GABELLI EQUITY SERIES FUNDS, INC.
THE GABELLI SMALL CAP GROWTH FUND
THE GABELLI EQUITY INCOME FUND
THE GABELLI WOODLAND SMALL CAP VALUE FUND
One Corporate Center
Rye, New York 10580-1422
800-GABELLI
800-422-3554
FAX: 914-921-5118
WEBSITE: WWW.GABELLI.COM
E-MAIL: INFO@GABELLI.COM
Net Asset Value available daily by calling
800-GABELLI after 6:00 p.m.
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QUESTIONS?
Call 800-GABELLI
or your investment representative.
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TABLE OF CONTENTS
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INVESTMENT AND PERFORMANCE SUMMARY ............ 2
INVESTMENT AND RISK INFORMATION ............... 8
MANAGEMENT OF THE FUNDS ....................... 10
Purchase of Shares ................... 11
Redemption of Shares ................. 13
Exchange of Shares ................... 14
Pricing of Fund Shares ............... 15
Dividends and Distributions .......... 15
Tax Information ...................... 15
Mailings to Shareholders ............. 16
FINANCIAL HIGHLIGHTS .......................... 16
GABELLI
EQUITY
SERIES
FUNDS,
INC.
THE GABELLI SMALL CAP GROWTH FUND
THE GABELLI EQUITY INCOME FUND
THE GABELLI WOODLAND SMALL CAP
VALUE FUND
CLASS AAA SHARES
PROSPECTUS
FEBRUARY 2, 2004
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THE
SHARES DESCRIBED IN THIS PROSPECTUS OR DETERMINED WHETHER THIS PROSPECTUS IS
ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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INVESTMENT AND PERFORMANCE SUMMARY
The Gabelli Small Cap Growth Fund (the "Small Cap Growth Fund"), The Gabelli
Equity Income Fund (the "Equity Income Fund") and The Gabelli Woodland Small Cap
Value Fund (the "Woodland Small Cap Value Fund") (each a "Fund" and
collectively, the "Funds") are series of Gabelli Equity Series Funds, Inc. (the
"Corporation").
SMALL CAP GROWTH FUND
INVESTMENT OBJECTIVE:
The Fund seeks to provide a high level of capital appreciation.
PRINCIPAL INVESTMENT STRATEGIES:
Under normal market conditions, the Fund invests at least 80% of its net assets
in equity securities of companies that are considered to be small companies at
the time the Fund makes its investment. The Fund invests primarily in the common
stocks of companies which the Fund's investment adviser, Gabelli Funds, LLC (the
"Adviser"), believes are likely to have rapid growth in revenues and above
average rates of earnings growth. The Adviser currently characterizes small
companies as those with total market values of $1 billion or less at the time of
investment.
PRINCIPAL RISKS:
The Fund's share price will fluctuate with changes in the market value of the
Fund's portfolio securities. Stocks are subject to market, economic and business
risks that cause their prices to fluctuate. When you sell Fund shares, they may
be worth less than what you paid for them. Consequently, you can lose money by
investing in the Fund. The Fund is subject to the risk that small capitalization
stocks may trade less frequently and may be subject to more abrupt or erratic
movements in price than medium and large capitalization stocks. The Fund is also
subject to the risk that the Adviser may be incorrect in its assessment of the
value of the securities it holds, which may result in a decline in the value of
Fund shares.
WHO MAY WANT TO INVEST:
The Fund's Class AAA Shares offered herein are offered only to investors who
acquire them directly through Gabelli & Company, Inc., the Fund's distributor
(the "Distributor"), or through a select number of financial intermediaries with
whom the Distributor has entered into selling agreements specifically
authorizing them to offer Class AAA Shares.
YOU MAY WANT TO INVEST IN THE FUND IF:
o you are a long-term investor
o you seek growth of capital
o you believe that the market will favor small capitalization stocks over
the long term
YOU MAY NOT WANT TO INVEST IN THE FUND IF:
o you are seeking a high level of current income
o you are conservative in your investment approach
o you seek stability of principal more than growth of capital
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EQUITY INCOME FUND
INVESTMENT OBJECTIVE:
The Fund seeks to provide a high level of total return on its assets with an
emphasis on income.
PRINCIPAL INVESTMENT STRATEGIES:
The Fund will seek to achieve its investment objective through a combination of
capital appreciation and current income by investing, under normal market
conditions, at least 80% of its net assets in income producing equity securities
including securities convertible into common stock. In making stock selections,
the Fund's Adviser looks for securities that have a better yield than the
average of the Standard and Poor's Composite 500 Stock Price Index (the "S&P(R)
500 Stock Index"), as well as capital gains potential.
PRINCIPAL RISKS:
The Fund's share price will fluctuate with changes in the market value of the
Fund's portfolio securities. Stocks are subject to market, economic and business
risks that cause their prices to fluctuate. Preferred stocks and debt securities
convertible into or exchangeable for common or preferred stock also are subject
to interest rate risk and/or credit risk. When interest rates rise, the value of
such securities generally declines. It is also possible that the issuer of a
security will not be able to make interest and principal payments when due. When
you sell Fund shares, they may be worth less than what you paid for them.
Consequently, you can lose money by investing in the Fund. The Fund is subject
to the risk that its portfolio companies will reduce or eliminate the dividend
rate on securities held by the Fund. The Fund is also subject to the risk that
the Adviser may be incorrect in its assessment of the value of the securities it
holds, which may result in the decline in the value of Fund shares.
YOU MAY WANT TO INVEST IN THE FUND IF:
o you are a long-term investor
o you are seeking income as well as growth of capital
YOU MAY NOT WANT TO INVEST IN THE FUND IF:
o you are conservative in your investment approach
o you seek stability of principal more than growth of capital
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WOODLAND SMALL CAP VALUE FUND
INVESTMENT OBJECTIVE:
The Fund seeks to provide a high level of capital appreciation.
PRINCIPAL INVESTMENT STRATEGIES:
Under normal market conditions, the Fund invests at least 80% of its net assets
in equity securities of companies that are considered to be small capitalization
companies at the time the Fund makes the investment. The Fund invests primarily
in the common stocks of companies which the Fund's portfolio manager believes
are undervalued. The Fund's Adviser currently characterizes small capitalization
companies for this Fund as those with a total market value of $1.5 billion or
less at the time of investment. The Adviser looks for undervalued companies with
shareholder oriented management teams that are employing strategies to grow the
company's value.
PRINCIPAL RISKS:
The Fund's share price will fluctuate with changes in the market value of the
Fund's portfolio securities. Stocks are subject to market, economic and business
risks that cause their prices to fluctuate. When you sell Fund shares, they may
be worth less than what you paid for them. Consequently, you can lose money by
investing in the Fund. The Fund is subject to the risk that small capitalization
stocks may trade less frequently and may be subject to more abrupt or erratic
movements in price than medium and large capitalization stocks. The Fund is also
subject to the risk that the portfolio manager may be incorrect in its
assessment of the value of the securities the Fund holds, which may result in a
decline in the value of Fund shares. The Fund is "non-diversified" which means
that the Fund's investments may be concentrated in fewer securities than a
"diversified" mutual fund. As a result, an investment in the Fund may entail
greater risk than an investment in a "diversified" mutual fund.
WHO MAY WANT TO INVEST:
The Fund's Class AAA Shares offered herein are offered only to investors who
acquire them directly through the Distributor, or through a select number of
financial intermediaries with whom the Distributor has entered into selling
agreements specifically authorizing them to offer Class AAA Shares.
YOU MAY WANT TO INVEST IN THE FUND IF:
o you are a long-term investor
o you seek growth of capital
o you believe that the market will favor small capitalization stocks over
the long term
YOU MAY NOT WANT TO INVEST IN THE FUND IF:
o you are seeking a high level of current income
o you are conservative in your investment approach
o you seek stability of principal more than growth of capital
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PERFORMANCE:
The bar charts and tables that follow provide an indication of the risks of
investing in the Funds by showing changes in the Funds' performance from year to
year (since 1994), and by showing how the Funds' average annual returns for the
one year, five years, ten years and the life of each Fund, as applicable, Fund
compare to those of a broad-based securities market index. As with all mutual
funds, the Funds' past performance (before and after taxes) does not predict how
the Funds will perform in the future. Both the chart and the table assume the
reinvestment of dividends and distributions.
SMALL CAP GROWTH FUND (FOR THE PERIODS ENDED DECEMBER 31)
[GRAPHIC OMITTED]
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
1994 -2.9%
1995 25.2%
1996 11.9%
1997 36.5%
1998 0.0%
1999 14.2%
2000 11.3%
2001 4.7%
2002 -5.3%
2003 37.6%
During the period shown in the bar chart, the highest return for a quarter was
18.27% (quarter ended June 30, 2003) and the lowest return for a quarter was
(20.26)% (quarter ended September 30,1998).
AVERAGE ANNUAL TOTAL RETURNS PAST PAST PAST SINCE OCTOBER 22,
(FOR THE PERIODS ENDED DECEMBER 31, 2003) ONE YEAR FIVE YEARS TEN YEARS 1991*
----------------------------------------- -------- ---------- --------- -----------------
The Gabelli Small Cap Growth Fund Class AAA Shares
Return Before Taxes ............................ 37.56% 11.62% 12.39% 15.55%
Return After Taxes on Distributions ............ 37.27% 9.63% 10.06% 13.46%
Return After Taxes on Distributions
and Sale of Fund Shares ...................... 29.95% 8.92% 9.46% 12.67%
Russell 2000 Index** ............................... 47.25% 7.13% 9.47% 11.25%
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* From October 22, 1991, the date that the Fund commenced investment
operations.
** The Russell 2000 Index is an unmanaged index consisting of a broad-base of
common stocks. The performance of the index does not include expenses or
fees.
After-tax returns are calculated using the historical highest individual federal
marginal income tax rates and do not reflect the impact of state and local
taxes. In some instances, the "Return After Taxes on Distributions and Sale of
Fund Shares" may be greater than "Return Before Taxes" because the investor is
assumed to be able to use the capital loss of the sale of Fund shares to offset
other taxable gains. Actual after-tax returns depend on the investor's tax
situation and may differ from those shown. After-tax returns shown are not
relevant to investors who hold their Fund shares through tax-deferred
arrangements, such as 401(k) plans or individual retirement accounts.
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EQUITY INCOME FUND (FOR THE PERIODS ENDED DECEMBER 31)
[GRAPHIC OMITTED]
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
1994 1.1%
1995 28.3%
1996 17.9%
1997 27.9%
1998 12.6%
1999 9.3%
2000 11.3%
2001 -0.9%
2002 -7.7%
2003 28.3%
During the periods shown in the bar chart, the highest return for a quarter was
15.67% (quarter ended June 30, 2003) and the lowest return for a quarter was
(13.54)% (quarter ended September 30, 2002).
AVERAGE ANNUAL TOTAL RETURNS PAST PAST PAST SINCE JANUARY 2,
(FOR THE PERIODS ENDED DECEMBER 31, 2003) ONE YEAR FIVE YEARS TEN YEARS 1992*
----------------------------------------- -------- ---------- --------- ----------------
The Gabelli Equity Income Fund Class AAA Shares
Return Before Taxes ............................. 28.29% 7.39% 12.14% 12.40%
Return After Taxes on Distributions ............. 27.94% 5.27% 9.94% 10.40%
Return After Taxes on Distributions
and Sale of Fund Shares ....................... 22.67% 5.26% 9.51% 9.96%
S&P(R)500 Composite Stock Price Index** ............. 28.67% (0.57)% 11.06% 10.69%
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* From January 2, 1992, the date that the Fund commenced investment operations.
** The S&P(R) 500 Composite Stock Price Index is a widely recognized, unmanaged
index of common stock prices. The performance of the Index does not include
expenses or fees.
After-tax returns are calculated using the historical highest individual federal
marginal income tax rates and do not reflect the impact of state and local
taxes. In some instances, the "Return After Taxes on Distributions and Sale of
Fund Shares" may be greater than "Return Before Taxes" because the investor is
assumed to be able to use the capital loss of the sale of Fund shares to offset
other taxable gains. Actual after-tax returns depend on the investor's tax
situation and may differ from those shown. After-tax returns shown are not
relevant to investors who hold their Fund shares through tax-deferred
arrangements, such as 401(k) plans or individual retirement accounts.
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WOODLAND SMALL CAP VALUE FUND (FOR THE PERIOD ENDED DECEMBER 31)
[GRAPHIC OMITTED]
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
2003 20.7%
During the period shown in the bar chart, the highest return for a quarter was
14.11% (quarter ended December 31, 2003) and the lowest return for a quarter was
(8.00)% (quarter ended March 31, 2003).
PAST ONE YEAR
AVERAGE ANNUAL TOTAL RETURNS (SINCE DECEMBER 31,
(FOR THE PERIOD ENDED DECEMBER 31, 2003) 2002)
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The Gabelli Woodland Small Cap Value Fund Class AAA Shares
Return Before Taxes ............................ 20.73%
Return After Taxes on Distributions ............ 20.60%
Return After Taxes on Distributions
and Sale of Fund Shares ...................... 16.52%
Russell 2000 Index* ................................. 47.25%
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* The Russell 2000 Index is an unmanaged index consisting of a broad-base of
common stocks. The performance of the index does not include expenses or
fees.
After-tax returns are calculated using the historical highest individual federal
marginal income tax rates and do not reflect the impact of state and local
taxes. In some instances, the "Return After Taxes on Distributions and Sale of
Fund Shares" may be greater than "Return Before Taxes" because the investor is
assumed to be able to use the capital loss of the sale of Fund shares to offset
other taxable gains. Actual after-tax returns depend on the investor's tax
situation and may differ from those shown. After-tax returns shown are not
relevant to investors who hold their Fund shares through tax-deferred
arrangements, such as 401(k) plans or individual retirement accounts.
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FEES AND EXPENSES OF THE FUNDS:
This table describes the fees and expenses that you may pay if you buy and hold
Class AAA Shares of the Funds.
WOODLAND
SMALL CAP EQUITY SMALL CAP
GROWTH INCOME VALUE
FUND FUND FUND
--------- ------ ---------
ANNUAL FUND OPERATING EXPENSES (expenses that are deducted from Fund assets):
Management Fees .......................................................... 1.00% 1.00% 1.00%
Distribution (Rule 12b-1) Expenses(1) .................................... 0.25% 0.25% 0.25%
Other Expenses ........................................................... 0.20% 0.24% 13.80%(2)
---- ---- -----
Total Annual Fund Operating Expenses ..................................... 1.45% 1.49% 15.05%(2)
==== ==== =====
Fee Waiver and Expense Reimbursement ..................................... (13.05)%(2)
Net Annual Operating Expenses ............................................ 2.00%(2)
======
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(1) Due to the payment of Rule 12b-1 fees, long-term shareholders may indirectly
pay more than the equivalent of the maximum permitted front-end sales charge.
(2) The Adviser has contractually agreed to waive its investment advisory fee
and/or to reimburse expenses of the Fund to the extent necessary to maintain the
Fund's Total Annual Fund Operating Expenses (excluding brokerage, interest,
taxes and extraordinary expenses) at 2.00% on an annualized basis for Class AAA
shares. This arrangement will continue until at least through September 30,
2004. In addition, the Fund has agreed, during the two-year period following any
waiver or reimbursement by the Adviser, to repay such amount to the extent,
after giving effect to the repayment, such adjusted Total Annual Fund Operating
Expenses would not exceed 2.00% on an annualized basis for Class AAA shares.
EXPENSE EXAMPLE:
This example is intended to help you compare the cost of investing in Class AAA
Shares of the Funds with the cost of investing in other mutual funds. The
example assumes (1) you invest $10,000 in the Funds for the time periods shown,
(2) you redeem your shares at the end of those periods, (3) your investment has
a 5% return each year and (4) the Funds' operating expenses remain the same.
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
SMALL CAP GROWTH FUND $148 $459 $792 $1,735
EQUITY INCOME FUND $152 $471 $813 $1,779
WOODLAND SMALL CAP VALUE FUND $203 $3,000 $5,262 $9,205
INVESTMENT AND RISK INFORMATION
The investment policy of each of the Small Cap Growth Fund, the Equity Income
Fund and the Woodland Small Cap Value Fund relating to the type of securities in
which 80% of the Fund's net assets must be invested may be changed by the Board
of Directors without shareholder approval. Shareholders will, however, receive
at least 60 days' prior notice of any change in this policy.
SMALL CAP GROWTH FUND/WOODLAND SMALL CAP VALUE FUND
In selecting investments for the Small Cap Growth Fund and Woodland Small Cap
Value Fund, the Adviser seeks issuers with a dominant market share or niche
franchise in growing and/or consolidating industries. The Adviser considers for
purchase the stocks of small capitalization (capitalization is the price per
share multiplied by the number of shares outstanding) companies with experienced
management, strong balance sheets and rising free cash flow and earnings. The
Adviser's goal is to invest long term in the stocks of companies trading at
reasonable valuations relative to perceived economic worth.
Frequently, smaller companies exhibit one or more of the following traits:
o New products or technologies
o New distribution methods
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o Rapid changes in industry conditions due to regulatory or other
developments
o Changes in management or similar characteristics that may result not
only in expected growth in revenues but in an accelerated or above
average rate of earnings growth, which would usually be reflected in
capital appreciation.
In addition, because smaller companies are less actively followed by stock
analysts and less information is available on which to base stock price
evaluations, the market may overlook favorable trends in particular smaller
growth companies and then adjust its valuation more quickly once investor
interest is gained.
EQUITY INCOME FUND
In selecting investments for the Equity Income Fund, the Adviser focuses on
issuers that:
o have strong free cash flow and pay regular dividends
o have potential for long-term earnings per share growth
o may be subject to a value catalyst, such as industry developments,
regulatory changes, changes in management, sale or spin-off of a
division or the development of a profitable new business
o are well-managed
o will benefit from sustainable long-term economic dynamics, such as
globalization of an issuer's industry or an issuer's increased focus on
productivity or enhancement of services.
The Adviser also believes preferred stock and convertible securities of selected
companies offer opportunities for capital appreciation as well as periodic
income and may invest a portion of the Equity Income Fund's assets in such
securities. This is particularly true in the case of companies that have
performed below expectations. If a company's performance has been poor enough,
its preferred stock and convertible debt securities will trade more like the
common stock than like a fixed income security and may result in above average
appreciation if performance improves. Even if the credit quality of the company
is not in question, the market price of the convertible security will reflect
little or no element of conversion value if the price of its common stock has
fallen substantially below the conversion price. This leads to the possibility
of capital appreciation if the price of the common stock recovers.
The Funds may also use the following investment technique:
o DEFENSIVE INVESTMENTS. When adverse market or economic conditions occur,
the Funds may temporarily invest all or a portion of their assets in
defensive investments. Such investments include fixed income securities
or high quality money market instruments. When following a defensive
strategy, the Funds will be less likely to achieve their investment
goals.
Investing in the Funds involve the following risks:
o EQUITY RISK. The principal risk of investing in the Funds is equity
risk. Equity risk is the risk that the prices of the securities held by
the Funds will fall due to general market and economic conditions,
perceptions regarding the industries in which the companies issuing the
securities participate and the issuer company's particular
circumstances.
o VALUE INVESTING RISK. Each Fund invests in "value" stocks. The portfolio
manager may be wrong in the assessment of a company's value and the
stocks the Fund holds may not reach what the portfolio manager believes
are their full values. From time to time "value" investing falls out of
favor with investors. During those periods, the Fund's relative
performance may suffer.
o FUND AND MANAGEMENT RISK.
o SMALL CAP GROWTH FUND AND WOODLAND SMALL CAP VALUE FUND ONLY -- The
Funds invest in stocks issued by smaller companies. Each Fund's
price may decline if the market favors large or mid-size
capitalization company stocks over stocks of small companies. If the
portfolio manager's assesment of the value of the securities each
Fund holds is incorrect, or the events expected to increase value do
not occur, then the value of the Fund's shares may decline.
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o EQUITY INCOME FUND ONLY -- The Fund invests in stocks issued by
companies believed by the portfolio manager to be undervalued and
that have the potential to achieve significant capital appreciation.
If the portfolio manager is incorrect in its assessment of the
values of the securities it holds, or no event occurs which surfaces
value, then the value of the Fund's shares may decline.
o SMALL CAPITALIZATION COMPANY RISK. SMALL CAP GROWTH FUND AND WOODLAND
SMALL CAP VALUE FUND ONLY -- Investing in securities of small
capitalization companies may involve greater risks than investing in
larger, more established issuers. Smaller capitalization companies
typically have relatively lower revenues, limited product lines and lack
of management depth, and may have a smaller share of the market for
their products or services, than larger capitalization companies. The
stocks of smaller capitalization companies tend to have less trading
volume than stocks of larger capitalization companies. Less trading
volume may make it more difficult for our portfolio managers to sell
securities of smaller capitalization companies at quoted market prices.
Finally, there are periods when investing in smaller capitalization
stocks falls out of favor with investors and the stocks of smaller
capitalization companies underperform.
o INTEREST RATE RISK AND CREDIT RISK. EQUITY INCOME FUND ONLY --
Investments in preferred stock and securities convertible into or
exchangeable for common or preferred stock involve interest rate risk
and credit risk. When interest rates decline, the value of such
securities generally rises. Conversely, when interest rates rise, the
value of such securities generally declines. It is also possible that
the issuer of a security will not be able to make interest and principal
payments when due.
o LOW CREDIT QUALITY RISK. EQUITY INCOME FUND ONLY -- Lower rated
convertible securities are subject to greater credit risk, greater price
volatility and a greater risk of loss than investment grade securities.
There may be less of a market for lower rated convertible securities,
which could make it harder to sell them at an acceptable price.
o NON-DIVERSIFICATION. WOODLAND SMALL CAP VALUE FUND ONLY -- The Fund is
classified as a "non-diversified" investment company. Because the Fund,
as a non-diversified investment company, may invest in the securities of
individual issuers to a greater extent than a "diversified" mutual fund,
an investment in the Fund may present greater risk to an investor than
an investment in a diversified mutual fund because the investment risk
may be concentrated in fewer securities.
MANAGEMENT OF THE FUNDS
THE ADVISER. Gabelli Funds, LLC, with its principal offices located at One
Corporate Center, Rye, New York 10580-1422, serves as investment adviser to the
Funds. The Adviser makes investment decisions for the Funds and continuously
reviews and administers the Funds' investment program under the supervision of
the Funds' Board of Directors. The Adviser also manages several other open-end
and closed-end investment companies in the Gabelli family of funds. The Adviser
is a New York limited liability company organized in 1999 as successor to
Gabelli Group Capital Partners, Inc. (formerly named Gabelli Funds, Inc.), a New
York corporation organized in 1980. The Adviser is a wholly owned subsidiary of
Gabelli Asset Management Inc. ("GBL"), a publicly held company listed on the New
York Stock Exchange ("NYSE").
As compensation for its services and the related expenses borne by the Adviser,
for the fiscal year ended September 30, 2003, each of the Small Cap Growth and
Equity Income Funds paid the Adviser a fee equal to 1.00% of the value of its
average daily net assets. With respect to the Woodland Small Cap Value Fund, as
compensation for its services and the related expenses borne by the Adviser, the
Fund is contractually obligated to pay the Adviser a fee equal to 1.00% per year
of the value of the Fund's average daily net assets. For the fiscal period from
the Fund's commencement of operations through September 30, 2003, the Adviser
waived fees and reimbursed expenses of the Fund.
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The Adviser has contractually agreed to waive its investment advisory fee and/or
reimburse expenses to the extent necessary to maintain Total Annual Fund
Operating Expenses (excluding brokerage, interest, taxes and extraordinary
expenses) at no more than 2.00%. The fee waiver and expense reimbursement
arrangement will continue until at least through September 30, 2004. In
addition, the Fund has agreed, during the two year period following any waiver
or reimbursement by the Adviser, to repay such amount to the extent that after
giving effect to the repayment, such adjusted Total Annual Operating Expenses
would not exceed 2.00%.
THE PORTFOLIO MANAGERS. Mr. Mario J. Gabelli, CFA, is primarily responsible for
the day-to-day management of the Small Cap Growth Fund and Equity Income Fund.
Mr. Gabelli has been Chairman, Chief Executive Officer and Chief Investment
Officer of the Adviser and its predecessor since inception, as well as its
parent company, GBL. Mr. Gabelli also acts as Chief Executive Officer and Chief
Investment Officer of GAMCO Investors, Inc., a wholly owned subsidiary of GBL,
and is an officer or director of various other companies affiliated with GBL.
The Adviser relies to a considerable extent on the expertise of Mr. Gabelli, who
may be difficult to replace in the event of his death, disability or
resignation.
Elizabeth M. Lilly, CFA, is primarily responsible for the day-to-day management
of the Woodland Small Cap Value Fund. In November 2002, Ms. Lilly joined Gabelli
Asset Management Inc. as Senior Vice President and Portfolio Manager of Gabelli
Funds, LLC and GAMCO Investors, Inc. Prior to November 2002, Ms. Lilly was a
Managing Partner of Woodland Partners LLC since 1996.
RULE 12B-1 PLAN. Each Fund has adopted a plan under Rule 12b-1 (the "Plan")
which authorizes payments by the Fund on an annual basis of 0.25% of its average
daily net assets attributable to Class AAA Shares to finance distribution of its
Class AAA Shares or pay shareholder service fees. Each Fund may make payments
under its Plan for the purpose of financing any activity primarily intended to
result in the sales of Class AAA Shares of the Fund or pay shareholder service
fees. To the extent any activity is one that the Funds may finance without a
distribution plan, the Funds may also make payments to compensate such activity
outside of the Plan and not be subject to its limitations. Because payments
under the Plan are paid out of each Fund's assets on an ongoing basis, over time
these fees will increase the cost of your investment and may cost you more than
paying other types of sales charges. Due to the payment of 12b-1 fees, long-term
shareholders may indirectly pay more than the equivalent of the maximum
permitted front-end sales charge.
PURCHASE OF SHARES
You can purchase the Funds' shares on any day the NYSE is open for trading (a
"Business Day"). You may purchase shares through the Distributor, directly from
the Funds through the Funds' transfer agent or through registered broker-dealers
that have entered into selling agreements with the Distributor.
o BY MAIL OR IN PERSON. You may open an account by mailing a completed
subscription order form with a check or money order payable to "The
Gabelli Small Cap Growth Fund", "The Gabelli Equity Income Fund" or "The
Gabelli Woodland Small Cap Value Fund" to:
BY MAIL BY PERSONAL DELIVERY
------- --------------------
THE GABELLI FUNDS THE GABELLI FUNDS
P.O. BOX 8308 C/O BFDS
BOSTON, MA 02266-8308 66 BROOKS DRIVE
BRAINTREE, MA 02184
You can obtain a subscription order form by calling 800-GABELLI (800-422-3554).
Checks made payable to a third party and endorsed by the depositor are not
acceptable. For additional investments, send a check to the above address with a
note stating your exact name and account number, the name of the Fund(s) and
class of shares you wish to purchase.
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o BY BANK WIRE. To open an account using the bank wire transfer system,
first telephone the Fund(s) at 800-GABELLI (800-422-3554) to obtain a
new account number. Then instruct a Federal Reserve System member bank
to wire funds to:
STATE STREET BANK AND TRUST COMPANY
ABA #011-0000-28 REF DDA #99046187
RE: THE GABELLI ______ FUND
ACCOUNT #__________
ACCOUNT OF [REGISTERED OWNERS]
225 FRANKLIN STREET, BOSTON, MA 02110
If you are making an initial purchase, you should also complete and mail
a subscription order form to the address shown under "By Mail." Note
that banks may charge fees for wiring funds, although State Street Bank
and Trust Company ("State Street") will not charge you for receiving
wire transfers.
SHARE PRICE. The Funds sell their Class AAA Shares at the net asset value next
determined after the Funds receive your completed subscription order form but
does not issue the shares to you until it receives full payment. See "Pricing of
Fund Shares" for a description of the calculation of net asset value.
MINIMUM INVESTMENTS. Your minimum initial investment must be at least $1,000.
See "Retirement Plans/Education Savings Plans" and "Automatic Investment Plan"
regarding minimum investment amounts applicable to such plans. There is no
minimum subsequent investment requirement. Broker-dealers may have different
minimum investment requirements.
RETIREMENT PLANS/EDUCATION SAVINGS PLANS. The Funds make available IRA, "Roth"
IRA and "Coverdell" Education SavingsPlans for investment in Fund shares.
Applications may be obtained from the Distributor by calling 800-GABELLI
(800-422-3554). Self-employed investors may purchase shares of the Funds through
tax-deductible contributions to existing retirement plans for self-employed
persons, known as "Keogh" or "H.R.-10" plans. The Funds do not currently act as
a sponsor to such plans. Fund shares may also be a suitable investment for other
types of qualified pension or profit-sharing plans which are employer sponsored,
including deferred compensation or salary reduction plans known as "401(k)
Plans." The minimum initial investment in all such retirement plans is $250.
There is no minimum subsequent investment requirement for retirement plans.
AUTOMATIC INVESTMENT PLAN. The Funds offer an automatic monthly investment plan.
There is no initial minimum investment for accounts establishing an automatic
investment plan. Call the Distributor at 800-GABELLI (800-422-3554) for more
details about the plan.
TELEPHONE OR INTERNET INVESTMENT PLAN. You may purchase additional shares of the
Funds by telephone and/or over the Internet if your bank is a member of the
Automated Clearing House ("ACH") system. You must have a completed, approved
Investment Plan application on file with the Funds' transfer agent. There is a
minimum of $100 for each telephone or Internet investment. To initiate an ACH
purchase, please call 800-GABELLI (800-422-3554) or 800-872-5365 or visit our
website at www.gabelli.com.
GENERAL. State Street will not issue share certificates unless you request them.
The Funds reserve the right to (i) reject any purchase order if, in the opinion
of the Funds' management, it is in the Funds' best interest to do so, (ii)
suspend the offering of shares for any period of time and (iii) waive the Funds'
minimum purchase requirements.
CUSTOMER IDENTIFICATION PROGRAM. Federal law requires the Corporation, on behalf
of the Funds, to obtain, verify and record identifying information, which may
include the name, residential or business street address, date of birth (for an
individual), social security or taxpayer identification number or other
identifying information, for each investor who opens or reopens an account with
the Funds. Applications
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without the required information, or without any indication that a social
security or taxpayer identification number has been applied for, may not be
accepted. After acceptance, to the extent permitted by applicable law or its
customer identification program, the Corporation reserves the right (a) to place
limits on transactions in any account until the identity of the investor is
verified; or (b) to refuse an investment in the Funds or to involuntarily redeem
an investor's shares and close an account in the event that an investor's
identity is not verified. The Corporation and its agents will not be responsible
for any loss in an investor's account resulting from the investor's delay in
providing all required identifying information or from closing an account and
redeeming an investor's shares when an investor's identity is not verified.
THIRD PARTY ARRANGEMENTS. The Adviser and its affiliates utilize a portion of
their assets, including 12b-1 fees, to pay all or a portion of the charges of
various programs that make shares of the Funds available to their customers.
Subject to tax limitations and approval by the Board of Directors on a
Fund-by-Fund basis, each of the Funds pays a portion of these charges, out of
assets other than 12b-1 payments, representing savings of expenses the Funds
would otherwise incur in maintaining shareholder accounts for those who invest
in the Funds through these programs.
REDEMPTION OF SHARES
You can redeem shares of the Funds on any Business Day. The Funds may
temporarily stop redeeming their shares when the NYSE is closed or trading on
the NYSE is restricted, when an emergency exists and the Funds cannot sell their
shares or accurately determine the value of their assets, or if the Securities
and Exchange Commission orders the Funds to suspend redemptions.
The Funds redeem their shares at the net asset value next determined after the
Funds receive your redemption request in proper form. See "Pricing of Fund
Shares" for a description of the calculation of net asset value.
You may redeem shares through the Distributor or directly from the Funds through
the Funds' transfer agent.
o BY LETTER. You may mail a letter requesting redemption of shares to: THE
GABELLI FUNDS, P.O. BOX 8308, BOSTON, MA 02266-8308. Your letter should
state the name of the Fund(s) and the share class, the dollar amount or
number of shares you are redeeming and your account number. You must
sign the letter in exactly the same way the account is registered. If
there is more than one owner of shares, all must sign. A signature
guarantee is required for each signature on your redemption letter. You
can obtain a signature guarantee from financial institutions such as
commercial banks, brokers, dealers and savings associations. A notary
public cannot provide a signature guarantee.
o BY TELEPHONE OR THE INTERNET. Unless you have requested that telephone
or Internet redemptions from your account not be permitted, you may
redeem your shares in an account directly (including an IRA) registered
with State Street by calling either 800-GABELLI (800-422-3554) or
800-872-5365 (617-328-5000 from outside the United States) or visiting
our website at www.gabelli.com. IRA holders should consult a tax advisor
concerning the current tax rules applicable to IRAs. If State Street
acts on telephone or Internet instructions after following reasonable
procedures to protect against unauthorized transactions, neither State
Street nor the Funds will be responsible for any losses due to
unauthorized telephone or Internet transactions and instead you would be
responsible. You may request that proceeds from telephone or Internet
redemptions be mailed to you by check (if your address has not changed
in the prior 30 days), forwarded to you by bank wire or invested in
another mutual fund advised by the Adviser (see "Exchange of Shares").
Among the procedures State Street may use are passwords or verification
of personal information. The Funds may impose limitations from time to
time on telephone or Internet redemptions.
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1. TELEPHONE OR INTERNET REDEMPTION BY CHECK. The Funds will make checks
payable to the name in which the account is registered and normally
will mail the check to the address of record within seven days.
2. TELEPHONE OR INTERNET REDEMPTION BY BANK WIRE. The Funds accept
telephone or Internet requests for wire redemption in amounts of at
least $1,000. The Funds will send a wire to either a bank designated on
your subscription order form or on a subsequent letter with a
guaranteed signature. The proceeds are normally wired on the next
Business Day.
AUTOMATIC CASH WITHDRAWAL PLAN. You may automatically redeem shares on a
monthly, quarterly or annual basis if you have at least $10,000 in your account
and if your account is directly registered with State Street. Call 800-GABELLI
(800-422-3554) for more information about this plan.
INVOLUNTARY REDEMPTION. The Funds may redeem all shares in your account (other
than an IRA) if their value falls below $1,000 as a result of redemptions (but
not as a result of a decline in net asset value). You will be notified in
writing if the Funds initiate such action and allowed 30 days to increase the
value of your account to at least $1,000.
REDEMPTION PROCEEDS. A redemption request received by a Fund wilI be effected at
the net asset value next determined after a Fund receives the request. If you
request redemption proceeds by check, the Funds will normally mail the check to
you within seven days after receipt of your redemption request. If you purchased
your Fund(s) shares by check or through the Automatic Investment Plan, you may
not receive proceeds from your redemption until the check clears, which may take
up to as many as 15 days following purchase. While the Funds will delay the
processing of the payment until the check clears, your shares will be valued at
the next determined net asset value after receipt of your redemption request.
EXCHANGE OF SHARES
You can exchange shares of the Fund(s) you hold for shares of the same class of
another fund managed by the Adviser or its affiliates based on their relative
net asset values. To obtain a list of the funds whose shares you may acquire
through an exchange call 800-GABELLI (800-422-3554). You may also exchange your
shares for shares of a money market fund managed by the Adviser or its
affiliates.
In effecting an exchange:
o you must meet the minimum investment requirements for the fund whose
shares you purchase through exchange.
o if you are exchanging to a fund with a higher sales charge, you must
pay the difference at the time of exchange.
o you may realize a taxable gain or loss.
o you should read the prospectus of the fund whose shares you are
purchasing through exchange. Call 800-GABELLI (800-422-3554) or
visit our website at www.gabelli.com to obtain the prospectus.
You may exchange shares through the Distributor, directly through the Funds'
transfer agent or through a registered broker-dealer.
o EXCHANGE BY TELEPHONE. You may give exchange instructions by telephone
by calling 800-GABELLI (800-422-3554). You may not exchange shares by
telephone if you hold share certificates.
o EXCHANGE BY MAIL. You may send a written request for exchanges to: THE
GABELLI FUNDS, P.O. BOX 8308, BOSTON, MA 02266-8308. Your letter should
state your name, your account number, the
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dollar amount or number of shares you wish to exchange, the name and
class of the fund whose shares you wish to exchange, and the name of the
fund whose shares you wish to acquire.
o EXCHANGE THROUGH THE INTERNET. You may also give exchange instructions
via the Internet at www.gabelli.com. You may not exchange shares through
the Internet if you hold share certificates. The Funds may impose
limitations from time to time on Internet exchanges.
The Funds may modify or terminate the exchange privilege at any time. You will
be given notice 60 days prior to any material change in the exchange privilege.
Your broker may charge you a processing fee for assisting you in purchasing or
redeeming shares of the Funds. This charge is set by your broker and does not
benefit the Funds or the Adviser in any way. It is in addition to the sales
charges and other costs described in this prospectus and must be disclosed to
you by your broker.
PRICING OF FUND SHARES
The net asset value per share of each Fund's Class AAA Shares is calculated on
each Business Day. The NYSE is open Monday through Friday, but currently is
scheduled to be closed on New Year's Day, Dr. Martin Luther King, Jr. Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day and on the preceding Friday or subsequent
Monday when a holiday falls on a Saturday or Sunday, respectively.
The net asset value per share of each Fund's Class AAA Shares is determined as
of the close of regular trading on the NYSE, normally 4:00 p.m., Eastern Time.
Net asset value per share is computed by dividing the value of a Fund's net
assets (i.e. the value of its securities and other assets less its liabilities,
including expenses payable or accrued but excluding capital stock and surplus)
attributable to its Class AAA shares by the total number of Class AAA Shares
outstanding at the time the determination is made. The Funds use market
quotations in valuing their portfolio securities. Short-term investments that
mature in 60 days or less are valued at amortized cost, which the Directors
believe represents fair value. The price of Fund shares for the purpose of
purchase and redemption orders will be based upon the calculation of net asset
value per share next made as of a time after the time as of which the purchase
or redemption order is received in proper form.
DIVIDENDS AND DISTRIBUTIONS
The Funds intend to pay dividends monthly for the Equity Income Fund and
annually for the Small Cap Growth Fund and Woodland Small Cap Value Fund and
capital gain distributions, if any, on an annual basis. You may have dividends
or capital gain distributions that are declared by the Funds automatically
reinvested at net asset value in additional shares of the Funds. You will make
an election to receive dividends and distributions in cash or Fund(s) shares at
the time you purchase your shares. You may change this election by notifying the
Funds in writing at any time prior to the record date for a particular dividend
or distribution. There are no sales or other charges in connection with the
reinvestment of dividends and capital gain distributions. Shares purchased
through dividend reinvestment will receive a price based on the net asset value
per share on the reinvestment date, which is typically the date dividends are
paid to shareholders. There is no fixed dividend rate, and there can be no
assurance that the Funds will pay any dividends or realize any capital gains.
TAX INFORMATION
The Funds expect that distributions will consist primarily of investment company
taxable income and net capital gains. Dividends out of investment company
taxable income and distributions of net short-term capital gains (i.e. gains
from assets held by the Funds for one year or less) are taxable to you as
ordinary
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income except that qualifying dividends are eligible for a reduced rate.
Distributions of net long-term capital gains are taxable to you at long-term
capital gain rates. The Funds' distributions, whether you receive them in cash
or reinvest them in additional shares of the Fund, generally will be subject to
federal, state or local taxes. A redemption of the Fund's shares or an exchange
of the Funds' shares for shares of another fund will be treated for tax purposes
as a sale of the Funds' shares, and any gain you realize on such a transaction
generally will be taxable. Foreign shareholders may be subject to a federal
withholding tax.
This summary of tax consequences is intended for general information only and is
subject to change by legislative or administrative action, and any such change
may be retroactive. A more complete discussion of the tax rules applicable to
you can be found in the Statement of Additional Information. You should consult
a tax adviser concerning the tax consequences of your investment in the Funds.
MAILINGS TO SHAREHOLDERS
In our continuing efforts to reduce duplicative mail and fund expenses, we
currently send a single copy of prospectuses and shareholder reports to your
household even if more than one family member in your household owns the same
fund or funds described in the prospectus or report. Additional copies of our
prospectuses and reports may be obtained by calling 800-GABELLI (800-422-3554).
If you do not want us to continue to consolidate your fund mailings and would
prefer to receive separate mailings at any time in the future, please call us at
the telephone number above and we will resume separate mailings in accordance
with your instructions within 30 days of your request.
FINANCIAL HIGHLIGHTS
The financial highlights tables are intended to help you understand the
financial performance for the past five fiscal years or for the life of the
Fund, if less. The total returns in the tables represent the rate that an
investor would have earned or lost on an investment in the Funds' Class AAA
Shares. This information has been audited by Ernst & Young LLP, independent
auditors, whose report along with the Funds' financial statements and related
notes are included in the annual report, which is available upon request.
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SMALL CAP GROWTH FUND
Per share amounts for the Fund's Class AAA Shares outstanding throughout each
fiscal year ended September 30,
2003 2002 2001 2000 1999
-------- -------- -------- -------- --------
OPERATING PERFORMANCE:
Net asset value, beginning of period .......... $ 17.04 $ 17.13 $ 23.60 $ 21.84 $ 18.81
-------- -------- -------- -------- --------
Net investment income (loss) .................. (0.05) (0.04) 0.06 0.06 (0.07)
Net realized and unrealized
gain (loss) on investments .................. 4.74 0.31 (1.75) 4.16 3.63
-------- -------- -------- -------- --------
Total from investment operations .............. 4.69 0.27 (1.69) 4.22 3.56
-------- -------- -------- -------- --------
DISTRIBUTIONS TO SHAREHOLDERS:
Net investment income ......................... -- (0.01) (0.05) -- --
Net realized gain on investments .............. (0.25) (0.35) (4.73) (2.46) (0.53)
-------- -------- -------- -------- --------
Total distributions ........................... (0.25) (0.36) (4.78) (2.46) (0.53)
-------- -------- -------- -------- --------
NET ASSET VALUE, END OF PERIOD ................ $ 21.48 $ 17.04 $ 17.13 $ 23.60 $ 21.84
======== ======== ======== ======== ========
Total return+ ................................. 27.84% 1.39% (7.47)% 21.00% 19.24%
======== ======== ======== ======== ========
RATIOS TO AVERAGE NET ASSETS AND
SUPPLEMENTAL DATA:
Net assets, end of period (in 000's) .......... $540,397 $428,416 $372,865 $366,459 $305,403
Ratio of net investment income (loss) to
average net assets .......................... (0.22)% (0.22)% 0.30% 0.26% (0.34)%
Ratio of operating expenses to
average net assets (a) ..................... 1.45% 1.45% 1.45% 1.49%(a) 1.56%(a)
Portfolio turnover rate ....................... 4% 10% 17% 47% 24%
EQUITY INCOME FUND
Per share amounts for the Fund's Class AAA Shares outstanding throughout each
fiscal year ended September 30,
2003 2002 2001 2000 1999
-------- -------- -------- -------- --------
OPERATING PERFORMANCE:
Net asset value, beginning of period .......... $ 11.93 $ 13.88 $ 16.35 $ 17.58 $ 15.97
-------- -------- -------- -------- --------
Net investment income (loss) .................. 0.28 0.23 0.25 0.46 0.23
Net realized and unrealized
gain (loss) on investments .................. 2.64 (1.79) (0.28) 0.81 2.82
-------- -------- -------- -------- --------
Total from investment operations .............. 2.92 (1.56) (0.03) 1.27 3.05
-------- -------- -------- -------- --------
DISTRIBUTIONS TO SHAREHOLDERS:
Net investment income ......................... (0.25) (0.23) (0.36) (0.36) (0.22)
Net realized gain on investments .............. -- (0.16) (2.44) (2.50) (1.44)
-------- -------- -------- -------- --------
Total distributions ........................... (0.25) (0.39) (2.44) (2.50) (1.44)
-------- -------- -------- -------- --------
NET ASSET VALUE, END OF PERIOD ................ $ 14.60 $ 11.93 $ 13.88 $ 16.35 $ 17.58
======== ======== ======== ======== ========
Total return+ ................................. 24.59% (11.58)% (0.43)% 8.41% 19.82%
======== ======== ======== ======== ========
RATIOS TO AVERAGE NET ASSETS AND
SUPPLEMENTAL DATA:
Net assets, end of period (in 000's) .......... $261,777 $162,938 $121,499 $ 89,164 $ 92,111
Ratio of net investment income (loss) to
average net assets .......................... 2.09% 1.75% 1.65% 2.85% 1.32%
Ratio of operating expenses to
average net assets (b) ..................... 1.49%(b) 1.50% 1.55% 1.66%(b) 1.60%
Portfolio turnover rate ....................... 27% 12% 41% 33% 39%
----------------
+ 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.
(a) The Fund incurred interest expense during the fiscal years ended September
30, 2000 and 1999. If interest expense had not been incurred, the ratios of
operating expenses to average net assets would have been 1.49% and 1.53%,
respectively.
(b) The Fund incurred interest expense during the fiscal years ended September
30, 2003 and 2000. If interest expense had not been incurred, the ratios of
operating expenses to average net assets would have been 1.49% and 1.61%,
respectively.
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WOODLAND SMALL CAP VALUE FUND
Per share amounts for the Fund's Class AAA Shares outstanding for the fiscal
period ended September 30,
2003
------
OPERATING PERFORMANCE:
Net asset value, beginning of period (a) ........ $10.00
------
Net investment income (loss) (c) ................ (0.07)
Net realized and unrealized
gain (loss) on investments .................... 0.65
------
Total from investment operations ................ 0.58
------
NET ASSET VALUE, END OF PERIOD .................. $10.58
======
Total return+ ................................... 5.80%
======
RATIOS TO AVERAGE NET ASSETS AND
SUPPLEMENTAL DATA:
Net assets, end of period (in 000's) ............ $2,323
Ratio of net investment income (loss) to
average net assets (d) ........................ (0.97)%
Ratio of expenses net of waivers/
reimbursements (d) ............................ 2.00%
Ratio of expenses before waivers/
reimbursements (b)(d) ......................... 15.05%
Portfolio turnover rate ......................... 39%
----------------
+ 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.
(a) As of December 31, 2002.
(b) During the period, certain fees were voluntarily reduced and/or reimbursed.
If such fee reductions and/or reimbursements had not occured, the ratio
would have been as shown.
(c) Per share amounts have been calculated using the monthly average shares
outstanding method.
(d) Annualized.
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GABELLI FUNDS AND YOUR PERSONAL PRIVACY
WHO ARE WE?
The Gabelli Funds are investment companies registered with the Securities and
Exchange Commission under the Investment Company Act of 1940. We are managed by
Gabelli Funds LLC, Gabelli Advisers, Inc. and Gabelli Fixed Income, LLC, which
are affiliated with Gabelli Asset Management Inc. Gabelli Asset Management is a
publicly-held company that has subsidiaries that provide investment advisory or
brokerage services for a variety of clients.
WHAT KIND OF NON-PUBLIC INFORMATION DO WE COLLECT ABOUT YOU IF YOU BECOME A
GABELLI CUSTOMER?
If you apply to open an account directly with us, you will be giving us some
non-public information about yourself. The non-public information we collect
about you is:
o INFORMATION YOU GIVE US ON YOUR APPLICATION FORM. This could include your
name, address, telephone number, social security number, bank account
number, and other information.
o INFORMATION ABOUT YOUR TRANSACTIONS WITH US, ANY TRANSACTIONS WITH OUR
AFFILIATES AND TRANSACTIONS WITH THE ENTITIES WE HIRE TO PROVIDE SERVICES
TO YOU. This would include information about the shares that you buy or
redeem, and the deposits and withdrawals that you make. If we hire someone
else to provide services -- like a transfer agent -- we will also have
information about the transactions you conduct through them.
WHAT INFORMATION DO WE DISCLOSE AND TO WHOM DO WE DISCLOSE IT?
We do not disclose any non-public personal information about our customers or
former customers to anyone, other than our affiliates, our service providers who
need to know such information and as otherwise permitted by law. If you want to
find out what the law permits, you can read the privacy rules adopted by the
Securities and Exchange Commission. They are in volume 17 of the Code of Federal
Regulations, Part 248. The Commission often posts information about its
regulations on its website, WWW.SEC.GOV.
WHAT DO WE DO TO PROTECT YOUR PERSONAL INFORMATION?
We restrict access to non-public personal information about you to the people
who need to know that information in order to provide services to shareholders
of the Funds and to ensure that we are complying with the laws governing the
securities business. We maintain physical, electronic and procedural safeguards
to keep your personal information confidential.
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GABELLI EQUITY SERIES FUNDS, INC.
THE GABELLI SMALL CAP GROWTH FUND
THE GABELLI EQUITY INCOME FUND
THE GABELLI WOODLAND SMALL CAP VALUE FUND
CLASS AAA SHARES
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FOR MORE INFORMATION:
For more information about the Funds, the following documents are available free
upon request:
ANNUAL/SEMI-ANNUAL REPORTS:
Each Fund's semi-annual and audited annual reports to shareholders contain
additional information on the Funds' investments. In each Fund's annual report,
you will find a discussion of the market conditions and investment strategies
that significantly affected each Fund's performance during its last fiscal year.
STATEMENT OF ADDITIONAL INFORMATION (SAI):
The SAI provides more detailed information about the Funds, including their
operations and investment policies. It is incorporated by reference, and is
legally considered a part of this prospectus.
--------------------------------------------------------------------------------
You can get free copies of these documents and prospectuses of other funds in
the Gabelli family, or request other information and discuss your questions
about the Funds by contacting:
Gabelli Equity Series Funds, Inc.
One Corporate Center
Rye, NY 10580-1422
Telephone: 800-GABELLI (800-422-3554)
www.gabelli.com
--------------------------------------------------------------------------------
You can review and/or copy the Funds' prospectuses, reports and SAI at the
Public Reference Room of the Securities and Exchange Commission. You can get
text-only copies:
o For a fee, by electronic request at publicinfo@sec.gov, by writing the
Public Reference Section of the Commission, Washington, D.C. 20549-0102
or calling 202-942-8090.
o Free from the EDGAR Database on the Commission's website at www.sec.gov.
(Investment Company Act File No. 811-06367)
GABELLI EQUITY SERIES FUNDS, INC.
THE GABELLI SMALL CAP GROWTH FUND
THE GABELLI EQUITY INCOME FUND
THE GABELLI WOODLAND SMALL CAP VALUE FUND
One Corporate Center
Rye, New York 10580-1422
800-GABELLI
800-422-3554
FAX: 914-921-5118
WEBSITE: WWW.GABELLI.COM
E-MAIL: INFO@GABELLI.COM
Net Asset Value available daily by calling
800-GABELLI after 6:00 p.m.
QUESTIONS?
Call 800-GABELLI
or your investment representative.
TABLE OF CONTENTS
-----------------
INVESTMENT AND PERFORMANCE SUMMARY ............ 2
INVESTMENT AND RISK INFORMATION ............... 7
MANAGEMENT OF THE FUNDS ....................... 12
Classes of Shares .................... 13
Purchase of Shares ................... 17
Redemption of Shares ................. 18
Exchange of Shares ................... 19
Pricing of Fund Shares ............... 20
Dividends and Distributions .......... 20
Tax Information ...................... 21
Mailings to Shareholders ............. 21
FINANCIAL HIGHLIGHTS .......................... 21
GABELLI
EQUITY
SERIES
FUNDS,
INC.
THE GABELLI SMALL CAP GROWTH FUND
THE GABELLI EQUITY INCOME FUND
THE GABELLI WOODLAND SMALL CAP
VALUE FUND
CLASS A, B, C SHARES
PROSPECTUS
FEBRUARY 2, 2004
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THE
SHARES DESCRIBED IN THIS PROSPECTUS OR DETERMINED WHETHER THIS PROSPECTUS IS
ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
INVESTMENT AND PERFORMANCE SUMMARY
The Gabelli Small Cap Growth Fund (the "Small Cap Growth Fund"), The Gabelli
Equity Income Fund (the "Equity Income Fund") and The Gabelli Woodland Small Cap
Value Fund (the "Woodland Small Cap Value Fund") (each a "Fund" and
collectively, the "Funds") are series of Gabelli Equity Series Funds, Inc. (the
"Corporation").
SMALL CAP GROWTH FUND
INVESTMENT OBJECTIVE:
The Fund seeks to provide a high level of capital appreciation.
PRINCIPAL INVESTMENT STRATEGIES:
Under normal market conditions, the Fund invests at least 80% of its net assets
in equity securities of companies that are considered to be small companies at
the time the Fund makes its investment. The Fund invests primarily in the common
stocks of companies which the Fund's investment adviser, Gabelli Funds, LLC (the
"Adviser"), believes are likely to have rapid growth in revenues and above
average rates of earnings growth. The Adviser currently characterizes small
companies as those with total market values of $1 billion or less at the time of
investment.
PRINCIPAL RISKS:
The Fund's share price will fluctuate with changes in the market value of the
Fund's portfolio securities. Stocks are subject to market, economic and business
risks that cause their prices to fluctuate. When you sell Fund shares, they may
be worth less than what you paid for them. Consequently, you can lose money by
investing in the Fund. The Fund is subject to the risk that small capitalization
stocks may trade less frequently and may be subject to more abrupt or erratic
movements in price than medium and large capitalization stocks. The Fund is also
subject to the risk that the Adviser may be incorrect in its assessment of the
value of the securities it holds, which may result in a decline in the value of
Fund shares.
YOU MAY WANT TO INVEST IN THE FUND IF:
o you are a long-term investor
o you seek growth of capital
o you believe that the market will favor small capitalization stocks over
the long term
YOU MAY NOT WANT TO INVEST IN THE FUND IF:
o you are seeking a high level of current income
o you are conservative in your investment approach
o you seek stability of principal more than growth of capital
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2
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EQUITY INCOME FUND
INVESTMENT OBJECTIVE:
The Fund seeks to provide a high level of total return on its assets with an
emphasis on income.
PRINCIPAL INVESTMENT STRATEGIES:
The Fund will seek to achieve its investment objective through a combination of
capital appreciation and current income by investing, under normal market
conditions, at least 80% of its net assets in income producing equity securities
including securities convertible into common stock. In making stock selections,
the Fund's Adviser looks for securities that have a better yield than the
average of the Standard and Poor's Composite 500 Stock Price Index (the "S&P(R)
500 Stock Index"), as well as capital gains potential.
PRINCIPAL RISKS:
The Fund's share price will fluctuate with changes in the market value of the
Fund's portfolio securities. Stocks are subject to market, economic and business
risks that cause their prices to fluctuate. Preferred stocks and debt securities
convertible into or exchangeable for common or preferred stock also are subject
to interest rate risk and/or credit risk. When interest rates rise, the value of
such securities generally declines. It is also possible that the issuer of a
security will not be able to make interest and principal payments when due. When
you sell Fund shares, they may be worth less than what you paid for them.
Consequently, you can lose money by investing in the Fund. The Fund is subject
to the risk that its portfolio companies will reduce or eliminate the dividend
rate on securities held by the Fund. The Fund is also subject to the risk that
the Adviser may be incorrect in its assessment of the value of the securities it
holds, which may result in the decline in the value of Fund shares.
YOU MAY WANT TO INVEST IN THE FUND IF:
o you are a long-term investor
o you are seeking income as well as growth of capital
YOU MAY NOT WANT TO INVEST IN THE FUND IF:
o you are conservative in your investment approach
o you seek stability of principal more than growth of capital
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3
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WOODLAND SMALL CAP VALUE FUND
INVESTMENT OBJECTIVE:
The Fund seeks to provide a high level of capital appreciation.
PRINCIPAL INVESTMENT STRATEGIES:
Under normal market conditions, the Fund invests at least 80% of its net assets
in equity securities of companies that are considered to be small capitalization
companies at the time the Fund makes the investment. The Fund invests primarily
in the common stocks of companies which the Fund's portfolio manager believes
are undervalued. The Fund's Adviser currently characterizes small capitalization
companies for this Fund as those with a total market value of $1.5 billion or
less at the time of investment. The Adviser looks for undervalued companies with
shareholder oriented management teams that are employing strategies to grow the
company's value.
PRINCIPAL RISKS:
The Fund's share price will fluctuate with changes in the market value of the
Fund's portfolio securities. Stocks are subject to market, economic and business
risks that cause their prices to fluctuate. When you sell Fund shares, they may
be worth less than what you paid for them. Consequently, you can lose money by
investing in the Fund. The Fund is subject to the risk that small capitalization
stocks may trade less frequently and may be subject to more abrupt or erratic
movements in price than medium and large capitalization stocks. The Fund is also
subject to the risk that the portfolio manager may be incorrect in its
assessment of the value of the securities the Fund holds, which may result in a
decline in the value of Fund shares. The Fund is "non-diversified" which means
that the Fund's investments may be concentrated in fewer securities than a
"diversified" mutual fund. As a result, an investment in the Fund may entail
greater risk than an investment in a "diversified" mutual fund.
YOU MAY WANT TO INVEST IN THE FUND IF:
o you are a long-term investor
o you seek growth of capital
o you believe that the market will favor small capitalization stocks over
the long term
YOU MAY NOT WANT TO INVEST IN THE FUND IF:
o you are seeking a high level of current income
o you are conservative in your investment approach
o you seek stability of principal more than growth of capital
PERFORMANCE:
As of the date of this Prospectus, the Fund was newly organized and had no
operations. Accordingly, no performance information has been presented for the
Fund.
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4
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PERFORMANCE:
The bar charts and tables that follow provide an indication of the risks of
investing in the Funds by showing changes in the Funds' performance from year to
year, and by showing how the Funds' average annual returns for one year, five
years, ten years and the life of each Fund, as applicable, compare to those of a
broad-based securities market index. As with all mutual funds, the Funds' past
performance (before and after taxes) does not predict how the Funds will perform
in the future. Both the chart and the table assume the reinvestment of dividends
and distributions.
SMALL CAP GROWTH FUND (FOR THE PERIODS ENDED DECEMBER 31)*
[GRAPHIC OMITTED]
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
1994 -2.9%
1995 25.2%
1996 11.9%
1997 36.5%
1998 0.0%
1999 14.2%
2000 11.3%
2001 4.7%
2002 -5.3%
2003 37.6%
------------------------
* The bar chart above shows the total returns for Class AAA Shares (not
including sales load). The Class A, Class B and Class C Shares are new
classes of the Fund for which performance is not yet available. The Class AAA
Shares of the Fund are offered in a separate prospectus. The returns for the
Class A, Class B and Class C Shares will be substantially similar to those of
the Class AAA Shares shown in the chart above because all shares of the Fund
are invested in the same portfolio of securities. The annual returns of the
different classes of shares will differ only to the extent that the expenses
of the classes differ.
Class A, B and C Share sales loads are not reflected in the above chart. If
sales loads were reflected, the Fund's returns would be less than those shown.
During the periods shown in the bar chart, the highest return for a quarter was
18.27% (quarter ended June 30, 2003) and the lowest return for a quarter was
(20.26)% (quarter ended September 30, 1998).
AVERAGE ANNUAL TOTAL RETURNS PAST PAST PAST SINCE OCTOBER 22,
(FOR THE PERIODS ENDED DECEMBER 31, 2003) ONE YEAR FIVE YEARS TEN YEARS 1991*
------------------------------------------- -------- ---------- --------- -----------------
The Gabelli Small Cap Growth Fund Class AAA Shares
Return Before Taxes ............................. 37.56% 11.62% 12.39% 15.55%
Return After Taxes on Distributions ............. 37.27% 9.63% 10.06% 13.46%
Return After Taxes on Distributions
and Sale of Fund Shares ....................... 29.95% 8.92% 9.46% 12.67%
Russell 2000 Index** ................................. 47.25% 7.13% 9.47% 11.25%
------------------------
* From October 22, 1991, the date that the Fund commenced investment
operations.
** The Russell 2000 Index is an unmanaged index consisting of a broad-base of
common stocks. The performance of the Index does not include expenses or
fees.
After-tax returns are calculated using the historical highest individual federal
marginal income tax rates and do not reflect the impact of state and local
taxes. In some instances, the "Return After Taxes on Distributions and Sale of
Fund Shares" may be greater than "Return Before Taxes" because the investor is
assumed to be able to use the capital loss of the sale of Fund shares to offset
other taxable gains. Actual after-tax returns depend on the investor's tax
situation and may differ from those shown. After-tax returns shown are not
relevant to investors who hold their Fund shares through tax-deferred
arrangements, such as 401(k) plans or individual retirement accounts.
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5
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EQUITY INCOME FUND (FOR THE PERIODS ENDED DECEMBER 31)*
[GRAPHIC OMITTED]
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
1994 1.1%
1995 28.3%
1996 17.9%
1997 27.9%
1998 12.6%
1999 9.3%
2000 11.3%
2001 -0.9%
2002 -7.7%
2003 28.3%
------------------------
* The bar chart above shows the total returns for Class AAA Shares (not
including sales load). The Class A, Class B and Class C Shares are new
classes of the Fund for which performance is not yet available. The Class AAA
Shares of the Fund are offered in a separate prospectus. The returns for the
Class A, Class B and Class C Shares will be substantially similar to those of
the Class AAA Shares shown in the chart above because all shares of the Fund
are invested in the same portfolio of securities. The annual returns of the
different classes of shares will differ only to the extent that the expenses
of the classes differ.
Class A, B and C Share sales loads are not reflected in the above chart. If
sales loads were reflected, the Fund's returns would be less than those shown.
During the periods shown in the bar chart, the highest return for a quarter was
15.67% (quarter ended June 30, 2003) and the lowest return for a quarter was
(13.54)% (quarter ended September 30, 2002).
AVERAGE ANNUAL TOTAL RETURNS PAST PAST PAST SINCE JANUARY 2,
(FOR THE PERIODS ENDED DECEMBER 31, 2003) ONE YEAR FIVE YEARS TEN YEARS 1992*
------------------------------------------- -------- ---------- --------- ----------------
The Gabelli Equity Income Fund Class AAA Shares
Return Before Taxes .............................. 28.29% 7.39% 12.14% 12.40%
Return After Taxes on Distributions .............. 27.94% 5.27% 9.94% 10.40%
Return After Taxes on Distributions
and Sale of Fund Shares ........................ 22.67% 5.26% 9.51% 9.96%
S&P(R)500 Composite Stock Price Index** ............... 28.67% (0.57)% 11.06% 10.69%
------------------------
* From January 2, 1992, the date that the Fund commenced investment operations.
** The S&P(R) 500 Composite Stock Price Index is a widely recognized, unmanaged
index of common stock prices. The performance of the Index does not include
expenses or fees.
After-tax returns are calculated using the historical highest individual federal
marginal income tax rates and do not reflect the impact of state and local
taxes. In some instances, the "Return After Taxes on Distributions and Sale of
Fund Shares" may be greater than "Return Before Taxes" because the investor is
assumed to be able to use the capital loss of the sale of Fund shares to offset
other taxable gains. Actual after-tax returns depend on the investor's tax
situation and may differ from those shown. After-tax returns shown are not
relevant to investors who hold their Fund shares through tax-deferred
arrangements, such as 401(k) plans or individual retirement accounts.
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6
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WOODLAND SMALL CAP VALUE FUND (FOR THE PERIOD ENDED DECEMBER 31)*
[GRAPHIC OMITTED]
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
2003 20.7%
------------------------
* The bar chart above shows the total returns for Class A Shares (not including
sales load). The annual returns of the different classes of shares will
differ only to the extent that the expenses of the classes differ.
Class A, B and C Share sales loads are not reflected in the above chart. If
sales loads were reflected, the Fund's returns would be less than those shown.
During the period shown in the bar chart, the highest return for Class A Shares
for a quarter was 14.11% (quarter ended December 31, 2003) and the lowest return
for a quarter was (8.00)% (quarter ended March 31, 2003).
PAST ONE YEAR
AVERAGE ANNUAL TOTAL RETURNS (SINCE DECEMBER 31,
(FOR THE PERIOD ENDED DECEMBER 31, 2003) 2002)
------------------------------------------ -------------------
The Gabelli Woodland Small Cap Value Fund Class A Shares*
Return Before Taxes ................................... 13.70%
Return After Taxes on Distributions ................... 13.57%
Return After Taxes on Distributions
and Sale of Fund Shares ............................. 10.90%
Class B Shares*
Return Before Taxes ................................... 20.93%
Class C Shares*
Return Before Taxes ................................... 20.13%
Russell 2000 Index** ....................................... 47.25%
------------------------
* Class A Shares include effect of the initial sales charge and Class B and
Class C Shares include the effect of the contingent deferred sales charge.
** The Russell 2000 Index is an unmanaged index consisting of a broad-base of
common stocks. The performance of the Index does not include expenses or
fees.
After-tax returns are calculated using the historical highest individual federal
marginal income tax rates and do not reflect the impact of state and local
taxes. In some instances, the "Return After Taxes on Distributions and Sale of
Fund Shares" may be greater than "Return Before Taxes" because the investor is
assumed to be able to use the capital loss of the sale of Fund shares to offset
other taxable gains. Actual after-tax returns depend on the investor's tax
situation and may differ from those shown. After-tax returns shown are not
relevant to investors who hold their Fund shares through tax-deferred
arrangements, such as 401(k) plans or individual retirement accounts.
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7
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FEES AND EXPENSES OF THE FUNDS:
These tables describe the fees and expenses that you may pay if you buy and hold
shares of the Funds.
CLASS A CLASS B CLASS C
SHARES SHARES SHARES
------- ------- -------
SHAREHOLDER FEES
(fees paid directly from your investment):
Maximum Sales Charge (Load) on Purchases
(as a percentage of offering price) ............. 5.75%(1) None None
Maximum Deferred Sales Charge (Load)
(as a percentage of redemption price(4)) ........ 1.00%(2) 5.00%(3) 1.00%(3)
SMALL CAP GROWTH FUND
CLASS A CLASS B CLASS C
SHARES SHARES SHARES
------- ------- -------
ANNUAL FUND OPERATING EXPENSES
(expenses that are deducted from Fund assets):
Management Fees ................................... 1.00% 1.00% 1.00%
Distribution and Service (Rule 12b-1) Expenses(5) . 0.25% 1.00% 1.00%
Other Expenses .................................... 0.20% 0.20% 0.20%
------ ----- -----
Total Annual Operating Expenses ................... 1.45% 2.20% 2.20%
====== ====== ======
EQUITY INCOME FUND
CLASS A CLASS B CLASS C
SHARES SHARES SHARES
------- ------- -------
ANNUAL FUND OPERATING EXPENSES
(expenses that are deducted from Fund assets):
Management Fees ................................... 1.00% 1.00% 1.00%
Distribution and Service (Rule 12b-1) Expenses(5) . 0.25% 1.00% 1.00%
Other Expenses .................................... 0.24% 0.24% 0.24%
------ ----- -----
Total Annual Operating Expenses ................... 1.49% 2.24% 2.24%
====== ====== ======
WOODLAND SMALL CAP VALUE FUND
CLASS A CLASS B CLASS C
SHARES SHARES SHARES
------- ------- -------
ANNUAL FUND OPERATING EXPENSES
(expenses that are deducted from Fund assets):
Management Fees ................................. 1.00% 1.00% 1.00%
Distribution and Service (Rule 12b-1) Expenses(5) 0.25% 1.00% 1.00%
Other Expenses .................................. 13.80% 13.80% 13.80%
------ ----- -----
Total Annual Fund Operating Expenses(6) ........... 15.05% 15.80% 15.80%
------ ----- -----
Fee Waiver and Expense Reimbursement(6) ........... (13.05)% (13.05)% (13.05)%
------ ----- -----
Net Annual Operating Expenses(6) .................. 2.00% 2.75% 2.75%
====== ====== ======
------------------------
(1) The sales charge declines as the amount invested increases.
(2) If no sales charge was paid at the time of purchase as part of an investment
that is greater than $2,000,000, shares redeemed within twenty-four months
of such purchase may be subject to a deferred sales charge of 1.00%.
(3) The Fund imposes a sales charge upon redemption of Class B Shares if you
sell your shares within seventy-two months after purchase. The sales charge
declines the longer the investment remains in the Fund. A maximum sales
charge of 1.00% applies to redemptions of Class C Shares within twelve
months after purchase.
(4) "Redemption price" equals the net asset value at the time of investment or
redemption, whichever is lower.
(5) Due to the payment of Rule 12b-1 fees, long-term shareholders may indirectly
pay more than the equivalent of the maximum permitted front-end sales
charge.
(6) The Adviser has contractually agreed to waive its investment advisory fee
and/or to reimburse expenses of the Fund to the extent necessary to maintain
the Fund's Total Annual Fund Operating Expenses (excluding brokerage,
interest, taxes and extraordinary expenses) at 2.00%, 2.75% and 2.75% on an
annualized basis for Class Class A, Class B and Class C shares,
respectively. This arrangement will continue until at least through
September 30, 2004. In addition, the Fund has agreed, during the two-year
period following any waiver or reimbursement by the Adviser, to repay such
amount to the extent, after giving effect to the repayment, such adjusted
Total Annual Fund Operating Expenses would not exceed 2.00%, 2.75% and 2.75%
on an annualized basis for Class A, Class B and Class C shares,
respectively.
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8
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EXPENSE EXAMPLE:
This example is intended to help you compare the cost of investing in the Funds
with the cost of investing in other mutual funds. The example assumes (1) you
invest $10,000 in the Funds for the time periods shown, (2) you redeem your
shares at the end of those periods, except as noted, (3) your investment has a
5% return each year and (4) the Funds' operating expenses remain the same.
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
SMALL CAP GROWTH FUND
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
Class A Shares
- assuming redemption ......... $714 $1,007 $1,322 $2,210
- assuming no redemption ...... $714 $1,007 $1,322 $2,210
Class B Shares
- assuming redemption ......... $723 $988 $1,380 $2,344
- assuming no redemption ...... $223 $688 $1,180 $2,344
Class C Shares
- assuming redemption ......... $323 $688 $1,180 $2,534
- assuming no redemption ...... $223 $688 $1,180 $2,534
EQUITY INCOME FUND
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
Class A Shares
- assuming redemption ......... $718 $1,019 $1,341 $2,252
- assuming no redemption ...... $718 $1,019 $1,341 $2,252
Class B Shares
- assuming redemption ......... $727 $1,000 $1,400 $2,386
- assuming no redemption ...... $227 $700 $1,200 $2,386
Class C Shares
- assuming redemption ......... $327 $700 $1,200 $2,575
- assuming no redemption ...... $227 $700 $1,200 $2,575
WOODLAND SMALL CAP VALUE FUND
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
Class A Shares
- assuming redemption ......... $766 $3,402 $5,535 $9,251
- assuming no redemption ...... $766 $3,402 $5,535 $9,251
Class B Shares
- assuming redemption ......... $778 $3,470 $5,670 $9,318
- assuming no redemption ...... $278 $3,170 $5,470 $9,318
Class C Shares
- assuming redemption ......... $378 $3,170 $5,470 $9,370
- assuming no redemption ...... $278 $3,170 $5,470 $9,370
--------------------------------------------------------------------------------
9
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INVESTMENT AND RISK INFORMATION
The investment policy of each of the Small Cap Growth Fund, the Equity Income
Fund and the Small Cap Value Fund relating to the type of securities in which
80% of the Fund's net assets must be invested may be changed by the Board of
Directors without shareholder approval. Shareholders will, however, receive at
least 60 days' prior notice of any change in this policy.
SMALL CAP GROWTH FUND/WOODLAND SMALL CAP VALUE FUND
In selecting investments for the Small Cap Growth Fund and Woodland Small Cap
Value Fund, the Adviser seeks issuers with a dominant market share or niche
franchise in growing and/or consolidating industries. The Adviser considers for
purchase the stocks of small capitalization (capitalization is the price per
share multiplied by the number of shares outstanding) companies with experienced
management, strong balance sheets and rising free cash flow and earnings. The
Adviser's goal is to invest long term in the stocks of companies trading at
reasonable valuations relative to perceived economic worth.
Frequently, smaller companies exhibit one or more of the following traits:
o New products or technologies
o New distribution methods
o Rapid changes in industry conditions due to regulatory or other
developments
o Changes in management or similar characteristics that may result not
only in expected growth in revenues but in an accelerated or above
average rate of earnings growth, which would usually be reflected in
capital appreciation.
In addition, because smaller companies are less actively followed by stock
analysts and less information is available on which to base stock price
evaluations, the market may overlook favorable trends in particular smaller
growth companies and then adjust its valuation more quickly once investor
interest is gained.
EQUITY INCOME FUND
In selecting investments for the Equity Income Fund, the Adviser focuses on
issuers that:
o have strong free cash flow and pay regular dividends
o have potential for long-term earnings per share growth
o may be subject to a value catalyst, such as industry developments,
regulatory changes, changes in management, sale or spin-off of a
division or the development of a profitable new business
o are well-managed
o will benefit from sustainable long-term economic dynamics, such as
globalization of an issuer's industry or an issuer's increased focus on
productivity or enhancement of services.
The Adviser also believes preferred stock and convertible securities of selected
companies offer opportunities for capital appreciation as well as periodic
income and may invest a portion of the Equity Income Fund's assets in such
securities. This is particularly true in the case of companies that have
performed below expectations. If a company's performance has been poor enough,
its preferred stock and convertible debt securities will trade more like the
common stock than like a fixed income security and may result in above average
appreciation if performance improves. Even if the credit quality of the company
is not in question, the market price of the convertible security will reflect
little or no element of conversion value if the price of its common stock has
fallen substantially below the conversion price. This leads to the possibility
of capital appreciation if the price of the common stock recovers.
The Funds may also use the following investment technique:
--------------------------------------------------------------------------------
10
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o DEFENSIVE INVESTMENTS. When adverse market or economic conditions occur,
the Funds may temporarily invest all or a portion of their assets in
defensive investments. Such investments include fixed income securities
or high quality money market instruments. When following a defensive
strategy, the Funds will be less likely to achieve their investment
goals.
Investing in the Funds involve the following risks:
o EQUITY RISK. The principal risk of investing in the Funds is equity
risk. Equity risk is the risk that the prices of the securities held by
the Funds will fall due to general market and economic conditions,
perceptions regarding the industries in which the companies issuing the
securities participate and the issuer company's particular
circumstances.
o VALUE INVESTING RISK. Each Fund invests in "value" stocks. The portfolio
manager may be wrong in the assessment of a company's value and the
stocks the Fund holds may not reach what the portfolio manager believes
are their full values. From time to time "value" investing falls out of
favor with investors. During those periods, the Fund's relative
performance may suffer.
o FUND AND MANAGEMENT RISK.
o SMALL CAP GROWTH FUND AND WOODLAND SMALL CAP VALUE FUND ONLY -- The
Funds invest in stocks issued by smaller companies. Each Fund's
price may decline if the market favors large or mid-size
capitalization company stocks over stocks of small companies. If the
portfolio manager's assesment of the value of the securities each
Fund holds is incorrect, or the events expected to increase value do
not occur, then the value of the Fund's shares may decline.
o EQUITY INCOME FUND ONLY -- The Fund invests in stocks issued by
companies believed by the portfolio manager to be undervalued and
that have the potential to achieve significant capital appreciation.
If the portfolio manager is incorrect in its assessment of the
values of the securities it holds, or no event occurs which surfaces
value, then the value of the Fund's shares may decline.
o SMALL CAPITALIZATION COMPANY RISK. SMALL CAP GROWTH FUND AND WOODLAND
SMALL CAP VALUE FUND ONLY -- Investing in securities of small
capitalization companies may involve greater risks than investing in
larger, more established issuers. Smaller capitalization companies
typically have relatively lower revenues, limited product lines and lack
of management depth, and may have a smaller share of the market for
their products or services, than larger capitalization companies. The
stocks of smaller capitalization companies tend to have less trading
volume than stocks of larger capitalization companies. Less trading
volume may make it more difficult for our portfolio managers to sell
securities of smaller capitalization companies at quoted market prices.
Finally, there are periods when investing in smaller capitalization
stocks falls out of favor with investors and the stocks of smaller
capitalization companies underperform.
o INTEREST RATE RISK AND CREDIT RISK. EQUITY INCOME FUND ONLY --
Investments in preferred stock and securities convertible into or
exchangeable for common or preferred stock involve interest rate risk
and credit risk. When interest rates decline, the value of such
securities generally rises. Conversely, when interest rates rise, the
value of such securities generally declines. It is also possible that
the issuer of a security will not be able to make interest and principal
payments when due.
o LOW CREDIT QUALITY RISK. EQUITY INCOME FUND ONLY -- Lower rated
convertible securities are subject to greater credit risk, greater price
volatility and a greater risk of loss than investment
--------------------------------------------------------------------------------
11
--------------------------------------------------------------------------------
grade securities. There may be less of a market for lower rated
convertible securities, which could make it harder to sell them at an
acceptable price.
o NON-DIVERSIFICATION. WOODLAND SMALL CAP VALUE FUND ONLY -- The Fund is
classified as a "non-diversified" investment company. Because the Fund,
as a non-diversified investment company, may invest in the securities of
individual issuers to a greater extent than a "diversified" mutual fund,
an investment in the Fund may present greater risk to an investor than
an investment in a diversified mutual fund because the investment risk
may be concentrated in fewer securities.
MANAGEMENT OF THE FUNDS
THE ADVISER. Gabelli Funds, LLC, with its principal offices located at One
Corporate Center, Rye, New York 10580-1422, serves as investment adviser to the
Funds. The Adviser makes investment decisions for the Funds and continuously
reviews and administers the Funds' investment program under the supervision of
the Funds' Board of Directors. The Adviser also manages several other open-end
and closed-end investment companies in the Gabelli family of funds. The Adviser
is a New York limited liability company organized in 1999 as successor to
Gabelli Group Capital Partners, Inc. (formerly named Gabelli Funds, Inc.), a New
York corporation organized in 1980. The Adviser is a wholly owned subsidiary of
Gabelli Asset Management Inc. ("GBL"), a publicly held company listed on the New
York Stock Exchange ("NYSE").
As compensation for its services and the related expenses borne by the Adviser,
for the fiscal year ended September 30, 2003, each of the Small Cap Growth and
Equity Income Funds paid the Adviser a fee equal to 1.00% of the value of its
average daily net assets. With respect to the Woodland Small Cap Value Fund, as
compensation for its services and the related expenses borne by the Adviser, the
Fund is contractually obligated to pay the Adviser a fee equal to 1.00% per year
of the value of the Fund's average daily net assets. For the fiscal period from
the Fund's commencement of operations through September 30, 2003, the Adviser
waived fees and reimbursed expenses of the Woodland Small Cap Value Fund.
The Adviser has contractually agreed to waive its investment advisory fee and/or
reimburse expenses to the extent necessary to maintain Total Annual Fund
Operating Expenses (excluding brokerage, interest, taxes and extraordinary
expenses) at no more than 2.00% for Class A Shares and 2.75% for Class B Shares
and Class C Shares. The fee waiver and expense reimbursement arrangement will
continue until at least through September 30, 2004. In addition, the Fund has
agreed, during the two year period following any waiver or reimbursement by the
Adviser, to repay such amount to the extent that after giving effect to the
repayment, such adjusted Total Annual Operating Expenses would not exceed 2.00%
for Class A Shares and 2.75% for Class B Shares and Class C Shares.
THE PORTFOLIO MANAGERS. Mr. Mario J. Gabelli, CFA, is primarily responsible for
the day-to-day management of the Small Cap Growth Fund and Equity Income Fund.
Mr. Gabelli has been Chairman, Chief Executive Officer and Chief Investment
Officer of the Adviser and its predecessor since inception, as well as its
parent company, GBL. Mr. Gabelli also acts as Chief Executive Officer and Chief
Investment Officer of GAMCO Investors, Inc., a wholly owned subsidiary of GBL,
and is an officer or director of various other companies affiliated with GBL.
The Adviser relies to a considerable extent on the expertise of Mr. Gabelli, who
may be difficult to replace in the event of his death, disability or
resignation.
Elizabeth M. Lilly, CFA, is primarily responsible for the day-to-day management
of the Woodland Small Cap Value Fund. In November 2002, Ms. Lilly joined Gabelli
Asset Management Inc. as Senior Vice President and Portfolio Manager of Gabelli
Funds, LLC and GAMCO Investors, Inc. Prior to November 2002, Ms. Lilly was a
Managing Partner of Woodland Partners LLC since 1996.
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12
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CLASSES OF SHARES
Three classes of the Funds' shares are offered in this prospectus -- Class A
Shares, Class B Shares and Class C Shares. The table below summarizes the
differences among the classes of shares.
o A "front-end sales load," or sales charge, is a one-time fee charged at
the time of purchase of shares.
o A "contingent deferred sales charge" ("CDSC") is a one-time fee charged
at the time of redemption.
o A "Rule 12b-1 fee" is a recurring annual fee for distributing shares and
servicing shareholder accounts based on the Fund's average daily net
assets attributable to the particular class of shares.
------------------------------------------------------------------------------------------------------------------
CLASS A SHARES CLASS B SHARES CLASS C SHARES
------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------
Front-End Sales Load? Yes. The percentage declines No. No.
as the amount invested
increases.
------------------------------------------------------------------------------------------------------------------
Contingent Deferred Yes, for shares redeemed Yes, for shares redeemed Yes, for shares redeemed
Sales Charge? within twenty-four months within seventy-two months within twelve months
after purchase as part of an after purchase. Declines after purchase.
investment greater than $2 over time.
million if no front-end
sales charge was paid at the
time of purchase.
------------------------------------------------------------------------------------------------------------------
Rule 12b-1 Fee 0.25% 1.00% 1.00%
------------------------------------------------------------------------------------------------------------------
Convertible to Another No. Yes. Automatically No.
Class? converts to Class A
Shares approximately
ninety-six months
after purchase.
------------------------------------------------------------------------------------------------------------------
Fund Expense Levels Lower annual expenses Higher annual expenses Higher annual expenses
than Class B or Class C than Class A Shares. than Class A Shares.
Shares.
------------------------------------------------------------------------------------------------------------------
In selecting a class of shares in which to invest, you should consider
o the length of time you plan to hold the shares
o the amount of sales charge and Rule 12b-1 fees, recognizing that your
share of 12b-1 fees as a percentage of your investment increases if the
Fund's assets increase in value and decreases if the Fund's assets
decrease in value
o whether you qualify for a reduction or waiver of the Class A sales
charge
o that Class B Shares convert to Class A Shares approximately ninety-six
months after purchase
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13
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IF YOU... THEN YOU SHOULD CONSIDER...
--------------------------------------------------------------------------------
o do not qualify for a reduced or waived purchasing Class C Shares
front-end sales load and intend to hold instead of either Class A
your shares for only a few years Shares or Class B Shares
--------------------------------------------------------------------------------
o do not qualify for a reduced or waived purchasing Class B Shares
front-end sales load and intend to hold instead of either Class A
your shares for several years Shares or Class C Shares
--------------------------------------------------------------------------------
o do not qualify for a reduced or waived purchasing Class A Shares
front-end sales load and intend to hold
your shares indefinitely
--------------------------------------------------------------------------------
SALES CHARGE -- CLASS A SHARES. The sales charge is imposed on Class A Shares at
the time of purchase in accordance with the following schedule:
SALES CHARGE SALES CHARGE REALLOWANCE
AS % OF THE AS % OF TO
AMOUNT OF INVESTMENT OFFERING PRICE* AMOUNT INVESTED BROKER-DEALERS
-------------------- --------------- --------------- --------------
Under $50,000 ..................... 5.75% 6.10% 5.00%
$50,000 but under $100,000 ........ 4.50% 4.71% 3.75%
$100,000 but under $250,000 ....... 3.50% 3.62% 2.75%
$250,000 but under $500,000 ....... 2.50% 2.56% 2.00%
$500,000 but under $1 million ..... 2.00% 2.04% 1.75%
$1 million but under $2 million ... 1.00% 1.01% 1.00%
$2 million ........................ 0.00% 0.00% 1.00%
------------------------
* Includes Front-end sales load
SALES CHARGE REDUCTIONS AND WAIVERS -- CLASS A SHARES:
You may qualify for a reduced sales charge, or a waiver of sales charges, on
purchases of Class A Shares. The requirements are described in the following
paragraphs. To receive a reduction that you qualify for, you may have to provide
additional information to your broker or other service agent. For more
information about sales charge discounts and waivers, consult with your broker
or other service provider.
1. VOLUME DISCOUNTS. In order to determine whether you qualify for a volume
discount under the sales charge schedule above, you may combine your new
investment and your existing investments in Class A Shares with those of your
immediate family (spouse and children under age 21), your and their IRAs and
other employee benefit plans and trusts and other fiduciary accounts for your
and their benefit. You may also include Class A Shares of any other investment
company managed by the Adviser or its affiliates that are held in any of the
forgoing accounts. You may base your eligibility on the current value of these
holdings. For example, if you own Class A Shares of the Funds that have an
aggregate value of $100,000, and make an additional investment in Class A Shares
of the Funds of $4,000, the sales charge applicable to the additional investment
would be 3.50%, rather than the 5.75% normally charged on a $4,000 purchase.
Your broker may require you to document holdings from other accounts, which may
include accounts at other brokers.
2. LETTER OF INTENT. If you initially invest at least $1,000 in Class A Shares
of a Fund and submit a Letter of Intent to your broker or Gabelli & Company,
Inc. the Funds' distributor (the "Distributor"), you may make purchases of Class
A Shares of that Fund during a 13-month period at the reduced sales charge rates
applicable to the aggregate amount of the intended purchases stated in the
Letter. The Letter may apply to purchases made up to 90 days before the date of
the Letter. You will have to pay sales charges at the
--------------------------------------------------------------------------------
14
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higher rate if you fail to honor your Letter of Intent. For more information on
the Letter of Intent, call your broker.
3. INVESTORS ELIGIBLE FOR SALES CHARGE WAIVERS. Class A Shares of the Funds may
be offered without a sales charge to: (1) any other investment company in
connection with the combination of such company with the Funds by merger,
acquisition of assets or otherwise; (2) shareholders who have redeemed shares in
the Funds and who wish to reinvest in the Funds, provided the reinvestment is
made within 45 days of the redemption; (3) tax-exempt organizations enumerated
in Section 501(c)(3) of the Internal Revenue Code of 1986 (the "Code") and
private, charitable foundations that in each case make lump-sum purchases of
$100,000 or more; (4) qualified employee benefit plans established pursuant to
Section 457 of the Code that have established omnibus accounts with the Fund or
an intermediary; (5) qualified employee benefit plans having more than one
hundred eligible employees and a minimum of $1 million in plan assets invested
in the Funds (plan sponsors are encouraged to notify the Funds' Distributorwhen
they first satisfy these requirements); (6) any unit investment trusts
registered under the Investment Company Act of 1940 (the "1940 Act") which have
shares of the Funds as a principal investment; (7) financial institutions
purchasing Class A Shares of the Funds for clients participating in a fee based
asset allocation program or wrap fee program which has been approved by the
Funds' Distributor; and (8) registered investment advisers or financial planners
who place trades for their own accounts or the accounts of their clients and who
charge a management, consulting or other fee for their services; and clients of
such investment advisers or financial planners who place trades for their own
accounts if the accounts are linked to the master account of such investment
adviser or financial planner on the books and records of a broker or agent.
Investors who qualify under any of the categories described above should contact
their brokerage firm.
CONTINGENT DEFERRED SALES CHARGES.
You will pay a CDSC when you redeem:
o Class A Shares within approximately twenty-four months of buying them as
part of an investment greater than $2 million if no front-end sales
charge was paid at the time of purchase
o Class B Shares within approximately seventy-two months of buying them
o Class C Shares within approximately twelve months of buying them
The CDSC payable upon redemption of Class A Shares and Class C Shares in the
circumstances described above is 1.00%. The CDSC schedule for Class B Shares is
set forth below. The CDSC is based on the net asset value at the time of your
investment or the net asset value at the time of redemption, whichever is lower.
CLASS B SHARES
YEARS SINCE PURCHASE CDSC
-------------------- --------------
First 5.00%
Second 4.00%
Third 3.00%
Fourth 3.00%
Fifth 2.00%
Sixth 1.00%
Seventh and thereafter 0.00%
The Distributor pays sales commissions of up to 4.00% of the purchase price of
Class B Shares of the Funds to brokers at the time of sale that initiate and are
responsible for purchases of such Class B Shares of the Funds.
--------------------------------------------------------------------------------
15
--------------------------------------------------------------------------------
The Distributor pays sales commissions of up to 1.00% of the purchase price of
Class C Shares of the Funds to brokers at the time of sale that initiate and are
responsible for purchase of such Class C Shares of the Fund.
You will not pay a CDSC to the extent that the value of the redeemed shares
represents reinvestment of dividends or capital gains distributions or capital
appreciation of shares redeemed. When you redeem shares, we will assume that you
are first redeeming shares representing reinvestment of dividends and capital
gains distributions, then any appreciation on shares redeemed, and then
remaining shares held by you for the longest period of time. We will calculate
the holding period of shares acquired through an exchange of shares of another
fund from the date you acquired the original shares of the other fund. The time
you hold shares in a money market fund, however, will not count for purposes of
calculating the applicable CDSC.
We will waive the CDSC payable upon redemptions of shares for:
o redemptions and distributions from retirement plans made after the death
or disability of a shareholder
o minimum required distributions made from an IRA or other retirement plan
account after you reach age 591/2
o involuntary redemptions made by the Fund
o a distribution from a tax-deferred retirement plan after your retirement
o returns of excess contributions to retirement plans following the
shareholder's death or disability
CONVERSION FEATURE -- CLASS B SHARES:
o Class B Shares automatically convert to Class A Shares of the Funds on
the first business day of the ninety-seventh month following the month
in which you acquired such shares.
o After conversion, your shares will be subject to the lower Rule 12b-1
fees charged on Class A Shares, which will increase your investment
return compared to the Class B Shares.
o You will not pay any sales charge or fees when your shares convert, nor
will the transaction be subject to any tax.
o The dollar value of Class A Shares you receive will equal the dollar
value of the Class B Shares converted.
o If you exchange Class B Shares of one fund for Class B Shares of another
fund, your holding period for calculating the CDSC will be from the time
of your original purchase of Class B Shares. If you exchange shares into
a Gabelli money market fund, however, your holding period will be
suspended.
The Board of Directors may suspend the automatic conversion of Class B Shares to
Class A Shares for legal reasons or due to the exercise of its fiduciary duty.
If the Board determines that such suspension is likely to continue for a
substantial period of time, it will create another class of shares into which
Class B Shares are convertible.
RULE 12B-1 PLAN. The Funds have adopted a plan under Rule 12b-1 (the "Plan") for
each of their classes of shares. Under the Plan, the Funds may use their assets
to finance activities relating to the sale of their shares and the provision of
certain shareholder services.
--------------------------------------------------------------------------------
16
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For the classes covered by this Prospectus, the Rule 12b-1 fees vary by class as
follows:
CLASS A CLASS B CLASS C
------- ------- -------
Service Fees ................... 0.25% 0.25% 0.25%
Distribution Fees .............. None 0.75% 0.75%
These are annual rates based on the value of each of these Classes' average
daily net assets. Because the Rule 12b-1 fees are higher for Class B and Class C
Shares than for Class A Shares, Class B and Class C Shares will have higher
annual expenses. Because Rule 12b-1 fees are paid out of the Funds' assets on an
on-going basis, over time these fees will increase the cost of your investment
and may cost you more than paying other types of sales charges.
PURCHASE OF SHARES
You can purchase the Funds' shares on any day the NYSE is open for trading (a
"Business Day"). You may purchase shares through registered broker-dealers or
other financial intermediaries that have entered into selling agreements with
the Funds' Distributor.
The broker-dealer or other financial intermediary will transmit a purchase order
and payment to State Street Bank and Trust Company ("State Street") on your
behalf. Broker-dealers or other financial intermediaries may send you
confirmations of your transactions and periodic account statements showing your
investments in the Funds.
o BY MAIL OR IN PERSON. Your broker-dealer or financial consultant can
obtain a subscription order form by calling 800-GABELLI (800-422-3554).
Checks made payable to a third party and endorsed by the depositor are
not acceptable. For additional investments, send a check to the
following address with a note stating your exact name and account
number, the name of the Fund(s) and class of shares you wish to
purchase.
BY MAIL BY PERSONAL DELIVERY
------- --------------------
THE GABELLI FUNDS THE GABELLI FUNDS
P.O. BOX 8308 C/O BFDS
BOSTON, MA 02266-8308 66 BROOKS DRIVE
BRAINTREE, MA 02184
o BY BANK WIRE. To open an account using the bank wire transfer system,
first telephone the Fund(s) at 800-GABELLI(800-422-3554)to obtain a new
account number. Then instruct a Federal Reserve System member bank to
wire funds to:
STATE STREET BANK AND TRUST COMPANY
ABA #011-0000-28 REF DDA #99046187
RE: THE GABELLI _________ FUND
ACCOUNT #__________
ACCOUNT OF [REGISTERED OWNERS]
225 FRANKLIN STREET, BOSTON, MA 02110
If you are making an initial purchase, you should also complete and mail
a subscription order form to the address shown under "By Mail." Note
that banks may charge fees for wiring funds, although State Street will
not charge you for receiving wire transfers.
SHARE PRICE. The Funds sell their shares at the net asset value next determined
after the Funds receive your completed subscription order form and your payment,
subject to an up-front sales charge in the case of Class A Shares. See "Pricing
of Fund Shares" for a description of the calculation of the net asset value as
described under "Classes of Shares-Class A Shares."
--------------------------------------------------------------------------------
17
--------------------------------------------------------------------------------
MINIMUM INVESTMENTS. Your minimum initial investment must be at least $1,000.
See "Retirement Plans/Education Savings Plans" and "Automatic Investment Plan"
regarding minimum investment amounts applicable to such plans. There is no
minimum subsequent investment requirement. Broker-dealers may have different
minimum investment requirements.
RETIREMENT PLANS/EDUCATION SAVINGS PLANS. The Funds make available IRA, "Roth"
IRA and "Coverdell" Education SavingsPlans for investment in Fund shares.
Applications may be obtained from the Distributor by calling 800-GABELLI
(800-422-3554). Self-employed investors may purchase shares of the Funds through
tax-deductible contributions to existing retirement plans for self-employed
persons, known as "Keogh" or "H.R.-10" plans. The Funds do not currently act as
sponsor to such plans. Fund shares may also be a suitable investment for other
types of qualified pension or profit-sharing plans which are employer sponsored,
including deferred compensation or salary reduction plans known as "401(k)
Plans." The minimum initial investment in all such retirement plans is $250.
There is no minimum subsequent investment requirement for retirement plans.
AUTOMATIC INVESTMENT PLAN. The Funds offer an automatic monthly investment plan.
There is no initial minimum investment for accounts establishing an automatic
investment plan. Call the Distributor at 800-GABELLI (800-422-3554) for more
details about the plan.
TELEPHONE OR INTERNET INVESTMENT PLAN. You may purchase additional shares of the
Funds by telephone and/or over the Internet if your bank is a member of the
Automated Clearing House ("ACH") system. You must have a completed, approved
Investment Plan application on file with the Fund's transfer agent. There is a
minimum of $100 for each telephone or Internet investment. To initiate an ACH
purchase, please call 800-GABELLI (800-422-3554) or 800-872-5365 or visit our
website at www.gabelli.com.
GENERAL. State Street will not issue share certificates unless you request them.
The Funds reserve the right to (i) reject any purchase order if, in the opinion
of the Funds' management, it is in the Funds' best interest to do so, (ii)
suspend the offering of shares for any period of time and (iii) waive the Funds'
minimum purchase requirements.
CUSTOMER IDENTIFICATION PROGRAM. Federal law requires the Corporation, on behalf
of the Funds, to obtain, verify and record identifying information, which may
include the name, residential or business street address, date of birth (for an
individual), social security or taxpayer identification number or other
identifying information, for each investor who opens or reopens an account with
the Funds. Applications without the required information, or without any
indication that a social security or taxpayer identification number has been
applied for, may not be accepted. After acceptance, to the extent permitted by
applicable law or its customer identification program, the Corporation reserves
the right (a) to place limits on transactions in any account until the identity
of the investor is verified; or (b) to refuse an investment in the Funds or to
involuntarily redeem an investor's shares and close an account in the event that
an investor's identity is not verified. The Corporation and its agents will not
be responsible for any loss in an investor's account resulting from the
investor's delay in providing all required identifying information or from
closing an account and redeeming an investor's shares when an investor's
identity is not verified.
REDEMPTION OF SHARES
You can redeem shares of the Funds on any Business Day. The Funds may
temporarily stop redeeming their shares when the NYSE is closed or trading on
the NYSE is restricted, when an emergency exists and the Funds cannot sell their
shares or accurately determine the value of their assets, or if the Securities
and Exchange Commission orders the Funds to suspend redemptions.
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18
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The Funds redeem their shares at the net asset value next determined after the
Funds receive your redemption request in proper form, subject in some cases to a
CDSC, as described under "Classes of Shares - Contingent Deferred Sales
Charges". See "Pricing of Fund Shares" for a description of the calculation of
net asset value.
You may redeem shares through a broker-dealer or other financial intermediary
that has entered into a selling agreement with the Distributor. The
broker-dealer or financial intermediary will transmit a redemption order to
State Street on your behalf. The redemption request will be effected at the net
asset value next determined (less any applicable CDSC) after State Street
receives the request. If you hold share certificates, you must present the
certificates endorsed for transfer.
In the event that you wish to redeem shares and you are unable to contact your
broker-dealer or other financial intermediary, you may redeem shares by mail.
You may mail a letter requesting redemption of shares to: THE GABELLI FUNDS,
P.O. BOX 8308, BOSTON, MA 02266-8308. Your letter should state the name of the
Fund(s) and the share class, the dollar amount or number of shares you are
redeeming and your account number. You must sign the letter in exactly the same
way the account is registered. If there is more than one owner of shares, all
must sign. A signature guarantee is required for each signature on your
redemption letter. You can obtain a signature guarantee from financial
institutions such as commercial banks, brokers, dealers and savings
associations. A notary public cannot provide a signature guarantee.
INVOLUNTARY REDEMPTION. The Funds may redeem all shares in your account (other
than an IRA) if their value falls below $1,000 as a result of redemptions (but
not as a result of a decline in net asset value). You will be notified in
writing if the Funds initiate such action and allowed 30 days to increase the
value of your account to at least $1,000.
REDEMPTION PROCEEDS. A redemption request received by a Fund will be effected at
the net asset value next determined after a Fund receives the request. If you
request redemption proceeds by check, the Funds will normally mail the check to
you within seven days after receipt of your redemption request. If you purchased
your Fund(s) shares by check or through the Automatic Investment Plan, you may
not receive proceeds from your redemption until the check clears, which may take
up to as many as 15 days following purchase. While the Funds will delay the
processing of the redemption until the check clears, your shares will be valued
at the next determined net asset value after receipt of your redemption request.
EXCHANGE OF SHARES
You can exchange shares of the Fund(s) you hold for shares of the same class of
another fund managed by the Adviser or its affiliates based on their relative
net asset values. To obtain a list of the funds whose shares you may acquire
through an exchange call your broker. Class B and Class C Shares will continue
to age from the date of the original purchase of such shares and will assume the
CDSC rate such shares had at the time of exchange. You may also exchange your
shares for shares of a money market fund managed by the Adviser or its
affiliates, without imposition of any CDSC at the time of exchange. Upon
subsequent redemption from such money market funds or the Fund(s) (after
re-exchange into the Fund(s)), such shares will be subject to the CDSC
calculated by excluding the time such shares were held in a money market fund.
In effecting an exchange:
o you must meet the minimum investment requirements for the fund whose
shares you purchase through exchange.
o if you are exchanging into a fund with a higher sales charge, you
must pay the difference at the time of exchange.
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19
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o you may realize a taxable gain or loss.
o you should read the prospectus of the fund whose shares you are
purchasing through exchange. Call 800-GABELLI (800-422-3554) or
visit our website at www.gabelli.com to obtain the prospectus.
You may exchange shares by telephone, by mail, over the Internet or through a
registered broker-dealer or other financial intermediary.
o EXCHANGE BY TELEPHONE. You may give exchange instructions by telephone
by calling 800-GABELLI (800-422-3554). You may not exchange shares by
telephone if you hold share certificates.
o EXCHANGE BY MAIL. You may send a written request for exchanges to: THE
GABELLI FUNDS, P.O. BOX 8308, BOSTON, MA 02266-8308. Your letter should
state your name, your account number, the dollar amount or number of
shares you wish to exchange, the name and class of the fund whose shares
you wish to exchange, and the name of the fund whose shares you wish to
acquire.
o EXCHANGE THROUGH THE INTERNET. You may also give exchange instructions
via the Internet at www.gabelli.com. You may not exchange shares through
the Internet if you hold share certificates. The Funds may impose
limitations from time to time on Internet exchanges.
The Funds may modify or terminate the exchange privilege at any time. You will
be given notice 60 days prior to any material change in the exchange privilege.
Your broker may charge you a processing fee for assisting you in purchasing or
redeeming shares of the Funds. This charge is set by your broker and does not
benefit the Funds or the Adviser in any way. It is in addition to the sales
charges and other costs described in this prospectus and must be disclosed to
you by your broker.
PRICING OF FUND SHARES
The net asset value per share is calculated separately for each class of shares
of each Fund on each Business Day. The NYSE is open Monday through Friday, but
currently is scheduled to be closed on New Year's Day, Dr. Martin Luther King,
Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor
Day, Thanksgiving Day and Christmas Day and on the preceding Friday or
subsequent Monday when a holiday falls on a Saturday or Sunday, respectively.
The net asset value per share is determined as of the close of regular trading
on the NYSE, normally 4:00 p.m., Eastern Time. Net asset value per share of each
class of each Fund is computed by dividing the value of the applicable Fund's
net assets (i.e. the value of its securities and other assets less its
liabilities, including expenses payable or accrued but excluding capital stock
and surplus) attributable to the applicable class of shares by the total number
of shares of such class outstanding at the time the determination is made. The
Funds use market quotations in valuing their portfolio securities. Short-term
investments that mature in 60 days or less are valued at amortized cost, which
the Directors believe represents fair value. The price of Fund shares for the
purposes of purchase and redemption orders will be based upon the calculation of
net asset value per share next made as of a time after the time as of which the
purchase or redemption order is received in proper form.
DIVIDENDS AND DISTRIBUTIONS
The Funds intend to pay dividends monthly for the Equity Income Fund and
annually for the Small Cap Growth Fund and Woodland Small Cap Value Fund and
capital gain distributions, if any, on an annual basis. You may have dividends
or capital gain distributions that are declared by the Funds automatically
reinvested at net asset value in additional shares of the Funds. You will make
an election to receive div-
--------------------------------------------------------------------------------
20
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idends and distributions in cash or Fund(s) shares at the time you purchase your
shares. You may change this election by notifying the Funds in writing at any
time prior to the record date for a particular dividend or distribution. There
are no sales or other charges in connection with the reinvestment of dividends
and capital gain distributions. Shares purchased through dividend reinvestment
will receive a price based on the net asset value per share on the reinvestment
date, which is typically the date dividends are paid to shareholders. There is
no fixed dividend rate, and there can be no assurance that the Funds will pay
any dividends or realize any capital gains. Dividends and distributions may
differ for different classes of shares.
TAX INFORMATION
The Funds expect that distributions will consist primarily of investment company
taxable income and net capital gains. Dividends out of investment company
taxable income and distributions of net short-term capital gains (i.e. gains
from assets held by the Funds for one year or less) are taxable to you as
ordinary income except that qualifying dividends are eligible for a reduced
rate. Distributions of net long-term capital gains are taxable to you at
long-term capital gain rates. The Funds' distributions, whether you receive them
in cash or reinvest them in additional shares of the Funds, generally will be
subject to federal, state or local taxes. A redemption of the Fund's shares or
an exchange of the Funds' shares for shares of another fund will be treated for
tax purposes as a sale of the Funds' shares, and any gain you realize on such a
transaction generally will be taxable. Foreign shareholders may be subject to a
federal withholding tax.
This summary of tax consequences is intended for general information only and is
subject to change by legislative or administrative action, and any such change
may be retroactive. A more complete discussion of the tax rules applicable to
you can be found in the Statement of Additional Information. You should consult
a tax adviser concerning the tax consequences of your investment in the Funds.
MAILINGS TO SHAREHOLDERS
In our continuing efforts to reduce duplicative mail and fund expenses, we
currently send a single copy of prospectuses and shareholder reports to your
household even if more than one family member in your household owns the same
fund or funds described in the prospectus or report. Additional copies of our
prospectuses and reports may be obtained by calling 800-GABELLI (800-422-3554).
If you do not want us to continue to consolidate your fund mailings and would
prefer to receive separate mailings at any time in the future, please call us at
the telephone number above and we will resume separate mailings in accordance
with your instructions within 30 days of your request.
FINANCIAL HIGHLIGHTS
The financial highlights tables are intended to help you understand the
financial performance of the Woodland Small Cap Value Fund for the period shown.
The total returns in the tables represent the rate that an investor would have
earned or lost on an investment in the Fund's shares (assuming reinvestment of
all dividends and distributions). This information has been audited by Ernst &
Young LLP, independent auditors, whose report along with the Funds' financial
statements and related notes are included in each Fund's annual report, which is
available upon request. The Class A, Class B and Class C Shares of the Small Cap
Growth Fund and Equity Income Fund have not previously been offered and
therefore do not have a previous financial history.
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21
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THE GABELLI WOODLAND SMALL CAP VALUE FUND
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------
Selected data for a share of Common Stock outstanding throughout each period:
OPERATING PERFORMANCE
----------------------------------------------------
NET
REALIZED
NET ASSET NET AND TOTAL NET NET ASSETS,
VALUE, INVESTMENT UNREALIZED FROM ASSET VALUE, END OF
PERIOD ENDED BEGINNING INCOME GAIN (LOSS) ON INVESTMENT END OF TOTAL PERIOD
SEPTEMBER 30 OF PERIOD(A) (LOSS)(C) INVESTMENTS OPERATIONS PERIOD RETURN+ IN (000'S)
------------ ------------ ---------- -------------- ---------- ------------ ------- -----------
CLASS A
2003 $10.00 $(0.07) $0.64 $0.57 $10.57 5.70% $ 3
CLASS B
2003 $10.00 $(0.12) $0.71 $0.59 $10.59 5.90% $ 0.1
CLASS C
2003 $10.00 $(0.11) $0.66 $0.55 $10.55 5.50% $ 118
RATIOS TO AVERAGE NET ASSETS AND SUPPLEMENTAL DATA
-----------------------------------------------------------------
NET
INVESTMENT EXPENSES EXPENSES
INCOME (LOSS) NET OF BEFORE PORTFOLIO
PERIOD ENDED TO AVERAGE WAIVERS/ WAIVERS/ TURNOVER
SEPTEMBER 30 NET ASSETS(D) REIMBURSEMENTS(D) REIMBURSEMENTS(B)(D) RATE
------------ ------------- ----------------- -------------------- ---------
CLASS A
2003 (0.97)% 2.00% 15.05% 39%
CLASS B
2003 (1.72)% 2.75% 15.80% 39%
CLASS C
2003 (1.72)% 2.75% 15.80% 39%
--------------------------
+ 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.
(a) As of December 31, 2002.
(b) During the period, certain fees were voluntarily reduced and/or reimbursed.
If such fee reductions and/or reimbursements had not occurred, the ratio
would have been as shown.
(c) Per share amounts have been calculated using the monthly average shares
outstanding method.
(d) Annualized.
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22
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GABELLI FUNDS AND YOUR PERSONAL PRIVACY
WHO ARE WE?
The Gabelli Funds are investment companies registered with the Securities and
Exchange Commission under the Investment Company Act of 1940. We are managed by
Gabelli Funds LLC, Gabelli Advisers, Inc. and Gabelli Fixed Income, LLC, which
are affiliated with Gabelli Asset Management Inc. Gabelli Asset Management is a
publicly-held company that has subsidiaries that provide investment advisory or
brokerage services for a variety of clients.
WHAT KIND OF NON-PUBLIC INFORMATION DO WE COLLECT ABOUT YOU IF YOU BECOME A
GABELLI CUSTOMER?
If you apply to open an account directly with us, you will be giving us some
non-public information about yourself. The non-public information we collect
about you is:
o INFORMATION YOU GIVE US ON YOUR APPLICATION FORM. This could include your
name, address, telephone number, social security number, bank account
number, and other information.
o INFORMATION ABOUT YOUR TRANSACTIONS WITH US, ANY TRANSACTIONS WITH OUR
AFFILIATES AND TRANSACTIONS WITH THE ENTITIES WE HIRE TO PROVIDE SERVICES
TO YOU. This would include information about the shares that you buy or
redeem, and the deposits and withdrawals that you make. If we hire someone
else to provide services -- like a transfer agent -- we will also have
information about the transactions you conduct through them.
WHAT INFORMATION DO WE DISCLOSE AND TO WHOM DO WE DISCLOSE IT?
We do not disclose any non-public personal information about our customers or
former customers to anyone, other than our affiliates, our service providers who
need to know such information and as otherwise permitted by law. If you want to
find out what the law permits, you can read the privacy rules adopted by the
Securities and Exchange Commission. They are in volume 17 of the Code of Federal
Regulations, Part 248. The Commission often posts information about its
regulations on its website, WWW.SEC.GOV.
WHAT DO WE DO TO PROTECT YOUR PERSONAL INFORMATION?
We restrict access to non-public personal information about you to the people
who need to know that information in order to provide services to shareholders
of the Funds and to ensure that we are complying with the laws governing the
securities business. We maintain physical, electronic and procedural safeguards
to keep your personal information confidential.
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GABELLI EQUITY SERIES FUNDS, INC.
THE GABELLI SMALL CAP GROWTH FUND
THE GABELLI EQUITY INCOME FUND
THE GABELLI WOODLAND SMALL CAP VALUE FUND
CLASS A, B, C SHARES
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FOR MORE INFORMATION:
For more information about the Funds, the following documents are available free
upon request:
ANNUAL/SEMI-ANNUAL REPORTS:
Each Fund's semi-annual and audited annual reports to shareholders contain
additional information on the Funds' investments. In each Fund's annual report,
you will find a discussion of the market conditions and investment strategies
that significantly affected each Fund's performance during its last fiscal year.
STATEMENT OF ADDITIONAL INFORMATION (SAI):
The SAI provides more detailed information about the Funds, including their
operations and investment policies. It is incorporated by reference, and is
legally considered a part of this prospectus.
--------------------------------------------------------------------------------
You can get free copies of these documents and prospectuses of other funds in
the Gabelli family, or request other information and discuss your questions
about the Funds by contacting:
Gabelli Equity Series Funds, Inc.
One Corporate Center
Rye, NY 10580-1422
Telephone: 800-GABELLI (800-422-3554)
www.gabelli.com
--------------------------------------------------------------------------------
You can review and/or copy the Funds' prospectuses, reports and SAI at the
Public Reference Room of the Securities and Exchange Commission. You can get
text-only copies:
o For a fee, by electronic request at publicinfo@sec.gov, by writing the
Public Reference Section of the Commission, Washington, D.C. 20549-0102
or calling 202-942-8090.
o Free from the EDGAR Database on the Commission's website at www.sec.gov.
(Investment Company Act File No. 811-06367)
GABELLI EQUITY SERIES FUNDS, INC.
THE GABELLI EQUITY INCOME FUND
THE GABELLI SMALL CAP GROWTH FUND
THE GABELLI WOODLAND SMALL CAP VALUE FUND
Statement of Additional Information
February 2, 2004
This Statement of Additional Information ("SAI"), which is not a prospectus,
describes:
o The Gabelli Equity Income Fund ("Equity Income Fund")
o The Gabelli Small Cap Growth Fund ("Small Cap Growth Fund")
o The Gabelli Woodland Small Cap Value Fund ("Woodland Small Cap Value
Fund")
(each a "Fund" and together the "Funds") which are series of Gabelli Equity
Series Funds, Inc., a Maryland corporation (the "Corporation"). This SAI should
be read in conjunction with the Prospectuses for Class A, Class B, Class C, and
Class AAA Shares of the Equity Income Fund, Small Cap Growth Fund and Woodland
Small Cap Value Fund dated February 2, 2004. For a free copy of the
Prospectuses, please contact the Funds at the address, telephone number or
Internet Web site printed below.
One Corporate Center
Rye, New York 10580-1422
Telephone 800-GABELLI (800-422-3554)
www.gabelli.com
TABLE OF CONTENTS
PAGE
----
General Information.................................................2
Investment Strategies and Risks.....................................2
Investment Restrictions.............................................9
Directors and Officers.............................................12
Control Persons and Principal Shareholders.........................19
Investment Advisory and Other Services ............................20
Distribution Plan..................................................24
Portfolio Transactions and Brokerage...............................25
Redemption of Shares...............................................28
Determination of Net Asset Value...................................28
Dividends, Distributions and Taxes.................................29
Investment Performance Information.................................32
Description of the Funds' Shares...................................33
Financial Statements...............................................34
Appendix A........................................................A-1
GENERAL INFORMATION
The Corporation is an open-end, management investment company organized under
the laws of the State of Maryland on July 25, 1991. The Equity Income Fund, the
Small Cap Growth Fund and the Woodland Small Cap Value Fund are each a series of
the Corporation and commenced operations on January 2, 1992, October 22, 1991
and December 31, 2002, respectively. The Equity Income Fund and Small Cap Growth
Fund are each classified as a diversified investment company and the Woodland
Small Cap Value Fund is classified as a "non-diversified" investment company.
INVESTMENT STRATEGIES AND RISKS
The Funds' Prospectuses discuss the investment objective of each Fund and the
principal strategies to be employed to achieve that objective. This section
contains supplemental information concerning certain types of securities and
other instruments in which the Funds may invest, additional strategies that the
Funds may utilize and certain risks associated with such investments and
strategies.
EQUITY SECURITIES
Common stocks represent the residual ownership interest in the issuer and
holders of common stock are entitled to the income and increase in the value of
the assets and business of the issuer after all of its debt obligations and
obligations to preferred stockholders are satisfied. Common stocks generally
have voting rights. Common stocks fluctuate in price in response to many factors
including historical and prospective earnings of the issuer, the value of its
assets, general economic conditions, interest rates, investor perceptions and
market liquidity.
Equity securities also include preferred stock (whether or not convertible into
common stock) and debt securities convertible into or exchangeable for common or
preferred stock. Preferred stock has a preference over common stock in
liquidation (and generally dividends as well) but is subordinated to the
liabilities of the issuer in all respects. As a general rule the market value of
preferred stock with a fixed dividend rate and no conversion element varies
inversely with interest rates and perceived credit risk, while the market price
of convertible preferred stock generally also reflects some element of
conversion value. Because preferred stock is junior to debt securities and other
obligations of the issuer, deterioration in the credit quality of the issuer
will cause greater changes in the value of a preferred stock than in a more
senior debt security with similarly stated yield characteristics. Debt
securities that are convertible into or exchangeable for preferred common stock
are liabilities of the issuer but are generally subordinated to more senior
elements of the issuer's balance sheet. Although such securities also generally
reflect an element of conversion value, their market value also varies with
interest rates and perceived credit risk. The market value of preferred stock
will also generally reflect whether (and if so when) the issuer may force
holders to sell their preferred shares back to the issuer and whether (and if so
when) the holders may force the issuer to buy back their preferred shares.
Generally speaking the right of the issuer to repurchase the preferred stock
tends to reduce any premium that the preferred stock might otherwise trade at
due to interest rate or credit factors, while the right of the holders to
require the issuer to repurchase the preferred stock tend to reduce any discount
that the preferred stock might otherwise trade at due to interest rate or credit
factors.
Gabelli Funds, LLC (the "Adviser") believes that opportunities for capital
appreciation may be found in the preferred stock and convertible securities of
companies. This is particularly true in the case of companies that have
performed below expectations at the time the preferred stock or convertible
security was issued. If the company's performance has been poor enough, its
preferred stock and convertible debt securities will trade more like the common
stock than like a fixed income security and may result in above average
appreciation once it becomes apparent that performance is improving. Even if the
credit quality of the company is not in question, the market price of the
convertible security will often reflect little or no element of conversion value
if the price of its common stock has fallen substantially below the conversion
price. This leads to the possibility of capital appreciation if the price of the
common stock recovers. Many convertible securities are not investment grade,
that is, not rated BBB or better by Standard & Poor's Corporation ("S&P") or Baa
or better by Moody's Investors Service, Inc. ("Moody's") and not considered by
the Adviser to be of similar quality. There is no minimum credit rating for
these securities in which the Fund may invest. Preferred stocks and convertible
securities have many of the same characteristics and risks as nonconvertible
debt securities described below.
2
NONCONVERTIBLE DEBT SECURITIES
Under normal market conditions, each Fund may invest up to 20% of its total
assets in lower quality nonconvertible debt securities. These securities include
preferred stocks, bonds, debentures, notes, asset- and mortgage- backed
securities and money market instruments such as commercial paper and bankers'
acceptances. There is no minimum credit rating for these securities in which the
Funds may invest. Accordingly, the Funds could invest in securities in default
although the Funds will not invest more than 5% of its assets in such
securities. The market values of lower quality fixed income securities tend to
be less sensitive to changes in prevailing interest rates than higher-quality
securities but more sensitive to individual corporate developments than
higher-quality securities. Such lower-quality securities also tend to be more
sensitive to economic conditions than are higher-quality securities.
Accordingly, these lower-quality securities are considered predominantly
speculative with respect to the issuer's capacity to pay interest and repay
principal in accordance with the terms of the obligation and will generally
involve more credit risk than securities in the higher-quality categories. Even
securities rated Baa or BBB by Moody's and S&P respectively, which ratings are
considered investment grade, possess some speculative characteristics. There are
risks involved in applying credit ratings as a method for evaluating high yield
obligations in that credit ratings evaluate the safety of principal and interest
payments, not market value risk. In addition, credit rating agencies may not
change credit ratings on a timely basis to reflect changes in economic or
company conditions that affect a security's market value. The Funds will rely on
the Adviser's judgment, analysis and experience in evaluating the
creditworthiness of an issuer. In this evaluation, the Adviser will take into
consideration, among other things, the issuer's financial resources and ability
to cover its interest and fixed charges, factors relating to the issuer's
industry and its sensitivity to economic conditions and trends, its operating
history, the quality of the issuer's management and regulatory matters.
The risk of loss due to default by the issuer is significantly greater for the
holders of lower quality securities because such securities are generally
unsecured and are often subordinated to other obligations of the issuer. During
an economic downturn or a sustained period of rising interest rates, highly
leveraged issuers of lower quality securities may experience financial stress
and may not have sufficient revenues to meet their interest payment obligations.
An issuer's ability to service its debt obligations may also be adversely
affected by specific corporate developments, its inability to meet specific
projected business forecasts, or the unavailability of additional financing.
Factors adversely affecting the market value of high yield and other securities
will adversely affect each Fund's net asset value. In addition, each Fund may
incur additional expenses to the extent it is required to seek recovery upon a
default in the payment of principal of or interest on its portfolio holdings.
From time to time, proposals have been discussed regarding new legislation
designed to limit the use of certain high yield debt securities by issuers in
connection with leveraged buy-outs, mergers and acquisitions, or to limit the
deductibility of interest payments on such securities. Such proposals, if
enacted into law, could reduce the market for such debt securities generally,
could negatively affect the financial condition of issuers of high yield
securities by removing or reducing a source of future financing, and could
negatively affect the value of specific high yield issues and the high yield
market in general. For example, under a provision of the Internal Revenue Code
of 1986, as amended (the "Code"), a corporate issuer may be limited from
deducting all of the original issue discount on high-yield discount obligations
(i.e., certain types of debt securities issued at a significant discount to
their face amount). The likelihood of passage of any additional legislation or
the effect thereof is uncertain.
3
The secondary trading market for lower-quality fixed income securities is
generally not as liquid as the secondary market for higher-quality securities
and is very thin for some securities. The relative lack of an active secondary
market may have an adverse impact on market price and a Fund's ability to
dispose of particular issues when necessary to meet the Funds' liquidity needs
or in response to a specific economic event such as a deterioration in the
creditworthiness of the issuer. The relative lack of an active secondary market
for certain securities may also make it more difficult for a Fund to obtain
accurate market quotations for purposes of valuing the Funds' portfolio. Market
quotations are generally available on many high yield issues only from a limited
number of dealers and may not necessarily represent firm bids of such dealers or
prices for actual sales. During such times, the responsibility of the
Corporation's Board of Directors to value the securities becomes more difficult
and judgment plays a greater role in valuation because there is less reliable,
objective data available.
SECURITIES SUBJECT TO REORGANIZATION
Subject to each Fund's policy of investing at least 80% of its net assets in
income producing equity securities (Equity Income Fund) or small company equity
securities (Small Cap Growth Fund and Woodland Small Cap Value Fund), each Fund
may invest without limit in securities for which a tender or exchange offer has
been made or announced and in securities of companies for which a merger,
consolidation, liquidation or reorganization proposal has been announced if, in
the judgment of the Adviser, there is a reasonable prospect of capital
appreciation significantly greater than the brokerage and other transaction
expenses involved.
In general, securities which are the subject of such an offer or proposal sell
at a premium to their historic market price immediately prior to the
announcement of the offer or may also discount what the stated or appraised
value of the security would be if the contemplated transaction were approved or
consummated. Such investments may be advantageous when the discount
significantly overstates the risk of the contingencies involved; significantly
undervalues the securities, assets or cash to be received by shareholders of the
prospective portfolio company as a result of the contemplated transaction; or
fails adequately to recognize the possibility that the offer or proposal may be
replaced or superseded by an offer or proposal of greater value. The evaluation
of such contingencies requires unusually broad knowledge and experience on the
part of the Adviser which must appraise not only the value of the issuer and its
component businesses as well as the assets or securities to be received as a
result of the contemplated transaction but also the financial resources and
business motivation of the offer or and the dynamics and business climate when
the offer of proposal is in process. In making the investments each Fund will
not violate any of its investment restrictions (see below, "Investment
Restrictions") including the requirement that, (a) as to 75% of its total
assets, it will not invest more than 5% of its total assets in the securities of
any one issuer (Equity Income Fund and Small Cap Growth Fund only) and (b) it
will not invest more than 25% of its total assets in any one industry. The
principal risk is that such offers or proposals may not be consummated within
the time and under the terms contemplated at the time of the investment, in
which case, unless such offers or proposals are replaced by equivalent or
increased offers or proposals which are consummated, the Funds may sustain a
loss. Since such investments are ordinarily short-term in nature, they will tend
to increase the turnover ratio of the Funds thereby increasing their brokerage
and other transaction expenses (see "Dividends, Distributions and "Taxes" in
this SAI).
ASSET-BACKED AND MORTGAGE-BACKED SECURITIES (EQUITY INCOME FUND AND SMALL CAP
GROWTH FUND ONLY)
Prepayments of principal may be made at any time on the obligations underlying
asset- and most mortgage- backed securities and are passed on to the holders of
the asset- and mortgage- backed securities. As a result, if the Fund purchases
such a security at a premium, faster than expected prepayments will reduce, and
slower than expected prepayments will increase, yield to maturity. Conversely,
if a Fund purchases these securities at a discount, faster than expected
prepayments will increase, while slower than expected prepayments will reduce,
yield to maturity.
4
FOREIGN SECURITIES
The Equity Income Fund and the Small Cap Growth Fund may invest up to 35% of its
total assets, and the Woodland Small Cap Value Fund may invest without limit in
the securities of non-U.S. issuers. These investments involve certain risks not
ordinarily associated with investments in securities of domestic issuers. These
risks include fluctuations in foreign exchange rates (which the Equity Income
Fund and Small Cap Growth Fund will not seek to hedge), future political and
economic developments, and the possible imposition of exchange controls or other
foreign governmental laws or restrictions. In addition, with respect to certain
countries, there is the possibility of expropriation of assets, confiscatory
taxation, political or social instability or diplomatic developments which could
adversely affect investments in those countries.
There may be less publicly available information about a foreign company than
about a U.S. company, and foreign companies may not be subject to accounting,
auditing and financial reporting standards and requirements comparable to or as
uniform as those of U.S. companies. Non-U.S. securities markets, while growing
in volume, have, for the most part, substantially less volume than U.S. markets,
and securities of many foreign companies are less liquid and their prices more
volatile than securities of comparable U.S. companies. Transaction costs of
investing in non-U.S. securities markets are generally higher than in the U.S.
There is generally less government supervision and regulation of exchanges,
brokers and issuers than there is in the U.S. The Funds might have greater
difficulty taking appropriate legal action in non-U.S. courts. Non-U.S. markets
also have different clearance and settlement procedures which in some markets
have at times failed to keep pace with the volume of transactions, thereby
creating substantial delays and settlement failures that could adversely affect
the Funds' performance.
Dividend and interest income from non-U.S. securities will generally be subject
to withholding taxes by the country in which the issuer is located and may not
be recoverable by the Funds or the investor.
HEDGING TRANSACTIONS
OPTIONS. Each Fund may purchase or sell options on individual securities as well
as on indices of securities as a means of achieving additional return or of
hedging the value of the Fund's portfolio.
A call option is a contract that gives the holder of the option the right, in
return for a premium paid, to buy from the seller the security underlying the
option at a specified exercise price at any time during the term of the option
or, in some cases, only at the end of the term of the option. The seller of the
call option has the obligation upon exercise of the option to deliver the
underlying security upon payment of the exercise price. A put option is a
contract that gives the holder of the option the right, in return for a premium
paid, to sell to the seller the underlying security at a specified price. The
seller of the put option, on the other hand, has the obligation to buy the
underlying security upon exercise at the exercise price.
If a Fund has sold an option, it may terminate its obligation by effecting a
closing purchase transaction. This is accomplished by purchasing an option of
the same series as the option previously sold. There can be no assurance that a
closing purchase transaction can be effected when a Fund so desires.
The purchaser of an option risks a total loss of the premium paid for the option
if the price of the underlying security does not increase or decrease
sufficiently to justify exercise. The seller of an option, on the other hand,
will recognize the premium as income if the option expires unexercised but
foregoes any capital appreciation in excess of the exercise price in the case of
a call option and may be required to pay a price in excess of current market
value in the case of a put option. Options purchased and sold other than on an
exchange in private transactions also impose on a Fund the credit risk that the
counterparty will fail to honor its obligations. Each Fund will not purchase
options if, as a result, the aggregate cost of all outstanding options exceeds
10% of the Fund's assets. To the extent that puts, straddles and similar
investment strategies involve instruments regulated by the Commodity Futures
Trading Commission ("CFTC") each Fund is limited to an investment not in excess
of 5% of its total assets.
5
FUTURES CONTRACTS. Each Fund may enter into futures contracts only for certain
bona fide hedging, yield enhancement and risk management purposes. Each Fund may
enter into futures contracts for the purchase or sale of debt securities, debt
instruments, or indices of prices thereof, stock index futures, other financial
indices, and U.S. Government Securities.
A "sale" of a futures contract (or a "short" futures position) means the
assumption of a contractual obligation to deliver the securities underlying the
contract at a specified price at a specified future time. A "purchase" of a
futures contract (or a "long" futures position) means the assumption of a
contractual obligation to acquire the securities underlying the contract at a
specified price at a specified future time.
Certain futures contracts are settled on a net cash payment basis rather than by
the sale and delivery of the securities underlying the futures contracts. U.S.
futures contracts have been designed by exchanges that have been designated as
"contract markets" by the CFTC, an agency of the U.S. Government, and must be
executed through a futures commission merchant (i.e., a brokerage firm) which is
a member of the relevant contract market. Futures contracts trade on these
contract markets and the exchange's affiliated clearing organization guarantees
performance of the contracts as between the clearing members of the exchange.
These contracts entail certain risks, including but not limited to the
following: no assurance that futures contracts transactions can be offset at
favorable prices, possible reduction of each Fund's yield due to the use of
hedging, possible reduction in value of both the securities hedged and the
hedging instrument, possible lack of liquidity due to daily limits on price
fluctuation, imperfect correlation between the contracts and the securities
being hedged, and potential losses in excess of the amount invested in the
futures contracts themselves.
CURRENCY TRANSACTIONS. Each Fund may enter into various currency transactions,
including forward foreign currency contracts, currency swaps, foreign currency
or currency index futures contracts and put and call options on such contracts
or on currencies. A forward foreign currency contract involves an obligation to
purchase or sell a specific currency for a set price at a future date. A
currency swap is an arrangement whereby each party exchanges one currency for
another on a particular date and agrees to reverse the exchange on a later date
at a specific exchange rate. Forward foreign currency contracts and currency
swaps are established in the interbank market conducted directly between
currency traders (usually large commercial banks or other financial
institutions) on behalf of their customers. Futures contracts are similar to
forward contracts except that they are traded on an organized exchange and the
obligations thereunder may be offset by taking an equal but opposite position to
the original contract, with profit or loss determined by the relative prices
between the opening and offsetting positions. Each Fund expects to enter into
these currency contracts and swaps in primarily the following circumstances: to
"lock in" the U.S. dollar equivalent price of a security a Fund is contemplating
to buy or sell that is denominated in a non-U.S. currency; or to protect against
a decline against the U.S. dollar of the currency of a particular country to
which the Fund's portfolio has exposure. Each Fund anticipates seeking to
achieve the same economic result by utilizing from time to time for such hedging
a currency different from the one of the given portfolio security as long as, in
the view of the Adviser, such currency is essentially correlated to the currency
of the relevant portfolio security based on historic and expected exchange rate
patterns.
UNSEASONED COMPANIES. The Small Cap Growth Fund and the Woodland Small Cap Value
Fund may invest in securities of unseasoned companies, which generally have
limited liquidity, more speculative prospects and price volatility. The Small
Cap Growth Fund will not invest more than 10% its of assets (at the time of
purchase) in securities of companies (including predecessors) that have operated
less than three years.
6
OTHER INVESTMENT COMPANIES
The Small Cap Growth Fund and the Woodland Small Cap Value Fund each may invest
up to 10% of its total assets in other investment companies (not more than 5% of
its total assets may be invested in any one investment company and it may not
invest in more that 3% of the voting securities of any one investment company).
WARRANTS AND RIGHTS
Each Fund may invest in warrants or rights (other than those acquired in units
or attached to other securities) which entitle the holder to buy equity
securities at a specific price for or at the end of a specific period of time.
With respect to the Equity Income Fund and Small Cap Growth Fund, an investment
in warrants and rights is limited to up to 5% of each Fund's total assets.
WHEN ISSUED, DELAYED DELIVERY SECURITIES AND FORWARD COMMITMENTS
Each Fund may enter into forward commitments for the purchase or sale of
securities, including on a "when issued" or "delayed delivery" basis in excess
of customary settlement periods for the type of security involved. In some
cases, a forward commitment may be conditioned upon the occurrence of a
subsequent event, such as approval and consummation of a merger, corporate
reorganization or debt restructuring, i.e., a when, as and if issued security.
When such transactions are negotiated, the price is fixed at the time of the
commitment, with payment and delivery taking place in the future, generally a
month or more after the date of the commitment. While the Funds will only enter
into a forward commitment with the intention of actually acquiring the security,
the Funds may sell the security before the settlement date if it is deemed
advisable.
Securities purchased under a forward commitment are subject to market
fluctuation, and no interest (or dividends) accrues to the Funds prior to the
settlement date. Each Fund will segregate with its Custodian (as hereinafter
defined) cash or liquid securities in an aggregate amount at least equal to the
amount of its outstanding forward commitments.
SHORT SALES
Each Fund may make short sales of securities. A short sale is a transaction in
which the Fund sells a security it does not own in anticipation that the market
price of that security will decline. The Fund expects to make short sales both
to obtain capital gains from anticipated declines in securities and as a form of
hedging to offset potential declines in long positions in the same or similar
securities. The short sale of a security is considered a speculative investment
technique.
When a Fund makes a short sale, it must borrow the security sold short and
deliver it to the broker-dealer through which it made the short sale in order to
satisfy its obligation to deliver the security upon conclusion of the sale. The
Fund may have to pay a fee to borrow particular securities and is often
obligated to pay over any payments received on such borrowed securities.
The Fund's obligation to replace the borrowed security will be secured by
collateral deposited with the broker-dealer, usually cash, U.S. government
securities or other highly liquid securities. The Fund will also be required to
deposit similar collateral with its custodian to the extent, if any, necessary
so that the value of both collateral deposits in the aggregate is at all times
equal to the greater of the price at which the security is sold short or 100% of
the current market value of the security sold short. Depending on arrangements
made with the broker-dealer from which it borrowed the security regarding
payment over of any payments received by the Fund on such security, the Fund may
not receive any payments (including interest) on its collateral deposited with
such broker-dealer.
If the price of the security sold short increases between the time of the short
sale and the time the Fund replaces the borrowed security, the Fund will incur a
loss; conversely, if the price declines, the Fund will realize a capital gain.
Any gain will be decreased, and any loss increased, by the transaction costs
described above. Although the Fund's gain is limited to the price at which it
sold the security short, its potential loss is theoretically unlimited.
7
With respect to the Equity Income Fund and Small Cap Growth Fund, the market
value of the securities sold short of any one issuer will not exceed either 5%
of the Fund's total assets or 5% of such issuer's voting securities. With
respect to all Funds, a Fund will not make a short sale, if, after giving effect
to such sale, the market value of all securities sold short exceeds 25% of the
value of its assets or the Fund's aggregate short sales of a particular class of
securities exceeds 25% of the outstanding securities of that class. The Funds
may also make short sales "against the box" without respect to such limitations.
In this type of short sale, at the time of the sale, the Funds own or have the
immediate and unconditional right to acquire at no additional cost the identical
security.
RESTRICTED AND ILLIQUID SECURITIES
Each Fund may invest up to 15% of its net assets in securities the markets for
which are illiquid. Illiquid securities include most of the securities the
disposition of which is subject to substantial legal or contractual
restrictions. The sale of illiquid securities often requires more time and
results in higher brokerage charges or dealer discounts and other selling
expenses than does the sale of securities eligible for trading on national
securities exchanges or in the over-the-counter markets. Restricted securities
may sell at a price lower than similar securities that are not subject to
restrictions on resale. Securities freely salable among qualified institutional
investors under special rules adopted by the Securities and Exchange Commission
("SEC") may be treated as liquid if they satisfy liquidity standards established
by the Board of Directors. The continued liquidity of such securities is not as
well assured as that of publicly traded securities, and accordingly the Board of
Directors will monitor their liquidity.
REPURCHASE AGREEMENTS
Each Fund may invest in repurchase agreements, which are agreements pursuant to
which securities are acquired by a Fund from a third party with the
understanding that they will be repurchased by the seller at a fixed price on an
agreed date. These agreements may be made with respect to any of the portfolio
securities in which the Fund is authorized to invest. Repurchase agreements may
be characterized as loans secured by the underlying securities. The Funds may
enter into repurchase agreements with (i) member banks of the Federal Reserve
System having total assets in excess of $500 million and (ii) securities
dealers, provided that such banks or dealers meet certain creditworthiness
standards ("Qualified Institutions"). The Adviser will monitor the continued
creditworthiness of Qualified Institutions, subject to the supervision of the
Corporation's Board of Directors. The resale price reflects the purchase price
plus an agreed upon market rate of interest which is unrelated to the coupon
rate or date of maturity of the purchased security. The collateral is
marked-to-market daily. Such agreements permit a Fund to keep all its assets
earning interest while retaining "overnight" flexibility in pursuit of
investments of a longer-term nature.
The use of repurchase agreements involves certain risks. For example, if the
seller of securities under a repurchase agreement defaults on its obligation to
repurchase the underlying securities, as a result of its bankruptcy or
otherwise, a Fund will seek to dispose of such securities, which action could
involve costs or delays. If the seller becomes insolvent and subject to
liquidation or reorganization under applicable bankruptcy or other laws, a
Fund's ability to dispose of the underlying securities may be restricted.
Finally, it is possible that a Fund may not be able to substantiate its interest
in the underlying securities. To minimize this risk, the securities underlying
the repurchase agreement will be held by the Fund's Custodian at all times in an
amount at least equal to the repurchase price, including accrued interest. If
the seller fails to repurchase the securities, a Fund may suffer a loss to the
extent proceeds from the sale of the underlying securities are less than the
repurchase price. The Funds will not enter into repurchase agreements of a
duration of more than seven days if taken together with all other illiquid
securities in the Fund's portfolio, more than 15% of its net assets would be so
invested.
LOANS OF PORTFOLIO SECURITIES
To increase income, each Fund may lend its portfolio securities to securities
broker-dealers or financial institutions if (1) the loan is collateralized in
accordance with applicable regulatory requirements including collateralization
continuously at no less than 100% by marking to market daily, (2) the loan is
subject to termination by the Fund at any time, (3) the Fund receives reasonable
interest or fee payments on the loan, (4) the Fund is able to exercise all
voting rights with respect to the loaned securities and (5) the loan will not
cause the value of all loaned securities to exceed 33% of the value of the
Fund's assets.
8
If the borrower fails to maintain the requisite amount of collateral, the loan
automatically terminates and the Fund could use the collateral to replace the
securities while holding the borrower liable for any excess of replacement cost
over the value of the collateral. As with any extension of credit, there are
risks of delay in recovery and in some cases even loss of rights in collateral
should the borrower of the securities fail financially.
BORROWING
The Funds may not borrow money except for (1) short-term credits from banks as
may be necessary for the clearance of portfolio transactions, and (2) borrowings
from banks for temporary or emergency purposes, including the meeting of
redemption requests, which would otherwise require the untimely disposition of
portfolio securities. Borrowing may not, in the aggregate, exceed 15% of assets
after giving effect to the borrowing and borrowing for purposes other than
meeting redemptions may not exceed 5% of the value of each Fund's assets after
giving effect to the borrowing. The Funds will not make additional investments
when borrowings exceed 5% of assets. The Funds may mortgage, pledge or
hypothecate assets to secure such borrowings.
TEMPORARY DEFENSIVE INVESTMENTS
For temporary defensive purposes each Fund may invest up to 100% of its assets
in nonconvertible fixed income securities or high quality money market
instruments.
PORTFOLIO TURNOVER
The investment policies of the Funds may lead to frequent changes in
investments, particularly in periods of rapidly fluctuating interest or currency
exchange rates. Each Fund's portfolio turnover is expected to be less than 100%.
Portfolio turnover generally involves some expense to the Fund, including
brokerage commissions or dealer mark-ups and other transaction costs on the sale
of securities and reinvestment in other securities. The portfolio turnover rate
is computed by dividing the lesser of the amount of the securities purchased or
securities sold by the average monthly value of securities owned during the year
(excluding securities whose maturities at acquisition were one year or less).
Portfolio turnover may vary from year to year, as well as within a year. For the
fiscal years ended September 30, 2003, 2002 and 2001, the turnover rates were
27%, 12% and 41%, respectively, in the case of the Equity Income Fund, and 4%,
10% and 17%, respectively, in the case of the Small Cap Growth Fund. For the
period ended September 30, 2003, the turnover rate was 39% for the Woodland
Small Cap Value Fund.
INVESTMENT RESTRICTIONS
Each Fund's investment objective and the following investment restrictions are
fundamental and cannot be changed without the approval of a majority of the
applicable Fund's shareholders defined in the Investment Company Act of 1940, as
amended (the "1940 Act") as the lesser (1) 67% of the Fund's shares present at a
meeting if the holders of more than 50% of the outstanding shares are
represented in person or by proxy, or (2) more than 50% of the Fund's
outstanding shares. All other investment policies or practices are considered
not to be fundamental and accordingly may be changed without shareholder
approval. If a percentage restriction on investment or use of assets set forth
below is adhered to at the time a transaction is effected, later changes in
percentage resulting from changing market values or total assets of a Fund will
not be considered a deviation from policy.
9
EQUITY INCOME FUND AND SMALL CAP GROWTH FUND
Under such restrictions, each of these Funds may not:
(1) with respect to 75% of its total assets, invest more than 5% of the
value of its total assets (taken at market value at time of purchase) in the
outstanding securities of any one issuer or own more than 10% of the outstanding
voting securities of any one issuer, in each case other than securities issued
or guaranteed by the U.S. Government or any agency or instrumentality thereof;
(2) invest 25% or more of the value of its total assets in any one
industry;
(3) issue senior securities (including borrowing money, including on margin
if margin securities are owned and through entering into reverse repurchase
agreements) in excess of 33-1/3% of its total (including the amount of senior
securities issued but excluding any liabilities and indebtedness not
constituting senior securities) except that a Fund may borrow up to an
additional 5% of its total assets for temporary purposes; or pledge its assets
other than to secure such issuances or in connection with hedging transactions,
short sales, when-issued and forward commitment transactions and similar
investment strategies. A Fund's obligations under the foregoing types of
transactions and investment strategies are not treated as senior securities;
(4) make loans of money or property to any person, except through loans of
portfolio securities, the purchase of fixed income securities or the acquisition
of securities subject to repurchase agreements;
(5) underwrite the securities of other issuers, except to the extent that
in connection with the disposition of portfolio securities or the sale of its
own shares the Fund may be deemed to be an underwriter;
(6) invest for the purpose of exercising control over management of any
company;
(7) purchase real estate or interests therein, including limited
partnerships that invest primarily in real estate equity interests, other than
mortgage-backed securities and similar instruments; or
(8) purchase or sell commodities or commodity contracts except for hedging
purposes or invest in any oil, gas or mineral interests.
WOODLAND SMALL CAP VALUE FUND
Under such restrictions, the Fund may not:
(1) invest 25% o r more of the value of its total assets in any one
industry;
(2) issue senior securities (including borrowing money, including on margin
if margin securities are owned and through entering into reverse repurchase
agreements) in excess of 33-1/3% of its total (including the amount of senior
securities issued but excluding any liabilities and indebtedness not
constituting senior securities) except that the Fund may borrow up to an
additional 5% of its total assets for temporary purposes; or pledge its assets
other than to secure such issuances or in connection with hedging transactions,
short sales, when-issued and forward commitment transactions and similar
investment strategies. The Fund's obligations under the foregoing types of
transactions and investment strategies are not treated as senior securities;
10
(3) make loans of money or property to any person, except through loans of
portfolio assets, the purchase of debt instruments or the acquisition of assets
subject to repurchase agreements;
(4) underwrite the securities of other issuers, except to the extent that
in connection with the disposition of portfolio securities the Fund may be
deemed to be an underwriter;
(5) invest for the purpose of exercising day-to-day operating control over
management of any company;
(6) purchase real estate or interests therein, which does not include
securities or other instruments issued by companies that invest primarily in
real estate; or
(7) purchase or sell commodities or commodity contracts or invest in any
oil, gas or mineral interests except in each case to the extent the Fund would
not be required to register as a commodity pool.
11
DIRECTORS AND OFFICERS
Under Maryland law, the Corporation's Board of Directors is responsible for
establishing the Funds' policies and for overseeing the management of the Funds.
The Board also elects the Funds' officers who conduct the daily business of the
Funds. Information pertaining to the Directors and executive officers of the
Corporation is set forth below.
TERM OF NUMBER OF
OFFICE FUNDS IN
AND FUND
NAME, POSITION(S) LENGTH OF COMPLEX
ADDRESS 1 TIME OVERSEEN PRINCIPAL OCCUPATION(S) OTHER DIRECTORSHIPS
AND AGE SERVED 2 BY DIRECTOR DURING PAST FIVE YEARS HELD BY DIRECTOR 3
----------------- --------- ----------- ---------------------- -------------------
INTERESTED
DIRECTORS 4:
------------
MARIO J. GABELLI Since 24 Chairman of the Board and Chief Director of Morgan Group
Director and Chairman of the 1991 Executive Officer of Gabelli Asset Holdings, Inc.
Board Management Inc. and Chief (transportation
Age: 61 Investment Officer of Gabelli services); Vice Chairman
Funds, LLC and GAMCO Investors, of Lynch Corporation
Inc. Vice-Chairman and Chief (diversified
Executive Officer of Lynch manufacturing)
Interactive Corporation
(multimedia and services)
JOHN D. GABELLI Since 10 Senior Vice President of Gabelli & ---
Director 1991 Company, Inc.; Director of Gabelli
Age: 59 Advisers, Inc.
KARL OTTO POHL Since 33 Member of the Shareholder Director of Gabelli
Director 1992 Committee of Sal Oppenheim Jr. & Asset Management Inc.
Age: 74 Cie (private investment bank); (investment management);
Former President of the Deutsche Chairman, Incentive
Bundesbank and Chairman of its Capital and Incentive
Central Bank Council (1980-1991) Asset Management
(Zurich); Director at
Sal Oppenheim Jr. & Cie,
Zurich
12
TERM OF NUMBER OF
OFFICE FUNDS IN
AND FUND
NAME, POSITION(S) LENGTH OF COMPLEX
ADDRESS 1 TIME OVERSEEN PRINCIPAL OCCUPATION(S) OTHER DIRECTORSHIPS
AND AGE SERVED 2 BY DIRECTOR DURING PAST FIVE YEARS HELD BY DIRECTOR 3
----------------- --------- ----------- ---------------------- -------------------
NON-INTERESTED
DIRECTORS:
--------------
ANTHONY J. COLAVITA Since 1991 35 President and Attorney at Law in ---
Director the law firm of Anthony J.
Age: 68 Colavita, P.C.
VINCENT D. ENRIGHT Since 1991 12 Former Senior Vice President and ---
Director Chief Financial Officer of KeySpan
Age: 60 Energy Corporation
ROBERT J. MORRISSEY Since 1991 10 Partner in the law firm of ---
Director Morrissey, Hawkins & Lynch
Age: 64
ANTHONY R. PUSTORINO Since 1991 17 Certified Public Accountant; Director of Lynch
Director Professor Emeritus, Pace Corporation (diversified
Age: 78 University manufacturing)
ANTHONIE C. VAN EKRIS Since 1991 20 Managing Director of BALMAC Director of Aurado
Director International, Inc. (consulting) Exploration Inc.
Age: 69 (oil & gas operations)
SALVATORE J. ZIZZA Since 2001 11 Chairman, Hallmark Electrical Director of Hollis Eden
Director Suppliers Corp.; Former Executive Pharmaceuticals.
Age: 58 Vice President of FMG Group (OTC),
a healthcare provider
13
TERM OF
OFFICE
AND
NAME, POSITION(S) LENGTH OF
ADDRESS 1 TIME PRINCIPAL OCCUPATION(S)
AND AGE SERVED 2 DURING PAST FIVE YEARS
----------------- --------- ----------------------
OFFICERS:
---------
BRUCE N. ALPERT Since 2003 Executive Vice President and Chief Operating Officer of Gabelli Funds, LLC
President and Principal since 1988 and an officer of all mutual Funds advised by Gabelli Funds, LLC
Financial Officer and its affiliates.] Director and President of Gabelli Advisers, Inc.
Age: 52
JAMES E. MCKEE Since 1995 Vice President, General Counsel and Secretary of Gabelli Asset Management
Secretary Inc. since 1999 and GAMCO Investors, Inc. since 1993; Secretary of all
Age: 40 mutual funds advised by Gabelli Advisers, Inc. and Gabelli Funds, LLC
1 Address: One Corporate Center, Rye, NY 10580-1422, unless otherwise noted.
2 Each Director will hold office for an indefinite term until the earliest of
(i) the next meeting of shareholders if any, called for the purpose of
considering the election or re-election of such Director and until the
election and qualification of his or her successor, if any, elected at such
meeting, or (ii) the date a Director resigns or retires, or a Director is
removed by the Board of Directors or shareholders, in accordance with the
Company's By-Laws and Articles of Incorporation.
3 This column includes only directorships of companies required to report to
the SEC under the Securities Exchange Act of 1934, as amended (i.e. public
companies) or other investment companies registered under the 1940 Act.
4 "Interested person" of the Fund as defined in the 1940 Act. Mario J. Gabelli,
John D. Gabelli and Karl Otto Pohl are each considered an "interested person"
because of their affiliation with Gabelli Funds, LLC, which acts as
investment adviser to the Fund. Mario J. Gabelli and John D. Gabelli are
brothers.
STANDING BOARD COMMITTEES
The Board of Directors has established three standing committees in connection
with their governance of the Corporation - Audit, Nominating and Proxy Voting.
The Corporation's Nominating Committee consists of two members: Messrs. Colavita
(Chairman) and Morrissey, who are not "interested persons" of the Corporation as
defined in the 1940 Act. The Nominating Committee is responsible for selecting
and recommending qualified candidates to the full Board in the event that a
position is vacated or created. The Nominating Committee would consider
recommendations by shareholders if a vacancy were to exist. Such recommendations
should be forwarded to the Secretary of the Corporation. The Nominating
Committee did not meet during the fiscal year ended September 30, 2003. The
Corporation does not have a standing compensation committee.
14
The Corporation's Audit Committee consists of two members: Messrs. Pustorino
(Chairman) and Enright, who are not "interested persons" of the Corporation as
defined in the 1940 Act. The Audit Committee operates pursuant to a Charter that
was most recently reviewed and approved by the Board of Directors of the
Corporation on November 19, 2003. As set forth in the Charter, the function of
the Audit Committee is oversight; it is managements' responsibility to maintain
appropriate systems for accounting and internal control and it is the
independent accountants' responsibility to plan and carry out an audit. The
Audit Committee is generally responsible for reviewing and evaluating issues
related to the accounting and financial reporting policies and practices of the
Corporation, its internal controls, and as appropriate, the internal controls of
certain service providers, overseeing the quality and objectivity of the Fund's
financial statements and the audit thereof and to act as a liaison between the
Board of Directors and the Corporation's independent accountants. During the
fiscal year ended September 30, 2003, the Audit Committee met twice.
The Proxy Voting Committee consists of three members: Messrs. Pustorino
(Chairman), Morrissey and Zizza, who are not "interested persons" as defined in
the 1940 Act. Under certain circumstances and pursuant to specific procedures
and guidelines, the Proxy Voting Committee will, in place of the Corporation's
Adviser, exercise complete control and discretion over the exercise of all
rights to vote or consent with respect to certain securities owned by the Fund.
The Proxy Voting Committee meets periodically on an as needed basis to consider
certain proxy related materials. The Proxy Voting Committee did not meet during
the fiscal year ended September 30, 2003.
DIRECTOR OWNERSHIP OF FUND SHARES
Set forth in the table below is the dollar range of equity securities in
the Funds and the aggregate dollar range of equity securities in the Fund
complex beneficially owned by each Director as of December 31, 2003.
DOLLAR RANGE OF AGGREGATE DOLLAR
EQUITY RANGE OF EQUITY
SECURITIES HELD SECURITIES HELD IN
NAME OF DIRECTOR FUND IN EACH FUND* FUND COMPLEX*
---------------- ---- ------------ ------------
INTERESTED
DIRECTORS:
Mario J. Gabelli The Gabelli Equity Income Fund E
The Gabelli Small Cap Growth Fund E E
The Gabelli Woodland Small Cap Value Fund E
John D. Gabelli The Gabelli Equity Income Fund B
The Gabelli Small Cap Growth Fund D D
The Gabelli Woodland Small Cap Value Fund B
Karl Otto Pohl The Gabelli Equity Income Fund A
The Gabelli Small Cap Growth Fund A A
The Gabelli Woodland Small Cap Value Fund A
15
DOLLAR RANGE OF AGGREGATE DOLLAR
EQUITY RANGE OF EQUITY
SECURITIES HELD SECURITIES HELD IN
NAME OF DIRECTOR FUND IN EACH FUND* FUND COMPLEX*
---------------- ---- ------------ ------------
NON-INTERESTED
DIRECTORS:
Anthony J. Colavita The Gabelli Equity Income Fund C
The Gabelli Small Cap Growth Fund D E
The Gabelli Woodland Small Cap Value Fund A
Vincent D. Enright The Gabelli Equity Income Fund C
The Gabelli Small Cap Growth Fund D E
The Gabelli Woodland Small Cap Value Fund B
Robert J. Morrisey The Gabelli Equity Income Fund C
The Gabelli Small Cap Growth Fund C D
The Gabelli Woodland Small Cap Value Fund A
Anthony R. Pustorino** The Gabelli Equity Income Fund B
The Gabelli Small Cap Growth Fund B E
The Gabelli Woodland Small Cap Value Fund A
Anthonie C. van Ekris The Gabelli Equity Income Fund E
The Gabelli Small Cap Growth Fund E E
The Gabelli Woodland Small Cap Value Fund D
Salvatore J. Zizza The Gabelli Equity Income Fund A
The Gabelli Small Cap Growth Fund E E
The Gabelli Woodland Small Cap Value Fund A
------------------
* KEY TO DOLLAR RANGES- INFORMATION AS OF DECEMBER 31, 2003
A. None
B. $1 - $10,000
C. $10,001 - $50,000
D. $50,001 - $100,000
E. Over $100,000
** Mr. Pustorino beneficially owns less than 1% of the common stock of Lynch
Corporation having a value of $10,450 as of December 31, 2003. Lynch
Corporation may be deemed to be controlled by Mario J. Gabelli and in that
event would be deemed to be under common control with the Fund's Adviser.
DIRECTOR AND OFFICER COMPENSATION
The Corporation pays each Director who is not an employee of the Adviser or
an affiliated company an annual fee of $6,000 and $1,000 for each regular
meeting of the Board of Directors attended by the Director, and reimburses
Directors for certain travel and other out-of-pocket expenses incurred by them
in connection with attending such meetings. The Corporation pays each Director
serving as a member of the Audit, Proxy and Nominating Committees a fee of $500
per meeting. Directors and officers of the Fund who are employed by the Adviser
or an affiliated company receive no compensation or expense reimbursement from
the Corporation.
The following table sets forth certain information regarding the
compensation of the Corporation's directors. Except as disclosed below, no
principal officer or person affiliated with the Fund received compensation from
the Corporation for the fiscal year ended September 30, 2003 in excess of
$60,000.
16
COMPENSATION TABLE - AGGREGATE COMPENSATION FROM REGISTRANT (FISCAL YEAR)
Total Compensation
From Corporation and
Name of Person, Aggregate Compensation From Fund Complex Paid
POSITION THE CORPORATION TO DIRECTORS*
-------- --------------- ------------
Mario J. Gabelli
Director and Chairman of the Board $0 $0 (24)
Anthony J. Colavita
Director $10,000 $160,543 (35)
Vincent D. Enright
Director $11,000 $61,592 (12)
John D. Gabelli
Director $0 $0 (10)
Robert J. Morrissey
Director $10,000 $48,342 (10)
Anthony R. Pustorino
Director $11,000 $136,000 (17)
Anthonie C. van Ekris
Director $10,000 $73,293 (20)
Karl Otto Pohl
Director $0 $0 (33)
Salvatore J. Zizza
Director $10,000 $82,043 (11)
---------------------
* Represents the total compensation paid to such persons for the calendar
year ended December 31, 2003. The parenthetical number represents the
number of investment companies (including the Funds) from which such
person receives compensation and which are considered part of the same
"fund complex" as the Funds because they have common or affiliated
investment advisers.
CODE OF ETHICS
The Corporation, its Adviser and principal underwriter have adopted a code of
ethics (the "Code of Ethics") under Rule 17j-1 of the 1940 Act. The Code of
Ethics permits personnel, subject to the Code of Ethics and its restrictive
provisions, to invest in securities, including securities that may be purchased
or held by one or more of the Funds.
PROXY VOTING POLICIES
The Corporation, on behalf of the Funds, has delegated the voting of portfolio
securities to Gabelli Funds, LLC in its capacity as the Funds' investment
adviser. The Adviser has adopted proxy voting policies and procedures (the
"Proxy Voting Policy") for the voting of proxies on behalf of client accounts
for which the Adviser has voting discretion, including the Funds. Under the
Proxy Voting Policy, shares are to be voted in the best interests of the Funds.
Normally, the Adviser exercises proxy voting discretion on particular types of
proposals in accordance with guidelines (the "Proxy Guidelines") set forth in
the Proxy Voting Policy. The Proxy Guidelines address, for example, proposals to
elect the board of directors, to classify the board of directors, to select
auditors, to issue blank check preferred stock, to use confidential ballots, to
eliminate cumulative voting, to require shareholder ratification of poison
pills, to support fair price provisions, to require a supermajority shareholder
vote for charter or bylaw amendments, to provide for director and officer
indemnification and liability protection, to increase the number of authorized
shares of common stock, to allow greenmail, to limit shareholders' rights to
call special meetings, to consider nonfinancial effects of a merger, to limit
shareholders' right to act by written consent, to approve executive
17
and director compensation plans (including golden parachutes), to limit
executive and director pay, to approve stock option plans, to opt in or out of
state takeover statutes and to approve mergers, acquisitions, corporate
restructuring, spin-offs, buyouts, assets sales or liquidations.
A Proxy Committee comprised of senior representatives of the Adviser and its
affiliated investment advisers has the responsibility for the content,
interpretation and application of the Proxy Guidelines. In general, the Director
of Proxy Voting Services, using the Proxy Guidelines, recommendations of
Institutional Shareholder Corporate Governance Service ("ISS"), other
third-party services and the analysts of Gabelli & Company, Inc., will determine
how to vote on each issue. For non-controversial matters, the Director of Proxy
Voting Services may vote the proxy if the vote is (1) consistent with the
recommendations of the issuer's board of directors and not contrary to the Proxy
Guidelines; (2) consistent with the recommendations of the issuer's board of
directors and is a non-controversial issue not covered by the Proxy Guidelines;
or (3) the vote is contrary to the recommendations of the issuer's board of
directors but is consistent with the Proxy Guidelines.
All matters identified by the Chairman of the Committee, the Director of Proxy
Voting Services or the Adviser's Legal Department as controversial, taking into
account the recommendations of ISS or other third party services and the
analysts of Gabelli & Company, Inc., will be presented to the Proxy Voting
Committee. If the Chairman of the Committee, the Director of Proxy Voting
Services or the Adviser's Legal Department has identified the matter as one that
(1) is controversial; (2) would benefit from deliberation by the Proxy Voting
Committee; or (3) may give rise to a conflict of interest between the Adviser
and its clients, the Chairman of the Committee will initially determine what
vote to recommend that the Adviser should cast and the matter will go before the
Committee.
For matters submitted to the Committee, each member of the Committee will
receive, prior to the meeting, a copy of the proxy statement, any relevant third
party research, a summary of any views provided by the Chief Investment Officer
and any recommendations by Gabelli & Company, Inc. analysts. The Chief
Investment Officer or the Gabelli & Company, Inc. analysts may be invited to
present their viewpoints. If the Adviser's Legal Department believes that the
matter before the Committee is one with respect to which a conflict of interest
may exist between the Adviser and its clients, legal counsel will provide an
opinion to the Committee concerning the conflict. If legal counsel advises that
the matter is one in which the interests of the clients of the Adviser may
diverge, the Committee may make different recommendations as to different
clients. For any matters where the recommendation may trigger appraisal rights,
counsel will advise concerning the likely risks and merits of such an appraisal
action.
Where a proxy proposal raises a material conflict between the interests of the
Fund shareholders on the one hand, and those of the Fund's Adviser, the
principal underwriter or other principal underwriter on the other, the conflict
will be brought to the Proxy Voting Committee of the Corporation to determine a
resolution. The Proxy Voting Committee mat determine to resolve such conflicts
itself, may ask the independent Directors of the relevant Funds to vote the
proxies or may delegate the voting of such proxies to an independent person.
Each matter submitted to the Committee will be determined by the vote of a
majority of the members present at the meeting. Should the vote concerning one
or more recommendations be tied in a vote of the Committee, the Chairman of the
Committee will break the tie. The Committee will notify the proxy department of
its decisions and the proxies will be voted accordingly.
The Corporation will be required to file new Form N-PX with each Fund's complete
proxy voting record for the 12 months ended June 30th, no later than August 31st
of each year, commencing August 31, 2004. This filing for each Fund will be
available without charge, upon request, by calling toll-free (800) 422-3554 and
on the SEC's website at www.sec.gov.
18
CONTROL PERSONS AND PRINCIPAL SHAREHOLDERS
As of January 5, 2004, the following persons were known to own of record or
beneficially 5% or more of any of the Funds' outstanding shares:
NAME AND ADDRESS % OF CLASS NATURE OF OWNERSHIP
---------------- ---------- -------------------
SMALL CAP GROWTH FUND:
Class AAA Charles Schwab & Co., Inc. 19.27% Record
Special Custody Acct FBO
Exclusive Benefit of Customers
Attn Mutual Funds
101 Montgomery Street
San Francisco, CA 94104-4122
National Automobile Dealers & Assoc 7.29% Record
Retirement Trust
8400 Westpark Dr
Mclean, VA 22102-5116
EQUITY INCOME FUND:
Class AAA Charles Schwab & Co., Inc. 16.83% Record
Special Custody Acct FBO
Exclusive Benefit of Customers
Attn Mutual Funds
101 Montgomery Street
San Francisco, CA 94104-4122
Citigroup Global Markets Inc. 11.43% Record
333 West 34th St. - 3rd Floor
New York, NY 10001-2402
WOODLAND SMALL CAP VALUE FUND:
Class AAA Bear Stearns Securities Corp 26.36% Record
1 Metrotech Center North
Brooklyn, NY 11201-3870
Mario Gabelli 48.16%* Beneficial
One Corporate Center
Rye, NY 10580
Class A Susan S Oblon 64.75% Record
Susan S Oblon Revoc Trust
Norman Oblon POA
11201 Tara Rd
Potomac. MD 20854-1351
Jones (Edward D.) and Company 34.13% Record
P.O. Box 2500
Maryland Heights, MO 63043-8500
19
NAME AND ADDRESS % OF CLASS NATURE OF OWNERSHIP
---------------- ---------- -------------------
WOODLAND SMALL CAP VALUE FUND:
Class B Gabelli Asset Management Inc 100.00% Beneficial
Attn: Chief Financial Officer
One Corporate Center
Rye, NY 10580-1422
Class C Southwest Securities Inc 91.52% Record
FBO Customers
P.O. Box 509002 Dallas, TX 75250-9002
* Includes 92,450 (42.42% of the number of shares of outstanding) indirectly
beneficially owned by Mr. Gabelli as a result of his position as a controlling
person of certain shareholders, including Gabelli Asset Management, Inc.
("GBL"), Gabelli Group Capital Partners and Gabelli Securities Inc. The shares
shown as beneficially owned by Mr. Gabelli include the shares shown as
beneficially owned by GBL and of record at Bear Stearns.
As of January 5, 2004, the Officers and Directors of the Funds, as a group,
owned 1.80% of the Equity Income Fund and 29.75% of the Woodland Small Cap Value
Fund. The Officers and Directors of the Funds, as a group, owned less than 1% of
the Small Cap Growth Fund.
INVESTMENT ADVISORY AND OTHER SERVICES
THE INVESTMENT ADVISER
The Adviser is a New York limited liability company which also serves as Adviser
to 15 other open-end investment companies and 5 closed-end investment companies
with aggregate assets in excess of $12.1 billion as of December 31, 2003. The
Adviser is a registered investment adviser under the Investment Advisers Act of
1940, as amended. Mr. Mario J. Gabelli may be deemed a "controlling person" of
the Adviser on the basis of his controlling interest in Gabelli Asset
Management, Inc. ("GBL"), the parent company of the Adviser. The Adviser has
several affiliates that provide investment advisory services: GAMCO Investors,
Inc. ("GAMCO"), acts as investment adviser for individuals, pension trusts,
profit-sharing trusts and endowments, and had assets under management of
approximately of $13 billion as of December 31, 2003. Gabelli Advisers, Inc.
acts as investment adviser to the Gabelli Westwood Funds with assets under
management of approximately $480 million as of December 31, 2003; Gabelli
Securities, Inc. acts as investment adviser to certain alternative investments
products, consisting primarily of risk arbitrage and merchant banking limited
partnerships and offshore companies, with assets under management of
approximately $692 million as of December 31, 2003; and Gabelli Fixed Income,
LLC acts as investment adviser for the 3 active portfolios of the Treasurer's
Fund, Inc. and separate accounts having assets under management of approximately
$1.3 billion as of December 31, 2003. Each of the forgoing companies is a
subsidiary of GBL.
Affiliates of the Adviser may, in the ordinary course of their business, acquire
for their own account or for the accounts of their advisory clients, significant
(and possibly controlling) positions in the securities of companies that may
also be suitable for investment by the Funds. The securities in which the Funds
might invest may thereby be limited to some extent. For instance, many companies
in the past several years have adopted so-called "poison pill" or other
defensive measures designed to discourage or prevent the completion of
non-negotiated offers for control of the company. Such defensive measures may
have the effect of limiting the shares of the company which might otherwise be
acquired by the Funds if the affiliates of the Adviser or their advisory
accounts have or acquire a significant position in the same securities. However,
the Adviser does not believe that the investment activities of its affiliates
will have a material adverse effect upon the Funds in seeking to achieve their
respective investment objectives. Securities purchased or sold pursuant to
contemporaneous orders entered on behalf of the investment company accounts of
the Adviser or the advisory accounts managed by its affiliates for their
unaffiliated clients are allocated pursuant to principles believed to be fair
and not disadvantageous to any such accounts. In addition, all such orders are
accorded priority of execution over orders entered on behalf of accounts in
which the Adviser or its affiliates have a substantial pecuniary interest. The
Adviser may on occasion give advice or take action with respect
20
to other clients that differs from the actions taken with respect to the Funds.
The Funds may invest in the securities of companies which are investment
management clients of GAMCO. In addition, portfolio companies or their officers
or directors may be minority shareholders of the Adviser or its affiliates.
Pursuant to each investment advisory contract ("Investment Advisory Contracts")
which were initially approved by each Fund's sole shareholder on December 9,
1991 for the Equity Income Fund, October 2, 1991 for the Small Cap Growth Fund
and December 31, 2002 for the Woodland Small Cap Value Fund, the Adviser
furnishes a continuous investment program for each Fund's portfolio, makes the
day-to-day investment decisions for each Fund, arranges the portfolio
transactions for each Fund and generally manages each Fund's investments in
accordance with the stated policies of each Fund, subject to the general
supervision of the Board of Directors of the Corporation. As compensation for
its services and related expenses borne by the Adviser, each Fund is
contractually obligated to pay the Adviser a fee equal to 1.00% per year of the
value of each Fund's average daily net assets.
Advisory Fees
For the Year Ended September 30
2003 2002 2001
Equity Income Fund $2,360,531 $1,609,192 $1,047,561
Small Cap Growth Fund $4,715,146 $4,601,591 $3,995,187
Woodland Small Cap Value Fund $9,547* N/A N/A
------------------
* From commencement of operations on December 31, 2002. Amount reflects advisory
fees prior to reimbursement of expenses by the Adviser.
The Adviser has contractually agreed to waive its investment advisory fee and/or
to reimburse expenses of the Woodland Small Cap Value Fund to the extent
necessary to maintain the Fund's Total Annual Fund Operating Expenses (excluding
brokerage, interest, taxes and extraordinary expenses) at certain specified
levels. Pursuant to this agreement, the Adviser reimbursed expenses of the Fund
in the amount of $124,599 for the period from the Fund's commencement of
operations on December 31, 2002 through September 30, 2003. This arrangement
will continue until at least through September 30, 2004. In addition, the Fund
has agreed, during the two-year period following any waiver or reimbursement by
the Adviser, to repay such amount to the extent, after giving effect to the
repayment, such adjusted Total Annual Fund Operating Expenses would not exceed
2.00%, 2.00%, 2.75% and 2.75% on an annualized basis for Class AAA, Class A,
Class B and Class C shares, respectively.
The Investment Advisory Contracts were most recently approved by the Directors,
including a majority of the Directors who are not parties to the Investment
Advisory Contracts or "interested persons" (as such term is defined in the 1940
Act") of any party thereto on February 19, 2003. At that meeting, the Board of
Directors reviewed the written and oral presentations provided by the Adviser in
connection with the Directors' consideration of the Investment Advisory
Contracts. The Directors also reviewed their responsibilities under applicable
law. The Directors considered, in particular, the level of each Fund's
contractual advisory fee rate and the actual total expense ratio borne by each
Fund and compared the information on these matters to similar information for
unrelated mutual funds of a comparable size and investment program. The Board
also reviewed the profitability of the contracts to the Adviser, each Fund's
absolute and comparative investment performance and the nature and quality of
the services provided to each Fund by the Adviser and its affiliates. The
independent Directors met separately to discuss this information. Based on their
consideration of all of the above factors, the independent Directors recommended
to the full Board, and each of the Directors present at the meeting determined,
that renewal of each of the Investment Advisory Contracts was in the best
interest of each Fund and its shareholders. In the course of arriving at such
determination, the independent Directors noted in particular the comparative
investment performance of each Fund, the experience of each Fund's portfolio
manager and the level of services provided by the Adviser.
Under each Investment Advisory Contract, the Adviser (1) provides the Funds with
the services of persons competent to perform such supervisory, administrative,
and clerical functions as are necessary to provide efficient administration of
the Funds, including maintaining certain books and records and overseeing the
activities of the Funds Custodian and Transfer Agent; (2) oversees the
performance of administrative and professional services
21
provided to the Funds by others, including the Funds' Custodian, Transfer Agent
and Dividend Disbursing Agent, as well as legal, accounting, auditing and other
services performed for the Funds; (3) provides the Funds, if requested, with
adequate office space and facilities: (4) prepares, but does not pay for,
periodic updating of the Funds' registration statement, Prospectus and SAI,
including the printing of such documents for the purpose of filings with the
SEC; (5) supervises, but does not pay for, the calculation of the net asset
value of shares of the Funds; (6) supervises the preparation of, but does not
pay for, all filings under state "Blue Sky" laws of such states or countries as
are designated by the Distributor, which may be required to register or qualify,
or continue the registration or qualification, of the Fund and/or their shares
under such laws; and (7) prepares notices and agendas for meetings of the
Corporation's Board of Directors and minutes of such meetings in all matters
required by the 1940 Act to be acted upon by the Board.
The cost of calculating each Fund's net asset value is an expense payable by the
Corporation pursuant to the Investment Advisory Contracts. To the extent that a
portion of the sub-administration fee is used to pay for personnel and equipment
related to the calculating the net asset value, each Fund will reimburse the
Adviser for such expenses. During the fiscal year ended September 30, 2003, the
Funds reimbursed the Adviser $34,800, $34,800 and $0 for the Equity Income Fund,
Small Cap Growth Fund and Woodland Small Cap Value Fund, respectively, in
connection with the cost of computing each Fund's net asset value.
Each Investment Advisory Contract provides that absent willful misfeasance, bad
faith, gross negligence or reckless disregard of its duty, the Adviser and its
employees, officers, directors and controlling persons are not liable to the
Funds or any of their investors for any act or omission by the Adviser or for
any error of judgment or for losses sustained by the Funds. However, the
Contract provides that each Fund is not waiving any rights it may have with
respect to any violation of law which cannot be waived. The Contract also
provides indemnification for the Adviser and each of these persons for any
conduct for which they are not liable to the Funds. The Investment Advisory
Contract in no way restricts the Adviser from acting as adviser to others. The
Funds have agreed by the terms of the Investment Advisory Contract that the word
"Gabelli" in its name is derived from the name of the Adviser which in turn is
derived from the name of Mario J. Gabelli; that such name is the property of the
Adviser for copyright and/or other purposes; and that therefore, such name may
freely be used by the Adviser for other investment companies, entities or
products. The Funds have further agreed that in the event that for any reason,
the Adviser ceases to be its investment adviser, the Funds will, unless the
Adviser otherwise consents in writing, promptly take all steps necessary to
change its name to one which does not include "Gabelli."
Each Investment Advisory Contract is terminable without penalty by the
Corporation on not more than sixty days' written notice when authorized by the
Directors of the Corporation, by the holders of a majority, as defined in the
1940 Act, of the outstanding shares of the Corporation, or by the Adviser. The
Investment Advisory Contract will automatically terminate in the event of its
assignment, as defined in the 1940 Act and rules thereunder except to the extent
otherwise provided by order of the Commission or any rule under the 1940 Act and
except to the extent the 1940 Act no longer provides for automatic termination,
in which case the approval of a majority of the disinterested directors is
required for any "assignment." Each Investment Advisory Contract provides in
effect, that unless terminated it will remain in effect initially for two years
and then from year to year so long as continuance of the Investment Advisory
Contract is approved annually by the Directors of the Corporation, or the
shareholders of the Funds and in either case, by a majority vote of the
Directors who are not parties to the Investment Advisory Contract or "interested
persons" as defined in the 1940 Act of any such person cast in person at a
meeting called specifically for the purpose of voting on the continuance of the
Investment Advisory Contract.
THE SUB-ADMINISTRATOR
The Adviser has entered into a Sub-Administration Agreement (the
"Sub-Administration Agreement") with PFPC Inc. (the "Sub-Administrator"), which
is located at 760 Moore Road, King of Prussia, Pennsylvania 19406. Under the
Sub-Administration Agreement, the Sub-Administrator (a) assists in supervising
all aspects of the Corporation's operations except those performed by the
Adviser under its advisory agreement with the Corporation; (b) supplies the
22
Corporation with office facilities (which may be in the Sub-Administrator's own
offices), statistical and research data, data processing services, clerical,
accounting and bookkeeping services, including, but not limited to, the
calculation of the net asset value of shares in each Fund, internal auditing and
regulatory administration services, internal executive and administrative
services, and stationery and office supplies; (c) prepares and distributes
materials for all Corporation Board of Directors' Meetings including the mailing
of all Board materials and collates the same materials into the Board books and
assists in the drafting of minutes of the Board Meetings; (d) prepares reports
to Corporation shareholders, tax returns and reports to and filings with the SEC
and state "Blue Sky" authorities; (e) calculates each Fund's net asset value per
share and provides any equipment or services necessary for the purpose of
pricing shares or valuing the Fund's investment portfolio (f) provides
compliance testing of all Fund activities against applicable requirements of the
1940 Act and the rules thereunder, the Code, and the Corporation's investment
restrictions; (g) furnishes to the Adviser such statistical and other factual
information and information regarding economic factors and trends as the Adviser
from time to time may require; and (h) generally provides all administrative
services that may be required for the ongoing operation of the Corporation in a
manner consistent with the requirements of the 1940 Act.
For the services it provides, the Adviser pays the Sub-Administrator an annual
fee based on the value of the aggregate average daily net assets of all funds
under its administration managed by the Adviser as follows: up to $10 billion:
-.0275%; $10 billion to $15 billion: -.0125%; over $15 billion: -.0100%. The
Sub-Administrator's fee is paid by the Adviser.
CUSTODIAN, TRANSFER AGENT AND DIVIDEND DISBURSING AGENT
State Street Bank and Trust Company ("State Street"), 225 Franklin Street,
Boston, Massachusetts 02110 is the Custodian for each Fund's cash and
securities. Boston Financial Data Services, Inc. ("BFDS"), an affiliate of State
Street, located at The BFDS Building, 66 Brooks Drive, Braintree, MA 02184,
performs the shareholder services on behalf of State Street and acts as each
Fund's transfer agent and dividend disbursing agent. Neither BFDS or State
Street assists in or is responsible for investment decisions involving assets of
the Funds.
COUNSEL
Skadden, Arps, Slate, Meagher & Flom LLP, Four Times Square, New York, New York
10036, serves as the Corporation's legal counsel.
INDEPENDENT AUDITORS
Ernst & Young LLP has been appointed independent auditors for the Funds, and is
located at 5 Times Square, New York, NY 10036.
DISTRIBUTOR
To implement each Fund's 12b-1 Plans, the Fund has entered into a Distribution
Agreement with Gabelli & Company, Inc. (the "Distributor"), a New York
corporation which is an indirect majority owned subsidiary of GAMI, having
principal offices located at One Corporate Center, Rye, New York 10580-1422. The
Distributor acts as agent of each Fund for the continuous offering of its shares
on a best efforts basis.
No underwriting commissions or redemption compensation were received for the
fiscal years ended September 30, 2001, 2002 and 2003 by Gabelli & Company, Inc.
Set forth in the table below is the amount of commissions and other compensation
received by the Distributor during the fiscal year ended September 30, 2003.
23
NET UNDERWRITING COMPENSATION ON
DISCOUNTS AND REDEMPTIONS AND BROKERAGE OTHER
COMMISSIONS REPURCHASES COMMISSIONS COMPENSATION
---------------- --------------- ----------- ------------
Equity Income Fund N/A N/A $298,656 -
Small Cap Growth Fund N/A N/A $219,979 -
Woodland Small Cap Value Fund* N/A N/A $ 7,778 -
---------------
* From commencement of operations on December 31, 2002.
DISTRIBUTION PLAN
Each Fund has adopted a separate Plans of Distribution (each, a "Plan") pursuant
to Rule 12b-1 under the 1940 Act on behalf of each Fund's Class AAA Shares,
Class A Shares, Class B Shares and the Class C Shares. Payments may be made by
each Fund under each Plan for the purpose of financing any activity primarily
intended to result in the sales of shares in the class to which such Plan
relates as determined by the Board of Directors. Such activities typically
include advertising; compensation for sales and marketing activities of the
Distributor and other banks, broker-dealers and service providers; shareholder
account servicing; production and dissemination of prospectuses and sales and
marketing materials; and capital or other expenses of associated equipment,
rent, salaries, bonuses, interest and other overhead. To the extent any activity
is one which a Fund may finance without a distribution plan, a Fund may also
make payments to finance such activity outside of the Plans and not subject to
their limitations. Payments under the Plans are not dependent on distribution
expenses actually incurred by the Distributor.
Each Plan has been implemented by written agreements between each Fund and/or
the Distributor and each person (including the Distributor) to which payments
may be made. Administration of the Plans is regulated by Rule 12b-1 under the
1940 Act which includes requirements that the Board of Directors receive and
review, at least quarterly, reports concerning the nature and qualification of
expenses for which payments are made, that the Board of Directors approves all
agreements implementing the Plans and that the Plans may be continued from year
to year only if the Board of Directors concludes, at least annually, that
continuation of the Plans is likely to benefit shareholders. To the extent any
of these payments are based on allocations by the Distributor, the Funds may be
considered to be participating in joint distribution activities with other funds
distributed by the Distributor. For the fiscal year ended September 30, 2003,
the Equity Income Fund, Small Cap Growth Fund and Woodland Small Cap Value Fund
incurred distribution costs of $614,900, $738,900 and $69,300, respectively, to
the Distributor for underwriting. The Plan compensates the Distributor
regardless of its expense. For the fiscal year ended September 30, 2003, the
Distributor identified expenditures for the Equity Income Fund, Small Cap Growth
Fund and Woodland Small Cap Value Fund, respectively, of approximately: $11,300,
$17,000 and $2,700 for advertising and promotion, $40,00, $24,300 and $7,200 for
printing, postage and stationery, $7,600, $6,500 and $2,500 for overhead support
expenses, $134,200, $111,300 and $40,900 for salaries of personnel of the
Distributor and $421,800, $579,800 and $16,000 on third party servicing fees.
Due to the possible continuing nature of Rule 12b-1 payments, long-term
investors may pay more than the economic equivalent of the maximum front-end
sales charge permitted by NASD, Inc.
The amounts included in the previous paragraph as third party servicing fees
include amounts paid to the providers of various programs that make shares
available to their customers. Subject to tax limitations and approvals by the
Board of Directors on a Fund-by-Fund basis, each of the Funds also makes
payments to the providers of these programs, out of its assets other than 12b-1
payments, in amounts not greater than savings of expenses the Fund would
otherwise incur in maintaining shareholder accounts for those who invest in the
Fund directly rather than through these programs. The Adviser and its affiliates
may also pay for all or a portion of these program's charges out of their
financial resources other than 12b-1 fees.
24
No independent Director had a direct or indirect financial interest in the
operation of any Plan or related agreements. Those interested persons who
beneficially own stock in affiliates of the Adviser or the Distributor or are
employed by the Gabelli companies may be deemed to have an indirect financial
interest.
PORTFOLIO TRANSACTIONS AND BROKERAGE
Under each Investment Advisory Contract the Adviser is authorized on behalf of
each Fund to employ brokers to effect the purchase or sale of portfolio
securities with the objective of obtaining prompt, efficient and reliable
execution and clearance of such transactions at the most favorable price
obtainable ("best execution") at reasonable expense. Transactions in securities
other than those for which a securities exchange is the principal market are
generally done through a principal market maker. However, such transactions may
be effected through a brokerage firm and a commission paid whenever it appears
that the broker can obtain a more favorable overall price. In general, there may
be no stated commission in the case of securities traded on the over-the-counter
markets, but the prices of those securities may include undisclosed commissions
or markups. Options transactions will usually be effected through a broker and a
commission will be charged. Each Fund also expects that securities will be
purchased at times in underwritten offerings where the price includes a fixed
amount of compensation generally referred to as the underwriter's concession or
discount.
The Adviser currently serves as Adviser to a number of investment company
clients and may in the future act as adviser to others. Affiliates of the
Adviser act as investment adviser to numerous private accounts and adviser to
other investment companies. It is the practice of the Adviser and its affiliates
to cause purchase and sale transactions to be allocated among the Funds and
others whose assets they manage in such manner as it deems equitable. In making
such allocations among the Funds and other client accounts, the main factors
considered are the respective investment objectives, the relative size of
portfolio holdings of the same or comparable securities, the availability of
cash for investment, the size of investment commitments generally held and the
opinions of the persons responsible for managing the portfolios of the Funds and
other client accounts.
The policy of each Fund regarding purchases and sales of securities and options
for its portfolio is that primary consideration will be given to obtaining the
most favorable prices and efficient execution of transactions. In seeking to
implement each Fund's policies, the Adviser effects transactions with those
brokers and dealers who the Adviser believes provide the most favorable prices
and are capable of providing efficient executions. If the Adviser believes such
price and execution are obtainable from more than one broker or dealer, it may
give consideration to placing portfolio transactions with those brokers and
dealers who also furnish research and other services to the Funds or the Adviser
of the type described in Section 28(e) of the Exchange Act of 1934. In doing so,
the Funds may also pay higher commission rates than the lowest available when
the Adviser believes it is reasonable to do so in light of the value of the
brokerage and research services provided by the broker effecting the
transaction. Such services may include, but are not limited to, any one or more
of the following: information as to the availability of securities for purchase
or sale; statistical or factual information or opinions pertaining to
investments; wire services; and appraisals or evaluations of potential and
existing investments.
Research services furnished by broker or dealers through which the Funds effect
securities transactions are used by the Adviser and its advisory affiliates in
carrying out their responsibilities with respect to all of their accounts over
which they exercise investment discretion. Such investment information may be
useful only to one or more of such other accounts. The purpose of this sharing
of research information is to avoid duplicative charges for research provided by
brokers and dealers. Neither the Funds nor the Adviser has any agreement or
legally binding understanding with any broker or dealer regarding any specific
amount of brokerage commissions which will be paid in recognition of such
services. However, in determining the amount of portfolio commissions directed
to such brokers or dealers, the Adviser does consider the level of services
provided and, based on such determinations, has allocated brokerage commissions
of $61,079 for Equity Income Fund, $27,319 for Small Cap Growth Fund and $1,336
for Woodland Small Cap Value Fund, respectively, on portfolio transactions in
the principal amount of $24,145,944, $5,054,601 and $445,718 for Equity Income
Fund, Small Cap Growth Fund and Woodland Small Cap Value Fund, respectively,
during 2003. The average commission on these transactions were $0.0457, $0.0366
and $0.0486 per share for Equity Income Fund, Small Cap Growth Fund and Woodland
Small Cap Value Fund, respectively.
25
The Adviser may also place orders for the purchase or sale of portfolio
securities with Gabelli & Company, Inc. ("Gabelli"), a broker-dealer member of
NASD, Inc. and an affiliate of the Adviser, when it appears that, as an
introducing broker or otherwise, Gabelli can obtain a price, execution and
commission which is at least as favorable as that obtainable by other qualified
brokers and at a commission rate at least as favorable as it provides to its
best customers for similar transactions. The Funds paid the following brokerage
commissions for the fiscal year ended September 30 as indicated:
EQUITY INCOME FUND
Commissions
FISCAL YEAR PAID
----------- -----------
Total Brokerage Commissions 2001 $125,722
2002 $652,475
2003 $298,656
Commission paid to Gabelli & Company 2001 $117,472
2002 $174,676
2003 $230,467
% of Total Brokerage Commissions paid 2003 77.17%
to Gabelli & Company
% of Total Transactions involving Commissions 2003 74.72%
paid to Gabelli & Company
SMALL CAP GROWTH FUND
Commissions
FISCAL YEAR PAID
----------- -----------
Total Brokerage Commissions 2001 $428,001
2002 $503,105
2003 $219,979
Commission paid to Gabelli & Company 2001 $372,723
2002 $302,873
2003 $174,657
% of Total Brokerage Commissions paid 2003 79.40%
to Gabelli & Company
% of Total Transactions involving Commissions 2003 80.19%
paid to Gabelli & Company
26
WOODLAND SMALL CAP VALUE FUND
Commissions
FISCAL YEAR PAID
----------- -----------
Total Brokerage Commissions 2003* $7,778
Commission paid to Gabelli & Company 2003* $37
% of Total Brokerage Commissions paid 2003* 0.48%
to Gabelli & Company
% of Total Transactions involving Commissions 2003* 0.90%
paid to Gabelli & Company
-------------
* From commencement of operations on December 31, 2002.
As required by Rule 17e-1 under the 1940 Act, the Board of Directors has adopted
"Procedures" which provide that the commissions paid to Gabelli on brokerage
transactions may not exceed those which would have been charged by another
qualified broker or member firm able to effect the same or a comparable
transaction at an equally favorable price or those Gabelli charges its most
favored customers on similar transactions. Rule 17e-1 and the Procedures contain
requirements that the Board, including its independent Directors, conduct
periodic compliance reviews of such brokerage allocations and review such
schedule at least quarterly for continuing compliance with the foregoing
standard. The Adviser and Gabelli are also required to furnish reports and
maintain records in connection with such reviews.
To obtain the best execution of portfolio trades on the New York Stock Exchange
("NYSE"), Gabelli controls and monitors the execution of such transactions on
the floor of the NYSE through independent "floor brokers" or through the
Designated Order Turnaround ("DOT") System of the NYSE. Such transactions are
then cleared, confirmed to the Fund for the account of Gabelli, and settled
directly with the Custodian of the Funds by a clearing house member firm which
remits the commission less its clearing charges to Gabelli. Gabelli may also
effect Fund portfolio transactions in the same manner and pursuant to the same
arrangements on other national securities exchanges which adopt direct access
rules similar to those of the NYSE.
REDEMPTION OF SHARES
Cancellation of purchase orders for Fund shares (as, for example, when checks
submitted to purchase shares are returned unpaid) cause a loss to be incurred
when the net asset value of the Fund shares on the date of cancellation is less
than on the original date of purchase. The investor is responsible for such
loss, and the Fund may reimburse shares from any account registered in that
shareholder's name, or by seeking other redress. If the Fund is unable to
recover any loss to itself, it is the position of the SEC that the Distributor
will be immediately obligated to make the Fund whole.
OTHER INVESTORS
No minimum initial investment is required for officers, directors or full-time
employees of the Fund, other investment companies managed by the Adviser, the
Adviser, the Sub-Administrator, the Distributor or their affiliates, including
members of the "immediate family" of such individuals and retirement plans and
trusts for their benefit. The term "immediate family" refers to spouses,
children and grandchildren (adopted or natural), parents, grandparents,
siblings, a spouse's siblings, sibling's spouse and a sibling's children.
27
If the Board of Directors should determine that it would be detrimental to the
remaining shareholders of a Fund to make payment wholly or partly in cash, the
Fund may pay the redemption price in whole or in part by a distribution in kind
of securities from the portfolio of the Fund, in lieu of cash, in conformity
with applicable rules of the SEC. Under such circumstances, shareholders of the
Fund receiving distributions in-kind of securities will incur brokerage
commissions when they dispose of the securities.
DETERMINATION OF NET ASSET VALUE
Net Asset Value ("NAV") is calculated separately for each class of each Fund.
The NAV of Class B and Class C shares of each Fund, as applicable, will
generally be lower than the NAV of Class A or Class AAA shares, as applicable,
as a result of the larger service and distribution-related fee to which Class B
and Class C shares are subject. It is expected, however, that the NAV per share
of each class will tend to converge immediately after the recording of
dividends, if any, which will differ by approximately the amount of the
distribution and/or service fee expense accrual differential among the classes.
For purposes of determining each of the Fund's NAV per share, readily marketable
portfolio securities (including options and futures) traded on a market where
trades are reported contemporaneously are valued, except as indicated below, at
the last sale price or a market's official closing price reflected at the close
of the regular trading session of the principal market occurring as of or prior
to the time of day as of which such value is being determined. If there has been
no sale on such day, the securities are valued at the average of the closing bid
and asked price on the principal market for such other security on such day. If
no asked prices are quoted on such day, then the security is valued at the
closing bid price on the principal market for such other security on such day.
If no bid or asked prices are quoted on such day, then the security is valued at
the most recently available price, or if the Board so determines, by such method
as the Board of Directors shall determine in good faith to reflect its fair
market value.
All other readily marketable securities are valued at the latest average of the
bid and asked price obtained from a pricing service or a dealer maintaining an
active market in such security.
Portfolio securities which are primarily traded on foreign exchanges may be
valued with the assistance of a pricing service and are generally valued at the
preceding closing values of such securities on their respective exchanges.
Short-term debt instruments having 60 days or less remaining until maturity are
valued at amortized cost from the later of purchase date or valuation on the
61st day prior to maturity. Other debt obligations (including convertible debt)
for which market quotations are readily available are valued at the average of
the latest bid and asked prices. If there were no asked prices quoted on such
day the security is valued using the closing bid price. The Funds may obtain
valuations on the basis of prices provided by a pricing service approved by the
Board of Directors. All other investment assets, including restricted and not
readily marketable securities, are valued in good faith at fair value under
procedures established by and under the general supervision and responsibility
of the Corporation's Board of Directors designed to reflect in good faith the
fair value of such securities.
In addition, whenever developments in one or more securities markets after the
close of the principal markets for one or more portfolio securities would, if
such developments had been reflected in such principal markets, have more than a
minimal effect on each Fund's net asset value per share, each Fund may fair
value such portfolio securities based on available market information as of the
time each Fund determines its net asset value.
28
DIVIDENDS, DISTRIBUTIONS AND TAXES
Set forth below is a discussion of certain Federal Income tax issues concerning
the Funds and the purchase, ownership and disposition of the Funds' shares. This
discussion is based upon present provisions of the Internal Revenue Code of 1986
as amended (the "Code"), the regulations promulgated thereunder, and judicial
and administrative ruling authorities, all of which are subject to change, which
change may be retroactive. This discussion does not purport to be complete or to
deal with all aspects of Federal income taxation that may be relevant to
investors in light of their particular circumstances. Prospective investors
should consult their own tax advisers with regard to the Federal tax
consequences arising under the laws of any state, foreign country, or other
taxing jurisdiction.
GENERAL
Each Fund has qualified and intends to continue to qualify as a regulated
investment company under Subchapter M of the Code. If it so qualifies, the Fund
will not be subject to U.S. Federal income tax on its investment company taxable
income and net short-term capital gain, if any, realized during any fiscal year
to the extent that it distributes such income and capital gains to its
shareholders.
Each Fund will determine either to distribute, or to retain for reinvestment,
all or part of any net long-term capital gain. If any such gains are retained,
the Fund will be subject to a tax at a rate of 35% of such amount. In that
event, the Fund expects to designate the retained amount as undistributed
capital gain in a notice to its shareholders, each of whom (1) will be required
to include in income for tax purposes as long-term capital gain its share of the
undistributed amount, (2) will be entitled to credit its proportionate share of
the tax paid by the Fund against its U.S. Federal income tax liability and to
claim refunds to the extent the credit exceeds such liability, and (3) will
increase its basis in its shares of the Fund by an amount equal to 65% of the
amount of undistributed capital gain included in such shareholder's gross
income.
A distribution will be treated as paid during any calendar year if it is
declared by the Fund in October, November or December of the year, payable to
shareholders of record on a date during such month and paid by the Fund during
January of the following year. Any such distributions paid during January of the
following year will be deemed to be received on December 31 of the year the
distributions are declared, rather than when the distributions are received.
Under the Code, amounts not distributed on a timely basis in accordance with a
calendar year distribution requirement are subject to a 4% excise tax. To avoid
the tax, the Fund must distribute during each calendar year, an amount equal to
at least the sum of (1) 98% of its ordinary income (not taking into account any
capital gains or losses) for the calendar year, (2) 98% of its capital gains in
excess of its capital losses for the twelve-month period ending on October 31,
(unless an election is made by a fund with a November or December year-end to
use the fund's fiscal year) and (3) all ordinary income and net capital gains
for previous years that were not previously distributed and upon which no tax
was imposed.
Gains or losses on the sales of securities by the Funds will be long-term
capital gains or losses if the securities have been held by the Fund for more
than twelve months. Gains or losses on the sale of securities held for twelve
months or less will be short-term capital gains or losses.
Certain options, futures contracts and options on futures contracts are "section
1256 contracts". Any gains or losses on section 1256 contracts are generally
considered 60% long-term and 40% short-term capital gains or losses ("60/40").
Also, section 1256 contracts held by the Funds at the end of each taxable year
(and, generally, for purposes of the 4% excise tax), are "marked-to-market" with
the result that unrealized gains or losses are treated as though they were
realized and the resulting gain or loss is treated as 60/40 gain or loss.
29
Hedging transactions undertaken by the Funds may result in "straddles" for U.S.
Federal income tax purposes. The straddle rules may affect the character of
gains (or losses) realized by the Fund. In addition, losses realized by the
Funds on positions that are part of a straddle may be deferred under the
straddle rules, rather than being taken into account in calculating the taxable
income for the taxable year in which such losses are realized. Further, the
Funds may be required to capitalize, rather than deduct currently, any interest
expense on indebtedness incurred or continued to purchase or carry any positions
that are part of a straddle. The Funds may make one or more of the elections
available under the Code which are applicable to straddles. If the Funds make
any of the elections, the amount, character and timing of the recognition of
gains or losses from the affected straddle positions will be determined under
rules that vary according to the election(s) made. The rules applicable under
certain of the elections accelerate the recognition of gains or losses from the
affected straddle positions. Because application of the straddle rules may
affect the character and timing of gains, losses or deductions from the affected
straddle positions, the amount which must be distributed to shareholders, and
which will be taxed to shareholders as ordinary income or long-term capital
gain, may be increased or decreased substantially as compared to a fund that did
not engage in such hedging transactions.
The diversification requirements applicable to each Fund's assets may limit the
extent to which a Fund will be able to engage in transactions in options,
futures contracts and options on futures contracts.
NATURE OF SMALL CAP INVESTMENTS
Certain of the Small Cap Growth and Woodland Small Cap Value Funds' investment
practices are subject to special and complex Federal income tax provisions that
may, among other things, (i) disallow, suspend or otherwise limit the allowance
of certain losses or deductions, (ii) convert lower taxed long-term capital gain
into higher taxed short-term capital gain or ordinary income, (iii) convert an
ordinary loss or a deduction into a capital loss (the deductibility of which is
more limited), (iv) cause the Fund to recognize income or gain without a
corresponding receipt of cash, (v) adversely affect the time as to when a
purchase or sale of stock or securities is deemed to occur and (vi) adversely
alter the characterization of certain complex financial transactions. Each Fund
will monitor its transactions and may make certain tax elections in order to
mitigate the effect of these provisions.
DISTRIBUTIONS
Distributions of investment company taxable income (which includes among other
items, dividends, interest and the excess of net short-term capital gains over
net long-term capital losses) are taxable to a U.S. shareholder as ordinary
income. Dividends paid by a Fund may qualify (provided holding period and other
requirements are met) for (i) the deduction for dividends available to corporate
shareholders to the extent the Fund's income consists of dividends received from
U.S. corporations and (ii) under the Jobs and Growth Tax Relief Reconciliation
Act of 2003 (effective for taxable years after December 31, 2002 through
December 31, 2008) (the "Tax Act") as qualified dividend income eligible for the
reduced maximum rate to individuals of generally 15% (5% for individuals in
lower tax brackets) to the extent the Funds receive qualified dividend income
(i.e. dividend income from domestic corporations and certain qualifying foreign
corporations). Distributions of net capital gain (which consist of the excess of
net long-term capital gains over net short-term capital losses), if any, are
taxable as long-term capital gain and are not eligible for the dividends
received deduction. Shareholders receiving distributions in the form of newly
issued shares will have a basis in such shares of the Fund equal to the fair
market value of such shares on the distribution date. If the net asset value of
shares is reduced below a shareholder's cost as a result of a distribution by
the Fund, such distribution may be taxable even though it represents a return of
invested capital. The price of shares purchased at any time may reflect the
amount of a forthcoming distribution. Those purchasing shares just prior to a
distribution will receive a distribution which will be taxable to them, even
though the distribution represents in part a return of invested capital.
30
Distributions of amounts in excess of the Fund's current and accumulated earning
and profits will be treated by a shareholder as a return of capital to the
extent of (and in reduction of) the shareholder's tax basis in its shares. Any
excess will be treated as gain from the sale of its shares, as discussed below.
Distributions will be treated in the manner described above regardless of
whether such distributions are paid in cash or invested in additional shares of
the Fund.
SALES OF SHARES
Upon a sale or exchange of shares, a shareholder will realize a taxable gain or
loss depending upon the basis in the shares. Such gain or loss will be
long-term, or short-term, generally depending upon the shareholder's holding
period for the shares, under the Tax Act; for non-corporate shareholders the
maximum rate on capital gains resulting from the disposition of shares held for
more than 12 months ois15% (5% if the taxpayer is, and would be after accounting
for such gains, subject to the 10% or 15% tax bracket for ordinary income) for
such gain realized after May 5, 2003 and before January 1, 2009. Any loss
realized on a sale or exchange will be disallowed to the extent the shares
disposed of are replaced by substantially identical shares within a 61-day
period beginning 30 days before and ending 30 days after the date the shares are
disposed of. In such case, the basis of the shares acquired will be adjusted to
reflect the disallowed loss.
Any loss realized by a shareholder on the sale of Fund shares held by the
shareholder for six months or less will be treated for tax purposes as a
long-term capital loss to the extent of any distributions of net capital gain
received by the shareholder with respect to such shares.
If a shareholder (i) incurs a sales load charge in acquiring shares in a Fund
and, by reason of incurring such charge or acquiring the shares, acquires the
right to acquire shares of one or more regulated investment companies without
the payment of a load charge or with the payment of a reduced load charge (a
"reinvestment right") and (ii) disposes of the Fund shares before the 91st day
after the date on which the shares were acquired and subsequently acquires
shares in the Fund or in another regulated investment company whereby the
otherwise applicable load charge is reduced by reason of the reinvestment right,
then the original load charge will not be taken into account for the purposes of
determining the shareholder's gain or loss on the disposition (to the extent the
original load charge does not exceed the reduction in the subsequent load
charge). To the extent such charge is not taken into account in determining the
amount of gain or loss, the charge will be treated as incurred in connection
with the subsequently acquired shares and will have a corresponding effect on
the shareholder's basis in such shares.
BACKUP WITHHOLDING
The Corporation may be required to withhold Federal income tax currently at a
rate of 28% on all taxable distributions payable to shareholders who fail to
provide their correct taxpayer identification number or to make required
certifications, or who have been notified by the Internal Revenue Service that
they are subject to backup withholding. Backup withholding is not an additional
tax. Any amounts withheld may be credited against the shareholder's Federal
income tax liability.
FOREIGN WITHHOLDING TAXES
Income received by the Funds from sources within foreign countries may be
subject to withholding and other taxes imposed by such countries. Tax
conventions between certain countries and the United States may reduce or
eliminate such taxes. It is impossible to determine the rate of foreign tax in
advance since the amount of the Funds' assets to be invested in various
countries is not known. Because each Fund will not have more than 50% of its
total assets invested in securities of foreign governments or corporations, the
Funds will not be entitled to "pass-through" to shareholders the amount of
foreign taxes paid by the Funds.
31
INVESTMENT PERFORMANCE INFORMATION
Each Fund may furnish data about its investment performance in advertisements,
sales literature and reports to shareholders. "Total return" represents the
annual percentage change in value of $1,000 invested at the maximum public
offering price for the one, five and ten year periods (if applicable) and the
life of the Fund through the most recent calendar quarter, assuming reinvestment
of all dividends and distributions. Quotations of "yield" will be based on the
investment income per share earned during a particular 30 day period, less
expenses accrued during the period, with the remainder being divided by the
maximum offering price per share on the last day of the period. Each Fund may
also furnish total return and yield calculations for other periods based on
investments at various sales charge levels or net asset values. Each Fund may
also provide investment performance data on an after-tax basis. The forgoing
"total return" and "yield" quotations must be calculated in accordance with
standardized formulas prescribed by the SEC. Each Fund may also calculate
performance in a nonstandardized manner if all elements of return are included.
Quotations of total return will reflect only the performance of a hypothetical
investment in a Fund during the particular time period shown. A Fund's total
return and current yield may vary from time to time depending on market
conditions, the compositions of the Funds' portfolio and operating expenses.
These factors and possible differences in the methods used in calculating yield
should be considered when comparing a Fund's current yield to yield published
for other investment companies and other investment vehicles. Total return and
yield should also be considered relative to change in the value of the Funds'
shares and the risks associated with each Fund's investment objectives and
policies. At any time in the future, total returns and yield may be higher or
lower than past total returns and yields and there can be no assurance that any
historical return or yield will continue.
From time to time evaluations of performance are made by independent sources
that may be used in advertisements concerning the Funds. These sources include:
LIPPER INC., WEISENBERGER INVESTMENT COMPANY SERVICE, BARRON'S, BUSINESS WEEK,
FINANCIAL WORLD, FORBES, FORTUNE, MONEY, PERSONAL INVESTOR, SYLVIA PORTER'S
PERSONAL FINANCE, BANK RATE MONITOR, MORNINGSTAR AND THE WALL STREET JOURNAL.
In connection with communicating its yield or total return to current or
prospective shareholders, the Fund may also compare these figures to the
performance of other mutual funds tracked by mutual fund rating services or to
other unmanaged indexes which may assume reinvestment of dividends but generally
do not reflect deductions for administrative and management costs.
32
The Fund's respective average annual total returns were as follows for the
periods indicated through September 30, 2003:
SINCE
FUND NAME/CLASS NAME (INITIAL OFFERING DATE) ONE YEAR FIVE YEARS TEN YEARS INCEPTION
-------------------------------------------- -------- ---------- --------- ---------
SMALL CAP GROWTH FUND
Class AAA (10/22/91)
Return Before Taxes 27.78% 11.58% 11.42% 14.57%
Return After Taxes on Distributions 27.47% 9.49% 9.05% 12.47%
Return After Taxes on Distributions and Sale of Fund Shares 14.82% 6.16% 8.21% 12.95%
EQUITY INCOME FUND
Class AAA (1/2/92)
Return Before Taxes 24.59% 7.34% 10.94% 11.52%
Return After Taxes on Distributions 24.10% 4.77% 8.64% 9.50%
Return After Taxes on Distributions and Sale of Fund Shares 9.23% 3.09% 8.46% 10.19%
WOODLAND SMALL CAP VALUE FUND
Class AAA (12/31/02)
Return Before Taxes N/A N/A N/A 5.80%
Return After Taxes on Distributions N/A N/A N/A 5.80%
Return After Taxes on Distributions and Sale of Fund Shares N/A N/A N/A 3.77%
* Not annualized
DESCRIPTION OF THE FUNDS' SHARES
DESCRIPTION OF THE FUNDS' SHARES
Each Fund is a series of Gabelli Equity Series Funds, Inc., which was
incorporated in Maryland on July 25, 1991. The authorized capital stock consists
of one billion shares of stock having a par value of one tenth of one cent
($.001) per share. The Corporation is not required, and does not intend, to hold
regular annual shareholder meetings, but may hold special meetings for
consideration of proposals requiring shareholder approval, such as changing
fundamental policies or upon the written request of 10% of the Funds' shares to
replace its Directors. The Corporation's Board of Directors is authorized to
classify or reclassify the unissued shares of the Corporation to one or more
classes of separate series of stock, each series representing a separate,
additional portfolio. The Board currently has authorized the division of the
unissued shares into three series each having a separate portfolio. The Funds
offer Class AAA, Class A, Class B and Class C shares. Shares of all series will
have identical voting rights, except where by law, certain matters must be
approved by a majority of the shares of the affected series. Each share of any
series of shares when issued has equal dividend, liquidation (see "Redemption of
Shares") and voting rights within the series for which it was issued and each
fractional share has those rights in proportion to the percentage that the
fractional share represents of a whole share. Shares will be voted in the
aggregate except where otherwise required by law and except that each class of
each series will vote separately on certain matters pertaining to its
distribution and shareholder servicing arrangements.
There are no conversion or preemptive rights in connection with any shares of
the Fund. All shares, when issued in accordance with the terms of the offering,
will be fully paid and nonassessable. Shares will be redeemed at NAV, at the
option of the shareholder.
The Funds send semi-annual and annual reports to all of their shareholders which
include a list of portfolio securities. Unless it is clear that a shareholder is
a nominee for the account of an unrelated person or a shareholder otherwise
specifically requests in writing, the Funds may send a single copy of
semi-annual, annual and other reports to shareholders to all accounts at the
same address and all accounts of any person at that address.
33
The shares of each Fund have noncumulative voting rights which means that the
holders of more than 50% of the shares can elect 100% of the directors if the
holders choose to do so, and, in that event, the holders of the remaining shares
will not be able to elect any person or persons to the Board of Directors.
Unless specifically requested by an investor who is a shareholder of record, the
Funds do not issue certificates evidencing Fund shares.
CORPORATE MATTERS
The Corporation reserves the right to create and issue a number of series
shares, in which case the shares of each series would participate equally in the
earnings, dividends, and assets of the particular series and would vote
separately to approve management agreements or changes in investment policies,
but shares of all series would vote together in the election or selection of
Directors, principal underwriters and auditors and on any proposed material
amendment to the Corporation's Certificate of Incorporation.
Upon liquidation of the Corporation or any series, shareholders of the affected
series would be entitled to share pro rata in the net assets of their respective
series available for distribution to such shareholders.
SHAREHOLDER APPROVAL
Other than elections of Directors, which is by plurality, any matter for which
shareholder approval is required by the 1940 Act requires the affirmative vote
of at least a majority, as defined by the 1940 Act, of the outstanding voting
securities of a Fund or the Corporation at a meeting called for the purpose of
considering such approval.
INFORMATION FOR SHAREHOLDERS
All shareholder inquiries regarding administrative procedures including the
purchase and redemption of shares should be directed to the Distributor, Gabelli
& Company, Inc., One Corporate Center, Rye, New York 10580-1422. For assistance,
call 800-GABELLI (800-422-3554) or through the internet at www.gabelli.com.
FINANCIAL STATEMENTS
The Financial Statements for each of the Small Cap Growth Fund, the Equity
Income Fund and the Woodland Small Cap Value Fund for the fiscal year ended
September 30, 2003, including the Report of Ernst & Young LLP, independent
auditors, are incorporated herein by reference to each Fund's Annual Report.
Each Fund's Annual Report is available upon request and without charge by
calling the number printed above. Ernst & Young LLP provides audit services, tax
return preparation and assistance and consultation in connection with certain
SEC filings.
34
APPENDIX A
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S ("MOODY'S") CORPORATE BOND
RATINGS
AAA: Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edge." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues. Aa: Bonds which are rated Aa are
judged to be of high quality by all standards. Together with the Aaa group they
comprise what are generally known as high grade bonds. They are rated lower than
the best bonds because margins of protection may not be as large as in Aaa
securities or fluctuation of protective elements may be of greater amplitude or
there may be other elements present which made the long term risks appear
somewhat larger than in Aaa securities. A: Bonds which are rated A possess many
favorable investment attributes and are to be considered as upper medium grade
obligations. Factors giving security to principal and interest are considered
adequate but elements may be present which suggest a susceptibility to
impairment sometime in the future. Baa: Bonds which are rated Baa are considered
as medium grade obligations, i.e., they are neither highly protected nor poorly
secured. Interest payments and principal security appear adequate for the
present but certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such bonds lack
outstanding investment characteristics and in fact have speculative
characteristics as well. Ba: Bonds which are rated Ba are judged to have
speculative elements; their future cannot be considered as well assured. Often
the protection of interest and principal payments may be very moderate and
thereby not well safeguarded during both good and bad times over the future.
Uncertainty of position characterizes bonds in this class. B: Bonds which are
rated B generally lack characteristics of the desirable investment. Assurance of
interest and principal payments or of maintenance of other terms of the contract
over any long period of time may be small. Caa: Bonds which are rated Caa are of
poor standing. Such issues may be in default or there may be present elements of
danger with respect to principal or interest. Ca: Bonds which are rated Ca
represent obligations which are speculative in a high degree. Such issues are
often in default or have other marked shortcomings. C: Bonds which are rated C
are the lowest rated class of bonds and issues so rated can be regarded as
having extremely poor prospects of ever attaining any real investment standing.
Note: Moody's may apply numerical modifiers, 1, 2 and 3 in each generic rating
classification from Aa through B in its corporate bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.
DESCRIPTION OF STANDARD & POOR'S CORPORATION'S ("S&P'S") CORPORATE DEBT RATINGS
AAA: Debt rated AAA has the highest rating assigned by S&P's. Capacity to pay
interest and repay principal is extremely strong. AA: Debt rated AA has a very
strong capacity to pay interest and repay principal and differs from the highest
rated issues only in small degree. A: Debt rated A has a strong capacity to pay
interest and repay principal although it is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than debt in
higher rated categories. BBB: Debt rated BBB is regarded as having adequate
capacity to pay interest and repay principal. Whereas it normally exhibits
protection parameters, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to pay interest and repay principal
for debt in this category than for debt in higher rated categories. BB, B, CCC,
CC, C: Debt rated BB, B, CCC, CC and C is regarded, on balance, as predominantly
speculative with respect to capacity to pay interest and repay principal in
accordance with the terms of the obligation. BB indicates the lowest degree of
speculation and C the highest degree of speculation. While such debt will likely
have some quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions. CI: The rating CI
is reserved for income bonds on which no interest is being paid. D: Debt rated D
is in payment default. The D rating category is used when interest payments or
principal payments are not made on the date due even if the applicable grace
period has not expired, unless S&P's believes that such payments will be made
during such grace period. The D rating also will be used upon the filing of a
bankruptcy petition if debt service payments are jeopardized.
A-1
Plus (+) or Minus (-): The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
DESCRIPTION OF MOODY'S PREFERRED STOCK RATINGS
aaa: An issue which is rated aaa is considered to be a top-quality preferred
stock. This rating indicates good asset protection and the least risk of
dividend impairment within the universe of preferred stocks. aa: An issue which
is rated aa is considered a high-grade preferred stock. This rating indicates
that there is reasonable assurance that earnings and asset protection will
remain relatively well maintained in the foreseeable future. a: An issue which
is rated a is considered to be an upper medium grade preferred stock. While
risks are judged to be somewhat greater than in the aaa and aa classifications,
earnings and asset protection are, nevertheless expected to be maintained at
adequate levels. baa: An issue which is rated baa is considered to be medium
grade, neither highly protected nor poorly secured. Earnings and asset
protection appear adequate at present but may be questionable over any great
length of time. ba: An issue which is rated ba is considered to have speculative
elements and its future cannot be considered well assured. Earnings and asset
protection may be very moderate and not well safeguarded during adverse periods.
Uncertainty of position characterizes preferred stocks in this class. b: An
issue which is rated b generally lacks the characteristics of a desirable
investment. Assurance of dividend payments and maintenance of other terms of the
issue over any long period of time may be small. caa: An issue which is rated
caa is likely to be in arrears on dividend payments. This rating designation
does not purport to indicate the future status of payment. ca: An issue which is
rated ca is speculative in a high degree and is likely to be in arrears on
dividends with little likelihood of eventual payment. c: This is the lowest
rated class of preferred or preference stock. Issues so rated can be regarded as
having extremely poor prospects of ever attaining any real investment standing.
Note: Moody's may apply numerical modifiers 1, 2 and 3 in each rating
classification from "aa" through "b" in its preferred stock rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.
DESCRIPTION OF S&P'S PREFERRED STOCK RATINGS
AAA: This is the highest rating that may be assigned by S&P's to a preferred
stock issue and indicates an extremely strong capacity to pay the preferred
stock obligations. AA: A preferred stock issue rated AA also qualifies as a
high-quality fixed income security. The capacity to pay preferred stock
obligations is very strong, although not as overwhelming as for issues rated
AAA. A: An issue rated A is backed by a sound capacity to pay the preferred
stock obligations, although it is somewhat more susceptible to the adverse
effect of changes in circumstances and economic conditions. BBB: An issue rated
BBB is regarded as backed by an adequate capacity to pay the preferred stock
obligations. Whereas it normally exhibits adequate protection parameters,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity to make payments for a preferred stock in this category than
for issues in the A category. BB, B, CCC: Preferred stock rated BB, B, and CCC
are regarded, on balance, as predominantly speculative with respect to the
issuer's capacity to pay preferred stock obligations. BB indicates the lowest
degree of speculation and CCC the highest degree of speculation. While such
issues will likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major risk exposures to adverse conditions.
CC: The rating CC is reserved for a preferred stock in arrears on dividends or
sinking fund payments but that is currently paying. C: A preferred stock rated C
is a non-paying issue. D: A preferred stock rated D is a non-paying issue with
the issuer in default on debt instruments.
Plus (+) or Minus (-): The ratings from "AA" to "B" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
A-2