THE GABELLI SMALL CAP GROWTH FUND
FIRST QUARTER REPORT
DECEMBER 31, 1998(A)
TO OUR SHAREHOLDERS,
Although rallying strongly from early October lows, small cap stocks
finished 1998 in the red. Small caps have been the market wallflowers in the
midst of a large cap stock party. This is clearly demonstrated by the Russell
2000 Index's dull 2.6% decline for the year while the Standard & Poor's ("S&P")
500 Index danced to a 28.7% gain.
INVESTMENT PERFORMANCE
For the fourth quarter ended December 31, 1998, The Gabelli Small Cap
Growth Fund's (the "Fund") total return was 14.7%. The Value Line Composite and
Russell 2000 Indices had returns of 18.1% and 16.3%, respectively, over the same
period. Each index is an unmanaged indicator of stock market performance. The
Fund was virtually unchanged for 1998. The Value Line Composite rose 5.8% while
the Russell 2000 declined 2.6% over the same twelve month period.
For the five year period ended December 31, 1998, the Fund's total return
averaged 13.2% annually versus average annual total returns of 15.3% and 11.9%
for the Value Line Composite and Russell 2000, respectively. Since inception on
October 22, 1991 through December 31, 1998, the Fund had a cumulative total
return of 236.8%, which equates to an average annual return of 18.4%.
WHAT WE DO
We view the small capitalization stock market as a research driven stock
picker's paradise. Unlike the large cap market, where most companies are closely
followed by dozens of Wall Street analysts, the small cap market is largely
unclaimed territory. Our analysts put on their hiking shoes, strap on their
backpacks and hit the trails looking for little companies Wall Street does not
know or care about. They are seeking a particular type of company, which we
would describe generally as a dominant market share, niche franchise in a
growing and/or consolidating industry.
[MANAGEMENT CASH FLOW RESEARCH GRAPHIC HERE]
- --------------------------------------------------------------------------------
(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> <C>
1998: Net Asset Value $23.93 $23.59 $18.81 $21.01 $21.01
Total Return 10.9% (1.4)% (20.3)% 14.7% 0.0%
- -----------------------------------------------------------------------------------------------------------------
1997: Net Asset Value $19.11 $22.23 $25.42 $21.58 $21.58
Total Return 3.1% 16.3% 14.7% (0.8)% 36.5%
1996: Net Asset Value $19.65 $20.68 $20.02 $18.53 $18.53
Total Return 6.2% 5.2% (3.2)% 3.4% 11.9%
- -----------------------------------------------------------------------------------------------------------------
1995: Net Asset Value $17.03 $17.88 $19.34 $18.50 $18.50
Total Return 7.4% 5.0% 8.2% 2.6% 25.2%
- -----------------------------------------------------------------------------------------------------------------
1994: Net Asset Value $16.76 $16.33 $17.24 $15.85 $15.85
Total Return (3.6)% (2.6)% 5.6% (2.1)% (2.9)%
- -----------------------------------------------------------------------------------------------------------------
1993: Net Asset Value $15.46 $15.74 $16.90 $17.38 $17.38
Total Return 6.6% 1.8% 7.4% 5.3% 22.8%
- -----------------------------------------------------------------------------------------------------------------
1992: Net Asset Value $13.42 $13.41 $13.10 $14.50 $14.50
Total Return 9.9% (0.1)% (2.3)% 12.1% 20.3%
- -----------------------------------------------------------------------------------------------------------------
1991: Net Asset Value __ __ __ $12.21 $12.21
Total Return __ __ __ 22.9%(b) 22.9%(b)
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
Dividend History
- -------------------------------------------------------------------------------------------------------------------
Payment (ex) Date Rate Per Share Reinvestment Price
- -------------------------------------------------------------------------------------------------------------------
December 21, 1998 $0.534 $19.80
December 29, 1997 $3.590 $21.29
September 30, 1997 $0.070 $25.42
December 27, 1996 $2.160 $18.46
December 29, 1995 $1.340 $18.50
December 30, 1994 $1.030 $15.85
December 31, 1993 $0.420 $17.38
December 31, 1992 $0.185 $14.50
December 31, 1991 $0.080 $12.21
- -------------------------------------------------------------------------------------------------------------------
Average Annual Returns - December 31, 1998 (a)
- -------------------------------------------------------------------------------------------------------------------
1 Year 0.0%
5 Year 13.2%
Life of Fund (b) 18.4%
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Total returns and average annual returns reflect changes in share price and
reinvestment of dividends and are net of expenses. The net asset value of the
Fund is reduced on the ex-dividend (payment) date by the amount of the dividend
paid. Of course, returns represent past performance and do not guarantee future
results. Investment returns and the principal value of an investment will
fluctuate. When shares are redeemed they may be worth more or less than their
original cost. (b) From commencement of operations on October 22, 1991. (c) The
Fund's fiscal year ends September 30. Note: Investing in small capitalization
securities involves special challenges because these securities may trade less
frequently and experience more abrupt price movements than large capitalization
securities.
2
<PAGE>
Our analysts are guided by specific investment principles that include:
experienced management, healthy balance sheets and rising free cash flow and
earnings. They also live by certain value parameters--their goal is to find
great companies trading at reasonable valuations relative to "real world"
economic worth. These are the kind of companies we can feel comfortable owning
long term, rather than trading like so many small cap investors are prone to do.
COMMENTARY
OUTLOOK FOR 1999
Mario Gabelli, our Chief Investment Officer, has appeared in the
prestigious BARRON'S Roundtable discussion annually since 1980. Many of our
readers have enjoyed the inclusion of selected and edited comments from BARRON'S
Roundtable in previous reports to shareholders. Once again, we are including
selected comments of Mario Gabelli from BARRON'S 1999 Roundtable. For our
shareholders who prefer to view the entire interview, the complete text is
available on the Internet at www.barrons.com.
January 18, 1999 BARRON'S o Roundtable'99
-------------------------------------------------------
BARRON'S
ROUNDTABLE
-----------------
MARIO GABELLI
CHAIRMAN AND CHIEF INVESTMENT OFFICER,
GABELLI FUNDS, RYE, NEW YORK
Barron's ("Q"): A NEW YEAR, A NEW MARKET ENVIRONMENT? MEANING, ARE INVESTORS
GOING TO HAVE TO GRAPPLE WITH SEISMIC ECONOMIC SHIFTS AS WELL AS IMPEACHMENT AND
Y2K?
Gabelli ("G"): Let's focus on the U.S. economy. I'm in the camp that argues that
consumers are going to get another tailwind. There is going to be a major tax
cut that is going to be very stimulative to the consumer. If I'm a consumer
today, I feel good. I'm working. Gasoline, I just went and bought a tankful. I
paid 20 cents a gallon less than it cost me the last time I filled up.
Q: YOU OBVIOUSLY DON'T DO IT OFTEN.
G: What I mean is that on 500 gallons of gas, I save 100 bucks. That's two bucks
a week. That's terrific. There are 50 million vehicles on the road. At two bucks
a week, that's $100 million a week, that's around $5 billion annually going back
into consumers' pockets. I just refinanced my mortgage. I got a jumbo $240,000
loan at 6 7/8%. I'm saving 1%, that's $2,400, that's another $45 or so a week
and I'm going to get a tax cut. And I own Internet stocks. I think this is
terrific.
Q: BUT YOU COULD SEE LONG-TERM INTEREST RATES GOING UP SOON BECAUSE JAPAN MAY BE
ASKING FOR THEIR SAVINGS BACK.
G: Well, they have gone up to 5.3%,
3
<PAGE>
January 18, 1999 BARRON'S o Roundtable'99
- --------------------------------------------------------------------------------
but still, I just refinanced my house, so I feel good. You can talk about
long-term rates, but my mortgage is what I look at as a consumer. Besides,
looking at the redressing of imbalances, one of the concerns we had was that the
dollar was too strong. Now if you look at the dollar versus the euro, this
morning it was 114, and versus the yen it was 107. So when translating Euroland
earnings into U.S. dollars, companies that are operating there could get a
terrific tailwind. Reported S&P earnings, I think, could be a lot better than
people expect, because they've forgotten the currency factor. Especially if I
have 2% real growth in Euroland and I have companies that are now rationalizing
and getting the benefit of synergies. The companies I talk to in the U.S. that
have big operations in Europe are all saying, "Hey, in the last couple of
months, we are getting a big benefit from currency." That could continue for the
next half. So the U.S. economy is reasonably good. Earnings and cash flow for
the companies I follow should be up 5%, 7%, 8% in 1999. I think the U.S. portion
of non-U.S. earnings could translate better. So I can't make anything but an
optimistic case, let's put it that way, for corporate profits. The other element
in 1999 that I have to factor in is that some of the companies I'm talking to
and listening to say they are worried about a Y2K problem. So the fourth quarter
of 1999 will likely have a big inventory bulge. That is certainly a plus, from
what I see, for shipments.
Let me give you one other element on earnings: A lot of corporate controllers
and a lot of CFOs squirreled away earnings in the first and second quarters of
last year. Then the accounting problems of Cendant and others emerged. So now
you will not squirrel away earnings in that fourth quarter or in the first half
anymore. You are not going to play that game -- as much. I can see reported
earnings doing better than economic earnings over the next couple of quarters,
just because you are not going to use the other side of your pencil or whatever
they use nowadays.
Another item to consider is that virtually every country in Europe now has a
socialist government. The Italians probably have a Communist government. I mean,
how are they going to sit back and not undo what they've done? They've
constrained, they constrained, until they could introduce their single economic
unit. Now, why not do the reverse of that? Why don't you factor that into your
thinking?
Q: IT MAY BE BULLISH FOR THOSE ECONOMIES. BUT IT MEANS REFLATION, IT MEANS
HIGHER INTEREST RATES, LOWER P/E RATIOS.
G:: Oh, yes. That's what I'm saying. It's the reflationary theme.
Changing gears to the manufacturing sector of the economy -- people are
asking, "Where is it?" It is being transported outside of the United States.
Machine-tool orders in November were $440 million, down from $532 million.
You see it in the farm-equipment industry, the domestic construction equipment
industry; and manufacturing jobs are disappearing, probably. When Cuba opens up,
labor rates will go from $1 an hour to $1 a day, if you are looking at Mexico
versus Cuba.
Q: BUT IS THIS A HOLLOWING-OUT OF THE ECONOMY? OR IS THIS A TRANSITION TO THE
BRAVE NEW INTERNET AGE?
G: Adam Smith is alive and well.
I have to stay with the bullish interpretation of all these dynamics. The
notion of globalization of the economy and the movement of capital around to the
lowest cost . . . every country, as long as you have free trade, is going to
contribute to global wealth at some point. What's more, the Japanese, as they
come out of their problems, eventually will be going from seeking share of
market on a global basis to seeking share of profits. That has to be good for
corporate profitability around the world.
Q: WHAT IS YOUR CONCLUSION ON THE MARKET?
G: Let me give you some numbers on the flow of funds. Cash into the market from
stock buybacks in 1998 was $207 billion, up from $181 billion. Mutual-fund
inflow was $176 billion, down from $232 billion. IPOs, which hit a
4
<PAGE>
January 18, 1999 BARRON'S o Roundtable'99
- --------------------------------------------------------------------------------
big air pocket, are starting to accelerate again but were $108 billion last
year, down from $118 billion. Other elements were foreign purchases of U.S.
stocks and U.S. purchases of non-stock assets. But the big element that makes
those flows look tiny was that deals in the U.S. alone amounted to $1.6
trillion. Now, for you cynics who'd argue how much was in cash, the cash portion
was $672 billion, up from $414 billion last year. So money moving from savers
into the stock market wasn't as dynamic a flow-of-funds element as how much came
into the market being recycled from transactions. Again, incrementally in 1998
an unprecedented $250 billion came into the market from the cash portion of
deals, that's 1 1/2 times the amount that came in via mutual funds -- U.S. only,
not globally. It is just a phenomenon that has to be constantly hammered away
at.
Q: [SOME OF THE BIGGEST CAP STOCKS ARE UP OVER 100%. SUCH MOVES ARE CLEARLY
UNSUSTAINABLE.]
G: Some of that is part of the migration of money into indexing -- which is
mindlessly buying stocks based on their index weightings. It's just
self-reinforcing. I don't know the numbers for 1998, but the trend has been more
mutual-fund purchases of index funds. More defined-benefit plans going into the
index funds. And those funds have to, by definition, buy mindlessly based on
capitalization. And that is going to continue.
Q: UNTIL YOU GET TO THE LAST GUY.
G: I will tell you a story. I'm creating this. But in 1973, it was conventional
wisdom that McDonald's had a market capitalization greater than all of the steel
industry's, and that we were going to become a nation of hamburger flippers --
indeed, that the world was going that way. Every cycle has the same thing. You
know, somebody sits up and says AOL and Amazon.com have caps greater than the
steel industry's. But that is what Schumpeter said, creative destruction is one
of the great virtues of capitalism. It's very positive.
Q: [HOW ABOUT WHAT IS GOING ON IN WASHINGTON?]
G: Going back to interest rates, I think there's plenty of margin of flexibility
on the short end. Real rates are much too high here. They should migrate down.
The dollar -- I don't know how Greenspan handles it. It is a challenge. The
balance-of-payments deficit is going to go way up. I believe, based on last
month's deficit, the run rate was about $180 billion. But $250 billion sounds
like a reasonable number. That has got to, with a new currency bloc in Europe,
create all sorts of question marks that I don't have an answer to. Those are
moving parts. We don't invest that way. We just think about these things.
Q: DOESN'T ANYONE FIND ALL THIS BLIND FAITH IN GREENSPAN AND RUBIN "DOING THE
RIGHT THING" A MITE DISCOMFORTING?
G: The concern isn't that they won't do the right thing, but that Rubin and
Greenspan retire like Mantle and Maris.
Q: BUT IN GENERAL, YOU ARE BULLISH?
G: On the world economy.
Q: AND ON EQUITIES?
G: No, not on equities. There is no margin of safety in stocks. Absolutely none.
But I do think Adam Smith is alive and well. Once you can start migrating labor
and goods to the highest efficiency, you create incredible opportunities on a
global scale. We don't have those efficiencies baked into the system. But there
are enormous birthing pains. You saw these birthing pains in Southeast Asia. But
I don't think that's a big depressive because the sunshine in the valley is that
we'll come out in a world in which profits are the driver. That is pretty
interesting.
Q: BUT MARIO, WHERE WILL RATES GO?
G: Like 5 3/4%-6%. Long rates have already started up. But I see short rates
coming down.
Q: IF ED HYMAN IS RIGHT AND THERE ISN'T MUCH NOMINAL GROWTH IN THE ECONOMY,
WON'T THAT MAKE IT DIFFICULT FOR SMALL COMPANIES?
G: The comment I want to make -- this is very important -- is that the business
people I talk to really were shocked by the virtual shutdown of the capital
markets following the [John] Meriwether debacle. Not only did the
5
<PAGE>
January 18, 1999 BARRON'S o Roundtable'99
- --------------------------------------------------------------------------------
spreads widen, but the market started closing on them. That is creating a
backlash in terms of either selling out -- the option which I happen to be fond
of -- and also in terms of bringing back a margin of safety to their balance
sheets and their perspectives on how to run their businesses. From the market's
point of view, looking out over the next five years, I still think we are in a
world in which corporate profits can rise -- not return on equity, where I can't
see much improvement, not return on sales, where I can't see much improvement
from here. But I can see maintaining some of these levels. I see these global
synergies, the Exxon-Mobils, adding to profitability. There won't necessarily be
revenue synergies in some of these, but there will certainly be margin
synergies, capital synergies, and efficiency elements. So I still see a 6%-8%
secular growth rate over the next five years in corporate profits. For 1999 I am
in the camp that has S&P earnings up, because over one-third of the earnings mix
in the S&P is non-U.S. Now, that's leaving Brazil aside, because it is part of
my wall of worry -- I have my A-B-C-D issues: Asia, Brazil, Clinton and the
Dollar are the things I worry about. But in terms of my model, where I have
interest rates backing up, and earnings at that level, the market has absolutely
no margin of safety. So we could see it up 3%, down 20%. Probably somewhere
in-between at the end of the year. With much more volatility. I think volatility
is increased by the new generation of traders. Individuals now come in to work
and trade. Or they don't even come in to work. There is nothing between them and
a buy/sell decision except their finger on a mouse. There is no broker who has a
boss asking, "Hey, is he churning? Is he overinvesting?" There is nothing there.
So the volatility you saw from July through the beginning of January I think is
just the way the world's going to be. As long as you are treating stocks like
commodities, you have to expect that to continue. And they are trading stocks
like they are soybeans.
Q: SO THE STOCK MARKET WILL BE THE PITS?
G: There will be great opportunities to make a lot of money if you short. If you
go long, then it's just going to be a terrific eclectic market.
Q: WHAT WILL MAKE THE SMALL-FRY GO UP, ESPECIALLY IF THE S&P SELLS OFF AND THE
ECONOMY IS NO GREAT SHAKES?
G: Forcing transactions, by managements, that narrow the spreads between their
intrinsic values and the stock prices.
Q: IT LOOKS LIKE MARIO WANTS TO TALK TULIPS NEXT.
G: Our goal always has been to make 10% real by picking stocks that we hope,
after taxes, after inflation, accomplish that. So we try to find companies at a
significant margin of safety to intrinsic value. The second part of our strategy
is to try to buy things for the long term, because it's not only what you make,
but what you keep. We'd rather pay 20% long-term capital-gains taxes than 40% on
ordinary income from trading. But we're here in January of 1999, and even 25%
looks awfully dull when you make that in one week -- 50%, in Amazon. So I have
succumbed and I am going to recommend only stocks that have grown to the sky --
Excite, uBid, eBay, Amazon and that's it. Nothing else! You can also have my
tulips, Arthur. Don't say I never gave you anything. They're starting to wilt --
Art Samberg: Am I allowed to eat them?
G: Do anything you like. Charles MacKay wrote about all this in 1841, in
EXTRAORDINARY POPULAR DELUSIONS AND THE MADNESS OF CROWDS.
Anyway, when we look at stocks, we also look for a catalyst. Forcing
transactions. That is, a management, if they are alert and sensitive, can do
things like buying back stock, like LBOs or financial engineering. One of the
dynamics that have been in place for the last four years is deals. Deals will
continue in 1999 -- a year in which the Exxons and the Mobils are driving values
by becoming global, further reinforcing their positions. There are a lot of
areas where that's happening.
Q: THANKS , MARIO. [ ]
6
<PAGE>
YEAR END REVIEW - WALKING IN MUD
For the fourth quarter of 1998, rather than repeating the economic and
market dynamics that we discussed in our third quarter report to shareholders,
we invite our shareholders to review these comments from the third quarter
report. The report is available on our website at www.gabelli.com.
Most investors will remember 1998 as another bull market year, with the
leading large cap market indices (the Dow Jones Industrial Average and S&P 500)
posting double digit gains. Small cap stock investors will look back on 1998
with very different memories. Investing in small cap stocks felt like walking
though waist high mud. Although we exerted our usual maximum effort, there was
no advancing in this small cap market. Losers swamped gainers in the Russell
2000 Index, with only the largest 200 component companies posting a collective
gain and the remaining 1,800 collectively underwater. Technology stocks were the
primary winners, with the sizzling Internet stocks leading the way.
We feel quite fortunate to have materially exceeded our Russell 2000
benchmark and closed 1998 virtually flat. We must credit our disciplined stock
picking for the Fund's relative showing. Approximately 45% of our portfolio
holdings finished the year with gains. This is more than double the batting
average for the benchmark index.
Our relative performance was not the result of heavy overweightings in a
few top performing industry groups. Our technology exposure was relatively
modest compared to many small cap growth funds. We did not own a single pure
Internet stock--in our opinion, these are bubbles just waiting to burst. Stocks
in our Top Twenty performance list, which posted gains from around 75% to above
300%, include a radio broadcaster (Price Communications); a candy/sports trading
card company (Topps); a cable television operator (Cablevision Systems); a home
furnishings retailer (Bed Bath & Beyond); and a motorcycle manufacturer
(Harley-Davidson). Our biggest losers were an equally eclectic mix including a
publisher, a few gold mining companies, a sports gear retailer and a satellite
broadcaster.
OPPORTUNITY AHEAD
Where do you invest in this uncertain economic and market environment? We
suggest the best investment candidates are quality small companies with leading
market shares in niche industries. That general description essentially
encapsulates the Fund's portfolio holdings.
Clearly, there is better relative value in the small cap market. The S&P
500 is trading at around 25 times trailing earnings. The Russell 2000 is trading
around 16 times trailing earnings. On a historical basis, it is relatively rare
for small cap stocks, which generally grow earnings faster than large caps, to
trade at a valuation discount. Today's growing spread between small cap and
large cap valuations is almost unprecedented.
Of course, this does not mean that the spread will narrow tomorrow. Large
cap stocks benefit from foreign investment, which is generally concentrated in
blue chip household names and S&P 500 indexing, which in our opinion is fast
becoming an investment mania that will eventually collapse under
7
<PAGE>
the weight of excessive valuations. However, the performance cycles of large and
small stocks will eventually adjust. We note that the last time we saw a
comparable performance differential between the S&P 500 and Russell 2000 was in
1990. Over the next three years, small caps materially outperformed large cap
stocks.
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.
CARTER-WALLACE INC. (CAR - $19.625 - NYSE) markets toiletries, pharmaceuticals,
diagnostic specialties, proprietary drugs and pet products. Carter-Wallace
products include such recognized brand names as Arrid deodorant, Nair hair
remover and Pearl Drops toothpaste. Asteline, a nasal spray for allergies
introduced last year, is expected to be profitable in the fiscal year ending
March 1999.
CELESTIAL SEASONINGS INC. (CTEA - $27.8125 - NASDAQ), based in Boulder,
Colorado, developed and popularized the herb tea category in the U.S. as a
flavorful, non-caffeinated alternative to other hot beverages. With over 40 tea
varieties under the Celestial Seasonings brand, CTEA is the largest manufacturer
of herb teas with an estimated 50% market share. The company is expected to
maintain its dominant position in the herb tea market. Celestial Seasonings is
positioned to leverage its excellent brand name into dietary herbal supplements,
the market for which is growing 25% annually.
CLARCOR INC. (CLC - $20.00 - NYSE) is a U.S.-based manufacturer and distributor
of engine/mobile and industrial/environmental filtration products and consumer
packaging products. Filtration products include air, fuel and hydraulic filters
for heavy duty trucks, buses, cars and boats, as well as air and anti-microbial
filters for factories, hospitals and clean rooms. CLARCOR's consumer packaging
segment operates in two markets, custom-decorated metal containers and plastic
closures, including such products as Rayovac battery shells and Kodak film
canisters. Substantial cost savings and productivity improvements are expected
through the end of the decade. The company has a history of bringing
acquisitions profitably into the fold and is entering into strategic alliances
in European and other markets.
KAMAN CORP. (KAMNA - $16.0625 - NASDAQ), founded in 1945, is a pioneer in the
helicopter industry. Aircraft manufacturing remains at the core of the business.
Kaman services both commercial and government markets with helicopters and
aircraft components. The company also produces specialized, high-value niche
market products and services which tend to be technological leaders in their
markets. Kaman is a major, national distributor of original equipment, repair
and replacement products and value-added services to nearly every sector of
North American industry. The company also manufactures and distributes musical
instruments (Ovation guitars) and accessories to independent retailers.
LIBERTY CORP. (LC - $49.25 - NYSE), headquartered in Greenville, S.C., is a
holding company with operations in broadcasting and insurance. Liberty's Cosmos
Broadcasting owns and operates eleven network affiliated television stations in
the Southeast and Midwest. Six stations are affiliated with NBC,
8
<PAGE>
three with ABC and two with CBS. These stations serve more than four million
households. In August, Cosmos agreed to acquire CBS-affiliated KGBT-TV in
Harlingen, Texas for approximately $42 million. Also in August, the company
closed on its purchase of NBC affiliate WALB-TV in Albany, Georgia. The purchase
of WWAY, the ABC affiliate in Wilmington, NC, for $34 million was completed at
year end. Liberty Life is a regional insurer, with North Carolina, South
Carolina and Louisiana accounting for more than 50% of its premium volume. The
insurance segment specializes in providing agency (home service) and mortgage
protection, life and health insurance. Former affiliate Pierce National Life
Insurance Co. was sold to Fortis Inc. in April 1998 for $180 million. In March,
Liberty Corp. repurchased 2.4 million shares in a tender offer at $52 per share.
PIONEER GROUP INC. (PIOG - $19.75 - NASDAQ) is a Boston-based money management
firm. Pioneer operates a successful U.S. mutual fund business with over $20
billion under management. The company has invested in financial services
businesses outside the U.S., primarily in Russia, Poland and the Czech Republic.
Pioneer also is involved in natural resource development projects which
management is de-emphasizing. An effort, so far unsuccessful, has been made to
sell its 90% stake in the Teberebie gold mine, one of Ghana's largest mines.
Pioneer has extensive timber operations in eastern Russia.
UNITED TELEVISION INC. (UTVI - $115.00 - NASDAQ), headquartered in Beverly
Hills, California, is a television broadcasting group which owns and operates
the six stations (one ABC, one NBC and four UPN affiliates) that comprise
Chris-Craft's (CCN - $48.1875 - NYSE) television division. In January 1998, UTVI
purchased WHSW in Baltimore for $80 million. The station began broadcasting as
WUTB, a UPN affiliate, immediately following completion of the acquisition. The
$60 million purchase of WRBW, a UPN affiliate in Orlando (the country's 22nd
largest and the fastest growing television market over the past decade), is
pending FCC approval. UTVI stations cover approximately eight percent of the
U.S. population. UTVI is 59%-owned by BHC Communications (BHC - $122.00 - AMEX).
Strong advertising demand, prospects for favorable regulatory changes in the
industry and corporate cost control enhance EBITDA prospects.
USA NETWORKS INC. (USAI - $33.125 - NASDAQ), through its subsidiaries, engages
in diversified media and electronic commerce businesses that include: electronic
retailing, ticketing operations and television broadcasting. Chairman and CEO
Barry Diller has brought together under one umbrella: the USA Network, the
Sci-Fi Channel, USA Networks Studios, USA Broadcasting, The Home Shopping
Network and the Ticketmaster Group. The plan is to integrate these assets,
leveraging programming, production capabilities and electronic commerce across
this strong distribution platform.
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 Small Cap Growth Fund and other Gabelli Funds are
available through the no-transaction fee programs at many major discount
brokerage firms.
9
<PAGE>
IN CONCLUSION
Despite ongoing global economic uncertainty, the popular market indices
are once again in record territory. While we will always have a "wall of worry",
we believe the economy and the capital market landscape for 1999 will provide
stock pickers like us the opportunity to unearth well-managed companies, trading
at significant discounts to their private market value, that should benefit from
sustainable long term economic dynamics. The Fund is invested in what we believe
to be undervalued companies in much more reasonably priced sectors of the
market.
It has been a tough year for small cap investors. While their larger cap
brethren, particularly large cap growth stock advocates, enjoyed attractive
returns, small cap devotees generally experienced losses. We are pleased the
Fund was able to retain its value in the midst of a bear market for small cap
stocks. We do not know when small caps will regain their historical performance
advantage over large cap stocks. We do know they have not underperformed by such
a wide margin since 1990. We also know small caps are currently much more
reasonably valued than large caps. These two factors, along with our research
driven stock selection process, give us confidence there are much better days
ahead for small cap stocks and the Fund.
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 GABSX. Please call us during the
business day for further information.
Sincerely,
/s/ Mario J. Gabelli
MARIO J. GABELLI, CFA
Portfolio Manager and
Chief Investment Officer
January 29, 1999
TOP TEN HOLDINGS
DECEMBER 31, 1998
USA Networks Inc.
Liberty Corp.
United Television Inc.
Celestial Seasonings Inc.
CLARCOR Inc.
Pittway Corp.
Kaman Corp.
Carter-Wallace Inc.
CTS Corp.
Pioneer Group 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.
10
<PAGE>
THE GABELLI SMALL CAP GROWTH FUND
PORTFOLIO OF INVESTMENTS -- DECEMBER 31, 1998 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MARKET
SHARES VALUE
- -------------- -----------------
<S> <C> <C>
COMMON STOCKS -- 97.5%
AGRICULTURE -- 0.0%
6,000 Cadiz Inc.+ ..................................... $ 45,750
10,000 Erly Industries Inc.+ ........................... 400
----------
46,150
----------
AUTOMOTIVE: PARTS AND ACCESSORIES -- 5.4%
100,000 Acktion Co.+ .................................... 758,493
1,000 Borg-Warner Automotive Inc. ..................... 55,813
78,000 GenCorp Inc. .................................... 1,945,125
10,000 Lund International Holdings Inc.+ ............... 85,000
20,000 Meritor Automotive Inc. ......................... 423,750
123,700 Modine Manufacturing Co. ........................ 4,484,124
5,250 Monro Muffler Brake Inc.+ ....................... 38,063
50,000 Redlaw Industries Inc.+ ......................... 50,000
1,000 SPX Corp.+ ...................................... 67,000
152,500 Standard Motor Products Inc. .................... 3,698,125
17,000 Strattec Security Corp.+ ........................ 510,000
20,000 Superior Industries International Inc. .......... 556,250
122,000 TransPro Inc. ................................... 594,750
183,500 Wynn's International Inc. ....................... 4,059,938
----------
17,326,431
----------
AVIATION: PARTS AND SERVICES -- 5.3%
15,000 AAR Corp. ....................................... 358,125
50,000 Banner Aerospace Inc.+ .......................... 471,875
5,000 Barnes Group Inc. ............................... 146,875
40,000 Coltec Industries Inc.+ ......................... 780,000
56,000 Curtiss-Wright Corp. ............................ 2,135,000
7,500 Ducommun Inc.+ .................................. 103,594
113,000 Fairchild Corp., Cl. A+ ......................... 1,779,750
26,500 Hi-Shear Industries Inc.+ ....................... 68,734
44,000 Hudson General Corp. ............................ 2,772,000
320,000 Kaman Corp., Cl. A .............................. 5,140,000
80,000 Moog Inc., Cl. A+ ............................... 3,130,000
----------
16,885,953
----------
BROADCASTING -- 6.8%
200,000 Ackerley Group Inc. ............................. 3,650,000
20,000 Granite Broadcasting Corp.+ ..................... 120,000
32,000 Gray Communications Systems Inc. ................ 586,000
48,000 Gray Communications Systems Inc.,
Cl. B ........................................... 657,000
167,000 Liberty Corp. ................................... 8,224,749
110,000 Paxson Communications Corp.+ .................... 1,010,625
39,062 Price Communications Corp.+ ..................... 505,365
57,800 United Television Inc. .......................... 6,647,000
8,000 Young Broadcasting Inc., Cl. A+ ................. 335,000
----------
21,735,739
----------
BUILDING AND CONSTRUCTION -- 1.8%
16,000 Florida Rock Industries Inc. .................... 496,000
14,000 Morgan Products Ltd.+ ........................... 49,000
130,000 Nortek Inc.+ .................................... 3,591,250
</TABLE>
<TABLE>
<CAPTION>
MARKET
SHARES VALUE
- -------------- -----------------
<S> <C> <C>
10,000 Oakwood Homes Corp. ............................. $ 151,875
75,000 Republic Group Inc. ............................. 1,504,688
----------
5,792,813
----------
BUSINESS SERVICES -- 2.7%
15,000 Amway Asia Pacific Ltd. ......................... 138,750
21,641 Amway Japan Ltd., ADR ........................... 116,320
40,000 Berlitz International Inc.+ ..................... 1,160,000
22,000 Borg-Warner Security Corp.+ ..................... 412,500
50,000 Data Broadcasting Corp.+ ........................ 893,750
3,000 Data Transmission Network Corp.+ ................ 86,625
2,000 Gartner Group Inc.+ ............................. 42,500
13,000 Hach Co. ........................................ 156,000
20,000 Hach Co., Cl. A ................................. 205,000
33,000 Industrial Distribution Group Inc.+ ............. 251,625
10,000 Landauer Inc. ................................... 323,750
4,000 Marquee Group Inc.+ ............................. 18,000
110,000 Nashua Corp.+ ................................... 1,464,375
115,000 Paxar Corp.+ .................................... 1,027,813
15,000 Pittston Brink's Group .......................... 478,125
18,000 Princeton Video Image Inc.+ ..................... 54,000
40,000 R. H. Donnelley Corp. ........................... 582,500
86,300 Trans-Lux Corp. (b) ............................. 787,488
8,000 Wackenhut Corp., Cl. A .......................... 203,500
6,187 Wackenhut Corp., Cl. B .......................... 135,727
----------
8,538,348
----------
CABLE -- 1.1%
35,000 Cablevision Systems Corp., Cl. A+ ............... 1,756,562
2,000 Century Communications Corp., Cl. A+ ............ 63,438
85,000 United International Holdings Inc.,
Cl. A+ .......................................... 1,636,250
----------
3,456,250
----------
COMMUNICATIONS EQUIPMENT -- 0.1%
72,000 Allen Telecom Inc.+ ............................. 481,500
----------
COMPUTER SOFTWARE AND SERVICES -- 0.6%
1,000 @Home Corp., Ser. A+ ............................ 74,250
3,000 Anacomp Inc.+ ................................... 55,875
92,500 Bull Run Corp.+ ................................. 312,188
20,000 Checkfree Holdings Corp.+ ....................... 467,500
3,000 Cylink Corp.+ ................................... 10,875
200 Macromedia Inc.+ ................................ 6,738
33,000 N2K Inc.+ ....................................... 431,063
75,000 Phoenix Technologies Ltd.+ ...................... 646,874
2,000 Powerhouse Technologies Inc.+ ................... 29,000
1,500 Volt Information Sciences Inc.+ ................. 33,844
----------
2,068,207
----------
CONSUMER PRODUCTS -- 5.3%
3,000 Action Performance Companies Inc.+ .............. 106,125
10,000 Adams Golf Inc.+ ................................ 40,938
12,000 American Safety Razor Co.+ ...................... 144,000
255,000 Carter-Wallace Inc. ............................. 5,004,374
</TABLE>
11
<PAGE>
THE GABELLI SMALL CAP GROWTH FUND
PORTFOLIO OF INVESTMENTS (CONTINUED) -- DECEMBER 31, 1998 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MARKET
SHARES VALUE
- -------------- -----------------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
CONSUMER PRODUCTS (CONTINUED)
60,000 Church & Dwight Co. Inc. ......................... $2,156,249
12,000 Coachmen Industries Inc. ......................... 315,000
5,000 Department 56 Inc.+ .............................. 187,813
27,000 First Brands Corp. ............................... 1,064,813
8,000 French Fragrances Inc.+ .......................... 58,000
68,000 General Cigar Holdings Inc.+ ..................... 590,750
133,500 General Cigar Holdings Inc., Cl. B+ (a) .......... 1,159,781
100,000 General Housewares Corp. ......................... 1,200,000
75,000 Genlyte Group Inc.+ .............................. 1,406,250
2,000 Harley-Davidson Inc. ............................. 94,750
120,000 Hartmarx Corp.+ .................................. 675,000
10,000 Madden (Steven) Ltd.+ ............................ 85,000
25,000 National Presto Industries Inc. .................. 1,065,625
14,000 Nature's Sunshine Products Inc. .................. 213,500
5,000 Scotts Co., Cl. A+ ............................... 192,188
12,000 Skyline Corp. .................................... 390,000
14,000 Stewart Enterprises Inc., Cl. A .................. 311,500
110,000 Weider Nutrition International Inc. .............. 701,250
----------
17,162,906
----------
CONSUMER SERVICES -- 1.7%
10,000 Bowlin Outdoor Advertising & Travel
Centers Inc.+ .................................... 51,250
207,500 Loewen Group Inc. ................................ 1,750,781
20,000 Response USA Inc.+ ............................... 67,500
162,000 Rollins Inc. ..................................... 2,835,000
3,000 Ticketmaster Online-CitySearch Inc.+ ............. 171,000
16,000 Travel Services International Inc.+ .............. 488,000
----------
5,363,531
----------
COUNTRY AND CLOSED END FUNDS -- 1.4%
45,000 Central European Equity Fund Inc. ................ 599,063
80,000 Emerging Germany Fund Inc. ....................... 1,014,999
45,000 France Growth Fund Inc. .......................... 613,125
32,000 Germany Fund Inc. ................................ 444,000
44,000 Italy Fund Inc. .................................. 660,000
65,000 New Germany Fund Inc. ............................ 840,938
11,000 Spain Fund Inc. .................................. 224,813
----------
4,396,938
----------
DIVERSIFIED INDUSTRIAL -- 6.3%
99,500 Ampco-Pittsburgh Corp. ........................... 1,082,063
8,000 Anixter International Inc.+ ...................... 162,500
70,000 Crane Co. ........................................ 2,113,125
37,500 Gardner Denver Machinery Corp.+ .................. 553,125
16,000 GATX Corp. ....................................... 606,000
36,000 Katy Industries Inc. ............................. 632,250
450,000 Lamson & Sessions Co.+ ........................... 2,306,250
70,000 Lawter International Inc. ........................ 813,750
75,000 Lindsay Manufacturing Co. ........................ 1,110,938
16,000 Myers Industries Inc. ............................ 458,000
610,400 Noel Group Inc.+ ................................. 686,700
</TABLE>
<TABLE>
<CAPTION>
MARKET
SHARES VALUE
- -------------- -----------------
<S> <C> <C>
40,000 Oil-Dri Corporation of America ................... $ 600,000
110,000 Park-Ohio Holdings Corp.+ ........................ 1,663,750
22,000 Standex International Corp. ...................... 577,500
190,000 Thomas Industries Inc. ........................... 3,728,749
457,000 Tyler Corp.+ ..................................... 2,799,124
50,000 WHX Corp.+ ....................................... 503,125
----------
20,396,949
----------
EDUCATION -- 0.0%
22,000 Whitman Education Group Inc.+ .................... 72,875
----------
ELECTRONICS -- 0.8%
595,000 Oak Technology Inc.+ ............................. 2,082,500
17,000 Watkins-Johnson Co. .............................. 346,375
----------
2,428,875
----------
ENERGY AND UTILITIES -- 4.3%
25,100 AGL Resources Inc. ............................... 578,869
6,000 Basin Exploration Inc.+ .......................... 75,375
20,000 Central Hudson Gas & Electric Corp. .............. 895,000
81,661 Citizens Utilities Co., Cl. A+ ................... 663,495
15,000 Eastern Enterprises .............................. 656,250
5,000 Fall River Gas Co. ............................... 84,375
40,000 Florida Public Utilities Co. ..................... 685,000
10,000 Forcenergy Inc.+ ................................. 26,250
1,425,000 GEO International Corp. (a)(b)+ .................. 0
130,000 Kaneb Services Inc.+ ............................. 528,125
55,000 Orange & Rockland Utilities Inc. ................. 3,134,999
285,000 RPC Inc. ......................................... 2,101,875
105,000 Southwest Gas Corp. .............................. 2,821,875
15,000 Tesoro Petroleum Corp.+ .......................... 181,875
5,000 TransMontaigne Oil Co.+ .......................... 75,625
38,500 United Water Resources Inc. ...................... 921,594
15,000 Wicor Inc. ....................................... 327,188
----------
13,757,770
----------
ENTERTAINMENT -- 5.5%
115,000 Ascent Entertainment Group Inc.+ ................. 848,125
15,000 Dover Downs Entertainment Inc. ................... 180,938
41,000 Fisher Companies Inc. ............................ 2,808,500
85,000 Florida Panthers Holdings Inc.+ .................. 791,563
48,000 GC Companies Inc.+ ............................... 1,997,999
3,000 International Speedway Corp. ..................... 121,500
4,000 Loews Cineplex Entertainment Corp.+ .............. 40,500
3,000 Metromedia International Group Inc.+ ............. 16,313
180,000 Spelling Entertainment Group Inc.+ ............... 1,350,000
10,000 TCI Music Inc.+ .................................. 46,875
160,000 Topps Co. Inc.+ .................................. 800,000
263,000 USA Networks Inc.+ ............................... 8,711,874
----------
17,714,187
----------
ENVIRONMENTAL SERVICES -- 0.1%
40,428 EnviroSource Inc.+ ............................... 207,194
----------
</TABLE>
12
<PAGE>
THE GABELLI SMALL CAP GROWTH FUND
PORTFOLIO OF INVESTMENTS (CONTINUED) -- DECEMBER 31, 1998 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MARKET
SHARES VALUE
- -------------- -----------------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
EQUIPMENT AND SUPPLIES -- 15.6%
22,000 Aeroquip-Vickers Inc. ......................... $ 658,625
65,000 AFC Cable Systems Inc.+ ....................... 2,185,625
17,000 Alltrista Corp.+ .............................. 408,000
145,000 AMETEK Inc. ................................... 3,235,313
22,000 Amphenol Corp., Cl. A+ ........................ 664,125
320,000 Baldwin Technology Co. Inc., Cl. A+ ........... 1,800,000
15,000 Belden Inc. ................................... 317,813
4,000 Bway Corp.+ ................................... 60,250
20,000 C&D Technologies Inc. ......................... 550,000
282,000 CLARCOR Inc. .................................. 5,639,999
3,000 Commercial Intertech Corp. .................... 38,813
22,000 Core Materials Corp.+ ......................... 77,000
109,000 CTS Corp. ..................................... 4,741,500
55,000 Cuno Inc.+ .................................... 893,750
52,000 Daniel Industries Inc. ........................ 630,500
257,600 Fedders Corp. ................................. 1,497,300
62,000 Flowserve Corp. ............................... 1,026,875
40,000 General Magnaplate Corp. ...................... 180,000
70,000 Gerber Scientific Inc. ........................ 1,666,875
40,000 Global Industrial Technologies Inc.+ .......... 427,500
145,000 Hussmann International Inc. ................... 2,809,374
34,650 Johnston Industries Inc.+ ..................... 108,281
10,000 K-Tron International Inc.+ .................... 186,250
113,000 Kollmorgen Corp. .............................. 1,723,250
15,000 Kuhlman Corp. ................................. 568,125
10,000 Littelfuse Inc.+ .............................. 192,500
22,000 Lufkin Industries Inc. ........................ 407,000
24,000 Mark IV Industries Inc. ....................... 312,000
110,000 Material Sciences Corp.+ ...................... 935,000
19,000 Met-Pro Corp. ................................. 237,500
160,000 Pittway Corp. ................................. 5,409,999
3,000 Plantronics Inc.+ ............................. 258,000
26,000 Raytech Corp.+ ................................ 74,750
40,000 Sequa Corp., Cl. A+ ........................... 2,395,000
12,500 Sequa Corp., Cl. B+ ........................... 918,750
40,000 SL Industries Inc. ............................ 510,000
1,000 Smith (A.O.) Corp. ............................ 24,563
9,000 Smith (A.O.) Corp., Cl. A ..................... 219,094
75,000 SPS Technologies Inc.+ ........................ 4,246,875
5,000 Teleflex Inc. ................................. 228,125
15,000 Tennant Co. ................................... 601,875
27,000 U.S. Filter Corp.+ ............................ 617,625
5,000 Valmont Industries Inc. ....................... 69,375
7,875 Watsco Inc., Cl. B ............................ 131,906
----------
49,885,080
----------
FINANCIAL SERVICES -- 3.2%
20,000 Argonaut Group Inc. ........................... 489,999
68,000 Berliner Bank Aktiengesellschaft .............. 1,102,356
45,000 Danielson Holding Corp.+ ...................... 160,313
1,000 Federal Agricultural Mortgage Corp.,
Cl. C+ ........................................ 37,125
</TABLE>
<TABLE>
<CAPTION>
MARKET
SHARES VALUE
- -------------- -----------------
<S> <C> <C>
35,000 Gainsco Inc. .................................. $ 214,375
20,000 Gryphon Holdings Inc.+ ........................ 372,500
18,000 Hibernia Corp. ................................ 312,750
3,000 Landamerica Financial Group ................... 167,438
7,958 Metris Companies Inc. ......................... 400,387
105,800 Midland Co. ................................... 2,552,425
500 Net.B@nk Inc.+ ................................ 13,750
231,000 Pioneer Group Inc. ............................ 4,562,249
----------
10,385,667
----------
FOOD AND BEVERAGE -- 4.8%
12,000 Advantica Restaurant Group Inc.+ .............. 74,250
34,863 Buenos Aires Embotelladora SA+ (a) ............ 0
226,000 Celestial Seasonings Inc.+ .................... 6,285,625
6,000 Cheesecake Factory Inc.+ ...................... 177,938
186,100 Chock Full o'Nuts Corp.+ ...................... 1,163,125
116,000 Eskimo Pie Corp. (b) .......................... 1,537,000
1,000 Farmer Brothers Co. ........................... 214,000
20,000 Genesee Corp., Cl. B .......................... 465,000
10,000 International Multifoods Corp. ................ 258,125
8,000 Irwin Naturals/4Health Inc.+ .................. 38,000
12,000 J & J Snack Foods Corp.+ ...................... 268,500
8,000 Midwest Grain Products Inc.+ .................. 109,000
1,000 Northland Cranberries Inc., Cl. A ............. 9,031
130,000 Pepsi-Cola Puerto Rico Bottling Co.+ .......... 674,375
40,000 Ralcorp Holdings Inc.+ ........................ 730,000
5,000 Sylvan Food Holdings Inc.+ .................... 74,375
30,736 Tootsie Roll Industries Inc. .................. 1,202,546
55,000 Twinlab Corp.+ ................................ 721,875
50,000 Whitman Corp. ................................. 1,268,750
----------
15,271,515
----------
HEALTH CARE -- 0.7%
18,000 HealthPlan Services Corp. ..................... 207,000
140,000 IVAX Corp.+ ................................... 1,741,250
48,000 Penwest Pharmaceuticals Co.+ .................. 300,000
6,000 U.S. Physical Therapy Inc.+ ................... 54,000
----------
2,302,250
----------
HOME FURNISHINGS -- 0.8%
8,000 Bassett Furniture Industries Inc. ............. 193,000
2,000 Bed Bath & Beyond Inc.+ ....................... 68,250
17,000 Foamex International Inc. ..................... 210,375
30,000 La-Z-Boy Chair Co. ............................ 534,375
50,000 Mikasa Inc. ................................... 637,500
70,000 Oneida Ltd. ................................... 1,036,875
----------
2,680,375
----------
HOTELS AND GAMING -- 2.8%
410,000 Aztar Corp.+ .................................. 2,075,624
15,000 Boyd Gaming Corp.+ ............................ 49,688
20,000 Churchill Downs Inc. .......................... 657,500
60,000 Extended Stay America Inc.+ ................... 630,000
72,000 Gaylord Entertainment Co. ..................... 2,169,000
90,000 Grand Casinos Inc.+ ........................... 725,625
</TABLE>
13
<PAGE>
THE GABELLI SMALL CAP GROWTH FUND
PORTFOLIO OF INVESTMENTS (CONTINUED) -- DECEMBER 31, 1998 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MARKET
SHARES VALUE
- -------------- -----------------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
HOTELS AND GAMING (CONTINUED)
140,000 Jackpot Enterprises Inc.+ .................... $1,321,250
5,000 Jurys Hotel Group plc ........................ 38,020
52,000 Mirage Resorts Inc.+ ......................... 776,750
22,000 Penn National Gaming Inc.+ ................... 154,000
15,000 Station Casinos Inc.+ ........................ 122,813
110,000 Trump Hotels & Casino Resorts Inc.+ .......... 412,500
----------
9,132,770
----------
METALS AND MINING -- 0.4%
199,000 Echo Bay Mines Ltd.+ ......................... 348,250
245,000 Pegasus Gold Inc.+ ........................... 4,288
190,000 Royal Oak Mines Inc.+ ........................ 47,500
20,000 Stillwater Mining Co.+ ....................... 820,000
5,000 Toreador Royalty Corp.+ ...................... 15,625
80,000 TVX Gold Inc.+ ............................... 145,000
----------
1,380,663
----------
PAPER AND FOREST PRODUCTS -- 1.1%
123,000 Greif Bros. Corp. ............................ 3,590,063
----------
PUBLISHING -- 5.0%
10,000 CMP Media Inc., Cl. A+ ....................... 182,500
121,278 Independent Newspapers Ltd. .................. 497,269
2,000 Lee Enterprises Inc. ......................... 63,000
40,000 McClatchy Newspapers Inc., Cl. A ............. 1,415,000
55,000 Media General Inc., Cl. A .................... 2,915,000
25,000 Meredith Corp. ............................... 946,875
170,000 Penton Media Inc. ............................ 3,442,500
44,000 Pulitzer Publishing Co. ...................... 3,811,500
193,400 Thomas Nelson Inc. ........................... 2,610,900
6,000 Wiley (John) & Sons Inc., Cl. B .............. 287,250
----------
16,171,794
----------
PUMPS AND VALVES -- 2.3%
58,500 Franklin Electric Co. ........................ 3,948,750
17,775 Gorman-Rupp Co. .............................. 297,731
17,000 Graco Inc. ................................... 501,500
70,000 IDEX Corp. ................................... 1,715,000
10,000 Robbins & Myers Inc. ......................... 221,250
30,000 Roper Industries Inc. ........................ 611,250
----------
7,295,481
----------
REAL ESTATE -- 1.2%
150,000 Catellus Development Corp.+ .................. 2,146,875
118,000 Griffin Land & Nurseries Inc.+ ............... 1,504,500
8,500 Gyrodyne Company of America Inc.+ ............ 112,625
----------
3,764,000
----------
RETAIL -- 3.9%
60,000 Aaron Rents Inc. ............................. 907,500
46,000 Aaron Rents Inc., Cl. A ...................... 687,125
110,000 Burlington Coat Factory Warehouse
Corp. ........................................ 1,794,375
</TABLE>
<TABLE>
<CAPTION>
MARKET
SHARES VALUE
- -------------- -----------------
<S> <C> <C>
26,000 Coldwater Creek Inc.+ ........................ $ 357,500
25,000 Fingerhut Companies Inc. ..................... 385,938
105,000 Ingles Markets Inc., Cl. A ................... 1,148,438
195,000 Lillian Vernon Corp. ......................... 3,217,499
2,500 Midas Inc. ................................... 77,813
33,500 Mott's Holdings Inc.+ (a) .................... 201,000
95,000 Neiman Marcus Group Inc.+ .................... 2,369,063
190,000 Scheib (Earl) Inc.+ .......................... 1,045,000
90,000 Sports Authority Inc.+ ....................... 472,500
----------
12,663,751
----------
SATELLITE -- 1.3%
38,000 COMSAT Corp. ................................. 1,368,000
3,000 Pegasus Communications Corp.+ ................ 75,188
40,000 TCI Satellite Entertainment+ ................. 57,500
110,000 United Video Satellite Group Inc.,
Cl. A+ ....................................... 2,598,750
----------
4,099,438
----------
SPECIALTY CHEMICALS -- 1.1%
31,000 Airgas Inc.+ ................................. 277,063
6,000 Bush Boake Allen Inc.+ ....................... 211,500
25,000 Dexter Corp. ................................. 785,937
60,000 Ferro Corp. .................................. 1,560,000
600 MacDermid Inc. ............................... 23,475
32,000 Penford Corp. ................................ 512,000
10,000 Sybron Chemicals Inc.+ ....................... 135,000
----------
3,504,975
----------
TELECOMMUNICATIONS -- 2.3%
18,400 Aliant Communications Inc. ................... 752,100
23,000 ARC International Corp.+ ..................... 35,938
9,200 Atlantic Tele-Network Inc. ................... 83,375
2,000 BHI Corp.+ ................................... 61,500
47,300 Commonwealth Telephone Enterprises
Inc.+ ........................................ 1,584,550
20,000 Commonwealth Telephone Enterprises
Inc., Cl. B+ ................................. 630,000
100,000 Communications Systems Inc. .................. 1,181,250
115,000 GST Telecommunications Inc.+ ................. 754,688
100,000 RCN Corp.+ ................................... 1,768,749
20,000 Rogers Communications Inc., Cl. B+ ........... 177,500
20,000 Viatel Inc.+ ................................. 457,500
----------
7,487,150
----------
TRANSPORTATION -- 0.1%
2,000 Irish Continential Group plc ................. 21,470
50,000 OMI Corp.+ ................................... 162,500
----------
183,970
----------
WIRELESS COMMUNICATIONS -- 1.7%
70,000 Aerial Communications Inc.+ .................. 411,250
8,000 Associated Group Inc., Cl. A+ ................ 344,000
26,000 Cellular Communications of Puerto Rico
Inc.+ ........................................ 481,000
</TABLE>
14
<PAGE>
THE GABELLI SMALL CAP GROWTH FUND
PORTFOLIO OF INVESTMENTS (CONTINUED) -- DECEMBER 31, 1998 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MARKET
SHARES VALUE
- ------------ --------------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
WIRELESS COMMUNICATIONS (CONTINUED)
64,000 Centennial Cellular Corp., Cl. A+ ......... $ 2,624,000
33,000 CommNet Cellular Inc.+ .................... 404,250
25,000 Corecomm Ltd.+ ............................ 393,750
10,000 Teligent Inc., Cl. A+ ..................... 287,500
30,000 Western Wireless Corp., Cl. A+ ............ 660,000
-----------
5,605,750
-----------
TOTAL COMMON STOCKS ....................... 313,237,308
-----------
RIGHTS -- 0.0%
FOOD AND BEVERAGE -- 0.0%
1,708,287 Buenos Aires Embotelladora SA, Cl. B+...... 0
-----------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
- ----------
<S> <C> <C>
CONVERTIBLE CORPORATE BONDS -- 0.0%
EQUIPMENT AND SUPPLIES -- 0.0%
$ 500 MacNeal-Schwendler Corp.,
Sub. Deb. Cv.
7.88%, 08/18/04 .............. 460
---------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
- ------------- -----------------
<S> <C> <C>
U.S. GOVERNMENT OBLIGATIONS -- 0.5%
$1,663,000 U.S. Treasury Bills,
3.87% to 4.49%++,
due 01/07/99 to 02/04/99 ................. $ 1,658,188
------------
TOTAL INVESTMENTS -- 98.0%
(Cost $232,738,243)....................... 314,895,956
OTHER ASSETS AND
LIABILITIES (NET) -- 2.0% ................ 6,396,861
------------
NET ASSETS -- 100.0%
(15,294,077 shares outstanding) .......... $321,292,817
============
NET ASSET VALUE,
OFFERING AND REDEMPTION
PRICE PER SHARE .......................... $ 21.01
============
</TABLE>
- ---------------------
(a) Security fair valued as determined by the Board of Directors.
(b) Security considered an affiliated holding because the Fund owns at
least 5% of the outstanding shares.
+ Non-income producing security.
++ Represents annualized yield at date of purchase.
ADR -- American Depositary Receipt.
15
<PAGE>
Gabelli Equity Series Funds, Inc.
THE GABELLI SMALL CAP GROWTH 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
<TABLE>
<S> <C>
Mario J. Gabelli, CFA Robert J. Morrissey
CHAIRMAN AND CHIEF ATTORNEY-AT-LAW
INVESTMENT OFFICER MORRISSEY, HAWKINS & LYNCH
GABELLI ASSET MANAGEMENT INC.
Felix J. Christiana Karl Otto P|f-hl
FORMER SENIOR VICE PRESIDENT FORMER PRESIDENT
DOLLAR DRY DOCK SAVINGS BANK DEUTSCHE BUNDESBANK
Anthony J. Colavita Anthony R. Pustorino
ATTORNEY-AT-LAW CERTIFIED PUBLIC ACCOUNTANT
ANTHONY J. COLAVITA, P.C. PROFESSOR, PACE UNIVERSITY
Vincent D. Enright Anthonie C. van Ekris
FORMER SENIOR VICE PRESIDENT MANAGING DIRECTOR
AND CHIEF FINANCIAL OFFICER BALMAC INTERNATIONAL INC.
KEYSPAN ENERGY CORP.
John D. Gabelli
VICE PRESIDENT
GABELLI & COMPANY, INC.
OFFICERS
Mario J. Gabelli, CFA Bruce N. Alpert
PRESIDENT AND CHIEF VICE PRESIDENT AND TREASURER
INVESTMENT OFFICER
James E. McKee
SECRETARY
</TABLE>
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 Small Cap Growth Fund. It is not authorized for distribution to
prospective investors unless preceded or accompanied by an effective
prospectus.
- --------------------------------------------------------------------------------
[PICTURE GRAPHIC HERE]
THE
GABELLI
SMALL CAP
GROWTH
FUND
FIRST QUARTER REPORT
DECEMBER 31, 1998
