The Gabelli Woodland Small Cap Value Fund

Transcription

1 Shareholder Commentary June 30, 2007 Elizabeth M. Lilly, CFA To Our Shareholders, (the Fund ) increased 5.91% for the quarter ending June 30, 2007 versus the Russell 2000, which increased 4.42%. Small Cap stocks underperformed large cap stocks for the quarter, with the S&P 500 up 6.27%. Comparative Results Average Annual Returns through June 30, 2007 (a)(b) Since Inception Quarter 1 Year 3 Year (12/31/02) Gabelli Woodland Small Cap Value Fund Class AAA % 18.19% 12.55% 14.68% Russell 2000 Index S&P 500 Index Value Line Composite Index The gross expense ratio is 2.31%. The net expense ratio is 2.00%, after contractual reimbursements by the Adviser in place through September 30, Class AAA Shares do not have a sales charge. (a) Returns represent past performance and do not guarantee future results. Total returns and average annual returns reflect changes in share price and reinvestment of dividends and are net of expenses. Investment returns and the principal value of an investment will fluctuate. When shares are redeemed, they may be worth more or less than their original cost. Performance returns for periods less than one year are not annualized. Current performance may be lower or higher than the performance data presented. Visit for performance information as of the most recent month end. Investors should carefully consider the investment objectives, risks, charges, and expenses of the Fund before investing. The prospectus contains more information about this and other matters and should be read carefully before investing. See page 3 for performance of other classes of shares. Investing in small capitalization securities involves special challenges because these securities may trade less frequently and experience more abrupt price movements than large capitalization securities. The Russell 2000, the S&P 500, and Value Line Composite Indices are unmanaged indicators of stock market performance. (b) The Fund s fiscal year ends September 30.

2 Let s Talk Stocks The following are stock specifics on selected holdings of our Fund. Favorable earnings prospects do not necessarily translate into higher stock prices, but they do express a positive trend that we believe will develop over time. Individual securities mentioned are not necessarily representative of the entire portfolio. For the following holdings, the percentage of net assets and their share prices are presented as of June 30, Among the best performing stocks for the quarter were SurModics (3.3% of net assets as of June 30, 2007), Andrew Corp (2.3%), and Columbus McKinnon (1.4%). During the quarter, SurModics (SRDX $50.00 Nasdaq) gained 39%. We invested in SurModics several years ago because we believed the company was at the center of the convergence of the pharmaceutical and medical device industries. SurModics established itself when it provided the polymer coating for Johnson & Johnson s drug eluding stents, which has generated extremely high margins and revenue for SurModics the last several years. As the concern over the drug eluding stents market has increased and penetration rates have slowed, the market became bearish about SurModics platform for future growth. In June, these concerns were put to rest when SurModics announced a $308 million licensing and development agreement with Merck for the IVation drug delivery system. This agreement alone could generate over $17 per share cash for SurModics over the next several years. Even with the dramatic appreciation in SurModics stock price this quarter, we continue to believe the future looks very encouraging for SurModics and have maintained our holding. Andrew Corporation (ANDW $14.44 Nasdaq) increased 36% during the quarter. Our investment in Andrew earlier this year was based on the premise that management was focused on improving the operations of Andrew and increasing margins back to historical levels of 10%. After speaking with many of the suppliers to the telecommunications infrastructure market, it was our contention that consolidation was going to happen and Andrew was a perfect candidate to be acquired. In June, CommScope announced a $15 per share offer for Andrew. Columbus McKinnon Corp. (CMCO $32.20 Nasdaq), up 36% since we acquired the company in April 2007, manufactures industrial hoist devices, fabricates cranes, and produces complementary handling components and equipment. The company has been focused over the last couple of years on selling off noncore assets, rationalizing its infrastructure, and implementing LEAN manufacturing in its plants. Columbus McKinnon has achieved a great deal over the past couple of years, but still has room for further improvement in margins, working capital management, and divestiture of noncore businesses. We believe the company s earnings power is in excess of $2.30 resulting in an intrinsic value over $40 per share. One of our weaker performers during the quarter was BUCA, Inc. (0.8%) (BUCA $3.50 Nasdaq), down 36%. BUCA owns and operates 92 full service family style Italian restaurants under the name Buca di Beppo. In late 2004 BUCA brought in a new management team to oversee the turnaround of the business. CEO, Wally Doolin, and his management team have been focused on divesting of noncore restaurant concepts, closing unprofitable locations, and refocusing the company on growth, while at the same time working on improving average unit volume and returning EBITDA margins to double digit levels. The plan is to accomplish this through a number of strategic initiatives. These initiatives include franchising, growing the store count, adding smaller portions to appeal to families, and changing restaurant hours to include lunch. We believe the company can achieve its goals over the next five years and, based on our analysis, the company is worth $10/share. During the quarter, the market gave us the opportunity to purchase numerous companies at prices that we believe are below their intrinsic value; one we would like to highlight is L.B. Foster (1.1%). L.B. Foster Co. (FSTR $28.68 Nasdaq) is a leading manufacturer and distributor of products and services for the rail, construction, energy, and utility markets. The company operates in three segments: Rail Products, which provides a full line of new and used rail, track work, and accessories to railroads; Construction Products, which sells sheet piling, fabricated highway products, and precast concrete buildings; and Tubular Products, which provides fusion bond and other coatings for corrosion protection on pipelines. The company also owns a 13% stake in the Dakota, Minnesota, and Eastern Railroad (DM&E). The DM&E is a privately owned US Class II railroad that has a 2,500 mile footprint across eight states. It competes with all seven major railroads and is a very desirable property. DM&E s Board of Directors is currently studying strategic alternatives for the railroad including a potential sale. L.B. Foster s stake (original investment of $9 million) is worth close to 2

3 $55$60 million today. The realization of this additional $5$6 per share value should act as a catalyst for the stock. On an operational level, L.B. Foster s management has committed to increasing margins from the 4% level they achieved in 2006 to over 7% in the next several years. They are focused on earning a higher return on their invested capital base (ROIC) and believe that over time it can increase from 10% to 15%. We believe as the management team improves the fundamentals of the core business and the value of the DM&E is realized the intrinsic value of L.B. Foster is over $39 per share. Conclusion The portfolio has been constructed with a bottomup investment approach. Therefore, we do not have a Fund that will mirror the performance of the Russell 2000 yearin and yearout. What we do own is a collection of businesses that we believe are operated by strong management teams that generate free cash flow and are intelligent in their allocation of that cash flow. As always, we appreciate your loyalty and support and look forward to communicating with you next quarter. Sincerely, July 31, 2007 Elizabeth M. Lilly, CFA Portfolio Manager Gabelli Woodland Small Cap Value Fund Average Annual Returns June 30, 2007 Class AAA Shares Class A Shares Class B Shares Class C Shares Quarter % 5.87% (0.22)(a) 5.55% 0.55(c) 5.67% 4.67(d) One Year (a) (c) (d) Three Year (a) (c) Since Inception (b) (a) (c) Gross Expense Ratio Current Expense Ratio after Advisor Reimbursements Maximum Sales Charge..... None Past performance does not guarantee future results. Performance returns for less than one year are not annualized. Total returns reflect changes in share price and reinvestment of distributions and are net of expenses. Investment returns and the principal value of an investment will fluctuate. When shares are redeemed, they may be worth more or less than their original cost. The Adviser reimbursed expenses to limit the expense ratio. Had such limitation not been in place, returns would have been lower. Current performance may be lower or higher than the performance data presented. Visit to obtain performance information as of the most recent month end. Investors should carefully consider the investment objectives, risks, charges, and expenses of the Fund before investing. The prospectus contains more information about this and other matters and should be read carefully before investing. Investing in small capitalization securities involves special challenges because these securities may trade less frequently and experience more abrupt price movements than large capitalization securities. Expenses are limited by contract through September 30, (a) Includes the effect of the maximum 5.75% sales charge at the beginning of the period. (b) Performance is calculated since inception of Class AAA Shares on December 31, (c) Performance results include the deferred sales charges for the Class B Shares upon redemption at the end of the quarter, one year, three year, and since inception periods of 5%, 5%, 3%, and 0%, respectively, of the Fund s NAV at the time of purchase or sale whichever is lower. (d) Performance results include the deferred sales charge for the Class C Shares upon redemption at the end of the quarter and one year periods of 1% of the Fund s NAV at the time of purchase or sale whichever is lower. We have separated the portfolio manager s commentary from the financial statements and investment portfolio due to corporate governance regulations stipulated by the SarbanesOxley Act of We have done this to ensure that the content of the portfolio manager s commentary is unrestricted. The financial statements and investment portfolio are mailed separately from the commentary. Both the commentary and the financial statements, including the portfolio of investments, will be available on our website at 3

4 Gabelli Equity Series Funds, Inc. One Corporate Center Rye, New York GABELLI fax: website: Net Asset Value per share available daily by calling 800GABELLI after 6:00 P.M. Board of Directors Mario J. Gabelli, CFA Robert J. Morrissey Chairman and Chief AttorneyatLaw Executive Officer Morrissey, Hawkins & Lynch GAMCO Investors, Inc. Anthony J. Colavita AttorneyatLaw Anthony J. Colavita, P.C. Vincent D. Enright Former Senior Vice President and Chief Financial Officer KeySpan Energy Corp. John D. Gabelli Senior Vice President Gabelli & Company, Inc. Anthony R. Pustorino Certified Public Accountant, Professor Emeritus Pace University Anthonie C. van Ekris Chairman BALMAC International, Inc. Salvatore J. Zizza Chairman Zizza & Co., Ltd. Officers and Portfolio Manager Elizabeth M. Lilly, CFA Bruce N. Alpert Portfolio Manager President James E. McKee Peter D. Goldstein Secretary Chief Compliance Officer Agnes Mullady Treasurer Distributor Gabelli & Company, Inc. Custodian, Transfer Agent, and Dividend Agent State Street Bank and Trust Company The E M P PS V MANAGEMENT CASH FLOW R E S E A R C H Gabelli Woodland Small Cap Value Fund Legal Counsel Skadden, Arps, Slate, Meagher & Flom LLP This report is submitted for the general information of the shareholders of. It is not authorized for distribution to prospective investors unless preceded or accompanied by an effective prospectus. GAB840Q207SC SHAREHOLDER COMMENTARY JUNE 30, 2007

5 Third Quarter Report (a) June 30, 2007 To Our Shareholders, During the quarter ended June 30, 2007, (the Fund ) rose 5.9% while the Russell 2000 Index was up 4.4%. For the six month period ended June 30, 2007, the Fund was up 7.8% versus a gain of 6.5% for the Russell 2000 Index. Enclosed is the investment portfolio as of June 30, Comparative Results Average Annual Returns through June 30, 2007 (a)(b) Since Quarter Six Months 1 Year 3 Year Inception (12/31/02)* Gabelli Woodland Small Cap Value Fund Class AAA % 7.82% 18.19% 12.55% 14.68% Russell 2000 Index S&P 500 Index Value Line Composite Index Class A (0.22)(c) 1.75(c) 11.60(c) 10.47(c) 13.25(c) Class B (d) 1.99(d) 11.98(d) 11.08(d) 14.09(d) Class C (e) 6.36(e) 16.27(e) The current gross expense ratio for Class AAA, A, B, and C Shares is 2.31%, 2.31%, 3.06%, and 3.06%, respectively. The net expense ratio after contractual reimbursements by the Adviser in place through September 30, 2007 is 2.00%, 2.00%, 2.75%, and 2.75%, respectively. Class AAA Shares do not have a sales charge. The maximum sales charge for Class A, B, and C Shares is 5.75%, 5.00%, and 1.00%, respectively. (a) The Fund s fiscal year ends September 30. (b) Returns represent past performance and do not guarantee future results. Total returns and average annual returns reflect changes in share price and reinvestment of distributions and are net of expenses. Investment returns and the principal value of an investment will fluctuate. When shares are redeemed, they may be worth more or less than their original cost. Performance returns for periods less than one year are not annualized. Current performance may be lower or higher than the performance data presented. Visit for performance information as of the most recent month end. Investors should carefully consider the investment objectives, risks, charges, and expenses of the Fund before investing. The prospectus contains more information about this and other matters and should be read carefully before investing. Investing in small capitalization securities involves special risks because these securities may trade less frequently and experience more abrupt price movements than large capitalization securities. The Russell 2000 Index of small U.S. companies, the S&P 500 Index of the largest U.S. companies, and the Value Line Composite Index (comprised of equally weighted positions in every stock covered in the Value Line Investment Survey) are unmanaged indicators of stock market performance. Dividends are considered reinvested. You cannot invest directly in an index. (c) Includes the effect of the maximum 5.75% sales charge at the beginning of the period. (d) Performance results include the deferred sales charges for the Class B Shares upon redemption at the end of the quarter, six months, one year, three year, and since inception periods of 5%, 5%, 5%, 3%, and 2%, respectively, of the Fund s net asset value ( NAV ) per share at the time of purchase or sale, whichever is lower. Class B Shares are not available for new purchases. (e) Performance results include the deferred sales charge for the Class C Shares upon redemption at the end of the quarter, six months, and one year periods of 1% of the Fund s NAV at the time of purchase or sale, whichever is lower. * Performance is calculated since inception of Class AAA Shares on December 31, We have separated the portfolio manager s commentary from the financial statements and investment portfolio due to corporate governance regulations stipulated by the SarbanesOxley Act of We have done this to ensure that the content of the portfolio manager s commentary is unrestricted. The financial statements and investment portfolio are mailed separately from the commentary. Both the commentary and the financial statements, including the portfolio of investments, will be available on our website at

6 Schedule of Investments June 30, 2007 (Unaudited) Market Market Shares Value Shares Value COMMON STOCKS 91.7% Equipment and Supplies 9.2% Aerospace 2.5% 17,220 C&D Technologies Inc $ 96,432 2,445 Alliant Techsystems Inc $ 242,422 42,800 FSI International Inc ,532 Automotive: Parts and Accessories 2.4% 6,295 Mueller Water Products Inc., Cl. B ,425 6,240 Midas Inc ,461 9,160 Tennant Co ,340 4,700 Noble International Ltd ,068 4,150 Toro Co , , ,122 Financial Services 6.9% Aviation: Parts and Services 2.4% 11,540 Franklin Bank Corp ,946 7,135 EDO Corp ,527 4,390 Hilb Rogal & Hobbs Co ,155 Business Services 8.7% 2,830 HMN Financial Inc ,475 41,700 AMICAS Inc ,618 14,700 NewAlliance Bancshares Inc ,384 6,090 Deluxe Corp , ,960 3,680 Imation Corp ,645 Food and Beverage 6.7% 4,140 Intermec Inc ,783 22,660 Buca Inc ,310 3,580 The Brink s Co ,566 14,320 Del Monte Foods Co , ,927 4,620 PepsiAmericas Inc ,467 Communications Equipment 2.8% 13,580 Triarc Cos. Inc., Cl. A ,515 15,320 Andrew Corp ,221 4,880 Triarc Cos. Inc., Cl. B ,616 5,430 Radyne Corp , , ,159 Health Care 7.9% 4,650 KV Pharmaceutical Co., Cl. A ,666 Computer Software and Services 8.1% 7,972 Lifecore Biomedical Inc ,516 17,040 eresearch Technology Inc ,051 5,130 PolyMedica Corp ,560 15,620 Furmanite Corp ,899 6,366 SurModics Inc ,300 29,710 Lawson Software Inc ,832 9,760 ProQuest Co , ,042 12,670 Tier Technologies Inc., Cl. B ,166 Hotels and Gaming 4.5% 5,370 Gaylord Entertainment Co , ,058 6,460 Marcus Corp ,489 Consumer Products 7.7% 7,770 AlbertoCulver Co , ,536 Retail 2.0% 13,490 Callaway Golf Co ,257 25,863 delia*s Inc ,335 4,435 Church & Dwight Co. Inc ,920 Specialty Chemicals 3.9% 13,530 Sally Beauty Holdings Inc ,770 5,100 Arch Chemicals Inc , ,251 2,230 FMC Corp ,340 Diversified Industrial 7.7% 378,554 4,230 Columbus McKinnon Corp ,206 TOTAL COMMON STOCKS ,018,404 3,840 L.B. Foster Co., Cl. A ,131 Principal 30,600 Magnetek Inc ,590 Amount 2,020 Pentair Inc ,912 U.S. GOVERNMENT OBLIGATIONS 8.3% 3,500 Texas Industries Inc ,435 $824,000 U.S. Treasury Bills, 4.771% to 4.991%, 756,274 07/12/07 to 09/27/ ,008 Energy and Utilities 4.4% TOTAL INVESTMENTS 100.0% 2,879 ALLETE Inc ,457 (Cost $8,218,489) $9,835,412 5,420 Comstock Resources Inc ,437 5,740 Mariner Energy Inc ,195 Aggregate book cost $8,218, ,089 Gross unrealized appreciation $1,917,058 Entertainment 3.9% Gross unrealized depreciation (300,135) 11,350 Discovery Holding Co., Cl. A ,936 Net unrealized appreciation (depreciation).. $1,616,923 3,430 Steinway Musical Instruments Inc , ,580 Nonincome producing security. Represents annualized yield at date of purchase. See accompanying notes to schedule of investments. 2

7 Notes to Schedule of Investments (Unaudited) Security Valuation. Portfolio securities listed or traded on a nationally recognized securities exchange or traded in the U.S. overthecounter market for which market quotations are readily available are valued at the last quoted sale price or a market s official closing price as of the close of business on the day the securities are being valued. If there were no sales that day, the security is valued at the average of the closing bid and asked prices or, if there were no asked prices quoted on that day, then the security is valued at the closing bid price on that day. If no bid or asked prices are quoted on such day, the security is valued at the most recently available price or, if the Board of Directors (the Board ) so determines, by such other method as the Board shall determine in good faith to reflect its fair market value. Portfolio securities traded on more than one national securities exchange or market are valued according to the broadest and most representative market, as determined by Gabelli Funds, LLC (the Adviser ). Portfolio securities primarily traded on a foreign market are generally valued at the preceding closing values of such securities on the relevant market, but may be fair valued pursuant to procedures established by the Board if market conditions change significantly after the close of the foreign market but prior to the close of business on the day the securities are being valued. Debt instruments with remaining maturities of 60 days or less that are not credit impaired are valued at amortized cost, unless the Board determines such amount does not reflect the securities fair value, in which case these securities will be fair valued as determined by the Board. Debt instruments having a maturity greater than 60 days 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. Futures contracts are valued at the closing settlement price of the exchange or board of trade on which the applicable contract is traded. Securities and assets for which market quotations are not readily available are fair valued as determined by the Board. 3

8 Gabelli Equity Series Funds, Inc. One Corporate Center Rye, New York GABELLI fax: website: Net Asset Value per share available daily by calling 800GABELLI after 6:00 P.M. Board of Directors Mario J. Gabelli, CFA Robert J. Morrissey Chairman and Chief AttorneyatLaw Executive Officer Morrissey, Hawkins & Lynch GAMCO Investors, Inc. Anthony J. Colavita AttorneyatLaw Anthony J. Colavita, P.C. Vincent D. Enright Former Senior Vice President and Chief Financial Officer KeySpan Energy Corp. John D. Gabelli Senior Vice President Gabelli & Company, Inc. Anthony R. Pustorino Certified Public Accountant, Professor Emeritus Pace University Anthonie C. van Ekris Chairman BALMAC International, Inc. Salvatore J. Zizza Chairman Zizza & Co., Ltd. Officers and Portfolio Manager Elizabeth M. Lilly, CFA Bruce N. Alpert Portfolio Manager President James E. McKee Peter D. Goldstein Secretary Chief Compliance Officer Agnes Mullady Treasurer Distributor Gabelli & Company, Inc. Custodian, Transfer Agent, and Dividend Agent State Street Bank and Trust Company The E M P PS V MANAGEMENT CASH FLOW R E S E A R C H Gabelli Woodland Small Cap Value Fund Legal Counsel Skadden, Arps, Slate, Meagher & Flom LLP This report is submitted for the general information of the shareholders of. It is not authorized for distribution to prospective investors unless preceded or accompanied by an effective prospectus. GAB840Q207SR THIRD QUARTER REPORT JUNE 30, 2007