The Fund has no reason to believe that (1) the Year 2000 plans of the
Adviser and the Fund's other service providers for services critical to the
Fund's operations will not be completed by December 31, 1999, and (2) the costs
currently associated with the implementation of their plans will have material
adverse impact on the business, operations or financial condition of the Fund
or its service providers.
In addition, the Year 2000 problem may adversely affect the companies in which
the Fund invests. For example, these companies may incur substantial costs to
correct the problem and may suffer losses caused by data processing errors.
Since the ultimate costs or consequences of incomplete or untimely resolution of
the Year 2000 problem by the Fund's service providers are unknown to the Fund at
this time, there may be costs or consequences having a material adverse impact
on the Fund, its service providers and/or your account records. The Fund and the
Adviser will continue to monitor developments relating to this issue.
Upon request, Gabelli and Company, Inc. will provide without charge, a paper
copy of this Prospectus to investors or their representatives who received this
Prospectus in an electronic format.
16
<PAGE> 40
This Prospectus omits certain information contained in the Registration
Statement filed with the SEC. Copies of the Registration Statement including
items omitted herein, may be obtained from the Commission by paying the charges
prescribed under its rules and regulations. The Additional Statement included in
such Registration Statement may be obtained without charge from the Fund or its
Distributor.
17
<PAGE> 41
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Table of Fees and Expenses .................
Financial Highlights .......................
Investment Objective and Policies and
Related Risk Factors .....................
Other Investment Techniques and
Related Risk Factors .....................
Management of the Fund .....................
Distribution Plan ..........................
Purchase of Shares .........................
Redemption of Shares .......................
Retirement Plans ...........................
Dividends, Distributions and Taxes .........
General Information ........................
</TABLE>
- --------------------------------------------------------------------------------
No dealer, salesman or other person has been authorized to give any information
or to make any representation other than those contained in this Prospectus, and
if given or made, such information or representation may not be relied upon as
being authorized by the Fund, the Adviser, the Administrator, the Distributor or
any affiliate thereof. This Prospectus does not constitute an offer to sell or a
solicitation of any offer to buy in any state to any person to whom it is
unlawful to make such offer in such state.
18
<PAGE> 42
THE
GABELLI
EQUITY
INCOME
FUND
PROSPECTUS
DECEMBER 21, 1998
GABELLI FUNDS, INC.
INVESTMENT ADVISER
GABELLI & COMPANY, INC.
DISTRIBUTOR
19
<PAGE> 43
GABELLI EQUITY SERIES FUNDS, INC.
THE GABELLI EQUITY INCOME FUND
THE GABELLI SMALL CAP GROWTH FUND
One Corporate Center
Rye, New York 10580-1434
Telephone 1-800-GABELLI (1-800-422-3554)
STATEMENT OF ADDITIONAL INFORMATION
December 21, 1998
This Statement of Additional Information ("Additional Statement") relates
to The Gabelli Equity Income Fund (the "Equity Income Fund") and The Gabelli
Small Cap Growth Fund (the "Small Cap Fund") (each a "Fund" collectively the
"Funds") which are series of Gabelli Equity Series Funds, Inc., a Maryland
corporation (the "Corporation"), and is not a prospectus and is only authorized
for distribution when preceded or accompanied by the relevant Fund's prospectus
(the "Prospectus") dated December 21, 1998, as supplemented from time to time.
This Additional Statement contains additional and more detailed information than
that set forth in the Prospectus and should be read in conjunction with the
Prospectus, additional copies of which may be obtained without charge by writing
or telephoning the Fund at the address and telephone number set forth above.
TABLE OF CONTENTS
Page
----
Other Investment Techniques B-2
The Adviser B-4
The Distributor B-5
Directors and Officers B-5
Investment Restrictions B-8
Portfolio Transactions and Brokerage B-9
Purchase and Redemption of Shares B-10
Determination of Net Asset Value B-11
Dividends, Distributions and Taxes B-11
Investment Performance Information B-13
Appendix to Additional Statement B-15
Financial Statements B-16
<PAGE> 44
OTHER INVESTMENT TECHNIQUES
Securities Subject to Reorganization
Subject to each Fund's policy of investing at least 65% of its total assets
in income producing equity securities (Equity Income Fund) or small company
equity securities (Small Cap Fund) each Fund may invest without limit in
securities for which a tender or exchange offer has been made or announced and
in securities of companies for which a merger, consolidation, liquidation or
reorganization proposal has been announced if, in the judgment of Gabelli Funds,
Inc. (the "Adviser"), there is a reasonable prospect of capital appreciation
significantly greater than the brokerage and other transaction expenses
involved. (See "Other Investment Techniques and Related Risk Factors" in the
Prospectus.)
In general, securities which are the subject of such an offer or proposal
sell at a premium to their historic market price immediately prior to the
announcement of the offer or may also discount what the stated or appraised
value of the security would be if the contemplated transaction were approved or
consummated. Such investments may be advantageous when the discount
significantly overstates the risk of the contingencies involved; significantly
undervalues the securities, assets or cash to be received by shareholders of the
prospective portfolio company as a result of the contemplated transaction; or
fails adequately to recognize the possibility that the offer or proposal may be
replaced or superseded by an offer or proposal of greater value. The evaluation
of such contingencies requires unusually broad knowledge and experience on the
part of the Adviser which must appraise not only the value of the issuer and its
component businesses as well as the assets or securities to be received as a
result of the contemplated transaction but also the financial resources and
business motivation of the offeror and the dynamics and business climate when
the offer of proposal is in process. In making the investments each Fund will
not violate any of its investment restrictions (see below, "Investment
Restrictions") including the requirement that, (a) as to 75% of its total
assets, it will not invest more than 5% of its total assets in the securities of
any one issuer and (b) it will not invest more than 25% of its total assets in
any one industry. Since such investments are ordinarily short-term in nature,
they will tend to increase the turnover ratio of the Fund thereby increasing its
brokerage and other transaction expenses (see "Dividends, Distributions and
Taxes" in the Prospectus).
Nonconvertible Debt Securities
As disclosed in the Prospectus, up to 35% of each Fund's total assets may
be invested in lower quality nonconvertible debt securities. The market values
of lower quality fixed income securities tend to be less sensitive to changes in
prevailing interest rates than higher-quality securities but more sensitive to
individual corporate developments than higher-quality securities. Such
lower-quality securities also tend to be more sensitive to economic conditions
than are higher-quality securities. Accordingly, these lower-quality securities
are considered predominantly speculative with respect to the issuer's capacity
to pay interest and repay principal in accordance with the terms of the
obligation and will generally involve more credit risk than securities in the
higher-quality categories. Even securities rated Baa or BBB by Moody's and S&P
respectively, which ratings are considered investment grade, possess some
speculative characteristics. There are risks involved in applying credit ratings
as a method for evaluating high yield obligations in that credit ratings
evaluate the safety of principal and interest payments, not market value risk.
In addition, credit rating agencies may not change credit ratings on a timely
basis to reflect changes in economic or company conditions that affect a
security's market value. The Funds will rely on the Adviser's judgment, analysis
and experience in evaluating the creditworthiness of an issuer. In this
evaluation, the Adviser will take into consideration, among other things, the
issuer's financial resources and ability to cover its interest and fixed
charges, factors relating to the issuer's industry and its sensitivity to
economic conditions and trends, its operating history, the quality of the
issuer's management and regulatory matters.
The risk of loss due to default by the issuer is significantly greater for
the holders of lower quality securities because such securities are generally
unsecured and are often subordinated to other obligations of the issuer. During
an economic downturn or a sustained period of rising interest rates, highly
leveraged issuers of lower quality securities may experience financial stress
and may not have sufficient revenues to meet their interest payment obligations.
An issuer's ability to service its debt obligations may also be adversely
affected by specific corporate developments, its inability to meet specific
projected business forecasts, or the unavailability of additional financing.
B-2
<PAGE> 45
Factors adversely affecting the market value of high yield and other
securities will adversely affect each Fund's net asset value. In addition, each
Fund may incur additional expenses to the extent it is required to seek recovery
upon a default in the payment of principal of or interest on its portfolio
holdings.
From time to time, proposals have been discussed regarding new legislation
designed to limit the use of certain high yield debt securities by issuers in
connection with leveraged buy-outs, mergers and acquisitions, or to limit the
deductibility of interest payments on such securities. Such proposals, if
enacted into law, could reduce the market for such debt securities generally,
could negatively affect the financial condition of issuers of high yield
securities by removing or reducing a source of future financing, and could
negatively affect the value of specific high yield issues and the high yield
market in general. For example, under a provision of the Internal Revenue Code
of 1986 (the "Code") enacted in 1989, a corporate issuer may be limited from
deducting all of the original issue discount on high-yield discount obligations
(i.e., certain types of debt securities issued at a significant discount to
their face amount). The likelihood of passage of any additional legislation or
the effect thereof is uncertain.
The secondary trading market for lower-quality fixed income securities is
generally not as liquid as the secondary market for higher-quality securities
and is very thin for some securities. The relative lack of an active secondary
market may have an adverse impact on market price and a Fund's ability to
dispose of particular issues when necessary to meet the Fund's liquidity needs
or in response to a specific economic event such as a deterioration in the
creditworthiness of the issuer. The relative lack of an active secondary market
for certain securities may also make it more difficult for a Fund to obtain
accurate market quotations for purposes of valuing the Fund's portfolio. Market
quotations are generally available on many high yield issues only from a limited
number of dealers and may not necessarily represent firm bids of such dealers or
prices for actual sales. During such times, the responsibility of the
Corporation's Board of Directors to value the securities becomes more difficult
and judgment plays a greater role in valuation because there is less reliable,
objective data available.
Hedging Transactions
Futures Contracts. Each Fund may enter into futures contracts only for
certain bona fide hedging, yield enhancement and risk management purposes. Each
Fund may enter into futures contracts for the purchase or sale of debt
securities, debt instruments, or indices of prices thereof, stock index futures,
other financial indices, and U.S. Government Securities.
A "sale" of a futures contract (or a "short" futures position) means the
assumption of a contractual obligation to deliver the securities underlying the
contract at a specified price at a specified future time. A "purchase" of a
futures contract (or a "long" futures position) means the assumption of a
contractual obligation to acquire the securities underlying the contract at a
specified price at a specified future time.
Certain futures contracts are settled on a net cash payment basis rather
than by the sale and delivery of the securities underlying the futures
contracts. U.S. futures contracts have been designed by exchanges that have been
designated as "contract markets" by the Commodity Futures Trading Commission
(the "CFTC"), an agency of the U.S. Government, and must be executed through a
futures commission merchant (i.e., a brokerage firm) which is a member of the
relevant contract market. Futures contracts trade on these contract markets and
the exchange's affiliated clearing organization guarantees performance of the
contracts as between the clearing members of the exchange.
These contracts entail certain risks, including but not limited to the
following: no assurance that futures contracts transactions can be offset at
favorable prices, possible reduction of each Fund's yield due to the use of
hedging, possible reduction in value of both the securities hedged and the
hedging instrument, possible lack of liquidity due to daily limits on price
fluctuation, imperfect correlation between the contracts and the securities
being hedged, and potential losses in excess of the amount invested in the
futures contracts themselves.
Currency Transactions. Each Fund may enter into various currency
transactions, including forward foreign currency contracts, currency swaps,
foreign currency or currency index futures contracts and put and call options on
such contracts or on currencies. A forward foreign currency contract involves an
obligation to purchase or sell a specific currency for a set price at a future
date. A currency swap is an arrangement whereby each party exchanges one
currency for another on a particular date and agrees to reverse the exchange on
a later date at a specific exchange rate. Forward foreign currency contracts and
currency swaps are established in the interbank market
B-3
<PAGE> 46
conducted directly between currency traders (usually large commercial banks or
other financial institutions) on behalf of their customers. Futures contracts
are similar to forward contracts except that they are traded on an organized
exchange and the obligations thereunder may be offset by taking an equal but
opposite position to the original contract, with profit or loss determined by
the relative prices between the opening and offsetting positions. Each Fund
expects to enter into these currency contracts and swaps in primarily the
following circumstances: to "lock in" the U.S. dollar equivalent price of a
security a Fund is contemplating to buy or sell that is denominated in a
non-U.S. currency; or to protect against a decline against the U.S. dollar of
the currency of a particular country to which the Fund's portfolio has exposure.
Each Fund anticipates seeking to achieve the same economic result by utilizing
from time to time for such hedging a currency different from the one of the
given portfolio security as long as, in the view of the Adviser, such currency
is essentially correlated to the currency of the relevant portfolio security
based on historic and expected exchange rate patterns.
Unseasoned Companies. The Fund may invest in securities of unseasoned
companies. In view of the limited liquidity, more speculative prospects and
price volatility, the Fund will not invest more than 10% of the Fund's assets
(at the time of purchase) in securities of companies (including predecessors)
that have operated less than three years.
THE ADVISER
The Adviser is a New York corporation with principal offices located at One
Corporate Center, Rye, New York 10580-1434.
Pursuant to an Investment Advisory Contract which was approved by each
Fund's sole shareholder on December 9, 1991 for the Equity Income Fund and
October 2, 1991 for the Small Cap Fund, the Adviser furnishes a continuous
investment program for each Fund's portfolio, makes the day-to-day investment
decisions for each Fund, arranges the portfolio transactions for each Fund and
generally manages each Fund's investments in accordance with the stated policies
of each Fund, subject to the general supervision of the Board of Directors of
the Corporation.
Advisory Fees
For the Year Ended September 30
1998 1997 1996
---- ---- ----
Equity Income Fund $ 823,207 $ 640,070 $ 561,461
Small Cap Fund $3,223,995 $2,269,141 $2,276,908
Under each Investment Advisory Contract, the Adviser also (1) provides the
Fund with the services of persons competent to perform such supervisory,
administrative, and clerical functions as are necessary to provide efficient
administration of the Fund, including maintaining certain books and records and
overseeing the activities of the Fund's Custodian and Transfer Agent; (2)
oversees the performance of administrative and professional services provided to
the Fund by others, including the Fund's Custodian, Transfer Agent and Dividend
Disbursing Agent, as well as legal, accounting, auditing and other services
performed for the Fund; (3) provides the Fund, if requested, with adequate
office space and facilities: (4) prepares, but does not pay for, periodic
updating of the Fund's registration statement, Prospectus and Additional
Statement, including the printing of such documents for the purpose of filings
with the SEC; (5) supervises the calculation of the net asset value of shares of
the Fund; (6) prepares, but does not pay for, all filings under state "Blue Sky"
laws of such states or countries as are designated by the Distributor, which may
be required to register or qualify, or continue the registration or
qualification, of the Fund and/or its shares under such laws; and (7) prepares
notices and agendas for meetings of the Corporation's Board of Directors and
minutes of such meetings in all matters required by the Investment Company Act
of 1940 (the "Act") to be acted upon by the Board.
The Adviser has entered into a Sub-Administration Contract with BISYS Fund
Services ("BISYS" or the "Sub-Administrator") 3435 Stelzer Road, Columbus, Ohio
43219, pursuant to which the Sub-Administrator provides certain administrative
services necessary for the Fund's operations but which do not concern the
investment advisory and portfolio management services provided by the Adviser.
For such services and the related expenses
B-4
<PAGE> 47
borne by BISYS, the Adviser pays a prorated monthly fee at the annual rate of
.0625% of the average net assets of the Fund (minimum annual fee of $30,000 per
portfolio) on the first $350 million of all of the funds advised by the Adviser
and its affiliates and administered by BISYS and .0425% of any net assets above
$350 million, and .0225% of any assets above $700 million which together with
the services to be rendered, is subject to negotiation between the parties and
both parties retain the right unilaterally to terminate the arrangement on not
less than 60 days' notice.
The Investment Advisory Contract provides that absent willful misfeasance,
bad faith, gross negligence or reckless disregard of its duty, the Adviser and
its employees, officers, directors and controlling persons are not liable to the
Funds or any of its investors for any act or omission by the Adviser or for any
error of judgment or for losses sustained by the Funds. However, the Contract
provides that each Fund is not waiving any rights it may have with respect to
any violation of law which cannot be waived. The Contract also provides
indemnification for the Adviser and each of these persons for any conduct for
which they are not liable to the Funds. The Investment Advisory Contract in no
way restricts the Adviser from acting as adviser to others. The Funds have
agreed by the terms of the Investment Advisory Contract that the word "Gabelli"
in its name is derived from the name of the Adviser which in turn is derived
from the name of Mario J. Gabelli; that such name is the property of the Adviser
for copyright and/or other purposes; and that therefore, such name may freely be
used by the Adviser for other investment companies, entities or products. The
Funds have further agreed that in the event that for any reason, the Adviser
ceases to be its investment adviser, the Funds will, unless the Adviser
otherwise consents in writing, promptly take all steps necessary to change its
name to one which does not include "Gabelli."
The Investment Advisory Contract is terminable without penalty by the
Corporation on not more than sixty days' written notice when authorized by the
Directors of the Corporation, by the holders of a majority, as defined in the
Act, of the outstanding shares of the Corporation, or by the Adviser. The
Investment Advisory Contract will automatically terminate in the event of its
assignment, as defined in the Act and rules thereunder except to the extent
otherwise provided by order of the Commission or any rule under the Act and
except to the extent the Act no longer provides for automatic termination, in
which case the approval of a majority of the disinterested directors is required
for any "assignment." Each Investment Advisory Contract provides in effect, that
unless terminated it will remain in effect from year to year so long as
continuance of the Investment Advisory Contract is approved annually by the
Directors of the Corporation, or the shareholders of the Fund and in either
case, by a majority vote of the Directors who are not parties to the Investment
Advisory Contract or "interested persons" as defined in the Act of any such
person cast in person at a meeting called specifically for the purpose of voting
on the continuance of the Investment Advisory Contract.
THE DISTRIBUTOR
Each Fund has entered into a Distribution Agreement with Gabelli & Company,
Inc. (the "Distributor"), a New York corporation which is a subsidiary of
Gabelli Funds, Inc., having principal offices located at One Corporate Center,
Rye, New York 10580-1434. The Distributor acts as agent of the Funds for the
continuous offering of its shares on a best efforts basis.
The Distribution Agreement is terminable by the Distributor or the
Corporation at any time without penalty on not more than sixty nor less than
thirty days' written notice, provided, that termination by the Corporation must
be directed or approved by the Board of Directors of the Corporation, by the
vote of the holders of a majority of the outstanding securities of the Funds or
by written consent of a majority of the directors who are not interested persons
of the Corporation or the Distributor. The Distribution Agreement will
automatically terminate in the event of its assignment, as defined in the Act.
The Distribution Agreement provides that, unless terminated, it will remain in
effect so long as continuance of the Distribution Agreement is approved annually
by the Corporation's Board of Directors or by a majority of the outstanding
voting securities of the Corporation, and in either case, also by a majority of
the Directors who are not interested persons of the Corporation or the
Distributor.
DIRECTORS AND OFFICERS
The Directors and Executive Officers of the Corporation, their principal
business occupations during the last five years and their affiliations, if any,
with the Adviser or the Administrator, are shown below. Directors deemed to be
"interested persons" of the Fund for purposes of the Act are indicated by an
asterisk.
B-5
<PAGE> 48
<TABLE>
<CAPTION>
- ---------------------------------------------- ---------------------------------------------------------------
Principal Occupations During Last Five Years; Affiliations
Name, Position with the Funds and Address with the Adviser or Administrator
- ---------------------------------------------- ---------------------------------------------------------------
<S> <C>
Mario J. Gabelli* Chairman of the Board, Chief Executive Officer and Chief
President, Director and Chief Investment Investment Officer of Gabelli Funds, Inc. and GAMCO
Officer Investors, Inc., Chairman of the Board and Chief Executive
Age: 56 Officer of Lynch Corporation, a diversified manufacturing
and communications services company; Director of East/West
Communications, Inc.; Governor of the American Stock
Exchange and officer and/or Director or Trustee of 12 other
Gabelli funds.
- ---------------------------------------------- ---------------------------------------------------------------
James E. McKee Vice President and General Counsel of GAMCO Investors, Inc.
Secretary since 1993; Secretary of all mutual funds managed by the
Age: 35 Adviser or its affiliates; U.S. SEC, New York, (Branch
Chief, 1992-1993, Staff Attorney, 1989-1992).
- ---------------------------------------------- ---------------------------------------------------------------
Bruce N. Alpert Vice President and Chief Operating Officer of the Investment
Vice President and Treasurer Advisory Division of Gabelli Funds, Inc. (the "Adviser");
Age: 46 officer of each mutual fund managed by the Adviser or its
affiliates.
- ---------------------------------------------- ---------------------------------------------------------------
</TABLE>
B-6
<PAGE> 49
<TABLE>
- ---------------------------------------------- ---------------------------------------------------------------
<S> <C>
Felix J. Christiana Formerly Senior Vice President of Dry Dock Savings Bank.
Director Director or Trustee of 8 other Gabelli funds.
Age: 73
- ---------------------------------------------- ---------------------------------------------------------------
Anthony J. Colavita President and Attorney at Law in the law firm of Anthony J.
Director Colavita, P.C. since 1961; Director or Trustee of 12 other
Age: 62 Gabelli funds.
- ---------------------------------------------- ---------------------------------------------------------------
Vincent D. Enright Former Senior Vice President and Chief Financial Officer of
Director KeySpan Energy Corporation; Director or Trustee of 2 other
Age: 56 Gabelli funds.
- ---------------------------------------------- ---------------------------------------------------------------
John D. Gabelli* Vice President of Gabelli & Company, Inc.; Director of
Director Gabelli Advisers, Inc.; Director of one other Gabelli fund.
Age: 53
- ---------------------------------------------- ---------------------------------------------------------------
Robert J. Morrissey Partner in the law firm of Morrissey & Hawkins. Director of
Director The Gabelli Value Fund Inc.
Age: 58
- ---------------------------------------------- ---------------------------------------------------------------
Anthony R. Pustorino Professor of Accounting at Pace University (1965 - present).
Director Formerly President, consultant, and shareholder, Pustorino
Age: 72 Puglisi & Co., certified public accountants (1961-1989).
Director/Trustee of several of the other Gabelli funds.
- ---------------------------------------------- ---------------------------------------------------------------
Anthonie C. van Ekris Managing Director of Balmac International, Ltd.; Director of
Director Spinnaker Industries, Inc. and Stahel Mardmeyer A.Z.; and
Age: 63 Director or Trustee of 9 other Gabelli funds.
- ---------------------------------------------- ---------------------------------------------------------------
</TABLE>
B-7
<PAGE> 50
<TABLE>
- ---------------------------------------------- ---------------------------------------------------------------
<S> <C>
Karl Otto Pohl* Partner of Sal Oppenheim Jr. & Cie (private investment
Director bank); Former President of the Deutsche Bundesbank and
Age: 66 Chairman of its Central Bank Council from 1980 through 1991;
Currently Board Member of IBM World Trade Europe/Middle
East/Africa Corp.; Bertelsmann AG, Zurich
Versicherungs-Gesellschaft (insurance); the International
Advisory Board for JP Morgan & Co.; Supervisory Board Member
of Royal Dutch (petroleum company) ROBECo/o Group; Advisory
Board of Unilever N.V. and Unilever Deutschland; German
Governor, International Monetary Fund from 1980 through
1991; Board Member, Bank for International Settlements from
1980 through 1991; and Director or Trustee of all the funds
in the Gabelli family of funds.
- ---------------------------------------------- ---------------------------------------------------------------
</TABLE>
Each Fund pays each Director who is not an employee of the Adviser or an
affiliated company an annual fee of $3,000 and $500 for each regular meeting of
the Board of Directors attended by the Director, and reimburses Directors for
certain travel and other out-of-pocket expenses incurred by them in connection
with attending such meetings. Directors and officers of the Funds who are
employed by the Adviser or an affiliated company receive no compensation or
expense reimbursement from the Corporation. Messrs. Mario J. Gabelli and John D.
Gabelli are brothers. Mr. Pohl receives fees from the Adviser but has no
obligation to provide any services to the Adviser. Although this relationship
does not appear to require designation of Mr. Pohl as an interested person, the
Corporation is currently making such designation in order to avoid the
possibility that Mr. Pohl's independence would be questioned.
The following table sets forth certain information regarding the
compensation of the Corporation's directors . Except as disclosed below, no
executive officer or person affiliated with the Funds received compensation from
either Fund for the calendar year ended December 31, 1998 in excess of $60,000.
B-8
<PAGE> 51
COMPENSATION TABLE
Aggregate Compensation
from Registrant
(Fiscal Year)
<TABLE>
<CAPTION>
------------------------------------------ ---------------- ----------------- ---------------------
Total Compensation
From Registrant and
Name of Person, Equity Income Small Cap Fund Complex Paid
Position Fund Fund To Directors*
------------------------------------------ ---------------- ----------------- ---------------------
<S> <C> <C> <C>
Mario J. Gabelli
President, Director and
Chief Investment Officer $ 0 $ 0 $ 0
------------------------------------------ ---------------- ----------------- ---------------------
Felix J. Christiana
Director 5,000 5,000 88,100 (9)
------------------------------------------ ---------------- ----------------- ---------------------
Anthony J. Colavita
Director 5,000 5,000 81,500 (10)
------------------------------------------ ---------------- ----------------- ---------------------
Vincent D. Enright
Director 5,000 5,000 18,500 (4)
------------------------------------------ ---------------- ----------------- ---------------------
John D. Gabelli
Director 0 0 0
------------------------------------------ ---------------- ----------------- ---------------------
Robert J. Morrissey
Director 4,500 4,500 24,500 (3)
------------------------------------------ ---------------- ----------------- ---------------------
Anthony R. Pustorino
Director 5,000 5,000 100,500 (8)
------------------------------------------ ---------------- ----------------- ---------------------
Anthonie C. van Ekris
Director 5,000 5,000 57,500 (12)
------------------------------------------ ---------------- ----------------- ---------------------
Karl Otto Pohl
Director 5,000 5,000 98,466 (20)
------------------------------------------ ---------------- ----------------- ---------------------
- -------------
* Represents the total compensation paid to such persons during the year ended December 31, 1998 (and,
with respect to the Funds, estimated to be paid during a full calendar year). The parenthetical number
represents the number of investment companies (including each Fund) from which such person receives
compensation that are considered part of the same fund complex as the Funds, because, among other things,
they have a common investment adviser.
</TABLE>
INVESTMENT RESTRICTIONS
Each Fund's investment objective and the following investment restrictions
are fundamental and cannot be changed without the approval of the holders of a
majority of the Fund's outstanding voting securities (defined in the Act as the
lesser of (a) more than 50% of the outstanding shares or (b) 67% or more of the
shares represented at a meeting at which more than 50% of the outstanding shares
are represented). All other investment policies or practices are considered not
to be fundamental and accordingly may be changed without stockholder approval.
If a percentage restriction on investment or use of assets set forth below is
adhered to at the time a transaction is effected, later changes in percentage
resulting from changing market values or total assets of a Fund will not be
considered a deviation from policy. Each Fund may not:
(1) with respect to 75% of its total assets, invest more than 5% of the
value of its total assets taken at market value at time of purchase) in the
outstanding securities of any one issuer or own more than 10% of the outstanding
voting securities of any one issuer, in each case other than securities issued
or guaranteed by the U.S. Government or any agency or instrumentality thereof;
B-9
<PAGE> 52
(2) invest 25% or more of the value of its total assets in any one
industry;
(3) issue senior securities (including borrowing money, including on margin
if margin securities are owned and through entering into reverse repurchase
agreements) in excess of 33-1/3% of its total (including the amount of senior
securities issued but excluding any liabilities and indebtedness not
constituting senior securities) except that a Fund may borrow up to an
additional 5% of its total assets for temporary purposes; or pledge its assets
other than to secure such issuances or in connection with hedging transactions,
short sales, when-issued and forward commitment transactions and similar
investment strategies. A Fund's obligations under the foregoing types of
transactions and investment strategies are not treated as senior securities;
(4) make loans of money or property to any person, except through loans of
portfolio securities, the purchase of fixed income securities or the acquisition
of securities subject to repurchase agreements;
(5) underwrite the securities of other issuers, except to the extent that
in connection with the disposition of portfolio securities or the sale of its
own shares the Fund may be deemed to be an underwriter;
(6) invest for the purpose of exercising control over management of any
company;
(7) purchase real estate or interests therein, including limited
partnerships that invest primarily in real estate equity interests, other than
mortgage-backed securities and similar instruments; or
(8) purchase or sell commodities or commodity contracts except for hedging
purposes or invest in any oil, gas or mineral interests.
PORTFOLIO TRANSACTIONS AND BROKERAGE
The Adviser is authorized on behalf of each Fund to employ brokers to
effect the purchase or sale of portfolio securities with the objective of
obtaining prompt, efficient and reliable execution and clearance of such
transactions at the most favorable price obtainable ("best execution") at
reasonable expense. Transactions in securities other than those for which a
securities exchange is the principal market are generally done through a
principal market maker. However, such transactions may be effected through a
brokerage firm and a commission paid whenever it appears that the broker can
obtain a more favorable overall price. In general, there may be no stated
commission in the case of securities traded on the over-the-counter markets, but
the prices of those securities may include undisclosed commissions or markups.
Options transactions will usually be effected through a broker and a commission
will be charged. Each Fund also expects that securities will be purchased at
times in underwritten offerings where the price includes a fixed amount of
compensation generally referred to as the underwriter's concession or discount.
The Adviser currently serves as Adviser to a number of investment company
clients and may in the future act as adviser to others. Affiliates of the
Adviser act as investment adviser to numerous private accounts and adviser to
other investment companies. It is the practice of the Adviser and its affiliates
to cause purchase and sale transactions to be allocated among the Funds and
others whose assets they manage in such manner as it deems equitable. In making
such allocations among the Funds and other client accounts, the main factors
considered are the respective investment objectives, the relative size of
portfolio holdings of the same or comparable securities, the availability of
cash for investment, the size of investment commitments generally held and the
opinions of the persons responsible for managing the portfolios of the Funds and
other client accounts.
The policy of each Fund regarding purchases and sales of securities and
options for its portfolio is that primary consideration will be given to
obtaining the most favorable prices and efficient execution of transactions. In
seeking to implement each Fund's policies, the Adviser effects transactions with
those brokers and dealers who the Adviser believes provide the most favorable
prices and are capable of providing efficient executions. If the Adviser
believes such price and execution are obtainable from more than one broker or
dealer, it may give consideration to placing portfolio transactions with those
brokers and dealers who also furnish research and other services to the Funds or
the Adviser of the type described in Section 28(e) of the Exchange Act of 1934.
In doing so, the Funds may also pay higher commission rates than the lowest
available when the Adviser believes it is reasonable to do so in light of the
value of the brokerage and research services provided by the broker effecting
the transaction. Such services may
B-10
<PAGE> 53
include, but are not limited to, any one or more of the following: information
as to the availability of securities for purchase or sale: statistical or
factual information or opinions pertaining to investment; wire services; and
appraisals or evaluations of portfolio securities.
Research services furnished by broker or dealers through which the Fund
effects securities transactions are used by the Adviser and its advisory
affiliates in carrying out their responsibilities with respect to all of their
accounts over which they exercise investment discretion. Such investment
information may be useful only to one or more of such other accounts. The
purpose of this sharing of research information is to avoid duplicative charges
for research provided by brokers and dealers. Neither the Fund nor the Adviser
has any agreement or legally binding understanding with any broker or dealer
regarding any specific amount of brokerage commissions which will be paid in
recognition of such services. However, in determining the amount of portfolio
commissions directed to such brokers or dealers, the Adviser does consider the
level of services provided. Based on such determinations, the Adviser has
allocated brokerage commissions of $126,855 on portfolio transactions in
the principal amount of $44,109,134 during fiscal year ended September 30,
1998, to various broker-dealers that have provided research services to the
Adviser. The average commission on these transactions was $.05 per share.
The Adviser may also place orders for the purchase or sale of portfolio
securities with Gabelli & Company, Inc. ("Gabelli"), a broker-dealer member of
the National Association of Securities Dealers, Inc. and an affiliate of the
Adviser, when it appears that, as an introducing broker or otherwise, Gabelli
can obtain a price and execution which is at least as favorable as that
obtainable by other qualified brokers. The Adviser may also consider sales of
shares of the Funds and any other registered investment companies managed by the
Adviser and its affiliates by brokers and dealers other than the Distributor as
a factor in its selection of brokers and dealers to execute portfolio
transactions for the Funds. The Funds paid the following brokerage commissions
for the year ended September 30, as indicated:
<TABLE>
<CAPTION>
Small Cap Fund Equity Income Fund
1996 1997 1998 1996 1997 1998
- ----------------------------------------- ------------ ------------- ------------ ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Affiliated Commissions $ 25,682 $ 43,851 $150,289 $10,065 $19,323 $25,652
- ----------------------------------------- ------------ ------------- ------------ ------------ ------------- ------------
Total Commissions 133,633 204,515 334,559 25,191 54,306 56,789
- ----------------------------------------- ------------ ------------- ------------ ------------ ------------- ------------
% of affiliated Commission to total 19.2% 21.4% 44.9% 40.0% 35.5% 45.2%
- ----------------------------------------- ------------ ------------- ------------ ------------ ------------- ------------
% of aggregate dollar amount of -- 17.37% 40.0% -- 46.64% 32.5%
transactions involving commissions paid
to affiliates
- ----------------------------------------- ------------ ------------- ------------ ------------ ------------- ------------
</TABLE>
As required by Rule 17e-1 under the Act, the Board of Directors has adopted
"Procedures" which provide that the commissions paid to Gabelli on stock
exchange transactions may not exceed that which would have been charged by
another qualified broker or member firm able to effect the same or a comparable
transaction at an equally favorable price. Rule 17e-1 and the Procedures contain
requirements that the Board, including its independent Directors, conduct
periodic compliance reviews of such brokerage allocations and review such
schedule at least annually for its continuing compliance with the foregoing
standard. The Adviser and Gabelli are also required to furnish reports and
maintain records in connection with such reviews.
B-11
<PAGE> 54
To obtain the best execution of portfolio trades on the New York Stock
Exchange ("Exchange"), Gabelli controls and monitors the execution of such
transactions on the floor of the Exchange through independent "floor brokers" or
through the Designated Order Turnaround ("DOT") System of the Exchange. Such
transactions are then cleared, confirmed to the Fund for the account of Gabelli,
and settled directly with the Custodian of the Funds by a clearing house member
firm which remits the commission less its clearing charges to Gabelli. Gabelli
may also effect Fund portfolio transactions in the same manner and pursuant to
the same arrangements on other national securities exchanges which adopt direct
access rules similar to those of the Exchange.
Portfolio turnover may vary from year to year, as well as within a year.
For the fiscal years ended September 30, 1998 and September 30, 1997, the
turnover rates were 35% and 43%, respectively, in the case of the Equity Income
Fund, and 20% and 14%, respectively, in the case of the Small Cap Fund.
PURCHASE AND REDEMPTION OF SHARES
Cancellation of purchase orders for Fund shares (as, for example, when
checks submitted to purchase shares are returned unpaid) cause a loss to be
incurred when the net asset value of the Fund shares on the date of cancellation
is less than on the original date of purchase. The investor is responsible for
such loss, and the Fund may reimburse shares from any account registered in that
shareholder's name, or by seeking other redress. If the Fund is unable to
recover any loss to itself, it is the position of the SEC that the Distributor
will be immediately obligated to make the Fund whole.
DETERMINATION OF NET ASSET VALUE
The net asset value per share of each Fund is determined once daily as of
the close of business of the regular trading session of the Exchange, normally
4:00 p.m. eastern time, on each day that the Exchange is open and on each other
day in which there is a sufficient degree of trading in the Fund's investments
to affect the net asset value, except that the net asset value may not be
computed on a day on which no orders to purchase, or tenders to sell or redeem,
Fund shares have been received, by taking the value of all assets of the Fund,
subtracting its liabilities, dividing by the number of shares outstanding and
adjusting to the nearest cent. The Exchange currently observes the following
holidays: New Year's Day; Martin Luther King Day; President's Day; Good Friday;
Memorial Day; Independence Day; Labor Day; Thanksgiving Day; and Christmas Day.
In the calculation of each Fund's net asset value: (1) a portfolio security
listed or traded on the New York or American Stock Exchanges or quoted by
National Association of Securities Dealers Automated Quotations, Inc. ("NASDAQ")
is valued at its last sale price on that exchange (if there were no sales that
day, the security is valued at the average of the bid and asked price); (2) 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 price;
and (3) when market quotations are not readily available, portfolio securities
are valued at their fair value as determined in good faith under procedures
established by and under the general supervision of the Fund's Directors.
DIVIDENDS, DISTRIBUTIONS AND TAXES
General
Each Fund has qualified and intends to continue to qualify as a regulated
investment company under Subchapter M of the Code. If it so qualifies, the Fund
will not be subject to Federal income tax on its net investment income and net
short-term capital gain, if any, realized during any fiscal year to the extent
that it distributes such income and capital gains to its shareholders.
Each Fund will determine either to distribute, or to retain for
reinvestment, all or part of any net long-term capital gain. If any such gains
are retained, the Fund will be subject to a tax of 35% of such amount. In that
event, the Fund expects to designate the retained amount as undistributed
capital gain in a notice to its shareholders, each of whom (1) will be required
to include in income for tax purposes as long-term capital gain its share of
undistributed amount, (2) will be entitled to credit its proportionate share of
the tax paid by the Fund against its Federal income tax liability
B-12
<PAGE> 55
and to claim refunds to the extent the credit exceeds such liability, and (3)
will increase its basis in its shares of the Fund by an amount equal to 65% of
the amount of undistributed capital gain included in such shareholder's gross
income.
A distribution will be treated as paid during any calendar year if it is
declared by the Fund in October, November or December of the year, payable to
shareholders of record on a date during such month and paid by the Fund during
January of the following year. Any such distributions paid during January of the
following year will be deemed to be received on December 31 of the year the
distributions are declared, rather than when the distributions are received.
Under the Code, amounts not distributed on a timely basis in accordance
with a calendar year distribution requirement are subject to a 4% excise tax. To
avoid the tax, the Fund must distribute during each calendar year, an amount
equal to at least the sum of (1) 98% of its ordinary income (not taking into
account any capital gains or losses) for the calendar year, (2) 98% of its
capital gains in excess of its capital losses for the twelve-month period ending
on October 31, (unless an election is made by a fund with a November or December
year-end to use the fund's fiscal year) and (3) all ordinary income and net
capital gains for previous years that were not previously distributed.
Gains or losses on the sales of securities by the Funds will be long-term
capital gains or losses if the securities have been held by the Fund for more
than twelve months. Gains or losses on the sale of securities held for twelve
months or less will be short-term capital gains or losses.
Certain options, futures contracts and options on futures contracts are
"section 1256 contracts". Any gains or losses on section 1256 contracts are
generally considered 60% long-term and 40% short-term capital gains or losses
("60/40"). Also, section 1256 contracts held by the Funds at the end of each
taxable year are "marked-to-market" with the result that unrealized gains or
losses are treated as though they were realized and the resulting gain or loss
is treated as 60/40 gain or loss.
Hedging transactions undertaken by the Funds may result in "straddles" for
U.S. Federal income tax purposes. The straddle rules may affect the character of
gains (or losses) realized by the Fund. In addition, losses realized by the
Funds on positions that are part of a straddle may be deferred under the
straddle rules, rather than being taken into account in calculating the taxable
income for the taxable year in which such losses are realized. Further, the
Funds may be required to capitalize, rather than deduct currently, any interest
expense on indebtedness incurred or continued to purchase or carry any positions
that are part of a straddle. The Funds may make one or more of the elections
available under the Code which are applicable to straddles. If the Funds make
any of the elections, the amount, character and timing of the recognition of
gains or losses from the affected straddle positions will be determined under
rules that vary according to the election(s) made. The rules applicable under
certain of the elections accelerate the recognition of gains or losses from the
affected straddle positions. Because application of the straddle rules may
affect the character and timing of gains, losses or deductions from the affected
straddle positions, the amount which must be distributed to shareholders, and
which will be taxed to shareholders as ordinary income or long-term capital
gain, may be increased or decreased substantially as compared to a fund that did
not engage in such hedging transactions.
The diversification requirements applicable to each Fund's assets may limit
the extent to which a Fund will be able to engage in transactions in options,
futures contracts and options on futures contracts.
Distributions
Distributions of investment company taxable income (which includes taxable
interest income and the excess of net short-term capital gains over long-term
capital losses) are taxable to a U.S. shareholder as ordinary income, whether
paid in cash or in additional Fund shares. Dividends paid by a Fund will qualify
for the 70% deduction for dividends received by corporations to the extent the
Fund's income consists of qualified dividends received from U.S. corporations.
Distributions of net capital gain (which consist of the excess of long-term or
mid-term capital gains over net short-term capital losses), if any, are taxable
as long-term capital gain, whether paid in cash or in shares, and are not
eligible for the dividends received deduction. Shareholders receiving
distributions in the form of newly issued shares will have a basis in such
shares of the Fund equal to the fair market value of such shares on the
distribution date. If the net asset value of shares is reduced below a
shareholder's cost as a result of a distribution by
B-13
<PAGE> 56
the Fund, such distribution may be taxable even though it represents a return of
invested capital. The price of shares purchased at any time may reflect the
amount of a forthcoming distribution. Those purchasing shares just prior to a
distribution will receive a distribution which will be taxable to them, even
though the distribution represents in part a return of invested capital.
Sales of Shares
Upon a sale or exchange of shares, a shareholder will realize a taxable
gain or loss depending upon the basis in the shares. Such gain or loss will be
long-term, or short-term, generally depending upon the shareholder's holding
period for the shares. Non-corporate shareholders are subject to tax at a
maximum rate of 20% on capital gains resulting from the disposition of shares
held for more than 12 months (10% if the taxpayer is, and would be after
accounting for such gains, subject to the 15% tax bracket for ordinary income).
Any loss realized on a sale or exchange will be disallowed to the extent the
shares disposed of are replaced within a 61-day period beginning 30 days before
and ending 30 days after the date the shares are disposed of. In such case, the
basis of the shares acquired will be adjusted to reflect the disallowed loss.
Any loss realized by a shareholder on the sale of Fund shares held by the
shareholder for six months or less will be treated for tax purposes as a
long-term capital loss to the extent of any distributions of net capital gain
received by the shareholder with respect to such shares.
Backup Withholding
The Corporation may be required to withhold Federal income tax at a rate of
31% on all taxable distributions payable to shareholders who fail to provide
their correct taxpayer identification number or to make required certifications,
or who have been notified by the Internal Revenue Service that they are subject
to backup withholding. Backup withholding is not an additional tax. Any amounts
withheld may be credited against the shareholder's Federal income tax liability.
Foreign Withholding Taxes
Income received by the Funds from sources within foreign countries may be
subject to withholding and other taxes imposed by such countries. Tax
conventions between certain countries and the United States may reduce or
eliminate such taxes. It is impossible to determine the rate of foreign tax in
advance since the amount of the Funds' assets to be invested in various
countries is not known. Because each Fund will not have more than 50% of its
total assets invested in securities of foreign governments or corporations, the
Funds will not be entitled to "pass-through" to shareholders the amount of
foreign taxes paid by the Funds.
Corporate Matters
The Corporation reserves the right to create and issue a number of series
shares, in which case the shares of each series would participate equally in the
earnings, dividends, and assets of the particular series and would vote
separately to approve management agreements or changes in investment policies,
but shares of all series would vote together in the election or selection of
Directors, principal underwriters and auditors and on any proposed material
amendment to the Corporation's Certificate of Incorporation.
Upon liquidation of the Corporation or any series, shareholders of the
affected series would be entitled to share pro rata in the net assets of their
respective series available for distribution to such shareholders.
INVESTMENT PERFORMANCE INFORMATION
The Funds may furnish data about their investment performance in
advertisements, sales literature and reports to shareholders. "Total return"
represents the annual percentage change in value of $1,000 invested at the
maximum public offering price for the one year period and the life of the Fund
through the most recent calendar quarter,
B-14
<PAGE> 57
assuming reinvestment of all dividends and distributions. The Funds may also
furnish total return calculations for these and other periods, based on
investments at various sales charge levels or net asset value.
Quotations of yield will be based on the investment income per share earned
during a particular 30 day period, less expenses accrued during the period ("net
investment income") and will be computed by dividing net investment income by
the maximum offering price per share on the last day of the period, according to
the following formula:
YIELD = 2[( a-b + 1)6 - 1]
cd
where A = dividends and interest earned during the period, B = expenses accrued
for the period (net of any reimbursements), C = the average daily number of
shares outstanding during the period that were entitled to receive dividends,
and D = the maximum offering price per share on the last day of the period.
Quotations of total return will reflect only the performance of a
hypothetical investment in a Fund during the particular time period shown. A
Fund's total return and current yield may vary from time to time depending on
market conditions, the compositions of the Funds' portfolio and operating
expenses. These factors and possible differences in the methods used in
calculating yield should be considered when comparing a Fund's current yield to
yields published for other investment companies and other investment vehicles.
Total return and yield should also be considered relative to change in the value
of the Funds' shares and the risks associated with each Fund's investment
objectives and policies. At any time in the future, total returns and yield may
be higher or lower than past total returns and yields and there can be no
assurance that any historical return or yield will continue.
From time to time evaluations of performance are made by independent
sources that may be used in advertisements concerning the Funds. These sources
include: Lipper Analytical Services, Weisenberger Investment Company Service,
Barron's, Business Week, Financial World, Forbes, Fortune, Money, Personal
Investor, Sylvia Porter's Personal Finance, Bank Rate Monitor, Morningstar and
The Wall Street Journal.
In connection with communicating its yield or total return to current or
prospective shareholders, the Fund may also compare these figures to the
performance of other mutual funds tracked by mutual fund rating services or to
other unmanaged indexes which may assume reinvestment of dividends but generally
do not reflect deductions for administrative and management costs.
Quotations of the Funds' total return will represent the average annual
compounded rate of return of a hypothetical investment in the Fund over periods
of 1, 5, and 10 years (up to the life of the Fund), and are calculated pursuant
to the following formula:
P(1+T)n = ERV
(where P = a hypothetical initial payment of $1,000, T = the average annual
total return, n = the number of years, and ERV = the redeemable value at the end
of the period of a $1,000 payment made at the beginning of the period). Total
return figures will reflect the deduction of Fund expenses (net of certain
expenses reimbursed by the Adviser) on an annual basis, and will assume that all
dividends and distributions are reinvested and will deduct the maximum sales
charge, if any is imposed.
B-15
<PAGE> 58
<TABLE>
<CAPTION>
Total Return
for the period ended September 30, 1998
Small Equity Income
Cap Fund* Fund*
----------------- -----------------
<S> <C> <C>
Cumulative Total Return (since commencement of operations of the 193.6% 152.8%
Fund)
Average Annual Total Return (since commencement of operations of the 16.8% 14.7%
Fund)
Average Annual Total Return (5 years) 11.3% 14.7%
Average Annual Total Return (12 months) (13.5%) 3.0%
* Commencement of operations for the Small Cap Fund and the Equity Income Fund took place on October 22,
1991 and January 2, 1992, respectively.
</TABLE>
SHARES OF BENEFICIAL INTEREST
As of the date of this Additional Statement, the Directors of the
Corporation as a group owned less than 1% of the outstanding shares of each
Fund.
The following persons were known to own of record 5% or more of the
outstanding voting securities of the indicated funds as of November 13, 1998:
<TABLE>
<CAPTION>
NAME AND ADDRESS OF HOLDER OF RECORD PERCENTAGE OF FUND
SMALL CAP FUND
<S> <C>
Charles Schwab & Co., Inc. 17.58%
101 Montgomery Street
San Francisco, CA 94104
EQUITY INCOME FUND
Charles Schwab & Co., Inc. 15.40%
101 Montgomery Street
San Francisco, CA 94104
</TABLE>
B-16
<PAGE> 59
APPENDIX TO ADDITIONAL STATEMENT
Description of Moody's Investors Service, Inc.'s ("Moody's") Corporate Bond
- ---------------------------------------------------------------------------
Ratings
- -------
AAA: Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edge." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues. Aa: Bonds which are rated Aa are
judged to be of high quality by all standards. Together with the Aaa group they
comprise what are generally known as high grade bonds. They are rated lower than
the best bonds because margins of protection may not be as large as in Aaa
securities or fluctuation of protective elements may be of greater amplitude or
there may be other elements present which made the long term risks appear
somewhat larger than in Aaa securities. A: Bonds which are rated A possess many
favorable investment attributes and are to be considered as upper medium grade
obligations. Factors giving security to principal and interest are considered
adequate but elements may be present which suggest a susceptibility to
impairment sometime in the future. Baa: Bonds which are rated Baa are considered
as medium grade obligations, i.e., they are neither highly protected nor poorly
secured. Interest payments and principal security appear adequate for the
present but certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such bonds lack
outstanding investment characteristics and in fact have speculative
characteristics as well. Ba: Bonds which are rated Ba are judged to have
speculative elements; their future cannot be considered as well assured. Often
the protection of interest and principal payments may be very moderate and
thereby not well safeguarded during both good and bad times over the future.
Uncertainty of position characterizes bonds in this class. B: Bonds which are
rated B generally lack characteristics of the desirable investment. Assurance of
interest and principal payments or of maintenance of other terms of the contract
over any long period of time may be small. Caa: Bonds which are rated Caa are of
poor standing. Such issues may be in default or there may be present elements of
danger with respect to principal or interest. Ca: Bonds which are rated Ca
represent obligations which are speculative in a high degree. Such issues are
often in default or have other marked shortcomings. C: Bonds which are rated C
are the lowest rated class of bonds and issues so rated can be regarded as
having extremely poor prospects of ever attaining any real investment standing.
Note: Moody's may apply numerical modifiers, 1, 2 and 3 in each generic rating
classification from Aa through B in its corporate bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.
Description of Standard & Poor's Corporation's ("S&P's") Corporate Debt Ratings
- -------------------------------------------------------------------------------
AAA: Debt rated AAA has the highest rating assigned by S&P's. Capacity to pay
interest and repay principal is extremely strong. AA: Debt rated AA has a very
strong capacity to pay interest and repay principal and differs from the highest
rated issues only in small degree. A: Debt rated A has a strong capacity to pay
interest and repay principal although it is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than debt in
higher rated categories. BBB: Debt rated BBB is regarded as having adequate
capacity to pay interest and repay principal. Whereas it normally exhibits
protection parameters, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to pay interest and repay principal
for debt in this category than for debt in higher rated categories. BB, B, CCC,
CC, C: Debt rated BB, B, CCC, CC and C is regarded, on balance, as predominantly
speculative with respect to capacity to pay interest and repay principal in
accordance with the terms of the obligation. BB indicates the lowest degree of
speculation and C the highest degree of speculation. While such debt will likely
have some quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions. CI: The rating CI
is reserved for income bonds on which no interest is being paid. D: Debt rated D
is in payment default. The D rating category is used when interest payments or
principal payments are not made on the date due even if the applicable grace
period has not expired, unless S&P's believes that such payments will be made
during such grace period. The D rating also will be used upon the filing of a
bankruptcy petition if debt service payments are jeopardized.
Plus (+) or Minus (-): The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
B-17
<PAGE> 60
Description of Moody's Preferred Stock Ratings
- ----------------------------------------------
aaa: An issue which is rated aaa is considered to be a top-quality preferred
stock. This rating indicates good asset protection and the least risk of
dividend impairment within the universe of preferred stocks. aa: An issue which
is rated aa is considered a high-grade preferred stock. This rating indicates
that there is reasonable assurance that earnings and asset protection will
remain relatively well maintained in the foreseeable future. a: An issue which
is rated a is considered to be an upper medium grade preferred stock. While
risks are judged to be somewhat greater than in the aaa and aa classifications,
earnings and asset protection are, nevertheless expected to be maintained at
adequate levels. baa: An issue which is rated baa is considered to be medium
grade, neither highly protected nor poorly secured. Earnings and asset
protection appear adequate at present but may be questionable over any great
length of time. ba: An issue which is rated ba is considered to have speculative
elements and its future cannot be considered well assured. Earnings and asset
protection may be very moderate and not well safeguarded during adverse periods.
Uncertainty of position characterizes preferred stocks in this class. b: An
issue which is rated b generally lacks the characteristics of a desirable
investment. Assurance of dividend payments and maintenance of other terms of the
issue over any long period of time may be small. caa: An issue which is rated
caa is likely to be in arrears on dividend payments. This rating designation
does not purport to indicate the future status of payment. ca: An issue which is
rated ca is speculative in a high degree and is likely to be in arrears on
dividends with little likelihood of eventual payment. c: This is the lowest
rated class of preferred or preference stock. Issues so rated can be regarded as
having extremely poor prospects of ever attaining any real investment standing.
Note: Moody's may apply numerical modifiers 1, 2 and 3 in each rating
classification from "aa" through "b" in its preferred stock rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.
Description of S&P's Preferred Stock Ratings
- --------------------------------------------
AAA: This is the highest rating that may be assigned by S&P's to a preferred
stock issue and indicates an extremely strong capacity to pay the preferred
stock obligations. AA: A preferred stock issue rated AA also qualifies as a
high-quality fixed income security. The capacity to pay preferred stock
obligations is very strong, although not as overwhelming as for issues rated
AAA. A: An issue rated A is backed by a sound capacity to pay the preferred
stock obligations, although it is somewhat more susceptible to the adverse
effect of changes in circumstances and economic conditions. BBB: An issue rated
BBB is regarded as backed by an adequate capacity to pay the preferred stock
obligations. Whereas it normally exhibits adequate protection parameters,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity to make payments for a preferred stock in this category than
for issues in the A category. BB, B, CCC: Preferred stock rated BB, B, and CCC
are regarded, on balance, as predominantly speculative with respect to the
issuer's capacity to pay preferred stock obligations. BB indicates the lowest
degree of speculation and CCC the highest degree of speculation. While such
issues will likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major risk exposures to adverse conditions.
CC: The rating CC is reserved for a preferred stock in arrears on dividends or
sinking fund payments but that is currently paying. C: A preferred stock rated C
is a non-paying issue. D: A preferred stock rated D is a non-paying issue with
the issuer in default on debt instruments.
Plus (+) or Minus (-): The ratings from "AA" to "B" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
B-18
<PAGE> 61
FINANCIAL STATEMENTS
Each Fund's Financial Statements for the year ended September 30, 1998,
including the Report of Ernst & Young LLP, independent auditors, is incorporated
herein by reference to each Fund's Annual Report. Each Fund's Annual Report is
available upon request and without charge. Ernst & Young LLP provides audit
services, tax return preparation and assistance and consultation in connection
with certain SEC filings.
B-19
<PAGE> 62
PART C
OTHER INFORMATION
Item 23. Financial Statements and Exhibits.
(a) Financial Statements:
(1) Financial information included in Part A, the Prospectus:
The Gabelli Equity Income Fund:
-- Financial Highlights for the years ended September 30, 1998,
September 30, 1997, September 30, 1996, September 30, 1995,
September 30, 1994, September 30, 1993 and for the period January
2, 1992 (Commencement of Operations) through September 30, 1992.
The Gabelli Small Cap Growth Fund:
-- Financial Highlights for the years ended September 30, 1998,
September 30, 1997, September 30, 1996, September 30, 1995,
September 30, 1994, September 30, 1993 and for the period October
22, 1991 (Commencement of Operations) through September 30, 1992.
(2) Financial Statements incorporated by reference in Part B, the
Statement of Additional Information: The Gabelli Equity Income
Fund:
-- Portfolio of Investments dated September 30, 1998.
-- Statement of Assets and Liabilities dated September 30, 1998.
-- Statement of Operations for the year ended September 30, 1998.
-- Statement of Changes in Net Assets for the years ended
September 30, 1998 and September 30, 1997.
-- Notes to Financial Statements.
-- Financial Highlights for the years ended September 30, 1998,
September 30, 1997, September 30, 1996, September 30, 1995,
September 30, 1994, September 30, 1993 and for the period January
2, 1992 (Commencement of Operations) through September 30, 1992.
-- Report of Ernst & Young LLP (independent auditors)
dated November 10, 1998. The Gabelli Small Cap Growth Fund:
-- Portfolio of Investments dated September 30, 1998.
-- Statement of Assets and Liabilities dated September 30, 1998.
-- Statement of Operations for the year ended September 30, 1998.
-- Statement of Changes in Net Assets for the years ended
September 30, 1998 and September 30, 1997.
-- Notes to Financial Statements.
-- Financial Highlights for the years ended September 30, 1998,
September 30, 1997, September 30, 1996, September 30, 1995,
September 30, 1994., September 30, 1993 and for the period
October 22, 1991 (Commencement of Operations) through September
30, 1992.
-- Report of Ernst & Young LLP (independent auditors) dated
November 10, 1998.
(b) Exhibits:
(1) Articles of Incorporation of the Registrant are incorporated by
reference to Exhibit 1 of Post Effective Amendment No. 8 to
Registration Statement No. 33-41913 on January 28, 1998.
(2) By-Laws of the Registrant are incorporated by reference to
Exhibit 2 of Post Effective Amendment No. 8 to Registration
Statement No. 33-41913 on January 28, 1998.
(3) Not Applicable
(4) (a) Form of Stock Certificate of The Gabelli Small Cap Growth
Fund is incorporated by reference to Exhibit 4 of Pre-Effective
Amendment No. 1 to Registration Statement No. 33-41913 on
September 20, 1991. (b) Form of Stock Certificate of The Gabelli
Equity Income Fund is incorporated by reference to Exhibit 4
ofPre-Effective Amendment No. 1 to Registration Statement No.
33-41913 on September 20, 1991.
(5) Investment Advisory Agreement with Gabelli Funds, Inc. for The
Gabelli Equity Series, Inc. is incorporated by reference to
Exhibit 5 of Post Effective Amendment No. 8 to Registration
Statement No. 33-41913 on January 28, 1998.
(6) Distribution Agreement is incorporated by reference to Exhibit 6
of Post Effective Amendment No. 8 to Registration Statement No.
33-41913 on January 28, 1998.
<PAGE> 63
(7) Not Applicable
(8) Form of Custodian Agreement is incorporated by reference to
Exhibit 8 of Post Effective Amendment No. 8 to Registration
Statement No. 33-41913 on January 28, 1998.
(9) Form of Transfer Agent Agreement is incorporated by reference to
Exhibit 9 of Post Effective Amendment No. 8 to Registration
Statement No. 33-41913 on January 28, 1998.
(10) Opinion and Consent of Counsel are incorporated by reference to
Exhibit 10 of Pre-Effective Amendment No. 1 to Registration
Statement No. 33-41913 on September 30, 1991.
(11) (a) Consent of Independent Auditors*
(b) Powers of Attorney of the Directors are incorporated by
reference to Exhibit 11 of Post-Effective Amendment No. 1 to
Registration Statement No. 33-41913 on August 31, 1992.
(12) Not Applicable
(13) Agreement with Initial Shareholder is incorporated by reference
to Exhibit 13 of Pre-Effective Amendment No. 1 to Registration
Statement No. 33-41913 on September 20, 1991.
(14) Model IRA Plan is incorporated by reference to Exhibit 14 of
Pre-Effective Amendment No. 1 to Registration Statement No.
33-41913 on September 20, 1991.
(15) Distribution Plan is incorporated by reference to Exhibit 15 of
Post Effective Amendment No. 8 to Registration Statement No.
33-41913 on January 28, 1998.
(16) N/A
(17) Financial Data Schedules*
* Filed herewith.
Item 24. Persons Controlled by or Under Common Control with Registrant.
Insofar as the following have substantially identical boards of
directors or trustees they may be deemed with Registrant to be
under common control: The Gabelli Asset Fund, The Gabelli Equity
Trust Inc., The Gabelli Growth Fund, The Gabelli Value Fund Inc.,
The Gabelli Convertible Securities Fund, Inc., The Gabelli
Investor Funds, Inc., The Gabelli Global Series Funds Inc., the
Gabelli Money Market Funds, The Gabelli Global Multimedia Trust
Inc., Gabelli International Growth Fund, Inc., Gabelli Capital
Series Fund, Gabelli International Growth Fund, Inc., Gabelli
Capital Asset Fund, The Gabelli Westwood Funds, Gabelli
International Growth Fund, Inc. and The Gabelli Gold Fund, Inc.
Item 25. Number of Holders of Securities.
N/A
Item 26. Indemnification.
The basic effect of the respective indemnification provisions of
the Registrant's By-Laws, the Investment Advisory Agreement with
Gabelli Funds, Inc. for The Gabelli Small Cap Growth Fund, the
Investment Advisory Agreement with Gabelli Funds, Inc. for The
Gabelli Equity Income Fund and Section 2-418 of the Maryland
General Corporation Law is to indemnify each officer and director
of both the Registrant and Gabelli Funds, Inc. to the full extent
permitted under the General Laws of the State of Maryland, except
that such indemnity shall not protect any such person against any
liability to which such person would otherwise be subject by
reason of willful misfeasance, bad faith, gross
<PAGE> 64
negligence or reckless disregard of the duties involved in the
conduct of his office. Insofar as indemnification for liability
arising under the Securities Act of 1933 may be permitted to
directors, officers and controlling persons of the Registrant and
the investment advisor and distributor pursuant to the foregoing
provisions, or otherwise, the Registrant has been advised that in
the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment
by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in and the
principal underwriter in connection with the successful defense
of any action, suit or proceeding) is asserted against the
Registrant by such director, officer or controlling person or the
distributor in connection with the shares being registered, the
Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in
the Act and will be governed by the final adjudication of such
issue.
Item 27. Business and Other Connections of Investment Adviser.
See "Management of the Fund" in the Prospectus and "Directors and
Officers" in the Statement of Additional Information as well as
the Adviser's current Form ADV which has been previously filed
with the Securities and Exchange Commission.
Item 28. Principal Underwriters.
(a) The Distributor, Gabelli & Company,Inc., is also the principal
underwriter for The Gabelli Growth Fund, The Gabelli Asset Fund,
The Gabelli Value Fund, The Gabelli ABC Fund, The Gabelli Global
Series Funds, The Gabelli Money Market Funds, The Gabelli Gold
Fund, Gabelli International Growth Fund, Inc., Gabelli Capital
Asset Fund, The Treasurer's Fund, Inc. and The Gabelli Westwood
Funds.
(b) The information required with respect to the directors and
executive officers of the Distributor is set forth under the
heading "Directors and Officers" in the Statement of Additional
Information as well as in Gabelli & Company, Inc.'s current Form
BD, which has been previously filed with the Securities and
Exchange Commission.
(c) Not applicable. The Registrant's only principal underwriter is an
affiliated person of an affiliated person of the Registrant.
Item 29. Location of Accounts and Records.
All accounts, books and other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940 and the Rules
thereunder will be maintained at the offices of the Sub-Administrator,
BISYS, 3435 Stelzer Road, Columbus, Ohio, at the offices of the Fund's
Custodian, State Street Bank and Trust Company, 225 Franklin Street,
Boston, Massachusetts, at the offices of the Fund's Transfer Agent and
Dividend Disbursing Agent, State Street Bank and Trust Company, c/o
Boston Financial Data Services, 2 Heritage Drive, North Quincy, MA
02171 or at the offices of the Adviser, Gabelli Funds, Inc., One
Corporate Center, Rye, New York 10580-1434.
Item 30. Management Services.
The Registrant is not a party to any management-related service
contract.
Item 31. Undertakings.
Not applicable.
<PAGE> 65
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant certifies that it meets all of the
requirements for effectiveness of this Post-Effective Amendment to the
Registration Statement pursuant to Rule 485(b) under the Securities Act of 1933
and has duly caused this Amendment No. 9 to the Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Rye, and State of New York on the 30th day of November, 1998.
GABELLI EQUITY SERIES FUNDS, INC.
/s/BRUCE N. ALPERT
-----------------------------------
By: Bruce N. Alpert
Title: Vice President and Treasurer
Pursuant to the requirements of the Securities Act of 1933, this amendment to
the Registration Statement has been signed below by the following in the
capacity and on the date indicated.
<TABLE>
<CAPTION>
Signature Title Date
-------- --- ----
<S> <C> <C>
* President, and Director November 30, 1998
- -----------------------
Mario J. Gabelli
/s/BRUCE ALPERT Vice-President and Treasurer November 30, 1998
- -----------------------
Bruce N. Alpert
* Secretary November 30, 1998
- -----------------------
James E. McKee
* Director November 30, 1998
- -----------------------
Felix J. Christiana
* Director November 30, 1998
- -----------------------
Anthony J. Colavita
* Director November 30, 1998
- -----------------------
Vincent D. Enright
* Director November 30, 1998
- -----------------------
John D. Gabelli
* Director November 30, 1998
- -----------------------
Robert J. Morrissey
* Director November 30, 1998
- -----------------------
Karl Otto Pohl
* Director November 30, 1998
- -----------------------
Anthony R. Pustorino
* Director November 30, 1998
- -----------------------
Anthonie C. van Ekris
*BY /s/BRUCE ALPERT Attorney-in-Fact
- -----------------------
Bruce N. Alpert
</TABLE>
<PAGE> 1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Financial
Highlights," "Independent Auditors" and "Financial Statements" and to the use of
our reports on the Gabelli Equity Income Fund and Gabelli Small Cap Growth Fund
dated November 10, 1998, incorporated by reference in this Registration
Statement (Form N-1A No. 33-79994) of Gabelli Equity Series Funds, Inc.
ERNST & YOUNG LLP
New York, New York
November 24, 1998
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000877670
<NAME> THE GABELLI EQUITY SERIES FUNDS, INC.
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<NAME> THE GABELLI SMALL CAP GROWTH FUND
<S> <C>
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<FISCAL-YEAR-END> SEP-30-1998
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WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0081106367
<NAME> THE GABELLI EQUITY SERIES FUNDS, INC.
<SERIES>
<NUMBER> 002
<NAME> THE GABELLI EQUITY INCOME FUND
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> SEP-30-1998
<INVESTMENTS-AT-COST> 57,484,366
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<OTHER-ITEMS-LIABILITIES> 291,113
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