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The
Gabelli
Equity
Income
Fund
ANNUAL REPORT
SEPTEMBER 30, 1999
<PAGE>
The Gabelli Equity Income Fund
Annual Report
September 30, 1999(a)
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Morningstar Rated(TM) Gabelli Equity Income Fund 4 stars overall and for the
three-year period ended 9/30/99 among 3210 domestic equity funds, and for the
five-year period ended 9/30/99 among 2010 domestic equity funds.
To Our Shareholders,
Through most of the third quarter of 1999, stocks were slowly sinking
under the weight of a declining bond market, a tumbling dollar, and the prospect
of more aggressive Federal Reserve monetary policy tightening. Technology
stocks--the last bastion of strength in an otherwise weak market--finally
cracked in the last two weeks of the quarter, sending virtually all market
indices sharply lower.
Investment Performance
For the quarter ended September 30, 1999, The Gabelli Equity Income Fund's
(the "Fund") net asset value declined 3.39% after adjusting for the $0.06 per
share dividend paid on September 27, 1999. The Standard & Poor's ("S&P") 500
Index and Lipper Equity Income Fund Average declined 6.24% and 8.60%,
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 19.82% over the trailing twelve-month period. The S&P 500 Index and Lipper
Equity Income Fund Average rose 27.79% and 12.29%, respectively, over the same
twelve-month period.
For the five-year period ended September 30, 1999, the Fund's total return
averaged 18.12% annually versus average annual total returns of 25.03% and
15.81% for the S&P 500 Index and Lipper Equity Income Fund Average,
respectively. Since inception on January 2, 1992 through September 30, 1999, the
Fund had a cumulative total return of 202.91%, which equates to an average
annual total return of 15.37%.
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.
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Past performance is no guarantee of future results. Morningstar proprietary
ratings reflect historical risk adjusted performance as of September 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>
INVESTMENT RESULTS (a)(c)
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Calendar Quarter
----------------------------------------
1st 2nd 3rd 4th Year
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1999: Net Asset Value $16.39 $18.26 $17.58 -- --
Total Return .. (1.5)% 11.7% (3.4)% -- --
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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%
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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%
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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%
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1995: Net Asset Value $11.56 $11.99 $12.65 $12.84 $12.84
Total Return .. 8.5% 4.3% 6.1% 6.9% 28.3%
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1994: Net Asset Value $11.26 $11.08 $11.54 $10.72 $10.72
Total Return .. (2.2)% (0.8)% 4.9% (0.7)% 1.1%
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1993: Net Asset Value $11.35 $11.72 $12.15 $11.57 $11.57
Total Return .. 7.4% 3.8% 4.2% 1.5% 17.9%
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1992: Net Asset Value $10.19 $10.36 $10.40 $10.64 $10.64
Total Return .. 2.4%(b) 2.3% 1.1% 3.7% 9.8%(b)
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Average Annual Returns - September 30, 1999 (a)
1 Year ................................................................. 19.82%
5 Year ................................................................. 18.12%
Life of Fund (b) ....................................................... 15.37%
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(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.
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COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN THE GABELLI EQUITY
INCOME FUND, THE LIPPER EQUITY INCOME FUND AVERAGE AND THE S&P 500 INDEX
Gabelli Equity Lipper Equity
Income Fund Income Fund Average S&P 500 Index
----------- ------------------- -------------
1/2/92 $10,000 $10,000 $10,000
9/30/92 $10,580 $10,530 $10,250
9/30/93 $12,750 $12,415 $11,583
9/30/94 $13,171 $12,688 $12,011
9/30/95 $15,700 $15,226 $15,590
9/30/96 $18,320 $17,783 $18,755
9/30/97 $24,549 $23,865 $26,332
9/30/98 $25,285 $23,889 $28,728
9/30/99 $30,296 $26,825 $36,712
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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.
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Dividend History
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Rate Reinvestment
Payment (ex) Date Per Share Price
- ----------------- --------- -----
September 27, 1999 $0.06 $17.39
June 28, 1999 $0.05 $17.98
March 29, 1999 $0.06 $16.67
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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
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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
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December 27, 1996 $0.76 $14.28
September 30, 1996 $0.07 $13.81
June 28, 1996 $0.06 $13.54
March 31, 1996 $0.07 $13.47
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December 29, 1995 $0.68 $12.84
September 29,1995 $0.07 $12.65
June 30, 1995 $0.07 $11.99
March 31, 1995 $0.07 $11.56
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December 30, 1994 $0.74 $10.72
September 30, 1994 $0.08 $11.54
June 30, 1994 $0.09 $11.08
March 31, 1994 $0.06 $11.26
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December 31, 1993 $0.76 $11.57
September 30, 1993 $0.06 $12.15
June 30, 1993 $0.06 $11.72
March 31, 1993 $0.08 $11.35
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December 31, 1992 $0.15 $10.64
September 30, 1992 $0.07 $10.40
June 30, 1992 $0.06 $10.36
March 31, 1992 $0.05 $10.19
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3
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COMMENTARY
Too Much of a Good Thing?
In the third quarter of 1999, the U.S. economy continued to barrel along
at a pace that investors feared would lead to higher inflation. Paced by the
long anticipated recovery in Japan, Asian economies are perking up. Coupled with
prospects that European economies are gaining momentum, this has spawned concern
that synchronized global growth would further increase inflationary pressure
here at home. All of this positive global economic news was simply too much of a
good thing for the U.S. bond market, which continued to slide.
Long term, synchronized global growth is a blessing--we should all be
thinking in terms of Gross World Product ("GWP") rather than Gross Domestic
Product ("GDP"). However, in the short term it may put additional pressure on
the Fed to press down on the monetary brakes. Investors should view this as a
dose of cod liver oil--bitter medicine, but a tonic that will improve the long
term health of the economy and the stock market. Unfortunately, "Mr. Market"
often does not like to take his medicine and additional Fed interest rate hikes
and higher bond yields are not likely to improve his mood. So, even though third
quarter corporate earnings are likely to be quite strong, price/earnings ("P/E")
multiples (a function of investor psychology and interest rates) may continue to
contract, sending stocks even lower. The good news in this scenario would be the
return of Ben Graham's "margin of safety" to the market.
If the domestic economy begins to decelerate in the fourth quarter and the
Fed declares a monetary cease-fire, "Mr. Market" may be in a better mood.
Although P/E multiples are not likely to expand, they may stabilize, allowing
earnings to rally stocks. However, with equity valuations still at relatively
lofty levels, advances will engender additional speculative risks.
The Dollar in Limbo--How Low Can It Go?
As we write, the dollar has hit a four-year low against the yen. This is
another good news/bad news situation. A cheaper dollar benefits U.S. exporters
and ultimately would help reduce trade deficits, which have been running at
extraordinarily high levels. It also bolsters dollar denominated earnings from
the international operations of U.S. companies. However, over the short term, it
actually increases dollar calculated trade deficits. Perhaps most importantly, a
lower dollar is potentially inflationary, because the prices of imported
products that U.S. consumers treasure will move higher. If the American consumer
is willing to pay these higher prices for Toyota cars and trucks, Sony big
screen televisions, and Sega video games, it will soon be reflected in the
Consumer Price Index ("CPI"). This leads us to another important question...
Will Fatigue Hit the American Consumer?
High employment and the "wealth effect" of a rising housing and stock
market have buoyed consumer confidence. Discretionary income has risen as a
result of depressed energy prices, low mortgage rates, and rising wages. If the
domestic economy does slow down, consumers may become more concerned about job
security. When investors receive third quarter statements from their brokers,
money managers and mutual funds, they will realize that their net worth has been
trimmed. Americans are paying more at the pump for gasoline and their home
heating bills will be significantly higher this winter. Variable rate mortgage
payments will increase and new fixed rate mortgages are higher. So,
4
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consumers will not be able to raise spending money by leveraging real estate
assets--no more "take the home mortgage from $100,000 to $150,000 with the same
monthly payments and pocket the difference". As aforementioned, the prices for
imported goods are increasing. Will all this be enough to cause the American
consumer to tighten the purse strings? Or, will a significant tax cut--the
Republicans are running on the "3 Fs" (Faith, Finances, and Family)--embolden
the American consumer and keep the economic wheels moving here and abroad?
This Quarter's Scorecard
This quarter our Top Twenty performance list included a water utility
(United Water Resources--which is being taken over by France's Suez Lyonnaise),
an independent broadcaster (Granite Broadcasting), a global bank (Commerzbank),
and a breakfast cereal maker (Kellogg). Our poor performers also came from an
eclectic group of industries, including waste disposal (Waste Management),
publishing (Reader's Digest), industrials (Tenneco), and aviation suppliers
(GenCorp).
In general, our utility investments performed well, as consolidation in
the industry gained momentum. We have seen twenty-one transactions in the
utilities industry from June 1 to September 30. Since utilities represent the
single largest industry group concentration in the portfolio, we want to share
excerpts from an article we prepared for Cigar Aficionado magazine discussing
what we believe is now a very exciting investment sector.
"These Are Not Your Father's Utility Stocks"
The Good Old Days
In the glory days of the 1950s, utilities were growth monopolies. To
satisfy the needs of a rapidly expanding post-war America, utilities companies
poured money into new plant and equipment. This new investment was baked into
the rate base--the prices utilities were allowed to charge their customers. Due
to economies of scale, actual operating costs were coming down rapidly.
Eventually, rates were adjusted lower, but the lag time allowed utilities to
increase earnings and dividends substantially while still pleasing consumers and
regulators who saw rates trending down. This was the best of all possible worlds
for utilities companies and utilities stock investors.
The Bad Old Days
Beginning in the mid-1960s, the industry began encountering problems. A
new, environmentally sensitive America forced utilities to invest heavily in
pollution control equipment and rates started to creep up. The oil embargo hit
in 1973, and rates went through the roof. Just when things looked like they
couldn't get worse, the Three Mile Island nuclear plant disaster aborted
investment in nuclear facilities, stranding costs and leading to a further round
of substantial rate increases. Utilities were still increasing earnings per
share, but the quality of those earnings was deteriorating. Most utilities were
still increasing dividends every year, but had to borrow money to do so. For
most of the 1970s utilities stocks greatly under-performed the broad market
averages.
Utilities stocks regained momentum in the 1980s, but it was declining
interest rates rather than improving industry fundamentals that buoyed the
group. In fact, annual utilities earnings and dividend
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growth declined on average to 0% to 2% over the decade. Many utilities had to
cut dividends because payouts were too high relative to flagging earnings, and
troubled utilities (mostly nuclear) frequently had to omit dividends for a time.
As we entered the 1990s, utilities had gone from being legitimate growth stocks,
to "safe haven" yield plays, to a group that no longer offered growth or even
secure yields.
The New Era
In the early 1990s, the utilities industry started to change once again.
As American industrial companies became more competitive in global markets, they
put pressure on suppliers to cut costs. Industrial customers came to view
electric and gas utilities as just another supplier, and started agitating for
change. Residential customers, forced to pay high and rising prices to
mismanaged monopolies, were screaming for relief. State governments began to
respond by changing the regulatory rules. Utility rates, which historically had
been set based on costs, were now often frozen or capped. Utilities could no
longer invest at will and be guaranteed a respectable rate of return. They were
forced to cut costs. In return, they would be compensated by being allowed to
keep a portion of cost savings rather than rebating them immediately to
customers in the form of lower rates.
Leaner is Better
There is a lot of fat in the overhead of a typical utility, a legacy of
cost based rate regulation, and this fat can be cut 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 only needs one headquarters, one CEO,
one CFO, and so on. Two utilities operating in the same state can eliminate one
regulatory department. There can also be some 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
them under more pressure to improve their rates by cutting costs.
Some consultants and investment bankers active in utilities mergers
believe the optimal size for a utilities company is 5 to 6 million customers. If
this is the ideal size, then the ideal number of electric utilities in the U.S.
is about 30. Yet, there are well over 80 investor-owned utilities in the U.S.
today, plus a large number of gas distribution companies, and a few interstate
gas pipelines and water companies. In addition, many electric utilities own or
are anxious to buy gas companies in order to be full energy service providers.
Buying a gas company that overlaps the electric utility's service territory is
particularly attractive to the electric company since even more costs can be
cut.
Takeout Utilities
There are two ways for investors to play "new era" utilities stocks. They
can invest in the likely consolidators--those companies committed to cutting
costs and growing earnings and dividends through acquisition. Or, they may
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 big factor. If
the optimum size is 5 to 6 million customers, utilities with sound balance
sheets that have two to three million customers can realistically acquire
another two or three million over time to attain optimal mass. For the small-cap
and mid-cap utilities with a million customers or less, however, it's just too
late. Utility mergers take a long
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time to close and then a long time to digest, and there isn't enough time to
consolidate your way into the top tier unless you are already halfway there. A
small or mid size utility may acquire a smaller utility or do a merger of equals
along the way. Ultimately, however, most of the small and medium size utilities
are destined to be acquired by bigger companies.
The type of market a utility company serves may also help investors
identify "takeout" utilities. One might assume that small utilities serving
faster growth markets would be the most likely targets. However, these stocks
are already fully valued.
We believe the best takeout opportunities are small companies in more
mature markets that are priced much more reasonably, allowing bigger 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.
Eastern Enterprises (EFU - $46.4375 - NYSE) owns and operates Boston Gas
Company, Colonial Gas Company, Essex Gas Company, Midland Enterprises, and
ServicEdge Partners. Upon completion of the pending merger with EnergyNorth,
Eastern will serve over 800,000 residential, commercial and industrial natural
gas customers in Massachusetts and New Hampshire. 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 is the largest unregulated provider
of residential HVAC equipment installation and service to customers in
Massachusetts.
Exxon Corp. (XON - $75.9375 - NYSE), founded in 1882 as Standard Oil of New
Jersey, has an equity market value exceeding $175 billion, making the company
the world's largest, publicly-owned integrated oil company engaged in the
exploration, production, manufacture, transportation and sale of crude oil,
natural gas and petroleum products. Downstream operations are conducted in more
than 75 countries around the world. Exxon's planned merger with Mobil (MOB -
$100.75 - NYSE) would produce a organization with a market capitalization of
$270 billion. Dividends have been paid by Exxon since 1882 and have been
increased annually since 1983.
Gallaher Group plc (GLH - $27.1875 - NYSE) is a leading regional manufacturer of
tobacco products. The company, which had sales of (pound)4.3 billion in 1998, is
the market leader in the United Kingdom and the Republic of Ireland. Gallaher
also has operations in Western Europe, the former Soviet Union and the Pacific
Rim. This U.K.-based company was spun-off from American Brands (now Fortune
Brands) in May 1997. Its brands include Benson & Hedges and Silt Cut in the U.K.
and Sovereign in the former Soviet Union. The company's ordinary shares trade on
the London Stock Exchange and the ADRs, each of which represent four ordinary
shares, trade on the New York Stock Exchange.
GTE Corp. (GTE - $76.875 - 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
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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. In September 1999, Bell Atlantic and GTE
announced a $70 billion wireless joint venture with Vodafone AirTouch by
contributing BEL'S and GTE's wireless assets to the new partnership.
Lone Star Industries Inc. (LCE - $49.875 - NYSE), incorporated in 1919, is a
cement and ready-mix concrete company with operations in the midwestern and
southern United States. Lone Star's cement operations consist of five portland
cement plants, a slag cement grinding facility in New Orleans and a 25% interest
in Kosmos Cement, a partnership which owns and operates two portland cement
plants in Kentucky and Pennsylvania. The company's ready-mix concrete business
owns and operates several facilities in the Memphis, Tennessee area.
Proposal to Shareholders
The Fund's Board of Directors has asked shareholders to consider a
proposal to amend the Fund's Articles of Incorporation to permit the Fund to
offer additional classes of shares. We believe that this proposal would benefit
the shareholders, and we urge you to give the proposal your careful
consideration.
The proposal was first introduced at a Special Meeting of Shareholders
held on May 18, 1999. This meeting was adjourned several times until July 21,
1999. Although the proposal received overwhelming support, the Fund did not
receive the required majority of outstanding shares voting in favor of the
proposal. The Board of Directors has set a new meeting on December 1, 1999 to
reconsider this proposal to permit the Fund to offer additional classes of
shares.
For existing shareholders we intend to remain a no-load fund. At the same
time, mutual fund distributors are increasingly employing a variety of different
types and combinations of sales charge arrangements for different classes of
shares that are targeted to the needs of particular types of investors. Your
Board of Directors believes that the Fund should be able to provide the
distribution alternatives and investment flexibility provided by other similarly
situated funds that offer multiple classes of shares. We believe that approval
of the proposal to permit the Fund to offer additional classes of shares will
enhance the potential for the Fund to attract additional investors in a manner
that could provide additional benefits for all investors in the Fund. Again, to
repeat, approval of this proposal will not diminish the ability of existing and
future shareholders to purchase and redeem shares at net asset value.
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.
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In Conclusion
Higher yielding stocks demonstrated their defensive characteristics as
equities sold off in the third quarter of 1999. Going forward, if the Federal
Reserve continues to deploy the monetary brakes and bond yields trend higher,
stocks may continue to struggle. We believe the Fund's yield will continue to
assist in weathering any extended market storm. We are also confident that
ongoing consolidation in the utility industry will buoy returns if the market
turns lower or settles into a trading range.
The Fund's daily net asset value is available in the financial press and
each evening after 6:00 PM (Eastern Time) by calling 1-800-GABELLI
(1-800-422-3554). The Fund's Nasdaq symbol is GABEX. Please call us during the
business day for further information.
Sincerely,
/s/ Mario J. Gabelli /s/ James Foung
Mario J. Gabelli, CFA James Foung, CFA
Portfolio Manager and Associate Portfolio Manager
Chief Investment Officer
October 25, 1999
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Top Ten Holdings
September 30, 1999
------------------
Eastern Enterprises Lone Star Industries Inc.
BCE Inc. GTE Corp.
Gallaher Group plc Texaco Inc.
Wicor Inc. Sprint Corp.
Southwest Gas Corp. Exxon Corp.
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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.
9
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The Gabelli Equity Income Fund
Portfolio of Investments -- September 30, 1999
================================================================================
Market
Shares Cost Value
------ ---- -----
COMMON STOCKS -- 88.8%
Aerospace -- 1.8%
18,000 Boeing Co. ..................... $ 711,194 $ 767,250
12,000 Northrop Grumman Corp. ......... 841,732 762,750
1,000 Raytheon Co., Cl. A ............ 27,785 48,500
2,000 Rockwell International Corp. ... 41,530 105,000
------------ ------------
1,622,241 1,683,500
------------ ------------
Automotive -- 1.1%
4,500 Ford Motor Co. ................. 70,226 225,844
12,500 General Motors Corp. ........... 401,922 786,719
------------ ------------
472,148 1,012,563
------------ ------------
Automotive: Parts and Accessories -- 2.2%
20,000 Dana Corp. ..................... 823,123 742,500
6,000 Ethyl Corp. .................... 43,487 23,250
20,000 GenCorp Inc. ................... 327,212 366,250
30,000 Genuine Parts Co. .............. 801,471 796,875
4,000 Meritor Automotive Inc. ........ 82,200 83,500
------------ ------------
2,077,493 2,012,375
------------ ------------
Aviation: Parts and Services -- 1.7%
25,000 Barnes Group Inc. .............. 449,017 501,562
19,000 Curtiss-Wright Corp. ........... 279,092 612,750
8,000 United Technologies Corp. ...... 226,617 474,500
------------ ------------
954,726 1,588,812
------------ ------------
Broadcasting -- 0.2%
17,000 Granite Broadcasting Corp. ..... 171,154 189,125
------------ ------------
Building and Construction -- 2.2%
40,000 Lone Star Industries Inc. ...... 1,987,000 1,995,000
------------ ------------
Business Services -- 1.2%
7,000 Donnelley (R.H.) Corp. ......... 79,054 130,375
4,000 Dun & Bradstreet Corp. ......... 85,317 119,500
1,000 Imation Corp.+ ................. 16,753 31,000
2,000 IMS Health Inc. ................ 28,208 45,625
1,500 Landauer Inc. .................. 25,747 37,687
20,000 Nielsen Media Research Inc. .... 693,271 743,750
------------ ------------
928,350 1,107,937
------------ ------------
Communications Equipment -- 0.1%
1,000 Motorola Inc. .................. 27,262 88,000
------------ ------------
Computer Software and Services -- 0.5%
3,500 International Business
Machines Corp. ............... 44,450 424,812
------------ ------------
Consumer Products -- 7.1%
2,000 Avon Products Inc. ............. 50,475 49,625
6,000 Clorox Co. ..................... 247,075 229,500
10,000 Eastman Kodak Co. .............. 601,984 754,375
2,000 Fortune Brands Inc. ............ 55,490 64,500
75,000 Gallaher Group plc, ADR ........ 1,614,558 2,039,062
5,000 General Cigar Holdings Inc.,
Cl. B+ (b) ................... 44,132 33,750
15,000 Gillette Co. ................... 511,050 509,063
5,500 Maytag Corp. ................... 200,556 183,219
25,000 National Presto Industries Inc. 1,000,907 965,625
48,000 Philip Morris Companies Inc. ... 1,968,365 1,641,000
3,000 Ralston Purina Group ........... 88,337 83,437
200 Rothmans Inc. .................. 27,296 23,131
------------ ------------
6,410,225 6,576,287
------------ ------------
Consumer Services -- 0.5%
30,000 Rollins Inc. ................... 580,657 463,125
------------ ------------
Diversified Industrial -- 2.9%
30,000 GATX Corp. ..................... 891,844 931,875
1,000 General Electric Co. ........... 23,481 118,562
5,000 Honeywell Inc. ................. 214,046 556,563
3,000 Minnesota Mining &
Manufacturing Co. ............ 246,962 288,187
25,000 Tenneco Inc. ................... 692,656 425,000
18,000 Thomas Industries Inc. ......... 141,892 336,375
1,000 Trinity Industries Inc. ........ 26,570 30,875
------------ ------------
2,237,451 2,687,437
------------ ------------
Energy and Utilities: Electric -- 6.0%
7,000 Cilcorp Inc. ................... 430,037 453,687
10,000 CMP Group Inc. ................. 267,437 263,750
15,000 Conectiv Inc. .................. 326,993 294,375
5,000 DPL Inc. ....................... 95,312 88,125
120,000 El Paso Electric Co.+ .......... 966,039 1,080,000
15,000 Florida Progress Corp. ......... 657,011 693,750
4,000 FPL Group Inc. ................. 192,250 201,500
10,000 New England Electric System .... 483,465 518,750
95,000 Niagara Mohawk
Holdings Inc. ................ 1,010,837 1,466,563
8,000 PacifiCorp ..................... 158,700 161,000
8,000 St. Joseph Light &
Power Co. .................... 165,598 165,000
2,000 TNP Enterprises Inc. ........... 76,475 77,875
2,000 United Illuminating Co. ........ 91,288 96,750
------------ ------------
4,921,442 5,561,125
------------ ------------
Energy and Utilities: Integrated -- 5.0%
16,000 Burlington Resources Inc. ...... 661,765 588,000
10,000 Central & South West Corp. ..... 267,563 211,250
6,000 Central Hudson Gas &
Electric Corp. ............... 251,613 236,250
41,270 Citizens Utilities Co., Cl. B+ . 428,235 466,867
22,000 Energy East Corp. .............. 474,584 522,500
42,200 Florida Public Utilities Co. ... 640,304 775,425
42,000 Nstar .......................... 1,001,875 1,627,500
5,000 Public Services Enterprise
Group Inc. ................... 164,125 193,125
------------ ------------
3,890,064 4,620,917
------------ ------------
See accompanying notes to financial statements.
10
<PAGE>
The Gabelli Equity Income Fund
Portfolio of Investments -- September 30, 1999
================================================================================
Market
Shares Cost Value
------ ---- -----
COMMON STOCKS (Continued)
Energy and Utilities: Natural Gas -- 12.0%
55,000 AGL Resources Inc. ............. $ 1,037,470 $ 893,750
74,961 Eastern Enterprises ............ 2,601,989 3,480,991
10,000 Fall River Gas Co. ............. 160,250 209,375
38,000 KeySpan Energy Corp. ........... 1,073,301 1,087,750
4,000 Peoples Energy Corp. ........... 138,275 140,750
12,000 Piedmont Natural Gas Co. ....... 403,475 363,750
4,000 Providence Energy Corp. ........ 84,825 111,000
2,000 Public Service Co. of
North Carolina ............... 59,100 62,000
1,050 Southern Union Co.+ ............ 20,113 19,950
75,000 Southwest Gas Corp. ............ 1,260,525 2,020,312
70,000 Wicor Inc. ..................... 1,711,419 2,034,375
15,000 Yankee Energy System Inc. ...... 617,563 640,313
------------ ------------
9,168,305 11,064,316
------------ ------------
Energy and Utilities: Oil -- 8.5%
13,000 Atlantic Richfield Co. ......... 703,893 1,152,125
13,000 BP Amoco plc, ADR .............. 285,513 1,440,563
10,000 Chevron Corp. .................. 312,562 887,500
1,000 Conoco Inc., Cl. A ............. 23,000 27,750
6,000 Elf Aquitaine SA ............... 299,550 549,750
58,000 ENI SpA ........................ 304,221 363,569
22,000 Exxon Corp. .................... 642,933 1,670,625
28,000 Texaco Inc. .................... 993,425 1,767,500
------------ ------------
3,565,097 7,859,382
------------ ------------
Energy and Utilities: Services -- 0.7%
16,000 Halliburton Co. ................ 335,656 656,000
------------ ------------
Energy and Utilities: Water -- 1.3%
35,000 United Water Resources Inc. .... 804,188 1,141,875
------------ ------------
Entertainment -- 0.2%
4,000 Viacom Inc., Cl. A+ ............ 61,100 173,000
------------ ------------
Environmental Services -- 0.5%
25,000 Waste Management Inc. .......... 566,803 481,250
------------ ------------
Equipment and Supplies -- 2.5%
3,000 Caterpillar Inc. ............... 35,181 164,438
2,000 Cooper Industries Inc. ......... 84,754 93,500
25,000 Deere & Co. .................... 395,915 967,187
2,000 EG&G Inc. ...................... 34,600 79,625
1,000 Ingersoll-Rand Co. ............. 25,117 54,938
15,000 Mark IV Industries Inc. ........ 219,187 296,250
1,500 Minerals Technologies Inc. ..... 37,938 72,844
18,000 Smith (A.O.) Corp., Cl. B ...... 401,225 544,500
1,000 Union Carbide Corp. ............ 16,675 56,812
------------ ------------
1,250,592 2,330,094
------------ ------------
Financial Services -- 13.5%
3,159 Aegon NV, ADR .................. 111,502 273,254
12,000 American Express Co. ........... 256,084 1,615,500
11,000 Argonaut Group Inc. ............ 275,975 276,375
1,500 Banco Popular Espanol .......... 122,662 103,525
20,000 Banco Santander SA, ADR ........ 72,181 206,250
2,000 Banco Santiago ................. 29,250 40,000
9,052 Bank of America Corp. .......... 167,810 504,083
22,000 Bank One Corp. ................. 796,974 765,875
3,000 Banque Nationale de Paris ...... 212,719 239,297
3,000 Block (H&R) Inc. ............... 131,587 130,313
8,000 Chase Manhattan Corp. .......... 458,313 603,000
31,000 Commerzbank AG, ADR ............ 678,161 1,216,750
20,000 Deutsche Bank AG, ADR .......... 1,015,262 1,385,000
3,000 Dresdner Bank AG, ADR .......... 107,625 141,696
2,000 Fidelity National Corp. ........ 22,957 16,250
35,000 First Union Corp. .............. 1,471,033 1,244,687
20,000 Mellon Bank Corp. .............. 598,279 675,000
1,500 Merrill Lynch & Co. ............ 68,700 100,781
2,000 MONY Group Inc. ................ 47,000 57,750
7,500 Morgan (J.P.) & Co. Inc. ....... 461,044 856,875
3,000 Municipal Mortgage &
Equity LLC ................... 60,488 60,750
3,000 Northern Trust Co. ............. 60,300 250,500
3,000 Orion Capital Corp. ............ 143,213 142,125
3,000 Pioneer Group Inc.+ ............ 66,204 45,000
3,000 Republic New York Corp. ........ 191,588 184,312
2,000 St. Paul Companies ............. 59,413 55,000
6,000 Sterling Bancorp ............... 135,550 103,500
12,000 SunTrust Banks Inc. ............ 251,737 789,000
4,000 U.S. Trust Corp. ............... 47,394 321,500
------------ ------------
8,121,005 12,403,948
------------ ------------
Food and Beverage -- 1.9%
4,000 Bestfoods Inc. ................. 192,316 194,000
3,402 Chock Full o'Nuts Corp. ........ 27,491 36,997
6,000 Coca-Cola Amatil Ltd., ADR ..... 63,363 42,134
12,000 Coca-Cola Beverages plc+ ....... 28,750 24,003
1,000 Coca-Cola Co. .................. 48,675 48,062
3,000 Corn Products
International Inc. ........... 86,909 91,313
10,000 Diageo plc, ADR ................ 453,102 414,375
6,000 Heinz (H.J.) Co. ............... 289,963 258,000
15,000 Kellogg Co. .................... 453,164 561,562
1,000 Quaker Oats Co. ................ 34,175 61,875
------------ ------------
1,677,908 1,732,321
------------ ------------
Health Care -- 1.3%
3,000 Bristol-Myers Squibb Co. ....... 193,463 202,500
1,000 Glaxo Wellcome plc, ADR ........ 54,024 52,000
3,000 Johnson & Johnson .............. 57,690 275,625
10,000 Pharmacia & Upjohn Inc. ........ 290,500 496,250
3,000 SmithKline Beecham
plc, ADR ..................... 184,980 172,875
------------ ------------
780,657 1,199,250
------------ ------------
Metals and Mining -- 0.3%
15,000 Freeport-McMoRan Copper &
Gold Inc., Cl. B ............. 272,350 233,438
------------ ------------
See accompanying notes to financial statements.
11
<PAGE>
The Gabelli Equity Income Fund
Portfolio of Investments -- September 30, 1999
================================================================================
Market
Shares Cost Value
------ ---- -----
COMMON STOCKS (Continued)
Publishing -- 1.8%
10,000 Dow Jones & Co. Inc. ........... $ 463,770 $ 533,750
3,000 Harcourt General Inc. .......... 136,775 124,875
5,000 McGraw-Hill Companies Inc. ..... 152,667 241,875
30,000 Reader's Digest Association
Inc., Cl. B .................. 808,001 791,250
------------ ------------
1,561,213 1,691,750
------------ ------------
Real Estate -- 0.0%
2,500 Griffin Land & Nurseries
Inc.+ ........................ 11,716 27,031
------------ ------------
Retail -- 0.1%
2,000 Sears, Roebuck & Co. ........... 51,242 62,750
------------ ------------
Satellite -- 0.2%
6,767 COMSAT Corp. ................... 133,861 200,472
------------ ------------
Specialty Chemicals -- 2.9%
5,000 Dexter Corp. ................... 158,443 186,562
2,000 du Pont de Nemours (E.I.)
and Co. ...................... 65,500 121,750
7,500 Ferro Corp. .................... 138,500 159,844
8,000 Grace (W.R.) & Co.+ ............ 91,915 128,500
8,000 Great Lakes Chemical Corp. ..... 302,087 304,500
12,000 Hoechst AG, ADR ................ 460,144 522,000
1,500 IMC Global Inc. ................ 31,075 21,844
33,000 Monsanto Co. ................... 1,209,123 1,177,687
------------ ------------
2,456,787 2,622,687
------------ ------------
Telecommunications -- 8.6%
3,000 Alltel Corp. ................... 71,900 211,125
1,000 AT&T Corp. ..................... 37,325 43,500
55,000 BCE Inc. ....................... 1,027,397 2,739,688
13,500 BCT. Telus
Communications Inc. .......... 238,092 281,499
4,500 BCT. Telus
Communications Inc., Cl. A ... 79,364 92,608
4,608 Bell Atlantic Corp. ............ 117,619 310,176
1,500 British Telecommunications
plc, ADR ..................... 84,309 232,406
15,000 Cable & Wireless HKT Ltd.,
ADR .......................... 224,921 326,250
15,000 Cable & Wireless plc, ADR ...... 417,616 496,875
7,000 Deutsche Telekom AG, ADR ....... 149,708 292,688
1,000 France Telecom SA, ADR ......... 34,487 87,063
24,000 GTE Corp. ...................... 811,200 1,845,000
4,000 SBC Communications Inc. ........ 75,916 204,250
3,000 Telecom Italia SpA, ADR ........ 93,240 258,562
9,243 Telefonica SA, ADR ............. 126,076 443,664
1,000 US West Inc. ................... 24,839 57,063
------------ ------------
3,614,009 7,922,417
------------ ------------
TOTAL COMMON STOCKS 60,757,152 81,812,996
------------ ------------
PREFERRED STOCKS -- 5.6%
Aviation: Parts and Services -- 0.3%
2,000 Coltec Capital Trust, Pfd. ..... 86,000 96,500
3,000 Coltec Capital Trust, Pfd. (a) . 129,000 122,250
------------ ------------
215,000 218,750
------------ ------------
Cable -- 0.6%
4,000 MediaOne Group Inc.,
Cv. Pfd. D ................... 206,033 540,000
------------ ------------
Diversified Industrial -- 0.1%
2,000 WHX Corp., Cv. Pfd. Ser. B ..... 75,037 66,875
------------ ------------
Energy and Utilities -- 0.9%
17,000 Citizens Utilities Co.,
5.00% Cv. Pfd. ............... 816,716 845,750
------------ ------------
Entertainment -- 0.0%
1,000 Metromedia International
Group Inc., Cv. Pfd. ......... 35,025 24,625
------------ ------------
Equipment and Supplies -- 0.6%
6,000 Sequa Corp.,
$5.00 Cv. Pfd. ............... 464,250 576,000
------------ ------------
Metals and Mining -- 0.1%
5,000 Freeport-McMoRan
Copper & Gold Inc.,
7.00% Cv. Pfd. ............... 106,500 88,125
------------ ------------
Paper and Forest Products -- 1.1%
20,000 Sealed Air Corp.,
$2.00 Cv. Pfd. ............... 831,527 1,015,000
------------ ------------
Telecommunications -- 1.9%
22,000 Sprint Corp.,
$2.63 Cv. Pfd. ............... 817,628 1,724,250
------------ ------------
TOTAL PREFERRED STOCKS ......... 3,567,716 5,099,375
------------ ------------
Principal
Amount
------
CORPORATE BONDS -- 2.5%
Automotive: Parts and Accessories -- 0.5%
$ 500,000 Standard Motor Products Inc.,
Sub. Deb. Cv.
6.75%, 07/15/09 .............. 500,460 440,313
------------ ------------
Business Services -- 0.1%
100,000 BBN Corp., Sub. Deb. Cv.
6.00%, 04/01/12 .............. 97,196 96,750
------------ ------------
Entertainment -- 0.1%
150,000 USA Networks Inc.,
Sub. Deb. Cv.
7.00%, 07/01/03 .............. 136,411 145,312
------------ ------------
See accompanying notes to financial statements.
12
<PAGE>
The Gabelli Equity Income Fund
Portfolio of Investments -- September 30, 1999
================================================================================
Principal Market
Amount Cost Value
------ ---- -----
CORPORATE BONDS (Continued)
Equipment and Supplies -- 0.9%
$ 356,000 Kollmorgen Corp.,
Sub. Deb. Cv.
8.75%, 05/01/09 .............. $ 308,763 $ 360,005
500,000 Mark IV Industries Inc.,
Sub. Deb. Cv.
4.75%, 11/01/04 .............. 443,633 432,500
------------ ------------
752,396 792,505
------------ ------------
Home Furnishings -- 0.5%
700,000 Pillowtex Corp.,
Sub. Deb. Cv.
6.00%, 03/15/12 .............. 553,515 458,500
------------ ------------
Hotels and Gaming -- 0.3%
300,000 Hilton Hotels Corp.,
Sub. Deb. Cv.
5.00%, 05/15/06 .............. 264,766 243,000
------------ ------------
Publishing -- 0.1%
100,000 News America Holdings Inc.,
Sub. Deb. Cv.
Zero Cpn., 03/31/02 .......... 82,705 137,000
------------ ------------
TOTAL CORPORATE BONDS .......... 2,387,449 2,313,380
------------ ------------
U.S. GOVERNMENT OBLIGATIONS -- 4.6%
4,274,000 U.S. Treasury Bills,
4.57% to 4.76%++,
due 10/07/99 to 11/26/99 ..... 4,246,974 4,246,974
------------ ------------
TOTAL
INVESTMENTS -- 101.5% ........ $ 70,959,291 $ 93,472,725
============
Other Assets and
Liabilities (Net) -- (1.5)% .. (1,361,863)
------------
NET ASSETS -- 100.00%
(5,240,864 shares outstanding) $ 92,110,862
============
NET ASSET VALUE,
Offering and Redemption
Price Per Share .............. $17.58
============
- ----------------
*For Federal tax purposes:
Aggregate cost ................ $ 70,981,864
============
Gross unrealized appreciation $ 24,741,448
Gross unrealized depreciation (2,250,587)
------------
Net unrealized appreciation $ 22,490,861
============
Settlement Unrealized
Date Depreciation
------------ ------------
FORWARD FOREIGN
EXCHANGE CONTRACTS
2,808,830(c) Sold Hong Kong Dollars
in exchange for
USD 356,586 08/24/00 $ (1,897)
------------
- ----------
(a) Security exempt from registration under Rule 144A of the Securities Act
of 1933, as amended. These securities may be resold in transactions
exempt from registration, normally to qualified institutional buyers. At
September 30, 1999, the market value of Rule 144A securities amounted to
$122,250 or 0.1% of total net assets.
(b) Security fair valued under procedures established 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.
USD -- U.S. Dollars.
See accompanying notes to financial statements.
13
<PAGE>
The Gabelli Equity Income Fund
Statement of Assets and Liabilities
September 30, 1999
================================================================================
Assets:
Investments, at value (Cost $70,959,291) .................. $93,472,725
Cash ...................................................... 108,514
Dividends and interest receivable ......................... 247,484
Receivable for investments sold ........................... 652,780
Receivable for capital shares sold ........................ 58,527
-----------
Total Assets .............................................. 94,540,030
-----------
Liabilities:
Payable for investments purchased ......................... 1,994,088
Payable for capital shares redeemed ....................... 111,183
Payable for investment advisory fees ...................... 73,449
Payable for distribution fees ............................. 18,881
Variation margin on futures contracts ..................... 128,475
Distributions payable ..................................... 20,778
Other accrued expenses .................................... 82,314
-----------
Total Liabilities ......................................... 2,429,168
-----------
Net Assets, applicable to 5,240,864
shares outstanding ...................................... $92,110,862
===========
Net Assets consist of:
Capital stock, at par value ............................... $ 5,241
Additional paid-in capital ................................ 59,234,693
Accumulated net investment income ......................... 33,249
Accumulated net realized gain
on investments, futures contracts and
foreign currency transactions ........................... 10,326,142
Net unrealized appreciation
on investments, futures contracts and
foreign currency transactions ........................... 22,511,537
-----------
Total Net Assets .......................................... $92,110,862
===========
Net Asset Value, offering and redemption
price per share ($92,110,862 / 5,240,864
shares outstanding; unlimited number of
shares authorized of $0.001 par value) .................. $ 17.58
===========
Statement of Operations
For the Year Ended September 30, 1999
================================================================================
Investment Income:
Dividends (net of foreign taxes of $9,050) ................. $ 2,368,081
Interest ................................................... 168,599
-----------
Total Investment Income .................................... 2,536,680
-----------
Expenses:
Investment advisory fees ................................... 865,741
Distribution fees .......................................... 217,480
Shareholder services fees .................................. 107,142
Legal and audit fees ....................................... 44,900
Shareholder communications expenses ........................ 42,433
Custodian fees ............................................. 37,420
Directors' fees ............................................ 23,968
Registration fees .......................................... 22,428
Miscellaneous expenses ..................................... 29,535
-----------
Total Expenses ............................................. 1,391,047
-----------
Net Investment Income ...................................... 1,145,633
-----------
Net Realized and Unrealized Gain
on Investments:
Net realized gain on investments, futures contracts
and foreign currency transactions ........................ 10,754,249
Net change in unrealized appreciation on
investments, futures contracts
and foreign currency transactions ........................ 3,127,043
-----------
Net realized and unrealized gain on
investments, futures contracts
and foreign currency transactions ........................ 13,881,292
-----------
Net increase in net assets resulting
from operations .......................................... $15,026,925
===========
Statement of Changes in Net Assets
================================================================================
<TABLE>
<CAPTION>
Year Ended Year Ended
September 30, September 30,
1999 1998
----------------------------
<S> <C> <C>
Operations:
Net investment income .................................... $ 1,145,633 $ 1,048,086
Net realized gain on investments, futures contracts
and foreign currency transactions ...................... 10,754,249 5,867,346
Net change in unrealized appreciation (depreciation)
on investments, futures contracts and foreign
currency transactions .................................. 3,127,043 (4,965,383)
------------ ------------
Net increase in net assets resulting from operations ..... 15,026,925 1,950,049
------------ ------------
Distributions to shareholders:
Net investment income .................................... (1,106,687) (1,221,353)
Net realized gain on investments ......................... (5,973,881) (7,160,971)
------------ ------------
Total distributions to shareholders ...................... (7,080,568) (8,382,324)
------------ ------------
Capital share transactions:
Net increase in net assets from capital share transactions 4,495,622 12,370,942
------------ ------------
Net increase in net assets ............................... 12,441,979 5,938,667
Net Assets:
Beginning of period ...................................... 79,668,883 73,730,216
------------ ------------
End of period ............................................ $ 92,110,862 $ 79,668,883
============ ============
</TABLE>
See accompanying notes to financial statements.
14
<PAGE>
The Gabelli Equity Income Fund
Notes to Financial Statements
================================================================================
1. Organization. The Gabelli Equity Income Fund (the "Fund"), a series of
Gabelli Equity Series Funds, Inc. (the "Corporation"), was organized on July 25,
1991 as a Maryland corporation. The Fund is a diversified, open-end management
investment company registered under the Investment Company Act of 1940, as
amended (the "1940 Act"), and one of two separately managed portfolios
(collectively, the "Portfolios") of the Corporation. The Fund's primary
objective is to seek a high level of total return with an emphasis on income.
The Fund commenced investment operations on January 2, 1992.
2. Significant Accounting Policies. The preparation of financial statements in
accordance with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts and disclosures
in the financial statements. Actual results could differ from those estimates.
The following is a summary of significant accounting policies followed by the
Fund in the preparation of its financial statements.
Security Valuation. Portfolio securities listed or traded on a nationally
recognized securities exchange, quoted by the National Association of Securities
Dealers Automated Quotations, Inc. ("Nasdaq") or traded on foreign exchanges are
valued at the last sale price on that exchange as of the close of business on
the day the securities are being valued (if there were no sales that day, the
security is valued at the average of the closing bid and asked prices or, if
there were no asked prices quoted on that day, then the security is valued at
the closing bid price on that day, except for open short positions, which are
valued at the last asked price). All other portfolio securities for which
over-the-counter market quotations are readily available are valued at the
latest average of the bid and asked prices. Portfolio securities traded on more
than one national securities exchange or market are valued according to the
broadest and most representative market, as determined by Gabelli Funds, LLC
(the "Adviser"). Securities and assets for which market quotations are not
readily available are valued at their fair value as determined in good faith
under procedures established by and under the general supervision of the Board
of Directors. Short term debt securities with remaining maturities of 60 days or
less are valued at amortized cost, unless the Directors determine such does not
reflect the securities' fair value, in which case these securities will be
valued at their fair value as determined by the Directors. Debt instruments
having a maturity greater than 60 days are valued at the highest bid price
obtained from a dealer maintaining an active market in those securities. Options
are valued at the last sale price on the exchange on which they are listed. If
no sales of such options have taken place that day, they will be valued at the
mean between their closing bid and asked prices.
Repurchase Agreements. The Fund may enter into repurchase agreements with
primary government securities dealers recognized by the Federal Reserve Bank of
New York, with member banks of the Federal Reserve System or with other brokers
or dealers that meet credit guidelines established by the Directors. Under the
terms of a typical repurchase agreement, the Fund takes possession of an
underlying debt obligation subject to an obligation of the seller to repurchase,
and the Fund to resell, the obligation at an agreed-upon price and time, thereby
determining the yield during the Fund's holding period. The Fund will always
receive and maintain securities as collateral whose market value, including
accrued interest, will be at least equal to 100% of the dollar amount invested
by the Fund in each agreement. The Fund will make payment for such securities
only upon physical delivery or upon evidence of book entry transfer of the
collateral to the account of the custodian. To the extent that any repurchase
transaction exceeds one business day, the value of the collateral is
marked-to-market on a daily basis to maintain the adequacy of the collateral. If
the seller defaults and the value of the collateral declines or if bankruptcy
proceedings are commenced with respect to the seller of the security,
realization of the collateral by the Fund may be delayed or limited.
15
<PAGE>
The Gabelli Equity Income Fund
Notes to Financial Statements (Continued)
================================================================================
Futures Contracts. The Fund may engage in futures contracts for the purpose of
hedging against changes in the value of its portfolio securities and in the
value of securities it intends to purchase. Upon entering into a futures
contract, the Fund is required to deposit with the broker an amount of cash or
cash equivalents equal to a certain percentage of the contract amount. This is
known as the "initial margin". Subsequent payments ("variation margin") are made
or received by the Fund each day, depending on the daily fluctuation of the
value of the contract. The daily changes in the contract are included in
unrealized gains or losses. The Fund recognizes a realized gain or loss when the
contract is closed. At September 30, 1999, there were no open futures contracts.
There are several risks in connection with the use of futures contracts as a
hedging device. The change in value of future contracts primarily corresponds
with the value of their underlying instruments, which may not correlate with the
change in value of the hedged investments. In addition, there is the risk that
the Fund may not be able to enter into a closing transaction because of an
illiquid secondary market.
Forward Foreign Exchange Contracts. The Fund may engage in forward foreign
exchange contracts for hedging a specific transaction with respect to either the
currency in which the transaction is denominated or another currency as deemed
appropriate by the Adviser. Forward foreign exchange contracts are valued at the
forward rate and are marked-to-market daily. The change in market value is
included in unrealized appreciation/depreciation on investments and foreign
currency transactions. When the contract is closed, the Fund records a realized
gain or loss equal to the difference between the value of the contract at the
time it was opened and the value at the time it was closed.
The use of forward foreign exchange contracts does not eliminate fluctuations in
the underlying prices of the Fund's portfolio securities, but it does establish
a rate of exchange that can be achieved in the future. Although forward foreign
exchange contracts limit the risk of loss due to a decline in the value of the
hedged currency, they also limit any potential gain that might result should the
value of the currency increase. In addition, the Fund could be exposed to risks
if the counterparties to the contracts are unable to meet the terms of their
contracts.
Foreign Currency Translation. The books and records of the Fund are maintained
in United States (U.S.) dollars. Foreign currencies, investments and other
assets and liabilities are translated into U.S. dollars at the exchange rates
prevailing at the end of the period, and purchases and sales of investment
securities, income and expenses are translated at the exchange rate prevailing
on the respective dates of such transactions. Unrealized gains and losses, which
result from changes in foreign exchange rates and/or changes in market prices of
securities, have been included in unrealized appreciation/depreciation on
investments and foreign currency transactions. Net realized foreign currency
gains and losses resulting from changes in exchange rates include foreign
currency gains and losses between trade date and settlement date on investment
securities transactions, foreign currency transactions and the difference
between the amounts of interest and dividends recorded on the books of the Fund
and the amounts actually received. The portion of foreign currency gains and
losses related to fluctuation in exchange rates between the initial trade date
and subsequent sale trade date is included in realized gain/(loss) on
investments.
Securities Transactions and Investment Income. Securities transactions are
accounted for on the trade date with realized gain or loss on investments
determined by using the identified cost method. Interest income (including
amortization of premium and accretion of discount) is recorded as earned.
Dividend income is recorded on the ex-dividend date.
Dividends and Distributions to Shareholders. Dividends and distributions to
shareholders are recorded on the ex-dividend date. Income distributions and
capital gain distributions are determined in accordance with income tax
regulations which may differ from generally accepted accounting principles.
These differences are
16
<PAGE>
The Gabelli Equity Income Fund
Notes to Financial Statements (Continued)
================================================================================
primarily due to differing treatments of income and gains on various investment
securities held by the Fund, timing differences and differing characterization
of distributions made by the Fund.
Expenses. Certain administrative expenses are common to, and allocated among,
the Portfolios. Such allocations are made on the basis of each Portfolio's
average net assets or other criteria directly affecting the expenses as
determined by the Adviser.
Provision for Income Taxes. The Fund has qualified and intends to continue to
qualify as a regulated investment company under Subchapter M of the Internal
Revenue Code of 1986, as amended. As a result, a Federal income tax provision is
not required.
Dividends and interest from non-U.S. sources received by the Fund are generally
subject to non-U.S. withholding taxes at rates ranging up to 30%. Such
withholding taxes may be reduced or eliminated under the terms of applicable
U.S. income tax treaties, and the Fund intends to undertake any procedural steps
required to claim the benefits of such treaties.
3. Investment Advisory Agreement. The Fund has entered into an investment
advisory agreement (the "Advisory Agreement") with the Adviser which provides
that the Fund will pay the Adviser a fee, computed daily and paid monthly, at
the annual rate of 1.00% of the value of the Fund's average daily net assets. In
accordance with the Advisory Agreement, the Adviser provides a continuous
investment program for the Fund's portfolio, oversees the administration of all
aspects of the Fund's business and affairs and pays the compensation of all
Officers and Directors of the Fund who are its affiliates.
4. Distribution Plan. The Fund's Board of Directors has adopted a distribution
plan (the "Plan") pursuant to Rule 12b-1 under the 1940 Act. For the year ended
September 30, 1999, the Fund incurred distribution costs payable to Gabelli &
Company, Inc., an affiliate of the Adviser, of $217,480, or 0.25% of average
daily net assets, the annual limitation under the Plan. Such payments are
accrued daily and paid monthly.
5. Portfolio Securities. Purchases and sales of securities for the year ended
September 30, 1999, other than short term securities, aggregated $33,083,323 and
$37,300,344, respectively.
6. Transactions with Affiliates. During the year ended September 30, 1999, the
Fund paid brokerage commissions of $24,904 to Gabelli & Company, Inc. and its
affiliates.
7. Line of Credit. The Fund has access to an unsecured line of credit from the
custodian for temporary borrowing purposes. Borrowings under this arrangement
bear interest at 0.75% above the Federal Funds rate on outstanding balances.
There were no borrowings outstanding at September 30, 1999.
8. Capital Stock Transactions. Transactions in shares of capital stock were as
follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
September 30, 1999 September 30, 1998
---------------------------- ----------------------------
Shares Amount Shares Amount
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Shares sold ................................ 1,118,588 $ 19,506,816 1,216,183 $ 20,779,591
Shares issued upon reinvestment of dividends 408,295 6,723,027 491,179 7,882,560
Shares redeemed ............................ (1,274,350) (21,734,221) (958,240) (16,291,209)
------------ ------------ ------------ ------------
Net increase ............................. 252,533 $ 4,495,622 749,122 $ 12,370,942
============ ============ ============ ============
</TABLE>
9. New Share Classes. On March 9, 1999, the Board of Directors of the Fund
approved (subject to shareholder approval of Amendments to the Fund's Articles
of Incorporation to permit the Fund to offer additional classes of shares) a
Rule 18f-3 Multi-Class Plan relating to the creation of three additional classes
of shares of the Fund -- Class A Shares, Class B Shares and Class C Shares (the
"New Share Classes"). The existing class of shares was redesignated as Class AAA
Shares. In addition, the Board has also approved an Amended and Restated
Distribution Agreement, Rule 12b-1 plans for each of the New Share Classes and
an Amended and Restated Plan of Distribution for the existing class of shares
(Class AAA shares) to be effective upon the commencement of the offering of the
New Share Classes. At September 30, 1999, shareholder approval was pending.
17
<PAGE>
The Gabelli Equity Income Fund
Financial Highlights
================================================================================
Selected data for a share of capital stock outstanding throughout each period:
<TABLE>
<CAPTION>
Year Ended September 30,
-------------------------------------------------------
1999 1998 1997 1996 1995
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Operating performance:
Net asset value, beginning of period .......... $ 15.97 $ 17.39 $ 13.81 $ 12.65 $ 11.54
------- ------- ------- ------- -------
Net investment income ......................... 0.23 0.22 0.22 0.28 0.29
Net realized and unrealized gain
on investments .............................. 2.82 0.29 4.28 1.76 1.77
------- ------- ------- ------- -------
Total from investment operations .............. 3.05 0.51 4.50 2.04 2.06
------- ------- ------- ------- -------
Distributions to shareholders:
Net investment income ......................... (0.22) (0.26) (0.22) (0.28) (0.29)
In excess of net investment income ............ -- -- -- (0.01) --
Net realized gain on investments .............. (1.22) (1.67) (0.70) (0.59) (0.66)
------- ------- ------- ------- -------
Total distributions ........................... (1.44) (1.93) (0.92) (0.88) (0.95)
------- ------- ------- ------- -------
Net asset value, end of period ................ $ 17.58 $ 15.97 $ 17.39 $ 13.81 $ 12.65
======= ======= ======= ======= =======
Total return+ ................................. 19.82% 2.98% 33.98% 16.69% 19.20%
======= ======= ======= ======= =======
Ratios to average net assets and supplemental data:
Net assets, end of period (in 000's) .......... $92,111 $79,669 $73,730 $57,006 $54,806
Ratio of net investment income
to average net assets ....................... 1.32% 1.27% 1.42% 1.99% 2.50%
Ratio of operating expenses
to average net assets ....................... 1.60% 1.64% 1.78% 1.93% 1.83%
Portfolio turnover rate ....................... 39% 35% 43% 20% 30%
</TABLE>
- ----------
+ Total return represents aggregate total return of a hypothetical $1,000
investment at the beginning of the period and sold at the end of the
period including reinvestment of dividends.
See accompanying notes to financial statements.
18
<PAGE>
The Gabelli Equity Income Fund
Report of Ernst & Young LLP, Independent Auditors
================================================================================
To the Shareholders and Board of Directors of
The Gabelli Equity Income Fund
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of The Gabelli Equity Income Fund (the "Fund") (a
series of Gabelli Equity Series Funds, Inc.) as of September 30, 1999, and the
related statement of operations for the year then ended, the statement of
changes in net assets for each of the two years in the period then ended, and
the financial highlights for each of the five years in the period ended. These
financial statements and financial highlights are the responsibility of the
Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and financial highlights. Our procedures included confirmation of
securities owned as of September 30, 1999 by correspondence with the custodian
and brokers, or other appropriate auditing procedures where replies from brokers
were not received. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of The
Gabelli Equity Income Fund at September 30, 1999, the results of its operations
for the year then ended, the changes in its net assets for each of the two years
in the period then ended, and the financial highlights for each of the five
years in the period then ended, in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
New York, New York
November 1, 1999
- --------------------------------------------------------------------------------
1999 TAX NOTICE TO SHAREHOLDERS (Unaudited)
For the fiscal year ended September 30, 1999, the Fund paid to shareholders
ordinary income dividends (comprised of net investment income and short term
capital gains) totaling $0.3655 per share and long term capital gains totaling
$1.0781 per share. For the fiscal year ended September 30, 1999, 100.00% of the
ordinary income dividend qualifies for the dividend received deduction available
to corporations.
U.S.Government Income:
The percentage of the ordinary income dividend paid by the Fund during fiscal
year 1999 which was derived from U.S. Treasury securities was 2.52%. Such income
is exempt from state and local tax in all states. However, many states,
including New York and California, allow a tax exemption for a portion of the
income earned only if a mutual fund has invested at least 50% of its assets at
the end of each quarter of the Fund's fiscal year in U.S. Government securities.
The Gabelli Equity Income Fund did not meet this strict requirement in 1999. Due
to the diversity in state and local tax law, it is recommended that you consult
your personal tax advisor as to the applicability of the information provided to
your specific situation.
- --------------------------------------------------------------------------------
19
<PAGE>
Gabelli Equity Series Funds, Inc.
The Gabelli Equity Income Fund
One Corporate Center
Rye, New York 10580-1434
1-800-GABELLI
[1-800-422-3554]
fax: 1-914-921-5118
http://www.gabelli.com
e-mail: [email protected]
(Net Asset Value may be obtained daily by calling
1-800-GABELLI after 6:00 P.M.)
Board of Directors
Mario J. Gabelli, CFA
Chairman and Chief
Investment Officer
Gabelli 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.
- --------------------------------------------------------------------------------
GAB444Q399SR
