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Gabelli Capital Asset Fund
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[PHOTO]
of
Mario J. Gabelli, C.F.A.
Portfolio Manager
Q. How has the Fund performed in its first seven months of existence and what
would you identify as your Fund's competitive strengths or advantages?
A. From the Fund's inception on May 1, 1995 through December 31, 1995, the Fund
had a total return of 8.4%.(1) The Fund's performance was positively affected by
the overall strong performance of the U.S. stock market, as stock picking took a
back seat to market momentum in generating returns. We invested our new cash
selectively in this rising market. If the market loses steam in 1996, stock
pickers will have the opportunity to excel. The motto of our firm is "creating
wealth through research." We believe that thorough fundamental research on
individual stocks is our greatest strength and is the key to delivering
potentially superior long-term investment returns.
Q. How has your investment strategy/focus changed, if at all, in the last
quarter? What conditions or events prompted that change?
A. Our strategy, which is to buy stocks trading at a deep discount to their
"real world" economic value, does not change. Specific pockets of value change
with economic, market and regulatory conditions. Broadcast stocks, which had
been stellar performers over the first three quarters of 1995, got hit hard in
the fourth quarter and are once again outstanding values. With more
consolidation in the industry likely in the year ahead and earnings rebounding
with the Olympics and, more importantly, election year advertising, the
broadcasters should do quite well. Telecommunications and cable television
stocks should also perform well, as a comprehensive telecommunications bill
finally diminishes the regulatory uncertainty that has plagued these industries.
Selected industrial franchises will also prove rewarding as corporate buyers
here and abroad focus on expanding their product lines and distribution systems.
Q. What is your economic overview of the fourth quarter? What is your
economic/financial market outlook for 1996?
A. The economy landed with its nose up in the fourth quarter, propelling the
equities market to record levels. Investors shrugged off soft earnings
comparisons in anticipation of lower interest rates and slow, but steady,
economic growth in 1996. Market leadership shifted from the broad technology
sector to consumer non-durables, offering more predictable earnings growth in
the year ahead.
Looking out to 1996, we expect 2.5% to 3% domestic gross domestic product
growth and 6% to 9% earnings growth for the S&P 500 Index.(2) Food and fuel
prices may rise modestly, but wages will remain constrained and inflation in
total will not be a problem in the year ahead. Interest rates are the wild card
for 1996. The consensus is that, with a soft economy, low inflation, lower
interest rates in Europe, a balanced budget agreement, and a Federal Reserve
Chairman up for reappointment in an election year, long-term interest rates
should come down. With a flat yield curve, we could see the Fed drop short rates
without long rates following, particularly if we get a watered down balanced
budget compromise. Price/earnings multiples are a function of earnings growth
and longer-term interest rates. If earnings growth slows as we anticipate and
long rates remain flat or trend modestly higher, stock multiples are likely to
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(1) Total return figures are historical and assume the reinvestment of
dividends and distributions, and the deduction of Fund expenses. The actual
total returns for owners of the variable annuity contracts or variable life
insurance policies which provide for investment in the Fund will be lower
to reflect separate account and contract/policy charges. Past performance
is not a guarantee of future results. Investment return and principal value
will fluctuate so that the value of your investment, when redeemed, may be
worth more or less than the original cost.
(2) The S&P 500 Index is an unmanaged index that is generally considered to be
representative of U.S. stock market activity and does not reflect deduction
of fees and expenses, which has been deducted within the Fund. The S&P 500
Index is not available for direct investment.
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contract. Our conclusion from all this conjecture is a much less inspiring
overall stock market in 1996.
Q. Do you have any overall Fund "Pearls of Wisdom"?
A. We were among the first on Wall Street to proclaim the beginning of the third
great wave of takeovers since World War II. Record setting merger and
acquisition activity, highlighted by a big jump in hostile deals this year,
further validates this thesis. In 1995, it was the three Bs: banks,
broadcasters, and brokers. In 1996, we believe deal activity will spread to
small and mid-sized industrial franchises. If we do get capital gains tax
relief, smaller companies that still have substantial family ownership will be
on the market.
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Gabelli Capital Asset Fund Profile
as of December 31, 1995
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TOTAL RETURN(1)
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Since Inception (5/1/95) ..................................... 8.4%
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Growth of a Hypothetical $10,000 Investment
[The following table was represented by a line chart in the printed material.]
S&P 500 Index Gabelli Capital Asset Fund
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5/1/95 10000 10000
May 31 10400 10050
Jun 30 10641 10201
Jul 31 10994 10415
Aug 31 11022 10530
Sep 30 11487 10582
Oct 31 11446 10476
Nov 30 11948 10759
12/31/95 12178 10841
To give you a comparison, the chart above shows the performance of a $10,000
investment made in the Gabelli Capital Asset Fund and in the S&P 500 Index.(2)
Investment return and principal value of an investment will fluctuate, so that
the value of your investment, when redeemed, may be worth more or less than the
original cost. Past performance is not a guarantee of future results.
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Top Ten Holdings
1. Cablevision Systems Corporation
2. GEICO Corp.
3. Magma Copper Company
4. Time Warner Inc.
5. Sequa Corporation
6. International Family Entertainment, Inc.
7. United Television, Inc.
8. Quaker Oats Company
9. Cellular Communications, Inc.
10. Capital Cities/ABC, Inc.
For a complete list of portfolio holdings, please see the Schedule of
Investments.
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Gabelli Capital
Asset Fund
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Gabelli Capital Asset Fund
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SCHEDULE OF INVESTMENTS
December 31, 1995
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COMMON STOCKS -- 76.7%
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Shares Value
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Aerospace -- 1.5%
5,000 Boeing Co. $ 391,875
------------
Automotive -- 0.8%
2,000 Ford Motor Company 58,000
3,000 General Motors Corporation 158,625
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216,625
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Automotive: Parts and Accessories -- 2.8%
15,000 GenCorp Inc. 183,750
11,500 Handy & Harman 189,750
12,000 Wynn's International, Inc. 355,500
------------
729,000
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Aviation: Parts and Services -- 2.7%
2,000 AAR Corp. 44,000
2,000 Curtiss-Wright Corporation 107,500
6,000 Hi-Shear Industries Inc. + 43,500
4,000 Moog, Inc., Class A + 69,000
10,000 Precision Castparts Corp. 397,500
3,000 Rohr Inc. + 43,125
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704,625
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Broadcasting -- 10.9%
20,000 Ackerley Communications Inc. 305,000
2,000 BHC Communications, Inc., Class A 189,000
4,000 Capital Cities/ABC, Inc. 493,500
5,000 Chris-Craft Industries, Inc. 216,250
10,000 Liberty Corporation 337,500
7,500 Multi-Market Radio Inc., Class A + 76,875
8,950 Outlet Communications, Inc., Class A + 422,888
6,000 United Television, Inc. 541,500
17,000 Westinghouse Electric Corp. 280,500
------------
2,863,013
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Cable -- 12.1%
5,600 BET Holdings, Inc., Class A + 128,100
20,500 Cablevision Systems Corporation, Class A + 1,112,125
33,100 International Family Entertainment, Inc., Class B + 542,012
13,000 Media General, Inc., Class A 394,875
3,000 Tele-Communications, Inc., Class A + 59,625
13,000 Tele-Communications, Inc./Liberty
Media Group, Class A + 349,375
2,000 Tele-Communications International, Inc.,
Class A + 45,500
12,000 United International Holdings, Inc.,
Class A + 177,000
20,000 US WEST Media Group + 385,000
------------
3,193,612
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Consumer Products -- 4.0%
6,500 American Brands, Inc. 290,062
5,000 Culbro Corporation + 245,625
2,000 Eastman Kodak Company 134,000
2,500 General Electric Company 180,000
5,000 Kerr Group, Inc. + 50,000
4,000 National Presto Industries Inc. 159,000
------------
1,058,687
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Diversified Industrial -- 1.0%
2,500 Minnesota Mining and Manufacturing
Company 165,625
4,000 Thomas Industries Inc. 94,000
------------
259,625
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Electric Equipment -- 1.5%
8,000 Honeywell Inc. 389,000
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Entertainment -- 3.3%
5,000 GC Companies, Inc. + 167,500
15,000 Time Warner Inc. 568,125
3,000 Viacom Inc., Class A + 137,625
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873,250
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Financial Services -- 6.8%
6,000 American Express Company 248,250
16,000 GEICO Corporation 1,118,000
3,000 H&R Block Inc. 121,500
6,000 Midland Company 294,750
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1,782,500
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Food and Beverage -- 4.4%
14,742 Bruno's, Inc. + 154,791
8,000 Celestial Seasonings, Inc. + 150,000
15,000 Quaker Oats Company 517,500
4,000 Seagram Company Ltd. 138,500
2,000 Tootsie Roll Industries, Inc. 79,250
2,000 Wrigley, (Wm.) Jr. Company 105,000
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1,145,041
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See notes to financial statements.
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Shares Value
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Health Care -- 1.4%
7,000 Genentech Inc. + $ 371,000
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Hotels/Casinos -- 1.9%
9,000 Aztar Corporation + 72,000
6,000 Hilton Hotels Corporation 369,000
2,000 Mirage Resorts, Incorporated + 69,000
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510,000
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Industrial Equipment and Supplies -- 6.3%
15,000 AMETEK, Inc. 281,250
5,000 Crane Co. 184,375
2,500 CTS Corporation 94,375
1,000 Franklin Electric Company 33,000
8,000 Ingersoll Rand Co. 281,000
10,000 Navistar International Corporation + 105,000
1,500 Pittway Corporation 99,563
16,000 Sequa Corporation, Class A + 488,000
10,000 TransPro Inc. 106,250
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1,672,813
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Metals and Mining -- 3.5%
33,500 Magma Copper Company + 933,813
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Oil and Gas Equipment/Services -- 0.2%
4,500 RPC Inc. + 41,062
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Publishing -- 5.1%
8,000 Houghton Mifflin Company 344,000
10,000 Meredith Corporation 418,750
8,000 Pulitzer Publishing 382,000
8,000 Thomas Nelson Inc. 104,000
11,000 Western Publishing Group, Inc. + 86,625
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1,335,375
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Specialty Chemical -- 1.2%
14,000 Ferro Corporation 325,500
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Telecommunications -- 2.0%
13,100 Pacific Telecom, Inc. 393,000
4,000 US WEST Communications Group 143,000
------------
536,000
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Wireless Communications -- 3.3%
10,000 Cellular Communications, Inc., Class A + 497,500
12,000 Centennial Cellular Corp., Class A + 205,500
4,500 Telephone and Data Systems, Inc. 177,750
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880,750
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TOTAL COMMON STOCK
(Cost $19,360,212) 20,213,166
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PREFERRED STOCKS -- 0.4%
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Cable -- 0.2%
1,500 Cablevision Systems Corporation,
Series I, 8.500%, Conv. Pfd. 40,875
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Industrial Equipment and Supplies -- 0.2%
1,000 Sequa Corporation, $5.00, Conv. Pfd. 58,000
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TOTAL PREFERRED STOCKS
(Cost $100,675) 98,875
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U.S. TREASURY BILLS -- 23.9%
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Principal
Amount
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$6,308,000 4.84% to 5.33%++ due
01/04/1996-02/08/1996 6,288,495
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TOTAL U.S. TREASURY BILLS
(Cost $6,288,495) 6,288,495
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REPURCHASE AGREEMENT -- 0.8%
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228,000 Agreement with State Street Bank and
Trust Company, 5.00% dated
12/29/1995, to be repurchased at
$228,127 on 01/02/1996, collateralized
by $210,000 U.S. Treasury Bonds,
8.00% due 08/15/1999
(value $234,664) 228,000
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TOTAL REPURCHASE AGREEMENT
(Cost $228,000) 228,000
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See notes to financial statements.
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Gabelli Capital Asset Fund
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SCHEDULE OF INVESTMENTS
December 31, 1995
Value
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TOTAL INVESTMENTS -- 101.8%
(Cost $25,977,382) (a) $ 26,828,536
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OTHER ASSETS AND LIABILITIES (Net)-(1.8)% (464,594)
------------
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NET ASSETS -- 100.0% $ 26,363,942
============
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(a) Aggregate cost for Federal tax purposes was $25,993,437. Net unrealized
appreciation for Federal tax purposes was $835,099 (gross unrealized
appreciation was $1,144,947 and gross unrealized depreciation was
$309,848).
+ Non-income producing security
++ Represents annualized yield at date of purchase (unaudited).
See notes to financial statements.
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STATEMENT OF ASSETS
AND LIABILITIES
December 31, 1995
Assets:
Investments, at value
(Cost $25,977,382) $ 26,828,536
Cash 857
Receivable for investments sold 66,448
Dividends and interest receivable 15,964
Receivable from Manager 14,377
Unamortized organization costs 86,576
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Total Assets 27,012,758
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Liabilities:
Payable for investments purchased 475,825
Organization costs payable 99,905
Management fee payable 22,578
Accrued Directors' fees 3,500
Accrued expenses and other payables 47,008
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Total Liabilities 648,816
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Net assets applicable to 2,463,338 shares of
common stock outstanding $ 26,363,942
============
NET ASSETS consist of:
Shares of common stock at par value $ 2,463
Additional paid-in capital 25,525,869
Distributions in excess of net realized
gain on investments (16,055)
Undistributed net investment income 511
Net unrealized appreciation of investments 851,154
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Total Net Assets $ 26,363,942
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Net Asset Value, offering and redemption
price per share ($26,363,942 / 2,463,338
shares outstanding; 500,000,000 shares
authorized of $0.001 par value) $ 10.70
============
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STATEMENT OF OPERATIONS
For the Period Ended December 31, 1995*
Investment Income:
Interest income $ 179,568
Dividend income (net of foreign
withholding taxes of $135) 84,468
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Total Investment Income 264,036
------------
Expenses:
Management fee 104,276
Legal and audit fees 41,000
Directors' fees 15,885
Amortization of organization costs 13,424
Custodian fees 10,370
Registration and filing fees 9,517
Transfer agent fees 5,223
Other 745
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Total expenses before expenses assumed
by Manager and Adviser 200,440
------------
Expenses assumed by Manager and Adviser (14,377)
------------
Total Expenses -- Net 186,063
------------
Net Investment Income 77,973
------------
Net Realized and Unrealized Gain on
Investments:
Net realized gain on investments sold 234,480
Net unrealized appreciation of investments
during the period 851,154
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Net realized and unrealized gain on investments 1,085,634
------------
Net increase in net assets resulting from
operations $ 1,163,607
============
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*The Fund commenced operations on May 1, 1995.
See notes to financial statements.
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Gabelli Capital Asset Fund
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STATEMENT OF CHANGES IN NET ASSETS
Period
Ended
12/31/95*
------------
Net investment income $ 77,973
Net realized gain on investments 234,480
Net unrealized appreciation of investments 851,154
------------
Net increase in net assets resulting from operations 1,163,607
Distribution to shareholders from:
Net investment income (77,462)
Net realized gain on investments (234,480)
Distributions in excess of net realized gain
on investments (16,055)
Net increase in net assets from Fund share
transactions 25,428,332
------------
Net increase in net assets 26,263,942
NET ASSETS:
Beginning of period 100,000
------------
End of period (including undistributed net
investment income of $511) $ 26,363,942
============
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*The Fund commenced operations on May 1, 1995.
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FINANCIAL HIGHLIGHTS
Per share amounts for a Fund share outstanding throughout the period.
Period
Ended
12/31/95*
------------
Operating performance:
Net asset value, beginning of period $ 10.00
-------
Net investment income (a) 0.03
Net realized and unrealized gain on investments 0.80
-------
Total from investment operations 0.83
-------
Distributions to shareholders from:
Net investment income (0.03)
Net realized gains (0.09)
Distributions in excess of net realized gains (0.01)
-------
Total Distributions (0.13)
-------
Net asset value, end of period $ 10.70
=======
Total return** 8.4%
=======
Ratios to average net assets/supplemental data:
Net assets, end of period (in 000's) $26,364
Ratio of net investment income to average
net assets 0.75%+
Ratio of operating expenses to average
net assets (b) 1.78%+
Portfolio turnover rate 81.4%
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* The Fund commenced operations on May 1, 1995.
** 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. Total return for the period of less
than one year is not annualized.
+ Annualized.
(a) Net investment income before expenses assumed by the Manager and Adviser
for the period ended December 31, 1995 was $0.03.
(b) Operating expense ratio before expenses assumed by the Manager and Adviser
for the period ended December 31, 1995 was 1.92%.
See notes to financial statements
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Gabelli Capital
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Gabelli Capital Asset Fund
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NOTES TO FINANCIAL STATEMENTS
December 31, 1995
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1. -- Significant Accounting Policies
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Gabelli Capital Asset Fund (the "Fund"), a series of Gabelli Capital Series
Funds, Inc. (the "Company"), was organized on April 8, 1993 as a Maryland
corporation. The Company is a diversified, open-end management investment
company registered under the Investment Company Act of 1940, as amended (the
"1940 Act") whose primary objective is growth of capital. Shares of the Fund are
available to the public only through the purchase of certain variable annuity
and variable life insurance contracts issued by The Guardian Insurance & Annuity
Company, Inc. The Fund commenced operations on May 1, 1995. On April 26, 1995,
the Fund sold a total of 10,000 shares of common stock to Guardian Insurance &
Annuity Company, Inc. and proceeds to the Fund amounted to $100,000. 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 which are traded only on a nationally recognized
securities exchange or are quoted on NASDAQ are valued at the last sale price as
of the close of business on the day the securities are being valued or, lacking
any sales, at the mean between closing bid and asked prices. Other portfolio
securities for which over-the-counter market quotations are readily available
are valued at the latest average of the bid and asked price. Portfolio
securities which are traded both in the over-the-counter market and on a stock
exchange are valued according to the broadest and most representative market, as
determined by Gabelli Funds, Inc. (the "Adviser"). Securities and assets for
which market quotations are not readily available are valued at fair value, as
determined in good faith by or under the direction of the Board of Directors of
the Company. Short-term investments that mature in more than 60 days are valued
at the highest bid price obtained from a dealer maintaining an active market in
that security. Short-term investments that mature in 60 days or less are valued
at amortized cost, unless the Board of Directors determines that such valuation
does not constitute fair value.
Repurchase Agreements.
The Fund may engage in repurchase agreement transactions. 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. This arrangement results
in a fixed rate of return that is not subject to market fluctuations during the
Fund's holding period. The value of the collateral is at least equal at all
times to the total amount of the repurchase obligations, including interest. In
the event of counterparty default, the Fund has the right to use the collateral
to offset losses incurred. There is potential loss to the Fund in the event the
Fund is delayed or prevented from exercising its rights to dispose of the
collateral securities, including the risk of a possible decline in the value of
the underlying securities during the period while the Fund seeks to assert its
rights. The Adviser, acting under the supervision of the Board of Directors,
reviews the value of the collateral and the creditworthiness of those banks and
dealers with which the Fund enters into repurchase agreements to evaluate
potential risks.
Securities Transactions and Investment Income.
Securities transactions are accounted for on the trade date with realized
gain or loss on investments determined using specific identification as the cost
method. Interest income (including amortization of premium and discount) is
recorded as earned.
Dividends and Distributions to Shareholders.
Dividend income and 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
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may differ from generally accepted accounting principles. These differences are
primarily due to differing treatments of income and gains on various investment
securities held by the Fund, timing differences and differing characterization
of distributions made by the Fund.
Provision for Income Taxes.
The Fund intends 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.
Deferred Organization Expenses.
A total of $100,000 was incurred in connection with the organization of the
Fund. These costs were advanced by the Guardian Insurance & Annuity Company and
will be reimbursed by the Fund after the sooner of one year or when the Fund
reaches $50 million. These costs were deferred and are being amortized on a
straight-line basis over a period of 60 months from the date the Fund commenced
investment operations.
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2. -- Agreements with Affiliated Parties
- ----------------------------------------
Pursuant to a management agreement (the "Management Agreement"), provides
that the Fund will pay the Guardian Investor Services Corporation (the
"Manager") a fee, computed daily and paid monthly, at the annual rate of 1.00
percent of the value of the Fund's average daily net assets. Pursuant to an
Investment Advisory Agreement among the Fund, the Manager and the Adviser, the
Adviser, under the supervision of the Company's Board of Directors and the
Manager, manages the Fund's assets in accordance with the Fund's investment
objectives and policies, makes investment decisions for the Fund, places
purchase and sale orders on behalf of the Fund, provides investment research and
provides facilities and personnel required for the Fund's administrative needs.
The Adviser may delegate its administrative role and currently has done so to
First Data Investor Services Group, Inc., the Fund's sub-administrator (the
"Sub-Administrator"). The Adviser will supervise the performance of
administrative and professional services provided by others and pays the
compensation of the Sub-Administrator and all officers and directors of the Fund
who are its affiliates. As compensation for its services and the related
expenses borne by the Adviser, the Manager pays the Adviser a fee, computed
daily and paid monthly, at the annual rate of 0.75 percent of the value of the
Fund's average daily net assets. During the period ended December 31, 1995, the
Manager and Adviser assumed certain expenses of the Fund in the amount of
$14,377.
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3. -- Portfolio Securities
- ---------------------------
Cost of purchases and proceeds from sales of investment securities for the
period ended December 31, 1995, excluding U.S. government and short-term
investments, aggregated $27,936,333 and $8,712,282 respectively.
- ----------------------------------
4. -- Transactions with Affiliates
- ----------------------------------
During the period ended December 31, 1995, the Fund paid brokerage
commissions of $4,045 to Gabelli & Company, Inc. and its affiliates.
- ----------------------------
5. -- Shares of Common Stock
- ----------------------------
Common stock transactions were as follows:
Period Ended
12/31/95*
------------
Shares Amount
--------- -----------
Sold 2,907,580 $30,237,331
Shares issued upon re- investment of dividends 30,769 327,997
Redeemed (485,011) (5,136,996)
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Net increase 2,453,338 $25,428,332
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* The Fund commenced operations on May 1, 1995.
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REPORT OF INDEPENDENT AUDITORS
To the Shareholders and Board of Directors
Gabelli Capital Asset Fund
(a series of Gabelli Capital Series Funds, Inc.)
We have audited the accompanying statement of assets and liabilities,
including the schedule of investments, of Gabelli Capital Asset Fund (a series
of Gabelli Capital Series Funds, Inc.) as of December 31, 1995, and the related
statements of operations and changes in net assets, and the financial highlights
from May 1, 1995 (commencement of operations) through December 31, 1995. 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 audit.
We conducted our audit 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 mate-rial misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1995 by correspondence with the custodian and brokers. 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 audit provides 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
Gabelli Capital Asset Fund at December 31, 1995, and the results of its
operations, the changes in its net assets and the financial highlights for the
period from May 1, 1995 to December 31, 1995, in conformity with generally
accepted accounting principles.
/S/ Ernst & Young LLP
New York, New York
February 7, 1996
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