THE GABELLI EQUITY INCOME FUND
THIRD QUARTER REPORT
JUNE 30, 1999(A)
* * * *
MORNINGSTAR RATED(TM) GABELLI EQUITY INCOME FUND 4 STARS OVERALL AND FOR
THE THREE-YEAR PERIOD ENDED 6/30/99 AMONG 3043 DOMESTIC EQUITY FUNDS, AND FOR
THE FIVE-YEAR PERIOD ENDED 6/30/99 AMONG 1878 DOMESTIC EQUITY FUNDS,
RESPECTIVELY.
TO OUR SHAREHOLDERS,
In the second quarter of 1999, value was in and growth was out. Higher
yielding stocks in traditional value sectors such as industrial cyclicals,
energy and other commodities-oriented businesses, and utilities performed quite
well on an absolute and relative basis. With the market retracing some of its
gains in June, investors may take a more defensive posture going forward. This
could work in higher yielding stocks' favor over the next several quarters or
longer.
INVESTMENT PERFORMANCE
For the quarter ended June 30, 1999, The Gabelli Equity Income Fund's (the
"Fund") total return was 11.7% after adjusting for the $0.05 per share dividend
paid on June 28, 1999. The Lipper Equity Income Fund Average and the Standard &
Poor's ("S&P") 500 Index had returns of 9.2% and 7.1%, respectively, over the
same period. The S&P 500 index is an unmanaged indicator of stock market
performance, while the Lipper Average reflects the average performance of mutual
funds classified in this particular category. The Fund was up 12.1% over the
trailing twelve-month period. The Lipper Equity Income Fund Average and S&P 500
rose 11.4% and 22.8%, respectively, over the same twelve-month period.
For the five-year period ended June 30, 1999, the Fund's total return
averaged 20.1% annually versus average annual total returns of 19.2% and 27.9%
for the Lipper Equity Income Fund Average and S&P 500, respectively. Since
inception on January 2, 1992 through June 30, 1999, the Fund had a cumulative
total return of 213.5%, which equates to an average annual return of 16.5%. The
Dividend History Chart details each dividend paid by the Fund since inception.
- --------------------------------------------------------------------------------
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. Morningstar proprietary
ratings reflect historical risk adjusted performance as of June 30, 1999 and are
subject to change every month. Morningstar ratings are calculated from a Fund's
three, five and ten-year average annual returns in excess of 90-day T-Bill
returns with appropriate fee adjustments and a risk factor that reflects fund
performance below 90-day T-Bill returns. The top 10% of the funds in a broad
asset class receive five stars, the next 22.5% receive four stars, the next 35%
receive three stars, the next 22.5% receive two stars and the bottom 10% receive
one star. (a) The Fund's fiscal year ends September 30.
<PAGE>
<TABLE>
<CAPTION>
INVESTMENT RESULTS (a)(c)
- -------------------------------------------------------------------------------------------------------------------
Calendar Quarter
---------------------------------------------
1st 2nd 3rd 4th Year
--- --- --- --- ----
<S> <C> <C> <C> <C> <C>
1999: Net Asset Value ................... $16.39 $18.26 -- -- --
Total Return (1.5)% 11.7% -- -- --
- -------------------------------------------------------------------------------------------------------------------
1998: Net Asset Value ................... $17.70 $17.72 $15.97 $16.70 $16.70
Total Return 10.1% 0.5% (9.7)% 12.7% 12.6%
- -------------------------------------------------------------------------------------------------------------------
1997: Net Asset Value ................... $14.27 $16.03 $17.39 $16.12 $16.12
Total Return 1.2% 12.7% 8.8% 3.0% 27.9%
- -------------------------------------------------------------------------------------------------------------------
1996: Net Asset Value ................... $13.47 $13.54 $13.81 $14.16 $14.16
Total Return 5.5% 1.0% 2.5% 8.0% 17.9%
- -------------------------------------------------------------------------------------------------------------------
1995: Net Asset Value ................... $11.56 $11.99 $12.65 $12.84 $12.84
Total Return 8.5% 4.3% 6.1% 6.9% 28.3%
- -------------------------------------------------------------------------------------------------------------------
1994: Net Asset Value ................... $11.26 $11.08 $11.54 $10.72 $10.72
Total Return (2.2)% (0.8)% 4.9% (0.7)% 1.1%
- -------------------------------------------------------------------------------------------------------------------
1993: Net Asset Value ................... $11.35 $11.72 $12.15 $11.57 $11.57
Total Return 7.4% 3.8% 4.2% 1.5% 17.9%
- -------------------------------------------------------------------------------------------------------------------
1992: Net Asset Value ................... $10.19 $10.36 $10.40 $10.64 $10.64
Total Return 2.4%(b) 2.3% 1.1% 3.7% 9.8%(b)
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
Average Annual Returns - June 30, 1999 (a)
------------------------------------------
1 Year ................................ 12.1%
5 Year ................................ 20.1%
Life of Fund (b) ...................... 16.5%
(a) Total returns and average annual returns reflect changes in share price and
reinvestment of dividends and are net of expenses. The net asset value of the
Fund is reduced on the ex-dividend (payment) date by the amount of the dividend
paid. Of course, returns represent past performance and do not guarantee future
results. Investment returns and the principal value of an investment will
fluctuate. When shares are redeemed they may be worth more or less than their
original cost. (b) From commencement of investment operations on January 2,
1992. (c) The Fund's fiscal year ends September 30.
- --------------------------------------------------------------------------------
WHAT WE DO
The success of momentum investing in recent years and investors' desire
for instant gratification have combined to make value investing appear dull. At
the risk of being dull, we will once again describe the "boring" value approach
that has seen us through both good and bad markets over the last seven years at
The Gabelli Equity Income Fund and for over 22 years at Gabelli Asset Management
Company. In past reports, we have tried to articulate our investment philosophy
and methodology. The accompanying graphic further illustrates the interplay
among the four components of our valuation approach.
[GRAPHIC]
2
<PAGE>
Our focus is on free cash flow; earnings before interest, taxes,
depreciation and amortization ("EBITDA") minus the capital expenditures
necessary to grow the business. We believe free cash flow is the best barometer
of a business' value. Rising free cash flow often foreshadows net earnings
improvement. We also look at earnings per share trends. Unlike Wall Street's
ubiquitous earnings momentum players, we do not try to forecast earnings with
accounting precision and then trade stocks based on quarterly expectations and
realities. We simply try to position ourselves in front of long term earnings
uptrends. In addition, we analyze on and off balance sheet assets and
liabilities such as plant and equipment, inventories, receivables, and legal,
environmental and health care issues. We want to know everything and anything
that will add to or detract from our private market value ("PMV") estimates.
Finally, we look for a catalyst; something happening in the company's industry
or indigenous to the company itself that will surface value. In the case of the
independent telephone stocks, the catalyst is a regulatory change. In the
agricultural equipment business, it is the increasing worldwide demand for
American food and feed crops. In other instances, it may be a change in
management, sale or spin-off of a division or the development of a profitable
new business.
Once we identify stocks that qualify as fundamental and conceptual
bargains, we then become patient investors. This has been a proven long term
method for preserving and enhancing wealth in the U.S. equity markets. At the
margin, our new investments are focused on businesses that are well-managed and
will benefit from sustainable long term economic dynamics. These include macro
trends, such as the globalization of the market in filmed entertainment and
telecommunications, and micro trends, such as an increased focus on productivity
enhancing goods and services.
- ------------------------------------------------------------
DIVIDEND HISTORY
- ------------------------------------------------------------
RATE REINVESTMENT
PAYMENT (EX) DATE PER SHARE PRICE
----------------- --------- -----
June 28, 1999 $0.05 $17.98
March 29, 1999 $0.06 $16.67
- ------------------------------------------------------------
December 21, 1998 $1.27 $16.36
September 28, 1998 $0.04 $16.20
June 26, 1998 $0.06 $17.65
March 27, 1998 $0.05 $17.70
- ------------------------------------------------------------
December 29, 1997 $1.78 $15.94
September 30, 1997 $0.05 $17.39
June 30, 1997 $0.05 $16.03
March 31, 1997 $0.06 $14.27
- ------------------------------------------------------------
December 27, 1996 $0.76 $14.28
September 30, 1996 $0.07 $13.81
June 28, 1996 $0.06 $13.54
March 31, 1996 $0.07 $13.47
- ------------------------------------------------------------
December 29, 1995 $0.68 $12.84
September 29,1995 $0.07 $12.65
June 30, 1995 $0.07 $11.99
March 31, 1995 $0.07 $11.56
- ------------------------------------------------------------
December 30, 1994 $0.74 $10.72
September 30, 1994 $0.08 $11.54
June 30, 1994 $0.09 $11.08
March 31, 1994 $0.06 $11.26
- ------------------------------------------------------------
December 31, 1993 $0.76 $11.57
September 30, 1993 $0.06 $12.15
June 30, 1993 $0.06 $11.72
March 31, 1993 $0.08 $11.35
- ------------------------------------------------------------
December 31, 1992 $0.15 $10.64
September 30, 1992 $0.07 $10.40
June 30, 1992 $0.06 $10.36
March 31, 1992 $0.05 $10.19
- ------------------------------------------------------------
3
<PAGE>
COMMENTARY
THE ECONOMY: DUELING DATA ON INFLATION
Inflation played "peek-a-boo" with investors in the second quarter of
1999. A jump in April's Consumer Price Index ("CPI") rattled the bond market and
had equity investors holding their breath. Inflation all but disappeared again
in the May CPI numbers. The bond market stabilized and stocks regained momentum.
Then, citing the emergence of "incipient ingredients" for inflation and the long
lead time of monetary policy, the Federal Reserve decided to hike the Federal
Funds rate by 25 basis points on June 30, in what Chairman Alan Greenspan
characterized as a "preemptive action" against inflation. This sparked a flurry
of observers to question whether this single modest rate hike would be an
effective vaccination against inflation or just the first in a series of shots
that will eventually take the froth out of the economy and financial markets.
We are not optimistic on inflation. The inflationary threat comes
partially from rising commodities prices, (most notably oil), which are
recovering from severely depressed levels following the Asian economic meltdown,
and from the prospect of wage inflation in fully employed America. Thus far,
technology driven productivity gains have offset rising wages. Along with Fed
Chairman Greenspan, we are not sure how much longer this can continue in an
America with help wanted signs in an increasing number of corporate windows.
AMERICAN CONSUMERS: WILL THE ENGINE OF GLOBAL ECONOMIC GROWTH CONTINUE STEAMING
ALONG?
We want to echo again the question we asked in our September 30, 1998
report and repeated in our March 31, 1999 report: Will the American consumer
continue to carry the rest of the world, or will the consumer eventually run low
on confidence and/or the resources required to nourish the global economy? Put
another way, can the U.S. continue to run enormous balance of payment deficits
that provide hope and sustenance for the other economies of the world as they
attempt to emerge from their economic malaise?
Full employment, higher wages, the wealth effect associated with rising
home values and a vibrant stock market have emboldened consumers, who continue
to spend quite liberally. If rising interest rates discourage consumers from
financing their spending spree, or we see a meaningful correction in the stock
market dent consumer confidence, the engine that has been driving global
economic growth may sputter. Equally important, if the U.S. consumer continues
to be the sole driver of global economic activity, the U.S. balance of payments
deficit will exceed even our dire forecast of a $250 billion run rate. The value
of the U.S. dollar is a wild card in the mix of elements that will determine the
direction of the overall U.S. economy and the stock market.
THE MARKET: EARNINGS AND INTEREST RATES
In our March 31, 1999 letter to shareholders, we also opined that earnings
and interest rates would call the market tune for the balance of the year. In
general, first quarter earnings met consensus estimates and second quarter
earnings should be stronger than anticipated, with particularly good comparisons
to 1998's second quarter, when General Motor's strike and the plunge in energy
prices
4
<PAGE>
crimped reported results. However, interest rates are higher, and until we see
convincing evidence that inflation is firmly under control, rates are not likely
to trend much lower. With the S&P 500's gains already approximating 1999
earnings growth forecasts, we see an inadequate "margin of safety" in the stock
market. Money flowing into the markets, particularly from deal activity, is the
fuel powering a market that still favors stocks. However, money is no longer
pouring into equity mutual funds at the rates we have seen in previous years.
All this conjecture leads us to the opinion that stock selectivity remains
crucial over the next twelve months.
THIS QUARTER'S SCORECARD
Industrial cyclicals such as Mark IV Industries, Ingersoll Rand,
Honeywell, Caterpillar and Boeing were among our performance leaders this
quarter. Commodities-oriented companies such as W.R. Grace, Freeport-McMoRan, du
Pont and Corn Products International were also high on the list. Energy and
energy service companies including YPF, PennzEnergy and Halliburton were solid
contributors and although our utilities holdings were mixed, we saw nice gains
in Citizens Utilities, Florida Public Utilities, Peoples Energy and Providence
Energy.
Portfolio disappointments this quarter included pharmaceutical stocks
Pharmacia & Upjohn and Glaxo Wellcome, financial services holdings Chase
Manhattan, First Union and Merrill Lynch and branded consumer goods companies
Gillette and Kellogg.
THE CYCLICALS: ONE BRIEF SHINING MOMENT?
With the U.S. economy barreling ahead and signs that Asia is beginning to
recover, economically sensitive stocks rebounded from the severely depressed
levels reached at the end of 1998. At issue today is whether the strong second
quarter rally in cyclicals will have legs. The bears are concerned that Fed
tightening may slow the economy too much and abort the cyclicals' recovery. The
bulls seem to feel that the international economic revival will take up any
slack resulting from slower growth in the U.S.
Fed Chairman Greenspan is walking a tightrope. If the Federal Reserve
tightens too slowly it risks inflation at home, while moving more aggressively
may jeopardize recovering economies in Asia and Latin America. We suspect this
will cause the Fed to move cautiously, raising rates in small increments and
waiting to see how each rate hike effects the domestic economy and the global
economic recovery. Only time will tell if Chairman Greenspan's balancing act
will succeed. In the interim, we point out that even after exceptional
performance in the second quarter, cyclical stocks remain inexpensive and growth
stocks remain expensive on a historical basis. Going forward, we believe
cyclicals and other value sectors have the potential to outperform traditional
growth sectors on a relative basis in either an up or down market.
TAKEOUT UTILITIES
The deregulation of the utilities industry is accelerating as individual state
regulators do away with traditional cost-based rate structures. Rates are being
capped or frozen, forcing utilities to cut costs. Scores of fat are present in
the overhead of a typical utility, a legacy of cost-based rate regulation, and
5
<PAGE>
this fat can be eliminated over time. However, a faster way to cut costs
significantly is to increase the size of the utility via mergers and
acquisitions. A merged utility needs only one headquarters, one CEO, one CFO,
and so on. Two utilities operating in the same state that merge can eliminate
one of their regulatory departments. There could also be savings in managing
plant assets more efficiently. And as each consolidation occurs and the merged
companies cut their cost of service, it raises the bar for all the other
utilities and puts these utilities under more pressure to improve their returns
by cutting costs.
There are two ways for investors to tackle utility stocks. They can invest
in the likely consolidators, those companies committed to cutting costs and
growing earnings and dividends through acquisition. Or, they can invest along
with us in the consolidators' most likely targets--what we call "takeout"
utilities.
How do you separate the hunters from the hunted? Size is a significant
factor. Industry consultants and investment bankers claim the optimum size for a
utility is five to six million customers. Utilities with sound balance sheets
that have two to three million customers can realistically acquire another two
to three million customers over time to attain critical mass. However, it is
just too late for the small cap and mid-cap utilities with one million customers
or less. It takes a long time for a utility merger to close and then a long time
to digest, so there is limited opportunity to consolidate your way into the top
tier unless you are already halfway there. A small-or-mid-sized utility may
acquire a smaller utility or undertake a merger of equals along the way.
Ultimately, however, most of the small and medium size utilities are destined to
be acquired by larger companies.
Our strategy is to own a share of fundamentally sound, reasonably valued
mid-cap and small cap utilities and then wait for the buyers to come calling.
One might assume that small utilities serving faster growth markets would be the
most likely targets. However, these stocks are essentially fully valued. We
believe the best takeout opportunities are small companies in more mature
markets that are priced much more reasonably, allowing larger companies to pay a
premium and still make the acquisition accretive to earnings.
LET'S TALK STOCKS
The following are stock specifics on selected holdings of our Fund.
Favorable earnings prospects do not necessarily translate into higher stock
prices, but they do express a positive trend which we believe will develop over
time.
AMERICAN EXPRESS CO. (AXP - $130.125 - NYSE) and its subsidiaries provide
travel-related services, financial advisory services and international banking
services worldwide. Founded in 1850, the company operates in 160 countries
around the world. Best known for its "green" charge card and its travel-related
services, including travelers checks, American Express also offers financial
planning, brokerage services, mutual funds, insurance and other investment
products. Harvey Golub, Chairman and CEO, has focused AXP on its core charge
card and investment management businesses. The company is expanding the
competitive reach of its credit card operations which should benefit if the U.S.
Department of Justice prevails in its antitrust suit against the Visa and
MasterCard associations.
6
<PAGE>
BCE INC. (BCE - $49.3125 - NYSE) is Canada's global communications company. BCE
recently completed a major transaction with Ameritech (AIT - $73.50 - NYSE).
Under the agreement, BCE sold 20% of Bell Canada, its wholly-owned Canadian
telecommunications subsidiary, to Ameritech. BCE also owns strategic stakes in
Nortel Networks (NT - $86.8125 - NYSE), Teleglobe (TGO - $29.4375 - NYSE), BCE
Emergis and CGI Group. One share of BCE provides ownership of 0.42 shares of
Nortel Networks. The company's positions in satellites, network operations,
information technology, media and e-commerce are expected to provide growth for
the company.
EASTERN ENTERPRISES (EFU - $39.75 - NYSE) owns and operates Boston Gas Company,
Essex Gas Company (acquired in September 1998), Midland Enterprises and
ServicEdge Partners. Together, Boston Gas and Essex Gas are New England's
largest distributor of natural gas, serving 580,000 residential, commercial and
industrial customers in Boston and 90 other eastern and central Massachusetts
communities. Midland Enterprises, headquartered in Cincinnati, Ohio, is the
leading carrier of coal and a major carrier of other dry bulk cargoes on the
nation's inland waterways, with a fleet of 2,399 barges and 87 towboats.
ServicEdge provides HVAC equipment installation and service to customers in
eastern Massachusetts. An agreement to acquire Colonial Gas Company (CLG -
$37.00 - NYSE), a regulated, natural gas distribution company servicing
customers northwest of Boston and on Cape Cod, has been approved.
GTE CORP. (GTE - $75.75 - NYSE) is one of the largest, publicly held
telecommunications companies in the world. The company is the largest U.S.-based
local telephone company. GTE's domestic and international operations serve 25.9
million access lines in the United States, Canada, the Dominican Republic and
Venezuela. GTE is a leading cellular operator in the U.S. with the potential of
serving 62 million cellular and personal communications services ("PCS")
customers. Outside the U.S., GTE operates cellular networks serving some 16.4
million points of presence ("POPs"). GTE is also a leader in government and
defense communications systems and equipment, aircraft passenger
telecommunications, directories and telecommunications-based information
services and systems. On July 28, 1998, GTE and Bell Atlantic (BEL - $65.375 -
NYSE) confirmed plans to merge in a $52.5 billion stock swap which would result
in a national telecommunications giant.
SOUTHWEST GAS CORP. (SWX - $28.625 - NYSE) is a natural gas utility based in Las
Vegas, providing natural gas service to over 1.2 million residential, commercial
and industrial customers in one of the most economically vibrant areas of the
United States: Arizona, Nevada and parts of northeastern and southeastern
California. The company added more than 58,000 customers during 1998. Southwest
is the nation's fastest growing natural gas distribution company. Southwest Gas'
board of directors has approved a revised offer from Oneok Inc. (OKE - $31.75 -
NYSE) to purchase all outstanding SWX shares for $30.00 per share in cash,
valuing Southwest Gas at approximately $1.8 billion, including assumed debt.
Regulatory approvals from the Nevada PUC and the Arizona ACC have been obtained.
SPRINT CORP. (FON - $52.8125 - NYSE) is the third largest long distance carrier
and the second largest independent local telephone company in the U.S. Sprint
has positioned itself globally through a joint venture called GlobalOne. Its
joint venture partners, France Telecom and Deutsche Telekom, also have a direct
20% stake in Sprint. FON faces risks from prospective new entrants in its long
distance business
7
<PAGE>
which may be offset by the "ION" high bandwith network the company is developing
and by other new services. Sprint PCS group is the leading personal
communications services ("PCS") carrier in the U.S. with over 3.5 million
customers and licenses covering over 230 million people.
MINIMUM INITIAL INVESTMENT - $1,000
The Fund's minimum initial investment for both regular and retirement
accounts is $1,000. There are no subsequent investment minimums. No initial
minimum is required for those establishing an Automatic Investment Plan.
Additionally, The Gabelli Equity Income Fund and other Gabelli Funds are
available through the no-transaction fee programs at many major discount
brokerage firms.
IN CONCLUSION
This has been a terrific quarter for higher yielding stocks in general and
for our value-oriented portfolio in particular. Looking ahead, we believe stocks
are likely to struggle against the headwind of higher interest rates. This may
spawn further rotation from growth to value stocks and particularly to higher
yielding stocks that offer protection in a declining market.
The Fund's daily net asset value is available in the financial press and
each evening after 6:00 PM (Eastern Time) by calling 1-800-GABELLI
(1-800-422-3554). The Fund's Nasdaq symbol is GABEX. Please call us during the
business day for further information.
Sincerely,
/s/Mario J. Gabelli, CFA /s/James Foung, CFA
------------------------ ---------------------------
MARIO J. GABELLI, CFA JAMES FOUNG, CFA
Portfolio Manager and Associate Portfolio Manager
Chief Investment Officer
July 30, 1999
- --------------------------------------------------------------------------------
TOP TEN HOLDINGS
JUNE 30, 1999
BCE Inc.
American Express Co.
Southwest Gas Corp.
Eastern Enterprises
Orange & Rockland Utilities Inc.
Philip Morris Companies Inc.
Sprint Corp.
Colonial Gas Corp.
GTE Corp.
Wicor Inc.
- --------------------------------------------------------------------------------
NOTE: The views expressed in this report reflect those of the portfolio manager
only through the end of the period stated in this report. The manager's views
are subject to change at any time based on market and other conditions.
8
<PAGE>
THE GABELLI EQUITY INCOME FUND
PORTFOLIO OF INVESTMENTS -- JUNE 30, 1999 (UNAUDITED)
================================================================================
MARKET
SHARES VALUE
------ -----
COMMON STOCKS -- 90.0%
AEROSPACE -- 2.1%
20,000 Boeing Co. ............................... $ 883,750
12,000 Northrop Grumman Corp. ................... 795,750
1,000 Raytheon Co., Cl. A ...................... 68,875
2,000 Rockwell International Corp. ............. 121,500
------------
1,869,875
------------
AGRICULTURE -- 1.4%
33,000 Monsanto Co. ............................. 1,301,438
------------
AUTOMOTIVE -- 1.1%
4,500 Ford Motor Co. ........................... 253,969
11,500 General Motors Corp. ..................... 759,000
------------
1,012,969
------------
AUTOMOTIVE: PARTS AND ACCESSORIES -- 2.9%
20,000 Dana Corp. ............................... 921,250
6,000 Ethyl Corp. .............................. 36,000
20,000 GenCorp Inc. ............................. 505,000
30,000 Genuine Parts Co. ........................ 1,050,000
4,000 Meritor Automotive Inc. .................. 102,000
------------
2,614,250
------------
AVIATION: PARTS AND SERVICES -- 2.1%
25,000 Barnes Group Inc. ........................ 543,750
19,000 Curtiss-Wright Corp. ..................... 738,625
8,000 United Technologies ...................... 573,500
------------
1,855,875
------------
BUSINESS SERVICES -- 0.5%
4,000 Dun & Bradstreet Corp. ................... 141,749
1,000 Imation Corp.+ ........................... 24,813
2,000 IMS Health Inc. .......................... 62,500
1,500 Landauer Inc. ............................ 44,250
1,666 Nielsen Media Research Inc. .............. 48,731
7,000 R. H. Donnelley Corp. .................... 136,938
------------
458,981
------------
COMMUNICATIONS EQUIPMENT -- 0.1%
1,000 Motorola Inc. ............................ 94,750
------------
COMPUTER SOFTWARE AND SERVICES -- 0.9%
6,000 International Business Machines Corp. .... 775,500
------------
CONSUMER PRODUCTS -- 6.4%
11,000 Eastman Kodak Co. ........................ 745,250
2,000 Fortune Brands Inc. ...................... 82,750
65,000 Gallaher Group plc, ADR .................. 1,588,437
5,000 General Cigar Holdings Inc., Cl. B+ (b) .. 39,063
2,000 General Electric Co. ..................... 226,000
2,000 Gillette Co. ............................. 82,000
25,000 National Presto Industries Inc. .......... 956,250
50,000 Philip Morris Companies Inc. ............. 2,009,374
200 Rothmans Inc. ............................ 24,324
------------
5,753,448
------------
CONSUMER SERVICES -- 0.5%
30,000 Rollins Inc. ............................. 478,125
------------
DIVERSIFIED INDUSTRIAL -- 3.8%
30,000 GATX Corp. ............................... 1,141,875
6,000 Honeywell Inc. ........................... 695,250
3,000 Minnesota Mining &
Manufacturing Co. ........................ 260,813
38,000 Tenneco Inc. ............................. 907,250
18,000 Thomas Industries Inc. ................... 369,000
1,000 Trinity Industries Inc. .................. 33,500
------------
3,407,688
------------
ENERGY AND UTILITIES -- 1.1%
41,270 Citizens Utilities Co., Cl. B+ ........... 459,129
24,000 United Water Resources Inc. .............. 544,500
------------
1,003,629
------------
ENERGY AND UTILITIES: ELECTRIC -- 9.5%
10,000 Central & South West Corp. ............... 233,750
6,000 Central Hudson Gas & Electric Corp. ...... 252,000
6,000 Cilcorp Inc. ............................. 375,000
500 CMP Group Inc. ........................... 13,094
2,000 Conectiv Inc. ............................ 48,875
120,000 El Paso Electric Co.+ .................... 1,072,499
22,000 Energy East Corp. ........................ 572,000
8,000 Florida Progress Corp. ................... 330,500
42,200 Florida Public Utilities Co. ............. 796,525
4,000 FPL Group Inc. ........................... 218,500
10,000 New England Electric System .............. 501,250
95,000 Niagara Mohawk Power Corp.+ .............. 1,525,937
35,000 Orange & Rockland Utilities Inc. ......... 2,045,312
8,000 PacifiCorp ............................... 147,000
5,000 Public Services Enterprise Group Inc. .... 204,375
8,000 St. Joseph Light & Power Co. ............. 164,500
2,000 TNP Enterprises Inc. ..................... 72,500
1,000 United Illuminating Co. .................. 42,438
------------
8,616,055
------------
ENERGY AND UTILITIES: NATURAL GAS -- 14.2%
55,000 AGL Resources Inc. ....................... 1,014,063
50,000 Colonial Gas Co. ......................... 1,850,000
40,000 Commonwealth Energy System ............... 1,680,000
52,000 Eastern Enterprises ...................... 2,067,000
58,000 ENI SpA .................................. 346,322
10,000 Fall River Gas Co. ....................... 190,000
40,000 KeySpan Energy Corp. ..................... 1,055,000
4,000 Peoples Energy Corp. ..................... 150,750
12,000 Piedmont Natural Gas Co. ................. 373,500
4,000 Providence Energy Corp. .................. 106,750
2,000 Public Service Co. of North Carolina ..... 58,500
1,000 Southern Union Co.+ ...................... 21,750
75,000 Southwest Gas Corp. ...................... 2,146,874
64,000 Wicor Inc. ............................... 1,788,000
1,500 Yankee Energy System Inc. ................ 59,531
------------
12,908,040
------------
ENERGY AND UTILITIES: OIL -- 10.2%
13,000 Atlantic Richfield Co. ................... 1,086,313
13,000 BP Amoco plc, ADR ........................ 1,410,500
16,000 Burlington Resources Inc. ................ 692,000
10,000 Chevron Corp. ............................ 951,875
9
<PAGE>
MARKET
SHARES VALUE
------ -----
COMMON STOCKS (CONTINUED)
ENERGY AND UTILITIES: OIL (CONTINUED)
1,000 Conoco Inc., Cl. A ....................... $ 27,875
6,000 Elf Aquitaine SA ......................... 441,375
22,000 Exxon Corp. .............................. 1,696,750
16,000 Halliburton Co. .......................... 724,000
25,000 PennzEnergy Co. .......................... 417,188
28,000 Texaco Inc. .............................. 1,749,999
------------
9,197,875
------------
ENTERTAINMENT -- 0.2%
5,000 Viacom Inc., Cl. A+ ...................... 220,625
------------
EQUIPMENT AND SUPPLIES -- 3.1%
3,000 Caterpillar Inc. ......................... 180,000
2,000 Cooper Industries Inc. ................... 104,000
25,000 Deere & Co. .............................. 990,625
3,000 EG&G Inc. ................................ 106,875
10,000 Holophane Corp.+ ......................... 381,250
1,000 Ingersoll Rand Co. ....................... 64,625
15,000 Mark IV Industries Inc. .................. 316,875
1,500 Minerals Technologies Inc. ............... 83,719
18,000 Smith (A.O.) Corp., Cl. B ................ 504,000
1,000 Union Carbide Corp. ...................... 48,750
------------
2,780,719
------------
FINANCIAL SERVICES -- 12.3%
18,000 American Express Co. ..................... 2,342,249
8,000 Argonaut Group Inc. ...................... 192,000
1,500 Banco Popular Espanol .................... 107,897
30,000 Banco Santander SA, ADR .................. 318,750
2,000 Banco Santiago ........................... 38,375
9,052 Bank of America Corp. .................... 663,625
3,000 Banque Nationale de Paris ................ 249,981
2,000 Block (H&R) Inc. ......................... 100,000
8,000 Chase Manhattan Corp. .................... 693,000
31,000 Commerzbank AG, ADR ...................... 957,125
20,000 Deutsche Bank AG, ADR .................... 1,230,000
3,000 Dresdner Bank AG, ADR .................... 116,636
2,000 Fidelity National Corp. .................. 18,500
1,500 First Union Corp. ........................ 70,500
20,000 Mellon Bank Corp. ........................ 727,500
1,500 Merrill Lynch & Co. ...................... 119,906
2,000 MONY Group Inc. .......................... 65,250
7,500 Morgan (J.P.) & Co. Inc. ................. 1,053,750
3,000 Municipal Mortgage & Equity LLC .......... 62,250
3,000 Northern Trust Co. ....................... 291,000
3,000 Pioneer Group Inc.+ ...................... 51,750
1,000 Republic New York Corp. .................. 68,188
5,000 Sterling Bancorp ......................... 95,000
12,000 SunTrust Banks Inc. ...................... 833,250
4,400 Transamerica Corp. ....................... 330,000
4,000 U.S. Trust Corp. ......................... 370,000
------------
11,166,482
------------
FOOD AND BEVERAGE -- 1.8%
4,000 Bestfoods Inc. ........................... 198,000
6,000 Coca-Cola Amatil Ltd., ADR ............... 48,365
12,000 Coca-Cola Beverages plc+ ................. 25,536
3,000 Corn Products International Inc. ......... 91,313
10,000 Diageo plc, ADR .......................... 430,000
6,000 Heinz (H.J.) Co. ......................... 300,750
15,000 Kellogg Co. .............................. 495,000
1,000 Quaker Oats Co. .......................... 66,375
------------
1,655,339
------------
HEALTH CARE -- 1.5%
3,000 Bristol-Myers Squibb Co. ................. 211,312
1,000 Glaxo Wellcome plc, ADR .................. 56,625
3,000 Johnson & Johnson ........................ 294,000
10,000 Pharmacia & Upjohn Inc. .................. 568,125
3,000 SmithKline Beecham plc, ADR .............. 198,188
------------
1,328,250
------------
METALS AND MINING -- 0.3%
15,000 Freeport-McMoRan Copper & Gold Inc.,
Cl. B .................................... 269,063
------------
PUBLISHING -- 2.7%
10,000 Dow Jones & Co. Inc. ..................... 530,625
3,000 Harcourt General Inc. .................... 154,688
5,000 McGraw-Hill Companies Inc. ............... 269,688
40,000 Reader's Digest Association Inc., Cl. B .. 1,499,999
------------
2,455,000
------------
REAL ESTATE -- 0.0%
2,500 Griffin Land & Nurseries Inc.+ ........... 29,688
------------
RETAIL -- 0.1%
2,000 Sears, Roebuck & Co. ..................... 89,125
------------
SATELLITE -- 0.5%
15,000 COMSAT Corp. ............................. 487,500
------------
SPECIALTY CHEMICALS-- 1.4%
5,000 Dexter Corp. ............................. 204,063
2,000 du Pont de Nemours (E.I.) and Co. ........ 136,625
7,500 Ferro Corp. .............................. 206,250
8,000 Grace (W.R.) & Co.+ ...................... 147,000
12,000 Hoechst AG, ADR .......................... 551,999
1,500 IMC Global Inc. .......................... 26,438
------------
1,272,375
------------
TELECOMMUNICATIONS -- 9.3%
3,000 Alltel Corp. ............................. 214,500
4,000 AT&T Corp. ............................... 223,250
55,000 BCE Inc. ................................. 2,712,187
13,500 BCT. Telus Communications Inc. ........... 322,895
4,500 BCT. Telus Communications Inc., Cl. A .... 105,959
4,608 Bell Atlantic Corp. ...................... 301,248
1,500 British Telecommunications plc, ADR ...... 256,875
15,000 Cable & Wireless plc, ADR ................ 594,375
7,000 Deutsche Telekom AG, ADR ................. 295,750
1,000 France Telecom SA, ADR ................... 77,000
24,000 GTE Corp. ................................ 1,817,999
15,000 Hong Kong Telecommunications Ltd., ADR ... 404,063
4,000 SBC Communications Inc. .................. 232,000
3,000 Telecom Italia SpA, ADR .................. 315,563
3,081 Telefonica de Espana, ADR ................ 453,292
1,000 US West Inc. ............................. 58,750
------------
8,385,706
------------
TOTAL COMMON STOCKS ...................... 81,488,370
------------
10
<PAGE>
MARKET
SHARES VALUE
------ -----
PREFERRED STOCKS -- 6.3%
AVIATION: PARTS AND SERVICES-- 0.3%
2,000 Coltec Capital Trust, Pfd. ............... $ 95,000
3,000 Coltec Capital Trust, Pfd. (a) ........... 142,500
------------
237,500
------------
BROADCASTING -- 0.1%
3,500 Granite Broadcasting Corp.,
$1.9375 Cv. Pfd. ...................... 132,125
------------
CABLE -- 0.7%
4,000 MediaOne Group Inc., Cv. Pfd. D .......... 599,250
------------
DIVERSIFIED INDUSTRIAL-- 0.1%
2,000 WHX Corp., Cv. Pfd. Ser. B ............... 64,250
------------
ENERGY AND UTILITIES - 0.9%
17,000 Citizens Utilities Co.,
5.00% Cv. Pfd. ......................... 826,625
------------
ENTERTAINMENT -- 0.0%
1,000 Metromedia International
Group Inc., Cv. Pfd. ................... 34,875
------------
EQUIPMENT AND SUPPLIES -- 0.6%
6,000 Sequa Corp.,
$5.00 Cv. Pfd. ......................... 579,000
------------
METALS AND MINING -- 0.1%
5,000 Freeport-McMoRan Copper & Gold Inc.,
7.00% Cv. Pfd. ......................... 93,750
------------
PAPER AND FOREST PRODUCTS -- 1.4%
20,000 Sealed Air Corp.,
$2.00 Cv. Pfd. ......................... 1,250,000
------------
TELECOMMUNICATIONS -- 2.1%
22,000 Sprint Corp.,
$2.63 Cv. Pfd. ......................... 1,914,000
------------
TOTAL PREFERRED STOCKS ................... 5,731,375
------------
PRINCIPAL
AMOUNT
------
CORPORATE BONDS -- 2.4%
BUSINESS SERVICES -- 0.1%
$100,000 BBN Corp., Sub. Deb. Cv.
6.00%, 04/01/12 (b) .................... 96,669
------------
CONSUMER PRODUCTS -- 0.5%
700,000 Fieldcrest Cannon Inc.,
Sub. Deb. Cv.
6.00%, 03/15/12 ........................ 496,125
------------
ENTERTAINMENT -- 0.2%
150,000 Savoy Pictures Entertainment Inc.,
Sub. Deb. Cv.
7.00%, 07/01/03 ........................ 151,313
------------
EQUIPMENT AND SUPPLIES -- 0.9%
356,000 Kollmorgen Corp., Sub. Deb. Cv.
8.75%, 05/01/09 ........................ 356,445
500,000 Mark IV Industries Inc.,
Sub. Deb. Cv.
4.75%, 11/01/04 ........................ 441,250
------------
797,695
------------
FOOD AND BEVERAGE -- 0.0%
28,000 Chock Full o' Nuts Corp., Cv.
7.00%, 04/01/12 ........................ 34,720
------------
CORPORATE BONDS (CONTINUED)
HOTELS AND GAMING -- 0.3%
300,000 Hilton Hotels Corp., Sub. Deb. Cv.
5.00%, 05/15/06 ........................ 275,250
------------
PUBLISHING -- 0.2%
100,000 News America Holdings Inc.,
Sub. Deb. Cv.
Zero Cpn., 03/31/02 .................... 137,000
------------
TRANSPORTATION -- 0.2%
200,000 Greyhound Lines Inc.,
Sub. Deb. Cv.
8.50%, 03/31/07 ........................ 200,000
------------
TOTAL CORPORATE BONDS 2,188,772
------------
U.S. GOVERNMENT OBLIGATIONS -- 1.9%
1,713,000 U.S. Treasury Bills,
4.47% to 4.64% ++,
due 07/29/99 to 09/23/99 ............... 1,700,737
------------
TOTAL INVESTMENTS -- 100.6%
(Cost $62,556,107) ...................... $ 91,109,254
OTHER ASSETS AND
LIABILITIES (NET)-- (0.6)% ............. (587,757)
------------
NET ASSETS -- 100.0%
(4,958,507 shares outstanding) ......... $ 90,521,497
============
NET ASSET VALUE,
OFFERING AND REDEMPTION
PRICE PER SHARE .......................... $18.26
======
----------------
NET
SETTLEMENT UNREALIZED
DATE APPRECIATION
-------- ------------
FORWARD FOREIGN EXCHANGE CONTRACTS
2,808,830(c) Sold Hong Kong Dollars
in exchange for
USD 361,633 08/24/99 $367
- ------------
(a) Security exempt from registration under Rule 144A of the Securities Act
of 1933, as amended. These securities may be resold in transactions
exempt from registration, normally to qualified institutional buyers. At
June 30, 1999, the market value of Rule 144A securities amounted to
$142,500 or 0.2% of net assets.
(b) Security fair valued as determined by the Board of Directors.
(c) Principal amount denoted in Hong Kong Dollars.
+ Non-income producing security.
++ Represents annualized yield at date of purchase.
ADR -- American Depositary Receipt.
11
<PAGE>
Gabelli Equity Series Funds, Inc.
THE GABELLI EQUITY INCOME FUND
One Corporate Center
Rye, New York 10580-1434
1-800-GABELLI
[1-800-422-3554]
FAX: 1-914-921-5118
HTTP://WWW.GABELLI.COM
E-MAIL: [email protected]
(Net Asset Value may be obtained daily
by calling 1-800-GABELLI after
6:00 P.M.)
BOARD OF DIRECTORS
Mario J. Gabelli, CFA
CHAIRMAN AND CHIEF
INVESTMENT OFFICER
GABELLI ASSET MANAGEMENT INC.
Felix J. Christiana
FORMER SENIOR VICE PRESIDENT
DOLLAR DRY DOCK SAVINGS BANK
Anthony J. Colavita
ATTORNEY-AT-LAW
ANTHONY J. COLAVITA, P.C.
Vincent D. Enright
FORMER SENIOR VICE PRESIDENT
AND CHIEF FINANCIAL OFFICER
KEYSPAN ENERGY CORP.
John D. Gabelli
SENIOR VICE PRESIDENT
GABELLI & COMPANY, INC.
Robert J. Morrissey
ATTORNEY-AT-LAW
MORRISSEY, HAWKINS & LYNCH
Karl Otto Pohl
FORMER PRESIDENT
DEUTSCHE BUNDESBANK
Anthony R. Pustorino
CERTIFIED PUBLIC ACCOUNTANT
PROFESSOR, PACE UNIVERSITY
Anthonie C. van Ekris
MANAGING DIRECTOR
BALMAC INTERNATIONAL, INC.
OFFICERS
Mario J. Gabelli, CFA
PRESIDENT AND CHIEF
INVESTMENT OFFICER
James E. McKee
SECRETARY
Bruce N. Alpert
VICE PRESIDENT AND TREASURER
DISTRIBUTOR
Gabelli & Company, Inc.
CUSTODIAN, TRANSFER AGENT AND DIVIDEND AGENT
State Street Bank and Trust Company
LEGAL COUNSEL
Skadden, Arps, Slate, Meagher & Flom LLP
- --------------------------------------------------------------------------------
This report is submitted for the general information of the shareholders of The
Gabelli Equity Income Fund. It is not authorized for distribution to prospective
investors unless preceded or accompanied by an effective prospectus.
- --------------------------------------------------------------------------------
GAB444Q299SR
[PHOTO]
THE
GABELLI
EQUITY
INCOME
FUND
THIRD QUARTER REPORT
JUNE 30, 1999
